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A Rational Basis for Setting Hourly Rates
For the past 20 years, law firms have annually increased their hourly rates on the basis of various ad hoc criteria ' what the market will bear, matching the competition, cost-plus, maintaining profit margins ' that neither firm members nor clients find satisfactory. Alternative pricing methods (fixed fees, percentage of the deal, etc.) have long been advocated as a solution to hourly billing discontents, but in practice, for a large majority of firms they remain limited in application. Firms whose clients expect fees to be charged on an hourly rate basis therefore require a rational means of constructing an hourly rate schedule that is transparent and acceptable to clients as well as defensible within the firm.
Rate-Setting Factors
In the United States, the Model Code of Professional Responsibility (Rule 1.5) provides some assistance in establishing a basis for setting hourly billing rates. In setting a fee, lawyers are allowed to consider any of eight factors, including:
- The time and labor required, the novelty and difficulty of the issues involved, and the skill required to perform the legal service properly;
- The fee customarily charged in the locality for similar legal services; and
- The experience, reputation, and ability of the lawyer or lawyers performing the services.
Therefore, we can develop hourly billing rates that vary by the sophistication of the matter, by the reputation and capability of the specific lawyers involved, and by standards of the marketplace. The mechanics to develop such a system are relatively simple. Three sources of input are required: an empirical basis on which to make assumptions about the level of rates in the marketplace; a means of evaluating the capabilities and reputations of the firm's lawyers; and a system for measuring the comparative sophistication of client matters.
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