6/28/10

Reducing Legal Fees: The Next Big Mistake

The first big mistake made on reducing legal fees was the focus by clients on rates and hourly discounts. We have previously talked about the value of this approach. Lower rates do not directly correlate to lower fees. Admittedly hourly rates have some impact, however, lowering unit costs without talking about number of units will have a marginal impact on costs at best.
The Next Big Mistake
Now we're hearing a lot of talk about the level of associate salaries (especially first years') and partner compensation from clients and client communities. Although it is not said quite this directly, clients are wanting to see published associate salaries and PPEP (profits per equity partner) numbers go down. Clients seem to be saying "When your comp goes down, that means I'll truly be saving money."
Thinking lower first year salaries or lower PPEP numbers will mean lower fees is yet another mistake. On the surface it may sound like there is a direct connection between lower fees and lawyer compensation, however this is not the case. To illustrate this point, consider that giving business to less profitable vendors of any type does equate to savings. In fact it has an equal or better chance of resulting in the opposite.
Taking a higher level view of this trend, I can see its source. In-house counsel have had issues with billing rates and outside counsel comp for years. So when internal pressures rose to decrease legal fees, the first two things in-house counsel would address are rates and comp.
My advice to clients: If you want to impact legal fees, focus your conversations on fees. I can appreciate the frustrations with rates and comp, but you should move past those and shift your attention to the real issue - Fees. I also appreciate that fees and cost savings are a new and challenging aspect of your job. Facing these issues head-on will be the least painful and most effect approach, in the short and long run.

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5 comments:

Steven B. Levy, Author of Legal Project Management: Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity said...

I'd go one step further and suggest conversations focus first on outcomes, then on out-of-scope, and only then on fees (a/k/a cost, rates, etc.). A significant cause of price unhappiness, I believe, arises from a lack of full agreement on what to do, what not to do, and what success ("Done") looks like.

Imagine this conversation.
- I want a TV.
- We have a good one for $429.
- I only want to pay $399.
- Okay, here's your TV.
- Thank you.

Unrealistic, you say. Where's the discussion over what kind of TV? What size? What brand? What quality?

Yet tell me how many conversations around engaging legal services look like this....

Aunt Debbie said...

I think big law is missing the point. Personally I do most of my communicating with law firm counsel electronically. I am not in your offices and don't need to be. Cut your overhead big firms get rid of the fancy offices, art work, plants, etc. You are subsidizing so much (old school) overhead you can't afford to drop your rates so instead you cut headcount. This is an e-world now haven't you noticed and by the way cubicles CAN come with doors.

Anonymous said...

I have never been concerned with associate billing rates or profits per partner.

I am concerned about the bottom-line cost to my company, so that is where I focus my attention with outside counsel. If a law firm sends me an invoice that is unexepectedly high, then I will have a talk with my lawyers. If it cannot be resolved, I will use another firm. It is as simple as that.

Anonymous said...

Where's the conversation on Value?

We all know that when you push down rates things seem to take longer. When time is money and getting it right is important, scratching around for a few extra dollars on fee cuts makes absolutely no sense at all.

I think law firms can make a very good case to raise their fees as long as they can show value.

Annon. General Counsel

James C. Roberts III said...

The argument in the post is correct: Lower rates help but it comes down to the "units" charged--i.e., number of hours for a project. Conversely, flat (or unit) fee projects run the risk of sloppy work (I am talking here about transactional and corporate work, not litigation).

We use flat and unit fee arrangements almost all the time now. We tell the client what it WILL cost but also explain risks and propose contingency plans. Clients have always been willing to go with the higher fee if we have to use a contingency plan.

Clients don't like surprises in their invoices. We try to give them an estimate at the start of, and a heads-up midway through, any billing cycle.

Minimizing surprises and providing the expected value keeps our clients coming back to us.

 

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