Amid the pandemic, law firms are experiencing acute cash flow issues; as a consequence, they may feel the need to offer discounts. They should resist this
We are in a period right now where many clients, perhaps more than even during the Great Recession, are experiencing acute cash flow issues. As a consequence, law firms are feeling a distinct tightening.
Perhaps more now than ever too, cash is king for law firms. As a result, most firms are placing a high emphasis on collecting as much cash as they can as quickly as they can. This is leading many firm partners to do whatever they feel they must in order to collect on their outstanding fees. While the need to bring cash in the door is paramount, especially now, not all strategies to bolster cash collection are created equal.
I recently spoke with several advisory board members for the Legal Value Network (LVN) who are some of the most experienced law firm pricing strategists in the industry about firms offering discounts at a time like this, and whether there may be better options to bolster law firm cash flow. The members have asked not to be identified so as to be able to speak more candidly.
Offer fee relief, not a discount
The idea of offering fee relief rather than a discount may seem like semantics; but lawyers make a living dealing in semantics. Discounts can be applied across the spectrum of law firm fee structures — from standard rates for the sake of engaging new matters, to work in progress as a means of managing the bill. They also can be applied after an invoice has been sent or at any point in between. Fee relief, on the other hand, is specifically applied only at the point of the final bill.
This makes an important difference because of the expectation it sets with the client. A discount that appears to be applied to the rates can change the client’s perception of how solid the firm’s rates really are. Fee relief, on the other hand, maintains the integrity of the firm’s rate structure, but still gives the client the accommodation needed to assist with short-term struggles.
Imagine a scenario where the firm wants to extend some extra help to a struggling client, said one LVN board member. The firm offers to provide two associates who normally bill $200 per hour each, but the firm will only bill $200 per hour for the pair, a substantial savings to the client. This is a potential win-win scenario as the firm can keep some of its attorneys busy while the client receives desperately needed help at a more budget-friendly price.
The trick comes in how the firm positions this offer, though. If both associates are offered at a 50% discount off their usual rate, the client will actually see a bill for two associates at $100 per hour each. This unfortunately (for the firm) now establishes a new billing rate of $100 for each of these attorneys in the client’s eyes, and this perception may extend far beyond the current crisis. On the other hand, if the client receives a bill for the full amount of the associates’ fees worked with fee relief in the form of a credit equal to the full value of the work of one of the associates, the firm has maintained the position that each associate is a $200 per hour resource. Ultimately, the client is still saving half-off the total bill. Same landing, very different airports in terms of the firm’s long-term strategy.
The LVN members all agreed that any relief sought by or offered to clients due to the current economic doldrums should be addressed by means of fee relief rather than discount.
Be cautious setting discount thresholds
It was common practice prior to the pandemic — and anecdotally has become more common since — to allow partners at law firms a certain amount of discretion in their ability to discount their rates before they have to seek approval, For example, some firms would allow a discount of up to 10% to be given before the partner was required to get approval. However, the pricing leaders I spoke to cautioned against this practice as a way to respond to today’s financial strains.
What lawyers can do, they will do. And that means, if they have permission to go up to a 10% discount, then you can almost guarantee that all rates will be discounted by 10%, making it very difficult to claw back once the current situation subsides.
Setting discount thresholds may be a wise strategy for the firm more generally in terms of rate setting and structures, but such a strategy may not work as a crisis response.
Consider switching to fixed fees
The LVN members unanimously advocated that now is the best time to enter into serious discussions with clients about transitioning more work away from hourly billing and to fixed fees. Such a shift presents an opportunity to better negotiate the scope of work to be performed, which gives both the firm and the client clearer expectations of exactly what work will be needed and at what price.
If a true fixed fee arrangement doesn’t feel appropriate for a given law firm or individual matter, consider putting mechanisms in place to provide meaningful, realistic budgets for these matters. Both budgets and fixed fees allow the firm to demonstrate cost-per-matter savings, which is a key consideration for clients’ law departments as they face intense internal pressure to manage costs.
Be proactive and forward looking
I left my discussion with these pricing leaders with a couple of key takeaways:
- Smart firms will go on offense — Clients are scrambling right now, and they will appreciate any efforts by their outside counsel to proactively address their pain points. Bringing forward ideas like fee relief or fixed fees allows a law firm to provide much-needed assistance to clients, but on the firm’s terms.
- Don’t lose sight of long-term strategies — Carefully consider what your firm is willing to offer as a means of crisis relief and whether it complements or undercuts long-term goals. Look past the immediate situation and toward the best outcome for the firm. The wrong short-term approaches can create lasting damage.
As the pandemic goes forward and law firms continue to feel a tightening in their cash flow, these tactics may be their best strategy to address acute revenue issues.