Navigating the Complexity of Billing Guidelines

Navigating the Complexity of Billing Guidelines

The purpose of outside counsel guidelines, or billing guidelines, ought to be to strengthen the relationships between corporate counsel and law firms.  Such guidelines are intended to be a level set that establishes an agreement between client and service provider for legal value – the best possible outcome at an efficient price.

Unfortunately, these guidelines have a tendency to devolve into mechanisms primarily focused on cost-cutting – a long list of things for which clients say they will not authorize payment.  Outside counsel guidelines have become a “counterproductive combination of micromanagement and blunt instrument,” according to D. Casey Flaherty, a former corporate lawyer, turned entrepreneur, and an early advocate of fostering technology skills in legal.

100 Pages of Legal Cost Cutting?

Law firms we speak with say these guidelines usually cover three primary categories:  invoicing, new matter assignments or intake, and general corporate policies for security and diversity, for example. Yet those three categories can grow into sizable volumes that some large law firms say inhibit their ability to act in the best interest of the client.

“For example, some general counsel impose 20, 40, or even 100 page outside counsel guidelines, much like governments erect more and more regulatory boundaries,” wrote Ken Grady, the Lean Law Evangelist for Seyfarth Shaw LLP, in a piece titled, Indifference and Micromanagement: Twin Evils.

And that’s just one client.  For a big law firm with dozens or even hundreds of clients, managing 40-page guidelines from each is an incredibly complex endeavor.

Too often this complexity causes delays between work-in-progress (WIP) and cash flow or realization.  This is because invoices are passed back and forth between partners, attorneys and the law firm billing department – all in an effort to comply with a client’s guidelines.

This business problem is exasperated for large law firms, when after all that effort, an invoice submitted to a client is flagged or kicked back by a client’s e-billing system, over a line item rule that was mistakenly overlooked in the process.

Citing research from the International Association of Defense Counsel’s (IADC) second annual Inside/Outside Counsel Relationship Survey, the publication, General Counsel News highlighted open-ended commentary that underscores the frustration inside law firms. For example, the publication reported “an outside counsel respondent suggested that in-house counsel should ‘eliminate budget requirements when a case is new and remove absurd billing guidelines.’”

Spending Volume Makes Guidelines “a Necessary Evil”

Yet clients have a valid perspective too.  For the last several years, corporate legal has been under intense pressure from business to reduce spending, or at least maintain costs. To their credit, long-held beliefs – that legal work tends to be complicated, unmeasurable and therefore unpredictable in price – have cracked.

More to the point, there’s big money at stake. According to the 2015 HBR Law Department Survey, “The median total legal spending was $27 million worldwide” or more than double the median spend inside which was “$12 million worldwide.”

The challenge is that averages, even a median, hide the fact that the larger the company is, usually the larger the legal spend is as well. This is especially true when factoring rising litigation costs, a large bank, for example, can easily spend billions with outside counsel.  It’s obviously a lot of money and so the corporate legal desire to place parameters around what it will – and will not pay for, in an effort to control costs, is quite understandable.

Outside counsel guidelines may be far from perfect, but these agreements are “a necessary evil” in Mr. Flaherty’s assessment.

How to Manage Complex Billing Guidelines

In our discussions and surveys with our large law customers, we’ve discovered that for all the complexity, many law firms don’t have a consistent process of managing guidelines.  Some law firms even go as far as to maintain physical copies of agreements in binders on their desks and review these in conjunction with invoicing intervals.

This lengthens the process of getting invoices generated, approved and distributed to clients.  It adds substantial overhead in both valuable time and staff to manage the process.  Worse still, ad hoc processes risk missing important aspects of the billing guidelines and potentially jeopardizing the client relationship.

However, billing guidelines aren’t going away in the foreseeable future.  To that end, there are several ways law firms can reduce the strain in managing complex rules, including the following:

  • Build a process for managing guidelines. Many law firms already have processes in place for new client intake or in taking on new business from existing clients.  Analyzing, distilling and publishing guidelines to a central location in order to communicate the essentials to a law firm team is simply pragmatic. Often, these rules can be categorized to find common components among different clients. Classic examples of this range from service level agreements around responsiveness and reporting – to the day-to-day requirements of which staff or attorneys can work on an account and at what billing rate.
  • Make a case for alternative fee arrangements. AFAs continue to seep further into the legal community at the behest of clients and fierce competition. Some of the law firms we’ve spoken to suggest flat fees can potentially reduce the requirements for billing guidelines since they are designed for an hourly billing model.  With the promise of new and modern technology linking case management with practice management, law firms are in a much better position to gather the data required to get flat-fee pricing right. This would stand to transform AFAs into to a welcomed law firm solution and even a competitive advantage.

Process and Tech:  Faster WIP to Cash

The benefits of applying just one or a combination of all three of these suggestions are all aimed at improving billing accuracy and reducing invoice rejection.  In trade, the law firm receives payments faster, which in turn has a positive influence on realization.

Most importantly of all, a standardized process and system for managing guidelines enable law firms to deliver a higher level of customer service which can measurably improve the client relationship. That would take us all the way back to the very purpose of what outside counsel guidelines are intended to achieve.

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