With Turn to Hybrid Work, Firms Are Recovering Fewer ‘Soft Costs’ and Losing Revenue

With Turn to Hybrid Work, Firms Are Recovering Fewer ‘Soft Costs’ and Losing Revenue 2021-11-03T18:51:54+00:00

This article appeared in The American Lawyer, October 27, 2021


What You Need to Know

  • Mattern surveyed nearly 40 firms to determine the future of the
  • The recovery of these costs now constitutes a shrinking portion of firms’ revenue.
  • Most firms have no intention of passing cybersecurity costs along to their clients.

A majority of law firms surveyed by operations consultancy Mattern don’t intend to recover costs generated from at-home work, according to new survey results released Wednesday.

Mattern surveyed nearly 40 firms, ranging from global giants like DLA Piper and Baker McKenzie to boutiques and regional players, to determine the future of the “traditional soft cost” recovery model that most firms employ.

In this model, firms formulate the costs of services like copying, printing and postage and charge them to clients, alongside “hard costs,” which are third-party invoices passed on directly to clients.

The survey found that soft-cost recovery is likely to be a declining component of firms’ revenue streams, owing to a decline in overall generation of these costs that’s been connected to remote work.

“Overall volumes decreased due to the increase in digital output due to remote working, and the fact that home-based workers are reluctant to output large documents due to lack of home capabilities, capacity, and personal expense,” Mattern’s report concluded.

As a consequence, the recovery of these costs now constitutes a shrinking portion of firms’ revenue. In 2004, when Mattern first began to track and collect cost recovery data, these earnings constituted between 3% and 6% of most firms’ revenue, with the disparity tied to whether legal research was included. In the 2021 survey, 60% of the firms responding stated that the recovery dollars constituted less than 1% of a their revenue, and only 14% said it exceeded 3% of their revenue.

One factor here is that recovery rates have dropped, while hourly billing rates have climbed. For example, the average recovery rate for black-and-white copies has decreased by 18% since 2010 while the average partner billing rate has climbed by 57% in the same interval.

And, as firms prepare for hybrid work to be a major part of their futures, a slim majority of those surveyed (51%) have no plans to recover costs generated by attorneys and other timekeepers while at home.

That’s not to say they’ve given up entirely. Only 3% of the firms surveyed have abandoned traditional soft cost recovery or are utilizing a flat percentage of hourly billing to approximate these costs.

One thing firms aren’t doing is passing cybersecurity costs along to their clients. Even with rates for cyber insurance rising rapidly—upward of 30% in 2020 and 40% in 2021, according to the report—none of those surveyed are currently recovering these costs, and only 8% are considering it, leaving 92% prepared to continue shouldering these expenses.

Those that are weighing doing so are considering several options: applying a percentage to all invoices, wrapping these costs into the billable hourly rate, or adding a separate “technology fee” line item to all invoices.

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