Using reverse e-auctions to procure legal work  isn’t entirely new , but companies have typically limited bidding to high-volume, non-critical work Honeywell General Counsel Katherine Adams  is using e-auctions on a larger scale, even for litigation. Law firms, Adams said, were initially “kind of shocked by this.”

“We might e-auction a litigation matter and set certain parameters. We might say, okay, assume you have to take the case through trial, assume there will be summary judgment motions, assume there will be some number of experts — all the variables that might go into the case,” Adams said. “Then the firms bid against each other.”

Adams said Honeywell typically gets a better deal because of the e-auction process, but “it’s not grotesquely cheaper." She was also quick to add that the e-auction process gives firms the benefit of greater transparency into how others are billing for certain kinds of matters.

A graduate of Brown University and the University of Chicago Law School, Adams was a partner at Sidley Austin before coming to Honeywell. Based in New Jersey, she recently spoke to Big Law Business about the benefits of the e-auction process, law firm inefficiency, and her relationship with former Supreme Court Justice Sandra Day O’Connor.

Honeywell is a Fortune 100 company that invents and manufactures a range of products, which include aerospace technology used in commercial and defense aircraft platforms, smart environmental controls, high performance chemicals and efficiency transportation technologies.

Part I Excerpts:

We’re not bigger. In fact we’re smaller, numerically, than we were in 2003, but we’ve structured ourselves to be more effective. I don’t think a corporate legal department needs to be bigger.

If somebody wanted to hire a lawyer, they’d just hire a lawyer. They paid them, and we got whatever outcome we got, and nobody really went back and looked at the track record after the fact. We’ve changed all that.

We’re not trying to create an uneconomic environment for our firms. We want to partner with them, and I mean that in the truest sense.

Every year at Honeywell we have to find new ways to be productive across the company. That’s just the nature of business. It’s hard for law firms to do that, and I think tools like [e-auctions] may ultimately be helpful in giving them more information, better information, about what they need to do to stay competitive.

Below is an edited transcript of the first installment of the interview.

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Big Law Business:  How have you seen the legal department change since you came to Honeywell? Has the department, like others, gotten bigger?

Adams: We’re not bigger. In fact we’re smaller, numerically, than we were in 2003, but we’ve structured ourselves to be more effective. I don’t think a corporate legal department needs to be bigger. There’s a certain scale you need to get the work done.

We could argue around the margins about what the appropriate scale is, but our strategy has been to hire the very best people across the board, to place those people at the point where they can be the most effective, and to give them stature in the organization.

Obviously, we leverage outside counsel. We also have contracts with professionals, many of whom are lawyers who do a lot of the day-to-day contracting. But even there, we try not to drive the work down to too many different people. We want to hire people that have expertise and a high level of competence in what they’re doing.

Big Law Business:  Does running a leaner legal department mean you rely more heavily on outside counsel?

Adams: It’s hard to say. We’ve actually reduced our outside counsel spending by 40 per cent since I came here. A lot of that is due to what we refer to as “preventive law efforts,” which basically entails developing better overall practices in the company to head off legal issues from the get-go.

When I came to the company we had hundreds of law firms. I had a list printed out in 2003, and it went on for pages and pages. There just hadn’t been any effort to consolidate the work and get efficiency. It was a different time, so I’m not being critical of my predecessors in saying this. It’s just the way people operated.

We didn’t have any system for evaluating firms, so if somebody wanted to hire a lawyer, they’d just hire a lawyer. They paid them, and we got whatever outcome we got, and nobody really went back and looked at the track record after the fact.

We’ve changed all that. We’ve consolidated with different groups of firms for different kinds of work. We tried to push the work to the core providers, because we’re demanding a lot of price concessions, but the law firm has the benefit of volume, because it has to be fair to everybody.

We’re not trying to create an uneconomic environment for our firms. We want to partner with them, and I mean that in the truest sense. We’ve identified core groups of firms that we’re primarily going to use, and we give them preferential treatment in terms of the allocation of the work.

But we also have an annual review. We survey everybody that’s worked with a firm at the company and get their feedback on a matter-by-matter basis, then we sit down with the managing partner or the relationship partner and go through all the feedback, and talk about where they stand in relation to other firms, in terms of quality and cost.

Big Law Business: What are the firms Honeywell relies on most heavily?

