8/14/09

Cost Recovery…Such a deal

[Please welcome 3 Geeks' Guest Blogger, Mark Gediman]

My Grandfather was notorious about finding a deal. He would go into a major department store and dicker with them over their prices. To him, the published price was just a starting point and he refused to buy unless he thought he was getting the price that he felt was reasonable. Clients in today’s legal marketplace have this same attitude.

You can see it in recent news items discussing the attitudes of General Counsels at large corporations as they struggle with reducing costs with major law firms. They are negotiating hourly rates aggressively and questioning every item that appears on their bill. The question of whether or not the hourly billing model has gone the way of the dodo has been debating extensively, including by 3Geeks’ own Toby Brown on this page. I think the hourly rate issue should be separate from the online research charges that appear on the bill. As you can see in my analysis below, these charges actually reflect the efficiencies these services provide.

In my position as Information Services Manager for a great metropolitan law firm (naw…even I don’t believe I’m Superman…all of the time), I find myself constantly explaining/defending/justifying our cost recovery policy. Maybe I’ve been sampling the Kool-aid along the way, but I’ve come to realize that most firms that charge back for online services are actually saving their clients money. Here are some examples of why I’m not delusional:

- Charging a fee for pulling a case online is less than the cost of pulling it off the shelf

Let’s say a firm charges clients $10 per case. It takes about a minute to pull and print the case. With a billing rate of $300/hr, the total cost to pull that case would be $15 ($10 for the case, $5 for the attorney’s time).

If the case is pulled from the shelf, let’s figure the following time is spent: 5 minutes to walk to the books, 2 minutes to pull the right volume, 5 more to copy the case and 5 more to walk back to the office for a grand total of 17 minutes. The cost is $85. And this doesn’t count the cost of the space required to house the cases or the copying charges.

The cost to pull the case online is only 17% the cost of pulling it in print. I realize that not everyone does these activities in exactly the same way. However, what is clear is that the client actually saved money in the process.

- Case & Code research is better online

First, let’s do this research online. Type in your search, starting broadly, and then narrow your search with focus or locate. It takes about 5 minutes to run the search and about 15-30 minutes to review the cases with your terms in context. In the interests of fairness, we’ll go with 30 minutes. Then print the cases you want and you’re done. Total time spent we’ll round up to 40 minutes to allow for printing. At our hypothetical $300/hr rate, the cost of the time spent comes to $200. Add in $40 for the search and you’ll have a total cost of $240. This analysis assumes that this is a normal search, not too esoteric, and that the search result is manageable, say about 20 cases. The analysis is essentially the same for searching codes.

Next, let’s look at the process for researching cases and codes in print. Picking up a digest or a code index, and looking for the correct subject can take anywhere from 10 minutes to an hour. This assumes that what we are looking for is easily translatable into the canned headings they use and not horrendously cross-referenced (i.e., “See post-trial” which then says “See Judgments”). This process can take anywhere from 10 minutes to an hour depending on the research. For the sake of discussion, we’ll stick with 10 minutes. Then we spend about an hour pulling and reading the cases that were listed in under the digest heading. Then we add in the 17 minutes it takes to copy the darn things. We now have a total time spent of 1 hour and 27 minutes and a cost of $435.

The cost to research cases and codes online is only 55% the cost of doing it in print. A significant difference I would say.

-Researching can be more cost effective online

The online process is relatively simple. Run the search in one or several treatises, focus or locate the sections discussing your specific terms, review the results and print the sections you want to keep. Say, about 40 minutes of your time. Couple that with the $40 search charge gives you a total cost of $240.

It is not quite as simple to do this with print. The process and time spent are similar to the case/code research referenced above. Assuming the book is on the shelf to begin with, start with the index or table of contents, look at the several sections/chapters that you find for the most relevant and then copy what you want. Total time is 1 hour 35 minutes and cost comes out to $435.

Again about a 55% difference in cost.

-Caveat

The same is not true if it is a treatise, usually a practice guide, that the end user knows intimately. Several years ago, I published an article discussing this phenomenon and concluded that it is actually better to keep these types of treatises in print.

I cannot think of anyone who practices law in this day and age (yes, I realize that phrase dates me) that does not subscribe in some way to an online service. To not do so would be to invite a malpractice claim. Courts have stated unequivocally that firms should utilize these resources to provide their clients with the best representation possible (Margolis, Ellie, Surfin’ Safari-While Competent Lawyers Should Research on the Web, 10 Yale J.L. & Tech. 82 (2007-2008)). An example of the advantage of using a service online instead of in print can be found with Shepardizing (or Keyciting for you West folks). The Shepard’s print service is 6-9 months out of date when the firm receives it, a delay caused by editorial deadlines and publishing requirements. Compare this to the online service that is updated within 24 hours of an opinion being issued and it is easy to see why this could be important to client.

