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. 

• Expense per lawyer: Are costs changing? If it costs more to run the firm, then rates may need to be reviewed to adjust for the increase. 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 feeling like they are getting a fair deal? Are payments delayed? Consider the cost to process payments, too. 
• Turning Rates into Revenue: Here's how the law firm turns increased rates into actual revenue.
  
  
  • Standard Rate Increase: This is a new standard rate. 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.
  • Cost Plus: Look at the cost of running the firm including salaries for the staff, whether it's one or several. Tally the fully loaded costs, including benefits, costs to maintain an office, software, hardware, and others. Estimate the number of hours worked by the team. Dividing the costs by the hours gives the firm what they need to charge per hour to cover all the costs. Consider total costs plus 10% to address potential increases. Key to this approach is understanding competitive rates. 
  • Post-work realization: Some matters are resolved cleanly and in a timely manner while others conclude with write-downs and discounts. 

If the firm offers discounts or a variety of rates based on the type of law or client, it gets a bit more complicated. It's all about understanding the competitive rates in the area and the costs to run the firm, including unpaid charges and discounts.

Differentiation

Why should a client select one law firm versus another? Does the firm stand out among competitors for any specific reason? If the firm has a stronger reputation or successful outcomes of cases, a higher rate may be warranted.

• Responsiveness and relationship history: Does the law firm have a good reputation regarding the client experience? Clients greatly value working with legal experts who provide excellent open communication. The rate may reflect this benefit.
• Resolution Rate: Law firms that have a consistently high percentage of successful outcomes can consider a rate that is higher than typical for the practice area and geography.
• Leadership: Law firms with high profile staff can also consider a slightly higher rate than average. Firms with thought and community leaders may also consider a higher rate.

For law firms that are seen as differentiated in the market, a higher than typical rate may be justified. The key to this approach is to monitor client and business flow. 

Summary

Reviewing law firm rates each year is key to being competitive and profitable. Driving growth in the next year starts now. Has your firm considered billing rates? Now is the time to get started.

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

👉 Want to see how SimpleLaw can transform your practice? [Schedule a demo today.]