The numbers being promised in the legal cost containment industry should scare you (and how to respond)
Welcome to this month’s issue of inVOICE. These “5-minute reads,” brought to you by InvoicePrep, are short, informational executive briefs designed for law firm executives and managing partners. They provide practical tips and provoke new ideas to make your management of your Firm more effective. (For our prior newsletters please visit us here).
Last month, I wrote about how artificial intelligence (AI) and machine learning (ML) are two of the hot topics in the legal cost containment industry. E-billing companies tout their expertise in those areas to show clients how significantly then can reduce (adjust) legal invoices from industry law firms like yours. I wrote about how it’s logical to assume as a law firm, that if you just had some AI and ML software on your side, that things would be better, and your bills would be left alone.
As I explained, however, over 80 percent of the dollar adjustments made to legal invoices are actually taken by human beings, on issues that software can’t possibly make decisions about. As I result, I argued, law firms need experts (in addition to technology) to prepare invoices that are acceptable to the experts who review them on the client side.
Numbers, Numbers, Numbers
This month I want to talk numbers. Specifically, I want to highlight a few of the very dramatic numbers being used by legal cost containment companies (e-billing and legal invoice audit companies). They are numbers that should scare you.
Before jumping into that, let me set the context briefly. Accordingly the 2017 CounselLink Enterprise Legal Management Trends Report (February 2017), there are several key trends in the industry. They are:
- Rate volatility differs by type of work. The difference, for example, between partner and associate work is the least in insurance defense work, followed by real estate firms.
- Clients continue to consolidate the number of firms they use. (In a bit of good news for insurance defense firms, the insurance industry has the lowest level of consolidation right now).
- The use of alternative fee arrangements remains relatively flat. In the insurance industry this is at less than 8% of billings.
- Average partner rates at large firms are much higher than partner rates at smaller firms and that gap has expanded. For smaller firms, this is important.
- Seattle, Boston and Washington, D. are the three cities where partner rates have grown by more than 3.5% when compared to last year and also over the last three years.
The Problem – The Industry That Promises to Cut Your Bills
Those findings affirm what we all know: namely, the legal services market remains highly competitive, compressed, and flat on rate for the most part. It’s harder, not easier, for law firms to produce profit. Every dollar matters. Particularly those revenue dollars that are submitted to clients on invoices.
It’s within this context that the legal cost containment industry markets their services. E-billing companies, frankly, are touting (in an almost bragging way) about how they excel at making life great for their customers (and arguably difficult for their law firms). Frankly, law firms should be terrified by the numbers being thrown around.
One company promises that that for every dollar invested in its e-billing platform, the service will produce a 14 times return (ROI)! Another says directly that they will “save” their customers a minimum of 10 percent in legal fees in the first year! Where is this money coming from you ask? The answer, of course, is directly from legal invoices – invoices just like yours.
The Challenge with Existing Law Firm Solutions
Law firms often respond to this problem (a problem defined as increased difficulty in getting paid for the work performed) in one of two ways:
- The Head-In-Sand-Approach, whereby the firm does nothing and says this is a “cost of doing business.”
- The If-Only-We-Had-Software-Too approach, whereby the firm wishes that if just had the same fancy software as their clients had, things would be better.
There are two critical problems with both of these approaches.
The first approach (Do Nothing), obviously, accomplishes nothing and in fact facilitates a kind of race-to-the-bottom environment which gets worse and worse over time. (We’re written before about how high adjustment rates are used by clients to give less business to specific firms).
The second approach (Software), is understandably tempting (who doesn’t want cool technology?). On the face of it, law firms have seen that their clients started using software so if they had software too it would be a more even playing field. And the few providers that offer software-only solutions offer tempting messages.
“We’ll cut your rejection rates by 65%!” sounds good to law firms – but it gets at the wrong issue and is ultimately not the solution. Let me explain why.
Rejection vs. Reduction Rates
Some attorneys I speak with talk to me about how many invoices are “sent back” by clients – rejected at the outset because of some basic but simple rule violation. Some firms can tell me their rejection rate very precisely. But when I ask about dollar adjustment rates, the number is sometimes harder to capture.
And yet it’s the adjustment rates that really matters! At the end of the day, if a firm submits a $100 invoice and it’s rejected, but re-submitted with the error corrected, and then the $100 is paid in full, it’s not so bad. Yes, it required extra effort and time to fix the error, but at the end of the day the full $100 was paid and the firm suffers very little loss. This is the less than 20% scenario.
Compare that against a scenario where the $100 invoice is submitted, and it’s not rejected, but on the client side the software flags some items in the invoice and the humans involved (invoice review experts, auditors) happily adjust the invoice by $12. Although there was no immediate rejection of the invoice, the firm was only paid $88 on its $100 invoice. That 12 percent hit is a big deal in today’s competitive environment. This is the greater than 80% scenario.
In short, it’s the adjustments, not the rejections, that really matter!
The Best Solution for Firms
The answer, of course, is that eliminating both rejections and adjustments is ideal. That’s the goal. To eliminate rejections but to keep getting adjustments is to miss the real damage. It’s like fixing a broken chair on the titanic. More comfortable perhaps, but ultimately disastrous.
The legal community, unless its leaders perk up and realize that reduction repair doesn’t come from software and software alone, has a rocky road ahead. To understand that the problem is human-driven is to start to get at the issue. With expert humans on the other side, firms are best served by putting expert humans on their side.
And by experts, I should be clear. I don’t mean a distributed invoice editing process with a clerk and/or an administrator, and an associate and/or an attorney – each adding their piece trying to get it to expert level. I mean seasoned invoice preparation specialists, with years of experience in auditing or preparing invoices, who have absolute knowledge of your clients’ guidelines, who have observed payer behavior across the industry and who are dedicated to nothing else but getting the firm paid as much as possible for the work performed. That’s what it takes, and nothing less.
I’m interested in what you think! Do you agree?
InvoicePrep enhances law firm profitability by improving e-billing quality and accuracy. When invoices are prepared properly, payment is more prompt and the number of denied charges decreases. InvoicePrep’s system is streamlined, efficient and uses a combination of cutting-edge technology and professionals with extensive legal invoice compliance and e-billing software knowledge. To learn more about InvoicePrep, please visit www.invoiceprep.com