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Proposals in competitive bids tell you market costs, not actual costs

Cal. Mgt. Rev., Vol. 49, Summer 2007 at 56, has an article about strategic sourcing of services. It makes a thoughtful point about law department’s bidding work to law firms (See my post of May 21, 2007 on bids compared to auctions.). “While a competitive bid sourcing process can provide good insight into the current market pricing for a predefined service, it rarely provides insight into the underlying dynamics of the supplier’s cost structure or the relative costs of the various activities the supplier is taking on. In essence, competitive bidding may tell you what the service does cost, but it does not tell you what a service should cost.”

Managers of law departments do well to run competitive processes before they pick a firm. The process, as noted, does not tell them about how firms operate themselves (“the underlying dynamics of the supplier’s cost structure”) nor much about what an ideal market would price the same services.