How to Improve Profitability Using Billing Data
Many specialized industries are undergoing significant change as a result of automation and the largely unfettered access to information.
The legal field has also started to feel the effects of this disruption, particularly with regard to billing.
According to an article in Inside Legal, the billing practices of legal firms face more intense scrutiny now than any other point in history. Clients are less willing to part with money they don’t feel a law firm has earned and are further emboldened to contest charges they view as questionable.
Most lawyers understand that regularly demanding — or even forcing — their clients to pay bills that their clients believe are unreasonable is not a recipe for long term success. Nor is it a good use of time to haggle about every charge that every client disputes, considering the opportunity costs of such efforts, and the potential for seriously damaging the business relationship.
But this does not mean that lawyers and their law firms have to simply accept the cuts in their bills and the related reductions in profits. Instead, law firms can actually become more profitable by using systems designed to allow their lawyers to avoid doing work for which their clients will not likely pay.
Standardization is the Easiest Fix
Despite various ethical rules against excessive or unreasonable billing, it’s no secret that many attorneys leave a thumb on the scale when it comes to billing practices. In their book, The Moral Compass of the American Lawyer, Richard Zitrin and Carol M. Langford highlight some of the more egregious instances of padded or unreasonable billing.
One such example deals with the theft of around $400,000 by once reputable attorney, who employed plainly unethical billing practices. Another lawyer at a reputable firm claimed to work an average of 5,941 billable hours a year. When you do the math on that claim, you’ll find that this attorney would have had to work 16 billable hours a day, every day of the year without interruption.
The amounts billed become all the more spurious when you take into account the fact that attorneys can typically only bill around 70% of their total time spent working using current billing software and methods.
Clients received some measure of protection against unethical practices with the advent of the Uniform Task-Based Management System (UTBMS) and the Legal Electronic Data Exchange Standard (LEDES) for UTBMS-coded invoices. These standardization efforts helped bring transparency and consistency to legal billing where there were previously nebulous judgment calls.
The UTBMS approach categorizes and codes legal work and expenses to give both clients and attorneys alike a clear and easy way to track reference points for each task and expense. LEDES most often accompanies UTBMS coding by providing a standardized invoice format, designed to make the invoice submission and review process much simpler. The faster an invoice can be submitted and reviewed, the faster the firm can receive payment.
Electronic billing through to use of UTMBS codes and LEDES formatted invoices has the additional effect of making data analysis easier. For example, analysis of the standardized billing data can be a great indicator of what’s working and what may need to change.
In addition, the consistent method of categorization allows greater transparency regarding how much a task or expense should cost.
Clients and Courts Won’t Stand for Overbilling
UTBMS and LEDES standards “capture meaningful billing information and data in an easier, more digestible way” for clients. The organizational consistency of these standards makes it easier than ever to compare legal billing practices and look for aberrations – whether they are intentional or mistakes.
Both courts and clients are demonstrating an increasing aversion to block billing or other vague billing practices. With UTBMS and LEDES, there are no more place for them to hide.
Lawyers who can’t or won’t let go of the old ways are being made examples of by the courts. Billing excessively for tasks that could have done much more efficiently using technology will no longer fly. The leader of a national cybersecurity, privacy and data management group for a top Toronto firm puts it plainly:
“What we are seeing from the bench, at least, is that the courts are mindful of the use of [automation] technology and are grappling with what it means for the litigation process.”
Pressure from clients is also increasing. Prior to the economic downturn in 2008, law firm realization and collection rates used to average around 90 to 95%. However, according to a recent Georgetown University Law Center and Thomson Reuters Peer Monitor study, realization rates have dropped to an average of 81.1% for large law firms, and an average of 83.9% for mid-sized firms.
The 2019 Legal Trends Report provided by Clio supports this conclusion, revealing that most firms are only able to bill approximately 81% of the hours worked, and only end up collecting 86% of the hours billed even after the reducing the charges before invoicing.
Standardization of Billing Data Improves Profitability
The benefits of UTBMS coding and LEDES formatted invoices are undeniable for clients looking for transparency and courts looking for overbilling. However, the act of manually applying these codes can be taxing on attorneys.
Many of the early UTBMS and LEDES programs designed to interface with billing systems were cumbersome and unwieldy. This only added to the fact that the manual coding process was prone to human error.
These effects are even further compounded by the fact that billing tasks, even time-consuming ones, are not in and of themselves billable. Attorneys are left with a monotonous task that is very literally costing them money to manually implement.
Fortunately, there is a far better way to go about UTBMS coding thanks to computer assisted billing. Not only do computers make the implementation of these standards easier to accomplish, but with machine learning the data produced can be used to improve both billing practices and related revenues moving forward.
Because the UTBMS coding is done by machine, the chances of human error become effectively nonexistent. The absence of idiosyncratic and erroneous codes provides valuable data to help further improve the process.
Technology is the Way Forward
Billing and collections are some of the most important aspects of maintaining a profitable law firm. If they are not being monitored and constantly optimized, the law firm is almost certainly losing money that it shouldn’t be. Let the problem fester for too long and it could become terminal.
There are now easy and efficient ways to implement standards that benefit clients and provide firms with useful data to help improve profitability down the line. Technology is providing attorneys with more tools than ever to maximize both their time and efforts.
Using standardized codes for their billing, law firms themselves gain actionable data about where they should be spending more time, where they should be spending less time, and a well-reasoned and mathematical idea of how much time and effort should go into similar tasks on future matters.
The financial realities of running a law firm have long been a drag – if not a deterrent — for many attorneys. Today, technology has arrived that can significantly lessen the burden through automation. Billing tasks that once took hours can be done in minutes.
No longer having to deal with many time-consuming non-billable tasks allows attorneys to focus their efforts on the quality of their work, marketing, and personal obligations. Similarly, tailoring their work to only what a client will pay for also accomplishes these goals.
Lawyers are not the only beneficiaries of these advancements. Clients can enjoy clear transparency and easy to review and understand invoices. Inconsistencies can be addressed before they become points of contention, mitigating the occurrences of disputes. Standardization of billing data through automation is an easy way to keep everyone on the same page.
So long as people can “Google” whatever they want to know on largely any subject they can think of, knowledge-based professions will never be the same. This makes clients more perceptive than ever when it comes to legal billing, but it also provides an opportunity for law firms to increase their efficiency.