I once proposed raising our hourly rates and was met with furious resistance by the head of our litigation department who assured me that no assessment officer would ever permit lawyers to charge the amounts that I had proposed. He was a brilliant litigator and he was completely correct. However, he was not much of a businessperson and had not considered how rarely our accounts were assessed. I was more than willing to lose all of the assessments and rake in the extra dollars on more than 99% of our files.
We raised our rates. We made more money.
It is no secret that lawyers are typically not great businesspeople, and nowhere is that more evident than in how they set their hourly rates.
I won’t even get into the stupidity of believing that hourly rates can be increased year over year across the board with no justification other than that the partners want to keep up with increasing costs or make more money. No, I have something even less intelligent to rant about, and that is when law firms set their hourly rates exclusively by year of call to the bar, or worse, year of call to the bar in their jurisdiction.
Back when I was the most senior lawyer in my firm, the hourly rate of some of my partners was significantly higher than my own. Why? Because they had something that I did not have: clients who were happy to pay it.
At many firms that situation would have been prevented by the egos of everyone involved.
Do you think that Apple sets the price of its iPhone by reference to the seniority of the people who manufacture it? Of course not. It is a real business. It sets the price based on what customers are willing to pay for it. Supply and demand are the basis for prices in just about every private business, except for professional firms.
Some lawyers are in more demand than others. Those lawyers can charge more. How much more? As much as their clients are happy to pay.
I frequently hear from lawyers who are overloaded with work for happy clients but feel that they are underpaid and are ready to jump ship. When they tell me that their compensation is calculated by reference to their billings, I always ask about their hourly rate. They often express frustration that their firm will not let them increase their rate, even though their clients would be happy to pay more, either because of their natural talent, area of specialization, particular expertise, experience in business or practicing law in a foreign jurisdiction prior to becoming a lawyer in Ontario, or their ability to speak a language which attracts clients from a particular ethnic community.
But firms ignore these things and set their hourly rates based on year of call to the Bar in Ontario. It is enough to convert me to a proponent of fixed fees. But, knowing Canadian law firms, I bet they will set their fixed fees based exclusively on the year of call to the Bar of the lawyers who are doing the work.
Stupid, stupid, stupid!
This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.