A calculation of savings from a competitive bid

Is there a defensible way to calculate savings from a competitive bid process? The answer is definitely “yes” if the bids are for fixed fees (See my post of Aug. 5, 2007 for my recommended methodology.). If, however, the law firms submit proposed budgets, but with no commitment to adhere to them, can you still calculate any reductions in projected spending?

Certainly you can if you compare the projected budget of the firm you select to the average of the projected budgets of the other law firms that competed. Not that you always choose a firm that anticipates costs below the average, but if you do, two forms of savings are at work.

At the first level, procurement professionals say that the mere fact that the law firms know that they are competing against capable other firms will temper their budget estimates – some use figures on the order of 7 percent. The other saving, more provable, is the selection of a below-average-cost firm.

Even then, once you have selected a firm, a third step is to negotiate a hold-back, discount or rate freeze with the selected firm (See my posts of April 26, 2006 on billing-rate freezes imposed too broadly; but Dec. 17, 2007 on per-matter rate freezes.).