Traditional Cost Recovery

The Oct. 22, 2012 issue of The Wall Street Journal published the article, “Law Firms Face Fresh Backlash Over Fees” by contributor Jennifer Smith in which she details how clients are raising objections to legal miscellany fees including legal research, photocopies, food, etc. The article cites our Mattern & Associates 2012 Cost Recovery Survey. Smith does a nice job of describing from both sides ' client and law firm ' the increasing refusal to pay and pushback firms are experiencing on the reimbursement of these costs. This is becoming such an issue for law firms that some firms are abandoning the traditional soft-cost recovery model and implementing alternative solutions or just converting the basis of these soft costs into overhead.

However, this move of costs into overhead cannot be taken lightly. The basis for these soft costs such as legal research and the back-office operation (copy, print, scan, IT) can amount to the fourth or fifth highest expense area for a firm, right behind wages, rent and insurances.

The Traditional Model: Dying or DOA?

The traditional model is still the method 99% of law firms use to recover soft costs ' that is, internally generated charges that do not have an external vendor's invoice. The firestorm of publicity regarding clients pushing back and refusing to pay for certain fees, and especially soft costs, begs the question: Is the traditional cost recovery model dying or perhaps already dead? The answer is no. While there is no doubt that pressure is increasing on the traditional method, there are a number of firms successfully utilizing this model. That is not to say that alternative models, which we will discuss later in the article, are not prudent in certain situations.

Similar to what Jim Collins did in his classic business management book, Good to Great, we identified high-performing law firms based upon the results of our last two cost recovery studies (2010 and 2012). These were firms that were in the top 5% in terms of net realization across the traditional areas of soft-cost recoveries. Net realization in this case is being defined as what firms actually collect of their total soft-cost revenue ' that is, after billable/non-billable designation, internal write-offs and client payments are calculated. Through our interaction with these firms, we have identified the five best practices of these firms as they relate to the recovery of their costs. I have listed them in order of importance.

1) Focus of Firm Management on the Recovery of Costs: From Engagement Letter Through Collection

The firms in the top 5% have an across-the-board mentality on the recovery of soft costs. It is reflected from their engagement letters through their efforts to collect these costs. They monitor these costs through the use of dedicated resources, are not afraid to police abusers of the system, nor do they fear making changes to their overall strategy while embracing new technologies. They adhere to the principle that they are recovering justifiable costs, not “charging” their clients.

2) Clear-Cut, Defensible Policy

“It doesn't matter what you can justify, it's what the client will pay.” This is what one CFO of a law firm stated to me when we were reviewing its results in the 2012 Mattern & Associates Cost Recovery Survey. Excellent point, and in this economic day and age, has never been more true. Taking this line of thought one step further, clients will pay what they can justify. If your costs are out of line on your legal research contract, or your firm is trying to charge the list rate on legal research as 37% of firms were attempting to do in 2008 and only 13% in 2012, this will be reflected in a low net realization because clients will not pay it.

Not only will the clients not pay it, the billing attorneys will not bill it. A clear-cut pricing strategy based on actual costs along with a solid basis for its recovery will lead to the highest net realization of your internal soft costs. It is very easy to sit in a room and justify allocating your non-billable costs to billable client costs, but in the end, the clients and billing attorneys are the judge and juries. Firms that know this and embrace it in the development of their policies are the ones that end up with the higher net realizations. In fact, firms that have the highest net realization are not the firms with rates at the higher end, but instead almost universally have rates that are at the lower end of the range, reflecting sensitivity to the market and competitive in-house operations.

3) Attorney Buy-In

Attorney buy-in is critical to the success of the recovery of soft costs. One of the items that participants are most surprised by in our survey is that internal write-offs (by attorneys) are higher than external write-offs (by clients) as a percentage of net realization. Yes, that is correct. The saying, “We have met the enemy, and he is us,” is true in the area of soft-cost recovery. How do you get attorney buy-in? As with most initiatives, the key is getting them involved. One of the firms in the top has a Reimbursable Cost Committee that is involved in determining the overall cost recovery strategy for the firm based upon recommendations by the financial management of the firm.

