THE NEWSLETTER FOR LEGAL OFFICE MANAGERS

LAW OFFICE ADMINISTRATOR

Volume XIX / Number 10 September 2010

(Reprinted with permission of Ardmore Publishing Company)

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When to raise the rates, How to raise the rates, Whether to raise the rates

The trend today “is away from the billable hour.” Even so, hourly billing is still very much alive, and raising those rates is tricky business.
How much is enough? How much is too much? When should the deed be done? And will the clients stay or leave?
The firm has to consider the entire picture, says ROBERT J. HENDERSON, a Jackson Hole, WY, law firm consultant. And that includes what it’s charging now, the feasibility of an increase, how to present it to the clients, and what’s to be done if a client says “no thanks.”

MAKE IT A YEARLY THING

Evaluate the rates every year, Henderson says. “If a firm isn’t looking at its hourly rate every year, chances are it’s losing money.”
For flat fees, it may be possible to hold the old rate for a while. But where the firm is charging by the hour, rates need to go up each year at least enough to keep up with inflation.
Better to do that annually than to raise the rates significantly later on. For a client, a 5% annual increase is far more acceptable than getting hit with a 20% increase after paying the same rate for four years.

WHAT DOES THE PROFIT LOOK LIKE?

Look at what kind of profit the firm is making with its current rates.
Calculate profit simply as revenue minus overhead, and for the profit margin divide that by the fee.
Thus, if the cost on a matter is $2,000, the firm has to bring in $4,000 in fees to make a 50% profit, which traditionally has been the ideal.
But ideal is not reality, he says. Rarely does a firm realize more than that, and most firms never go beyond 40% to 45%. For many firms, it’s not even possible to aim for any specific target because profit depends on many different factors.
One is the type of practice. Insurance defense and Worker’s Compensation, for example, generally command lower rates than other types of work while plaintiffs’ work can bring in extremely high revenues per attorney.
Another factor is location. A firm in New York City sees higher rent and general operational costs than a firm in a small city.
It’s also possible for a firm that has a high gross income to show a profit as low as 25% or 30% because it provides a lot of perks for its partners such as cars and expensive insurance programs.
Or, if a firm is owned by one or two persons and has 20 associates, its high overhead can make the profit margin lower while the owners still make a lot of money.
But on average, he says, if the profit margin is less than 40%, “it’s time to look at the revenues and expenses” as well as a rate hike.

HOW MUCH?

As to how much to charge, several elements come into play, Henderson says.
One is what the competition is charging in the same practice areas and location.
If other local firms are charging $200 an hour for a certain service, don’t expect to get $300 – unless the firm is providing some special service that’s worth the extra $100 an hour.
Flexibility also comes into the picture.
Fee negotiation “has been common for a long time, but today it’s very common” for hourly rates. “Clients are far more in control now than they have been historically.” They know that depending on the clout they carry, they can demand competitive fees with “we’ll send you so much business if you’ll do it for $X,” because any business wants the assurance of getting a certain volume of work.
But perhaps the greatest element to consider in a rate hike is client satisfaction. The worst mistake a firm can make is to announce a fee increase without knowing where it stands with the client. To approach a dissatisfied client with a fee increase is disaster. That client is going to leave.
Henderson recommends keeping constant tabs on the satisfaction level by surveying clients at the end of each matter.
Make it just a short survey – no more than six or seven questions, he says. “It’s important that it not be lengthy,” because the more effort it takes, the less likely clients are to fill it out. The points to cover are:
What was your first impression of the firm? The attorneys?
- What do you believe is our greatest strength? – Where do you believe we need the most improvement?
Do you anticipate needing other services in the next year? What type of services?
- In what two ways could we serve you better? – Would you recommend us to your friends and colleagues?
– What comments, suggestions, complaints, or concerns would you like to voice?
The client who gives a rave review may well accept a rate increase. But don’t expect the same from one who has problems. And don’t expect it either from a client who says the firm’s main strength is its pricing; raise the fee on the bargain hunter, and the hunt will continue elsewhere.
He adds that for the surveys to be candid, they need to be returned to the administrator, not to the attorney who handled the matter. It could be the client doesn’t like the attorney. Or there could be serious issues with performance, perhaps that the attorney didn’t get the work done on time. With a neutral person in the middle, the firm can find out what’s going on and hopefully fix the problems.

A BIT OF TIMING; A BIT OF TACT

And now for the big issue: how to break the rate hike news to the clients.
The key to success, Henderson says, is timing and tact.
As for timing, give the client enough time to include it in the next year’s budget, which means knowing when the client’s fiscal year ends. Don’t put the client in the position of having to make a budget adjustment midyear.
And it goes without saying not to drop the news during a holiday season, especially Christmas.
As for the tact, use common sense and common courtesy.
Meet with the client in person or at least have a phone conversation. Don’t send a letter or e-mail.
Justify the increase and keep the message positive. Present it on the basis that the firm’s costs, just like the client’s costs, are going up and that’s why the rates have to go up. Anybody knows the cost of operations increases, he says, “so it shouldn’t come as a surprise that a law firm’s costs increase.”
Tell the client the firm appreciates the business, values the relationship, and does everything it can to provide the best service. “And then be straight up and say it.” Tell the client that the cost of doing business has gone up “so we find it necessary to increase our hourly rates.”
Be careful of going beyond that and throwing in a bone, he says. If the firm has instituted something that it can honestly say is a benefit to that client, mention it. But otherwise, leave it alone. Tell a client “we’re raising our rates because we are doing a better job for you,” and that client is going to say “why weren’t you doing a better job before?”

IN THE END, IT’S A VALUE JUDGMENT

If the client can’t or won’t accept the increase, the firm has to make a value judgment on whether to acquiesce or let that client go.
The decision, Henderson says, will depend on whether the firm can replace that client with a higher paying client as well as on how well the client pays, the number of referrals the individual has provided, and also how much of the firm’s total revenue comes from that source.
Depending on the value of the business, it may be necessary to bite the bullet and let the client continue on at the old rate. Or the decision may be to fire the client – assuming, of course, that there are other clients in the queue.

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