If you picked “the law firm,” you may be in for a surprise. That’s because more companies are looking for ways to optimize their legal spend by dictating payment terms to law firms.

It all started in the 1990s when the in-house legal departments of big insurance companies and banks decided to take more control over their legal budgets, particularly for commoditized services like general liability. By specifying requirements for invoicing legal services, these companies wanted to cut costs, get better service and make better decisions about what to outsource. Specifically, they wanted to avoid:

• Spending beyond the authorized budget
• Duplicated time charges
• Billing for disallowed expenses
• Inefficient work delegation, such as under- or overqualified attorneys working on matters
• Excessive bundling of tasks and vague work descriptions

Clients communicate billing requirements through outside counsel guidelines (OCG), a document that defines what the law firm can or cannot bill for, how much can be billed for specific services, the experience level of attorneys working on matters and many other aspects related to quality, cost and delivery. OCGs can also put caps on certain types of legal work and law office activities that can be billed for and disallow certain miscellaneous expenses.

As a result, more clients are driving the billing process. “Sophisticated consumers of legal services are definitely in the driver’s seat and dictating billing practices,” says John Remsen Jr., President of The Remsen Group and an expert on law firm management. “It’s something clients have been driving for a long time. Insurance companies in particular are brutal when it comes to coding, auditing and monitoring your bills. It’s done their way, to their specifications.”

“For me, it was one of those things I never gave much thought to until it was in front of me to manage. At that point, it’s almost too late. Unless you’ve thought about it and anticipated it, by the time it gets to you, you’re probably already behind the ball.”

It’s something legal managers of all firm sizes are going to need to become familiar with, says April Campbell, JD, ALA’s Executive Director and a former administrator and operations director for law firms of various sizes, as businesses with as few as 200 employees are now considering e-billing. “It’s no longer just the big corporations that have OCGs and billing requirements.”

BIG RISKS

E-billing is nothing new, but its use is trending upward. “We continue to see an increase in corporate clients deciding to move to e-billing, and we’ve also heard that from our law firm clients,” says Marie Burgess, Senior Director of Product Management at Aderant, a technology company specializing in helping law firms navigate the e-billing landscape. 

To enforce their guidelines, clients use automated e-billing portals. Firms submit invoices online and the e-billing system reviews each line item, rejecting anything out of compliance.

The big risk is in the rejections. By not complying, law firms risk getting paid late, not getting paid in full or not getting paid at all. Law firms can appeal rejected line items or short payments, but that can take time — further delaying, or possibly forfeiting, payment. Unfortunately, many law firms absorb these rejections as part of the cost of doing business rather than organize their billing processes around compliance.

Besides enforcing compliance, e-billing gives companies more visibility into their legal spend, the work delivered and the ability to compare the quality and cost of service among their law firms. As an automated system, e-billing is also used to extract data for analysis. Clients review billing data to track several metrics to help them compare firms and individual lawyers by type of matter and jurisdiction. Common metrics analyzed can include the time from case opening to close or average settlement.

A LACK OF AWARENESS

The main challenge with OCGs and e-billing is that many administrators, attorneys, managing partners and other stakeholders aren’t aware of the content or gravity of the guidelines.

“For me, it was one of those things I never gave much thought to until it was in front of me to manage. At that point, it’s almost too late,” says Campbell. “Unless you’ve thought about it and anticipated it, by the time it gets to you, you’re probably already behind the ball.” Then, the client is engaged and attorneys are working on the matter but may not be following the guidelines.

“Getting discipline on all aspects of billing — from capturing billable time, feeding it into the e-billing system and then billing and collecting — all these steps need tightening up, because the result is pure profit.”

Not understanding client requirements up front has ripple effects downstream. Because OCGs can require capping time spent on cases, the number and types of attorneys authorized to work on specific matters, and even the diversity of the attorneys assigned to a case, having a full understanding of the OCG before starting work is crucial to maximizing revenue. For example, some OCGs specify that junior attorneys cannot work on certain matters. There may be a cap on how much can be charged for a deposition. Some clients don’t pay for photocopies. Charging for any of this may result in line items being rejected by the e-billing system.