We all know that these services come at a price. But, as you can see from the examples above, these services actually serve to save the clients money and advance their cases. It is reasonable for firms to bill the charges back to the client when they create efficiencies and add quality to the firms’ representation of their interests.

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15 comments:

Lisa Solomon said...

Sorry, you've been drinking the Kool-Aid too long.

Should a firm recover a proportionate share of its rent if its office is close to the courthouse, therefore reducing travel time?

Should a firm recover a proportionate share of its phone bill because it's more efficient to discuss some questions by phone than by snail mail?

And, back when all research was done in print, should a firm have recovered a proportionate share of the cost of its photocopier because it's more efficient for a lawyer to be able to copy a case and mark it up than to make notes on a separate piece of paper?

Technology leads to efficiencies. Clients are entitled to the benefit of those efficiencies.

Let's stop trying to squeeze clients and focus on providing real value.

Toby Brown said...

As a counter-point to Lisa's comment - Mark's analysis demonstrates how you can get more value to clients for fewer dollars. Whether this is covered in overhead or is charged to the client is another issue.

I have struggled with the 'cost recovery' approach for some time now. In some respects, I agree with Lisa about not passing on overhead to clients. However, some clients use significant overhead services (like online research) and others use little or none. By making all clients cover these costs (lumped into overhead) you penalize those who don't need it, thus lowering the value they receive.

Phone calls, faxes, normal course-of-business copies are one thing. Extensive online research is another. Mark is showing how, in those circumstances when its needed, you can minimize the cost to the client by moving away from paper.

Ideas that bring more value at lower costs to clients are ones I would encourage, regardless of the cost recovery debate.

Donna Seyle said...

I totally agree with Lisa. I don't recall charging clients for the cost of buying all those books that no longer line our shelves. Why should we now charge just because access to the same information is obtained online? Acquiring research tools is one of the costs of doing business for any attorney. We could not practice without it. There is no justification for charging it back to the client, and we should be pleased to be able to provide more cost-effective services to our clients.

Lisa Solomon said...

Toby-

Some client files take up a single manila folder. Others fill file drawer after file drawer, or rise in bankers boxes stacked one on top of the other. Does a firm charge the large-file client proportionately more based on the fact that its file takes up more of the square footage in its office?

Furthermore, conducting legal research is one of the core tasks that a lawyer performs. Therefore, I don't understand why a legal research subscription plan should be outside a "normal course-of-business" expense.

As you your unfairness rationale, I refer you to my May 10 post, entitled "The Cost of Your Online Legal Research Subscription is Your Overhead—Don’t Pass it Through to Your Clients," which you can find at http://tinyurl.com/ktpynx. Some clients use less of one resource and more of another. It all evens out in the end.

Anonymous said...

co-sign with Lisa.

Also, there's no connection between the proposition that electronic search can be done at lower cost and the conclusion that

"It is reasonable for firms to bill the charges back to the client when they create efficiencies and add quality to the firms’ representation of their interests."

Yes, firms should be using the most-effective, most-efficient, best-value processes, but this piece does absolutely nothing to convince me that such costs should be passed back to the client.

I would hardly say that it "adds quality" to use an absolutely standard best practice, either. That's a minimum in delivering decent service.

Toby Brown said...

From Lisa's referenced blog post:

"I’m not suggesting that lawyers should never bill clients for extraordinary expenses incurred when the lawyer must use a resource that is outside the scope of a reasonably broad flat-rate plan: I do it myself."

This statement is in line with my prior comment. I suppose our difference of opinion may center on the definition of "extraordinary."

I should clarify I am a strong proponent of alternative fee arrangements and for including expenses as part of the fee - including any extraordinary items.

Mark Gediman said...

These are all good points. My focus was intentionally on the efficiencies these services place at the clients disposal. When there is continuous downward pressure on the hourly rate, it makes it difficult for the firm to recover these types of overhead costs. As Toby correctly points out, these costs are significant and can account for 70%+ of a firm's library budget. While I understand Lisa's point that book costs were included in overhead, the rate pressures make this more difficult to do. The replacement of physical libraries, with their capital costs and non-billing square footage, is a consequence of these pressures. There is also a trend on the part of clients for greater itemization on their bills. So, as you can see from my analysis, the client ends up getting a more complete picture of the costs involved in their representation while the firm is able to demonstrate their efficiency on their behalf.

