Two main questions the managing partners of a firm must ask themselves are what kind of fee does the firm want to charge (contingency, flat, hourly rate, etc.), and how much should that fee be per attorney.  Larger firms will likely have an attorney or accountant with the knowledge to answer these questions, but smaller practices may not have such personnel.  This paper will give the small firm the tools it needs to decide what kind of fee it should charge and how much that fee should be per attorney.

There are parameters to the amount a  firm can charge regardless of the kind of fee charged by the firm.1  A firm must consider ethical, financial and market boundaries.  Ethically, a firm needs to establish how much it wants to take from the community and how much it wants to give back.  In other words, how much does the firm generally want to charge its customers, and how much pro bono work does it want to offer.  Who does the firm want to serve?  Does it want to set its fees low enough to be affordable for all the people in the community, or does it want to set its fee higher and be more selective in case load.  The higher the fee the more selective a firm must be in its case load selection, because the firm will need to select customers it feels can pay the firm for its service.  Firms must also charge a high enough fee so that the firm=s attorney=s are not tempted to participate in unethical billing practices such as double billing or padding bills.  The fee should provide enough revenue so that the firm=s attorneys do not have to double bill.
Financially, a firm needs to establish the minimum fee required to survive through the present year and beyond.  This means a firm must account for the costs of operation including salaries, building and equipment costs.  Additionally, a firm should charge its clients what the clients can pay.  If clients can=t afford to pay, then the firm will not have income flowing into the firm.  Without a positive cash flow, a firm will not survive.
 
A firm must also set a marketable fee to survive.  A firm needs to set its fee near its competition in the market.  This may mean some local market research.  A newer firm will have to set its fees reasonably low and yet avoid setting the fee so low that potential clients believe the service is worthless.  The amount an attorney will be able to charge is also dependent upon an attorney=s experience and specialty.

In addition to how much its attorneys should charge, a firm should also ask itself what kind of fees it wishes to charge (e.g. hourly rate, contingency fee, etc.).  This will of course depend upon the law practiced by the firm.  For example, a personal injury lawyer may wish to charge a contingency fee due to the fee=s amount=s correlation to success at trial.  This correlation is a selling point with potential clients, because if the client does not win a trial, the client does not owe anything.  A general practitioner who provides quick and easy legal advice or standardized services may wish to charge small flat fees for those services.

Of the various fees charged by firms, the most common is the billable hour.  The billable hour has come under a barrage of criticism.  Most of this criticism centers on the assertions that the billable hour does not correlate to value received by the client, and the billable hour fosters unethical practices.

 Critical Analysis of the Billable Hour

The most common critique of hourly billing is that it does not reflect value.2  In other words, an attorney may have spent hours on a case, poured every ounce of legal guile she could muster into a brief and given the best argument before the bench in her life.  However, the client may still lose.  The client still owes the attorney for all the time she spent on the case.  This seems fundamentally unfair to the client.  Conversely, an attorney may reach a settlement for a client with one phone call which saves the client millions of dollars.  Here again it seems fundamentally unfair to the attorney, because the attorney is only paid for fifteen minutes of her time which had an actual value to the client of millions of dollars.  Under this critique it is argued hourly billing is flawed, because time spent on a case by an attorney does not correlate to value received by the client.

The irony underlying this critique of the billable hour is that the billable hour was created specifically to meet the charge of attorneys= bills not reflecting the service received.  The billable hour was created to provide an accounting for clients.3  The billable hour was created to give an accurate account of what the attorney had done for the client.  Hourly billing does reflect what the client has received.4  The billable hour reflects the time and labor the firm spent to represent the client.  The billable hour represents the service received by the client.  The client agreed to pay for a service which was rendered.
 
Some critics argue that hourly billing does not reflect the value received by the client.  These critics argue that the way to measure what a client has received is by defining value through what the client feels they have received after the attorney=s services have been rendered.  This view has three underlying assumptions.  First, that the belief of the client is the correct measuring device of value conferred.  Second, that the client=s view of the received value is something different from the price the client paid for the service.  Third, that the proper time to measure value is after the completion of the firm=s service.

The first assumption depends upon the belief that the client is the correct source of measuring the value received.  However, the value of a product or service is generally measured by the cost to the business providing the product or service.  The cost of a product or service may seem over priced to a consumer, but that cost reflects the amount the company needs to charge to operate and produce the good or service.  In the case of an attorney/client relationship, the value received by the client is amount of service provided by the firm.  The value received by a client also encompasses a probability of winning in court based upon the attorney=s expertise.  In other words, the more likely an attorney can obtain a favorable result for a client, the more valuable the service provided.  The client is paying for a service and a likelihood of winning.  Win or lose, the client still received the firm=s time and labor.