Because rejections can be based on work descriptions and how matters are managed, attorneys need to be familiar with the OCG terms in order to manage and bill matters accordingly, ideally before the work starts.

And it’s not getting any easier. OCGs are getting bigger and more complex, with up to 100 pages of requirements for billing and other concerns such as data security. Clients may also change their requirements or change e-billing providers, forcing the firm to learn a new system. 

In addition, Burgess says that companies currently using e-billing are becoming stricter with enforcing rules they may have let slide in the past. “There’s been more scrutiny and validation, and we’ve seen tighter deadlines and less leniency for exceeding a deadline, whether it be for appealing an invoice or submitting an accrual.”

BILLING DISCIPLINE FOR PURE PROFIT

Large law firms have been working with OCGs for at least a decade and have the people and processes in place to handle e-billing. Some law firms have multiple billing coordinators with a person dedicated to each client.

But it’s a different story for smaller legal organizations, which are not prepared for e-billing and don’t have a process to fulfill them, says Campbell. Plus, they generally don’t have ready resources to handle e-billing complexities. In this case, improving discipline around established billing processes can help smaller law firms ease the e-billing burden while maximizing revenue.

“I’ve observed law firm billing practices to be quite sloppy,” says Remsen. “There are too many personalized processes. Attorneys can track time or bill any way they want. There are firms where lawyers write it out on a piece of paper and give it to the legal assistant, who may enter it incorrectly or code it to the wrong client.” The result? “Firms are leaking cash like a sieve. If you’re living on the billable hour, you need to get good at billing and become very efficient. Centralize the process. It’s inefficient to have people billing different ways,” he says.

Remsen adds that when a receivable becomes 90 days or older, the odds of collecting are low. “Getting discipline on all aspects of billing — from capturing billable time, feeding it into the e-billing system and then billing and collecting — all these steps need tightening up, because the result is pure profit,” he says.

CENTRALIZE THE BILLING PROCESS

To optimize revenue, experts agree that centralizing and standardizing billing processes is the best place to start. Campbell says OCG compliance starts with client onboarding and a conversation about billing requirements. “Often, firms are just happy to get the client in the door and don’t have that conversation about the requirements,” she says.

“There’s been more scrutiny and validation, and we’ve seen tighter deadlines and less leniency for exceeding a deadline, whether it be for appealing an invoice or submitting an accrual.”

“It’s best to fix these problems upstream. It’s the age-old problem of getting attorneys to enter their time as they do their work,” says Burgess. Compliance is often based on the work descriptions that attorneys provide during time entry, and these descriptions are analyzed by the client’s e-billing platform. “If that’s delayed or inaccurate — which is often the case — it ultimately leads to producing bills that don’t comply with the OCG. Promoting real-time time entry with embedded OCG rule validation ensures compliance at the very first step of the process.”

Even though firms are under pressure to cut costs, Campbell’s advice is to hire a billing person: “Make sure you have the right staff to handle e-billing. This is one area that has a great [return on investment] because your bills get paid on time for the full amount.”

Firms also need a communication process in place so that key stakeholders are aware of the requirements early in the client relationship. The firm billing coordinator can review guidelines and summarize them. “Pick the top things that are most important and make sure that anyone who bills on that matter or client knows what those are,” Campbell says. Reducing the number of line-item rejections will save the firm time and improve cash flow.

IT’S ABOUT THE RELATIONSHIP

Campbell emphasizes the relationship aspect of billing. A firm can spend months working on a project before the client sees tangible results. In the meantime, the invoice may be the only communication the client receives. “If you’re not following the rules, that can be a source of frustration for the client,” she says.

In the end, it’s a matter of being prepared for e-billing before it turns into a revenue or relationship problem. Unless your firm’s focus is on individuals and families, your next great client might deliver an OCG.

“Even if you don’t have OCGs yet, think of a process you would use to be ready the first time one crosses your desk,” Campbell says. “Because if you haven’t seen an OCG yet, you will eventually.”