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RFP's: A Necessary Evil

As we're all aware, in today's economic climate there is a big focus on cost reduction. It's no surprise, then, that RFP's are being used with even greater frequency by purchasers of legal services. The concept is not new, but the extreme focus on price across a large percentage of those companies probably is. For law firms, this is not a happy consequence. Law firms incur significant expense by simply responding to RFP's, with no guarantee of work at the end of the process. Of course, a primary reason for companies using RFP's to begin with is to get the lowest price across all parties-which means that the "winner" of the RFP may not be getting profitable work. In an RFP process, it's not a guarantee that the lowest price will get the business, but it's nearly certain that "bidders" with pricing substantially above the lowest prices will be eliminated quickly from consideration. It's useful for law firms to have a framework around which to operate when responding to RFP's. The numbers and margins can vary by geography, by area of law, or by the scale of the engagement, but specific parameters must be kept in mind and applied. Questions that must be answered to help shape the context of any response include: For existing clients: What would losing this business mean to firm or practice group utilization? How long has the firm been working with this client? How deep is the relationship? How many partners are involved? Is the current contribution margin on this client acceptable? How quickly does the client pay, and has there been a material shift in payment patterns recently? What is the context in which we should consider this RFP? Is the client unhappy with the work product the firm has provided? Are they simply looking for the lowest price? Are they happy with our firm, but simply looking for a better price? Did we begin working with this client through success in an RFP? The best way to deal with RFP's is to avoid them altogether, and the stronger and deeper the relationship with a client, the better chance a firm has of doing just that. Redwood Analytics has conducted research that indicates, not surprisingly, that clients with more than one senior partner who are actively engaged with a client are much less likely to stop working with that firm. (Another, perhaps more surprising finding, was that discounting, or lack thereof, was not a factor in the longevity of client relationships.) Given today's focus on expense savings, multiple high level relationships may not be enough to avoid having to enter into the RFP process. Once there, a firm must decide how important this work is. The impact on utilization, and contribution to overhead and profit, should be paramount in determining how aggressively to respond from a pricing standpoint. Additionally, a firm must put the work in the context of future opportunities for the practice area(s) affected. The more robust the practice area, the less beholden the firm is to low margin demands (taking scale into consideration). For prospects or dormant clients for whom the firm wants to re-engage, the baseline criteria are in some ways the same, but with a different context: What is the financial opportunity that this work represents? What does our bottom line pricing model look like? How much do we need this work? Are there resource utilization issues this might solve? Does this client offer work that we really want to do? RFP's always must be viewed in the context of existing and future forecasted resource utilization. The better the current situation and the future pipeline looks like, the higher the bottom line offered can be. Factors like size of client and the strategic opportunity of a client or piece of work will come into play, but if firms understand their utilization issues, and have a clear picture of how competitive they are willing to be on price, firms will avoid accepting work that is unprofitable. Of course, if firms continually lose work (and worse, existing clients) to RFP's because of poor pricing, they need to look at their relationships, service levels, and pricing assumptions more closely. In the end, firms and clients are best served working closely together to understand each other's needs and values, and arrive at pricing structures that fit up with the value delivered. This can only be achieved over time, with commitment from both sides. It can't be accomplished through concepts like RFP's, which measure only cost and work best when applied to commodity products. While RFP's are supposed to allow those using them to compare "apples to apples" with cost as a differentiator, not all businesses sell fruit. Service levels, client-specific knowledge and "win-win" pricing can't be achieved or measured through an RFP. To the extent that RFP's can be avoided with existing clients, firms should do so, even if it means proactively providing pricing concessions. For new work, firms should take a rigorous approach to pricing and matter planning, and be disciplined in not going below a "floor" margin. If firms can do that, while accurately factoring in their utilization to the equation to reach an acceptable margin, they should be able to gain work that fits within their existing parameters for pricing and margin.

Full post as published by More Partner Income on April 24, 2009 (boomark / email).