To bill or not to bill

Common cost-recovery myths exposed

By Derek Charter, Billback Systems

Itemised charging of exceptional expenses is not unfamiliar to the majority of firms. The inclusion of general office overheads, however – routine copying or printing, telephone calls or document-scanning activity, for example – into the client bill seems to be a practice that divides firms into two broadly opposing schools: those that include these as discrete line items and those that don’t.

Two groups, both involved in the provision of legal services for profit, which follow two diametrically apposed practices? If we examine some of the attitudes that lead to this dichotomy, the raison d’être for this article, we will be able to uncover a number of misconceptions and see emerging the conspectus of a useful strategy for disbursement recovery.

The logic that underpins the itemised billing of expenses, the ‘user pays’ principle, is a logic that is entirely familiar to most law firms today, even if this is not reflected in their billing policies. Indeed, hourly rates are the logical way of accounting for the fact that different matters will have an irregular draw on a firm’s time and that this should be reflected in the eventual bill presented to the client.

Why then don’t all firms reflect the varying administrative burden across matters in the same way as they record and reflect the varying number of hours across matters?

False economies

Many firms will fail to reflect itemised disbursements on the client bill, simply because they perceive that the effort to record individual transactions will lead to a false economy, with the cost in staff time, effort (and aggravation) equal to, or greater then, the costs recovered.

Of course it is not this view per se that is incorrect; it is, however, where these firms determine the break-even point to be that is overly conservative. Specialist cost-recovery technology available today from vendors such as Billback Systems, has driven down the cost of tracking print, copy, scan, mobile phone, courier and taxi costs to the point where the disbursement cost passed on to clients can justifiably be calculated to include a dimension that reflects the cost of the cost-recovery technology and the recovery process itself without pushing it to a level beyond which a client will be happy to pay – in essence, the cost recovery of cost recovery.

Client considerations

The risk of alienating existing clients and driving away new business is often cited as the reason why administration overheads are not billed separately, irrespective of the fact that clients understand that these costs have been accounted for in the hourly rate. In reality, however, this is the opposite of the client’s best interest.

Accounting for administrative overheads in the hourly rate is effectively equal to the largely abandoned practice of applying a crude administrative surcharge as a percentage to the bill (there is little difference in charging £250 per hour + ten per cent for administration overheads, or charging £275 per hour). This practice has always been challenged by clients who invariably, and correctly, identify that this will result in matters that are less heavily burdened administratively, subsidising the matters that carry a greater administrative load (with most people assuming they are the ones who are doing the subsidising and not the other way around).

Here effective communication to clients is paramount. For instance, a mid-sized Midlands-based firm, recently positioned to its clients that following a recent business system investment, and in line with its policy of continually striving to offer better levels of service, it was now able to offer clear and transparent billing previously unavailable due to technology limitations. Furthermore, this meant that it was able to avoid raising its fees in line with inflation for the next financial period.

Other areas

It is also worth pointing out that for firms that currently include routine office expenses on their client’s bills, there are a number of issues that fall beyond the scope of this short article, which need to be considered if a well-thought-out cost-recovery policy is to be achieved. These would include the role of disbursements in the realm of complex billing, protecting profitability across matters in fixed-fee scenarios and how sensible discounting of disbursements can boost a firm’s ability to compete while protecting core revenue streams. Although the principles involved are simple, cost recovery is an area with often complex and far-reaching impact.

Derek Charter of Billback Systems can be contacted at derek.charter@billback.com