Professional Services Accounting ARTICLE -
Enhance Profitability with the Right Cost-Recovery System

Target Audience: Practice Partners, Unique Practices, Partnerships, Law Firm Professionals, Lawyers, Law Firm Associates

In today’s tough economy, finding ways to improve profitability is vital. Revenue-generating strategies such as expanding your client base, ramping up marketing efforts and cross selling your services can help boost your firm’s bottom line, but another important strategy is controlling costs. A cost-recovery system can help. By capturing costs, it enables you to pinpoint your spending, devise a plan to make necessary cuts — and even bill more back to clients.

The savings

Serving clients day-to-day needs can add up; consider these costs: legal research, couriers, printing and copying, scanning, and handling telephone calls and faxes. If your firm bills a flat rate for these expenses, you may be missing out on potential revenue by leaving some recoverable costs unrecovered.

Tracking certain office expenses through a cost-recovery system helps show you and your clients where the money is — and where it’s going — and enables you to recoup costs without overcharging them.

Let’s look at a simple way you can track usage and cost. Suppose your firm starts equipping photocopiers, printers and fax machines with control terminals that require users to input client account numbers before any faxing, scanning or copying can be done. Just alone for photocopying fees, you can save substantially.

For example, under your firm’s old cost-recovery policy, let’s assume that 50% of the copies made each month were billable and 50% were administrative or nonbillable. You billed clients .20 per copy and the number of copies billed to each client was computed by taking their billable time for the month divided by your firm’s total billable time. This percentage is multiplied by the number of copies made during the month, which is then multiplied by 50%. [Number of copies per client = (billable time for each client ÷ your firm’s billable time) x number of copies made in the month x 50%.]

The new system allocates copies to each specific client at .20 cents per copy, but this specific allocation raises the copies billed to 75% of the copies made per month. Here’s an example:              

Employing a cost-recovery system can help you follow expenses from capture through allocation and approval; charge clients for actual disbursements and services; increase billing speed and accuracy; and, ultimately, increase profitability. Of course, you won’t be able to recover all of your administrative expenses, because those attributable to overhead can’t be charged back to clients.

The road to recouped costs

The information collected from control terminals, telephones and computers is stored in cost-recovery software. The desktop program is the key component of any cost-recovery system, so be sure that it — along with your other management systems ­— is compatible.

The software allows your system administrators and other authorized users to add or delete billing codes and perform other necessary functions. Billing information can be reviewed daily, and customizable reports can be generated quickly and easily.

You can also capture and recover other costs, such as online research. Standalone software or software integrated with your proprietary research databases, such as LexisNexis and Westlaw, enables you to perform cost tracking, client validation and bill-back functions.

For example, pop-up screens tied into your client code system requests information from the user, such as a client number or name and a description of the research being captured, before the user can begin a search. Any search conducted by a firm member can be dissected in a report that indicates the client, the user, the database accessed, the amount of time spent and other relevant information.

There are a number of other available features, such as reporting and cost-management tools. Software and systems vary, so be sure to shop around.

Trading up

Keeping pace with advancing technology allows you to remain competitive, better serve your tech-savvy corporate clients and be in compliance with any federal or state statutes that require extensive financial reporting and electronic record keeping.

Assess your existing software, ongoing license costs and the actual use of the software, and consider upgrading to current versions, particularly if your systems are more than five years old. Old software may pose issues of compatibility with other management systems, as well as lack adequate security and support.

Meanwhile, newer software tends to have many improvements, better usability, and more critical features and functions. For instance, you’ll have real-time access, which allows you to see work in progress for any project at any time and bill more accurately, allowing you to cut costs while increasing profitability.

An up-to-date and well-designed system’s cost-cutting benefits can add up to more funds to invest in other technologies that help your firm run more efficiently and productively.

Benefits for all

Cost-recovery systems can be beneficial for your clients and your firm. Your clients can rest easy knowing that their money is being spent wisely and that they’re not being overcharged. Meanwhile, your firm reaps the benefits of greater efficiency and a healthier bottom line. Do you need any more reasons for putting an effective cost-recovery system in place?

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

related links

Specialized Professional Services

Litigation & Forensic Accounting

Law Firms

Specialized Law Firm Services

Law Firm Newsletter Archive

Tax and Business Updates