The second assumption depends upon the belief that consumers are willing to pay more for a good or service than the price agreed to by the business and customer.  In other words, a consumer may say, AGiven my situation, that is not worth $500 to me.@  If this were true, then why did the consumer pay $500?  If a product or service is not worth $500 to a consumer, then it is only logical for a consumer to seek a product or service elsewhere which conforms to the consumers desired cost.  If a consumer can not find a similar product or service conforming to their desired cost, then a consumer will not purchase that type of product or service.  Clients hire attorney=s to represent them.  If a potential client does not believe that a firm=s fees are worth the cost, then the client will retain the services of another firm.  If no firms conform to the consumer=s desired cost, then the consumer can forgo entering the adversarial process or retaining representation.

The third assumption depends upon the belief that the proper time to measure the value of an attorney is after the completion of the adversarial process.  In truth, the value of representation is agreed to before the attorney takes any action.  At the time the fee is agreed to, the client does believe the representation is worth the price set.   The client agrees to the fee knowing there is a chance they will lose in the adversarial process.  The value received is the representation and expertise of the attorney.  The value received is the service.  Win or lose, the client received that attorney=s representation and expertise.  It is that for which a client has paid.  Additionally, clients pay more for the attorneys whom they believe are more likely to obtain a favorable result.  The value of increased probability of the likelihood of winning is reflected in the elevated fees charged by prestigious firms and senior attorneys.  Attorneys and clients agree to a fee before the attorney is retained based upon the attorney=s experience and expertise.  This is the correct time to value the service which the client shall receive.

Another common critique of hourly billing is that it is too time consuming and too inefficient.5  Critics argue that hourly billing adds to the overhead costs of a law firm.  Recording billable hours takes time away from an attorney which she could use serving her clients.  Since firms are not reimbursed for attorneys recording hours, firms will have to find some way to make up the difference.  This usually equates to a higher fee.  Given this added cost to the firm and the client the billable hour, seems like a lose/lose situation.  The attorney loses, because the of the lost opportunity to spend time on another client, thus increasing cash flow.  The client also loses, because the fee must be raised to make up for the time by the lawyer providing the data necessary to bill the client.

Critics argue that hourly billing can lead to fraud.  Fraud committed by attorneys may be fostered by large firms demanding large amounts of billable hours per year by their attorneys.6  Critics argue the billable hour provides an incentive for attorneys to accumulate as many hours as possible, because attorneys generate income for a firm by billing hours.  The more hours an attorney can bill, the greater the firm=s income.  Firms have an incentive to push their attorneys to bill more hours to increase the incoming cash flow of the firm.

The critique of charging clients for too much time ignores the market.  Clients will not go back to a firm, which is inefficient or charges for excessive hours.  Additionally, the firm shall earn a bad reputation among people who recommend attorneys in the local market.  Much of a local firm=s repeat and new business is dependent upon the efficiency of their research and advocacy.  Additionally, the American Bar Association requires attorneys to charge reasonable fees.  A firm can not charge for time in excess of what a reasonable attorney would charge for the service performed.7

Other critics of hourly billing argue that hourly billing cuts research short.8   The firm wants to give a client something of value.  A trait of valuable service is efficiency.  Marketability and repeat business depend upon efficiency.  This places pressure on the firm=s attorneys to complete research as efficiently as possible.  Hourly billing, therefore, rewards quick researching.  The cost, critics argue, is thorough research for the client.  The firm puts pressure on attorneys to wrap up research as soon as possible, because clients appreciate efficiency.  Firm=s need to give clients what they appreciate for repeat business and a good reputation in the local market.  The billable hour is the mechanism which the firm uses to track how quickly attorneys are completing their tasks.

The billable hour does force attorneys to work efficiently.  This can be abused.  However, this is an ethical issue.  This is not a billable hours issue.  The billable hour actually provides an effective training tool for young attorneys.  It provides a means for young attorneys to compare how long it takes them to research a case compared to a veteran attorney.9  The difference between research time for a young attorney and veteran attorneys gives young attorneys some measure of how much they need to improve their researching skills.  Tracking hours also benefits clients, because inefficient attorneys can be noted and given the necessary training to improve their skills.  Without such a tracking tool, inefficient attorneys may be providing sub-standard service to a firm=s clients and not given the proper training to improve their skills.

The billable hour was created to provide clients with an accounting of the service they received from the attorney.  The service coupled with a probability of winning at trial  is the thing of value which the client has received.  Hourly billing directly correlates to this service received.  Many critiques of the billable hour ignore the restraints upon the hourly rate.  A firm can not charge more than the market price for legal services for a given area.  A firm can not charge more than a reasonable fee.  The firm must be efficient to be marketable.  Many of the criticisms leveled against the billable hour may also be leveled against the suggested replacements of the billable hour.

 The Billable Hour Compared to its Alternatives

Before a firm discusses how much it should charge, a firm must determine what kind of fee to charge (e.g. billable hour, flat fee, contingency fee, etc.).  For the small firm, the hourly rate provides the accounting information it requires, and it provides a straight-forward billing system for both the attorney=s staff and clients to follow.  The hourly rate tracks the commodity of the small firm, which is the attorney=s time.  For a firm to operate at a profit, the income generated by that firm must outweigh the cost of that income.  The hourly rate is an effective and efficient fee that can be incorporated into the small firm and serve the additional function as a resource tracking tool.

