Law Department Management Blog

Back in the day, there was a moderate amount of talk about and acclaim for discounts on law firms bills automatically applied when the company paid quickly. A common combination was about two percent if a bill were paid within a week.

You don’t hear about cost control by prompt payment discounts, and I think I know some of the reasons why. In the first place, law firms routinely grant discounts of five percent or more just for the asking, so the glare of deeper discounts washes out the paltry two percent. Another nail in the coffin has been the difficulty accounts payable has had with compliance; you can promise five days but if the average check cycle is 45 days, good luck. Nor did the interest accrued of the deferred payments prevent early payment discounts from sliding into extremis.

Maybe it became complicated to rush payments and then sometimes have to rewind a part of it, or perhaps general counsel had the sneaking suspicion that promptness led to rubber stamping – any “savings” were wiped out by the lack of invoice review.

Some matter management systems might not smoothly accommodate the billing arrangement. The system can’t know whether the discount was paid on time. All in, it is easier to arrange for a partial retainer bill payment at the start

If a general counsel normalizes the hourly rates charged be various law firms – an effective-billing rate calculation – it is almost always calculated at the firm level. Take a pile of firm’s bills and divide their total by lawyer hours. A variation, and one that can produce significantly different effective rates, does the same calculation but within types of matters. Look at IP-related bills, or M&A bills, or the employment-related bills. Variations by the firm in staffing and managing matters in different substantive areas can create widely different numbers. By the way, your fully-loaded internal cost probably differs as dramatically by practice area.

For background on effective billing rates, my first metapost is available (See my post of March 9, 2009: effective billing rates with 9 references.).

Since then several other posts pertain to effective rates (See my post of May 22, 2009: total hours of legal work per unit of revenue; Sept. 1, 2009: effective billing rates adjusted for cost of living; Oct. 11, 2009: some differences in costs between firms and departments; Nov. 25, 2009: adjust discounts by effective billing rates; April 21, 2011: cautions when departments compare internal to external billing rates; and May 29, 2011: effective rates and trimmed means.).

At a customer conference for users of a leading e-billing system, one speaker gave some data about inquiries from law firms about invoice processing. That category of inquiries, by the way, accounted for the most calls (about a third), with invoice rejection accounting for about a quarter more.

Of the processing questions, predominantly they regarded either submission or status. In fact, 65 percent of those inquiries fell under those two, followed by 10 percent each for invoice deletion, appeals and payment inquiry.

I mention this data because a law department should focus training of its law firms on these frequently asked topics.

To calculate the effective billing rate of a law firm, divide the amounts of several of its representative invoices by the number of lawyer hours charged under the invoices. Law departments calculate that figure sometimes to compare it to their own fully-loaded cost per lawyer hour. The range for U.S. law departments can be something like $350 an hour outside and $215 an hour inside.

One problem, however, arises from including the law firm your department paid the most during the period. That firm may well have handled your biggest law suit or largest acquisition. Cost discipline may have been less and the firm was probably large and therefore expensive.

At the other end of the scale, your department might use a one-person firm to handle very simple kinds of specialized work, or hyper-efficient boutiques to handle workers comp questions. The effective billing rates of those lower-end providers will be as unrepresentative of your normal effective rate paid as the top-of-the-line rates for the largest matter.

A trimmed mean calculation lops off the top 2.5 percent of firms (and the bottom 2.5 percent of firms if the calculation is done for all firms). That statistical rigidity does not appeal to me. Maybe it is sufficient to exclude bills from your most expensive matter and be done with that. The point to be understood should be clear: avoid the inflationary and distorting effect of including costs that have relatively less discipline.

You can’t declare “mission accomplished” when your law firms agree to freeze their billing rates. The reason you can’t is that firms may end up with more senior lawyer time on similar matters than before the rates froze. In fact, that shift upward may be likely since for the same reason you have tightened the belt – budget constraints due to business falloff — at the law firm work may be less plentiful. The senior lawyers hoard work to plump up their own chargeable hours and handle more of the work at their higher, albeit frozen, rates. True, rates did not go up; false, fees held even or declined.

A panelist from Baxter Laboratories recently shared with the audience that the law department requests an early case assessment at the 180-day mark. Baxter’s period between receipt of the complaint and receipt of the law firm’s assessment – six months – is longer than the more usual 30- or 45-day periods. Baxter feels a month allows too little time to gather documents and interview people and think carefully about the case.

That criticism is well-founded, I suspect. Still, six months feels like too long on the other side. Perhaps the best practice would be to choose and ECA due date based on the type of case (See my post of June 10, 2008: firm hired solely for ECA; Aug. 5, 2008: millions saved at GE by early case assessment and resolution; Feb. 4, 2009: different use of term “Early Case Assessment”; Nov. 25, 2009: “Well-done ECA uncovers 80% of what you will ever know”; and Feb. 23, 2008: early case assessment with 8 references.).