Virtually every legal department is under pressure to reduce and tightly manage costs. And for most legal departments, outside counsel spending represents a very large portion of that cost. There is a lot of focus in the industry on managing hourly rates to control costs, but it’s important to consider all the tools in the cost management toolkit. In addition to enforcing the billing of approved timekeeper hourly rates or alternative fee arrangements, CounselLink® has features to manage discount arrangements with law firms. We were curious as to the sorts of discounts used most by legal departments today, and whether any best practices could be gleaned from these arrangements. We will be exploring this question through a series of blog posts.
To start, we took a look at departments leveraging prompt pay discounts. About 26% of CounselLink customers take a discount off of some law firm invoices if they pay the invoices within a relatively small number of days after receiving them. On average, these customers receive a 5.7% rate of savings on prompt pay invoices, and the overall savings these customers take to their bottom line is 0.27% of their total gross invoices (those with and without prompt pay discounts). While that percentage may be small, looking more closely at how customers utilize prompt pay points to multiple ideas for optimizing the savings potential of this discount arrangement.
- Arrange for prompt pay discounts with as many law firms as possible.
- Of legal departments utilizing prompt pay discounts, 78% have discount arrangements with fewer than 10 firms. These discounts result in a 6.5% rate of savings on prompt pay invoices. The overall savings these customers take to their bottom line is 0.10% of their total gross invoices (those with and without prompt pay discounts).
- In contrast, the legal departments leveraging prompt pay with 10 or more of their firms have a lower rate of savings on prompt pay invoices, 2.8% (they take lower average discount percentages), but the overall savings these customers take to their bottom line is 86% of their total gross invoices—nine times greater than customers only employing prompt pay for a handful of firms.
- Negotiate as large a discount rate as you can.
- The majority of prompt pay discount rates are between 1% and 3%, with discounts between 5% and 10% being the next most popular rates.
- Do not assume that firms only accept prompt pay discount rates up to 3%. Nearly 50% of clients using prompt pay discounts include a discount greater than 3% in some portion of their discount arrangements.
- Employ multiple tiers of discounts.
- The most common terms for a prompt pay discount are 30 days, 10 days, and 15 days. About half of legal departments taking prompt pay discounts use a 30-day threshold as part of their discount structure.
- Prompt pay discounts can be tiered where each tier corresponds to a period of time and a discount percentage. For example, the legal department can approve an invoice within 10 days and receive a 5% discount with the firm but if they miss that cut-off and approve within 30 days, they can still receive a 3% discount.
- 80% of legal departments with prompt pay arrangements have a single tier discount structure
- 11% have two tiers
- 9% have three tiers
- Customers only using a single tier for discounts save 0.27% of total gross invoice value.
- Customers using two or three tiers of discounts save 0.92% of total gross invoice value, more than three times the savings of clients only using a single tier.
Whether you’ve been considering adding prompt pay to your savings toolkit or already employing the feature, these tips should help you get the most value from this discount arrangement.
Stay tuned for our next post related to other discounting best practices.
As Director of Strategic Consulting at LexisNexis, Kris leads the LexisNexis CounselLink team’s efforts to advise corporate legal departments on improving operations with data driven decisions. She is an expert in managing the business of law and in data mining, and also has expertise in matter pricing and staffing, partner compensation, practice area metrics, and scorecards. Kris joined LexisNexis in 2000 after honing her finance skills as a Senior Vice President of Strategic Finance at SunTrust Bank. She has authored numerous articles and speaks regularly at legal industry events. Kris has a B.B.A. in Finance from the College of William and Mary in Virginia.
Stephanie Beck manages the technical consulting group within the CounselLink Professional Services organization, overseeing the delivery of reports, data conversions and integrations. Stephanie’s roots are in data analysis, hired as a Reporting Specialist she was quickly awarded CounselLink Employee of the Year due to her impact in the CounselLink reporting space. Staying close to her roots, Stephanie worked as a Senior Technical Consultant prior to her current role, implementing client integrations, complex reports and large scale data migrations. Stephanie has a bachelor’s degree in Computer Information Systems from California State University, Chico and a Master’s degree in Computer Science from University of California, Davis. When not at her desk, you can find her at a hot yoga class or paddle boarding on the American river.