As the established accounting and billing device of law firms, the hourly fee has become the target of critical analysis.10  Several new billing practices have sprung up in an attempt to replace the hourly fee.11  It is ironic the hourly rate has undergone so much criticisms, because the hourly rate was itself born from critical analysis.  The hourly rate was created to hold attorneys accountable to their clients, and give clients a way to evaluate what the attorney had done for them.  Prior to the hourly rate, clients simply received a piece of paper with the phrase Afor services rendered@ followed by a dollar amount.  When critics of the hourly fee speak of its short comings, they forget its strengths.

Some critics have focused on what they feel are better ways of billing clients.  One of these new billing methods is the flat fee.12  Under this fee structure, the firm charges a pre-determined and set fee for the complete service provided an attorney instead of an hourly rate based upon an attorney=s time on a project.  Flat fees lend themselves to affordable, and predictable service, but flat fees do not work for anything but simple projects.  For flat fees to be profitable, a firm needs to know how much time a project will take, and it is hard to know how much time will be spent on a complex project.13

The hourly rate can actually be less expensive for a client than a flat fee.  If projects suitable for flat fees are simple and can be done quickly, then an hourly rate charged by an efficient attorney may be less than a flat fee.  Clients may actually save money with the hourly rate.  Additionally, attorneys must spend minimal amounts of time on flat fee projects for those projects to be profitable.  In other words, attorneys must spend as little time as possible on flat fee projects.  This means attorneys have an incentive not to answer the phone when clients call.  In fact, attorneys have greater incentives with the flat fee than the hourly rate to cut short service to a customer.14

The contingency fee is the other predominate challenger to the hourly fee.15  Critics believe that the contingency fee is superior to the billable hour, because there is a great fit between a court award from a case and the fees paid by the client.  A client only pays a percentage of the award from the court.16  The attorney receives a pre-defined percentage of the court award.  Critics say the correlation between court award and the fee is a better measure of value of the service provided by the firm.  As discussed above, this view works on several assumption and is not necessarily true.

It is inherently dangerous for small firms to operate on a contingency basis.  Small firms are dependent upon a positive cash flow.17  A firm=s survival depends upon bringing more money into the firm than the cost to bring that money into the firm.  Taking a chance on possibly receiving a percentage of an award and gambling with the firm=s cash flow is gambling with the future of the firm.  Law firms have very little hard assets adding to the value of their business.  Small firms can not afford to expend the cost to represent a case and not receive income for that representation.  Small firms generally lack the Awar chest@ necessary to successfully run a contingency fee based business.

Further, a firm that charges contingency fees will need to implement additional accounting mechanisms to track profitability.  Without tracking what resources the firm has spent upon any given case (namely the firm=s personnel=s time), a firm will not know if it has a positive cash flow.  A firm must weigh the resources it has spent against the percentage of the award received by the firm.18  A small firm may be using too many resources on too little return even if they are winning a case.  Hourly billing provides an effective means of  keeping tracking the personnel=s time, which is necessary to evaluate whether the firm has a positive cash flow.

The newest contender to the billable hour is the retrospective fee.19  This billing system is labor intensive, and complex.  Under the retrospective fee, the attorney and client agree upon a minium and maximum fee before the case is taken by the attorney.  When the case is over the attorney and client meet again to discuss the value of the firm=s service as viewed from the firm=s and the client=s perspectives.  In some cases the fee may be determined solely by the client.  The advantage to this form of fee is that attorneys are not pushed to compromise speed for thorough research like the hourly fee is accused.20  Additionally, the client=s subjective view of value received plays a role in the determination of the fee.  However, this fee structure depends upon the assumption that clients will be honest (with themselves and the firm) about the value they feel they received from the firm.  Further, the firm is subjected to clients= confusion about what value they received from the firm.  A client may equate the value received by a court award or beneficial outcome, but as discussed above the client actually received a firms=s service, expertise, representation, and a probability of winning at trial.  Additionally, the same risks that accompany the contingency fee accompany the retrospective fee.  A small firm needs a positive cash flow.  A client may set a value of service at an amount less than the cost to produce that service.  If a firm receives less for its services than its costs, then the firm will have a short life span.

     The retrospective fee, contingency fee and flat fee are noteworthy additions to the billing practices in the legal field.  These fees have their advantages, and they have their draw backs.  Hourly billing has its draw backs, but it is a very versatile tool for the small firm.  It provides a stratified structure for billing based on the services provided by the firm=s personnel. Hourly rates provide a market of variable rates for services based upon experience and reputation.21  The billable hour gives a small firm the tools it needs to track its cash flow.  Small firms need to ensure they have a positive cash flow to survive.  The hourly rate provides a comprehendible way for attorneys to charge their clients for services rendered.  Given the hourly fee=s conduciveness with small firm management, the remainder of this paper will address how to incorporate the billable hour into a law practice and how much should be charged.

