Making Money: Your Practical Guide to Profit PART II

Published November 1, 2004


Reprinted from:

Qualify Your Clients

I once worked for a large law firm, and they had to write off the billings of several clients, each of whom had three or four hundred thousand dollars in accrued receivables! That’s a huge number, even for a large firm, to write off. And the reason they did this is because they never bothered to qualify the clients during the intake process. They forgot to ask the clients how much they were willing to spend to pursue their matters. Basically, the firm forgot to check out the economic viability of the clients. Instead, and because the fear of malpractice had them covering every base they could conceivably think of, they ran up big bills. And the clients said, “Wait a minute, for what that matter was, you’re not entitled to that kind of a fee.” And they refused to pay it.

The moral of this story: When you get a new client, make sure you qualify them first.

  1. Raise Your FeesChances are, your fees have been at the same level for a long time. How do you raise them? One of the keys is to do it in small amounts, like $5, $10, or $15 at a time, done once a year or once every 18 months. That kind of incremental increase will seldom offend anyone or cause a client to leave you for another attorney. They understand that costs are increasing, but whether they do or not, think about raising your fees if you think your market will accept it.
  2. Price Your Legal Services RightWhat the Market Says: How you price your services is dependent on a number of things, one of which is: what is the market telling you? In the 1960s, the Bar Association could tell us what a reasonable fee was. This was a great tool for new lawyers in order to figure out what the market was charging for particular services. However, the Supreme Court said that was price fixing, and this no longer happens today. But, you can still gather the information by talking to your colleagues, by being active in your Bar Association, by having a network of other lawyers. You can find out what’s being charged in your market, and then react accordingly.What Type of Practice is it? Another important aspect of pricing is understanding what kind of practice you have. Is it a commodity practice, such as consumer bankruptcy, low-income family law, or personal injury? Or, do you have a bet-the-company type of practice handling one-of-a-kind cases? You need to clearly understand what type of practice you have in order to determine what your pricing should be.

    By the Hour, or…? Hourly is not the only way to bill. Another popular way is to create a laundry list of charges and, when you have a written fee agreement, attach that list to the agreement. And by laundry list, I mean things like: half-day deposition costs “X,” a Petition for Dissolution of Marriage costs “Y,” and so forth. You have fixed prices for each element of what you’re doing.

    Obviously, you can’t do that for everything you do, but you can certainly do it for many repeatable services. Why is this a good idea? First, the client will know up front what it’s going to cost. Second, if you are charging by the hour, you’ll eventually fall into the Technology Trap, which goes like this: You spend more money investing in the technology, you become much more efficient by using that technology, and you can now do your work faster. What is the result of these improvements if you’re still charging by the hour? You charge your client less, which means you’ve got to get two clients for the work you used to do for one client!

    If, however, you have a laundry list of fixed prices, then you can become more efficient, but you won’t be losing money since you can now do more work in the same amount of time. Think of it in terms of the assembly line. When Ford or Chevy improves their efficiency, do they lower their prices? No. They seek to take advantage of the efficiencies that they’re able to create. Lawyers ought to be able to do the same thing.

    Start Thinking More in Terms of Value Billing. Here’s a real-world example of how general counsel who had gotten accustomed to the billable hour learned to appreciate the concept of value billing.

    A large firm was dealing with a big bank in a major litigation. The outside counsel wanted to file a motion for summary judgment. The firm went to the client, the general counsel, and said they wanted to prepare and file this motion. General Counsel said, “I don’t think we’re going to win, and I don’t want to pay for an exercise in futility.” The outside counsel was so convinced of the value of the summary judgment that they got creative. They made an offer to the general counsel, saying, “Look, our normal rate is $300 per hour. We will charge you $150 for all the work on the motion for summary judgment, including the hearing. If we lose, you don’t owe us anything more. But, if we win the motion, we want $600 an hour.” General Counsel agreed to the deal. When the time came for the general counsel to write the check, he had no problem paying the $600 an hour since the motion for summary judgment resulted in a total victory for the bank. That’s value billing.

    Remember, it’s the client’s perception that determines value.

  3. Do Your Billing RightSend your bills out regularly. The end of the month is best. Do not wait until the third, fourth, or fifth day of the month. That’s when your client should be receiving your bill. If you’re dealing with businesses, around the fifth to the tenth of each month is when they cut off their accounts-payable cycle. That means that they’ll put your bill in their cycle for the following month, not for this month.Make Your Bills Understandable and Positive. Your clients need to understand the bills, so make sure they’re in English, not legalese. And, as a corollary to that, put a positive spin on your bill. In most tasks that you perform, there’s usually something positive, something of value that’s given to the client that you can talk about. Don’t hide the negative stuff, but start with the positive. Your clients will pay their bills faster if they think that they’ve received value from you, and they won’t know that unless you tell them.

    Here’s an example. In a family law matter, you represent the husband, and there’s a $10,000 per month temporary custody and spousal support order issued by the court. That’s a big number, and it’s going to hurt the client, economically as well as emotionally. However, maybe you succeeded in getting visitation rights that the client wasn’t expecting, or that he feared would be taken away from him. So, in the billing, start with the visitation rights, and then end up with the financial award.

    If you accept credit card payments, you’re going to get paid faster.

  4. Concentrate on Revenue, not Expenses.Overhead is a big issue, but, there’s only so much you can cut. When you focus only on expenses or overhead, you become obsessed with that because it’s something you can understand. But, when you cut too much, you’re cutting the muscle, not just the fat, of your practice. This could be the muscle that you may need for an increase in clients or for matters in the near future.If you want to make more money, think mostly about increasing your revenue. Figure out ways to target the right kind of client to get the right kind of work that will bring in the higher revenue. When you make more money, the costs will take care of themselves.

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Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners