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What's the dollar value of a photocopy, or a Lexis Nexis search? That depends on who you ask.

Sherry Perna, executive director of Delaware-based Morris James, said her firm has almost always billed clients for back-office functions like postage, courier service and computerized research. Its realization rate for such costs was 91 percent last year, she said.

But industry watchers say that's not the typical law firm experience.

Mark Santiago, of operational and management consultancy SB2, said administrative expenses are playing into a profit pinch at small and midsize firms, as billing for those functions becomes less common.

“Some charges are no longer acceptable. Other things are sent directly to the clients themselves,” Santiago said. “Some, [the firms] just kind of eat.”

The problem, he said, is that those costs are still rising in some respects, and rate increases may not make up for that.

“I don't think the awareness of what this costs rises up to setting the billing rate as much as it should,” Santiago said. “Now, there's a lot of pressure on the billing rates, and the back-office costs are rising, and [the firms] are having trouble passing those costs on.”

In its biannual cost recovery survey, Pennsylvania-based consultancy Mattern & Associates found that in 2018, the net realization rate was 37 percent for back-office functions like copying and printing, litigation support and legal research—and that was an improvement from the 2016 rate. Mattern's survey factors in whether a soft cost incurred is determined to be billable, whether it is actually billed and, finally, whether the client then pays for it.

Where Mattern saw growth from 2016 to 2018 was in the amount of back-office costs firms were actually billing for, once they were deemed billable.

“We've definitely seen that the decline in net realizations is really starting to level off,” Stephen Cole, Mattern's director of client technology and strategy, told The American Lawyer in October. If a cost actually makes it onto an invoice, Cole said, chances are the client will pay for it.

Santiago said the average realization rate for back-office costs, at least among law firms that actually bill for them, is probably somewhere between the 37 percent Mattern found and the 91 percent at Morris James.

John Banks, chief operating officer at Cleveland-based Benesch, Friedlander, Coplan & Aronoff, said his firm has increasingly approached back-office spend as simply a cost of doing business. And he expects more firms to absorb those functions into their own expenses.

“We run our firm like a business. When we look at this, we think it's just a function of creating a lot of paper on the bills,” Banks said. “Our core service is providing legal services and not charging for these back-office functions.”

Many firms are now taking a flat fee for administrative expenses, said Eric Wangler, president of North American services at Big Hand. His company, he noted, provides business intelligence tools for law firms to manage profitability.

“It's becoming more and more difficult to recover any of that” back-office spend, Wangler said. “You're having to compete up and down the street for that business that used to be a little more relationship-driven.” Cutting items from the invoice is one way to do that.

Managing 'The Little Things'

Even for firms that bill clients for back-office costs, certain charges are going out of style.

A lot of firms no longer bill for photocopying or administrative time, Santiago said. But items like e-filing, “you can absolutely charge for.”

At Benesch, billing for back-office functions has fallen off considerably, Banks said. The firm no longer passes photocopying expenses to clients, unless it's a huge volume requiring an outside vendor. And “less and less we're charging for research,” he said.

The changes are largely client-driven, he said. While the firm still charges for legal research generally, it has run into an increasing number of client billing guidelines that preclude that practice.

At Morris James, photocopying, courier service and postage fees have “continuously gone down over the years,” Perna said, while e-filing costs and other computerized research expenses have grown.

Morris James did try to stop charging for individual back-office expenses at one time, Perna said, with the intent of rolling those costs into the firm's billing rates. But the effort didn't last long.

“It was hard to track it, because one group might have been doing one thing, and one group might have been doing another thing,” Perna said.

Going back to the old way wasn't too difficult, because the attempt to eliminate those costs was so short-lived, she said. However, Perna noted, firms that haven't been charging clients for back-office functions in the past will struggle to start doing so years into the relationship. She said it's better to start with new clients going forward.

“It's not a ton of money. In the overall scheme, it's a very small percentage of overall revenue,” Perna said. “It's not that it's going to make or break a firm, at least of our size. … But it is a cost to the firm, so we should try to recover it if we can.”

For firms that don't look to recover these costs individually, “the burden of back-office” should still enter into their pricing discussions, Wangler said. That requires tracking the resources used, so firms can fully understand what that burden is, he said.

And, Santiago said, regardless of their back-office billing philosophy, every firm should be looking for ways to cut down on administrative expenses.

“Take the zero-budget approach and question everything,” Santiago said. “Take a look at everything you do and say, 'Why are we doing it that way?'”

For instance, he said, many firms have always provided an individual printer for each attorney, but that's not necessary. Others have always photocopied checks to keep on file, he said, but in the age of online banking, that practice is outdated and wasteful.

“There aren't any huge, gigantic wins… but I think in all firms, there's 10 or 15 or 20 smaller things” that could be cut, Santiago said. “It's the little things that slowly bleed you to death.”