 Which Billable Hour is Right for Your Small Firm?

There is more than one kind of billable hour.  In fact, there are three basic kinds of hourly billing.  There is straight hourly billing, premium hourly billing , reverse premium hourly billing .22  In addition, your firm will have to decide if it wants to charge stratified fees or one blended fee.23  A firm must consider two variables when deciding upon a fees structure.  A firm must think about how complex it wants its fee structure to be.

The straight billable hour is the easiest for a firm=s attorney, staff, and clients to understand.  The straight billable hour is the established billing practice in the legal profession.  The client is charged one flat rate for the time an attorney spends on his case.  Rates will vary based upon the experience of the attorney providing the service for the client.  As discussed above, hourly billing has been criticized because the total fee charged by the firm does not correlate to the amount of the court award or success at trial.  A firm which is concerned about this correlation may wish to use premium hourly billing.
 
When a firm uses a premium hourly billing structure, it sets creates a system through which a client may pay an increased fee based upon their success at trial.  In premium billing, the client pays his attorney an hourly rate during the course of the case and then pays an additional premium at the end for a favorable result.24
 
Reverse premium billing is the opposite of premium billing.  Under reverse premium billing, the attorney charges an hourly rate, but that rate is adjusted downward if the client is not successful at trial.25  By reducing the cost to the client, the client will feel the fee they were charged more accurately.  The client will pay a fee that correlates to the outcome of the case.  However, this will mean recomputing fees for your firm.  It takes time for a firm=s staff to recompute the fees and will raise operational costs for the firm.  This may mean higher fees for the clients.

In addition to choosing a type of fee to charge (continency, hourly rate, premium billing, etc.), a firm must decide how it wants to structure its fees.  Does the firm want to stratify its fees, or does the firm want to charge one blended fee?  When a firm stratifies its fees, the firm will charge higher fees varying with an attorney=s experience with the firm or in the field of practice.  In other words, the longer an attorney has been with the firm or practiced in a field of law, the higher the fee charged for that attorney=s work on a project.  Conversely, a blended fee charges an average fee on a project based upon the attorneys who worked on the project and their experience.

Clients may feel they are getting a bargain under a blended fee when they see the low hourly rate charged by a senior partner, but the client may actually be charged more under the blended fee.  For example in a situation where a young attorney has performed the majority of work for a client and a senior attorney performed very little work on the same case, the fees are blended at a rate representing an average of all attorneys working on the case.  Therefore, the work the young attorney does on the case will be charged at rate higher than if the rates were stratified and charged separately.  The client does receive some service from the senior partner at a reduced cost, but the client is also paying a younger attorney at higher rate than the attorney is worth.

Once a fee type (e.g. contingency fee, hourly rate, retrospective fee, etc.) and a fee structure is chosen (e.g. blended fee or stratified fee), the firm needs to evaluate how much its attorneys should charge per hour.  The decision can not be arbitrary, and a firm is constrained to a range of fees from which it can choose.  Firms are constrained by ethical, market, and financial boundaries.  If a firm crosses the boundaries, it puts its survival at risk.

 Ethical Parameters

The American Bar Association (ABA) has limited the fees a firm can charge to fees that are reasonable.26  The term reasonable fees has been defined in ABA Model Code of Professional Responsibility Disciplinary Rule 2-106 (rule 2-106).27  Rule 2-106 generally requires attorneys to charge fees similar to fees customarily charged by local attorneys with the same degree of specialty and experience, and to charge a fee reasonable for the time required by the attorney to represent the client.  The exact language of the rule is as follows:

DR 2-106 Fees for Legal Services.

(A) A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee.

(B) A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee.  Factors to be considered as guides in determining the reasonableness of a fee include the following.

(1) The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal services properly.
(2) The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer.
(3) The fee customarily charged in the locality for similar legal services.
(4) The amount involved and the results obtained.
(5) The time limitations imposed by the client or by the circumstances.
(6) The nature and length of the professional relationship with the client.
(7) The experience, reputation and ability of the lawyer or lawyers performing the services.
(8) Whether the fee is fixed or contingent.

DR 2-106 was clarified in 1984 by the Supreme Court in Blum v. Stenson.29  In Blum, the Court held that the hourly rate should reflect the skill, experience and reputation of the lawyer.30  In other words, an attorney may charge more than the fees charged by local attorneys if they are a seasoned lawyer with the representation of being an excellent advocate.  However, seasoned attorneys may be constrained to charging fees that are concerned reasonable for attorneys with their expertise.

