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Comparison of volume discounts to hourly rate discounts

A general counsel can request from law firms a ladder of discounts that rise as the law department pays more fees. For example, 10 percent above a million dollars; 12.5 percent above $2 million; 15 percent above $3 million (See my post of Aug. 13, 2006: tiers based on something other than volume of fees paid; March 24, 2005: pressure to instruct inappropriately to reach higher tiers; Nov. 27, 2005: another view of stepwise reductions; Dec. 19, 2005: UTC experienced volume discounts eroding; Aug. 8, 2006: retroactive application of discount levels; Nov. 22, 2006: tiered discounts based on the amount of fees; July 2, 2007: percentage increases in discounts; Oct. 19, 2007: survey data on preferences for tiered discounts; Jan. 19, 2008: example from British Columbia Transmission; Nov. 21, 2008: relationship to convergence; and Aug. 13, 2009: no tiers on my pillow.).

Alternatively, a general counsel can request discounts based on a percentage reduction in every timekeeper’s billing rate (See my post of Jan. 21, 2008: 10 more posts with variations on discounts; and Dec. 26, 2008: third metapost on discounts, with 12 references.).

One question is whether and at what amount do the two methods result in equal savings. The permutations are infinite, but let’s take two simple examples. Obviously, a 10 percent haircut on individual billing rates saves the same amount as a 10 percent volume discount that starts at the first dollar. But if the volume discount kicks in at $1 million and rises to 15 percent at $2 million and above, the law department has to spend $4 million before the two forms of fee reduction save equal amounts (10% of $4MM=$400,000 as compared to 10% of $1-2MM=$100,000 plus 15% of $2-4MM=$300,000).