Services Firms Hit by Procurement Buzz Saw
Commentary on:
Pricing Tactic Spooks Lawyers: Companies’ Use of Reverse Auctions to Negotiate Legal Services is Accelerating
The Wall Street Journal, August 2, 2011
I know, I know the instinctive gut reaction to anything that upsets lawyers is one of evil glee but this story about the increasing use of reverse auctions to procure legal services should serve as a cautionary tale for every business. Every product or technology-focused company worth its salt knows that their core business is in constant danger of commoditization. Many are making significant investments in services as a way to differentiate and maintain pricing power. So when the hardest of hardcore procurement tactics start getting applied to high-end services, it is only a matter of time before the pricing of services of all types gets put under the microscope. Our recent experiences with a broad range of high-value service providers show that the problem is already widespread.
The issue isn’t whether reverse auctions are appropriate for services – in the majority of cases they currently are not. The issue is whether those who are selling those services are well-prepared to deal with the procurement buzz saw. In professional services, all too often the answer is “no.” Professional services have long been thought of as the ultimate relationship sell. “Technical” competence is the ante to get in the game but developing an intimate understanding of clients’ organizations, their business priorities, processes, and culture used to win the day. Procurement professionals want to take all of this off the table. In some cases, they have a valid point. In others they are dead wrong.
Services organizations need to think about this challenge at two levels. The first is to assess pricing potential through the lens of the product life cycle. Services naturally move through this same cycle. In new fields, service providers have information and expertise advantages over clients so they can charge higher prices. For services that have moved well down the life cycle, service providers rarely have unique knowledge relative to clients. These routine services will be commoditized and providers need to develop high-efficiency models that drive out costs and lower prices.
The second (and often the most urgent) level is development of processes, tools, and techniques to ensure that rainmakers have the ability and willingness to play hardball with procurement – particularly when they are selling and delivering high-value services. Even small changes in deal performance can drive major increases in profitability. In many professional services firms, “selling” and “negotiating” are dirty words. Those firms that get over their inhibitions will adapt and thrive in the new world. Those that don’t will shrink their way to irrelevance.
