Under Billing - Do Not Be A Cheap Date

Peter Olson at Solo In Chicago has a good post concerning under billing.  It is a disaster that I believe grips too many younger lawyers and lawyers just going out on their own.  It is a hard lesson and an expensive lesson from which to learn, and you would do well to learn from others and avoid the practice altogether.  This is the biggest mistake, I have found, committed by lawyers who move their practices home.

The bottom line is that you do not want to be a cheap date for someone or some company that has nothing invested in the success of the relationship.  You do not want to be used and discarded.  That is where under billing will lead.

Most people know that I am not a big fan of fixed fees or what are properly called "decapitation fees". Do not get me wrong, they do tend to work well in certain types of practice areas, and mainly in transactional practices where an attorney's time and expenses are more predictable.  It is especially bad in one-shot litigation where it can be impossible to determine both the true intent of your client and the outrageous determination of the other side on a particular issue.

Especially in a Third Wave practice you do not have the volume to spread the risk of loss out or overcome losses in one case with higher profits in other cases.  Besides, I have found when an attorney is under billing he or she is doing so in almost every case.

Regardless if you bill by the hour or accept some sort of decapitation fee, under billing has a lot of drawbacks.  Let me review a few.

The biggest problem concerns not making enough money.  Let us face facts, attorneys under bill because they are worried about putting cases or clients up on the board.  They are worried about from where the next case is coming.  They are anxious that their prospect will not retain them if the fee is too much.  But, this is a sucker's game.  It is a mind game and the barrier is in the attorneys' own mind.

Years ago I remember an older roughed up gentleman and farmer came into my office for a legal matter.  I just convinced myself that he could pay my fee and I felt bad.  I took his questions as resistance instead of just clarifications.  And, admittedly, I needed to put cases on the board.  I did not inquire about his financial situation.  I assumed.  I finally agreed to take his case for $500.00 and the filing fee, instead of my normal $2,500.00 retainer.  The guy look so relieved.  Then he stood up, stuck his hand into the pocket of his tight jeans, and pulled out a roll of something like $5,000.00.  He said he brought it with him because he though my services would cost so much more.  He whipped out $600.00 to cover the five hundred and the filing fee, and even expected me to give him change.  Not only that, but his case turned into, what we East Texans kindly call, a "pisser".  As for me, I was stuck.

This does not mean you should bilk a client.  It just means you should have a better self-worth.  If you lose the prospect as a client because you need (notice I did not say want) to charge an appropriate fee, or bill an appropriate amount, or collect an appropriate retainer, then it is better off losing the client.

Well, you ask, is it not better to make some fee than no fee?

The answer is no.  Look, I know it is scary to turn down work, but the truth of the matter is if you under bill for one client just to get some income in the door, you will convince yourself to under bill all clients to continue to get business in the door.  That creates, as Peter Olson stated, "a bit of a self-fulfilling prophecy".

Look at it this way.  You need money, but you need good paying clients as well.  You need the right amount of money.  If you are wasting hours and energy and money working on a case that is under paying you for the privilege, then you do not have time to go out and promote yourself, and obtain better paying referrals.  You lose twice.  First, you do not get paid enough to do the quality of work you want to do.  Second, you do not now have time to aggressively get out and find the referral sources that can bring you in the business you need, and that can pay you what you need.

Then there is the whole self-esteem issue.  Many attorneys are under billing because they either do not have a good opinion of themselves or they do not see value in their own services.  Maybe it is not good to be so cocksure of yourself, but it is not good to think too little of your abilities either.

The truth of the matter is that higher paying clients will allow you to take fewer cases overall, which will leave more time to apply your trade properly.  This will improve your reputation.  It will allow you more personal time with your family.  And, it will allow you to seek more clients that can pay your necessary fee.

Then, of course, low fees damage your referrals.

How is that possible?

Simple really.  If you do not see value in your life's work, your referral sources are not going to see value in your life's work either.  They will start sending you only prospects that will or can pay you a low fee.  Clients will get use to you under billing and will only send bargain basement shoppers to retain you.  Further, once you under bill a client, they will not then tolerate you charging them a proper fee the next time you represent them, their company or their friends or their family.  Is that what you want?  Do you want to be seen as the five and dime of your practice area?  Do you really want to be a cheap date?

Home office attorneys believe they can cut their fees and compete on price because they have lower overhead.  That is wrong as well.  It is true these attorneys have lower overhead, but they also manage fewer cases.  You under bill at your own risk of having both fewer cases and making less money per case.  That is not good.  That is a prescription for bankruptcy.

The last point I want to make is that a proper fee breeds respect.  I hate to say this, but most people, whether they can afford something different or not, believe they get what they pay for.  They might initially think you did them a favor, but that feeling will not last.  They will lose respect for you for under billing.  After all, they want the best and the best would not under bill.  If you bill like a mill, you will be treated like a mill.  If you bill like a slip shot lawyer, people will see you as a slip shot lawyer.  The clients you under bill will gladly pay you less money, but they will disregard your advice and challenge your abilities.

Now this does not mean that you should never take on a charity case.  Do.  That is good for your well being and for the legal profession.  But, do it because you want to help someone and not because you think you have to do it.  Do not do it for money.  In fact, take no money for a charity case.  Besides, if you normally charge enough for your services, the no fee case will be looked at as charity and a good deed.  If you do not, the charity or good deed will not seem like such a good deal anyway.

Believe me when I say it does not take much to stay down there on a low level.  But, it takes effort to pull yourself up and do what is right for you and your family in the way of fees.  Do not let low fees define you.

Do not be a cheap date.

That is my advice.

Comments

[Tim Evans]

I am learning this lesson the hard way. I have, up to now, charged a flat fee for most of my services. However, I have realized that I am not making enough money charging a flat rate.

I have no doubt, as you said, that it would work well if I was doing more transactional work than I am. Right now, most of my cases are divorces, and as anyone who has ever been divorced or works in divorce law knows, simple divorce is an oxymoron. I may be able to make it on a flat fee if I had a higher case volume, but that's not happening right now.

What you said about taking effort to pull yourself up is soooooo true. I've seen so many potential clients balk at my fees that it's scary to try to raise my fees (or switch to hourly billing). My wife even encourages me not to change because she thinks some fees are better than no fees.

I think I'll do like I read in some book -- put a picture of my kids in front of me when discussing fees.

[Corinne A. Tampas]

Years ago I rented office space from a group of well established attorneys. I was a newly minted, unsure lawyer. I thought that I could not possibly garner the hourly fees that the more experienced attorneys in that office made, and to a certain extent, I was correct.

However, when those other attorneys heard what I was charging per hour they practically tore up my lease and tossed me out the window for all the reasons you give and then some: they were worried that my much lower hourly rate would reflect poorly on them since we all worked out of the same office.

Then, they gave me some excellent advice:

Keep your rate high. If you feel that a particular project is not worth what your hourly rate and hours dictate, then cut your billable hours. Your client will be impressed that s/he has this very capable attorney (manifest by that hourly rate). More importantly, your client will be impressed that you can get the job done in fewer hours than expected.

An added bonus is if your practice is the type where you have repeat clients, you will not have to raise your hourly rate anytime soon. Other than not returning telephone calls, nothing upsets a client more than being a loyal client during an attorney's lean years, only to have that attorney jack up rates as the attorney becomes more experienced.