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By David Bilinsky and Laura Calloway
When looking at profitability, a lot of law practices seem to take the "what you don't know can't hurt you" approach, viewing that old chestnut as an excuse for inaction rather than the warning it really is. Take the case of file management and retention (which latter term is really a euphemism for destruction).
Since we began writing this column, we've encouraged you (rather relentlessly) to prepare a budget for each year and to track your actual expenses against it. There are, however, many items within a practice that frequently don't even make it into the budget. Or, if they do, they are deeply buried, their true nature hidden.
One of these items is the cost of managing and retaining your files—or, to put a little finer point on it, of not managing and purging your files, most particularly hard-copy ones. Be warned: Those huge stacks of giant manila folders that are overflowing with papers take a bite out of your bottom line. To help you understand what you're dealing with, let's look at how to ferret out and measure these hidden costs.
Probably the most obvious and easy-to-get-a-grip-on cost of file management and retention involves the physical space used for storing records. In fact, if the firm rents off-site storage for its closed files, the cost of that rental space will be in the firm's budget, or on its income and expense statement, as part of the firm's housing overhead. When it comes to on-site storage space, however, things get a little murkier.
Most firms aren't likely aware of exactly how much square footage within the office is taken up by file storage, what the per-square-foot cost of that space is, or whether that space could be used more effectively. Sure, you may know those factors for the firm's "official" file storage room—but what about all the square footage that lawyers typically consume by retaining old and closed files in cabinets (or stacks) in their individual offices?
Unless you do a "cost-center" analysis of expenses such as these, it's difficult to know how they fit into your overall expense picture, and whether there is opportunity for savings. For firms in Class A or other high-cost-per-square-foot office space, the expense of storing paper files and other client property needed for preparation or trial alone can be considerable. But retaining old papers that could be digitized, purged or stored off-site is tantamount to paying top dollar for square footage that's supposed to be office space but is really a file storage system.
Even if you think you're making effective use of off-site file storage, and your budget and income and expense statement contain a line item for it, there are other hidden costs to consider in this area. For example, think of how often files are sent or retrieved from storage. What is the average cost each time you need to reference a file in storage—factoring in not only the "hard" cost but the staff time as well? Also, is this expense borne internally, or is it treated as a disbursement to the client? If it's treated as a disbursement, does the actual charge at least roughly equal your total costs of storage and retrieval (since this is presumably a benefit to the client)? You're beginning to see how the hidden costs start to mount, right?
Factor in how much space you have dedicated to file management and storage and what it probably costs you, and you have another question to consider: Is it all in line with what you actually need? Let's address that question next.
In their book The Lawyer's Guide to Records Management and Retention (ABA, 2006), George C. Cunningham and John C. Montaña make this compelling point:
Okay, let's do some math. At 12 linear feet and a square-foot cost of, say, $30 per square foot per year, your in-office storage costs would be: 12 x $30 = $360/year. That's hardly much to worry about. But let's change the assumptions somewhat.
If you're like most lawyers, you might keep at least two copies of everything that ever came through the office door and have never purged, much less destroyed, a single file. As a result, you may well be using a lot more space, as well as incurring costs for equipment such as filing cabinets or other storage containers, than you need to. Often that space and equipment, and the funds associated with them, could be much more profitably allocated—say, for a paralegal or associate to assist you in your practice.
Another hidden, and difficult to quantify, cost is the value of time spent looking for records. Many lawyers, particularly those in solo practices and small firms, appear to employ a file management system that involves stacking paper files all over the desk and floor. They seem to believe that they'll never lose or forget about anything if they just keep it in plain sight. The problem, of course, is that they often can't put their hands on something when they need it, and their staff members and other lawyers in the firm certainly can't find it if they need it. Usually time spent looking for a misplaced document or file can't be charged to the client, so it never gets recorded and thus becomes an invisible "leak"—meaning it's almost impossible to find or stop.
Let's do more math. Say you bill at $150 per hour, work the average of 231 billable days per year, and spend only 15 minutes per day looking for things that haven't been properly filed and returned to the appropriate storage area. You have cost yourself $8,662.50 as a result.
Extending this cost over a 15-person firm, the leak rises to the order of 15 x $8,662.50 = $129,937.50. This is not chump change! Moreover, remember that plugging a leak like this means you can automatically increase your practice's profitability without working any harder.
However, what this really comes down to is the most intangible but probably most important cost of all: the loss you incur as a result of the inability to provide your clients with the information that they need when they need it. The true cost of not being in control of your files and your information is the loss of credibility—along with the fact that you may be undercutting your clients' records management efforts if your own efforts are out of line. Consider that this intangible cost may some day be made tangible in the form of a malpractice judgment and you see it's time to take action.
So how can you proceed to plug the leaks and gain control of the costs in your document management? Look at the benefits of moving your files to a "paperless" online system—one that makes all your clients, other contact information, documents and calendar dates available in electronic form at your fingertips from your desktop. There are many legal document management software programs that can assist in this task. If you haven't already looked into one, today is the day to investigate the cost-effectiveness of converting your files to a paperless system rather than staying in the paper paradigm.