I recently read about a General Counsel breathing a sigh of relief regarding his ability to navigate the new economic reality by securing 25% discounts on hourly rates from his outside counsel. That sounds good, but there are two things that should temper that sigh of relief. First, it is not sustainable. At some point, the discounts will revert back, not just to what the rates where, but what they have been raised to during the discount period.
But more importantly, a 25% discount on hourly rates does not translate into a 25% reduction in fees. The data supporting this are by now widespread, but I thought it would be worth illustrating why this is so. The core reason is that GCs seeking discounts and firms offering them are focused on two different numbers. We know that the cost of outside counsel billing hourly is calculated as:
Hours x Rate = Cost
And because the customer’s cost is the firm’s revenue, the firm looks at the same formula. But while the GC is congratulating himself on securing the discount on hourly rates, the firm is focused on the revenue number. In troubled times, firms don’t care if revenue is achieved by more hours, higher rates, or both. They just want the revenue number to be as high as possible.
Consider this example:
Bingo! The firm has turned a 25% discount into a roughly 10% discount, which most firms give routinely. And given that there is one less person involved, the 10% impact is lessened.
The moral of this story? If you expect discounts in hourly rates to translate into like discounts in fees paid, you better be familiar with the staffing pre-discount and post, and the way work is spread among the staff. Firms are really good at this type of analysis. I want to emphasize that not every firm and not every partner handles matters in this fashion. But some do. Many years ago, one firm encouraged its partners to “manage hours up” to cover the cost of a salary increase to associates. The answer is to have your eyes open and look carefully to see the story your data tells.
Of course, the other approach is to fix fees for periods of time or milestones on cases. That approach provides a great deal more protection for a budget under assault.