Betsy McKenzie said...

Hi, Mark! What a fascinating analysis. I've always been a law school librarian, so this is not my area. But I try to teach my students to be efficient & ethical researchers, so you have my attention. I'm not sure you have me totally convinced, either, about charging through at the full attorney rates for work done by non-attorneys. But I'm not in the firm culture. But my biggest beef is really with the assumption you have that you're more efficient online. In particular, I think statutes & regs can be bears to search electronically. You make a lot of assumptions about how fast it's going to be online.... I've linked to your post & commented on it from Out of the Jungle at http://outofthejungle.blogspot.com/

Greg Lambert said...

Betsy,

I came to the private firm law library from Academic and State Law Library setting and found it to be a "different world" from what I was used to. The biggest difference is the lack of space allotted for the library, and the removal of print material over the last decade. Even if statutes and regs are easier to research in print, there's a good chance that the firm's library discontinued them years ago and went totally online. So, for a lot of us, that isn't an option (unless we hike down to the county law library and do research there.) Law firms have tried to use products like West km or Lexis Total Search to capture the work product of past matters and many attorneys do use this to start the initial research phase. None of this is charged to the clients (save the attorney's time.) There have been certain effieciencies that have been passed on to the clients, and (trust me on this one) there are a lot of charges that don't get passed on to the client. I think this is part of the issue that Mark is having because all of those charges don't affect the attorney or practice group that write off these charges, they hit the library budget. Then at the end of the year Mark is left having to justify why he is not recovering the online research expenses.
I've also heard of firms that tried an experiment a few years ago where they increased the overall hourly rate by 5 or 10 dollars per hour and did not pass along any charges, such as online research or copy charges to the client. At my last presentation I mentioned this to the audience and I had a couple of people tell me that their firms tried this and either stopped it, or were trying to stop it because the costs of online research were extraordinarily high, and the increase in hourly rates didn't keep up with the increase in cost.
I can't speak for all firms, but I do know that a lot of the big firms' clients understand the cost involved in Westlaw/Lexis online research. They don't like having to pay the costs, but understand that a lot of times it is part of the legal landscape (at least until Toby can get everyone on board with alternative fees). And there are those that negotiate caps or other deals in order to limit the cost of online research. The client is not helpless in this situation. The library on the other hand is subject to the whims of the attorneys and clients and get stuck with the budgeting issues that come with those decisions.

Tim Baran said...

A significant concern here seems to be that the cost of online research today is too high to be considered overhead and not charged back to the client. Eloquent defenses are offered. But...how about finding ways to diminish that concern?

I suggest that the high cost of legal research is exacerbated by the practice of charging back to the client. I’m sure we’ve all experienced the recurring theme during Westlaw/Lexis (and other vendors) contract negotiations that the proposed increase will be charged back to the clients anyway, so why quibble? The result is that firms are less squeamish about closing a deal. A no-charge back policy takes away that bargaining chip from the provider and keeps parties at the table, likely lowering the cost and the firms overhead.

And the argument that the client is empowered...well, not really. Should I, as a client, demand that online research (an unknown and potential runaway charge) not be charged back to me? Sure. But what does that mean? Will partners discourage associates from using or limiting use of available resources because of that clause? Even as a former library director that poured over bills and contracts, I would certainly not be coming from a position of strength when trying to make that decision.

Stephen said...

Pt.1

Hi, interesting post. I have some questions about some of your examples and wonder if anyone has done any formal or informal empirical research on the costs of online versus print searching. I'm sorry that there are so many questions below, but I actually am trying to do some research on these topics.

For example, in your section "Case & Code research is better online" you write, "Type in your search, starting broadly, and then narrow your search with focus or locate. It takes about 5 minutes to run the search and about 15-30 minutes to review the cases with your terms in context. In the interests of fairness, we’ll go with 30 minutes. Then print the cases you want and you’re done. Total time spent we’ll round up to 40 minutes to allow for printing...Add in $40 for the search..."

First of all, I kind of assume you're not discussing a flat-fee plan, because you discuss "$40 for the search." I would think for a flat-fee plan, you wouldn't be charged for a search, or is this incorrect? Or when you're discussing these charges, are you only discussing what the firm would charge to the client for recovery based on an attorney hourly rate, whereas the firm may actually be being charged much more by the fee-based online legal research company?

