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Prompt payment discounts with two twists – full review and end-of-year larger discount

In the fall of 2006, the 16-lawyer department of Circuit City Stores decided to speed up payment of law firm invoices in return for a discount on fees. According to Corp. Counsel, Vol. 14, June 2007 at 17, the trade-off was payment within 20 days of receipt of an invoice in return for a 3 percent discount.

Assume the typical client takes 75 days to process an invoice. Assume that one of those clients lops 55 days off that payment. On a $100,000 bill for legal services, if the law firm reduces it $3,000 it can invest the $97,000 at money market rates of 6 percent or so, 0.5% a month. The $3,000 discount shrinks by about $300.

The general counsel of Circuit City, Reginald Hedgebeth, said that every firm except one agreed to knock the 3 percent off its bills. The lone holdout preferred to be paid fully, later.

In a new twist, Circuit City will make an accelerated payment to meet a firm’s fiscal year deadline, but that special treatment merits a 5 percent reduction in legal fees. Another difference with Circuit City is that it builds in full review of the bills, by a paralegal and an attorney, before it makes payment. Some law departments agree to pay bills very quickly, but reserve the right to review the bill thereafter (See my posts of May 4, 2005; Aug. 24, 2005; Aug. 27, 2005; and Oct. 14, 2005 on prompt payment schemes.).