In addition to the reasonable fees standard set forth by the ABA, attorneys should ask themselves what they want from their law practice.  Is it more important for the firm=s attorneys to drive Lexuses, or is more important that they reduce their fee and make their services available to clientele who need quality representation?  How much billable time will the firm forego in order to do pro-bono work.  How much time will the firm want to spend volunteering in the community.  In other words, how much does the firm want to charge its community for its services, and how much does the firm want to give back to its community?  These are personal questions, but the attorneys of a firm should share a common philosophy about the mission of the firm and its relation to the community.

There are also specific practices noted by the ABA which an attorney must avoid when charging a fee.  These practices are not only unethical, but punishable.  In order to avoid the firm=s attorneys being tempted to turn to these unethical practices, the firm needs to set adequate hourly rates for its attorneys.  In other words, attorneys fees need to be set at a level which produces enough income to make up for the cost of the attorney=s time.  Attorneys should not be earning income for the firm through alternative methods like double billing.

An attorney double bills when she charges more than one client for the same period of time.  For instance if an attorney is flying on a plane to meet a client, then that attorney can not charge another client for work done on the plane.31    In the industry, this particular form of double billing is referred to as phantom hours, and the ABA has issued an ethics opinion that the practice will not be tolerated.
Another unethical billing practice is placing a surcharges on expenses.  In other words, you can not charge 15 cents for a copy which costs your firm ten cents to produce.32  You also cannot incorporate this cost into your hourly rate.33  Again, when setting or reviewing its fees, a firm trying to give affordable representation must make sure it charges enough in fees to avoid unethical practices to make up for its reduced fees.

Firms at the high end of the market are not ethically allowed to charge more than comparable firms in the area.  The ABA has defined the upper ethical boundary an attorney may charge through its reasonableness test.  Firms at the lower end of the market must charge a high enough fee to avoid specific unethical billing practices.  A firm=s fees is constrained by upper ethical by boundaries set by the profession and lower ethical boundaries in order to avoid misconduct.  Firms must take this ethical constrainment into consideration when it sets its fees.
 
 Market Parameters

A firm is also constrained by market factors.  A firm is constrained by the area of law in which its attorneys practice.  If an attorney has a specialization within a field of law, that specialization equates to a more valuable service thus increasing the ceiling to what a firm can charge.  A firm=s geographical location also constrains the range of fees a firm can charge.  Urban firms make more than rural firms.  The firm=s target market constrains its fees.  Does the firm want to offer its services to the entire community, or does it want to target higher income customers?

The general field of law a firm practices does constrain the possible range of a firm=s fees.  Consider the following statistics regarding average fees charged in Wisconsin.

Agriculture.............. $121   Intellectual Property...........  $167
Antitrust..................  $168   Juvenile..............................  $  82
Bankruptcy.............  $125   Landlord/Tenant.................  $118
Securities................  $213   Torts..................................  $130
Civil Rights..............  $142   Probate..............................  $129
Criminal...................  $107   Real Estate.........................  $129
Family.....................  $121   Sports Entertainment...........   $30534

In addition to the firm=s general area of practice, a specialty increases value of a firm=s services.35  In other words, an attorney in a firm which generally practices family law may charge an increased fee if they specialize in child custody disputes.  The rationale behind the increased fee is that an attorney who focuses on a specific area of law will know more information in that specific area, and the quality of the attorney=s information will be higher.  Therefore, the attorney=s time is worth more.  However, certain markets may not support this increased fee for specialization.  For example, a small town market will have a lower ceiling for attorney fees than a highly urban market.

There is an urban firm and rural firm hourly rate distinction.36  For example, fees range in Milwaukee from $85 to $315 per hour.  However, in rural Wisconsin fees range from $45 to $225.37  There may be a difference in hourly rates due to reduced operating costs in rural areas as compared to urban areas.  There may be a difference in hourly rates due to what the clientele can pay an attorney in an urban area compared to a rural area.  Whatever the cause, the firm must set its fees within the market range.  This may mean that firms in rural areas may need to closely monitor the resources it expends on each case.
Another marketing variable, is a firm=s age.  Older and established firms argue that their contacts and resources translate into reduced hours per case.38  This rule applies to smaller firms as well as larger firms.  As discussed above, setting a firm=s fees, each attorney=s hourly rate will increase with experience.  Parallel to this increase of fees for experience for an attorney, fees generally charged by a firm will increase with the firm=s age and prestige.39  Obviously, the
 

younger the firm the lower the ceiling on the fees.  Younger firms do not have the established networks of older firms.
Closely related to a firm=s age=s, a firms reputation also plays a role in the range of a firms possible fees.40  A firm=s greatest advertisement is its reputation.  New business and repeat business depends upon what former clients say about a law firm.  As a firm=s reputation for trustworthiness, efficiency and ability to attain favorable results grows, the value of the firms service grows.  In a time of crisis, clients seek firms they can depend upon to help them through that crisis.  A positive reputation has a definite value to clients, and that equates to an increased ceiling on what a fee can charge.  Conversely, if a firm gains a poor reputation the ceiling on what a firm can charge is lowered.

