For years I've counseled my clients that responding to RFPs is usually a waste of time, especially when compared to what you can accomplish with the same amount of time and money by pursuing tightly targeted business. Here's why.
- Are usually for commodity, low margin work that the buyer believes can be reduced to a formula
- Are often sham competitions to satisfy corporate or statutory bid requirements, but where the client knows who they want to have win
- Are usually written by, or at least are heavily influenced by, the incumbent law firm, with the conscious support of the buyer
- Are an attempt by the buyer to normalize all respondents, thereby preventing differentiation
- Are "screen out" exercises, evaluated by lower-level implementers rather than top-level decision-makers
- Emphasize price inordinately as a decision criteria, and often are precursors to serious price concessions
- Prevent access to decision-makers, trapping respondents in the role of task-fulfillers or vendors
Whenever I say this, someone always cites some piece of business they acquired via RFP as rebuttal. OK, you won that business. Good for you. But, did you make any money on it? What did it cost you to win? What has it cost you, overall, to play this game? Have you factored in the cost of all the RFPs you didn't win?
If you think that responding to RFPs is worthwhile, track the true costs of RFP responses:
- Preparation time spent by lawyers, your marketing department and researchers
- Lawyers' travel, presentation and follow-up time
- Travel cost
It doesn't take long to add up to a serious number, particularly when firms over-invest in the RFP because they see it as an entry point in a potentially huge client. (Before you're tempted by this thinking, analyze your clients and see a) what percentage remained at their original level or grew slightly, versus b) the percentage that actually grew to dwarf their initial matter value and, c) for the ones that did, how much additional time and money it cost to get there.)
Let's say that four lawyers each spend 10 hours on the RFP response prep, at an average of $400 per hour. That's $16,000 in direct opportunity cost (because those lawyers aren't billing those hours or selling to better prospects). Add to that another 20 hours by the Marketing department at an average of $75 per hour. (Even though they aren't billable timekeepers, it's still an opportunity cost because they have finite bandwidth and while they're working on this RFP response they're not helping other lawyers pursue business.) That's another $1500, for a total of $17,500, which you've spent not even knowing if you'll make the final cut to meet with the prospect and make a presentation. If you make the cut, and two partners spend a day on the road for the presentation, that's another 20 hours at $400 per hour, plus $1000 in travel expense. Add everything, and you've spent $26,500 on a speculative pursuit.
Using 36% as a simple guideline for gross operating margin, let's compare the gross profit from a $100,000 RFP sale requiring all the time and attention described above vs. a sole-source sale of the same amount achieved by six hours of targeted outreach by a single partner, plus an hour of coaching by a BD coach. Although it's often not required, we'll assume that the selling lawyer also traveled to another city to meet with the prospect. It would look like this:
The profit margin on the direct sale is triple that of the RFP sale. In the cases where the lawyer doesn't have to travel to meet the prospect (believe me, it's usually not necessary), the profit is 3.5 times that of the RFP:
This RFP cost-of-sales and profit calculation is only true if you win 100% of the RFPs you respond to, which isn't going to happen for all the reasons above that show how heavily the deck is stacked against anyone who isn't the incumbent. Let's say you win one of every three RFPs (which would be generous). Your overall profit on RFPs drops to 3%:
If your RFP win rate drops to one out of four, your overall profit drops to 2.4%; at one out of five you're making less than 2%, essentially nothing.
"Wait," you say, "this cost of sale is skewed by the small size of the sale." OK, let's see how much the sale would have to be worth to justify this cost. The only way to approach law firms' 36% gross profit norm is if the cost of sale is less than 1% of the gross revenue, i.e., in this example, if the RFP is worth $2 million, if you contain the cost-of-sale to the same level as the $100,000 sale, and if you win.
If you receive a significant number of RFPs each year, this is a really reliable signal that your practice has matured. You would be wise immediately to begin repositioning yourself for the future. Associate yourself with an emerging problem in a dynamic industry.
If you'd like to test scenarios that reflect your firm's circumstances, email me and I'll create a private copy of the spreadsheet for you, into which you can insert different values.
Would you feel more comfortable analyzing your market with the help of a seasoned coach to guide you? Book a free call with me to get started.