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Practice Management: Calculating value

Every Issue

Cite as: July 2014 88 (07) LIJ, p.77

Practitioners should be able to provide services at a price that satisfies the client and the firm.

What are you worth? The answer is not $200 an hour or $500 or $1000 or even more. The answer from every good lawyer who understands their clients’ needs should be – it depends.

On what, you say? Need, perceived or real. Urgency, real or imagined. Your competition. Your ability to complete or effect the outcome required, whether that be intellectually or practically. The application of those factors may result in an hourly rate, but may not.

Your aim should be to provide legal services at a price that represents value to the client and results in a profit for the firm. It is not unreasonable for your price to reflect the required urgency and the novelty of the issue you are engaged to advise on or resolve. As these factors are of value to the client over and above the technical legal aspect, they should be reflected in the price for the work.

Notice we have talked price and not cost. Cost is the money you pay to fulfill the services for which you are to receive the price. The distinction is important and may be, in part, attributable to hourly billing and yearly budgets. Divide the yearly budget by the anticipated hours, and you get an hourly rate that, if achieved over the year, will produce a predicted profit for that fee earner. The hourly rate is not the cost of production as it includes an element of profit, frequently an uneducated guess.

The simple application of a rate fails to reward the law firm for an outcome that exceeds the client’s expectations. Come in early and in fewer hours than expected, and the fees are less. Have a brilliant idea in the shower and make hours of research unnecessary. You may also pass on all of the efficiencies of scale, so they provide no benefit to you.

The simple application of a rate also discourages efficiency, and may protect the firm at the expense of the client. It may also result in work being rejected that might be profitable at the margin, given higher fixed costs, or which might act as a loss leader to other more profitable work.

Clearly, to stay in business, you need to know what it costs you to operate. All businesses need to know their costs of production. From a budgeting point of view you can then determine how much income you need.

Beyond that you should recognise that your aim from each piece of legal work should be to create a lasting relationship with your client, based on the provision of services under an arrangement that represents value to the client and provides an appropriate return to you. It may be measured task by task or file by file, and it may be measured over the whole time that person stays as your client.

Remember, if your perceived principal advantage is that you are cheap, there will always be someone cheaper. If you decide to be a low cost provider of legal services then make sure that it is a conscious decision and that you structure your firm accordingly. Low prices and high costs are a recipe for failure. Your low prices might drive revenue but the high costs will not produce a profit. As the saying goes “revenue is vanity, profit is sanity.” Remember, the number one determinant of law firm profitability is price.

How to charge

Start by listening. Allow the client to explain the problem from the client side. It is likely to be a mixture of legal and business or emotional issues. If you can solve both, why charge to solve one and not charge or capture the value for the other? You might think that you sell time but your client is buying a solution to a business or personal problem: they do not buy your time, they buy your legal, business and personal acumen.

There are regulatory issues that need to be addressed. Obligations in terms of disclosure statements and cost agreements have to be considered, particularly in relation to defining the scope of the work to be performed and the basis of charging. Time costing is one method allowed but it is not the only one.

If you choose to play it safe and charge solely on the basis of time, remember that there are 168 hours in the week, and they are not all equal. A solution tomorrow may well be worth more than a solution late next week. But your disclosure statement needs to make it clear that the fees are based on that turn around.

If you choose to charge on a different basis, factors that impact on the final amount need to be clearly spelled out. You will stay in business because you provide a service to your clients that they value at or above what they pay you for it. Part of their perception will be derived from the accounts that you send them. The balance will come from their understanding of what you have achieved for them. It is up to you to give them that understanding – no one else will.

PADDY OLIVER is managing director of Lexcel Consulting and DAVID WHITING is a principal lawyer at Donaldson Whiting + Grindal.


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