No tiers on my pillow: flaws of tiered discounts from hourly rates based on volume

Pfizer, wielding its mighty P3 program, likes to squeeze from its preferred law firms higher discounts the more it uses them. “To effectively share in the benefits of economies of scale, we [Pfizer] implemented a tiered-volume discount structure, with the level of discounts increasing as firms receive higher volumes of business,” according to the ACC Docket, Vol. 26, Nov. 2008 at 97.

Opponents of tiered discounts suspect that such an agreement only pushes the client to spend more money with the firm, but does not encourage the firm to be more efficient. Worse, at the margins a department might choose a lawyer of not as good quality as is available because the nominal savings of increased discounts for that lawyer blind them. Worst, just because you get an additional five percent knocked off the bill for reaching the next tier up does not mean you needed the additional work done by the firm in the first place (“Look at all the money I saved at the sale, buying things I didn’t need!”). Tiered discounts perpetuate, or exacerbate, the shortcomings of hourly rate discounts (See my post of Aug. 8, 2006: tiered discounts from hourly rates; July 2, 2007: percentage increases in discounts; Nov. 22, 2006: step-wise discounts from standard rates for increased volumes of fees, retroactivity and exclusions; March 24, 2005: criticizes step discounts; and Nov. 27, 2005: firm might resist step increase if it triggers a rebate.).

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