In an era of new innovations and strategies, legal operations and procurement leaders have used novel tactics to reduce spend while simultaneously increasing the quality of legal work.

But one tactic that a recent study indicated may not be getting a lot of attention is the reverse auction, the process by which firms bid competitively for work on a given matter—with the business going to the bidder who offers the best quality service for the lowest price.

Data released by legal procurement trade organization Buying Legal Council earlier this month showed only 18 percent of respondents used eAuctions, though that's actually an increase from earlier years.

Silvia Hodges Silverstein, the executive director of Buying Legal Council, noted that successful reverse auctions may require more sophisticated approaches to change management and a close alignment between legal and procurement, which can be obstacles for some companies with less legal ops experience.

But according to legal and ops professionals who have implemented reverse auctions extensively, the tactic is worth a closer look. They said that reverse auctions aren't as harmful to outside counsel relationships as some might fear, and can cut legal spend and build in new transparency around law firms' work.

The AIG Experience

One legal operations practitioner who has effectively used reverse auctions is Aaron Katzel, the founder and CEO of The Better Legal Infrastructure Project LLC and former head of the AIG Legal Operations Center. He implemented reverse auctions as part of the outside counsel selection process at the insurance company from 2012 to May 2017.

“We certainly didn't see any negative impact that was measurable in any way,” Katzel said. Out of the 1,500 firms AIG used at the time, according to Katzel, fewer than five sought to end their relationship due to auctions.

Some outside partners were initially wary, he said, but they understood AIG's motives. The insurance company had more than $2.5 billion in legal spend pre-auctions, and faced pressure to cut those costs.

Aaron Katzel. Photo credit: Carmen Natale/ALM

After instituting the auction tactic, Katzel said AIG not only avoided negative effects, it produced positive outcomes. When he left AIG in May 2017, the company's legal department had increased its transparency in the selection process, as firms could see competitors' offers—though Katzel notes outside counsel were not chosen just based on pricing, but on overall value. The firm with the lowest price didn't always get the job.

“We didn't see any negative effect on the companies' relationship with the law firms,” Katzel said. “I think it was a very successful program in terms of allowing the company to achieve tremendous value and quality of service while leveraging the law firms.”

And Katzel said that despite seeing a decrease in spend, the quality of the work didn't suffer based on the company's metrics. In some cases, it actually improved.

“At the end of the day, value isn't simply lowest cost,” he said. “It's, are you getting the best service and the lowest cost at the best value for those costs? We spent a lot of time developing analytical tools, we were tracking performance of the firms on the matters.”

AIG declined to comment on their current auction processes and if they have changed since Katzel's departure.

GlaxoSmithKline's Reverse Auctions

British pharmaceutical company GlaxoSmithKline also used reverse auctions in its Outside Counsel Selection Initiative, but to get proposals from different firms for total flat fees and not for hourly rates.

Procurement and operations professionals at GSK say they've had success with the tactic.

“Eight years later we cannot only say this works, but that law firms feel extremely comfortable with the flat fees they're providing,” said Brennan Torregrossa, vice president and associate general counsel of GSK.

GSK's director of legal services procurement, Marty Harlow, said the use of reverse auctions has made the choice of outside counsel more objective than before, because the in-house team knows they're getting the fair market value for their outside counsel and can focus on quality and value instead of cost.

Brennan Torregrossa. Photo credit: Adam Jones.

Harlow said the announcement that GSK would move to an auction system was met with some skepticism, as it's a model many weren't used to. But now, he's seen an improved relationship with outside counsel due to more feedback from the law department and greater transparency. Law firms not chosen at the auction's end receive information from GSK on how the decision was made and how they can improve.

Torregrossa said the use of auctions has also created an informal convergence of law firms, as certain entrants consistently come to the auctions offering high-quality work at good prices. To keep the field competitive, GSK will occasionally add new firms into the auction process.

GSK says it has saved around 20 percent per year on annual legal spend compared to the years before it implemented auctions.

But Harlow said successful auctions are only possible if procurement and operations are clear from the start with outside counsel about what the process will look like. It's important not to make exceptions for firms by granting work not won in auctions, regardless of previous relationships.

“It's being very steady and consistent with the program and resisting the temptation to cut corners [or to] do anything to undermine the integrity of the way the process works,” Harlow said.