The size of the firm also effects the range of fees the firm may charge.41  The larger a firm=s size, the higher the fee.  In fact, senior partners in large firms charge so much for their time they generally push the envelope of ethical billing.42  Larger firms can charge more because they can handle big projects quickly.  Clients who need large projects done quickly and correctly are willing to pay big fees, because large firms have the manpower and resources to handle large projects.  Because big firms can handle large projects quickly, big firms have the ability to keep big client=s negative publicity to a minium.43  For larger clients or clients dependent upon good public opinion, a large firm=s added value lies in a firm=s ability to reduce negative exposure.

A firm also needs to know what the local competition is charging.  Attorneys may not advertise their rates, but attorneys do usually disclose their range of fees even to the competition.44  It may seem like price fixing to compare a firms fees to other local firms.  However, it is important to remember that the local market=s fee range is the factor the ABA uses to determine reasonable fees.  In essence, by looking at the local market, a firm is merely trying to set a reasonable fee.

Setting a firm=s fees near the market price is important for two reasons.  First, if a firm charges too much, then the client will walk across the street to receive the same service at a lower price.45  However, if a firm sets its hourly rate too low, then clients will not hire the firm because they will believe the savings in legal fees means a reduced chance of winning their case.46

There are many factors playing a role in the marketable range of fees a firm can charge.  For a firm to survive, it must charge a fee near the local market.  It must account for its reputation and age.  A firm=s marketable range of fees is dependent upon the general field which the firm shall practice, and each attorney=s acceptable hourly rate will be affected by the attorney=s level of specialization.  In addition to the boundaries set by market factors, a firm must pin-point where it lies within that market.  Setting a marketable fee will help cash flow into a firm, which is necessary for survival.
 
 Financial Parameters

Above all else, there is one rule the small firm must remember when making operational decisions.  Cash flow is king.  The firm needs to charge a fee which keeps more money coming into the firm than leaves the firm.  A small firm may also want to chose a less complex billing structure, but prepare for write-offs.  A firm must create a billing structure which is designed to produce enough income to offset the overhead of the firm.

A firm=s life is bound up in cash flow.47  As I was told on my first day of law school, a car lot=s value is vested in its inventory, but an attorney=s value is vested in her ability to reason and apply the law.  In other words, unlike sales oriented businesses, law firms have very little hard asset value on which to fall back.48  For a firm to survive, it must utilize its attorneys= skill to keep cash flowing into the firm.

Since a law firm=s survival is based upon positive cash flow, a firm must necessarily track where the incoming cash of the firm will go before setting fees.  There are three primary costs to the firm draining its cash flow.  Those costs are personnel, facilities and equipment.49  80 percent of every dollar brought into a firm will be spent towards wages, fringe benefits, pensions, and payroll taxes.50  Facilities costs generally represent about five percent of every dollar brought into the firm.51
 
The most important personnel question a firm must ask itself when determining an hourly rate is, AHow much will it cost to retain a quality staff?@  Given the importance of cash flow, a firm may be tempted to reduce overhead by reducing the cost of support staff.  However, a firm should charge a fee high enough to hire a quality staff.   A survey of attorneys has shown that a quality staff is one of the keys to a small firm=s survival.52

A personnel issue of paramount importance to a firm=s attorneys is how much the attorneys want to work.  Obviously, a basic key to the formula of determining how much to charge per hour is how many hours are going to be worked.  The attorneys of a firm should determine an average amount of hours they can work per week.  The average should account for the periods of the year, expected and not expected, during which the firm may receive minimal client in-take.  Additionally, attorneys should account for any desired vacation time in this part of the formula.

Finally the attorneys of a firm must consider how much they want to make.  This is a question easily asked, but hard to answer.  Sometimes an attorney may not be able to charge what they wish, but constrained by the needs of the firm.  An attorney may wish to provide affordable legal service to the community, but if an attorney charges too little the firm may not earn enough for to survive.  This question, therefore, must be answered with the understanding that the attorneys of the firm may set an amount they wish to make, but they are constrained by the needs of the firm.

A smaller firm must be selective in the cases and clients it accepts.  If a firm needs to have positive cash flow to survive, then it needs to seek clients who can pay.  Therefore it is important that a firm carefully choose its clients and take cases with clear liability whenever possible.53  A firm must also now when to cut its losses.  In other words, a firm needs to know when to not seek the payment of fees from clients who cannot pay.

The operation of the firm is another cost to be weighed against the income produced.  Specifically, the cost of tracking time must be taken into account.  A smaller firm should keep time tracking simple.  It may wish to avoid complex billing structures such as premium or retrospective billing.  The simpler the hourly tracking, the lower the fees a firm can charge.  A firm must consider how much detail it wishes to incorporate into its billing and timekeeping.54  A firm must ask itself in what increments it will track time.  By this, I mean some firms track time by the minute while other firms may track time in increments of 15 minutes.  Most firms track time in increments of six minutes, because six minutes equates to a tenth of an hour.  The more time a firm=s attorneys and staff spend tracking this time, the higher the fees the firm will have to charge to compensate for the amount of unbilled hours.

