"Is This Price Fair? How Teams Inside a Company Find Out the Real Cost of Legal Services — And Manage Risks Better""How can I tell if I'm paying a fair price for legal services from my law firms?"
Typically, this kind of information hasn't been easily accessible to in-house teams or law firms. This lack of transparency leads to varying costs across the legal industry.
In this article, we'll explain the process PERSUIT uses to determine the "true market price" for a legal issue.
It might seem strange, but finding this true market price makes the actual price less crucial when selecting a law firm for a matter. This approach enables your team to better manage risks by choosing the best firm based on factors beyond just the rate they charge.
What is a True Market Price?
A "true market price" refers to the average price that both buyers and sellers typically agree upon for a specific product or service. However, in industries like legal services where there's a lack of transparency and competition, it's challenging to determine this true market price.
But in the legal field, things are starting to change. In-house teams face mounting pressure to prove their worth to the business and justify their decisions regarding external spending.
Because of these factors, legal teams are now turning to a new approach when hiring outside counsel. This approach emphasizes transparency and competition, allowing a genuine market price to become apparent.
Four-Step Process to Find the True Market Price for Legal Services
Step 1: Segment the matter by milestones and deliverables
Most legal work follows predictable patterns. While you may not know exactly how a case will unfold, you can anticipate the typical activities involved.
For instance, in litigation, you can expect activities like depositions, even if the exact number isn't clear from the start. Every legal matter can be broken down into phases and activities leading to a specific outcome.
In litigation, these milestones might include depositions, discovery, pre-trial procedures, trial, and potential appeals. Similar breakdowns can be applied to advisory or transactional matters.
This applies even to complex cases like intellectual property (IP) litigation. Certain phases, such as claim construction and the Markman hearing, can be outlined and scoped. While it requires some initial effort, this process enhances competition and transparency with your legal firms.
Maintaining a library of pre-made templates for various types of cases also streamlines the scoping process significantly.
Step 2: Invite preferred firms to submit proposals
Once you've outlined the phases of your legal matter, reach out to three to four of your preferred law firms and request proposals detailing their approach to the work.
Ask them to include their price estimate, a summary of their proposed approach, and any additional information you'll consider when selecting the firm (such as diversity, equity, and inclusion practices, relevant experience, etc.).
If you're handling this manually, you can send out emails inviting the proposals. Alternatively, you can utilize a firm relationship platform to streamline the process.
In some cases, companies allow bidding firms to ask questions and further clarify the scope of the matter. This helps ensure a fair comparison of proposals, making it easier to evaluate them on an equal basis.
Step 3: Use a competitive process
Sometimes, the proposals you receive will have similar price quotes.
In those cases, the competitive RFP process — on its own — has revealed a “true market price.” This gives you confidence that you’re not overpaying for the matter.
There are other cases where you’ll receive proposals with price estimates that are wildly different.
In that case, you can’t know if the prices you’re looking at are a true “market price.” It may be that the firms simply don’t know what other firms are charging for similar types of services.
In this scenario, the process we recommend is a “reverse auction” — a competitive process where you set a time window, show the price quotes (or their rankings) you received from firms, then give those firms a chance to revise their price quote.
This is usually done as a live event with a time limit between 30 minutes to an hour.
illustration of a real reverse auction taken from the PERSUIT platform
At the start of the auction, there was a $1.275 million spread between the highest-priced quote and the lowest.
One hour and six minutes later, the price spread had narrowed dramatically, with all four firms having price quotes within $270,000.
In this case, the “true market price” is about $1 million — the price the firms are grouping around at the end of the auction.
Step 4: Choose the firm you think has the best chance of giving you the result you need
At the conclusion of this competitive process, you and your team can assess the proposals and decide which firm to collaborate with for the matter.
Interestingly, a competitive process diminishes the significance of price when selecting a firm.
Initially, it might have seemed improbable for an in-house team to justify paying an additional $1.275 million to engage with the highest-priced firm competing for the work—unless it was an exceedingly critical matter for the company.
However, as the competitive process unfolds, the difference in bids narrows significantly. At the end, the gap between the highest and lowest bids reduces to only $270,000 among all four firms, and even less among the top three.
With the establishment of a true market price for the matter, the decision shifts away from solely considering price. Instead, it becomes more about selecting the team best equipped to manage the relative risks and achieve the desired outcomes.
The Payoff: Make Price Matter Less When Selecting Outside Counsel
Our internal data, which encompasses over $8 billion in proposals and $1 billion in legal work awarded through our platform, consistently demonstrates that the competitive process outlined above diminishes significant price discrepancies.
By pushing firms towards a consensus price or true market value, the emphasis shifts away from cost as the primary determining factor compared to traditional Request for Proposal (RFP) processes. This convergence in pricing allows in-house teams to prioritize other crucial factors when selecting a firm, such as experience, strategic insights, diversity and ESG metrics, among others.
