Aug 092011
 

In a recent article published by The Wall Street Journal, Patrick G. Lee reports that corporations are more frequently turning to online reverse auctions as a method to reduce outside legal fees. Some of the companies using reverse auctions include Toyota, Sun Microsystems, GlaxoSmithKline, and eBay. Reverse auctions can reduce legal costs anywhere from 15% to 40%, saving large companies a significant amount of money.

Reverse auctions allow multiple law firms to bid anonymously for certain matters advertised by companies. The firms compete against each other, each trying to offer the best discount. If a firm “introduces a new low price in the last minute or two of the session, it can be extended for several minutes – launching another round of calculations and lower offers.”

GlaxoSmithKline has been using reverse auctions since last year and has described this method as an effective way to “more fairly evaluate firms’ cost-effectiveness on a uniform basis.” It even plans to use reverse auctions for all substantive legal matters. However, some law firms participating in the auctions have criticized companies’ use of this cost-saving method, saying that “the trust and loyalty built up in long-term client-firm relationships could be undermined by a company’s insistence on opening up every new legal matter to competition.” Although reverse auctions are typically used for routine matters, many firms are worried that this cost-saving measure will extend to complex matters.

Some large companies have declined to follow the trend. Costco, Xerox and Cisco Systems have decided not to use reverse auctions as a way to cut costs. Xerox’s general counsel told the Wall Street Journal that Xerox is looking for its outside counsel “to be creative.” “I’m not so sure being on the spot in a chat room is the ideal format for creative thoughts.”

FMC Technologies has been using reverse auctions for its legal matters for more than ten years. “Every lawyer will tell you that every piece of work they do is incredibly important and risky and has to be custom-made and that’s just nonsense,” Jeff Carr, FMC’s general counsel, told the Wall Street Journal. “No matter how legally brilliant you are, there is always an alternative.”