Practical Responses to Client Demands for a Fee Cut

Make sure that the client knows you have the skill and the experience to justify your fee, and that it is competitive with others in your geographic and practice areas. Also, document your fee with billing statements that are easy to understand and clearly list actions taken on the client's behalf while relating the actions to the time it took to realize that value. Above all, communicate regularly with your clients. Don't wait for them to ask you to cut fees; continually demonstrate to clients what you've done for them. This helps clients see the effort made on their behalf and the value received ' which should make them less likely to insist that you cut your fees.

Ed Poll, J.D., M.B.A., CMC, helps attorneys and law firms increase profitability, coaching them on issues of internal operations, practice development, and financial matters. He practiced law for 25 years, has coached lawyers for 20 years, and is the author of 13 books, including Growing Your Law Practice Through Tough Times (West Pub. Co.), just released. Poll is a member of this newsletter's Board of Editors, a Fellow of the College of Law Practice Management, a board-certified Coach to the Legal Profession, and a charter member of the Million Dollar Consulting' Hall of Fame. He can be reached at 800-837-5880, http://www.lawbiz.com/, http://www.lawbizblog.com/ and http://www.lawbizforum.com/.

In a previous article in November 2009, we discussed some key questions about law firm billing: What is a reasonable fee? Can an hourly rate be justified, and who determines its value? Does a fee reflect cost of operation, and how can a lawyer demonstrate that fact? These are all important issues, but they presuppose a reasonable and unemotional discussion about fees. The recession, however, has created an unreasonable problem: A law firm's largest client suddenly demands a 10% rate cut. Without it, the client will stop sending new work to the law firm.

Firms respond in different ways to this dilemma. Some feel that there is no alternative but to agree because the recession has turned nearly all legal services into commodities. Others feel that the firm can push back by asserting the uniqueness of its practice and services, but this is a difficult point to prove ' most clients view all lawyers as equally qualified, and conversely (no matter what their own rhetoric) all lawyers can't be the best at their practices. Then there is the desperation strategy: Agree to the 10% rate cut, then pad the bill here and there to make up for it.

Clients are not always right; they can have unrealistic expectations or demands and still complain about everything. Shared expectations, effective communication, and dependable follow-through by lawyer and client all define the kind of good relationship that makes a fee cut demand unlikely. Sometimes, however, problems happen, and the choice seems to be between losing revenue and losing the client. The reality, though, is that the law firm has a variety of strategies that can address a client's need for ostensibly lower fees without putting the firm at a financial disadvantage. Following are four strategies to consider.

Unbundling Services

Airlines now uniformly charge extra for everything, from additional luggage to in-flight meals. Providing these services was once “free” (that is, included in the base passenger fare), but the pressures of recession and rising fuel costs led the air carriers to feel that ancillary fees were more palatable to more customers than increasing the base fares. Lawyers can learn a lesson from the airlines by taking valued services off the table ' “unbundling” them, in service industry parlance ' in order to keep the billing rate steady or to deliver a lower price to the client.

In effect, when the client wants a reduced price, the lawyer unbundles the services to accomplish that objective. In other words, for “X” dollars, you will do this and for “Y” dollars you will do that, less “ABC.” While “ABC” may not be important, the client gets the message that you're adjusting the price to fit the appropriate level based on the service to be delivered. For example, if returned phone calls within two hours are part of your regular hourly rate, take that response time off the table if you lower your hourly rate in response to your client's request. Tell the client that your response time will be 24, or even 48, hours. The point will be clear: You're not lowering your price; you're changing the value composition of what the client is buying.

Flat Fees and Productizing

Billing for legal services at a flat rate may, on the face of it, appear to be nothing other than a fee cut. In this billing method, the fee 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. Flat fees are especially useful for routine legal services, and encourage the use of technology to streamline the provision of those services. Fixed commodity pricing as typified by flat fees is generally synonymous with “low price.” When we provide legal services, we want them to be seen as unique because of the attorney-client relationship or because of the special skill required to deal with the challenge, or because the client has some constraint that only a few lawyers can accept. Yet, when clients increasingly want to see the dynamic shift toward the commodity model, the momentum can be hard to resist.

