Corporate Fee Setting
TASK-BASED BILLING Grows up
By Sally Fiona King
After years of working for in-house law departments, I am once again on the other side of the table as the COO of a law firm. The emphasis of my role has changed from controlling costs to thinking strategically about enhancing revenues. Be the focus on costs or revenues, though, one thing has not changed: the question of why more corporate clients and law firms don’t employ task-based billing and e-invoicing. The incentives for both sides are truly compelling—and they promise to change the way law firms compete for corporate work.
Hourly Billing: The Problem Writ Small and Large
In the early 1990s, shortly after I joined General Electric’s legal department, I was asked to review a bill from a revered law firm. It was for work performed nearly two years earlier and covered more than 18 months of work. The six-inch-thick tome contained entries from an army of partners and associates and totaled several hundred thousand dollars. GE lawyers familiar with the matter had departed for other endeavors. Budget dollars that might have been allocated for the issue had long since been spent.
The problem was further complicated because, apart from the heading on the bill indicating the project name, it was difficult to determine what work had actually transpired. After extensive deconstruction, internal auditing and reconstruction of the billing records in various formats, the final work product looked much like many task-based bills do today. The analysis provided considerable fodder for reductions and compromises. Ultimately, the bill in question was paid at the rate of approximately 20 cents on the dollar.
Once the matter at hand was settled, we knuckled down to the larger problem. How could we prevent this from happening again? In the face of ever-increasing pressures from the corporation, how could we really control and analyze our legal expenses? The answers lay in task-based billing and budgeting.
Strategic Value: Trying to Capture Efficiencies
The script was already written. Task-based billing had begun to receive significant attention, particularly from clients attempting to promote budget planning and litigation efficiency. Theoretically, the system—budgeting by task, then billing against the budget—had strategic value not just for the in-house law department, but for the law firm, too. In capturing the data in the prescribed manner, both the law department and law firm could discover their efficiencies and inefficiencies—with the data to support their claims and the metrics to illustrate improvements.
In the early days of the initiative, each law department provided law firms with its own task lists and preferred submission formats. GE’s comprised a lotus spreadsheet and summary cover sheet. We asked that budgets be prepared quarterly and bills submitted monthly, showing any variances—positive or negative—from what was displayed on the foregoing budget sheet. The lists of tasks would vary by matter and were generally simple. We no longer cared to know about every telephone call. At least, that was our intention.
In fact, however, law firms had large investments in time and billing systems and continued to feel the need to justify bills in excruciating detail, including providing data on every attempted phone call. Because few firms captured their data by task, the trusty hourly method remained one consistent manner with which the firms might measure productivity. Indeed, as yet the software providers had only sporadically adapted their products to meet the numerous permutations of submission formats. Many billing departments then (and continuing today) simply captured time in the traditional form and re-cranked the data as required for task-based billing formats.
Fortunately, help was at hand. The American Corporate Counsel Association formed a task force to develop uniform task-based management system (UTBMS) billing codes. Law firms would have one standard set of codes and formats for all their clients, and time and billing software providers would have the rules they needed to write their program code. Harmony was in sight. Or was it?
A New Economy Problem: Adopting Task-Based Billing and UTBMS Codes
Larger law departments agreed to adhere to the protocol prescribed in the UTBMS codes. Software manufacturers began to release applications built to cope with the new demands. However, in many cases, the task codes were—and are still—used only at the client’s request.
Moreover, by the mid-‘90s, the M&A and dot-com activity indicated boom times. Law department lawyers were again at the mercy of their law firm colleagues. For the first time in a decade, it became almost impossible to negotiate rates. Law firms no longer competing for clients were now competing for associates to work on client projects. The rising tide in associate salaries raised the level of rates for everyone.
In addition, even proponents acknowledge that the time and resources required to implement task-based billing and budgeting within law departments are sometimes understated. As with all solutions, this one has its place. That place is generally where a law department has determined to outsource various parts of its legal functions. Task-based billing using the UTBMS codes is not appropriate for every matter sent to outside counsel. Indeed, even the most enthusiastic supporters of task-based billing have had their support tested. In boom times, the drivers are speed and availability of resources—not budgetary constraints.
Unfortunately, for a time, these factors heralded an early demise for a methodology that had promised to be the panacea for time-based billing—and the best and fastest avenue to real value-based billing.
Evolution: Paving the Way with E-Invoicing Systems
So here we are, after a decade, still debating task-based billing’s benefits. The pendulum has swung again, and the economy is as far from boom time as in the early 1990s. Corporations are again contemplating significant expense cuts. The supply of associates is again exceeding demand. Salaries have stabilized. Have we learned anything from our journey? It would appear so.
It seems that the technology has finally caught up with the original concept. We are closer to true value billing than ever before. What effectuated the change? The Web has come of age. The tools now available truly support the profession in ways only dreamed of heretofore. The electronic invoicing and processing systems developed by ASPs are so compelling in their reporting capabilities and so cost-effective to implement that corporations are moving fairly quickly to utilize them. And law firms have begun to conclude that the tangible benefits in timely processing and payment outweigh the inconveniences of adherence to precise formatting and template data submission. The entire process of review, reduction or approval for payment online may take only minutes.
As a result, large law departments are mandating that law firms track their time by using the UTBMS codes. Smaller law departments are sure to follow. For the first time in recollection, the process does not have to adapt to the technology. Rather, technology takes the output from the process and massages it into the required format. The law firm’s own time and billing software provides the standardized format to electronically link the invoice to the client’s technology service provider. The law firm’s burden is simply to process the time entry and generate bills quickly.
The firm’s electronic invoice is then automatically tested against the client’s rules and procedures. Invoices with incomplete or duplicative entries are returned in seconds by e-mail for correction and resubmission. Reviewers scrutinize flagged invoices for inappropriate or over-budget charges outside the parameters of machine-set company guidelines. The technology eliminates haggling over submission issues that are more often correctable with proper data entry than with ongoing negotiations over payment or task parameters. The net benefit to law firms is timelier review and speedier payment.
Beyond that, the systems take the invoice data and slice and dice it in various ways. The ensuing data is used to measure any number of attributes, efficiencies or metrics. In-house counsel now have the information to truly measure law firm efficiency (not productivity). Very soon, legal departments will have the ability to measure efficiency firm-to-firm for similar projects; associates within a firm; rates between firms and geographies; matter outcomes; and any number of other metrics. Standard rates, discounts, alternate billing and fixed-fee arrangements will be tested as to whole case costs by comparing law firm financial information and disposition results. The message is clear: Law firms need to pay attention to their own efficiency and the statistics against which law departments will measure them.
Will Timesheets Be Relics?
Task-based billing has finally grown up. It is rapidly becoming a reality and will prove itself a necessity through trying economic times and cycles of intense competition. Firms may be competing differently in this new age.
Law departments will expect increased efficiency from firms and develop a greater reliance on those that demonstrate the ability to perform and transact tasks in a highly efficient way. Expectations will be communicated and set, leading to better performance and value to clients. The data collected now will pave the way, finally, for value billing as a workable goal. We may even eliminate the need to complete timesheets during our lifetimes and truly focus on substance and results, not shifting economics or competitive trends.
Sally Fiona King (firstname.lastname@example.org) is Chief Operating Officer of Kronish Lieb Weiner & Hellman, LLP in New York, NY. Contact her at (212) 479-6380.
This article was updated and adapted from the author’s presentation at the ABA Section of Real Property, Probate and Trust Law Annual Meeting in August 2001.