The business practice of recovering costs directly related to legal matters has been in existence since law firms have been practicing law. A transparent, justifiable, and strategic cost recovery strategy is a vital component of not only a healthy law firm financial strategy, but a vital component of healthy attorney-client and firm-client relationships.
Mattern & Associates has completed its 6th bi-annual Cost Recovery Survey, marking a decade of gathering industry-wide data on cost recovery practices, and along the way dispelling myths surrounding cost recovery.
According to the 2014 Survey results, the majority of firms are invested in cost recovery strategies in one form or another, though alternative methodologies for recovery are trending. Here is a snapshot of what we are seeing across the board in 2014 and into 2015:
- Copy/fax model continues to die with 56% of firms reporting declining copy volume. The recovery of color and black and white copies is remaining stable with net realization in the 40% range.
- Print/scan cost recovery remains solid and will continue to be the biggest facet of recovery. Black and white and color prints also are remaining stable on the net realization front. 44% of the firms that responded are reporting an increase in print volume while 43% are reporting an increase in scan volume.
- The death of legal research recovery is premature, but it is on the ropes. 92% of the firms that responded to the survey are still recovering legal research but the net realization is the lowest since we started the survey in 2004.
- Hard costs continue to be the leader. The recovery of hard costs (vendor invoices) continue to lead in the area of net realization.
- Electronic data storage sees a substantial increase. 33% of firms surveyed are recovering electronic data storage, up from 20% in 2012; however, internal attorney write-offs continue to be an issue.
What is typically happening is billing attorneys are writing off the soft costs due to client pressure, or discomfort with the “price.” In addition, clients are refusing to pay or pushing back on soft cost recovery. All these factors result in the 40% net realization we are seeing these days.
However, when the billing attorneys and clients see an invoice from a third party (hard cost), they are billed and paid at a much higher percentage than an internal (soft cost) charge, typically in the 90% net realization range.
Below is a simplified example of the difference between the typical soft cost scenario and a hard cost model.
Typical Soft Cost Scenario
|Item||Price determined by firm||Volume||Billable %||Billable Cost Recovery Revenue||Write offs (Internal and External)||Net Realization|
What is the bottom line impact of a firm-wide strategic plan that increases your billable percentages by 10% versus 10% in cost reduction? Depending on the areas, it can be quite dramatic as the example below illustrates.
|Hard Costs – Overnight Services||Current Scenario||Column C – Decrease Costsby 10%||Column D – Improve Billable %by 10%|
|Net Effect on Bottom Line||$7,500||$25,000|
|% Increase over a 10% price decrease||333%|
The recovery of costs still plays a vital role for most law firms and continues to have significant financial impact to the bottom line. The flow of information begins with unbiased market data combined with a strategy to address the unique culture that exists for each individual firm. In so doing, firms can address cost recovery through the right methodology that will simultaneously satisfy attorneys’ needs for justifiable and transparent billing with their clients, the clients’ needs for the same.
For a comprehensive overview of the 2014 Mattern & Associates Cost Recovery Survey please contact firstname.lastname@example.org.