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Upgrade your cost recovery system or risk a growing drain on income. We’re not talking pennies here. Whether or not you seek reimbursement, there’s a lot at stake. And if you aren’t using technology — current technology — you may be leaving a lot of those pennies unaccounted for. For example, Cozen O’Connor, a 475-lawyer Philadelphia-based firm, recently upgraded its cost recovery system after discovering that it wasn’t capturing about $1 million a year in out-of-pocket costs because of flaws with its 10-year-old system, said firm CIO Jeffrey Brandt. That’s not unusual, said Robert Mattern of Mattern Associates, an office services consultancy based in Wilmington, Del. Upgrading an obsolete system can typically increase captured costs “anywhere from 10 to 25 percent” of total billable dollars, he said. TOP VENDORS At least the days of scribbling your name and client on a log at the copier are just about gone. Currently, five vendors dominate the legal market, offering sophisticated cost recovery systems. The largest is Equitrac Corp., based in Coral Gables, Fla. (www.equitrac.com), which controls about half the legal market. The second biggest supplier with 20 percent of the market is Control Systems Inc., based in Boca Raton, Fla., and Toronto (www.copitrak.com). The rest of the legal market is divided among: CostWare Inc., based in Woodland Hills, Calif., which makes CostWare (www.costwareinc.com); Phoenix’s nQueue, with its namesake product (www.nqueue.com); and Los Angeles-based Thomson Elite, which recently launched Elite Billback (www.elite.com). Systems typically cost anywhere from $50,000 to $500,000 for hardware, software and maintenance, depending on the size of the firm, the number of copiers and fax machines, and the physical layout of the offices. A firm of 150 to 200 lawyers can expect to spend between $100,000 and $200,000 on a new system. TWO TRENDS Two industry trends are driving the need to modernize cost recovery systems. First, most large- to mid-sized firms have a system that tracks in-house copy, telephone and postage charges. Yet as offices become increasingly computerized, these traditional costs are on the decline, supplanted by scanning, digital impressions (DVD, CD), printing, desktop faxing and e-mail. Although more firms are starting to capture this new generation of costs, by and large, they still go untracked and uncharged. A recent Mattern & Associates survey of 105 firms with an average size of 443 lawyers found that 24 percent of firms now track laser printing; about 10 percent are tracking scans. (Although they are not necessarily charging these costs back to clients.) Second, as the legal profession continues to consolidate, firm administrations are getting bigger and more complex. When a firm opens new offices or merges with another firm, it can often find itself with two or more incompatible cost recovery systems. That’s what happened to Cozen O’Connor. It already had an Equitrac system, but it equipped three new offices with newer Equitrac systems. In 2000, Cozen O’Connor merged with a Chicago firm, 40-lawyer Blatt Hammesfahr & Eaton, that had a Copitrak system. None of the three systems could talk to the others, said Brandt. The firm is now in the process of replacing everything with the newest Equitrac system, in which all data automatically flows into a centralized server located in Philadelphia. LATEST TECHNOLOGY The latest technology trend is network-based cost recovery systems that run on Internet Protocol. With these systems, copiers, phones, faxes etc. are plugged into the network for tracking and monitoring. With older systems each office operated on a separate server. The new systems use one central server, eliminating the need to duplicate manual input of firm-wide data and reducing points of possible breakdown. For instance, Alston & Bird, a 675-lawyer firm with five offices nationwide, used to input each new client matter five times — once in each office, said CIO Robert Marburger. After installing a new Copitrak system in May, new client data is entered once into the centralized database and available throughout the firm. Another helpful feature of new systems involves exceptions reporting. With cost recovery systems, most hardware will not operate unless a valid client code is entered. But to avoid tantrums by impatient lawyers, telephones generally permit a default or temporary code to be entered. At most firms, lawyers are periodically sent a list of phone calls lacking valid codes and asked to fill in a client code, which then is manually input into the system. Cozen O’Connor used such a system, but Brandt said compliance was poor, and the exceptions reports would come back so late that “the effort was, in effect, useless.” The new system issues a report that shows up on each lawyer’s computer once a day and suggests possible client codes based on the pattern of calls being made. The valid codes are then automatically entered into the system. Of course, each vendor offers special features to stand out from the pack. The Elite Billback system is integrated into ProLaw, one of the company’s practice management software products. That allows all client charges to be automatically transmitted to billing, rather than being processed in batches once a day or once a week. NQueue has a feature that tracks packages in-house. The added features do not necessarily mean added expense. Steven McCue, IT director at San Francisco-based Keker & Van Nest, said his firm purchased an nQueue system for less than 10 percent more than the firm’s prior Equitrac system, which only tracked copies and telephone charges. The new system captures all computer-related costs such as scanning, printing and faxing as well as postage. PHILOSOPHY The best-cost recovery system requires more than the latest technology. Philosophical, management and client issues also play a part. “The single most important issue in cost recovery is the firm’s philosophy — whether it is going to charge back at all,” said Mattern. When he meets with law firms, Mattern said there’s always at least one person who argues against charging the client for copies and other such administrative charges, citing either tradition (“We’ve never charged in the past and our clients won’t accept it”) or cost-effectiveness (“Our clients won’t pay enough per copy to make it worth the hassle.”) The way to get partners on board is by showing them how much money the firm is losing by not capturing line item charges. “Once they see that, they change their minds,” Mattern said. For instance, a system breakdown at 325-lawyer Vorys Sater Seymore & Pease, a firm with six offices in the Midwest, convinced the firm to update, said CFO Edward Schultz. Under the old, decentralized system, the firm did not realize that the system was down at one of the offices for two months. “We were wondering why we were getting such low returns from certain locations,” he said. When the firm figured out what was happening, the decision to revamp “was basically a no-brainer.” Cost recovery systems typically involve three departments at the firm — accounting, information technology and the document production center. Mattern said it’s critical that the system be given a home and that someone be held accountable for its overall management. Otherwise, departmental buck passing will mean day-to-day administration will fall through the cracks, which is what happened to one Chicago-based firm when its cost recovery system at a satellite office broke down. “Internal management was so poor that we didn’t find out for eight months,” said the firm’s administrator, who asked not to be named. CLIENT CONCERNS Once firms have decided to bill clients, they need to decide how to bill — directly or indirectly. Do you include a line item charge or simply build the costs into the firm’s billing rates? If your firm decides to go with the line item charge, it must then decide how much and what to charge back. American Bar Association Model Rule 1.5 forbids law firms from making a profit on charge backs. Nevertheless, per-item charges vary considerably from firm to firm. Technological advances may be lowering out-of-pocket costs, or perhaps increased client scrutiny, but the Mattern Associates survey found that 70 percent of firms charge 18 cents or less for copies today, down from five years ago, when most charged more than 20 cents. Firms are starting to charge for computer-related costs, such as scanning and laser printing. Other options include blending copy and print charges into one standard rate for “impressions.” Whatever your firm decides to do, check your local bar rules: virtually every state bar has a rule similar to the ABA’s Model Rule 1.5 requiring that a firm’s engagement letters accurately reflect its charge back policies. Even if your firm decides to forego charging for certain items, simply tracking that information can tell management who is using what where. It can also help improve the responsiveness of attorneys in collecting billing data. “We can see what percentage of the time an attorney is using an invalid client code,” said Ed Gillespie, controller at the 250-lawyer firm of Fox Rothschild. “It kind of lets them know that Big Brother is watching.” Certainly, no law firm would deliberately leave hundreds of thousands of dollars on the floor each year. Update your cost recovery system and pick that money up.

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