In the 19th century, Benjamin Brewster summed up the essence of the billable hour debate as:
A lawyer starts life giving $500 worth of law for $5 and ends giving $5 worth for $500.
The key questions surrounding this issue boil down to: “what is all this advice worth” and “what are clients willing to pay”. As I see it, these are two sides of the same coin and regardless of how you want to get paid, there is a simple methodology for arriving at a pricing structure that will satisfy both the attorney and the client – accurately determine your daily rate and then give your clients full value.
The magic formula is: Profit + Labor Costs + Overhead = Daily Rate. This is the amount of money you need to earn each day to stay in business. It does not matter whether you bill by the hour or offer some from of value billing; fail to meet this mark and you won’t stay afloat long.
- Labor – the old saw about time being money is right. Until we can weigh and quantify legal advice like sliced meat in a Deli, the work of lawyering is all about turning time into money. Your time = your money. The formula here is: Salary / Days Worked = Labor Costs. For example if you work 266 days in a year (365 days in a year minus weekends and a 2 week vacation) and you want an annual salary of $80,000. Then your daily labor cost is $300 (80,000/266).
- Overhead – this is all about all those annoying reoccurring costs. Things like rent, utilities, staff salaries, insurance, postage, license fees, etc. All the big and small costs that are paid on a regular basis. The formula? Simple: Total Annual Costs / Client Working Days = Overhead. Research shows that the average attorney spends about 60% of their time actually working directly for their clients. So if there are 266 days worked in a year, there are, on average, 160 client working days in a year. As an example, if your total annual costs are: $48,000, your daily overhead is $300.
- Profit – you’ve paid yourself, now pay your firm. Your profit margin is what provides the cushion to meet expenses in the unlikely event that the money ever stops flowing in. Typical margins appear to be between 15 and 25% of overhead. So if your were to use a 20% margin and a $300 overhead (see above), your daily profit is $60
So putting the examples together, your daily rate would be $300 + $300 + $60 or $660 per day (or $83 per hour). Now that you know what all that advice is worth, are your clients getting full value for their money?