How a Cost Recovery System Boosts Profits
Joel A. Herman
Recovering costs related to clients’ legal matters is a standard law firm billing practice. However, to ensure you recover costs effectively, you need a strategic cost recovery policy. Not only is it an important part of your firm’s financial strategy, but it is also an important element of a healthy relationship with your firm’s clients. If you do not have a cost recovery system in place, now is the time to evaluate one to be implemented.
When you consider all the actions your firm takes to serve clients’ needs, expenses can accumulate quickly. While copying and faxes do not generate the volume they once did, firms are spending more on scanning, electronic data storage and document management software. There are also expanded costs of legal research, including online tools, licenses or software subscriptions from particular sectors and membership costs to gain access to specific industry databases. Of course, hard costs from vendors for expenditures such as printing, courier service and overnight package delivery still exist. Does your firm bill flat rates for many of these items? If so, it may be leaving some recoverable costs as overhead and missing out on potential revenue.
Tracking office expenses through a cost-recovery system helps account for costs and show you and your clients where the money is going. It also enables you to recoup costs without over charging clients. For example, are your firm’s photocopiers, scanners and printers equipped with control terminals that require users to input client account numbers before they can be used? They should be. If you already are billing clients for these activities at a cents per page rate, how has this fee been calculated and are you accounting for all of the costs related to these procedures, including the supplies, hardware and software? While you most likely will not be able to make 100% of these activities billable, a better understanding of the costs and an increase in the percentage of billable activities could provide immediate and potentially significant savings.
Shopping for software
Cost recovery software— either standalone or integrated with proprietary research databases—is essential for cost tracking, bill-back functions and client validation. Such software can collect and store information on everything from control terminals to telephones to computers. It enables your IT department and other authorized users to add or delete billing codes and perform other functions as needed.
Systems administrators also can review billing information daily and create customized reports. For example, pop-up screens tied into your client code system will request information from users, such as a client or project number, before they can begin a search. Any search conducted by a firm member can be dissected in a report that indicates the client, the user, the database accessed, the amount of time spent and other relevant information.
Software and systems vary, so be sure to research your options to make sure you obtain features appropriate for your firm’s needs. An important question to consider is whether the software you choose is compatible with your other management systems.
Staying up to date
To remain competitive and better serve your tech-savvy clients, keep pace with advancing technology. Assess your existing software, ongoing license costs and actual use of the software. Consider upgrading to current versions if your systems are more than five years old. Old software may have compatibility issues with other management systems and lack adequate security and support.
Newer software generally offers better usability and features. For instance, you will have real-time access, which allows you to access work in progress for any project at any time. This will allow the firm to bill more accurately, helping to cut costs while increasing cash flow and profitability. Many newer software systems also help to assure that your firm is in compliance with any federal or state statutes that require extensive financial reporting and electronic record keeping.
While cost recovery systems are a clear winner for a firm’s bottom line, clients may be less enthusiastic about your new or upgraded cost recovery system if they feel the costs are passed on to them. In fact, there has been growing client pushback on fees for electronic legal research and other fees. When meeting with new clients, provide a schedule of billable expenses along with the hourly rates, and be sure to communicate revisions of your charges to existing clients.
For more information, contact Joel Herman at email@example.com or 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.