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Cost Recovery in 2016

2016 is in full swing and we will soon be conducting the 2016 Mattern & Associates Cost Recovery Survey. We've been conducting this bi-annual survey since 2004 and, during that time, it has become an industry resource for tracking the cost recovery practices of law firms across size and geography.

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2016 is in full swing and we will soon be conducting the 2016 Mattern & Associates Cost Recovery Survey. We’ve been conducting this bi-annual survey since 2004 and, during that time, it has become an industry resource for tracking the cost recovery practices of law firms across size and geography.

As we try to predict what the 2016 survey will reveal, it is useful to keep in mind the overall macro environment in which law firms are operating: A growing global market while, domestically, firms are experiencing flat demand, increasing client pushback on fees and other charges, increasing competition from non-legal sources, in-house departments and an increase in outsourcing. All these factors should influence a firm’s overall cost recovery strategy.

In 2016, we predict the Mattern & Associates Cost Recovery Survey will show that the cost recovery “marketplace” will continue to be broken into two camps: First, those firms that are proactive about maintaining this expense recovery stream and are adjusting their strategy to the current workplace and marketplace, and second, those that are letting this 3%-4% of revenue of which this stream comprises to slip away.

Firms now work against the margin, and their success is dependent upon their ability to manage cash flow and drive profitability against the margins. It is no longer a race to revenue, which is to say, firms that select the second option are not taking advantage of recovering legitimate expenses to drive that profitability. Here are some details to these predictions.

Black & White Copies

In 2014, 98% of firms were still collecting black and white copies with an average rate of $.16. In 2016, we do not predict a decrease in the percentage of firms collecting copies or a decrease in the average rate; however, we do anticipate an increase in internal (write-offs) and external (client) pushback and refusal to pay. We feel this increase is attributable to a number of different factors: market pressure and firms still not developing a firm-wide strategic plan to maximize recovery and minimize internal and external pushback.

Prints

In 2014, approximately 54% of the firms were capturing and recovering prints ‘ a 6% increase from 48% in 2012. Will this increase continue? We expect it to in 2016. With copy volume continuing to decrease and print volume continuing to increase, firms have little choice but to join the print/scan recovery movement in order to recover the cost of their output operation.

Firms that don’t migrate to print recovery should really question the need to replace antiquated cost recovery systems in the years to come and whether they should stay in the cost recovery business. This position may not put me in a favorable light with nQueue Billback or Nuance, but the numbers do not lie. This is not to say that there are not other benefits to having a system such as these in place to assist in managing output, but without print or scan volume and the subsequent recovery, it is impossible to justify the cost and maintenance of these systems.

Scans

If there will be a Mount Vesuvius in the 2016 Mattern Cost Recovery Survey, this is it. While scan capture and recovery remained steady from 2012 to 2014 at 35%, we expect a significant increase in the percentage of firms recovering in this area in 2016.

Why? As more law firms are driving toward “less-paper” environments and moving toward adopting electronic matter files, scanning is becoming an integral part of a firm’s everyday workflow, creating a justifiable reason for recovery. The use of scanning also supplants facsimile and overnight services, in addition to the younger age of law firm decision makers who embrace this technology. In addition, the software has become much more productive with major advances by DocSolid, Nuance and Accuroute all making it easier to integrate technology and improving end user acceptance. All of these factors should combine to make this the fastest growth area in the survey.

Litigation Support And e-Discovery

This is the area where we predict the most change in 2016, with firms still struggling to manage this area and how to recover the associated costs effectively and fairly. With more and more firms migrating to a managed services environment (a third party providing infrastructure and software), the question becomes how to recover these “real” fees. Whether in-house or outsourced, is there a palatable soft cost or hard cost business model that the firms’ clients will accept?

We predict more firms will migrate to managed services models and look to pass these “hard costs” through to their clients. Of the firms that remain in-house, more will attempt to charge for storage and user fees, with mixed results from their own attorneys (write-offs) and client push-back.

The managed services trend allows firms to: mitigate the risk of hosting client data; host data in a certified data center with proper disaster recovery; and gain access to market-leading processing engines and review tools with data analytics. This is an expertise and expense that many firms cannot achieve on their own, but need to solve for the client billing model when looking outside to partners.

