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Compensation Models and Incentive
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Reflections on Hourly Rates
McGuireWoods has drawn considerable attention to itself with a new ad campaign that challenges the billable hour. The firm is hardly the only one to consider billing alternatives -- fixed fees, success fees, and the like -- but it is making itself distinctive and different simply by talking about the taboo topic of how law firms charge their clients. "The longer lawyers take, the more they make," one of the ads says. "Does that align their interest with yours?"
That's a question I think every firm and solo practitioner has to confront. I'm all in favor of law firms making money, but there's a right way and a wrong way to do it. Creating a marketing plan that targets specific types of clients and industries, and improving your accounts receivable and collections procedures, can do more to improve profitability and client good will than hiking up hourly rates. A fixation on hourly billing and fees can ultimately be self-defeating in any number of ways. Here are three factors to consider.
Culture. Any firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. But a willingness to approach compensation as an institution (lockstep compensation) makes for firm longevity. Perhaps it takes the entrepreneurial spirit to get going. Then the challenge is to change that into a managerial spirit, something that proves too difficult for most. Only a few really successful firms find a way to do it.
Expenses. Even if your retainer with a client lets you charge for opening a file on each matter or for photocopying a file before giving it to a client on request, consider whether these or other charges will ultimately cost more money than they bring in. If other firms in your position aren't doing the same thing, you may stand out and lose a client or prospect. Clients get angry at their attorneys for "nickel and diming" on charges they consider overhead and part of the cost of doing business, especially with what they perceive to be very high hourly fees they pay to lawyers.
Unbundling. If a client asks you to lower your hourly rate price, be sure you first list the things you do for the client for that price. Then, when you reduce your rate, take some of those things off the table. Thus, you are not really "lowering the price." You're adjusting the price to fit the appropriate level based on the service to be delivered -- and showing the client that the value is lowered as well.
Client Development: Plan, or Random Acts of Golf and Lunch?
As the Cheshire Cat observed to Alice long ago, the path you take doesn't matter if you don't know where you're going. That applies to marketing for too many lawyers and law firms. We know we want more clients and more business, so we go to a trade association meeting, invite a prospect to lunch, send out a newsletter, and hope something sticks.
This scattershot approach is counterproductive. Far more effective is to develop a plan and adhere to it. The two primary ways you can do this are to evaluate your marketing tactics, and the hypothetical client targets they're aimed at.
First, target your strategies. Make a list of five things you do to market yourself, your department or your whole law firm. Rank them in the order of what has worked best. Which activities bring in the most profitable new clients, develop most referral sources or generate the most inquiries? Your list might read something like:
- Networking with other professionals and referral sources
- Web site
Then, target your clients. Create a profile of your ideal client and develop a marketing strategy that focuses on this target, not everyone. Here are some questions to ask yourself:
- What characteristics describe your ideal client?
- What is your client's occupation?
- What are your client's demographics?
- Where are your clients located?
- How do you know when it's a "fit?
When it comes to the strategies you want to pursue and the targets you want to reach, you can't create them until you conceive them.
Outsourcing and Referrals: A Question of Fees
Until well into the post-World War II era, legal fees were based not only on the time spent, but also the nature of the service, the result achieved and the amount at stake. Charging an appropriate legal fee was a matter of professional judgment. That changed in the mid-1960s when clients began demanding detailed billing statements and lawyers used time records -- reflected in hourly billing rates -- as a management tool. Because that approach doesn't address value and benefits, clients have increasingly nudged firms to turn to outsourcing as a new form of value. USA Today recently carried a "snapshot" stating that 47% of legal service firms have outsourced a portion of their business.
The principle of outsourcing is fundamental: Do what you do best and let others do what they do best, most efficiently and at least cost to both you and the client. Many firms, both large and small, thus use "contract lawyers" to provide legal counsel at reduced cost. Yet one crucial question determines the extent of cost savings: when you have a contract attorney work for you, how do you bill your client? This issue has been litigated and the conclusion is that the contract attorney is not an out-of-pocket cost for billing purposes. Firms are not required to bill the client at the cost to them for the contract attorney's time. They may bill at an "attorney's rate," a standard flat rate, or any rate that is established in the engagement agreement and is acceptable to the client.
The contract lawyer is like an attorney employed as an associate in the firm. But, such an arrangement can carry the perils and pitfalls of "fee-salting," and thus be covered under the Code of Professional Conduct. Model Rule 1.5 declares that fee-salting is acceptable if both lawyers involved contribute something of value, if the client agrees in writing, and if the total fee is reasonable. This is distinctly different from a situation where you outsource a service like photocopying; in the contract lawyer arrangement, the outsourcing attorney contributes (presumably, though not necessarily) oversight of the legal work and interface with the client on how the legal work is applied.
The concern about getting the outsourcing arrangement in writing from the client is so strong that a second, equally obvious concern can be surprisingly overlooked -- and that is for the attorneys involved to have their own arrangement down in writing. Courts from California to Michigan have ruled that referral or split fees cannot be collected in full if there is not full documentation from either the client or the attorney side. Attorneys who don't get written confirmation of an outsourcing agreement are like the cobblers' children who go without shoes. They obviously have been ineffectual in taking care of themselves if their only recourse to secure an undocumented referral fee is to sue. And when there's money involved, even lawyers can have selective memories.
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