One way to do it is to consider “productizing” your practice by providing a tangible product that opens the door to the intangible, value-added services you want to offer. For example, an estate planning lawyer might combat do-it-yourself Web sites and software by establishing a section of his or her firm Web site that is password protected and that has authoritative forms and research that the lawyer has prepared or evaluated. For a flat fee of $100, a “client” could access this material and draw from it at will. However, if the client has a question or problem that the materials do not answer, the lawyer is available to provide personalized counsel, perhaps at a special rate that recognizes the relationship established through the Web site. Another example might be a blog that, for a subscription fee, combines the lawyer's observations on breaking legal or regulatory issues with specialized content and research ' again with the option of asking specific questions outside of the access fee.

Discounting Strategies

Lawyers should resist discounting their fees, particularly if the client has earlier agreed to pay the full amount in the engagement letter. The engagement letter should clearly state the consequences to the client for failure to honor the agreed-upon payment commitment. However, firms can be their own worst enemy. Too often, on repeat client accounts with significant billings, in its push to collect fees the firm will sometimes offer some type of discount. Even clients with a signed fee agreement soon say, “I'm not going to pay without a discount. I'll just wait until the firm gets desperate and I know I'll receive a discount at that time.”

There are a number of alternatives to choose from to meet the immediate request but stop the bleeding ' some better than others, but all certainly practical.

• Offer the discount immediately, emphasizing that subsequently there will be no more discounting ' and mean it.
• Refuse to offer the discount, saying there is a fee agreement in place and it will be enforced.
• Tell clients that unless they honor the agreement that they accepted and signed, the firm will, consistent with professional obligations, discontinue work for them. They should get other counsel, and the firm will seek to enforce collection of all billed fees outstanding.
• Offer a discount for everything to date, with the proviso that all work hereafter will be billed at full rate and collected in accord to the fee agreement. Get full acknowledgement of both the discount acceptance and the future adherence to the fee agreement.
• Accept the discount process and admit that means accepting less than 100% ' then compensate by raising the fee/rate either higher or sooner than other firms do.

Agreeing on a Budget

Experience shows that the costs of legal services go down more readily 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 go down. A general counsel told me some time ago that the mere fact of budgeting caused everyone to focus on the goal line and how to get there most efficiently. In one specific instance, budgeting saved more than $500,000 for this client, all without reducing the rates. That reduction also means that the law firm revenue was impacted, but rates were not, and the client got the desired result at a lower cost. And happy clients tend to bring the firm more work.

Unfortunately, lawyers too often view budgets as impractical. They may believe their services depend on too many variables that can't be anticipated; they may believe that budgeting always means a fee reduction; or they don't want budgets to constrain their quality. In reality, preparing a budget at the start of any matter ensures greater productivity, quality, and cost effectiveness for both sides. A budget can only be an estimate of what's going to happen. Budgeting begins by getting as much information as possible from the client about goals and expectations in order to define the two crucial budget parameters: time and money. Use common sense, be realistic, and communicate accurately about the amount of time it will take to complete any work, erring on the side of caution to build in more than adequate time. As for money, clients should have in mind how much they want to spend to resolve a problem. It makes no sense to budget spending $2 million to try a case if a $100,000 settlement will meet the client's objectives.

Don't Be Defensive

Each of these options for addressing a client's request to cut fees says that the firm is a business with certain policies in place, and that professionalism should define the process by which the lawyer sets fees and the client agrees to them. That still raises the issue in these tough times: 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 are, this 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 that the client knows you have the skill and the experience to justify your fee, and that it is competitive with others in your geographic and practice areas. Also, document your fee with billing statements that are easy to understand and clearly list actions taken on the client's behalf while relating the actions to the time it took to realize that value. Above all, communicate regularly with your clients. Don't wait for them to ask you to cut fees; continually demonstrate to clients what you've done for them. This helps clients see the effort made on their behalf and the value received ' which should make them less likely to insist that you cut your fees.

Ed Poll, J.D., M.B.A., CMC, helps attorneys and law firms increase profitability, coaching them on issues of internal operations, practice development, and financial matters. He practiced law for 25 years, has coached lawyers for 20 years, and is the author of 13 books, including Growing Your Law Practice Through Tough Times (West Pub. Co.), just released. Poll is a member of this newsletter's Board of Editors, a Fellow of the College of Law Practice Management, a board-certified Coach to the Legal Profession, and a charter member of the Million Dollar Consulting' Hall of Fame. He can be reached at 800-837-5880, http://www.lawbiz.com/, http://www.lawbizblog.com/ and http://www.lawbizforum.com/.