Activity-based costing (ABC) is hardly the alpha-to-omega of legal cost reporting

In 1987, Robert S. Kaplan and William Bruns introduced to business managers the tool of activity-based costing (ABC). The effort purports to trace indirect costs, such as legal ones, back to individual products or services, according to Edward Russell-Walling, 50 Management ideas your really need to know (Quercus) at 53. It sounds enticing to try to attribute legal costs to some output of a company (See my posts of Dec. 3, 2007: companies don’t tag legal fees to corporate initiatives; June 16, 2006: an application of ABC to e-mail; and April 12, 2006: applied to Total Cost of Electronic Discovery.). Too wonderful, however, to be realistic.

The ABC process requires arbitrary starting and ending points. What does that mean?. If a law department helps its client set up a company in a new country, it is entirely possible to track internal time spent on that assignment and multiply that time by some fully-loaded cost. It is also straightforward to add in the costs of external counsel.

But do you also chip in something for the cost of the matter management software that lets you track all this? Do you attribute something to subsequent, associated legal costs? Should you account for whatever was done in the past that enabled you to find and choose the local law firm?

The answer to each question like this is that you have to pick some point in the past beyond which you ignore investments, and you need to stop projecting costs at some point from this moment on out. Both choices are arbitrary.

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