Should Law Firms Impose a Cover Charge?
Should law firms charge a minimum (“cover”) to accept a client? I think that is perfectly reasonable. Indeed, it is more than reasonable, it is a good practice.
On February 2nd, I tweeted “Legal Week reports DLA Piper will require new clients spend annual minimum, $200k likely for US http://bit.ly/ffoJ9h || rationalizing intake.” Today, Legal Blog Watch reports on this article and asks some questions:
- Is this a novel requirement or is this something that is quietly in place at other firms?
- If novel, will clients go for this?
- What is the consequence if a client who commits to spend $200,000 with a law firm fails to do so? Termination? Or termination, but only if there is a more lucrative client waiting in the wings? Or no termination but the client must write a check for the difference (seems unlikely!)?
Here are my answers and some comments. First, this is novel to me. Second, I don’t see why a rational client would find this offensive. And third, I would un-ask the last question because the easier path is for the firm to bill the full “cover charge” upfront. Remember the old-fashioned retainers? – like that.
Lately I am writing about “law factory” versus “bet the farm” firms. The idea of a cover charge relates indirectly – it’s about making a conscious decision about your business, your costs, and your market position.
One reason to seek a cover charge is that conflicts are a real problem and therefore any new client or matter creates the risk that a firm will be conflicted from a much bigger / better / more profitable one. This is not academic; I remember partners talking about this 20 years ago in a kinder environment than today.
Another reason for a cover charge is that matter intake is expensive. I doubt many firms have quantified the cost to open a new matter and then bill for it but I venture that it is rather more costly than most partners and managers think. If your cost of goods sold includes a “start up” and on-going administration (billing) that costs thousands, then don’t charge less than that. Covering your cost is s basic business sense.
I suspect there even more hidden costs of small matters in large law firms. Task switching taxes the human brain. If lawyers have a lot of little matters, there is ‘frictional loss’ as they switch among matters. That means lost billable hours (or lost productivity in an alternative fee arrangement world). Further, I suspect that the psychology of small matters in BigLaw means that either lawyers under-bill (don’t upset the client, they can’t afford much) or over-bill (compensate for the pain-in-a** factor but violate ethics).
Of course, all this is idle speculation. If firms were real businesses, they would have data to analyze these questions and they would be able to run models to estimate the impact on their business. Some day.
If I were a DLA Piper partner, I would be very happy with this decision. Any clients who find the policy offensive are probably not ones I would want. And the policy would help check the ‘hope springs eternal’ view of my partners who always think the new small matter they want to take on will be the next Microsoft antitrust or Enron litigation.
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