The Psychology of Hourly Rates

Author: John G. Fraser - Lexpert (November/December 2005 at p. 118)

Contrary to popular opinion, most lawyers are embarrassed about how much they charge on an hourly basis. They are certainly embarrassed to talk about their rates with their clients.

This phenomenon was highlighted recently with two clients we worked with. In both cases we were recommending rate increases in the order of 20%, just to bring them into line with the market. We were greeted with howls of protest. "Clients wouldn’t put up with it. The rates were already too high. We were totally out of touch with reality."

Of course, part of the problem was that a good 30% of the work on each of the partner’s desks could have been done more properly by a lawyer with less experience and a lower rate. Not all of the work done by each partner was worth the new hourly rate. In fact, if the actual work was being staffed correctly, the overall cost of the work to the client would probably go down, despite the increase in the rates.

This problem is compounded by the fact that as the Baby Boomers, and the demographic bulge they represent, move up into and through the senior ranks of law firms, there are often fewer and fewer juniors to delegate the work to. (See "Talent Acquisition & Management," Lexpert, April 2005.)

For our two clients, this “hoarding” of work was aided and abetted by the compensation systems, which were essentially production-driven and rewarded the getting and the doing of the work, not origination, delegation, care and feeding of others, nor investing in the firm.

Their clients, our clients’ clients, are interested in the overall cost, good service, and in the outcome of the work. The “hourly rate” becomes a “red rag to a bull” and obscures any conversation about the real value proposition. It has three factors: service, results and cost. The lawyer should set out in writing what work is going to be done, what level of service should be expected, the purpose and objectives for the work and a range of expected costs. Invoicing should be done accordingly. Invoices will describe the outcomes achieved, milestones, and the activities undertaken. They should not, however, report the exact number of hours down to the nearest 0.1 of an hour with each activity.

It has to be scripted and the communications well thought out. But most of all, it’s not about the rates. When one must talk about rates, a blended rate for the team of professionals (including law clerks) working on the mandate is often more realistic and palatable.

Interestingly, going around the table of partners at both partnerships, our recommended rates were pushed higher in some instances as fellow partners weighed in on a colleague’s merits and standing in the marketplace. This is another phenomenon we often observe. Our rates tend to end up higher overall after partner input. One partner, pre-eminent in his field, refused to accept a higher rate. We did, however, obtain agreement from him as to who his peers were in the field. We did some research and were able to show that his peers at other firms were charging almost 40% more for the same work. He eventually acquiesced.

Another partner agreed to try on the new rates for size and quoted them to a new client (not quite on script). After the client stopped gasping, the partner patiently explained that he had a team of 3 associates and 3 paralegals. That he, the partner, would be doing the critical/strategic elements only, but that his team and back-up would be working on the project as well and that overall the costs would be $X. The client has since sent him two additional files.

The trade press has covered value billing, success fees, premium billing, fixed fees, blended rates, multi-year rates for over 15 years. But most legal work - about 90% - is still billed out on an hourly basis. We have to get away from the emphasis on time expended, time put in, a cost plus approach, and move towards outcomes, results and meeting the client’s objectives.

This is a relationship-driven business and rarely a cost-driven one.