Competitor collective: How law firms can collaborate to obtain supplier discounts

17 Oct 2011Feature

David Copping discusses the ways in which law firms can collaborate to obtain discounts on products and services from suppliers

Law firms love to emphasise how different they are from each other, whether in terms of culture, size, specialism, price or some other variable which makes their offerings unique. But regardless of how different individual law firms may be (or wish to be) perceived by their clients, as consumers, law firms are remarkably similar.

Even in an environment when traditional legal business models are being challenged, the main inputs for most businesses providing legal services are relatively standard, namely staff and premises (and a host of standard ancillary services and benefits relating thereto), insurance, technology, training and information resources, transport and standard office supplies.

In a time when technology is enabling consumers to collaborate to exploit joint buying opportunities (such as through Groupon, Living Social and Twongo), are law firms making the most of their (potentially sizeable) collective buying power?

Clients have certainly woken up to the potential benefits of collective procurement. For example, a number of higher education institutions obtain discounted legal fees via the London Universities Purchasing Consortium. But are similar models being fully exploited by law firms?

Confidentiality and competition law issues are commonly cited as reasons not to collaborate with competitors, but the risks are often overstated. In most cases, the issues are more cultural than legal: lawyers are inherently cautious and do not feel comfortable about collaborating with competitors.

Of course, certain types of collaborative arrangements between competitors are expressly prohibited under UK and EU competition law. These include price fixing (in the downstream market – in this case, the market for legal services), market sharing, agreements to limit output, bid rigging, resale price maintenance and the exchange of certain sensitive business information (such as on an intended pricing policy or marketing strategy).

However, increased bargaining power through purchasing cooperation is generally acknowledged as a way to generate pro-competitive and pro-consumer benefits. Broadly speaking, it is normally only problematic where the joint purchasing leads to a strong position on the purchasing market (but, even then, one needs to weigh up the countervailing power of the seller), or collusion on the selling market.

In addition, although most supply contracts are likely to contain non-disclosure undertakings which are likely to prevent discussions around current pricing arrangements, valuable discussions can still occur without such information being disclosed.

Competition and confidentiality checks

Consider the potential market power of the consortium, both in terms of the upstream market (the supplies being procured) and the downstream market (the provision of legal services).
Review agendas for meetings in advance and seek clarification of any items that seem inappropriate.
Exit any meeting where inappropriate items are discussed, having formally disassociated yourself from the discussions. Ensure objections are recorded in writing in meetings and report them immediately to your compliance officer.
Bear in mind any existing confidentiality obligations owed to suppliers. Where confidentiality undertakings restrict the discussion of input pricing, seek to achieve price transparency by asking the supplier for its best price, rather than sharing existing pricing information.

Don’t

Attend if you think inappropriate items may be discussed.
Discuss, agree or exchange price information in terms of a firm’s offerings to clients (such as on outputs, hourly rates or discounts), detailed marketing plans and/or strategies. The focus should be firmly on business inputs rather than outputs. Discussions relating to the downstream market (provision of legal services) should be avoided.
Disclose information which is subject to existing confidentiality restrictions.

Joint buying models

There is no right option for collaborative purchasing. What is appropriate will vary from case to case, but the following represents four main options which occupy various points on the procurement spectrum.

Purchasing consortium

Under the purchasing consortium model, firms can club together to negotiate price discounts from suppliers which are prepared to offer discounts on the basis of access to a larger customer base. In the loosest version of this model, firms are free to join or exit the buying consortium as they see fit, as are their suppliers.

Suppliers are also free to offer their products and services at a particular price, either formally or as a pre-contractual ‘invitation to treat’ which – if a formal order is concluded – provide the basis of pricing for an individual contract between the purchasing law firm and the supplier.

Legally, this is the most straightforward collective purchasing model. Barriers to entry are – on paper at least – very low, provided that economies of scale can be achieved.

In the most fluid and informal example, the relationship between parties need not even be formalised. If the parties wish to formalise the relationship, a low-level contractual framework is advisable to regulate the relationship between the collaborating firms as well as between the consortium and potential suppliers (see box: ‘Establishing a purchasing consortium’).

A purchasing consortium works well for commoditised products and services with a clear list price and a clear product/service description (such as office supplies, taxi hires, generic IT services, telephony services and information services).

This model is, however, less useful for bespoke services and products and those for which it is more difficult to establish a regular list price. In those scenarios, one of the other options below may be more appropriate.