In addition to examining how much time will be spent tracking hours, a firm must determine and account for its other overhead costs.  Overhead is the cost that a firm incurs in order to operate.  The three major costs of the firm which comprises overhead is personnel, building costs and equipment.55  It is not tied to the costs of services for a specific client.  It is the cost which the firm takes on to exist as a firm.  As discussed above, a firm=s overhead are things like personnel, facilities and equipment.  A firm must necessarily incorporate overhead into its hourly rate to ensure a positive cash flow.  A firm=s overhead is not synonymous with a firm=s expenses.

A firm=s expenses are separate costs to a firm from the firm=s overhead.  Expenses are those costs that a firm takes on in order to represent a specific client.  For example, an expense incurred by the firm would be copying materials, filing fees, court costs, phone calls, legal researcher time on a case, or travel time.  Expenses may not be incorporated into a firm=s hourly rate.  However, a firm may charge its clients for expenses incurred on the client=s behalf.  As discussed above, the ABA has declared surcharges on expense unethical.  Any computation of a firm=s hourly rate must be done without consideration of expenses.

A firm has financial constraints upon the range of fees which it can charge.  A firm must charge enough so income is greater than cost the cost to produce income.  A firm must account for overhead and expenses.  If a firm fails to charge a fee so income is greater than the cost to produce income, then a firm will not have to worry about what fee to charge.  There will be no firm to worry about.  Positive cash flow is the necessary element for a successful operation of a law firm.

 Conclusion

The managing partners of a firm have many factors to consider when it determines what fees it should charge.  There are clear and definite market and financial boundaries your firm can not cross.  In addition there are ethical considerations firms should make when setting its fees.   Respectable legal scholars openly critique the billable hour as antiquated and abusive of young lawyers.56  However, the billable hour was originally created in answer to a critique of attorney billing practices.

Hourly billing has also been critiqued as inefficient and not reflective of value.  However, it directly correlates to the labor and costs to provide the service received by the client.  Tracking hours may seem inefficient, but tracking hours is necessary regardless of the fee type charged.  A small law firm requires a resource tracking mechanism to weigh cash flowing into a firm against resources used to obtain that cash flow.  For a smaller firm, hourly billing provides a tool incorporated into the firm which tracks these resources as well as a tool to provide detailed billing for clients.

The billable hour gives the small firm a readily adjustable billing mechanism.  It can be adjusted for an attorney=s experience and specialization.  Hourly billing provides a quantifiable unit the small firm can adjust to make sure its income is greater than the costs of running the firm.  Other forms of income generation such as the contingency fee do not provide resource tracking and management tools like the billable hour.

Fee structure is among the most important things to a firm=s success.  There are market, financial and ethical parameters constraining the fee which can be set by a firm.  Regarding the market, small firms should research their local market to know where they fall among the competition, and what they should charge.  Financially, small firms need to now what the financial minimum fee they can charge in order to survive.  Ethically, small firms must make sure not to charge an unethically high fee, and yet charge a fee high enough to avoid unethical practices.  The managing partners of a firm should consider these factors routinely.

1By parameter, I mean a fixed limit or boundary as defined in The American Heritage Dictionary, Houghton Mifflin Company, 1982.  The concept of various parameters constraining a firm=s fee choices will be discussed in detail below.  The underlying premise is that firms are not free to set whatever fees they wish.  Firms are constrained by ethics by the American Bar Association.  Firms are constrained by what their local market will support.  Firms are constrained by the financial necessity of the of the firm.  It must have more money flowing into the firm than the cost of that cash flow.  It is these constraints that I refer to when I use the word Aparameters@.

2Robert L. Haig and Steven Caley, What is a Fair Fee for a Litigator, Litigation, no 1 v 20 (1993).

3Robert L. Haig and Steven Caley, What is a Fair Fee for a Litigator, Litigation, no 1 v 20 (1993).

4 Wendy Leibowitz,  Not Snow, nor Sleet, nor Gadget Boom Will Kill the Billable Hour <http://www.ljx.com/tech/wendy/wendy99.html>.

5 Id.

6Ralph Nader and Wesley J. Smith,  No Contest: Corporate Lawyers and the Perversion of Justice in America, Random House (1996).

7American Bar Association Disciplinary Rule DR 2-106 ' B (1)

8Bradley A. Ullrick, The Alternative Billing Diner:  Serving up a New Billing Scheme for the Technology Age, 5.1 J. TECH.L.&POL=2 (2000) <http://grove.ufl.edu/~techlaw/vol5uas:Bradleyllrickfinalthm>.

