If asked to identify only one point of frustration in law firm management, many senior attorneys and managing partners might say that it relates to how they invoice, and are paid, for their work. Firms work laboriously to prepare and submit an invoice, only to have it initially rejected by a client’s e-billing system, and then ultimately adjusted downward by the client or the client’s auditor. This all-too-common occurrence is a perfect recipe for frustration, and for good reason.
The premise of this article is that there is a misalignment of expectations between client and law firm, one that leads to frustrations on both sides. However, as we will explore, there are practical steps that firms can take to address these issues, reduce frustration and improve their financial return on the entire invoicing process.
Speaking the Same Language
A core tenet of our belief is that firms and clients can occasionally speak past one another when it comes to some of the critical building blocks for a good relationship. We’ll touch on three examples today, those being:
• Quality: How clients and firms may differ in how they define it;
• Compliance: And how important it is to clients; and
• Process: How important to a client a firm’s process is.
To understand how clients have come to define these three terms, we have to examine the history of “legal spend management” and other strategies designed to give clients more control over the costs of their law firms and the outcomes that those firms achieve.
An Industry History
We generally refer to the history of legal cost containment strategies in four phases: The Creation, The Great Debate, The Shift and Present Day. Let’s look at what we mean by that.
Most attorneys practicing today had not even completed law school when the legal invoice auditing industry started in the 1980s. Stuart, Maue, Mitchell & James, Law Audit Services and Legalgard were three of the first companies to build a business helping clients to audit law firm invoices.
Clients liked what these companies could do for them. Each of these founding companies grew in size and revenue and did well. Many ultimately became larger software companies. An important point to emphasize, though, is that many clients have more than 30 years of legal invoice auditing under their belts.
The Great Debate
By the mid-1990s, law firms had begun to push back against the rapid growth of auditing. Focusing on a central question of whether the use of third-party auditors created a waiver of privilege, firms won a significant victory in a Montana Supreme Court ruling in 2000.
The Court ruled that auditors are not part of a “privileged community” or “magic circle within which confidential information may be shared without waiver of attorney-client or work-product privilege.” The Montana decision (and a subsequent Texas State Bar Professional Ethics Committee Opinion to the same effect) meant that clients were increasingly reluctant to use auditing services.
The Montana decision threatened the very existence of auditing companies. And so they shifted – to software. By putting software in the hands of clients (avoiding the use of third parties that might jeopardize privilege), these companies could re-invent themselves and continue to service their customers.
The number of software e-billing companies proliferated. Visibillity, TyMetrix, Allegient, TrialNet, Bottomline, CSC, Examen, Serengeti, Datacert, and many more emerged during this time frame. Some were former hands-on auditing companies; others were simply new software providers – all with powerful new technology designed to keep a law firm’s bill “in check.”
The Present Day
Today the legal cost containment industry is bigger than ever, but heavily consolidated, as large corporations have come in to claim their piece of the market. Wolters Kluwer has purchased both TyMetrix and Datacert; Bottomline Technologies took over both Visibillity and Allegient; Thomson bought Serengeti; LexisNexis got Examen.
Importantly for law firms, there has also been a marked and dramatic re-emergence of third-party auditing services. Realizing that the auditing software they had purchased could only do “so much,” corporate and insurance executives have found the hiring of third-party legal auditors to be very attractive. We predict that auditing services will grow much faster than software in the coming years.
So What Does This Mean For Law Firms?
Let’s remember that law firm clients can have up to 30 years of cost containment experience. They may have been using an auditing company, switched to software and then gone back to auditing. In other words, they have deep experience.
They also have very sophisticated technology. Billing rules and budgeting modules are more advanced; some companies use machine learning and fuzzy logic to spot issues with invoices. For law firms, it means that it’s harder and harder to keep up, but with the right technology and resources, it’s possible.
In addition, though, and very importantly, 30 years of cost containment initiatives have shaped the terminology clients use to define law firm performance. For example:
• Quality: When clients speak of quality, they’re not just referring to a well-argued motion or a well-credentialed law firm. They also mean the quality of the invoice. Is it a high-quality invoice, or just one that was put together using a traditional pre-bill process, and commonly reduced or adjusted?
• Compliance: When clients speak of compliance, they’re not just referring to how timely a status report is delivered. They are also referring to whether a firm can follow their billing rules, which are now increasingly complex. E-billing companies produce “compliance” reports for your clients, and high-adjusted firms can be considered to be both “noncompliant” and “of lower quality.”
• Process: When clients speak of process, they’re also referring to a firm’s process for ensuring the delivery of a high-quality, compliant legal invoice. They’re also interested in how firms describe their own practice patterns – information available to them in the invoices they are receiving. That information is also available to the firms.
What Then, Can Firms Do?
When it comes to just these three commonly misaligned concepts, we would recommend that all firms remember to include the quality of their invoices in a broader conversation around law firm performance. We would also recommend that firms tout their compliance levels as a reflection of high performance. Clients expect and demand quality and compliance in this arena, and firms should not avoid the conversation.
When it comes to process and billing data, firms should present a compelling story around their focus on invoice accuracy and the processes they use to ensure it. Firms should use their own invoicing data to identify performance, staffing, efficiency and outcome successes in order to build persuasive stories around it. For many clients, process is the key to success in their own businesses; they expect the same of law firms.
More Things For Firms To Consider
For firms that feel that they may not have a great story to tell out of the box, here are three exceptionally practical ideas to undertake (or have undertaken for you):
- Take stock of the current situation. Identify adjustment rates by either client or timekeeper. Put the right technology in place to quantify initial adjustments, appeals effectiveness and net adjustments for both payers and timekeepers in the firm.
- Analyze how each payer differs in behavior. All clients adjust invoices differently. It’s not the e-billing software that drives this, it’s the people using the software. Perform a historical analysis of each of your highest-adjusting clients. Categorize each reduction. Assign a dollar and percentage value in the aggregate and in each category.
It is imperative that a firm understand each payer’s review process. Do you know who actually reviews your invoices? Is it the client? A centralized invoice review team? An outside auditing service?
- Improve the process. Consider getting outside help. Educating timekeepers is difficult. Firms need to really take to heart the idea that they have to do what their clients do. Audit yourselves – with experts and technology – and create an audit function. Collect and analyze all of your invoicing data. Measure the results and make being in alignment with your clients’ expectations a real requirement of your business.
What Should Firms Not Do?
There are three things I believe firms often do that they shouldn’t. To change these habits:
- Don’t continue to do the same thing and expect different results. The legal cost containment industry is getting more sophisticated, not less. You can create an even playing field.
- Don’t treat invoice adjustments as a cost of doing business. When clients equate quality with invoicing compliance and process, it’s too risky. In a perfect world your invoices should never be adjusted. Firms can improve their processes and get better results.
- Don’t ignore the data available to you. There is a real opportunity to understand the behaviors of the people using the e-billing software. There is a wealth of information in that historical and ongoing adjustment data which firms can use to be well-prepared in improving their processes and their billing outcomes.
These straightforward and practical actions can help firms to address these issues, reduce frustration and improve their financial return on the entire invoicing process.