As the holiday season began, I received an e-mail inquiry from a lawyer asking if I had a standard letter that his firm could use to inform clients that hourly rates would increase on January 1.
Since most firms have faced two-plus years of pressure by clients to cut rates, it was interesting (to say the least) that here was a firm intending to do the opposite. Yet a little research revealed that this firm is not alone. The Altman Weil consulting firm recently surveyed nearly 300 U.S. law firms and found that those firms intend to raise their 2010 rates by an average of more than 3 percent. And more than 80 percent of the managing partners at the nation’s 200 largest firms who responded to inquiries from a leading legal publication anticipated raising rates in 2010.
I must quickly point out, however, that these surveys focus on larger firms only; these firms deal with Corporate America where increased costs are expected, notwithstanding the “Value Challenge” campaign by Association for Corporate Counsel (ACC, formerly ACCA) for lower legal costs.
There is certainly no prohibition against raising rates at any time. As I’ve written before, the only ethical obligation is that legal fees be “reasonable,” by each lawyer’s and firm’s calculation of the simple equation P = R – E: Profit (take home pay) equals revenue collected less expenses. Each answer to this equation, and the resulting fee rationale, will be different. Your growth history, your professional reputation and success, your competition, the nature of your practice and clientele – all of these, in addition to the economic environment and your firm’s own cost structure, will impact any rate increase.
Although there is no universal rule on how much to raise fees, these considerations should typically be taken into account in any fee increase decision:
- Are you handling a big-ticket or break-the-company case successfully, one for which the client’s options are limited and the perception of need, and therefore value, is high?
- Do you have more business than you can handle without expanding, and would the loss of clients due to an increase likely be balanced out by an increase in both revenue and profit?
- Do clients say your rate or total fee is reasonable? This suggests that your fee structure is at the lower end of the spectrum compared to your competitors.
- Do you get business from other lawyers because clients won’t pay their rates? This is a sure indication that you are priced below the market.
- Do you have a gut feel of comfort with the new rate you want to charge?
There are, of course, certain times when even though your responses to these considerations are positive, raising rates is not feasible: for example, you are on the eve of trial or closing (and an increase could be seen as extortion), or you have agreed to a stated fee or retainer in an 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 for 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. Or, (heaven help us!) have more time to spend with your family. The decision is yours – but be sure to make it carefully.