Guest article: the changing face of cost recovery
In our latest legalit guest article, Stewart Hadley* of nQueue Billback argues that cost recovery isn’t dead, it’s just changed…
It’s a universal truth, the only constant is change, and legal technology is not immune. While the world of legal IT over the past three decades has not exactly been a hotbed of seismic shifts or quantum leaps, there has been a steady evolution. The trouble with evolution though is that the slow pace of change can fool people into thinking that things haven’t really changed at all.
Take the subject of cost recovery. There are those who think it has not changed with the times at all and as such it is now unnecessary. The mooted demise rests on the premise that the classic cost recovery model – “make a copy, bill for a copy” – is broken. However, the whole theory that cost recovery is “dead” because law firms are making fewer copies and clients are less willing to pay for them is a fallacy.
In fact, while the whole disbursement landscape has changed over the past decade, cost recovery has adapted quite successfully. The pace of that adaptation may be slow and measured but there is a very clear evolutionary path.
“Cost recovery” is actually just the starting point, and at the very beginning it was based solely on that simple ”make a copy, bill for a copy” paradigm. Over time there have been two change factors in play: (a) the scope of the disbursements and a firm’s appetite for charging them, and (b) the ability of modern, specialised software to capture more and better data, enabling a firm to immediately increase the amount it recovers from its clients.
Ten years ago, 97% of law firms billed for copies and almost all of those bills got paid. Today, only 87% of firms bill for copies. Ten years ago, printing was minimal and scanning was non-existent, as was recovering for scans or prints. But today, scanning is common (and there are real costs, including storage space); and many documents are printed in large quantity directly to a network printer. As a result, 51% of law firms now recover for prints and 36% recover for scans and these rates are increasing. Ten years ago, few client calls were made on mobiles. Today, they are made without thinking.
More data, better decisions
So the disbursement landscape – what is incurred, what is charged back – has certainly changed, and firms’ thinking has followed. Over the past two decades many firms have ceased to look at themselves as a profession and started to behave as a business. This requires business-like disciplines, prominently including management information and fiscal control. Profitability is everything and that necessitates not just a sustained drive to improve revenues but an on-going commitment to manage and control. Implicit in the latter half of that equation is the need to minimize firms expenses and transfer as much cost as prudent and possible to clients. To better recover, manage and control, firm’s need good information to make good decisions in order to improve profitability.
The trouble is, many are compromising their ability to generate that good information because they are just not capturing enough data – despite modern systems simplification of the task. How many copies are charged to ‘firm expense’ rather than a client? Are you billing for prints? Or tracking them? Are you billing for scans? Are you capturing those ‘hard costs’ such as taxis, couriers and legal research? Who is printing and why?
Not recovering chargeable costs is called “financial leakage”. At one end of the spectrum it can be down to individuals’ lack of care in, for example, assigning proper account codes when making copies or sending a package. At the other, it can be a collective resistance to ”modern” recovery protocols. Neither is excusable given that modern cost recovery systems make it so easy to capture all expense data. They allow automated import of all expense data, including hard costs, as long as the invoices can be delivered electronically. They make it easy for users to input data by anticipating their entries and making suggestions based on prior matters and favorites. They even automate the process of managing exceptions, so users that do not enter proper data at the work station or MFD can easily add it later or use auto-correcting technology in order to increase accuracy.
The law firm that operates an effective cost recovery program should be able to recover 50% of its non-rent, non-HR expenses. If your firm is recovering less than that, it is likely because you are not capturing enough data.
Beyond recovery: management
If you are capturing enough data, then you are also well positioned to do more with that information – to assert that degree of fiscal management and cost analysis associated with the profit-conscious firm. Or to put it another way, to transition from a pure cost recovery play to one that also interleaves the concept of cost management.
In essence, cost management is about using cost recovery data to better manage a firm’s own overheads and expenses, which in turn enables better decision-making about the cost, pricing and profitability of work undertaken.
Cost management requires taking the time to capture complete information and then mining it for answers. Is your firm missing opportunities to recover, say, courier costs because an invalid client/matter number was used and it’s just not worth cleaning it up? How many clients are not actually paying for any costs or expenses? Which teams are systematically charging for disbursements and which are not? Which partners have the highest write-off percentages? You can’t manage what you can’t measure, so building a data warehouse with this information and then analysing that data is a crucial path to improved profitability.
Complete visibility of your data provides the means to make better decisions throughout the firm. There may be clients generating revenue – but disbursements must be factored in to determine just how profitable they are. Busy practice areas may be billing hour after hour, but how do their margins stack up? Do alternative fee arrangements actually pay once all costs have been accurately computed? Operationally, are you geared up with the right number of devices? Are they configured appropriately? Are they in the right places?
The art of control
Effective cost recovery and cost management should be an integral part of every firm’s profit maximisation strategy. A recoverable expense that isn’t recovered is a profit opportunity lost. A non-recoverable expense that is not minimised is a cost-saving opportunity lost. Getting these basics right also provides a foundation for a new dimension in cost optimisation: cost control.
Cost control means avoiding costs before they are incurred. Not needing to recover or even manage an expense that never accrued in the first place is an immensely powerful adjunct to those core disciplines of recovery and management. Concerned about month on month increases in print volumes and associated print costs? Add simple rules, such as forcing non-billable print jobs to print double-sided or only black and white. Control access to more expensive MFDs or tackle print waste by deploying secure print technology. Worried about the growing incidence of excessive charges for low value services? Put in ceiling caps or approval processes for hard costs such as couriers. Keen to tackle exponential rises in telephony costs? Identify and strip out personal call costs from itemised mobile bills. Implicit in these simple changes or rules is that they cause changes in behavior.
The key is the interplay between information and technology: by leveraging detailed data about costs and having the right technology in place to enforce policy, a firm can save a fortune in unnecessary expenses.
This is a world away from the original simplicity of ‘make a copy, bill for a copy;” it is far more sophisticated, complex, and powerful, even transformational. The relatively gradual pace of change may have wrong-footed some into thinking that cost recovery hasn’t changed at all, and must thus be dismissed as a relic. But for those firms that have been able to move their thinking and their technology forward, cost recovery is very much alive and well and adding big numbers to the bottom line.
* Stewart Hadley is Vice President, EMEA at nQueue Billback, a provider of information accountability, expense management and cost recovery solutions worldwide. He can be reached at firstname.lastname@example.org