I was chatting recently with a colleague at another law firm. One of the topics of conversation became (quite how, I am not sure!) about how frequently law firms do not structure their matters' commercial terms clearly from the outset, thus impacting the profitability of the matters in question.
It got me thinking. There are a number of potential pitfalls to matter profitability that it is useful to address before starting the matter if not already done so. Some are appropriate to all agreements and other specific to the type of fee approach adopted.
Although by no means exhaustive, I pulled together a summary of typical areas we may want to consider. Additional suggestions welcomed!
For hourly based agreements:
- What is the period that these rates have been agreed? Are these rates agreed for the complete duration of the matter or a defined period of time (for example, if the matter may run for many months, or where we agreeing rates as part of a broader client panel relationship which are often multi-year)?
- Are there any exceptions to these rates which may be permitted (for example, for specific subject matter experts)?
- Do these rates allow for any promotional related increase for timekeepers on the matter (for example moving from an Associate to Senior Associate-level)?
For discounts based on volume:
- Is the volume discount determined by the total amount of fees when calculated based on your standard rate or your agreed client billing rate (where a discount may also be implied)?
- Is the level of discount determined once the threshold of fees is passed at point of billing or at point of collection?
- Consider how many of your clients actually do pay within your agreed standard terms. If they don’t, and you’re adopting a volume based discount driven by billings rather than collections, not only are you giving them a bigger discount once the relevant fee threshold is passed, but you are also potentially carrying the cost of money/late payment!
For performance or contingent based arrangements:
- Have we clearly defined what constitutes ‘success’? This may be very tangible (for example, a trial decision) or be more subjective (for example client feedback on a number of agreed criteria). These need to be defined from the outset to ensure a clear alignment of goals expectations.
More generally:
- Have you clearly defined the agreed payment terms?
- If working on international matter, have you agreed the billing currency? Remember, for exchange does have an impact - have you considered this ?
- Be specific about exclusions to your quoted fee. For example typically these include sales tax (or VAT and equivalents) and other disbursement charges (such as additional outside counsel, expert witnesses, permitted travel, etc).
Wishing everyone Happy Holidays!