It was the best of times

As someone who has been sitting by the side of some of the nation’s largest law firms for the past 15 years assisting them with developing an effective soft cost recovery strategy, it is refreshing to be authoring a three part series on how inside counsel can work with their law firm partners to create a soft cost recovery policy that is fair to both parties.

As a starting point, both law firms and inside counsel are feeling increasing economic pressures for cost-efficiency. Law departments are running as lean as possible. The question for both parties becomes how to manage over the long term and reduce costs without surrendering quality of service or staff.

The purpose of soft cost recovery in law firms is to allow for the recovery of the firm’s costs for services and products such as copies, facsimiles, scans and prints that are completed in-house for a specific matter. Not only an area of expertise for my consultancy, we also produce a bi-annual cost recovery survey, considered to be the industry standard on soft cost recoveries in law firms. That’s a good deal of data.

It was the worst of times

I think both law firms and inside counsel will agree that in the handling and management of a matter, there will be services and products provided to the client that fall outside of the normal business transactions, such as the scanning or copying of 50 boxes of documents for discovery purposes. This is problematic.

Additionally, there are occasionally those clients, especially the larger ones, who can dictate the cost recovery policy and take the position that all soft cost items, even the ones described previously, are part of the firm’s billing rates. These clients will push back and refuse pay for these charges, terming them ‘extraneous.’ This is also problematic.

It was the age of wisdom

For the most part, however, law firm clients will and do pay charges.

In fact, the vast majority of firms (99 percent) still use the traditional soft cost recovery model as we know it. A few have abandoned soft cost recovery overall and even fewer have adopted an alternative model.

However, using black and white copies as an example, most firms have a billable percentage of between 73 and 76 percent with an average rate of 14 to 16 cents. That means out of 100 copies, between 73 and 76 are billed to a valid client matter number. Out of that percentage, 16 to 20 percent are written off internally, usually by the billing attorney and another 11 to 14 percent are written off externally (clients). The net effect of all this is that the average firm has a net realization of between 50 to 57 percent on the copies they produce.

In the overall scheme of things, this is a pretty dismal return and in many situations, the firm is losing money on copies produced on-site.

It was the age of foolishness

Isn’t the purpose of a soft cost recovery policy to recover costs? Why is roughly 50 percent being written off with the biggest culprit being the firms themselves?

The answer is pretty simple, when you get down to it: a lack of trust both internally and externally. The internal billing attorneys don’t trust that the firm is actually charging the firm’s true costs and are not equipped to defend it; the external clients don’t trust that they are getting charged the true costs to produce these products and services.

How does this translate when inside counsel work with law firm partners? In my next column, we will discuss bringing the pieces together and building a defensible, verifiable cost recovery policy.