Law firms make money through their billing rates. Every $1 you charge is another $1 you earn. Charge too much and you may scare away clients. But charge to little, and you could be leaving potentially hundreds of thousands of dollars on the table.
But it’s not easy to come up with a billing rate. Attorneys are often faced with questions and concerns, such as:
I haven’t raised my billing rate in years. What should it be?
I’m bringing in a new attorney and I don’t know what to charge.
Potential clients aren’t signing with me and I think I might be charging too much.
Your billing rate can’t be a guessing game. It has to be something that you come up with using data – data that you have in your own firm.
“Fantastic!” you might say, sarcastically.
Or, if you’re not too snarky, your next question is “how?”
Determining Your Fair Market Rate
We have a client named Emily, an attorney that hadn’t raised her rate in nearly a decade. She assumed, rightfully, that she was undervaluing her services. But she was also afraid of losing her clients, and she had no idea what to charge.
We looked through her revenue, salaries, billing goals, etc., and came up with what the correct fair market rate of hers would be. It ended up being a full 20% higher than she was currently charging.
Now, on the one hand, this meant that she was missing out on a lot of profit, and by altering her rate, she could be making quite a bit more.
But instead of being thrilled, she was panicked.
She was convinced – and terrified – that she would lose a lot of her clients if she increased her rate.
“Awesome!” we said. “You can actually afford to lose 20% of your clientele and you’ll work less and make the same amount!”
Putting it in that context, of course, made it far less scary. She implemented the rate change.
It turned out that her fears were also unwarranted. She only had one client question the rate change, and that client ended up staying as well once Emily offered her two months at the same rate to think about it. She eventually lost 0 clients, and was pocketing 20% more.
How to Set Your Billing Rates
Hopefully, this puts into context how valuable an accurate billing rate can be. The next step is to figure out what your billing rate should be.
There are different ways to do this:
Method 1: Do What Everyone Else is Doing
The simplest method, and the one that requires the least amount of work, is to charge whatever everyone else is charging. Talk to your friends in the business, see what they charge, and set your rate at about the same amount.
Method 2: Contact the Bar
The Bar Association does a salary survey every 2 years and adds a lot of details, including location, time practicing law, and more, so you can see what your rate *should* be based on a variety of different factors – all in your geographic area.
Method 3: Do The Math Yourself
Our preference is to use the third method – figure out the billing rate that is right for your firm, based on your data. It’s a tad bit more challenging, but it is far more accurate and has greater financial benefits.
In order to calculate what your billing rate should be, there are a few things to keep in mind:
“Payroll” is more than just salary. It is the entire cost of employment, including bonuses, 401K, insurance, and even the cost of taxes.
All attorneys should be bringing in 3x, 4x, or 5x the cost of employment at minimum and that 3-5x multiple is based on the type of employee they are.
The “x” is the attorney’s current total payroll cost. So a 5x multiple attorney should be bringing in 5x their cost of employment. A 3x multiple should be billing for 3x their cost of employment.
With that in mind, your next step is to determine the type of attorney they are. There are three types of attorneys:
Finders – Finders are typically experienced attorneys. While they still have billable hours, they also spend quite a bit of time finding and managing clients, both of which are non-billable tasks. As a result, they have a 3x multiple.
Minders – Minders are attorneys that are not going out and finding as many new clients, but still spend some time on non-billable tasks, such as training new attorneys. Minders are typically 4x multiples.
Grinders – These are the young guns that spend every day grinding away at billable hours. They rarely do any non-billable tasks and are expected to work their butts off. They are a 5x multiple.
Now, even though a finder is “3x,” that does not necessarily mean they’re billing for less money. Sometimes, these experienced attorneys also charge more. Since they have a higher payroll cost as well, 3x can be as much or more than a 5x multiple grinder.
Once you have this information, you can determine the billing rate for these attorneys. If your “Minder” has a total employment cost of $85,000, they need to bring in 4*85,000, or $340,000. If they’re also expected to complete about 1200 billable hours in a year, then you can take that $340,000, divide it by 1200 billable hours, and you get $283. Bump that up to $285 per hour for simplicity, and voila, you have a billable rate.
Now, you just need to give that number a quick reasonability test. Does $285 per hour sound reasonable? If other attorneys are charging $500, or $100, then probably not. But if other attorneys are charging $250-$350 for similar work, then your $285 is spot on.
You now have a billing rate for your attorney that is profitable and justifiable.
At CathCap, we’ve worked with so many attorneys and law firms struggling with similar issues, that we compiled a variety of free resources to help you improve the profitability of your team. Click here to download the free resources, or use this link to schedule an appointment with one of our CFOs.
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