Where outside counsel billing guidelines and e-billing fall short

We recently spoke with a client who had received a large invoice from a law firm.

The total bill was much larger than they expected – and had budgeted – for that particular matter. To understand why the invoice was so large, the client turned to the data in Apperio’s legal spend management platform.

Immediately they could see the balance of the outside legal team was skewed. There were too many junior lawyers recording small numbers of hours. They could not be generating real value having spent so little time on the matter and it wasn’t clear why they had attended meetings with senior colleagues without contributing. The client presented the data to their law firm and asked them to remove the charges.

This anecdote is based on a true story and one that happens too often. That’s one of the reasons why outside counsel billing guidelines have grown in popularity in recent years.

The limitations of automated invoice review in e-billing

To assist in enforcing billing guidelines, some corporate legal teams have deployed e-billing software. E-billing can be effective at identifying billing practices that clearly violate the agreed terms. It will flag excessive billing rates, time entries by unapproved timekeepers, and highlight expenses that should not have been passed on.

Most billing guidelines will include prohibitions on charging for travel time unless work is being done during the travel or the travel has been pre-approved. Sometimes charges related to travel are justified and unavoidable, but this means that practically every charge for travel is flagged and corporate counsel still has to put in the time and effort to adjudicate the flag.

Any machine-based interpretation of the guidelines will either need to be configured permissively, so that only clear infringement is flagged, or conservatively so triaging the flags consumes valuable attention.

Our anecdote is an example of where billing guideline rules can be insufficient. Approving fee earners in advance is time consuming, and yet still does not ensure that a matter has the appropriate mix of time and skills. However, a glance at a visualisation of time on a matter can instantly trigger in-house counsel’s pattern recognition of what good looks like. For example, billing guidelines and e-billing aren’t a big help if the billing rates are technically accurate – yet it’s a partner, rather than an associate, billing most of the time on a relatively straightforward legal matter.

Blunt instruments draw time, focus and acrimony

Our internal analysis of the market suggests e-billing tools can potentially save corporate counsel 2-3% of total legal spend annually. However, such savings also come with opportunity costs, since e-billing is a blunt instrument. Rejecting invoices creates acrimony with law firm partners, takes up in-house time to mediate, and most importantly, is incapable of producing insights that drive better overall legal decisions.

The client referenced in the anecdote above didn’t have automated billing guidelines. While they may not have approved some of those junior timekeepers if they had, invoice-by-invoice flags can’t provide the same insight they found in a few clicks in their legal spend management tool.

That’s one of the drawbacks that accentuates how legal spend management differs from e-billing. Attention is focused on the flags thrown by the automated review of e-billing at the expense of missing the more meaningful levers to drive efficiency.

More meaningful data for more efficient legal spend

What’s the alternative? Rather than looking at a list of flags, in-house teams should look at legal spend attributes. This starts with making sure spend is attributed and categorised by budget and type. With a little effort upfront, corporate counsel can report back to the business how much the business is spending on legal matters over time.

In-house lawyers can use this data to identify opportunities for a business unit or department to drive efficiency. For example, a business unit that’s spending too much on routine contracts could yield savings by standardising on a self-service platform, bringing the work in-house or outsourcing to an alternative legal service provider.

Better pricing and relationships with law firms

This approach also raises the potential to work better with law firms. By grouping matters together in analysis, you can produce the average cost for a matter type. That information can be used to negotiate fixed fees. Many law firms would readily agree to a 10% discount on an average price-per-matter for a client that guarantees 1,000 such matters over the next year.

Clients can and should be transparent with their law firms about how they arrived at those price points. Transparency enables a law firm to see the work is profitable and allows them to get a greater share of a client’s business. In turn, clients benefit from a better relationship with their firm and a discount that has an effect on margins over and above e-billing.

Similarly, because the legal spend management provides visibility into work-in-progress (WIP) and unbilled time, law firms have access to the same single source of data. A proactive law firm can tally up work on matters that would be suitable for fixed fees and make a pre-emptive pitch to clients.

This both endears a firm to a client while also presenting a law firm with several competitive opportunities. Whether or not it’s the client or the law firm that comes with such a creative pricing idea first, it remains a vast improvement over a large invoice that catches the client by surprise.

See Apperio in action:  The Apperio platform provides in-house legal teams with a proactive approach to legal spend management. We’ve already partnered with more than 200 global law firms to provide clients with insight into WIP.  See for yourself and schedule a live demo by emailing info@apperio.com.

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