Why law firms agree to volume discounts and thus the leverage legal departments enjoy

Why do law firms grant discounts that rise with the volume of fees paid them?

1. Decreases marketing and selling costs. If a law firm spends a certain percentage of its revenue on marketing, that percentage of the fees above a volume threshold represents a savings of no marketing costs. Revenue came with no selling expenses.

2. Grapples the client closer to you. The more touch points a firm’s lawyers have with lawyers and managers at a client, the stronger the attachment, and thus the greater likelihood of additional work. Volume arrangements encourage law departments to assign more work to a firm.

3. Holds out hope for future, higher fees. Firm leadership may hope they will make up for the reduction in fees now by higher fees later, once they are firmly in the saddle as the department’s go-to firm. It’s the optimistic reasoning of the wanna-be monopolist who lowers costs now to corner the market later.

4. Encourages longer-term investments. Firms rely on more predictable volume to invest more shrewdly. With the prospect of larger fees coming, a firm can more confidently deploy systems, knowledge bases, standard procedures, and other cost reduction tools.

5. Expands expertise. Big spend helps firms grow expertise because some of the work that needs to be done will expand the professional competency of their lawyers. Breadth of work implies variety and novelty.

6. Squeezes out competitors. If a volume discount deal induces the law department to fill the plate of one firm and starve another, that has value to the well-fed (fee’d?).

7. Evens out cash flow. Law departments do not typically guarantee any level of fees but the likelihood of smoother income streams is greater with a volume discount arrangement.

8. Increases effectiveness of staff assignments. The larger the spend the better the firm can match competency to need. With only one matter, by contrast, and a defined pool of associates and partners, the match may not be as good between talent and need than when there are large numbers of matters.

9. Gets good press. Large amounts spent on a firm might generate favorable press, such as being publicized on a panel in the UK or the subject of a flattering article in the US. The deal with one big client might attract the attention of other clients.

Even with all these reasons, discounts at the 20 percent level and higher for millions of dollars of work are unusual. If the profit margin of well-run firms averages around 30 percent, a 20 percent discount represents a hefty cut.