Published on 1/8/07
It's that time of year again when lawyers reassess (and often raise) their billing rates. This annual exercise is hardly beloved by clients, especially after the 2006 news stories that the average profit per partner at the country's largest firms passed the $1 million mark for the first time.
However, my experience tells me that sole and small-firm practitioners' billing rates, despite such publicity, are often below market value.
Experts say, and the observations of most of us confirm, that the nation's largest firms bear little resemblance to the average American law firm. USA Today quoted a professor at Loyola University Law School as saying, "The average [American] lawyer is working at a small firm making $60,000 to $100,000 a year. Even at large firms in [many] big cities, it's $100,000 to $160,000 on average."
In my home state of California, state bar statistics show that one-quarter of all lawyers earn $50,000 a year or less. Most of these are sole or small-firm practitioners, and the same - or worse - is the norm in other states.
Such lawyers too often believe they have no leverage to rectify this situation. I recently advised a contract attorney, doing work for a large firm. When he proposed a new, higher fee schedule that included a volume discount based on a scaled number of hours per month, the client's managing partner asked that the number of hours and the discount be reviewed and be applied retroactively at the end of each three-month cycle.
A volume discount at a flat fee is based on a prospective, rather than a retrospective, guarantee of work. A retrospective review is a disaster, fails to offer any security and makes planning impossible. Without the prospective assurance of volume, there is little or no benefit to the contract lawyer; there is every benefit to the law firm. He who has an option usually is in the driver's seat. No lawyer wants to be on the other side of the table in this situation.
Firms grow because of their clients. Thus, lawyers must look for clients who have growth potential. In other words, "commodity" work will not result in high and profitable growth ... unless you have a large volume of such work.
Highly focused and "high-end" work will result in higher revenue and profits. When the client perceives the work you do as having high value, you will be able to charge more - even a percentage of the value of the work.
This will get you out of the time modality of billing and into the value modality of billing, where the profits are significantly higher. It's simple Business 101 - but too many law firms ignore the lesson. Don't simply assume that clients won't accept higher fees. Analyze whether your services, skill and experience justify a fee increase.
One way to do this is to establish what marketers call a unique selling position. Be different. Offer something that your competitors don't or can't. Create something new that your clients need or want. If you can't think of what makes you unique, you're really nothing more than a commodity to your clients.
A unique selling position is a key strategy in establishing higher rates. It can be approached in a variety of ways. If you handle estate planning, for example, you could add financial planning as a service, either as part of the fee package or for a designated added fee.
Sometimes, showing that you provide better-than-excellent service is all you need to establish a unique position - for example, calls consistently returned within two hours, or final client documents nicely packaged in an attractive folder.
You can also show that you are cutting-edge. An effective Knowledge Management program is a good example. Electronic Knowledge Management through a shared database makes information available faster and more completely to clients and others in the firm. The result is greater efficiency, better communication and faster turnaround that can justify a higher effective hourly rate.
I recently discussed on my blog an exposition of a unique selling position in action. Peter Jenkins, a noted consultant to corporate general counsel, suggested that outside counsel who recognize the cost and time constraints on GCs and come up with unique ways to address them, can assure their place as valued legal service providers.
Peter suggests that outside counsel come up with solutions to these typical GC concerns:
- How can I manage my IP portfolio more cost-effectively? I simply don't have any money in my budget for new systems.
- Electronic discovery costs are going through the roof. How can I gain effective control on this runaway, unpredictable expense?
- I would love to explore creative billing arrangements, but the law firms I use have little or no experience in decision tree analysis and budgeting. How do I get where I want to go?
- I know I could save a lot of money if the law firms I use would pay more attention to how they staff my matters. I just don't have time to oversee this; nor would I really know how to make effective staffing changes.
If the contract lawyer mentioned earlier could provide answers to these questions, he could show that he offers value, not just represents cost.
Providing solutions gets attention - and gets rewarded. Merely charging an hourly rate like a day laborer, with nothing unique about it, is a recipe for mediocrity at best, and insolvency at worst.