A tale of two soft cost recoveries: Developing a defensible, verifiable cost recovery policy

Crafting a policy that works for you and your clients

It was the winter of despair

In Part 1 of this series, I described the relatively recent erosion of soft cost recovery occurring in law firms as it is seen from the firm’s point of view. The majority of firms still use the traditional cost recovery model, even though by doing so, those firms may be losing money on many recoverable items. This decline in the recovery of costs is predicated largely on the fact that clients are much more sensitive to what they view as extraneous charges, ultimately breeding systemic mistrust in the validity of the costs of these charges.

The client’s mistrust of these charges extends back to the firms and falls primarily upon the shoulders of the attorneys who are handling these clients. This, in turn, causes the attorneys to be ever more hesitant to pass through these charges in the first place—and so goes the cycle of erosion.

It was the spring of hope

This is not necessarily a healthy situation if it is given that the law firms that represent your organization incur legitimate costs, and the goal is both fairness in billing practices and good communication between your organization and an outside law firm.

From the point of view of the client when faced with these issues, however, how do you position the law firms that service your organization to recover these legitimate costs in a fair and equitable fashion? From the client side, your organization has a number of options:

  • Decide what costs (if any) your organization is willing to reimburse the law firms that service you.
  • If your company generates a significant amount of legal business, you may want to take the position that your firm will negotiate these charges and that you will not pay for any soft costs.

This position can significantly impact the firm’s operations, however. The firms you are conducting business with will be reluctant to keep this type of work on-site (soft costs) because they are not getting reimbursed for it. When organizations take this stance, they should expect a significant amount of hard cost pass-throughs (outside vendor invoices). This may result in a slowing down of work product turnaround.

  • If your organization takes the position to reimburse your outside law firm’s soft costs, you should develop a clear, concise and well-thought-out policy. Many of our clients struggle with policies that are inconsistent; this often results in delays that frustrate both parties.

Some examples of where this frustrating logic may lead are:

  • Clients will reimburse for faxes but not for scans. The justification for this reasoning may be that faxes are an acceptable way of delivering documents, but scans are not. In the end, however, this encourages firms to fax documents at a dollar per page, whereas scanning the same documents would have cost 10 percent of that amount.
  • Sometimes clients take the position to only reimburse hard costs. Law firms, then, will send documents overnight (via FedEx or UPS) rather than simply scanning the document and sending it via email, a less expensive, more expedient and eco-friendly solution.
  • Clients will not pay for prints but will pay for copies. This logic does not represent how law firms and people in general are working today.

We had everything before us

It is completely logical that an organization would want to have clear guidelines in place for these costs. However, the guidelines should be reasonable, determined with the goal of keeping costs and work product turnaround time to a minimum, recognize the standard working practices of today’s law firms and ultimately not hamper the workflow between your organization and the law firm.

From the law firm side, the healthy solution is to formulate a clear, defensible policy that will minimize both internal and external write-offs. To that end, develop a plan that improves communication with your attorneys, improves their ability to communicate with their clients and encompasses the following:

  • A clear definition of how your costs are developed and an explanation of indirect or overhead costs.
  • A benchmark of your costs against other firms of similar size and geography. If your costs are out of line, then they may not be competitive or your overhead allocation may be excessive.
  • Education for your attorneys and staff on how the costs are developed and the ramifications of what happens when they are written off. Give your attorneys the ammunition to defend themselves when a client is taking a hard line stance.

In the final installment of this series we will discuss if alternative methods are the way to go.

Contributing Author

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Rob Mattern

Rob Mattern is president and founder of Mattern & Associates LLC, a consultancy proven to decrease law firm overhead expenses through developing in house...

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