A recent trend over the past several years in legal has taken shape where in particular large national law firms have partnered with Procurement Consulting firms such as (Profit Recovery Partners (PRC) to take a hard line negotiating stance with their incumbent office support outsourcing provider. Often the “negotiations” in the renewal process, which are based entirely by the procurement company’s benchmarking of what they claim industry labor costs to are contentious and adversarial, in contrast to the traditional RFP or closed bid renewal process. While these procurement firms do claim to extract at least 10% cost savings from incumbent vendors at minimum, there is no rationale in terms of where the savings is to come from.
What is particularly disturbing is the trend where an incumbent provider is essentially usurped or competitively displaced by a lower cost competitor, who simply assumes most/all of the former vendor’s on site labor pool, but reduces their wages and benefits to eke out cost savings to the law firm client. These tactics are predatory and underscore how these procurement-based consulting firms treat outsourcing labor-based solutions and the people themselves as commodities.
This commoditization of the on-site office support services outsourcing business is one of the real disturbing trends in the industry. It destroys the continuity of an incumbent vendor’s service capabilities, invalidates their loyal, effective service to the Firm, typically results in competitive displacements for bottom line reasons only, which effectively diminishes the quality of the service, the staff (as some employees will no doubt leave after having their wages reduced by the new provider) as well fewer equipment choices as often the procurement consulting firm attempts to influence the law firm customer to a single office equipment provider, regardless of the Firm’s historical vendor choice or integration experience.
Granted, an incumbent service provider’s cost structures often experience contract creep and increased labor costs, in particular if there is low turnover to the staff, often passed on to the customer in the form of annual increases. Often those annualized increases, if the contract is not negotiated by a seasoned outsourcing RFP veteran, are beyond the typical index, the local Consumer Price Index. But there means to reign in these contract creep costs during the contract renewal process or even by putting the services out to bid.
But this new trend effectively says on site outsourcing services are like office supplies, and law firms should indiscriminately look to change outsourcing vendors the same way they should change office suppliers for a small percentage of savings.
In a recent example of this practice, for national law firm Bingham, once one of Fortune’s top 100 companies to work for (no longer, however) incumbent vendor Merrill, which had their contract extension renegotiated by RAS and the Firm to a 20% savings in 2011 (after winning the services contract in early 2008), was ushered out the door in favor or a competitor, DTI. Bingham recently had a change in its Executive Director position, who brought in PRC, a procurement consulting firm that specializes in strong arm tactics to reduce law firm vendor spend, based almost exclusively on its benchmarking data. While benchmarking data is very useful as a tool to substantiate items such as labor rates, equipment costs, etc., it cannot be the sole source for decision-making for these services.
Merrill claims that they were told all along in the process by either The Firm or PRC that if they significantly reduced their costs, a renewal was eminent, only to eventually be displaced by DTI, who, Merrill claims, hired most/all of their former employees but cut their salaries and reduced their benefits by a reported 50% to save costs.
DTI, apparently, has been the recent beneficiary of several deals with this blueprint with PRC, in effect partnering with the procurement consulting firm (conspiring?) to supplant incumbent providers, a predatory practice that ironically DTI and other vendors fell victim to earlier in the decade with another vendor/consultant arrangement. Granted other vendors would no doubt smear the same blood as DTI has in this case in order to get new business in an area that is shrinking in revenues.
On site outsourcing services are still operationally-driven, require SLAs and require a staff that is motivated and has high morale to fulfill these all important services.
But it is also possible that the commoditization of these services is also driven by an overall de-emphasis on the value and the diminished importance that mail delivery and distribution, facsimile and office copy center services, the traditional services that form the core of outsourcing services now have at law firm.
Simply put, these traditional core outsourced services are less critical to a law firm’s existence, what with digitization of so many documents all but eliminating central copy center copying services, dramatic reductions in incoming/outgoing mail and interoffice mail, also due to digitization and the virtual elimination of fax services all serving to make office support outsourcing services less and less significant. If the services are less significant, why a law firm would want to pay a perceived (and real) premium for these services is a very valid question.
In particular, Merrill Corporation, who specializes 98% of its business in legal but who has a higher cost structure typically than some of its competitors, may struggle to find relevance and retain its client base thanks to this new trend, or if they do retain their client base, their profit margins will be cut to the bone and difficult decisions on how to cut employee or overhead costs to maintain competitiveness to some of their smaller, more nimble competitors will be a challenge.