In the world of supply chain management (Ch.11), dutch (or reverse) auctions are an effective way of finding the lowest price supplier of services or goods. This form of competitive bidding has suppliers bidding on-line: they start high, 
anonymously observe all the competing bidders in real-time, and keep lowering their quotes until they either win the job or drop out. Ariba, in Sunnyvale, CA, is the biggest provider of reverse auction software tools.
An article in today’s Wall Street Journal (Aug.2, 2011) describes how more and more big firms are using dutch auctions to negotiate contracts with law firms. This trend will reduce the revenues attorneys can expect to reap from clients. Already GlaxoSmithKline, eBay, Toyota, and Sun Microsystems have used the tactic, especially on high-volume work such as tax filings and intellectual-property transactions. Many lawyers are worrying that these auction-based pricing strategies will spread to more complex projects. “Is it making all of us uncomfortable? Yes.” says the director of one large firm.
Legal expenses for Fortune 500 companies range from $20 million to $200 million/year, and many firms are beginning to use the auctions to drive down fees. Lawyers say that trying to prepare standardized bids– specifying time and labor standards– for big jobs are hard to do because of their variability. Glaxo disagrees and responds that standardized proposals and reverse auctions make it easier to more fairly evaluate firms’ cost-effectiveness on a uniform basis.
Costco Wholesale still pays for legal work on a traditional hourly basis. “There is loyalty from us and loyalty from them”, says the firm’s general counsel. But FMC Technologies’ legal head says: “Every lawyer will tell you that every piece of work they do is incredibly important and risky because it has to be custom-made, and that’s just nonsense”.
Discussion questions:
1. Why do manufacturers like to use dutch auctions?
2. Are providing legal services different from providing parts?