Writing Alternative Billing Alternatives gave me an excuse to contact my friend, Jeff Rovner, for some background detail on the superb session he, Jeffrey Brandt,Thomas Gaines, and Eugene Stein presented at ILTA09. In our e-mail exchange today, he provided the following additional insights:
- In his original example, he proposed a 10% discount in rates for discussion purposes. However, in our conversation he told me that a 15% discount is becoming increasingly common in the market. If that’s the case, the consequences are even more striking. To prove this, let’s rerun his example using the new discount:
- Assume a law firm profit margin of 40%
- Apply a 15% discount on rates
- This results in a 38% decline in profits
- It’s ill-advised to view ad hoc discounts as a reasonable short-term fix. Even if current economic conditions last for only a couple of years, the impact of a 38% decline in profits in each of those years could be very damaging to a firm unless competing firms are similarly affected.
- While a firm may successfully reduce the fees it offers clients by implementing alternative billing arrangements, if that firm continues to perform its legal work exactly as it did in the days of the billable hour, it will not be able to off-set lower fees with lower expenses. The result is a “disguised discount,” with the resulting hit to profits.
- In the panel’s view, the best approach is for a firm to lower its internal costs of delivering client service, and then pass all or part of those savings on to its client through alternative billing arrangements. By doing so, the client reduces its legal spend and the firm’s profitability is not impaired.
There’s clearly much more than should be discussed about these issues. I do hope this ILTA session sparks further useful analysis and conversation.
[Photo Credit: twenty questions]