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Saturday, September 7, 2013

The elasticity of pricing professional services

This post keys off the following article from Wales, involving changes in the UK procurement rules for professional legal services.

UK Government's big change to legal plans after protest by lawyers
The UK Government has scrapped plans to award legal aid contracts to the lowest bidders after protest from lawyers who warned high street firms could go bust.

Justice Secretary Chris Grayling announced there would be a set number of contracts for duty work – such as that picked up in police stations – and these would be assessed on the quality and capacity of firms bidding for them. Under the original proposals, price would have been a key factor. There will be an unlimited number of contracts available for own client work, providing minimum quality requirements are met.

The Government stated that “providers delivering services in Wales would be required to ensure that services are accessible to, and understandable by, clients whose language of choice is Welsh”.

Andrew Thomas QC, who has practised across North Wales, welcomed the changes. He said: “The Government had proposed handing the work to big national companies looking to provide a cut-price service. “The intention was to take away the public’s right to choose a lawyer they know and trust, forcing them to accept the provider which had bid the lowest. Quality of service would have gone out the window.
The ABA Model Code provides a variety of "methods of source selection", that is to say, procurement mechanisms. In each, price plays, of course, a key relevant role, but in different ways. There is the common "competitive sealed bid" process whereby bids are assessed against objective criteria and specifications, and the contract goes to the lowest submitted price, without negotiation. It is, in essence, a plain vanilla auction.

The 1979 version of the ABA Model Code contained two different "proposal" methods, one called a competitive sealed proposal (let's call it the RFCP method: request for competitive sealed proposals) and the other a proposal for professional services (let's say RFP: request for proposals). The pricing mechanism differs. In the RFCP method, price is given a particular points weighting in the RFCP solicitation, and is negotiated along with other elements of the solicitation but is not re-weighted, with the best ultimate points winner getting the nod.

In the RFP method, price is not initially considered or even disclosed. Given the classically described in-elasticity of professional service of economics models, price is not a factor in the first instance of choosing the best service available. In the first instance, the quality of the service required relative to the outcome needed is the only consideration. Offerors are ranked in terms of deemed "best offer" of service, from best to least. At that point, the critical price factor comes in to play. The first best offeror is chosen to engage in negotiation for a fair and reasonable compensation. If a fair and reasonable price is agreed upon, the award goes to that offeror. If fair and reasonable price is not obtained from the first best, negotiations begin anew for compensation with the next best offeror.

What draws this story to my attention is the need to have a mechanism for obtaining professional services where quality of service is the foremost first objective. The story illustrates the desirability of a source selection method that places primacy of the professional service factor over price.

The ABA has jettisoned the separate old RFP system, subsuming it within the RFCP method, which requires a careful understanding and use of the weighting process by the procurement officer. It is a decision that is rarely if ever second-guessed, so can lead to less than ideal results, if not abuse.

Guam, which has adopted most of the ABA MC model, curiously kept the RFP method but years ago, soon after adoption, jettisoned the RFCP method, most likely because it is not easily an objectively verifiable selection process and easily subjected to abuse. I would think there is room in the quiver for both arrows, each more useful than the other in particular instances.

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