ILTA White Papers

Financial Management

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From 8-Track to MP3: Making Cost Recovery Current What's Next: Cost Management While the most effective way to reduce costs might be to simply have them reimbursed by clients, that is not practical for all costs. Firms have overhead and other firm-related expenses that must be managed. This means taking the time to drill down into who is incurring what type of costs and expenses and developing strategies to reduce them. Again, this can only be accomplished by starting with complete information. Cost management is using cost recovery data to better manage a firm's own costs and expenses. For example, your firm could be missing opportunities to recover for all your FedEx, messenger and car services and more because an invalid client/matter number was used, and it's seen as not worth the clean-up. Have you looked into which clients don't pay for any costs or expenses, or which partners write off too much? You can't manage what you don't measure, so building a data warehouse with this information and then mining that data are crucial parts of the path to improved profitability. The big benefit is that complete information leads to better decisions throughout the firm. Is that client as profitable as you think? Which practice areas are performing best? Is that alternative fee arrangement working out? Do you have the right number of devices? Are they all in the right places? Complete information informs better decisions to improve efficiency and save money. After all, as Ben Franklin famously said, "A penny saved is a penny earned." Down the Road: Cost Control Cost control means avoiding costs before they are incurred, and this is probably the biggest leap for a law firm. Firms typically implement strong cost recovery and cost management strategies and then move to cost control. However, cost control can be extremely powerful, as there is no need to recover or even manage an expense that never accrued in the first place. The easiest way to start a cost control program is by adding simple rules, such as forcing nonbillable print ILTA White Paper 43 jobs to print double-sided or only black and white. Firms can continue from there, forcing users to less expensive MFDs, controlling the amount spent for car services and more. The keys are 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. Modernize for More Money While many people seem to feel that cost recovery is "broken" (they might be correct if they are using a system that is five years old or older), this is the result of a strategy that has not kept up with the times. With today's law firms so concerned about profitability, it's important to optimize cost recovery and consider cost management and cost control. A law firm with an effective cost recovery program should be able to recover 50 percent of expenses, excluding rent and HR. If your firm is recovering less than that, it is likely because you are not capturing enough data. Furthermore, better management of costs should result in a two percent (or more) increase in recoverables, along with a reduction of those expenses that are not recoverable, aiding the bottom line even further. Firms today must include cost management, cost control and cost recovery. Indeed, simply relying on the antiquated methodology of "make a copy, bill for a copy" will lead to declining revenues and frustration with a broken system. You didn't stop listening to music just because you got sick of carrying a boom box around. Don't suspend cost recovery just because your outdated technology doesn't support today's trends.

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