May 2006

1. Do your bills convey cost - or value?
2. What doth it profit a lawyer ... ?
3. When money's the game, do you know your score?

Articles

1. Do Your Bills Convey Cost - or Value?

   Patrick Lamb's Podcast interview is a useful reminder that hourly rates, the billing method most lawyers continue to use, do not address value and benefits - the worth, as opposed to the cost, of the service you provide. Value billing focuses on actions taken to benefit the client, not the time taken to achieve that value. Rapid return of phone calls, personalized service, unexpectedly good results - these are all examples of value-added actions that the lawyer can demonstrate and charge for.

   There are a variety of billing alternatives by which you can convey and connote value to your clients. These are some of the most frequently used methods:

   • Blended Hourly Rate. The client is charged one fee per hour regardless of who in the firm works on the matter - a senior partner with a high rate, a junior lawyer with a lower one. The right balance gives clients a better price, and firms the financial incentive to delegate work.

   • Fixed or Flat Fee.. The fee is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends, or what the result. Flat fees are especially useful for routine legal services, and encourage the use of technology to streamline the provision of those services.

   • Contingent or Percentage Fee. Frequently used in personal injury and collection matters, this fee is a percentage of the value recovered for the client. It is particularly useful for the lawyer skilled at analyzing cases and accepting those with a high likelihood of success.

   • Premium Pricing.. An hourly rate or some other billing method is used as the base, and the lawyer is able to add on an additional premium if the result exceeds client expectations. Of course, there is no premium if the outcome is not successful. Premium pricing gives the lawyer a stake in the outcome and the assurance of a minimum fee even for a "bad" result.

   • Retainer.. This method sets up a fixed fee for a fixed time cycle (often monthly) during a designated period (often one year). It is sometimes used as a one-time payment to guarantee the availability of the lawyer or firm at a future date. As with other billing methods the parameters of the retainer should be set in the engagement agreement

   We've all heard that "a cynic knows the price of everything and the value of nothing." When it comes to pricing our services, lawyers can't afford to be cynical. Considering alternatives beyond the billable hour may be the best way to convey the value of your services, maintain good client relations - and get paid.

2. What Doth it Profit a Lawyer...?

   Those who think lawyers make too much money can find plenty of ammunition in American Lawyer magazine's new "AmLaw 100" listing of America's most profitable law firms.

   The average profit per partner at these firms passed the $1 million mark for the first time last year, with the top 10 firms booking profit per partner of $2 million or more. Gross revenue of the "AmLaw 100" increased about 10% over 2004, the magazine reported. Seven big law firms each generated more than $1 billion. The richest firm, as measured by the average compensation per partner ($3.8 million) and revenue per lawyer ($2.4 million), was Wachtell Lipton Rosen & Katz of New York, as it has been virtually since this listing began more than 20 years ago.

   Experts say, and the experience of most of us confirms, that the "AmLaw 100" bears 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."

   Certainly I agree that megafirms and the average law firm are different. But, my experience coaching lawyers and consulting with law firms around the country suggests that we shouldn't just leave it at that. There are some important lessons that can be learned from these statistics:

   • Size doesn't reflect necessarily on either revenue per partner nor profit per partner. A Los Angeles firm that I'm familiar with, Irell & Manella, has total revenue one-tenth that of the largest firms (it doesn't qualify for inclusion in the AmLaw 100). Yet it has controlled its leverage such that its revenue per lawyer and profit per partner would rank near the top of AmLaw 100 firms.

   • Firms grow based on 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 he work you do is perceived by the client 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. Again to refer to Patrick Lamb's Podcast interview, it's simple Business 101 - but too many law firms ignore the lesson.

   • You should seek to plan your business model, not allow it to occur by happenchance. Taking charge of your career is always more satisfying and usually more profitable. Often, when I coach attorneys who are dissatisfied in their practice, it's soon apparent that their real dissatisfaction is with measuring their days in six or ten-minute increments without a focus on the essence of their skills. You work too hard to let that happen to your practice.

3. When Money's the Game, Do You Know Your Score?

   The FICO scorecard (created by the Fair, Isaac credit analysis firm) is the number most bankers use to determine whether they want to lend you money. It estimates the risk that you will default on a payment, generally within the first three years of a loan. Your score is based on your history of borrowing and repaying money, and the national median score is 720. The highest possible score is 850.

   There are three national credit agencies that have been the repositories of individual and commercial credit reports: Equifax, Experian, and TransUnion. All three of them have until very recently incorporated FICO scores as part of their credit reporting. However, in March 2006 the three companies jointly announced that they would standardize how they calculate consumer credit scores, with the goal of making the numbers easier for lenders and borrowers to understand. The announcement is a competitive challenge to Fair Isaac's FICO system.

   The three major credit-reporting firms have long used individual formulas to calculate credit scores, with varying grades a possible result. Their new joint scoring system, called "VantageScore," is intended to provide a more consistent credit scoring process. The companies will continue to separately collect data for credit files, which they sell to creditors and consumers. But individual credit scores from the three firms should be the same if the companies' files on that person contain the same data.

   The system will give scores ranging from 501 to 990, which in turn will translate to grades of "A" through "F": Consumers with scores above 900 will be "A" credit risks, those with scores above 800 but less than 901 will rate a "B," and so on. At this early date, it remains to be seen whether this new system will supplant the traditional FICO score. What is certain is that, under any scoring system, consistently paying bills on time, having a long history of paying different types of bills and using credit modestly will result in a higher score.

   The importance of banks and bankers to law firm operations led me to focus on the lawyer -banker relationship as the subject of our next LawBiz^® Special Report. We plan to issue the report by July 1st. In it you'll find much more information on how to build the kind of mutually beneficial and effective business relationship with your bank that is a critical step in helping any law firm become a more successful business. Watch for the report to be announced on www.lawbiz.com as soon as it's available.