One risk to successful implementation of the scheme is that suppliers could be reluctant to agree price discounts without seeing the size of their potential customer base, and participants could be reluctant to join unless they are offered significant discounts. But the disincentives are lowered if there is no material cost to participation on either front and can be surmounted if the consortium has an enthusiastic and persuasive sponsor.

Establishing a purchasing consortium

Form a steering group of motivated procurement specialists or managers from a number of law firms.
Assess confidentiality and competition law issues upfront and (provided the project remains viable) brief the steering group members as to
their responsibilities.
Arrange for mutual non-disclosure agreements to be signed to cover initial discussions.
Give steering group representatives sufficient authority to discuss their procurement needs and aspirations with each other.
List the supplies with which there is commonality and/or a desire for greater efficiencies and cost savings.
Draw up short-form documentation to regulate the relationship between the consortium members. This could be a non-binding statement of intent, or a partially or fully binding contract, depending on the parties’ requirements.
Shortlist potential suppliers to pitch for the consortium’s business and solicit offers of discounts against standard pricing arrangements. This is one way to achieve price transparency without sharing any pricing information and should help to flush out suppliers’ lowest prices.
Maintain a favoured list of suppliers based on variables such as quality of supply and price. The consortium could choose more than one supplier per product or service category, or exclusivity could be considered if a supplier is prepared to offer suitably attractive discounts.
Prepare a short document for each supplier to sign which confirms its relationship with the consortium. This may set out a very low-level legal framework which confirms, for example:

the legal status of suppliers’ offers;
that, for each purchase, a binding contract is only made once a formal order is agreed with an individual consortium member;
that there is no guarantee of orders;
that there is no joint and several liability between purchasing firms; and
that the supplier has no right to remain on the list (unless individually negotiated).

Formal collective procurement

A more formal collective procurement model (as commonly utilised by the public sector, for example) involves participants jointly purchasing from a supplier under a formal contractual framework.

This model works well for customers with similar service or product needs and, unlike a more flexible purchasing consortium, can accommodate the purchasing of bespoke products or services with a scoping and implementation element.

In simple terms, it can allow the purchase of a quasi-bespoke product at a lower cost than if procured by a firm acting individually. Examples of this approach include the City LPC, where five City firms procured the development and teaching of a tailored legal practice course.

Although this model allows for a more bespoke end product than would be possible under a purchasing consortium, it involves a more formal and potentially complex legal structure.

Terms covering the liability of members, priority of orders, service description, service levels and entry and exit arrangements all need to be considered and covered in a formal contract.

This model is therefore usually only appropriate for supplies where the size of orders and potential cost savings justify the investment in the legal structuring and negotiations. However, joint procurements of this kind would only be successful if the parties have similar requirements and/or are prepared to compromise to a degree.

Shared services

The shared services model is a blend of the formal joint procurement model and the below straightforward outsourcing model.

This model is used primarily where a collection of firms wish to transfer non-core business functions (HR, IT or other back office functions) to a new entity (which is sometimes under common control).

The legal issues to be addressed are obviously significant given the degree of strategic and organisational change such a venture entails. Normally, it would involve a business transfer to the new company/service provider, combined with a long-term services agreement.

Outsourcing procurement

The outsourcing procurement model enables firms to achieve economies of scale via a third-party outsourcing service provider.

This is not joint buying as such, given the bilateral relationship between a single customer and a single supplier. However, it enables firms to bolster their purchasing power by engaging the services of a large service provider which, in turn, provides similar or identical services to multiple recipients.

Catering services and office services are two examples of this approach, where service providers are normally able to achieve more attractive volume discounts or otherwise drive better deals than their individual clients.

The outsourcing model is appropriate where a firm does not wish to expend its own time and resources focusing on procurement. In simple terms, the basic procurement function is itself outsourced.

It may also be appropriate where a firm does not wish to collaborate with its competitors due to cultural, strategic or other reasons. Another benefit to the outsourcing model is that, in theory, a firm can achieve greater buying leverage while remaining invisible to other members of the consortium.

Challenges with the outsourcing approach include:

incentivising the supplier to get the best price for supplies, particularly where a cost-plus model is applied;
ensuring that volume rebates are passed on in full to clients;
the risk of insolvency of the supplier;
the lack of choice of supplies and the supplier having control of the buying process (unless both elements are covered in the outsourcing contract); and
the risk of poor service from the supplier.

All of these matters can be covered to a degree in the outsourcing contract.

david.copping@farrer.co.uk