I'm kind of unclear on this here. Are you discussing saving money for a client based on charging an hourly rate to the client (i.e. regardless of what the firm is charged by the online legal research provider, the charge from the firm to the client is based on an hourly rate, and the research can be done quicker online), or are you discussing saving money for the firm by using online research?

For clarification, if the firm used print, couldn't the firm save more money for itself using print, since it isn't being charged for using the print--and then it wouldn't need to pass any of the costs to the client except for the time spent, which it incurred no charges for since it used print and not an online fee-based resource? I'm sort of confused here then when you discuss the online being cheaper than print--it's only cheaper to the client, not to the firm, right?

And has anyone done a real cost-benefit analysis of costs to a firm based on speed, as you discuss mostly the speed, taking into account transactional, hourly, possibly flat-fee charges to the firm for performing searches and printing and downloading from online fee-based legal research services versus using print? I mean, do firms bill clients less for legal research than other types of work, do they cap it at some point--if so, at what point is it cheaper for a firm to use online legal research to save time so they can bill for other types of work, despite online legal research fees, versus using print which may be slower (how much slower) which is free to use?

Continued in Pt.2 below...

Stephen said...

Pt.2

Further, I would be interested in finding out information such as: do searchers usually find what they need with just one initial search and then narrowing down with focus or locate? Or do searchers usually need to search more than once to find what they are searching for? (I.e., if the searcher realizes a problem with their original search query, they might not be able to fix it by using focus and locate, they might need to enter a modified search query, for which they would be charged additional money by the fee-based online search provider.)

Then, you write about printing "the cases you want." How many cases would a researcher be able to print plus the cost of one search and have the total cost be $40? What is the average cost of printing out or downloading a case?

My question about empirical information is that, what if on average searchers need to perform two or three searches, and print out six cases? I would think this could cost more than $40, at which point using print could be more economical.

I assume that these calculations differ between transactional, hourly, and flat-fee plans, and that this could be true for hourly and transactional plans. How about flat-fee fee plans: with with flat-fee plans, are searchers typically still charged for each print job or download, or is that included in the flat-fee?

Does anyone know then, for each of a typical transactional plan and an hourly plan, (and for flat-fee plan if you are charged for searches and/or printing/downloading), how much you would be charged for each search and each case printout or download?

If searchers typically need more than one search and print out more than a certain number of cases per session, the cost could easily exceed $40--so do we have any data on the typical amount of searches performed and results printed or downloaded, and the total cost of a typical fee-based online search session such as described?

I may have more questions, but thanks for the interesting post and thanks for any info if anyone has done empirical research on these topics and if you can point me to where I could find such data. Even if you have ideas offhand on how many searches and how many cases the average searcher might perform and print out per project might be useful, and at what point that would exceed $40, at what point using print would actually save money. Thanks!

Stephen said...

Hi, I think I see now...am I right that this post is written from the point of view that the client will be charged $300/hr for the legal research based on attorney hourly rate no matter what, so if online research is even incrementally faster than print, the client can save money by being charged less by the attorney?

My questions, among others, are: could this be more certain for only flat-fee online research plans, as given the amount of time or number of transactions performed in a hourly or transactional plan, that cost might exceed the cost recovery for that time at the attorney's rate being billed to the client?

Also, what are situations, if any, in which mixing print with online might be cheaper overall, for example, as I asked above, are printing and downloading fees always included in flat-fee plans, or could there be cases where printing out/downloading a number of cases might make using print in addition to online a better deal for both the attorney and the client?

I'm new to all of these concepts, so thanks for any info!

Stephen J. said...

Thanks if anyone has any info on my previous few comments above--

Looks like cost recovery is very controversial! That's why I'd be interested in learning more details--

Lawsuit Claims Chadbourne Overcharged for Computerized Legal Research

http://www.law.com/jsp/article.jsp?id=1202430546153

Law Firm Markup of Research Costs: Annoying or Unlawful?

http://legalblogwatch.typepad.com/legal_blog_watch/2009/05/law-firm-mark-up-of-research-costs-annoying-or-unlawful.html

Anonymous said...

Cost recovery is one thing, however, considering the current economy, Big Law is entirely out of control. Several firms have new profit centers, which bill clients separately for editing and formatting the documents they produce. I may be wrong, but wasn't secretarial editing well within the normal scope of practicing law? It's like going to a premium Department Store and being charged at checkout for the packaging.

 

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