Yes, We Can ' Raise Fees

After most firms have faced two-plus years of pressure by clients to cut rates, the thought of increasing fees seems a distant memory to many. In today's tough economic conditions, few lawyers at any size firm likely 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 ' and the market's reaction.

This reasoning applies to lawyers and law firms, as it does to any other kind of business entity. A lawyer in any given area of practice at any given firm can charge for services at an hourly rate, a flat fee, a contingency fee, or a mixture of these and other billing methods. Moreover, the amount of those charges can vary widely. The only requirement, according to Rule of Professional Conduct 1.5 (“The Code”), is that “a lawyer shall not make an agreement for, charge, or collect an unreasonable fee.” The Code defines “reasonableness” by such factors as:

• The time and labor required;
• The novelty and difficulty of the questions involved;
• The skill requisite to perform the legal service properly;
• The customary local fee for similar services;
• The amount involved and the results obtained;
• The time limitations imposed by the matter; and
• The experience, reputation and ability of the lawyer.

What Is Reasonable?

Some of these criteria are relatively objective, particularly time required and customary local fees. But to a much greater extent, The Code's guidelines as to how to define a reasonable fee are directly related to the value that the client receives in terms of a lawyer's skill, timeliness, experience, reputation, and results.

So, are lawyers who charge $1,000 per hour “reasonable”? How about $100 per 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 means 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).

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 impacts 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.

What Is Value?

“Value” does not have to be a vague buzzword. All lawyers, solo practitioners and members of megafirms alike, can structure what they do to consistently encourage a high client perception of value. Basic elements of establishing a perception of value for clients include:

• Establishing a return phone call policy; return calls yourself or have an assistant return clients' phone calls within two to four hours.
• Knowing your clients' concerns and understanding their business.
• Creating a client-friendly office environment. Have informative literature in the waiting room and make sure it's available in languages that reflect your clients' primary languages.
• Preparing your clients for interactive events such as negotiation sessions, depositions, and testimony so they know what to expect and are prepared for what might happen. Incorporate a wide range of possibilities so that clients are not shocked if the outcome, over which you have no control, is different from what they had hoped.
• Never making promises you can't keep.
• Regularly asking clients for feedback about whether they are pleased with your services. This feedback should be focused on their satisfaction with the service provided, rather than on the results achieved.

Such value-added elements are easy for clients to understand and, when related to the time it took the lawyer to realize that value, make billing statements more meaningful. Of course, price pressures can lead clients, particularly corporate ones, to ask for lower billing rates at any time. The advantage of charging for value is that, rather than lowering the price, the firm is in a position to take value/services off the table in order to deliver a lower price to the client. If returned phone calls within two hours are part of the regular hourly rate, take that response time off the table when lowering the hourly rate in response to a client's request. Tell the client that the response time will be 24, or even 48, hours. The point will be clear: The firm is not lowering its price; it is changing the value composition of what the client is buying.

What Is Convincing?

The positive side of the pricing equation is that demonstrating value can create a convincing case for raising fees. This is always a tricky thing to do, and the general ability to do it hinges on two factors, one qualitative and one quantitative:

• Qualitative considerations for a fee increase generally involve ethical questions of professional conduct. Is the amount of the fee reasonable and in proportion to the value of the services performed? Does the lawyer have the skill and experience to justify the fee? Does the client understand the amount and nature of the fee and consent to it? Answering “no” to any of these questions means a fee increase is not warranted.
• Quantitative factors typically come down to marketing considerations. Your new fee must be competitive with others in your geographic and practice areas. You must know the current market conditions and the competitive pressures on legal fees. Each local market has its own characteristics. National trends are interesting, but they do not control your situation.

Assuming you pass these two tests, the question becomes how best to make the case for raising your fees. The lawyer who thinks in terms of value can make these tangible arguments:

You Add Value

In other words, you provide additional services that cost less than the increase. If you handle estate planning, for example, you could add financial planning as a service, either as part of the fee package or for a designated added fee. Sometimes, showing that you provide better-than-excellent service is all you need to justify a fee increase. For example, consider packaging final documents in an attractive folder and hand delivering them to the client. This improved presentation adds only pennies to your costs, but it will be perceived as an example that you care for and nurture the client. Faster turnaround from engagement to completion is another way of adding value and exceeding expectations.

You Achieve Results

If you raise fees for future services after clients are happy because you've won a motion or negotiated a favorable deal ' even if somewhat before or beyond your normal billing date ' they're more likely to be accepted. It places the client on the peak of the “satisfaction curve,” the time of least resistance for accepting an increase. Do it later, and the client will invariably forget how important you were in achieving the result sought and may resist.

You Are Circumspect

All other things being equal, the smaller the fee increase, the easier it is for clients to accept it. Adding 3% to an hourly fee won't turn off many clients. Remember, for the average client, there is little price sensitivity in choosing a lawyer. More than 60% of lawyer-client relationships result from referrals from trusted friends, or from other factors such as the perception of legal ability. In these instances, clients are generally willing to understand and accept modest fee increases.

