Clients are increasingly pushing back on passed-on fees for disbursements, according to an Administrative Director in an AMLaw 100 firm (who I was fortunate to speak with recently). That is, some clients feel that they are paying such high hourly rates that they should be getting all-inclusive billing, and not be charged extra for disbursements such as legal research or printing. Leaving aside the empirical question of how prevalent this pushback is, let's consider whether it makes sense for clients to request all-inclusive billing.
It is understandable why some clients ask for all-inclusive billing. Hourly rates are really high and general counsel are trying to reduce ever-escalating legal spend. Disbursements are an easy place to push back; when charging more than $300/hour for the most junior lawyers, it's hard for firms to say that photocopies at $0.15/page shouldn't be included. Forcing all-inclusive billing is an easy battle for clients to win. But it does not help them win the overall war of lowering their legal fees, assuming they pay their lawyers fees on an hourly rate basis.
- Disbursements are Small Relative to Legal Fees
On most legal bills, the amount representing disbursements is paltry relative to the amount for legal fees. It takes a lot of SeamlessWeb dinners to equal one hour of lawyer time. In fact, depending on hourly rate and dinner budget, a fancy at-desk dinner costs clients less than five minutes of junior lawyer time. Legal research systems are more pricey, but also make lawyers more efficient at doing legal research, potentially saving clients money through reducing the amount of time it takes lawyers to do tasks.
- There are Other Ways to Drive Down Disbursement Costs
One good reason clients might elect to put law firms on the hook for disbursements is to incentivize law firms to (i) choose cheaper disbursement providers and (ii) use their purchasing power to push disbursement provider fees down. But clients should be able to achieve this through asking. Law is a service business and lawyers aim to please. Lawyers recognize that clients prefer to pay less and it is likely that most do what they can to keep bills down, especially when it's not law firm revenue on the table. Anecdotally, law firms consider costs when choosing service providers, comparing multiple RFPs and the like. While firms are not perfectly incentivized to reduce disbursement spend (as they would be if they bore the cost), this is not reason enough to push for all-inclusive billing.
- Reducing the Amount Spent on Legal Fees is the Key to Significantly Reducing Overall Legal Bills
Given the breakdown between disbursements and legal fees, attacking disbursements is not a winning strategy. In fact, when law firms inevitably raise their rates, they will likely point to their increased costs as a result of having to take on disbursements. And just as firms will cede to the reasonable argument that their fees should be all-inclusive, most clients will cede to the reasonable argument that law firms need to charge more to account for their increased costs. Some firms that think their clients will pay more may raise rates just enough to cover increased costs. Other firms may use this as an excuse to charge even more than their increased costs. If a client's firm is in the latter category, all-inclusive billing will cost them more.
- Fails to Incentivize Law Firms to Invest in Efficiency
Our product will make legal due diligence faster, better and cheaper for whomever is paying for the diligence investigation. We can charge on (i) a metered-fee basis (clients pay per use; firms pass bills on to clients as a disbursement) or (ii) an all-inclusive license. While we think our product will help law firms produce better work product quicker, as well as make more money over the medium and long term, it is a harder sell to convince firms that they should pay $X/month for a product that will decrease hours billed than it is to convince them to pass bills on to clients for something that will save clients money. Problematically, all-inclusive insisting clients discourage firms from spending money on systems that make lawyers more efficient. Systems like ours have the potential to save clients lots of money on each matter; clients should incentivize firms to use them. All-inclusive billing does the opposite.
Fixed fee billing arrangements change the all-inclusive equation. Under a fixed-fee arrangement, law firms are incentivized to push all costs down as far as possible, including disbursements. And law firms make more on fixed-fee matters when they do the projects in less time including through use of efficiency technology, when appropriate. Efficiency technology and other disbursements are costs of production for firms billing fixed-fee. Clients under fixed fee arrangements are right to expect that their matters be all-inclusive.
Again, despite the offensiveness to some clients of having to pay extra for disbursements, they are better off doing so for their billable hour matters.