Burning law firm question: what will clients do with our WIP and accrual data?
When we speak to law firms about Apperio and legal spend management, we typically get two types of responses. Those firms that are on board with providing their clients with transparent visibility into work-in-progress (WIP) and accruals and those that have natural reservations.
In this scenario, we start by listening to their concerns and ascertaining the benefits for their law firm which often include invoices being paid in full and more quickly. These aren’t just theoretical benefits our marketing department just slapped on the product label either. We have measured these in experiments like this one with Dentons.
Yet some law firms will counter with “we don’t have a problem with our invoices being paid”, or “we’ve heard this all before – that’s what the e-billing solution providers used to say and look what that got us.”
Those are valid concerns and when we dig into these, we usually find there are deeper reservations. These are often conveyed in a single question: “If we provide this data to clients, how are they going to use it?”
This post details what clients tell us about the spend management challenges they face and their goals for improving transparency around WIP and accrual data.
It’s not the price tag it’s the predictability
Most in-house teams tell us they aren’t especially price-sensitive to the cost of good outside counsel, but they are sensitive to unexpected, and unexpectedly high, bills from law firms. Predictable legal pricing is more important than a lower cost. It reflects poorly on the legal department to give the business a cost estimate and come back later to request more money to cover a higher cost.
This problem is compounded by the fact that when legal departments are reviewing an invoice, it’s very difficult to connect a line item back to the work that’s happening in the matter. When the size of that invoice surprises them, they are relegated to employing the only negotiation leverage they have left: picking over the line items for billing guideline violations.
Invoices as a trigger for bargaining sessions
We often see this in high-end legal work, such as among our private equity (PE) customers. When they begin an M&A transaction, the deal team instructs a law firm to help with due diligence, amongst many other tasks. The law firm provides a cost estimate and the in-house team, in turn, presents that estimate to an investment committee, which approves the expense. Then a few weeks later, after the deal closes, the invoice comes in, and to the GC's surprise, it’s £200,000 higher than the estimate.
The amount of money isn’t the issue. That’s a rounding number on a transaction that can range in the billions. The issue is that the in-house teams must go back to the investment committee and justify the increased budget. This is a difficult situation on its own, but GCs often feel like it’s a struggle to get the information they need to make their case effectively.
This creates two problems. First, it fosters a perception that the GC doesn’t have a handle on their organization’s legal work, costs and priorities. Second, speed is important to a PE firm working fast on a deal; they don’t want to call the investment committee back to rehash a budget they thought had already been settled.
The result is the client starts haggling over fees to bring the invoice down nearer to what was originally approved. The law firm often writes that amount off – regardless of whether it has trouble getting invoices paid – to avoid upsetting a profitable client with high-value legal work. Instead of being a formality, the law firm invoice becomes a trigger for a bargaining session.
What clients will do with law firm WIP and accrual data
This brings us back to that original law firm line of questioning – what will clients do with the data? Below are the answers we often hear from in-house lawyers.
1. Refocuses matter status conversations on legal work instead of invoices.
Access to law firm WIP and accruals immediately moves the conversations away from invoices and payments and refocuses the team’s attention on the strategic task of managing the legal work being performed. This gets them out of reviewing line items and running e-billing rules – a process that the in-house team doesn’t enjoy any more than law firms.
Law firms that provide this level of transparency don’t have clients that wonder what’s happening. They can see it anytime they want from beginning to end. If an anomaly exists, the client can see it and initiate a proactive conversation at that point. By the time the invoice comes around, the client already knows what to expect.
The net effect is beneficial to both sides: invoicing becomes a formality – and perhaps a chance to articulate the value of services rendered. Law firms working with these clients, in this way, find it refreshing to not have all their invoices kicked back every time.
2. Arms the in-house lawyers with the data they need internally.
Clients need this transparency to function internally. In some organizations, spending isn’t centralized through the legal department. This means another business leader may be instructing the law firm, but the GC is still held accountable for total legal spend. Imagine their surprise when they receive a large invoice for a matter they weren’t involved in instructing.
In high-end markets like PE, this dynamic evolves as a trilateral relationship among legal, finance and deal teams. Investment managers may instruct the law firm directly, finance counts cash flows in and out, and the legal team is again held accountable for total legal spend. When the actual budget exceeds the forecast, the whole organization is looking at the legal department for answers and they are largely flying blind.
Providing visibility into WIP and accruals arms the in-house lawyers with the data they need to manage the legal department’s business internally, in real-time. Without it, they have no other choice but to scrutinize invoices and cull through line items.
3. Stronger relationships between clients and law firms
The clients we speak with genuinely want strong ties with law firm partners; they want to trust that their outside legal team is truly working with their best interest in mind. It’s true that panel consolidation might yield better billing rates. But it’s also true that it’s just easier to send more work to fewer outside partners when they have a strong relationship built on real transparency – not just talk.
This is the way clients are thinking about legal spend management. It is a proven path to a stronger relationship and clients realize they can’t do this by redlining law firm invoices with e-billing. Getting invoices paid faster – and in full – is nice but in the grand scheme, there’s a whole lot more at stake.
Image credit: Unsplash