Early adopters of electronic billing include most of the major insurance carriers. But in the past year, we have seen electronic billing initiatives move well outside the boundaries of repetitive or commodity legal services often associated with insurance defense work. This has included major pieces of "bet the company" legal work being performed by AmLaw 100 law firms, where invoices must now be submitted to the corporate client electronically.
How Does E-billing Work?
Most of the electronic billing vendors offer four core components to their service/system:
Audit capability for the invoice being submitted. Essentially this means the corporation can filter a law firm's bill to ensure: arithmetic calculations are accurate, expense reimbursement rules are being followed, outside counsel guidelines are adhered to, only approved timekeepers are working on the matter and hourly rates reflect the agreed upon fee arrangement.
Workflow/routing. Once an invoice passes through the audit module, it is electronically routed to the appropriate in-house lawyer(s) or administrative staff to review, approve and pay.
Reporting/benchmarking. Once invoices are approved they are stored in a database. The database can then be queried for trends, analysis and metrics, and benchmarks can be applied against the data.
Integration with other systems. Integration of e-billing systems with corporate matter management systems or corporate accounts payable systems is common.
Implications to Law Firms
Electronic invoicing is not a short-term trend relegated to a handful of early adopters. Therefore law firms need to understand how e-billing works and leverage any benefits that might exist for them. Law firms should begin by considering the following:
Make sure your financial accounting system can produce a LEDES 2000 bill. LEDES is the industry standard data format for electronic exchange of legal invoices. Most good time/billing vendors can now produce a LEDES 2000 bill.
Target litigation work first. By its very nature, litigation matters fall into distinct phases and tasks. This makes "coding" of time entries easier. The American Bar Association has defined industry standards for litigation known as the ABA Task codes. In some instances the corporation may have slightly modified these codes.
Expect your litigators to learn the ABA codes and phases. This may seem like an unfair expectation at first, but have you ever met an internist or medical specialist who didn't know precisely which codes insurance companies paid for during a doctor visit? Medical services were "codified" by insurance companies in the late 1980s and early 1990s and every doctor knows those codes by memory. When legal invoices are not coded correctly they are rejected by the e-billing system. It is in the best interests of the law firm to have lawyers code the time entry correctly from the beginning. Some time and billing vendors offer time entry screens that assist the lawyer in using the codes correctly. A few even disallow certain words or phrases in narrative descriptions for codes that don't encompass that activity.
Request access to the benchmark/metric data. Over time the corporate purchaser of legal services will build valuable metrics and benchmarks about your law firm's performance and efficiencies. Request that the information be shared with your law firm. You want to be able to see how your firm compares to other law firms performing similar legal work. Access to this information can help you identify where opportunities exist to improve legal service delivery and where you excel relative to the competition.
Don't ignore transactional work. Transactional legal work is more difficult to "codify", but is not fully exempt. Even the ABA has had difficulty defining and agreeing on phases and tasks for transactional legal work. Therefore industry agreement on standards has not evolved as quickly. However, certain types of transactional work-bankruptcy, real estate and immigration-are receptive to e-billing efforts due to their repetitive nature.
Benefits to the Corporate Law Department
The potential upside for corporate law departments is significant. Corporate law departments have three primary roles: (1) to know the business better than outside counsel; (2) to alert business executives to risk and help them manage it; and (3) to control outside legal spending.
It is that third role-controlling costs-that e-billing addresses and in which it can add strategic value to a law department with significant outside spending. We see the benefits, which include:
Audit capabilities for legal invoices. Paper-based legal bills never lent themselves to quantitative analysis by in-house counsel. And third-party legal auditors often created an adversarial relationship with outside counsel firms. E-billing allows the corporation to define the degree of scrutiny applied to a firm, a lawyer, a class of cases or every case. It enables in-house counsel to measure everything from gender and racial diversity of lawyers working on a case to how a firm staffs and conducts depositions.
Streamlined process/reduced paper flow. Paper-based legal invoices are not only difficult to analyze, they get lost, get photocopied much too often, take up valuable filing cabinet space, are difficult to find at a later date and the list goes on and on. Efficiencies are gained not just by eliminating the paper, but also by improving the process of paying an invoice.
Lower costs. E-billing vendors' marketing literature suggests the internal cost of paying a single legal invoice ranges from $40 to $50. They claim to be able to reduce that to less then $1 per invoice. Although this is most likely an overly optimistic estimate, it's still worth noting that improving the process can result in significant internal cost reductions.
Metrics, metrics everywhere! As pressure from the board of directors, chief executive officer or chief financial officer builds on general counsel to control legal spending, metrics will only become more important to law departments. The challenge for many corporate law departments is defining valid metrics for legal services. Truth be told, not many in-house counsel even know where to begin. Requiring outside counsel to submit bills electronically is a great place to start, but it's only the first step of an ongoing process that will need constant fine-tuning.
Electronic billing can benefit both buyer and seller of legal services. While some e-billing initiatives are promoted as vehicles for "partnering" or "faster bill payment," to date few law firms have realized those types of benefits. Electronic billing certainly provides for closer scrutiny of outside counsel invoices, but for law firms that already adhere to agreed upon fee arrangements and billing guidelines that is not a problem.
However, great service and high quality always get noticed. E-billing now creates the opportunity to demonstrate the value and efficiency of a law firm in a quantitative manner. That gives law firms a new opportunity to differentiate themselves from the competition, and law departments a new method to objectively evaluate outside counsel.
David G. Briscoe is a senior consultant in the Altman Weil, Inc. technology services group. He specializes in strategic technology planning, acquisition and implementation, advising law firms and law departments throughout the U.S. and abroad. Mr. Briscoe can be reached at (610) 886-2000 or dgbriscoe@altmanweil.com.