September 2005

This issue contains the following articles:
  1. Outsourcing and Referrals: A Question of Fees
  2. The Client Relationship: A Two-Way Street
  3. Closing a Practice: Your Exit Strategy


  1. 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.

  2. The Client Relationship: A Two-Way Street

    The rules of professional conduct require that lawyers cannot agree to take on a new client without a signed engagement letter. The letter sets forth the responsibilities of each party to make the engagement a success. The idea of a written statement of responsibilities is definitely a two-way street. An engagement letter spells out both the lawyer's obligations to the client, and the client's obligations to the lawyer -- to be truthful, to provide all necessary and requested documents, and to pay invoices on time.

    Not attending to this crucial step is at the root of many malpractice claims. In developing the engagement letter, your focus as a professional must be to understand the intent, desires and wants of the client. You must compare your assessment of what the client needs with the client's understanding of what he/she wants. If the two are in harmony, and you inform the client (so the client understands clearly) what to expect, there is little likelihood of a malpractice claim. If your assessment of the client's needs and the client's wants are not in harmony and you continue the relationship knowing that, it is a blueprint for disaster … and an almost sure claim of malpractice OR a refusal to pay the attorney's final billing statement.

    For example, a question was recently asked of me: Should I take a prospective client who wants me to discount my price by 25%? If you are sure your price is competitive (within the market for your service, your geography and your type of practice), don't discount it. Your client will either regard you as a soft touch and ask for another discount, or will decide you are too expensive and will ultimately refuse to pay. Either set your price at the start and stay with it, or take something off the table -- tell the client that to charge for X dollars, you will do thus and thus and for "Y" dollars you will do thus and thus less "abc".

    If your prospect is truly a bargain hunter, without being realistic or reasonable in his/her request, you're better off not having this client. You will never satisfy the client. Your time will be better spent prospecting for other and better clients who will appreciate your service and value ... and pay your full fee. And you know that right from the start of the engagement.

  3. Closing a Practice: Your Exit Strategy

    In last month's Ezine I promised to provide this month another idea from my new book, Selling Your Law Practice: The Profitable Exit Strategy. The one I'd like to share is the flip side of selling a practice -- namely, closing a practice completely. Lawyers do this for a variety of reasons, sometimes because they are in one of the few states that still prohibit selling a practice completely, more often because they believe (erroneously, in my view) that they have little or nothing of value to sell, or because they simply choose to wind up their business in their own way.

    Whatever the reason, closing a practice involves skills that all lawyers should have but not enough exercise. Lawyers frequently emphasize the importance of planning to their clients, but may themselves be unprepared to devote the time and patience required to plan a successful closing. Closing a practice is such a complicated process that you should, ideally, allow six months to one year to accomplish the many tasks involved. Lawyers accustomed to the rush of meeting a 5:00 p.m. filing deadline at the courthouse tend to take for granted the weeks or months of effort required to reach that point. The same thing is true of what it takes to clean things up, tie the ends together, and perform all actions necessary to close your own law practice.

    Take, for instance, just two key questions: As a lawyer, who do you have to involve? As a business owner, what steps should you take to wind up operations?

    • "Who" obviously involves your employees and your clients. But it also involves financial institutions, insurance carriers, bar associations and courts, vendors, utilities, landlords, taxing authorities, the local legal media, and the U.S. Postal Service.
    • "What" involves your responsibility to these people (severance packages, return of records, final bills, fulfillment of policies and leases, mail forwarding), up through and including the move of any office furniture and equipment you want to keep.

    If all of this sounds complicated, it is. Making sure you get everything done right requires creation of a time line that includes descriptions of and completion dates for everything you need to do, in the order you need to do them. Ethical considerations relating to people, and practical considerations relating to business, should be the focus. Your time line must, at a minimum, include the date that you decide to close the practice, the date that your current lease runs out, and the date that you would like to have all steps in the process completed. Establishing a time line at the beginning of the process and keeping it up to date as events unfold give you a tool to help you focus your efforts and track the various elements of the closing, up to the moment that you walk into the sunset.

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