A test to see whether discounts on billing rates have saved money

One way to test whether discounted billing rates actually translate into savings is to compare the post-discount effective rate of a law firm to its pre-discount effective rate (See my post of June 13, 2006 for the definition of “effective billing rate.”). To do so take a representative selection of invoices from the law firm that has granted you a discount. Divide the total professional fees by the total professional hours as billed and you will know the effective billing rate.

If you then do the same calculation for a large sample of invoices after the discount has been granted, you will know or at least have an inkling whether the discount has lowered the firm’s effective rate.

Yes, all the matters are not the same in the pre- and post-discount bundles but if the billings are large enough, the figures should be representative, especially if the types of matters are fairly similar. Yes, billing rate increases may have taken effect, but you can reduce any invoices subject to higher rates by the higher rate percentage and then make the comparison (See my post of May 26, 2006 that derides discounts.).