Get off (and stay off) slippery slope of fee discounting

Published on: 
11/22/2010
Lawyers should resist discounting their fees, particularly if the client has already agreed to pay the full amount in the engagement agreement. Clients who argue about overbilling often just want a discounted bill.

Such tactics are quite popular with clients at the end of the calendar year. They agree to pay their large bills in order to wrangle discounts because the remuneration system for partners is based on how much has been collected by the year's end. Any bills collected in January do not count toward lawyer compensation for another 11 months. Knowing that, some clients attempt to discount their fees on every matter.

Worse is when law firms themselves propose the discount. A firm often will offer some type of discount for repeat clients with significant billings in its year-end push to collect fees. Even clients with a signed fee agreement soon decide not to pay without a discount.

Any fee ultimately can be justified if it reflects the cost structure behind it and if the client accepts the value that the fee represents. Value is ultimately determined by the client, but the attorney must educate the client about "value" from the perspective of business operations (budget, collections, profit, loss, etc.)

Most clients are willing to pay a fair fee for value. What they do not want is to pay for inefficiencies, duplications or unnecessary services. The cost of legal services will not be seen as excessive when the client and lawyer act as a team and create a budget for future services. The parties generally find that each one will assume certain risks and that the costs will be acceptable.

Even in this dynamic, however, there will be clients who think, "I'm not going to pay in full now; I'll wait until the end of the year when I know I'll receive a discount."

Here are a few tactics to combat that mindset:

  • Offer a discount immediately to get outstanding bills paid, emphasizing that there will be no more discounting come December — or any other month — irrespective of the firm's failure to enforce that policy in the past. Get full acknowledgement of both the discount acceptance and the future adherence to the fee agreement.

  • Tell clients that unless they honor the agreement that they accepted and signed, the firm will discontinue working for them under Rule 1.16 of the Rules of Professional Conduct. They should get other counsel, and the firm will seek to enforce collection of all billed fees outstanding.

  • Accept the discount process and admit that means accepting less than 100 percent, then compensate by raising the fee/rate either higher or sooner than other firms.

    Other, more strategic alternatives are available to address a discounting request — none as good as enforcing a signed agreement, but all better than an ad hoc response:

  • Take value/services off the table in order to deliver a lower price to the client. In effect, when the client wants a reduced price, unbundle the services to accomplish that objective. For example, if returning phone calls within two hours are part of your regular hourly rate, take that response time off the table and tell the client that your response time will be 24 or 48 hours. The point will be clear: You're not giving a discount; you're changing the value composition of what the client is buying.

  • Give clients the "power of the pen" by guaranteeing they will be satisfied with the service they receive and inviting them to write down their bills if they are not satisfied.

    Of course, no lawyer can ethically guarantee a result; doing so violates Rule of Professional Conduct 7.1's prohibition of false or misleading communication.

    However, lawyers can guarantee a certain degree of effort. Assert, as do a number of firms nationally, that if you do not perform to the client's satisfaction you will resolve the issue even if it means reducing your legal fee to what the client thinks it is worth. Giving clients such an opportunity generally means that it will rarely be used, in effect acting as a deterrent against a discounting request.

  • Use alternative billing methods when appropriate, such as a flat-fee arrangement in which the billing rate is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends or what the result may be.

    Flat fees are especially useful for routine legal services and encourage the use of technology to streamline the provision of those services. It should go without saying that a volume discount at a flat fee should be based on a prospective, rather than a retrospective, guarantee of work — or, even worse, on a possibility of work. Anything other than a prospective arrangement fails to offer any security and makes planning impossible.

    The fundamental idea of a flat fee is that the firm offering it is willing to treat clients fairly when clients reciprocate. In other words, the quid pro quo for a flat fee is a guarantee with payment up front, such that the payment will not be subject to a discounting request. It makes no sense to do business with a client who will not agree to do that.

    At what point do you decide that your bill is what it is, without feeling the need to be defensive about it or to discount it? No matter what the economic conditions, that question goes to the heart of what it means to be a lawyer. Our objective should be to provide and account for our service in such a way that clients understand and accept its value as well as its cost.

    Make sure the client knows you have the skill and experience to justify your fee and that it is competitive with others in your geographic and practice areas.

Above all, communicate regularly with your clients. Don't wait for them to ask you to discount fees; continually demonstrate to clients what you've done for them. That helps clients see the effort made on their behalf and should make them less likely to request, or even to consider, that you cut your fees.

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