Are you cheap... or reasonable?

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Published on 12/22/08

With today's tough economic conditions, chances are few lawyers at any size firm are considering an increase in their fees. This is, of course, a matter of economics. The seller of any service must understand costs, set profit targets and gauge market demand. The decision ultimately is a matter of the seller's choice.

Some lawyers, however, see the decision in a different light. For example, earlier this year a Texas lawyer said in an e-mail to my blog: "I know your coaching is aimed at making a law practice more profitable. But we as lawyers have a fiduciary relationship to our client. It is part of our job to our client to keep the legal fees low, ... to advise the client how to get the legal result desired, at the least possible cost."

Such a view in part reflects Rule of Professional Conduct 1.5, which states that "a lawyer shall not make an agreement for, charge, or collect an unreasonable fee."

Deciding a reasonable fee generally involves ethical questions of professional conduct. Is the amount of the fee proportional to the value of the services performed? Do the lawyer's skill and experience justify the fee? Does the client understand the amount and nature of the fee and consent to it?

However, this is not the same as saying that the lawyer's fee should always be low.

Here we can get into the slippery slope of what the fee should be. If the fee should be low, then is $200 per hour, for example, too high? If so, is $150 per hour too high?

I believe the lawyer's true obligation is not to be cheap, but to be fully committed to a collaborative client relationship that builds trust over the long term. That way, clients will see you as valuable, not expensive.

Many lawyers charge less than $200 per hour. Though faced with competition from other lawyers (and now paralegals), attorneys must fight to find ways to increase their fees, whether by the hour or otherwise. Like every other profession and trade and business, the practice of law is a business. That means we're governed by the same formula: P = R - E — or profit (take-home pay) equals revenue collected less expenses.

If you are a widget manufacturer, the question becomes: "Can I sell enough widgets to cover all my costs and have something left over?" Replace "widgets" with "hours," and you have the question that goes to the heart of the business-end of running smaller law firms.

So, are lawyers who charge $1,000 "reasonable"? How about $100 an hour? Ultimately, the rate that most lawyers charge is based on their "gut feel" after evaluating such factors as their years of experience (more years out of law school mean a higher billing rate); their practice area (mergers and acquisitions work, for example, is valued higher than family law); their geography (New York lawyers charge more than those in Des Moines); the number of lawyers in their geographic and practice area near them (the more lawyers there are, the higher the price competition); and type of billing method (hourly rate, flat fee, contingency fee and so on).

Pricing legal services is an art, not a science. Good "bedside manners" also help persuade the buyer/client that the price established is fair and reasonable.

The simple fact is that too many firms often don't know their costs of operation. Thus, the fee figure chosen often is a "by guess, by golly" fee, not one based on a cost-benefit analysis.

Your firm cannot aspire to set an appropriate fee unless you understand the operation of the firm as a business (budget, collections, profit, loss), the firm's billing structure and how each attorney determines firm profitability.

Any fee ultimately can be justified if you know the cost structure behind it, and if the client accepts the value that the fee represents.

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