Legal Research

Will 2016 finally show the death of the recovery of legal research? Not so quick! While legal research has been taking it on the chin for the last few surveys, the data shows that if priced appropriately and fairly, firms can still recover a significant portion of their costs. Granted a number of firms have decided not to fight this battle and are absorbing this cost internally, but the vast majority of firms are still recovering this area.

An interesting aspect to research recovery is the migration of this area to hard cost recovery as outlined in the American Lawyer article, “Reimagining Cost Recovery: A New Strategy for Higher Realization.” The article discusses a specific WestLawNext product, PeopleMap. When the cost of this particular product is included in a traditional cost recovery method for all of legal research (in this case for WestLawNext), it is argued that the ability to convey the value of the individual report to the client is diluted, drastically decreasing cost recovery.

In contrast, it is argued, if that same firm endeavors to bill those reports back to clients at closer to the retail rate for each transaction of the PeopleMap product and passes those through as hard costs incurred on behalf of the client, the firm could significantly increase realizations for its cost recovery efforts compared with the traditional soft cost model. The firm comes out ahead financially and actually absorbs less as overhead, even though it is billing for fewer total transactions.

Expect to see more of this in the future: salvaging legal research recovery as well as an increase in the number of firms outsourcing their entire legal research operation. The benefits are many, but from a cost recovery angle, it creates a hard cost pass through making these charges easier to collect.

Telephone, Facsimile, Postage

All these areas are dying and the 2016 survey will show that they continue to die a slow death. We recommend you recover what you can, but make sure the cost of recovery doesn’t outweigh the benefits.

Digital Services

Items such as blowbacks, Bates labeling, coding, OCR and CD/DVD creation, which had an overall low percentage of firms recovering in 2014, are expected to see significant increases in 2016.

The Hard Costs Versus Soft Costs Battle Will Continue

As clearly evident in the last few surveys, hard costs (charges where there is an external invoice for the cost) lead the way in net realization (the amount the firm recovers after billable/non-billable designation, and after internal/external write-offs). We see no reason why this trend will not continue and as a matter of fact, predict the gulf will widen even more as soft costs face increasing internal and external write-offs.

Alternative and New Recovery Methodologies

While we saw an increase in the number of firms implementing alternative strategies in 2014 from 2012, we expect to see this number remain unchanged in 2016. Firms that were proactive and took action in 2014 have implemented their new strategy for good or bad. However, we predict the majority of firms remain rooted in the traditional methodology with the minor tweaking of their strategy (dropping telephone, adding print for example). Unfortunately, the vast majority of firms remain rooted in their previous post-2008 strategy.

As more and more firms are embracing alternative fee arrangements and project management, now may be the time for firms to embrace new, more intelligent ways to recover costs.

A hard cost pass-through model can maximize benefits of hard cost recoveries. This is an alternative where on-site soft costs are turned into hard costs by being directly billed by a third party vendor providing these services. Imagine paying unit costs for prints, scans and copies and passing that charge directly to the client. This method takes advantage of the higher realization of hard costs while simplifying the recovery of these costs.

Some firms have rolled out the hard cost model in their litigation support areas with great success and we expect to see further traction in the 2016 survey.

A new recovery method we have worked on with some firms is where the firm decreases the level of services provided onsite and instead utilizes nearby third party overflow centers to provide these services. This results in a hard cost pass through and frees up expensive real estate.

The More Things Change ‘

Client and attorney pushback are nothing new since 2008. Pressure on rates and clients’ refusal to pay have been ‘ and will continue to be ‘ part of the norm. These aspects of firm management/cost recovery have changed and are not going back to the good old days. What is new is recognizing and taking advantage of the market conditions. As firms push business operating models and favor profit models of conducting business over antiquated revenue models, strong cost recovery models will become increasing important in 2016 and beyond.

If you are interested in participating in the 2016 Mattern & Associates Cost Recovery please contact info@matternassoc.com. If you have any topic that you would like covered in the survey please e-mail your suggestions to the same e-mail address.


Robert C. Mattern is president of Mattern & Associates LLC, a support services consulting firm that serves the legal industry. He may be reached at rmattern@matternassoc.com.

The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.