Law Firm Planning: Billing Rates

When was the last time the firm reviewed their billing rates? Reviewing law firm rates gives attorneys a better understanding of their competitive market, client demand, and how the firm can optimize revenue, value, and client attraction. With the new year approaching, now's the perfect time to look back and review the law firm rates.

Rate Determination Factors

Law firms use a variety of methods that help determine if there rates are optimized. Here are a few factors that can give attorneys an idea if what they're charging is realistic.

• Demand: How is the law firm doing in terms of overall demand? Is the firm optimized in terms of client requests and firm and personnel management? Is the firm happy with the overall client base and related demand?

• Practice Areas: How do billing rates compare to the demand level of the client base by practice area the firm offers?

• Competitive Field: What is the level of demand in firm's practice area within the target client base? Are there more law firms than clients, or vice versa? Law firms offering help on legal issues with high demand and few options can afford test higher rates. If law firms have to compete with each other to for the same potential leads, it's a good idea to set up rates that are more affordable.

• Practice Area Growth: What kind of lawyers are seeing the biggest increases in demand? Where is this demand the strongest? And for what practice areas? Industry reports, bar association panels, and hiring agency blog posts are good places to start looking.

• KPIs: Tracking the following KPIs gives attorneys a good idea on whether their rates are reasonable or need changing.

  • Client intake: Track the amount of clients attorneys in each focus area get. Does the number of clients they bring in justify their current billing rate?
  • Revenue: How much profit does each practice area bring to the firm? Are earnings split evenly across the firm or does one area generate the lion's share? Is the majority of revenue come from the billing rates themselves or the work attorneys get?
  • Collection Rate: Are attorneys getting paid at a rate that matches the firm's revenue? Are they getting paid a timely manner?

  • Seasonality: Keep track of client rates at different times (by quarter or by month are good metrics). Does the firm see any consistent increase or decrease in client intake at certain times? What can attorneys do differently during the low month to increase client intake?

Compare the firm's measurements with those of the average firm in the same legal market and geographic area. Industry reports and bar association insights make accessing this information easy. Knowing how attorneys' billing rates fair against the firm's peers gives a better idea of whether or not their reasonable. 

Realization Rate and Cost Factors

A realization rate is the percentage of standard billing rates attorneys actually collect. For example, an attorney that works one hundred hours but only gets paid for eighty has an eighty percent realization rate. Everything left over goes to covering the firm's costs. Figure out what the relationship between the two looks like. 

• Expense per lawyer: Are costs changing? If it costs more to run the firm, then rates likely need to go up. However, if rates are already at the top of the acceptable range, it might be time to review expenses.
• Client Payment: Are clients paying in a timely manner and saying they are getting a fair deal? Figure out how much of what they pay goes to the attorneys. High billing rates imply high realization rates. If clients say they're paying too much and attorneys aren't getting paid enough, it's time to change the billing rates.
• Turning Rates into Revenue: Here's how the law firms turn increased rates into actual revenue.
  • Standard Rate Increase: Increase rates just enough so that attorneys have a change for more profit but don't potentially drive away recurring clients. Most firms increase their attorneys' rates by three to five percent each year. Any more runs the risk of overwhelming the firm's intake abilities and sparking client resistance.
  • Negotiated realization: Figure out what costs attorneys incur while working, along with the cost of running the firm and what clients are willing to pay. Offering discounts might chip away at revenue in the short term, but that could be offset in the long run by the extra clients it attracts.
  • Post-work realization: Some matters are resolved cleanly and in a timely manner while others conclude with write-downs and discounts. 
  • Collected Revenue: How much do attorneys actually take home at the end of each matter? If collected revenue's consistently falling short of negotiated rates, it's probably time to start pushing for more aggressive percentages.

Don't try to maximize realization at every stage of the process. Instead, use low realization in one area to protect or enable high realization in another. This lets attorneys make away with relatively decent realization rates while maintaining good relationships with clients.

Differentiation

Clients that feel their chosen law firm successfully stood out among the competition are more cooperative when it comes to paying attorney rates. Reviewing the following components gives attorneys a better idea of how clients choose them.

• Responsiveness and relationship history: Ironically, law firms that take in greater numbers of new clients have an easier time growing both their business and attorney rates. The current state of the legal market doesn't reward retention, but expansion. Taking in large numbers of new clients also helps law firms weather rate hikes. it's a paradoxical situation, but it works.
• Reputation vs. Actual Expertise: Make sure attorneys live up to the hype. New clients generally expect lawyers with high rates to bring a level of expertise to the table. If their expectations aren't met, they could feel cheated.
• Future Planning: Clients value reliability, and the best firms demonstrate this not by overachieving, but through weathering uncertain times and coming out the other side. If a law firm's like a ship the key isn't being completely unsinkable, it's not capsizing. 

The ironic twist is that the market rewards law firms that take risks, but only ones that help the firm appear consistent and dependable. Higher client intake means the firm has more room for increasing rates. The key is not overshooting in any one area. It's all a balancing act, use success in one area to cover other areas that don't see as good results.

Summary

Reviewing billing rates shows where a firm's profitable areas are and if they be leveraged to cover the costs of struggling areas.  If they can't, it's time to reconsider the billing rates for the firm's attorneys. Knowing what to set rates at makes driving growth in the next year more feasible, because there's a better understanding of the firm can accomplish, what clients want, and what profit margins to track.

SimpleLaw streamlines all aspects of law firm planning into an all-in-one case management software program.

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