9 Wendy Leibowitz,  Not Snow, nor Sleet, nor Gadget Boom Will Kill the Billable Hour <http://www.ljx.com/tech/wendy/wendy99.html>

10 Wendy Leibowitz,  Not Snow, nor Sleet, nor Gadget Boom Will Kill the Billable Hour <http://www.ljx.com/tech/wendy/wendy99.html>

11Jeremy Holmes, Hourly Billing:  A Guide for Law Students (1999) <www.uiowa.edu/~cyberlaw/elp99/holmesj.html>.

12Charles Beeching, The Billable Hour is Dead.  Long Live... What?, New York State Bar Journal v 67 Dec p. 12-15 (1995).

13 id.

14 Emily Couric, Smart Money Methods to Setting and Collecting Fees, American Bar Association Journal v 71, p.66-68 (1985).

15for an in depth analysis of the contingency fee see. Molly Vakulskas Joly, Contingency Fee, (2000) <http://www.uiowa.edu/~cyberlaw/elp00/MVout02.html>.

16 Information about Attorney Fees, <http://tenant.net/Court/Legsystm/cos79.html>

17 James Cotterman, Staying Afloat:  Effective Cash Flow Strategies, Trial v 32 p.48-51 (1996).

18 John Lezzi, Reaping the Benefits of Keeping Time, Trial v. 33 p. 64-66 (1997).

19 Robert L. Haig and Steven Caley, What is a Fair Fee for a Litigator, Litigation, no 1 v 20 (1993)
20 Id.
21 Attorney Fees, <http://www.grdivorce.com/fees.html>.
22Robert L. Haig and Steven Caley, What is a Fair Fee for a Litigator, Litigation, no 1 v 20 (1993)

23Jeremy Holmes, Hourly Billing:  A Guide for Law Students (1999) <www.uiowa.edu/~cyberlaw/elp99/holmesj.html>.

24Robert L. Haig and Steven Caley, What is a Fair Fee for a Litigator, Litigation, no 1 v 20 (1993)

25 Id.

26Overview of the Ethical Aspects of Attorney Fees, <http://www.lectlaw.com/files/att09.html>

27For a complete discussion of reasonable fees see Jeremy Holmes, Hourly Billing:  A Guide for Law Students (1999) <www.uiowa.edu/~cyberlaw/elp99/holmesj.html>. which can be found on this website.

28American Bar Association Model Code of Professional Responsibility DR 2-106 (1981)(footnotes omitted).

29  Blum v. Stenson, 465 U.S. 886 (1984).

30 Sharlene W. Lassister, What is a Lawyer Really Worth?, Cumberland Law Review v 25 p.23-58 (1994).

31 Rebecca Jude, What are Reasonable Fees and Expenses for Legal Services?, <http://nysscpa.org/cpajournal/old16458946.html>

32Rebecca Jude, What are Reasonable Fees and Expenses for Legal Services?, <http://nysscpa.org/cpajournal/old16458946.html>

33 Id.

34Dianne Molvig, The Economics of Practicing Law:  A 1998 Snapshot, Wisconsin Lawyer v 72 no 11, p. 14-20 (1999).

35Emily Couric, Smart Money Methods to Setting and Collecting Fees, American Bar Association Journal v 71, p.66-68 (1985).

36 Dianne Molvig, The Economics of Practicing Law:  A 1998 Snapshot, Wisconsin Lawyer v 72 no 11, p. 14-20 (1999).

37Id.

38 Attorney Fees, <http://grdivorce.com/fees.html>

39 Guide to Legal Services Billing Rates, <http://www.lawyers.com/lawyers-com/content/legalresources/billingrates.html>

40Rebecca Jude, What are Reasonable Fees and Expenses for Legal Services?, <http://nysscpa.org/cpajournal/old16458946.html>

41Duncan MacDonald, Gross Profits: Symposium Audience Discussion, Hofstra Law Review v 22 Spring, p. 661-669 (1994).

42Duncan MacDonald, Gross Profits:  A Client=s Perspective, Hofstra Law Review v 22 Spring p. 645-653 (1994).

43Id. at 656-657.

44Emily Couric, Smart Money Methods to Setting and Collecting Fees, American Bar Association Journal v 71, p.66-68 (1985).

45Id. at 67.

46Id. at 67.

47James Cotterman, Staying Afloat:  Effective Cash Flow Strategies, Trial v 32 p.48-51 (1996).

48 Id. at 48.

49 Id. at 49-50.

50 Id at 48.

51 Id at 48.

52 Dianne Molvig, The Economics of Practicing Law:  A 1998 Snapshot, Wisconsin Lawyer v 72 no 11, p. 14-20 (1999).

53James Cotterman, Staying Afloat:  Effective Cash Flow Strategies, Trial v 32 p.48-51 (1996).

54Emily Couric, Smart Money Methods to Setting and Collecting Fees, American Bar Association Journal v 71, p.66-68 (1985).

55Id.

56Duncan MacDonald, Gross Profits: Symposium Audience Discussion, Hofstra Law Review v 22 Spring, p. 661-669 (1994).