Cutting Your Fee – If a Client Asks, What Do You Say?

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Chapter XI of the Canadian Bar Association’s Code of Professional Conduct states that “the lawyer shall not stipulate for, charge or accept any fee that is not fully disclosed, fair and reasonable.” Of course, “reasonable” is often in the eye of the beholder, and the CBA adds in its commentary that “the lawyer should try to avoid controversy with the client over fees and should be ready to explain the basis for charges, especially if the client is unsophisticated or uninformed about the proper basis and measurements for fees.”

Value is ultimately determined by the client, not the attorney. But, it’s the attorney who must educate the client about “value.” Most clients recognize the importance of and are willing to pay a fair fee for value. What they do not want is to pay too much – to pay for inefficiencies, duplications, or unnecessary services. The skills of a lawyer and the way in which services are delivered to the client must coincide with what the client wants and needs to have.

What is a “high” fee?

Deciding a reasonable fee generally involves ethical questions of professional conduct. Is the amount of the fee proportional to the value of the services performed? Do the lawyer’s skill and experience justify the fee? Does the client understand the amount and nature of the fee and consent to it? There is no one answer on what a fee should be. If the fee should be low, then is $200 per hour, for example, too high? If so, is $150 per hour too high? The lawyer’s true obligation is not to be cheap, but to be fully committed to a collaborative client relationship that builds trust over the long term, and to ensure that the fee reflects real value to and for the client.

Ultimately, the rate that most lawyers charge is based on a “gut feel” after evaluating such factors as their years of experience (more years out of law school means a higher billing rate), their practice area (mergers and acquisitions work, for example, is valued higher than family law), their geography (Toronto lawyers likely charge more than those in Thunder Bay), the number of lawyers in their geographic and practice area (the more lawyers there are, the higher the price competition), and the type of billing method (hourly rate, flat fee, contingency fee, and so on).

Is the client always right?

In my experience, the costs of legal services go down more readily when the client and lawyer act as a team and create a budget for future services. The parties generally find that each one will assume certain risks and that the costs will go down.

A general counsel told me some time ago that the mere fact of budgeting caused everyone to focus on the goal line and how to get there most efficiently. In one specific instance, budgeting saved over $500,000 for the client, all without reducing the then-hourly rates charged by the law firm. Of course, that reduction also meant that the law firm revenue was impacted, but rates were not. The client got the desired result at a lower cost, and happy clients tend to bring the firm more work.

All of this presupposes a reasonable and unemotional discussion about fees. Today, however, recession has created a common problem: a law firm’s largest client suddenly demands a 10 per cent rate cut. Without it, the client will stop sending new work to the law firm.

Firms increasingly face this dilemma, and respond in different ways. Some feel that there is no alternative but to agree, because the recession has turned nearly all legal services into commodities. Others feel that the firm can push back by asserting the uniqueness of its practice and services. The caveat here is that too many firms believe too much of their own rhetoric – not all lawyers can be the best at their practices!

How do you avoid a discount?

Fundamental to “The Business of Law”® is that lawyers should resist discounting their fees – particularly if the client has earlier agreed to pay the full amount in the engagement letter. The engagement letter should clearly state the consequences to the client for failure to honour the agreed-upon payment commitment. If this is clearly understood and the client still pushes for a fee reduction, rather than lowering the fee, the lawyer should offer to take services off the table in order to deliver a lower price to the client.

In effect, when the client wants a reduced price, unbundle the services and charge a different price for a different group of tasks and functions. The client should get the message that the price will only be adjusted to fit the appropriate level based on the service to be delivered.

Even worse is when law firms themselves propose the discount. Often on accounts for repeat clients with significant billings, the firm, in its push to collect fees, will offer some type of discount. Even clients with a signed fee agreement soon say, “I’m not going to pay without a discount. I'll just wait until the firm gets desperate and I know I’ll receive a discount at that time.”

There are a number of alternatives to choose from in stopping this practice – some better than others, but all certainly practical:

• Offer the discount immediately to get outstanding bills paid, emphasizing that subsequently there will be no more discounting – and mean it.

• Refuse to offer the discount, tell clients that there is a fee agreement in place and it will be enforced – irrespective of whether the firm has failed to enforce it in the past.

• Tell clients that unless they honour the agreement that they accepted and signed, the firm will, consistent with professional obligations, discontinue work for them. They should get other counsel and the firm will seek to enforce collection of all billed fees outstanding.

• Offer a discount for everything to date, with the proviso that all work hereafter will be billed at full rate and collected in accordance with the fee agreement. Get full acknowledgement of both the discount acceptance and the future adherence to the fee agreement.

• Accept the discount process and admit that means accepting less than 100 per cent – then compensate by raising the fee/rate either higher or sooner than other firms

How can you bill confidently?

Each of these options for breaking the discounting cycle says that the firm is a business with certain policies in place, and that professionalism should define the process by which the lawyer sets fees and the client agrees to pay them. That still raises the issue in these tough times: at what point do you decide that your bill is what it is, without feeling that you need to be defensive about it or to discount it.

No matter what the economic conditions are, this question goes to the heart of what it means to be a lawyer. Lawyers help people’s lives improve. Our objective should be to provide and account for our services in such a way that clients understand and accept the value as well as the cost of what we do. When that happens, fees are not an issue and lawyers do not have to apologize for what they charge.

With that in mind, these rules of thumb, most of which we’ve discussed in past columns, can be helpful. The lawyer who follows them when billing a client can bill confidently and have every expectation of being paid.

• Document that your fee is reasonable. That means making sure the client knows you have the skill and experience to justify the fee, and that it is competitive with others in your geographic and practice areas. You must know the current market conditions and the competitive pressures on legal fees.

• Be wary of ancillary fees. Some lawyers charge their clients for “opening” a file on each matter; others charge for photocopying the file before giving it to the client when requested. These are legitimate charges to clients if they are specified in the retainer agreement. But if your competitors do not make such charges, or if your client resents being “nickel and dimed” for them, it can create negative feelings toward your bill.

• Document your fee with billing statements that are easy to understand and that clearly list actions taken on the client’s behalf while relating them to the time it took to realize that value. These billing statements will be more meaningful to the client, and will go beyond a mere laundry list of tasks performed. Use action verbs to describe your services. Clearly indicate the specifics of what was accomplished. This gives clients an appreciation of the effort required for success.

• Offer something that your competitors don’t or can’t; create something new that your clients need or want. If you handle estate planning, for example, add financial planning as a service, either as part of the fee package or for a designated added fee. Providing better-than-excellent service is all you may need to establish a unique position – for example, calls consistently returned within two hours, or final client documents nicely packaged in an attractive folder.

• Communicate regularly with your clients. Don’t wait for them to ask you, send them copies of all relevant documents about them that come into the office, or provide status reports on a regular basis. Demonstrating to clients what you’ve done for them is the best way to be confident when you bill for it.

Edward Poll (edpoll@lawbiz.com) is a certified management consultant and coach in Los Angeles who coaches attorneys and law firms on how to deliver their services more profitably. He is the author of Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (ABA, 2002), Collecting Your Fee: Getting Paid from Intake to Invoice (ABA, 2003) and, most recently, Selling Your Law Practice: The Profitable Exit Strategy (LawBiz, 2005).