You Handle a Big-Ticket or Break-the-Company Case

In these instances, price doesn't seem to matter. The client's options are limited and the perception of need, and therefore value, is high. When matters are serious and precedent-setting, clients want whomever they perceive to be the best, and price typically is not a critical factor.

You Are Cutting Edge

Effective implementation of know- ledge management is a good example of this. Clients no longer want their lawyer to reinvent the wheel. Once you've done the research, or created the template, electronic knowledge management through a shared database makes the information available faster and more completely to clients and others involved in resolution of cases. The results are greater efficiency, better communication, and faster turnaround. That kind of value performance can justify a higher effective hourly rate, especially with corporate clients who reward continuous improvement.

Value Is the Criterion

Only value is the subject of the conversation in the intake session. You ask, and the client describes, the nature of the challenge and the value that is important to the client. As long as the return on the investment with the lawyer is substantial, the client is likely to accept the fee. In this instance, we're not talking about “raising the fee,” but rather about initially setting the fee. And the net result, generally, is a fee that is significantly higher than a comparable hourly rate. The client is satisfied, however, because the “partnership” between the lawyer and the client achieved the result desired by the client at a perceived “fair” price.

What Is the Timing?

There is no perfect time to raise fees. And there are times when it simply is not possible: on the eve of trial or closing (when an increase could be seen as extortion), or when a stated fee or retainer is spelled out in the engagement letter. Beyond this, however, accept the fact that those clients who value your service regardless of higher fees will remain with you, while those clients who do not want to pay a higher fee will seek other counsel. This can actually create several opportunities. With fewer clients, you can work less at the same average revenue, or have the time to increase your marketing efforts and replace defecting clients with new ones at the new, higher rate, which raises your average revenue per client. The decision is yours ' but be sure to make it carefully and consciously.

Ed Poll, J.D., M.B.A., CMC, helps attorneys and law firms increase profitability, coaching them on issues of internal operations, practice development, and financial matters. He practiced law for 25 years, has coached lawyers for 20 years, and is the author of 13 books, including most recently, Growing Your Law Practice Through Tough Times. Poll is a member of this newsletter's Board of Editors, a Fellow of the College of Law Practice Management, a board-certified Coach to the Legal Profession, and a charter member of the Million Dollar Consulting' Hall of Fame. He can be reached at 800-837-5880, www.lawbiz.com, www.lawbizblog.com, and www.lawbizforum.com.

After most firms have faced two-plus years of pressure by clients to cut rates, the thought of increasing fees seems a distant memory to many. In today's tough economic conditions, few lawyers at any size firm likely 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 ' and the market's reaction.

This reasoning applies to lawyers and law firms, as it does to any other kind of business entity. A lawyer in any given area of practice at any given firm can charge for services at an hourly rate, a flat fee, a contingency fee, or a mixture of these and other billing methods. Moreover, the amount of those charges can vary widely. The only requirement, according to Rule of Professional Conduct 1.5 (“The Code”), is that “a lawyer shall not make an agreement for, charge, or collect an unreasonable fee.” The Code defines “reasonableness” by such factors as:

• The time and labor required;
• The novelty and difficulty of the questions involved;
• The skill requisite to perform the legal service properly;
• The customary local fee for similar services;
• The amount involved and the results obtained;
• The time limitations imposed by the matter; and
• The experience, reputation and ability of the lawyer.

What Is Reasonable?

Some of these criteria are relatively objective, particularly time required and customary local fees. But to a much greater extent, The Code's guidelines as to how to define a reasonable fee are directly related to the value that the client receives in terms of a lawyer's skill, timeliness, experience, reputation, and results.

So, are lawyers who charge $1,000 per hour “reasonable”? How about $100 per 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 means 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).

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 impacts 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.

What Is Value?

“Value” does not have to be a vague buzzword. All lawyers, solo practitioners and members of megafirms alike, can structure what they do to consistently encourage a high client perception of value. Basic elements of establishing a perception of value for clients include:

• Establishing a return phone call policy; return calls yourself or have an assistant return clients' phone calls within two to four hours.
• Knowing your clients' concerns and understanding their business.
• Creating a client-friendly office environment. Have informative literature in the waiting room and make sure it's available in languages that reflect your clients' primary languages.
• Preparing your clients for interactive events such as negotiation sessions, depositions, and testimony so they know what to expect and are prepared for what might happen. Incorporate a wide range of possibilities so that clients are not shocked if the outcome, over which you have no control, is different from what they had hoped.
• Never making promises you can't keep.
• Regularly asking clients for feedback about whether they are pleased with your services. This feedback should be focused on their satisfaction with the service provided, rather than on the results achieved.

