Recovery rates continue to decline.
However, when we drilled down into our 2019 Legal Information Market Survey results we noticed a trend, with recovery rates holding steady at firms that continue to try. This made us ask the question; should the trend to move online legal research costs to overhead be reconsidered?
Clearly the heyday of recovery is over. Prior to the 2008 Recession a law firm could expect to ‘recover’ (bill clients for) 85% or more of their online research costs for Westlaw and Lexis. For a large firm, recovery at those rates meant hundreds of thousands (often millions) of dollars in cost reduction. Often wiping out the vast majority of the cost of online legal research. A firm with good recovery could effectively purchase and use Westlaw and Lexis as if it were free. Clients were footing the bill, and there was little pressure on the firm side to analyze ROI or make strategic and optimal choices between offerings available on competing platforms.
After the Great Recession, everything changed. Recovery rates nosedived as client’s began to scrutinize their billing and often removed Wexis charges as a matter of course.
Our survey results indicate that nationally all firm recovery is averaging 28%. However, for Firms that actively try to recover (backing out the firms that have already moved to overhead) the true recovery rate has been holding at 38%. Firms have discovered that there is a ‘bottom’ on the deterioration of pass-through costs and it looks like recovery has somewhat stabilized.
The overhead trend is clearly entrenched now, but it makes you wonder if it makes economic sense for anyone to move recovery to overhead. You can learn more about the overhead trend, and see specific data and charts in our upcoming book Optimizing Legal Information Pricing. This is particularly true in a market where vendors are aggressively increasing their prices and firms are looking for ways to reduce costs.
Obviously, there are cultural and qualitative reasons to move away from recovery. Attorneys don’t like to pass through one-off research costs to clients or risk irritating them. Many lawyers and firms believe there is a hidden marketing benefit to clients when the firm does not charge for online research costs. We hear this often, but the true benefits are difficult to quantify.
On the other hand, if you are recovering our market average of 38 cents on the dollar, and your firm’s spend with Wexis is $1 million a year, your return on your recovery efforts is $380,000. Obviously, there is a diminishing return the smaller the firm size (and the research cost). In most cases, however, successful recovery provides some wiggle room in your budget to offset costs.
This made us re-think the idea that recovery should be a dying trend. We now see an important upside in maintaining and enhancing recovery.
Michael Feit earned his J.D. from the Loyola University School of Law in Chicago and was an executive at Westlaw before founding Feit Consulting 16 years ago. Feit Consulting partners with law firm administrators and legal information professionals to optimize vendor contracts and the management and delivery of legal information resources by providing leading-edge, customized solutions. Contact Michael at email@example.com