Adams:You know, one interesting thing we’ve been doing is using e-auctions to set market prices. Our firms were kind of shocked by this. It’s an online auction process where we invite six or seven firms, and they bid on a matter. They’ll bid out their senior partner, mid-level partner, a couple of associate ranks, paralegals, and they can see exactly what the other firms are bidding, though they don’t know exactly who is behind the bid.

Once the auction is over, we have a set of rates we hold those firms to. It doesn’t guarantee them the work — it just means that if we award the work, we’re going to lock in the preferred rates. I guess there’s probably more than five or six firms, because we’ve done this process across practice areas.

But certainly O’Melveny has been a key provider for us. So have Kirkland & Ellis , McDermott Will & Emery , Arnold & Porter , Jenner & Block , and Hogan Lovells .

Big Law Business:  Is this something other companies are doing?

Adams: I don’t know of any other. The firms tell us they’ve never done it with anybody else. As far as I know, we’re the first.

Big Law Business: Maybe say a little more about how that process works.

Adams: Well, let me back up. First of all, it’s a company-wide tool. It’s something we use for all procurements, not just law. In fact, it’s really kind of innovative to apply the tool to the law, or the services work, because typically you would think of it for more commodity-type buys.

So, for example, we might e-auction a litigation matter and set certain parameters. We might say, okay, assume you have to take the case through trial, assume there will be summary judgment motions, assume there will be some number of experts — all the variables that might go into the case, including what jurisdiction it’s in. Obviously we need quality, so we’re also going to put in some non-negotiable requirements about how a matter is going to be staffed, for example.

Then the firms bid against each other. Typically, for something like I’ve described, we’ll ask for a fixed price for the matter, but we reserve the right not to take the lowest bidder, because we don’t know what compromises they might have made to get to that low bid.

Before we decide, we’re going to peek behind the curtain and understand exactly how a firm plans to manage the case. But certainly the price is going to be a very important component of our analysis. That’s what you get through the auction.

Big Law Business: I assume the firms that are bidding are typically firms you already have relationships with.

Adams: Absolutely, yes. Sometimes we’ll bring in somebody new that is hungry and has been asking for a shot at it, but even if they were new, it would be a firm that we had previously vetted and had a reason to consider able to work for us.

Big Law Business: How did firms react when you first started using the e-auctions?

Adams: It was a little bit of shock and awe, I’d imagine. There were some firms, initially, that basically said, “We don’t want to do this,” but more recently we’re getting great participation.

It’s like Chief Justice Rehnquist said—"You’ve got to take the bitter with the sweet.” In some sense, for the firms, it’s a bit bitter, but the sweet piece is that it allows them to see what the market price is. I think that’s an issue for law firms. They don’t really have a lot of transparency about what the competition is doing, and this process lets you see what people think is the market price for certain work.

Typically, we get a better deal, but it’s not grotesquely cheaper. The e-auction process just strips away some of the padding or the lack of clarity when you do it the old-fashioned way of just chatting with somebody by phone, and they give you a “back of the envelope” budget.

The e-auction process just strips away some of the padding or the lack of clarity when you do it the old-fashioned way

Big Law Business: Do you think this is something that could catch on? Can you think of any reason why this wouldn’t work for other companies?

Adams: Well, you do have to design the e-auctions correctly. It’s probably not worth getting into, but it does take quite a bit of effort to properly design an auction for services, so that’s a bit of an impediment.

We’ve kind of chopped a lot of wood to get good at it, and we did have some that weren’t as successful as others. Now that we know how to do it, we’re doing it much more effectively. I think it’s certainly something that other companies could use.

I also have a lot of friends running law firms, and I’m very sympathetic to the situation they find themselves in. They’ve got, typically, partnerships with complex governance, and certain deep expectations about compensation that are in tension with the productivity realities of the rest of the world.

Every year at Honeywell we have to find new ways to be productive across the company. That’s just the nature of business. It’s hard for law firms to do that, and I think tools like this may ultimately be helpful in giving them more information, better information, about what they need to do to stay competitive.

Big Law Business: Is there a particular company you use that provides the service? When exactly did you start using e-auctions?

Adams: There are online tools, purchasable as software. We’re supported by the Honeywell procurement organization, so we have a group here who specializes in buying things for us, and we have some dedicated professionals who support the law department. We are deep into our second full year of this.

Part II of the Kate Adams series will include:more of Adams’s thoughts on Honeywell’s e-auction process, her take on law firm diversity, and lessons she learned clerking for Supreme Court Justice Sandra Day O’Connor.