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For some attorneys, setting fees is like taking a stab in the dark. This is especially true now that the landscape for legal services has turned from a seller’s market in the 1970s and 1980s to a buyer’s market in the 1990s. Now more than ever, the client dictates the price, staffing and strategy, said Ward Bower, a law firm consultant with Altman Weil Inc. Bower spoke on how to set fees to an audience of about 100 solo and small-firm practitioners at the Solo and Small Firm Day 2000, an event put together by the General Practice, Solo and Small Firm Section of the American Bar Association for the ABA’s annual meeting in New York. Although clients often run the show, said Bower, lawyers do not have to relinquish all control over their rate structure. He emphasized that there are various ways to charge clients, from hourly rates to flat fees. Although billing by the hour is slowly fading, it is still the method of choice for most lawyers, said Bower. To determine an hourly rate, attorneys should consider not only their economic situation, like overhead, salary, profit and benefits, but also what clients are willing to pay and what other attorneys are charging. The hourly rate can be established by dividing the target figure for the firm’s revenues by the anticipated billable hours, Bower told the audience, which met at the Association of the Bar of the City of New York. For an individual lawyer, the hourly price can be determined by dividing target revenue goals for that lawyer by projected billable hours. For example, Bower told the solo and small firm practitioners that they can follow a simple formula to determine what they should charge per hour: BR=T/(RxU). BR stands for the hourly billing rate for the lawyer. T is target revenues and can be computed by adding per lawyer overhead, salary and benefits. R is the percentage of past billing actually collected (typically 90 percent), while U is lawyer use, or annual billable hours. This computation, however, is only half of the process of rate setting, he stressed. A lawyer must also consider the realities of the marketplace. Charging significantly more than others for the same work, for example, is for most lawyers a sure-fire way to chase away clients. In addition, certain variables can also affect hourly rates. According to an Altman Weil survey of law firms, experience, specialty, firm size, position in firm, geographic region and community population all influence fee structures. “In less sophisticated, ‘commodity’ areas of practice, clients will shop on the basis of price and refuse to pay high rates. In highly sophisticated areas of practice and matters of substantial economic impact, clients will pay more for quality,” said Bower. SETTING FLAT FEES But hourly rates should not be considered the only way to make money in the legal field. Bower explained that at the present time, “legal work billed hourly is subject to ever more intense client-induced price competition and revenue restraints, through intense scrutiny of detailed bills.” Alternative pricing, such as contingent fees, pre-negotiated results fees, percentage fees and flat fees, should be considered where appropriate, he stressed. “Everyone wins with flat fees,” said Bower. From routine divorces, incorporations and business transaction to routine litigation such as tort claim defense and employment, Bower said, flat fees are preferred by the client and can add revenue for the lawyer. For instance, with flat fees, clients know exactly what they will owe from the beginning, while the law firm can increase its profits through efficiency and cost reduction, he said. It also gives the client a more meaningful way to compare law firms while giving firms the ability to require either partial or whole payment at the outset of the case, thereby improving cash flow, realization and profit, he added. But for everyone to benefit, lawyers need to figure out their fixed rate correctly. According to Bower, there are two primary methods for setting fixed rates. One method is to budget based on hourly rates set by the rate formula and the estimated time involved in each step or phase of the matter. The other method is to resurrect past detailed billing information on similar completed matters and set fees accordingly. Yet even when everything is done right, Bower warned that fixed or flat-fee pricing does not guarantee a profit on every matter. Typically routine transactions and cases that resolve early can be very profitable, he said. However, unexpected complications can cause an occasional loss. To minimize losses, Bower suggested informing the client up front, in writing, that if time value invested in the matter exceeds the fee by a reasonable number, such as 20 to 50 percent, the client will pay hourly above the flat fee. Such an agreement will cut the lawyer’s losses for exceptionally difficult cases. And most importantly, do not wait until the resolution of the matter to collect money, Bower said. Get as much as possible up front as a retainer and set up a payment schedule at various key points in the case to collect the rest. “Money in your pocket is better for you than in the client’s wallet,” he cautioned.

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