Master the 'art' of setting fees

When setting their billing rates, lawyers have only one formal requirement under Massachusetts Rule of Professional Conduct 1.5: "A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee."

The rule concerning fees may differ somewhat among the states. While Massachusetts talks in terms of "excessive" the ABA Model Rule talks in terms of "reasonable," and California talks in terms of "unconscionable." They all use similar criteria, however, in interpreting their term.

In the law, as in any business, pricing is arbitrary; it is an art, not a science. The seller (lawyer) may calculate cost, set profit targets, gauge market demand, and then decide on the price for the service to be delivered.

I write this after The Wall Street Journal reported that, for the first time ever, the fees of top partners at the biggest law firms are exceeding $1,000 an hour — and clients are paying when they feel the service they receive is worth it.

Whether it's $1,000 or $100 an hour, the rates lawyers set are based on a number of factors.

These include years of experience, their practice area, their geography, the number of lawyers in their geographic and practice area near them, and type of billing method.

Ultimately, the rate that most lawyers charge is based on their "gut feel" after evaluating these and other factors. Rate setting is definitely an art, not a science.

When clients start telling you that your fee is really reasonable, you know that the next client in the door has to have an increased fee.

There is no perfect time to raise fees. Those clients who do not want to pay the higher fee will seek other counsel. Those who believe your service to be of value will accept the higher fees and remain with you.

Make sure you have tangible arguments that can support your case:

• You add value, by providing exemplary service or by adding new services that cost less than the increase.

• You achieve results. Higher fees are more likely to be accepted if clients are happy because you've won a motion or negotiated a favorable deal. It places the client on the peak of the "satisfaction curve," the time of least resistance for accepting an increase.

• You are reasonable. Not surprisingly, clients will more readily accept smaller fee increases, generally 3 percent to 5 percent for an hourly fee. The average client has little price sensitivity in choosing a lawyer because they decide based on referrals from trusted friends or the perception of legal ability.

Whatever rate you set, make sure clients understand that they're in a two-way relationship. The lawyer agrees to perform to the best of his or her ability in accord with professional standards, and the client agrees to communicate and cooperate fully — which includes paying the bill.