Discounts versus Rates - What's that price again?

After seeing and hearing too many fee discussions about discounts - a new thought clicked in my head. Clients are negotiating on discounts, not rates. The actual rates might matter with a wide a variation, but in most circumstances when clients push on law firms, it's not on the absolute rates, but instead it's about how big is the discount.
Upon reflection, there is a logic of sorts to this method. In-house counsel get pressure from management to cut legal fees. The simplest, most direct and seemingly logical message to bring back to management: We increased the discount by X% (which might be interpreted as - our legal fees will go down by X% this year).
The problem is - you can't and shouldn't make that leap of faith about savings . Even if the client/in-house lawyer keeps a close tab on hours billed (not the highest value task IMHO), then the absolute rate is what should matter - not the discount.
My suggestion to clients: If you want to maximize the return on your efforts with hourly billing, instead of talking discounts, focus your negotiations on rates.

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Steven said...

Absolutely right.

So here's a math problem. A firm raises its rates by 10% and you negotiate a 10% discount. How much of a discount are you actually getting?

The theoretical answer is 1%. (100% + 10% = 110%. Paying only 90% of 110% is 99% of the starting point.) The practical answer is that you may pay more, because the partners have incentive to raise their total revenue, which applies a subtle pressure to bill additional hours... or put their "best" people on no-discount projects and leave you with the folks that aren't billing as much.

So while I agree that negotiating rates is better than negotiating discounts, the real win is when you negotiate outcome and value.
-- Steven B. Levy, author of "Legal Project Management: Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity"


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