What are pass-through costs?

Pass-through costs are client invoice line items that attorneys include in addition to costs associated with billed hours. These include additional costs incurred by the firm in handling the matter that the firm wouldn’t otherwise be paying for outside the context of that particular matter.

Typically, the business units within a firm make decisions regarding which costs to pass through to clients, and which to bake in to the cost of doing business.

When to pass through costs

When determining whether to pass through costs to the client, start with the question: would the client otherwise need to go to the market and buy the solution themselves? Can the firm get a volume-based discount for that software and pass those savings on to the client? If the answer is yes, these kinds of costs can be passed through to the client.

Examples of these kinds of solutions include:

• eDiscovery tools
• Transactional due diligence AI tools

If this solution is instead something that improves the quality of services the firm provide or makes the team more efficient, then the answer is no—these costs should be baked in to the firm’s cost of doing business.

Examples of these kinds of solutions include:

• Closing and transaction management tools
• Document management solutions
• Think of these like non-software line items like office rent, physical materials, etc. (i.e., overhead)

To realize ROI, don’t tax early adopters

To see efficiency and quality gains from solutions introduced by the firm, attorney adoption is critical. Widespread adoption is unlikely when costs are passed through to clients. Why? Giving potential users a decision point causes friction, and ultimately discourages use. When passing through costs, associates need to decide:

• Can I get by without this?
• Is this transaction or matter large enough to require this tool?
• Do I have permission to incur additional costs on the client bill?

Inevitably, some attorneys will decide to opt out. This defeats the purpose of the software: if the firm taxes early adopters, it’ll struggle to get ROI on any product.

No associate at a modern practice should have to do things manually when a better solution exists.

-Jim Shoemaker, Chief Legal Operations Officer at Miles & Stockbridge

If modernization is a priority, so too should be encouraging — rather than inhibiting — new software adoption.

Instead, ask vendors for adoption-based pricing

Every new technology purchased for one of the firm’s practices changes that practice’s unit economics. Thus, knowledge management and innovation leaders are tasked with making smart bets on which technology solutions will have a tangible ROI to demonstrate knowledge of the practice group’s workflow, and build trust for the next software solution that they wish to introduce.

In lieu of passing through costs, some vendors (like SimplyAgree) design pricing around adoption. That means the firm can stair-step in to the full subscription, avoiding the need to go “all in” when introducing a new software solution. Instead, adoption-based pricing allows firms to start small, incentivizes the vendor to work the firm to achieve its ROI goals, and only grows as usage increases and the firm can realize quality and efficiency returns.

Want to watch the full conversation? Check out the recording here.

We hold webinars like this one every week. You can sign up for them here.