Cost recovery obstacles challenge law firm profits

Hard costs most likely to be recovered

Cost recovery obstacles challenge law firm profitabilityIt is nearly impossible for law firms to bill clients for typical soft costs. Recent surveys show that the top three soft costs that clients tend to push back on are legal research (with nearly 75% refusing to pay), followed by word processing and telephone calls (each of those hovering around 60%).

These findings confirm and validate our own findings with our law firm clientele, particularly regarding legal research. It is not only the legal research work that is being viewed as a cost of doing business, but the electronic information resources themselves that are affected. More law firms are seeking our advice on how to reduce the cost of legal research databases, content subscriptions and the fees associated with searching them.

Meanwhile, the primary and costlier online legal content providers are not inclined to right-size their pricing to accommodate this continual trend. When firms can’t recover these expenses, they pay out of their own pocket to maintain the research service platforms they rely on.

For the most part, firms continue to bill clients for hard costs – those that can be allocated to a specific client and supported with proof, preferably a 3rd party detailed invoice. Hard costs are kind of a short-term loan extended to the client, when the firm pays for a product or service on behalf of the client. Clients understand them, expect them and are more willing to reimburse them as a necessary cost of getting the legal service they need.

The client, however, increasingly views soft costs like research, word processing and phone calls, as the law firm’s cost of doing business.

Factors contributing to new cost recovery landscape

Factors contributing to new cost recovery landscape

Client cost pressures

Clients that pressure their outside legal counsel on matters of cost are under their own cost pressures. Clients have their own stakeholders to please, including shareholders and other financial backers. As such, they increasingly view law firms as another vendor, and they never want to overpay any vendors for any of the goods and services they purchase.

It’s not that law firms are being unfairly singled out; companies have always pressured their outside to get the best deals. It’s just that legal services have operated under different rules and conventions. Clients have been focused on other indirect expenses, but they have been turning their attention to the cost of legal services, which they only recently have been able to influence.

Client trust

Clients don’t like to be taken advantage of, especially when it comes to financial matters. And many law firm billing practices can provoke feelings of being overcharged and mistreated. As mentioned earlier in this article, clients are viewing certain processes like research as the firm’s cost of doing business. As such, they feel they are paying for it already, in the billable hours or other fee structure they pay. Anything else is viewed as “double dipping” and that leads to suspicion and resistance – neither of which builds trust.

Trust is conveyed through all means of interaction, including financial interactions. In that arena, trust is based on getting charged what we see as fair and reasonable prices. And cost issues always boil down to perceived value. We pay the price for something when we feel it’s worth it.

Digital is cheaper and more options are available

The move toward digitization has contributed to new cost and value perceptions. Many people, on both the firm side and the client side, believe that if the output isn’t physical, like a paper document, the cost to format and distribute is cheaper – even “free”. While digital output is much less expensive than paper, there are still costs associated with technology. And digital formats offer their own unique value – perhaps greater value than paper. Yet lawyers tend to resist an explanation or justification of value.

In addition, a surge of legal information startups offer a new generation of legal research technologies that are less expensive than the mainstream legal research information providers. These include Ravel Law, Casetext, Judicata and Premonition. FastCompany magazine offers a good overview on how artificial technology and other advances are bringing computers and people together to innovate the legal industry.

Conquering cost recovery obstacles

Conquering cost recovery obstacles
Make vendors compete for your business

Now more than ever, law firm finance executives need to formally address the gross disparity between the cost of research services compared to other overhead services support fees.  Firms must be willing to right-size legal research services on their own accord to suit their budgetary requirements. Often this means being open to veto proposals from vendors unwilling to move in cost or offer alternative options.  Firms with historical data on their actual recovery rates for Westlaw and LexisNexis costs can review that data for support prior to renewal negotiations.

Make bold moves and consider new choices

Firms that are receptive to considering less-developed legal research providers will experience a direct savings impact from the change, because these vendors are enthusiastic to collaborate with new customers and more willing to meet pricing conditions.

Now more than ever, buyers of legal services are looking to partner with providers that are not afraid of doings things differently and that focus on both innovation and efficiency.

Robyn Rebollo

Robyn Rebollo

Vice President at Chase Cost Management
Vice President Robyn Rebollo is an expert in library administration and information technologies. Her reputation has been established through many years of experience and numerous contributions to the design, development and implementation of information and knowledge solutions for corporations, law firms and universities.
Robyn Rebollo