Home > Information Centre > Spotlight & Hot Topics

www.billback.com

TO BILL OR NOT TO BILL?

Common cost recovery myths exposed.

Although the itemised charging of exceptional expenses is not unfamiliar to the majority of firms, the inclusion of general office overheads, 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 opposed schools; those who include these as discrete line items and those who 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 detre 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 than, 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 like 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. However in reality, this is the opposite of the clients 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 + 10% for administration overheads, or charging £275 per hour); a practice that 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 example, a midsized midlands based firm, recently positioned to their clients that following a recent business system investment, and in line with their policy of continually striving to offer better levels of service, they were now able to offer clear and transparent billing previously unavailable due to technology limitations, and furthermore, this meant that they were able to avoid raising their fees in line with inflation for the next financial period.  

Other areas:

By way of concluding, it is also worth pointing out that, of course, for firms who currently do include routine office expenses on their client’s bills there are a number of issues that fall beyond the scope of this short article, that need to be considered if a well thought out cost recovery policy is to be achieved. Including 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.  

To find out more go to www.billback.com 

Author: Derek Charter - Billback Systems

First Published In: FDLegal March 2007

Dated: June 2007

Back to Spotlight & Hot Topics