Thursday, July 14, 2005

The Economics of a Law Practice - Rates

A while back I did a post about cheap lawyers. One of the challenges for a lawyer is figuring out how much to charge.

I started out with the general notion that I was going to charge $200 per hour for my time. I figured that if I managed to bill only 500 hours a year (10 hours a week), I would get $100K in revenue. After all my expenses, I'd survive, but I wouldn't be making much. If things went well, I might get to billing 1000 hours per year, and then after expenses I'd be doing pretty well. If I got to 1500 hours, that'd be $300K in revenue, and then I'd be in the ballpark of getting rich. But I'd be working a lot of hours, because as a solo you end up working 2500-3000 hours in order to bill 1500. And if I actually managed to bill 2000 hours, I'd want someone to shoot me because I'd be working way too hard.

Then you get to the point where you think about hiring an associate. Suppose you have enough work that you could bill out an associate at $150/hour, and the associate would bill 2000 hours. That's another $300K in revenue. If you pay that associate $60K (a good wage in Albany for an associate with 2-3 years of experience), you're probably spending $100K total on that associate when you include benefits and other overhead. But that means you're making an extra $200K in profit. Not bad. This is where the economics of a law practice starts making a lot of sense for the rainmaker. If you can generate enough business for 5 associates, you're making $1 million a year in profit before your own billing.

Of course you have to manage your associates, and some of them may expect to become partners at some point. I have trouble with that. I'm very possessive of my law practice, since I started it and feel a bit like it's my baby. I'm happy to work with my wife, who tends to see this as my practice even though she is a co-owner. When you hire associates you're giving up some control. When you make someone a partner it's a big change. I tend to think I'd encourage my associates to start up their own practice, and help them get going, rather than having them become partners with me. But maybe down the road I'll find there's a good reason to take on partners. My education on the business of being a lawyer is not complete.

Getting back to rates though, most of my work is not billed hourly. I charge $250 for most traffic tickets, $400 or more if I have to travel. I charge $1000 for DWI violations. These tend to be flat fee rates. The time I put in varies, but the value for the client is the same regardless. It tends to average out okay, so I think it makes sense. I can resolve many traffic tickets by mail, which probably takes me less than an hour. For some I have to go to Court and that can take two hours or more. If you get a decent volume of traffic cases, you can get 2 or 3 tickets in the same court on the same night, and that works out better.

I charge more for DWI because you can't do them by mail, and you may have to go to Court more than once. And there's also a risk that you'll have to do a lot more work if the client doesn't accept a deal. At that point you will charge the client more, but there's a risk of nonpayment.

Criminal billing is tough because most defendants are poor. Criminal defense is a lot of work, and you have to charge a lot because you can put in a lot of time. You also have to charge a significant amount up front, because there's a strong risk of nonpayment. I'm thinking about raising my up-front charge on all felonies to $5000 from $2500.

I took on a case outside my usual area of practice recently, and charged $5000 up front. This case is burning a lot of time. The client calls me almost daily, even though I keep warning him that his calls are costing $20 every 6 minutes. We're already through over $3000. I feel a little bad for the client, but it's an area of law I find unpleasant and I am doing valuable work, providing a much higher quality of service than they've experienced in the past.

That's one of the things about rates. I charge more than the cheap lawyers, though I'm not the most expensive on the block. The big thing I'm selling is that I provide strong customer service and quality work. My toll-free number is answered 24/7 by a person who speaks both English and Spanish (an answering service in Los Angeles). They attempt to connect those calls to my cell phone from 7 am to 9 pm (Eastern time), 7 days a week (holidays too). If it's outside those hours, or I don't pick up, they send a text message to my cell phone, and I call back as soon as I get it.

When you call my firm, you will talk to me, usually right away. You don't talk to a legal assistant, who doesn't really know how things work. And you don't get a computer talking to you, telling you to press 1 for this or 2 for that. I hate that, and I'm sure many clients do too.

Several callers have been surprised when they get to talk to me. I think they're used to calling and not being able to get to talk to the right person. And that's part of what my clients are paying for. The other end is delivering quality work. I take care of things for my clients so they don't have to worry about it. That's why they hire me. And that's why I'm worth what I charge.

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