Another non-scientific reason for this attorney buy-in is the trickle-down effect it has on the other firm employees. If the attorneys have a recovery mentality, the secretaries will have it, along with the paralegals and the support staff. It is critical for the success of your cost-recovery program. Unfortunately, if it is missing in your firm, it is extremely difficult to instill it now in this economic climate without reinventing your entire strategy.

4) Dedicated Resources

In every firm that fell into this top 5%, there were titled resources dedicated to managing and overseeing the recovery of soft costs such as Firm Compliance Manager, Manager ' Strategic Planning & Analysis, or in the case of smaller firms, overseeing the recovery of soft costs was a clearly defined aspect of someone's job description. This person was the “guru,” the “go-to” person, or the “big cheese” on what the firm was recovering, how it was done and the issues involved. He/she understood the policies, analyzed the data and understood the mechanics. This person was instrumental in the strategy and the decision-making process.

Obviously as always, one must address the question of the financial feasibility of this type of position, but also whether the success of this position was a chicken or an egg type of situation. Did this person create the strong soft-cost recovery atmosphere or was it already in place and this person acts as overseer? Unfortunately, there is no clear-cut direction on this area. In regard to the financial feasibility of this position, the firms that fall into this top 5% category net on average 19% more on black-and-white copies, prints and scans than firms in the lower 95%. Even in a low-volume situation, this is a significant impact on the firm's bottom line. If they are effective, these positions will easily pay for themselves.

5) Market and Technology Awareness

Only 48% of all firms are recovering black-and-white print costs, and only 37% are recovering convenience scans. Current workflow is based on a print/scan model versus the antiquated copy/fax model, but despite that fact, less than half the firms have embraced it even though the clients that the firms are serving are experiencing the same changes to their workflow. Why?

Much of the hesitancy can be traced to a reluctance to charge for additional items in a down economy, anticipated client pushback, a lack of understanding of the changes to the modern workflow and the applicable technology, and lastly, the combined impact it is having on revenue.

Almost universally, firms that have a high realization recovery for prints and scans recover a significantly higher percentage than firms that don't. They have accepted the changes in workflow/technology, incorporated it into their strategy and are reaping the benefits.

These firms in the top 5% also take a strong interest in what other firms are doing in the marketplace. They participate in surveys, attend webinars and ask questions of the experts in the field.

Alternative Methodologies

I would be remiss if I didn't mention the growth of alternative methodologies in the recovery of soft costs. If your firm does not feel that it wants to make the necessary changes to improve the traditional soft-cost recovery model as outlined above, then perhaps an alternative model may be right for your firm. There are the industry-accepted alternatives models, such as adding a percentage or a fee to the hourly rate to recoup these costs, which a small number of firms have embraced. Many of the same pushback arguments as outlined above are still applicable, however, in addition to some new ones: questions as to the fairness of the percentage, determination of the percentage to use year after year, tracking, and more. Based upon our research, the most effective method to increase net realization is the hard-cost pass through model such as the Mattern Plan B' (U.S. Patent Pending). This is a methodology in which all of a firm's soft costs are converted to hard costs at typically a lower rate than its current recovery rates resulting in a net realization.

In summary, firms can make the traditional model work by implementing the steps outlined above. It is important not to let anecdotes dictate your policy, and stick to the facts. Client will pay if the recovery rates are fair and the policy is defensible. It is noteworthy that the firms in the top 5% also have the highest billing rates in their respective marketplaces. In other words, you can have your cake and eat it, too.

Robert Mattern is president and founder of Mattern & Associates LLC, a consultancy that decreases law firm overhead expenses through developing in-house and outsourcing strategies that streamline support services and increase net billable realization of soft-cost recoveries.

