Fair Auctions for Legal Services
In "Get More for Your Money: Auction Off Your Legal Work," Rees W. Morrison writes for the Legal Times on January 25, 2006 about four kinds of auctions and how law departments should choose among them. He also suggets solutions for several problematic aspects of auctions: one-shot bidding, unstated assumptions, the focus on costs, and the winner's curse.
According to Morrison, both research and theory have shown that a Vickrey auction leads to the best outcome for law departments.
"Of these four kinds, Vickrey has the strongest backing from academics who have studied the best way to conduct an auction. Contingent auctions add complexity, but they may have a place in the final stages of an auction, where the remaining few law firms can toss a contingent hat in the ring. Dutch and English auctions are most familiar to everyone. I believe it's usually too complicated to explain to law firms the law department's projected cost and have the firms bid larger gaps, as in English auctions. I favor Vickrey-Dutch auctions with a contingency or two available at the end."The Vickrey auction, also known as a "sealed second-price auction," is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than their own. In theory, this is mathematically equivalent to the English auction, because in both the first-place bidder receives the item at a price equal to the second-place bidder's willingness to pay, plus the bid increment.
"Regardless of the type of auction a law department conducts," writes Morrison, "the department needs to avoid five pernicious traps:"
- Unanticipated major changes in workload -- "With a collar, or one of its infinite permutations, both sides feel more comfortable that if the actual workload varies significantly from the projected workload, they will avoid rank injustice."
- Inflated bids on unexpressed assumptions -- "The proposing law firms and the law department should both state as many assumptions as they can and how they are relying on them."
- Single-shot bidding -- "If your law department lets firms submit only one proposal, no one fares as well."
- Whether to disclose hours -- "If you convert the past amounts you have spent into lawyer hours worked, firms will diverge more in their bid amounts, since they have different billing rates."
- The winner's curse. -- "Neither the law department nor the firm is served by a gross error in pricing. The remedy comes partly through a Vickrey auction and partly through multi-round bidding, collars, exposure of assumptions and describing the work in terms of activities and hours rather than in dollars."
And, I'll add one more -- It's not finished 'till we say so. -- Law departments (and service customers in general) can greatly improve the quality they receive by making their expectations clear before any auction with DETAILED specifications concering what the final product should look like and how the service provider is expected to get there. "I'm not satisfied, you'll just have to redo it" is never an acceptable response from a fixed-price purchaser of creative work.