The danger of discounted rates

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At the risk of being mistaken for an Ayn Rand devotee, one of my favourite moments in The Incredibles comes when Helen (Elastigirl) is admonishing her son Dash, who’s upset because he’s not allowed to use the super-speed that makes him special. “Everyone’s special, Dash,” says Helen, to which Dash mutters under his breath: “That’s another way of saying no one is.”

I thought of that line when I read the results of a fees and pricing benchmark survey published by RainToday.com (HT to The Greatest American Lawyer via Legal Blog Watch). Headlining the uniformly interesting results was the observation that 78% of all firms discount their rates (a startling 89% of firms with ten lawyers or more) from what they’ve advertised or initially advised the client. The average discount is 9.9%.

When everyone is discounting their rates, then no one is.

When you hear “alternative billing” discussed by lawyers and clients today, what’s being talked about most frequently is rate discounts: the lawyer knocks X percentage or Y dollars off the “going rate” in order to satisfy a client demand. The client is happy because she feels she carries enough influence to force a fee break; if she’s in-house, she can report to her bosses that she haggled the lawyer down from the starting rate, thereby proving her negotiating acumen and hard-line position on costs.

The lawyer’s happy too, for a bunch of reasons. The rate is not nearly as important as the number of hours he can bill, which has a far greater impact on the final tally and is anyway the criteria that the partnership cares about most. Moreover, any halfway clever lawyer builds into his rate the distinct possibility of future discount, ensuring that the final actual rate doesn’t plunge too deeply below what he actually wants to make. And of course, the most important thing is to actually get the work and strengthen the relationship, to ensure more work in future. In this light, the rate is a card the lawyer can afford to play early and easily when negotiating the overall agreement to produce legal work.

This lovely scenario grows problematic, of course, when discounting becomes so ubiquitous that it loses its cachet as a real benefit to the client. The point is rapidly approaching (if it’s not already here) when a lawyer offers a discount and the client shrugs and says, “You and everyone else. What else you got?” The lawyer presumably could offer a steeper discount, but that’s a difference of degree, not nature, and his rivals would soon follow suit, either causing another round of “standard rate” repricing adjustments or putting actual profitability in peril. And in any event, when you start really competing on price, no matter how good you might be, you’re in trouble.

But here’s what I think the real issue is with lawyers discounting their rates: it’s that invariably, the lawyer can’t provide a solid, rational explanation for why the standard rate is what it is in the first place. Most lawyers charge either (a) the going rate (what other lawyers in their field and with their experience seem to charge), or (b) the highest amount the market will bear. They don’t have an integrated economic model that details their revenues and expenses and explains their profit model.

Partly this is because lawyers have never needed to provide one — it wasn’t that long ago that one-line bills for “services rendered” were accepted without question by clients. Partly it’s because lawyers, unlike manufacturers or other businesspeople, don’t have traditional costs of doing business such as raw materials or processing, and so they can’t easily adapt traditional marketplace models. (That’s not to say pricing models don’t exist for lawyers — Ward Bower of Altman Weil has a great one.)

But mostly, I think, it’s because the value that lawyers deliver always varies from case to case and from client to client. The same task can be worth far less or far more than “usual,” depending on when the client wants it, how much (or little) the client needs it, what kind of benefit is delivered (or penalty is avoided) to the client by the successful completion of the task, and other factors. The simple fact is that the real value of a lawyer’s services have very little to do with the lawyer and almost everything to do with the client.

Viewed in this light, the idea of a “standard rate” loses much of its meaning — it’s a useful jumping-off point to the extent that it tells the client how much the lawyer thinks his or her applied talents are worth. Weak or unsophisticated clients will be inclined to accept this valuation prima facie — the problem for lawyers is that those kinds of clients are drying up fast. Clients with more leverage have the ability and (increasingly) the inclination to take that “standard rate” and dictate to the lawyer whether it corresponds with the reality of the client’s needs, circumstances and overall goals.

That’s why I think news that the great majority of lawyers are discounting their fees is a dangerous omen for the profession. It means that clients are finding lawyers’ “standard rate” pitched higher than their needs and objectives can justify. And because most lawyers can’t respond to clients’ discount demands with a detailed, rational explanation of what their services are worth, the lawyer is the one coming to occupy the role of “unsophisticated participant” in the fee negotiation process.

There are two lessons lawyers should take from this. The first is that if they’re going to tell clients they have a standard rate, they’d better be prepared to deliver a bulletproof financial breakdown of how they arrived at that rate and why it’s justified; “this is what other lawyers charge” won’t cut it. The second is that lawyers need to develop a much sharper understanding of their clients’ needs, circumstances, and objectives — because ultimately, those are the factors that are really going to control how much money the lawyer makes.

People who don’t really know what their services are worth always tend to undersell them, because they don’t have a good comeback when challenged on price. Make sure you have a comeback, and make sure you tie your ultimate price to the value derived by the client. It’s going to happen anyway — so you might as well be the one driving the process, rather than always being reactive, constantly discounting your rates, constantly undermining your value.

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