The Oct. 22, 2012 issue of The Wall Street Journal published the article, “Law Firms Face Fresh Backlash Over Fees” by contributor Jennifer Smith in which she details how clients are raising objections to legal miscellany fees including legal research, photocopies, food, etc. The article cites our Mattern & Associates 2012 Cost Recovery Survey. Smith does a nice job of describing from both sides ' client and law firm ' the increasing refusal to pay and pushback firms are experiencing on the reimbursement of these costs. This is becoming such an issue for law firms that some firms are abandoning the traditional soft-cost recovery model and implementing alternative solutions or just converting the basis of these soft costs into overhead.

However, this move of costs into overhead cannot be taken lightly. The basis for these soft costs such as legal research and the back-office operation (copy, print, scan, IT) can amount to the fourth or fifth highest expense area for a firm, right behind wages, rent and insurances.

The Traditional Model: Dying or DOA?

The traditional model is still the method 99% of law firms use to recover soft costs ' that is, internally generated charges that do not have an external vendor's invoice. The firestorm of publicity regarding clients pushing back and refusing to pay for certain fees, and especially soft costs, begs the question: Is the traditional cost recovery model dying or perhaps already dead? The answer is no. While there is no doubt that pressure is increasing on the traditional method, there are a number of firms successfully utilizing this model. That is not to say that alternative models, which we will discuss later in the article, are not prudent in certain situations.

Similar to what Jim Collins did in his classic business management book, Good to Great, we identified high-performing law firms based upon the results of our last two cost recovery studies (2010 and 2012). These were firms that were in the top 5% in terms of net realization across the traditional areas of soft-cost recoveries. Net realization in this case is being defined as what firms actually collect of their total soft-cost revenue ' that is, after billable/non-billable designation, internal write-offs and client payments are calculated. Through our interaction with these firms, we have identified the five best practices of these firms as they relate to the recovery of their costs. I have listed them in order of importance.

1) Focus of Firm Management on the Recovery of Costs: From Engagement Letter Through Collection

The firms in the top 5% have an across-the-board mentality on the recovery of soft costs. It is reflected from their engagement letters through their efforts to collect these costs. They monitor these costs through the use of dedicated resources, are not afraid to police abusers of the system, nor do they fear making changes to their overall strategy while embracing new technologies. They adhere to the principle that they are recovering justifiable costs, not “charging” their clients.

2) Clear-Cut, Defensible Policy

“It doesn't matter what you can justify, it's what the client will pay.” This is what one CFO of a law firm stated to me when we were reviewing its results in the 2012 Mattern & Associates Cost Recovery Survey. Excellent point, and in this economic day and age, has never been more true. Taking this line of thought one step further, clients will pay what they can justify. If your costs are out of line on your legal research contract, or your firm is trying to charge the list rate on legal research as 37% of firms were attempting to do in 2008 and only 13% in 2012, this will be reflected in a low net realization because clients will not pay it.

Not only will the clients not pay it, the billing attorneys will not bill it. A clear-cut pricing strategy based on actual costs along with a solid basis for its recovery will lead to the highest net realization of your internal soft costs. It is very easy to sit in a room and justify allocating your non-billable costs to billable client costs, but in the end, the clients and billing attorneys are the judge and juries. Firms that know this and embrace it in the development of their policies are the ones that end up with the higher net realizations. In fact, firms that have the highest net realization are not the firms with rates at the higher end, but instead almost universally have rates that are at the lower end of the range, reflecting sensitivity to the market and competitive in-house operations.

3) Attorney Buy-In

Attorney buy-in is critical to the success of the recovery of soft costs. One of the items that participants are most surprised by in our survey is that internal write-offs (by attorneys) are higher than external write-offs (by clients) as a percentage of net realization. Yes, that is correct. The saying, “We have met the enemy, and he is us,” is true in the area of soft-cost recovery. How do you get attorney buy-in? As with most initiatives, the key is getting them involved. One of the firms in the top has a Reimbursable Cost Committee that is involved in determining the overall cost recovery strategy for the firm based upon recommendations by the financial management of the firm.