Such value-added elements are easy for clients to understand and, when related to the time it took the lawyer to realize that value, make billing statements more meaningful. Of course, price pressures can lead clients, particularly corporate ones, to ask for lower billing rates at any time. The advantage of charging for value is that, rather than lowering the price, the firm is in a position to take value/services off the table in order to deliver a lower price to the client. If returned phone calls within two hours are part of the regular hourly rate, take that response time off the table when lowering the hourly rate in response to a client's request. Tell the client that the response time will be 24, or even 48, hours. The point will be clear: The firm is not lowering its price; it is changing the value composition of what the client is buying.

What Is Convincing?

The positive side of the pricing equation is that demonstrating value can create a convincing case for raising fees. This is always a tricky thing to do, and the general ability to do it hinges on two factors, one qualitative and one quantitative:

• Qualitative considerations for a fee increase generally involve ethical questions of professional conduct. Is the amount of the fee reasonable and in proportion to the value of the services performed? Does the lawyer have the skill and experience to justify the fee? Does the client understand the amount and nature of the fee and consent to it? Answering “no” to any of these questions means a fee increase is not warranted.
• Quantitative factors typically come down to marketing considerations. Your new fee must be competitive with others in your geographic and practice areas. You must know the current market conditions and the competitive pressures on legal fees. Each local market has its own characteristics. National trends are interesting, but they do not control your situation.

Assuming you pass these two tests, the question becomes how best to make the case for raising your fees. The lawyer who thinks in terms of value can make these tangible arguments:

You Add Value

In other words, you provide additional services that cost less than the increase. If you handle estate planning, for example, you could add financial planning as a service, either as part of the fee package or for a designated added fee. Sometimes, showing that you provide better-than-excellent service is all you need to justify a fee increase. For example, consider packaging final documents in an attractive folder and hand delivering them to the client. This improved presentation adds only pennies to your costs, but it will be perceived as an example that you care for and nurture the client. Faster turnaround from engagement to completion is another way of adding value and exceeding expectations.

You Achieve Results

If you raise fees for future services after clients are happy because you've won a motion or negotiated a favorable deal ' even if somewhat before or beyond your normal billing date ' they're more likely to be accepted. It places the client on the peak of the “satisfaction curve,” the time of least resistance for accepting an increase. Do it later, and the client will invariably forget how important you were in achieving the result sought and may resist.

You Are Circumspect

All other things being equal, the smaller the fee increase, the easier it is for clients to accept it. Adding 3% to an hourly fee won't turn off many clients. Remember, for the average client, there is little price sensitivity in choosing a lawyer. More than 60% of lawyer-client relationships result from referrals from trusted friends, or from other factors such as the perception of legal ability. In these instances, clients are generally willing to understand and accept modest fee increases.

You Handle a Big-Ticket or Break-the-Company Case

In these instances, price doesn't seem to matter. The client's options are limited and the perception of need, and therefore value, is high. When matters are serious and precedent-setting, clients want whomever they perceive to be the best, and price typically is not a critical factor.

You Are Cutting Edge

Effective implementation of know- ledge management is a good example of this. Clients no longer want their lawyer to reinvent the wheel. Once you've done the research, or created the template, electronic knowledge management through a shared database makes the information available faster and more completely to clients and others involved in resolution of cases. The results are greater efficiency, better communication, and faster turnaround. That kind of value performance can justify a higher effective hourly rate, especially with corporate clients who reward continuous improvement.

Value Is the Criterion

Only value is the subject of the conversation in the intake session. You ask, and the client describes, the nature of the challenge and the value that is important to the client. As long as the return on the investment with the lawyer is substantial, the client is likely to accept the fee. In this instance, we're not talking about “raising the fee,” but rather about initially setting the fee. And the net result, generally, is a fee that is significantly higher than a comparable hourly rate. The client is satisfied, however, because the “partnership” between the lawyer and the client achieved the result desired by the client at a perceived “fair” price.

What Is the Timing?

There is no perfect time to raise fees. And there are times when it simply is not possible: on the eve of trial or closing (when an increase could be seen as extortion), or when a stated fee or retainer is spelled out in the engagement letter. Beyond this, however, accept the fact that those clients who value your service regardless of higher fees will remain with you, while those clients who do not want to pay a higher fee will seek other counsel. This can actually create several opportunities. With fewer clients, you can work less at the same average revenue, or have the time to increase your marketing efforts and replace defecting clients with new ones at the new, higher rate, which raises your average revenue per client. The decision is yours ' but be sure to make it carefully and consciously.

Ed Poll, J.D., M.B.A., CMC, helps attorneys and law firms increase profitability, coaching them on issues of internal operations, practice development, and financial matters. He practiced law for 25 years, has coached lawyers for 20 years, and is the author of 13 books, including most recently, Growing Your Law Practice Through Tough Times. Poll is a member of this newsletter's Board of Editors, a Fellow of the College of Law Practice Management, a board-certified Coach to the Legal Profession, and a charter member of the Million Dollar Consulting' Hall of Fame. He can be reached at 800-837-5880, www.lawbiz.com, www.lawbizblog.com, and www.lawbizforum.com.