Billing Your Clients for Outside and Contract Counsel
We are continuing to talk about "tips" in the area of "billing." "Billing" is the fourth area of the five areas that make up every business in the world. The other four areas are as follows: "Clients" or "customers"; "Administration"; "Getting the work done"; and "Collecting."
We have been talking about "billing" to clients expenses that are of a non-personnel basis. I would now like to talk about billing outside attorneys or contract counsel to your clients as an additional expense. Remember that our engagement letter has a paragraph in it entitled: "Cooperating Attorneys and Fee Sharing." That paragraph is as follows:
COOPERATING ATTORNEYS AND FEE SHARING
You understand that The Wirken Law Group, P.C. may be cooperating with other firms and attorneys, if appropriate, in developing, filing, and litigating any claims you may have and will be sharing fees with such firms and attorneys. Your execution of this engagement letter authorizes us to work with other firms and attorneys and to share fees with such firms and attorneys.
Also, remember that our expense paragraph contains the language that we can "bill for...outside professionals..."
You may remember when we talked about the area of "clients" or "customers," we talked about our firm's concept regarding a "virtual law firm." Our "virtual law firm" is a group of a couple dozen lawyers whom we work with regarding areas we may not cover ourselves or where we can use their enhanced expertise to help us handle matters with our clients. Additionally, you will remember we discussed utilizing the local law school faculty as though they were all "of counsel" to our law firm.
When you are going to enlist the help of cooperating attorneys in your firm, you have to be sure you have a clear understanding with your client as to how they are going to get paid. In some cases, the client will also enter into an engagement letter with those cooperating attorneys. We always try to put both of the attorneys' bills in our bill so the client always knows exactly where they stand with regard to their legal representation with regard to the payment of fees. We show these expenses of outside counsel as expenses in the expense portion of our bills. When our clients pay the bills, we remit to the cooperating attorneys or the outside professionals, their share of the fees we have collected from the client.
There are a number of very important points to make with regard to the use of cooperating attorneys and outside attorney professionals, and those important points are as follows:
1. You must have a provision in your engagement letter with your client to be able to utilize cooperating attorneys;
2. You must have in your engagement letter with your client an agreement that you can share fees with such firms and attorneys;
3. You must have an agreement with your cooperating attorneys and your outside professionals with regard to how much you are going to charge them with regard to their hourly rates to your clients or what percentage of the fees they will share in; and
4. You must figure out a way to have a percentage of the fees from the cooperating attorneys or outside attorney professionals go to you for generating the business in the first place.
It makes no sense for you to spend all of your time and money trying to market yourself and your firm and then to simply give away fees to other lawyers who have agreed to help you handle your clients matters. There is a cost for marketing and you have to recoup the cost by being able to get some portion of the attorneys fees that work with you on your client matters.
How do you compensate lawyers in your firm who are "rainmakers" or "business getters?" You also need to think of a way to get part of the fees that are billed to your clients from the outside counsel and other cooperating attorneys and firms that you are working with.
I have noticed the lawyers I ask to help me in particular matters, because of their greater expertise in a particular area of law, have lower hourly rates than I do, and sometimes even lower hourly rates than other lawyers in my office with comparable years of experience. I often have been able to bill these lawyers out to my clients at higher rates than they would normally be billing out if they were billing them out to my clients directly. Quite often I have been able to pay these people at their number one hourly rate even after I have taken part of the fees that I bill to my clients as compensation for generating the legal business in the first place. The most important concept here is that you have to make a complete disclosure to your clients as to how much it is you are charging them per hour for all of the lawyers involved in the matter, and that you have their explicit written permission to share fees with those lawyers. Oftentimes, other lawyers are willing to take less than their number one hourly rate to work on legal matters and will give you part of their hourly rate for generating the legal business for them.
Let's look at this concept in the context of a typical law firm. Every dollar that comes into a law firm has to be divided. A significant part of the dollar goes to overhead. For the longest time, this used to be 33 and one-third percent, nowadays if you can keep that percentage under 50 percent you are doing a great job. Of the 50 cents left out of that dollar that comes in to your law firm, you have to pay the people who are doing the work, and for the longest time that has been 33 and one-third percent of that dollar. That leaves 16 and two-thirds percent of that dollar still left to be distributed. Who gets that? The person who generated the work gets 15 percent and that leaves one and two-thirds percent for the person who owns the law firm. Ouch, that is a profit squeeze!
When you utilize the above formula and apply it to outside cooperating attorneys or other attorney professionals whom you are working with, you can see that a couple of important changes take place. First of all, you have little or no overhead expense tied up in their hourly rates. Secondarily, they have their own overhead and therefore they need to get their overhead covered, plus, to be compensated for the work they do. Since you are the one generating the legal business, you should be able to get some percentage of their hourly rate for the fact that you have generated the business. In practice, I have not found this to be a certain percentage but usually some part of their hourly rate. For instance, if their hourly rate is $275 per hour, and you are billing them to your clients at that amount of money, you may get as much as $75 per hour for every hour they put in the case, and you will pay them $200 instead of the $275. A better way to proceed though, would be to bill the client at $300 per hour, you take $50 per hour of that time and give the other lawyer $250 per hour. The lawyer is usually happy to get the work, your client is happy to pay less than your hourly rate, and you are happy to be able to get part of that other lawyer's fee for your supplying the business. Again, complete disclosure with regard to rates and the ability to share fees is incredibly important. Where this system really works the best is where some lawyer has a relatively low hourly rate and you can actually increase their hourly rate to your clients and make it totally consistent with what other lawyers in your firm of the same experience have, and at the same time you get an override on that lawyer's time and still pay them their number one hourly rate. That is law firm nirvana!
I have been able to utilize this concept with law professors from the local law school as well. I will associate these professors as of counsel in our cases and will agree to pay them a certain amount of what I bill out to the clients and collect. This seems to make the professors very happy. I know it makes my clients happy and I am very happy to get a portion of their fees for generating the legal work in the first place. The secret to all of this is to make every bit of this a win-win-win situation. The client wins with the greater expertise and availability, the lawyer who you associate in the case wins because they get to perform some legal services and get paid for doing it, and you win because you get part of their fees by generating the legal business!
Next week we are going to talk about one of the absolute best ideas I have ever come up with regarding billing and that is the "work with audit." This concept is worth its weight in gold! We get an additional $5,000 of extra billings a month by simply doing a "work with audit." I think you will be interested in hearing about this concept next week.
Talk to you next week.
Jim Wirken is a civil trial attorney and the Chairman of the Board of The Wirken Law Group in Kansas City.