Another non-scientific reason for this attorney buy-in is the trickle-down effect it has on the other firm employees. If the attorneys have a recovery mentality, the secretaries will have it, along with the paralegals and the support staff. It is critical for the success of your cost-recovery program. Unfortunately, if it is missing in your firm, it is extremely difficult to instill it now in this economic climate without reinventing your entire strategy.

4) Dedicated Resources

In every firm that fell into this top 5%, there were titled resources dedicated to managing and overseeing the recovery of soft costs such as Firm Compliance Manager, Manager ' Strategic Planning & Analysis, or in the case of smaller firms, overseeing the recovery of soft costs was a clearly defined aspect of someone's job description. This person was the “guru,” the “go-to” person, or the “big cheese” on what the firm was recovering, how it was done and the issues involved. He/she understood the policies, analyzed the data and understood the mechanics. This person was instrumental in the strategy and the decision-making process.

Obviously as always, one must address the question of the financial feasibility of this type of position, but also whether the success of this position was a chicken or an egg type of situation. Did this person create the strong soft-cost recovery atmosphere or was it already in place and this person acts as overseer? Unfortunately, there is no clear-cut direction on this area. In regard to the financial feasibility of this position, the firms that fall into this top 5% category net on average 19% more on black-and-white copies, prints and scans than firms in the lower 95%. Even in a low-volume situation, this is a significant impact on the firm's bottom line. If they are effective, these positions will easily pay for themselves.

5) Market and Technology Awareness

Only 48% of all firms are recovering black-and-white print costs, and only 37% are recovering convenience scans. Current workflow is based on a print/scan model versus the antiquated copy/fax model, but despite that fact, less than half the firms have embraced it even though the clients that the firms are serving are experiencing the same changes to their workflow. Why?

Much of the hesitancy can be traced to a reluctance to charge for additional items in a down economy, anticipated client pushback, a lack of understanding of the changes to the modern workflow and the applicable technology, and lastly, the combined impact it is having on revenue.

Almost universally, firms that have a high realization recovery for prints and scans recover a significantly higher percentage than firms that don't. They have accepted the changes in workflow/technology, incorporated it into their strategy and are reaping the benefits.

These firms in the top 5% also take a strong interest in what other firms are doing in the marketplace. They participate in surveys, attend webinars and ask questions of the experts in the field.

Alternative Methodologies

I would be remiss if I didn't mention the growth of alternative methodologies in the recovery of soft costs. If your firm does not feel that it wants to make the necessary changes to improve the traditional soft-cost recovery model as outlined above, then perhaps an alternative model may be right for your firm. There are the industry-accepted alternatives models, such as adding a percentage or a fee to the hourly rate to recoup these costs, which a small number of firms have embraced. Many of the same pushback arguments as outlined above are still applicable, however, in addition to some new ones: questions as to the fairness of the percentage, determination of the percentage to use year after year, tracking, and more. Based upon our research, the most effective method to increase net realization is the hard-cost pass through model such as the Mattern Plan B' (U.S. Patent Pending). This is a methodology in which all of a firm's soft costs are converted to hard costs at typically a lower rate than its current recovery rates resulting in a net realization.

In summary, firms can make the traditional model work by implementing the steps outlined above. It is important not to let anecdotes dictate your policy, and stick to the facts. Client will pay if the recovery rates are fair and the policy is defensible. It is noteworthy that the firms in the top 5% also have the highest billing rates in their respective marketplaces. In other words, you can have your cake and eat it, too.

Robert Mattern is president and founder of Mattern & Associates LLC, a consultancy that decreases law firm overhead expenses through developing in-house and outsourcing strategies that streamline support services and increase net billable realization of soft-cost recoveries.