The quarterly publication of the International Legal Technology Association
Issue link: http://read.uberflip.com/i/34686
The Impending Demise of Cost Recovery Differentiating Between Soft and Hard Costs Initially, soft cost recovery systems were developed to provide firms with a mechanism to capture internal charges (soft costs) that did not have an invoice attached to them, such as internally generated copies. To quantify the “price” for such costs, firms would either perform an internal analysis of these costs or mimic what other firms charged. For external charges, such as overflow copy/litigation support jobs or overnight shipments (hard costs), a firm would have a vendor- generated invoice, which was then directly passed through to the client without a markup. These costs were of course more straightforward since the amount could be immediately proven and justified to the client. Upcoming Paradigm Shifts In order to accurately gauge what will happen with cost recovery in the next ten years, one must acknowledge two fundamental paradigm shifts in the support services landscape: • Prediction 1 –– A shift from copy/fax to print/scan workflow In the past, the typical legal cost recovery model was based on the output of copies, followed by the charging of facsimile pages and telephone calls. With copy and facsimile volumes decreasing and the cost of telephone declining, firms are discovering that the copy/fax model does not produce the necessary billable revenue to cover the associated expenses. This change was also precipitated by a shift in the way firm employees work, with daily workflow migrating from a copy/fax to a print/scan model. Many firms have embraced the move, but almost half have not, and are thus facing a declining cost recovery revenue stream. • Prediction 2 –– Client/internal pushback and refusal to pay Beginning in the 1980s, increasing in the ‘90s with the “Skaddenomics” debacle (in which Skadden was called out for charging exorbitant rates for basic services like faxes and long-distance calls), and reaching a pinnacle today, clients have taken an offensive stance toward firms regarding the recovery of soft costs. As one firm’s executive director stated about the recovery of these costs, “Clients do not trust that the soft cost recovery charges generated by law firms truly represent the firm’s costs for these services.” This same statement can be made about a firm’s attorneys, who are increasingly writing these charges off internally before the client is even notified that the charges have been incurred. In the next 10 years, we predict you will see changes in the cost recovery landscape as represented in these graphs: 2006 2008 2010 The percentage of firms charging for telephone declined 26 percent from 2006 to 2010. This is due to the decreases in rates firms are paying (VoIP) and the expense of managing this process. Already in decline, telephone recovery will just fade away. Percent of Firms Recovering Telephone Costs 100% 80% 60% 40% 20% Legal research recovery will continue to decline and the model will change so the client is billed directly by the vendor. Percent of Firms Recovering Legal Research Costs 100% 80% 60% 40% 20% 2008 2010 The percentage of firms charging for legal research decreased from 97 percent in 2008 to 73 percent in 2010. This 24 percent decrease is due primarily to the pricing strategies that firms have employed, and the belief by clients that this should be included in the hourly rates they are already paying. Peer to Peer the quarterly magazine of ILTA 93