Professional Services Accounting ARTICLE -
How to Raise Your Rates and Not Lose Clients
Target Audience: Law Firm Professionals, Lawyers, Professional Service Organizations, Practice Groups, Industry Experts
Setting billing rates for a law firm is part art and part science. That’s because rates are affected by a host of factors, including associates’ salaries, overhead costs, market rates for similar services and, often most important, the public perception of the value of a firm’s work.
A look back at billing rates
For years law firms have set billing rates by using a formulaic approach such as tying the rate to salary and the number of projected billable hours.
For example, the billing rate for an associate might be set by doubling his or her salary and then dropping the three zeros. If the salary was $75,000, the billing rate would be $150 ($75,000 x 2 = $150,000, dropping the three zeros = $150 rate). If the firm projected 1,500 billable hours for the associate, one third of the $225,000 would cover his or her salary, one third would go toward overhead, and the remaining one third would be profit — at least in theory.
As starting salaries for associates skyrocketed in the late 1990s, many firms were forced to absorb a larger percentage of the associate’s salary because clients refused to pay such high rates for novice attorneys.
Increasing rates may help clean out deadwood
Depending on your market and your competition, you may lose a few clients when you raise billing rates. But that’s not necessarily a bad thing.
Most rate-sensitive clients will be of the “C client” variety: They continually complain about fees, they are often slow or difficult payors, and responding to these problems takes up valuable time from partners and staff. The best thing to do with such clients is to let them go.
Losing some of this deadwood should enable your partners to either spend more time on those clients who recognize the valuable services you provide to them and are willing to pay for them, or cause them to engage in more business development activities to replace the lost business.
Test the waters on new clients
One way to test the market viability of your new billing rate structure is to present it to potential new clients. If they accept your rate structure without question, you may be charging too little for your market. Or if potential clients immediately balk at your rates, you may have overestimated the market.
You can also get a handle on current market rates by talking to attorneys with whom you have personal relationships, who may not be shy about sharing their rates. Once you’ve determined your rates are competitive — and remember, there’s nothing wrong with being the market leader so long as the quality of your work product and reputation can back it up — you can strategize how to pass on the new rates to existing clients.
Start small for big results
Smaller increases are always easier to swallow. Most clients, who are also battling cost increases on a daily basis, won’t have a problem accepting a 2% to 5% rate increase. If you try to spring a higher rate increase on them, you’ll need to provide them with a detailed explanation for the increase. But beware: Higher rate increases could prompt even good clients to start comparison shopping.
Letters from the firm’s managing partner with a brief justification for the increase followed up by phone calls from the lead attorneys should do the trick for smaller increases.
The time may be now
As with any business, pricing is a large component of a law firm’s profitability. When costs start putting the squeeze on your bottom line, it’s probably time to think about rate increases.
When should your firm consider raising rates?
The easy answer to the question is “now.” In December 2005, the National Law Journal published survey results gathered from the nation’s 250 largest law firms, showing that the majority of the responding firms had raised their rates for both partners and associates at both the high and low ends of their ranges in 2005.
The highest billable rate reported was $1,000 an hour for Benjamin Civiletti, a partner and chairman of the Venable firm in Baltimore. Mr. Civiletti, who specializes in internal investigations and corporate defense, was the U.S. attorney general under President Jimmy Carter. The lowest partner rate was $105 at Philadelphia-based Cozen O’Connor, which also reported the lowest associate rate of $75 per hour.
The good news for small to midsize firms is that, as the larger firms push up the market rates, it makes it easier for the rest of the profession to follow suit.
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