August 20, 2019
By Kevin CohnReading Time: 5 minutes
If your organization is spending seven figures each year with external legal service providers, chances are you sometimes struggle to spot legal billing violations.
This is understandable given the volume of invoices to be reviewed, the density of information on each invoice, and the lack of time in-house teams can devote to the task. But these violations can easily add up to 10% or more of the total invoice amount — even if you’re using a traditional e-billing system or invoice review vendor to manage compliance.
To get a better sense of where your next cost savings opportunity could be hiding, here are five legal billing violations that we frequently see eluding even the most diligent legal departments.
Work in excess of 8 hours per day
The Brightflag team’s all-time favorite legal billing violation is a customer being invoiced for 26 hours of work by a single timekeeper — in a single day. (Must have been a great multi-tasker!) Most organizations now impose a limit of eight to 10 hours of work per day per timekeeper, both to ensure that quality of work remains high and to avoid incentivizing a culture where billable hours are maximized at all costs within their partner firms.
Enforcing this simple guideline can be deceptively complex. Invoice line items may not be presented in chronological order, requiring the reviewer to turn back and forth to count the number of hours per day. There are also likely multiple timekeepers on each invoice. Then, some law firms may insist on submitting narrative descriptions that span multiple days of work.
All these factors contribute to a tendency for reviewers to settle on a number that’s “close enough.” On larger invoices, though, that latitude may translate to thousands of dollars in unnecessary expense.
Modern e-billing systems can now address this issue by automatically comparing each timekeeper’s hours per day to your organization’s agreed limits, identifying violations you can act on. Ideally, these tools enable you to approve the invoice with reductions, or reject the invoice to be corrected, without any human intervention. As a result, you genuinely can maximize legal billing compliance while minimizing administrative work.
Ratio of partner to non-partner time
Corporate legal teams invest considerable time and effort into conducting panel reviews. One common area of focus is agreeing on appropriate hourly rates for each timekeeper. Far less attention, however, is given to the ratio of partner time to non-partner time on any particular matter. So while an organization may have negotiated hourly rates with a particular blended rate in mind, this target can be difficult to match in practice.
As with the previous example, spotting this legal billing violation manually would require a significant amount of data entry (and creative maneuvering) in Microsoft Excel. Many legal teams end up ignoring the problem, as a result, except in extreme circumstances. This is another missed opportunity to better manage costs. But just as important, the lack of visibility into who is doing the work now will make it tougher to make informed resourcing decisions in the future.
Most invoice review systems summarize work performed by timekeeper seniority, with the best tools tracking trends over time and alerting you to invoices on which the ratio of partner time to non-partner time is unreasonable. From there you can start to benchmark law firm performance by blended hourly rate.
Excessive internal communication
It’s understood that law firms need to communicate internally in order to deliver quality results for their clients. At the same time, some law firms seem to be far more efficient in their collaboration than others. For this reason, most organizations cap billable internal communication at 10% of each invoice to incentivize the right behaviors.
But while “internal conference with R.G. and C.T.” is easy enough to spot on an invoice, calculating the percentage of fees that this represents and comparing it to your billing guidelines is cumbersome at best. The problem only compounds when law firms find — shall we say — creative ways to describe internal communication. At this point, even traditional e-billing systems have a hard time keeping up.
A.I.-based approaches are starting to find more success in identifying and correcting this common legal billing violation. Machine learning can identify obvious examples of internal communication (think keyword searches for “internal”) as well as less obvious examples that otherwise would be missed. The result is significant cost savings through stronger enforcement of the intended rule.
Multiple participants in meetings
One benefit of outsourcing matters to law firms is gaining their expertise and experience in a very particular practice area. As a condition of the higher associated hourly rates, clients have a reasonable expectation that the lawyer assigned to the matter will be largely self-sufficient. So their billing guidelines tend to permit only one participant in each meeting or call to bill for his or her time (usually the most junior timekeeper).
In cases where law firms have multiple participants in meetings, the corresponding narrative descriptions rarely follow one another on the invoice. This means that reviewers have to keep track of the descriptions they’ve read, referring back to earlier line items and pages to cross-reference. And if each timekeeper happens to use different wording to describe the same meeting, even a diligent reviewer can miss the duplication.
Once again, A.I.-based invoice review solutions offer new hope. Because machine learning doesn’t depend on matching exact words or phrases, it’s far more likely to correctly identify meetings with multiple participants. These systems can then apply an organization’s guidelines to invoices automatically by, for example, removing fees associated with all but the most junior timekeeper’s line item for the meeting.
Incorrect tax applied
Legal services are subject to taxation in most every business territory. Naturally, organizations will want to pay not too little, as this would be a risk to the business, and not too much, as this would be an unnecessary expense. Most reinforce this desire with billing guidelines that require their law firms to submit invoices with taxes correctly calculated prior to their being paid.
This process is a steep challenge for legal teams operating in multiple jurisdictions. It’s all too easy for a law firm to apply an incorrect tax rate, or for an invoice to be reduced without the tax being recalculated.
These simple errors can introduce significant friction into the relationship between the legal and finance teams. And in this scenario, your software may not come running as readily to your rescue.
Most e-billing implementations are centered in the United States — a country in which legal services aren’t subject to taxation. As a result, many tools on the market still lack basic functionality for managing global tax compliance. Those with a more worldly perspective, on the other hand, are now able to synchronize tax rates with finance systems of record, check legal invoices automatically for compliance with these rules, and return non-compliant invoices for correction.
Now that you know the ins and outs of each type of violation, here are five actions you can take to stop errors from slipping through your system:
- Organize your invoice review workflow so the people most familiar with the work performed are given an opportunity to spot discrepancies. Think beyond seniority level.
- Discuss variations in accounts payable practices with your finance team. For example, some regions may require corrected invoices versus short-paying invoices.
- Set clear expectations with your law firms regarding billing enforcement and dispute resolution processes. Structure will help sanity prevail.
- Use an e-billing system that’s customized to your organization’s own legal billing guidelines — ideally one that goes deeper than basic keyword matching.
- Monitor billing behavior by generating regular reports on invoice compliance and discuss the results with your law firms. They may appreciate the data more than you think.
Controlling spend is one of the clearest indicators of operational efficiency within corporate legal departments. It’s also a continuous fight that won’t be won with a single tactic. By focusing first on stronger billing compliance, though, you’ll position yourself for faster progress.
Whether spotted violations spare you $100 or $1 million next month, any cost savings are a positive result your colleagues can recognize. At the same time, law firm partners will value the predictability that comes from precise rules and consistent responses.
From GC and CFO to in-house attorneys and outside counsel, you’ll start creating powerful advocates for legal ops innovation.
Brightflag’s solution for better billing starts with A.I. trained to interpret the true nature, cost, and value of work described in legal invoice narratives. The results are then automatically compared against your billing guidelines to reveal potential cost saving opportunities. Over time, this creates a collection of data-backed insights you can use to inform everything from pricing negotiations to quality of service evaluations.