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As law firms and businesses struggle to maintain profitability after the 2008 financial crisis and recession, corporate counsels have been looking for ways to gain more predictability in legal spend. One of the most popular ways to gain predictability in spend is through the use of alternative fee arrangements (AFAs). An increasingly common practice in AFAs is the request by the client for firms to submit “shadow bills.” “Shadow billing” is a practice where a firm submits a fee for an alternative billing arrangement along with invoices outlining the actual hours and work performed. This 2-part blog post reveals why shadow billing tends to be controversial, two scenarios where shadow billing is necessary, and how to get the full benefit from shadow billing.

Controversy around shadow billing

Clients requesting shadow billing in conjunction with a fixed price structure often meet opposition from law firms. This is due to the fact that some firms see it as a lack of trust in their ability to invoice fairly for the work completed. But, law firms need to be cognizant of the fact that clients are under the stress of keeping costs under control. Sharing information with the client as to the actual hours billed can build trust and allow for more transparency in the relationship. Additionally, in the beginning of a fixed fee arrangement, providing hourly information could help both parties. Looking at hourly costs versus the fixed fee can assist the firm in evaluating risk and managing the case to ensure that the client is saving money and the firm is remaining profitable. For the client, having access to the shadow bills allows them to make educated decisions on the benefits and drawbacks of fixed fee arrangements versus hourly billing. Shadow bills also provide clients a clear-cut way to manage cases; for example, the client will be able to see if the firm is spending too much time on a specific aspect of a case and ask the firm to adjust their time accordingly. Also, shadow billing allows the client to still use a fixed fee arrangement but track and report on data elements supplied by hourly billing.

When you need shadow billing with an AFA

Capped fees with shared savings

Capped fees, common in transactional work, are often proposed in highly competitive situations. With a capped fee arrangement, the client agrees to pay the law firm a flat amount unless their hours come in less. If the hours come in less, the firm charges the client the lower rate. In this pricing scenario, some argue that it incentivizes the law firm to bill as close to the cap as possible. However, clients gain the benefit of predictability in costs.

When you need shadow billing with an AFA

Fee Collars

Fee collars allow for a lawyer to be paid a set amount if the hours come in on target or at a certain percentage above or below the set target. If the hours come in below the fixed percentage, the savings are shared between the client and the lawyer. If the hours are above the fixed percentage, the lawyer is paid only a percentage of the additional amount billed. Fee collars are often used in scenarios where outcomes are unpredictable. For example, let’s assume a client and an attorney agree to a fee of $100,000 for a project with a 20% up and down collar. If the lawyer’s billing comes in at an amount between $80,000 and $120,000, the attorney will be paid $100,000. However, if the billings come in at $60,000, the $20,000 difference is split between the client and attorney (the client receives a $10,000 credit, so the attorney is paid $90,000). If the attorney’s time amounts to $140,000, the attorney is paid 50% over the $120,000 collar (the final fee to the attorney is $110,000). Again, this is another situation where the firm has an incentive to try to bill at the cap or at the collar around the cap, if the fees are below the collar. As with the capped fees with sharing, the benefit to the client is a more predictable fee structure.

Getting the full benefit from shadow billing

With both types of alternative fee arrangements, capped fees with sharing (mentioned in Part I) and fee collars, there is a need for shadow billing in order to calculate the final cost to the client. The problem with shadow billing is that it can cause a disincentive for law firms. Firms may begin to worry that if the billed hours come in significantly lower than the fee caps, the client may feel like they are not getting a “good deal,” even if the amount paid is appropriate for the value delivered by the law firm. With this in mind, it is important to remember that shadow bills have their maximum value only when they are reviewed for billing guideline violations, consistency with ethical rules of professional responsibility, industry standards, and other relevant authority. This type of review will keep the law department on track and also benefit the client by giving them a more accurate view of their data. With the shadow bills available, clients also gain the benefit of using the data to track and report on the data found in the invoices.

Alternative fee arrangements have the benefit of providing predictability and, in some scenarios, cost savings for the client. However, if a legal department decides to shift to using some form of alternative fee arrangement, it is important to require shadow billing, at least in the beginning of the program. Shadow bills give the client a gauge to measure if the program is successful by allowing for full transparency. But, along with a request for shadow bills, comes the incentive for law firms to create shadow billing that comes close to the fixed fee in order to make the client feel they are getting a “good deal.” The best way to maximize the use of shadow billing is to review the bills for accuracy. This will give the legal department clean data to measure for reporting and analytics, and the client will have a more accurate picture of true costs when negotiating fixed fee arrangements in the future.

For more information about how Stuart Maue can help you effectively manage your legal spend, contact us at: 1-800-291-9940 or e-mail: info@smmj.com.

On March 25, 2015, the U.S. Bankruptcy Court for the Southern District of Florida entered an order[1] to reduce a chapter 13 debtor’s attorney’s fee application by more than 70 percent. The order provides a detailed analysis of the Court’s review of the limited case law on fee awards in Chapter 13 cases, as well as an in depth explanation by the Court of the basis for the fee reduction and ultimate award in the case before it. The Order also contains strong words for the fee applicant regarding his application and billing practices.

Background

The chapter 13 debtor had what the court described as a normal chapter 13 case, except for lengthy litigation with a creditor related to its objection to a plan confirmation, which required debtor’s counsel to bill more time than one would normally see in a routine chapter 13 case. At the conclusion of the litigation, debtor’s counsel filed a fee application with the court requesting $125,467.50 in fees and $11,730.78 in expenses.

What Is Reasonable Compensation?

Attorneys are entitled to reasonable compensation and expenses for the actual, necessary services they render.[2] Typically, the attorney’s fees for a chapter 13 debtor fall under a court’s no-look fee guidelines. [3] The no-look (flat) fee is a presumptively reasonable fee based on local hourly rates and the general amount of work required in a typical chapter 13 case.[4] The Chapter 13 Fee Guidelines set forth different no-look fees for services commonly required in a chapter 13 case. If an attorney seeks compensation or reimbursement of expenses exceeding the no-look limits, he or she must file a formal fee application. The fee application must “describe in detail the actual or estimated services or expenses for which compensation or reimbursement is sought; and (2) include … a copy of the retainer agreement, if any.”[5]

In evaluating the reasonableness of compensation, a court must take into consideration those relevant factors set forth in 11 U.S.C. § 330(a)(3), which is also relevant in a chapter 11 case. However, the fee analysis in a chapter 13 case differs from a chapter 11 case in that the focus in a chapter 13 case is on 8/26/2016 No Surprise: A Court Can and WILL SignificantlyReduce “Exaggerated” and “Overstated” Attorneys’ Fees http://www.abi.org/committee-post/no-surprise-a-court-can-and-will-significantly-reduce-%E2%80%9Cexaggerated%E2%80%9D-and-%E2%80%9Coverstated… 2/3 the “benefit and necessity of services to the debtor [not the estate].”[6]

What Was Unreasonable About this Fee Application?

The court was unable to locate many published decisions on chapter 13 fee applications. Additionally, there were no chapter 13 cases seeking fees anywhere near the six-figure request in this case.[7] After analyzing the applicable law, the court began reviewing the fee application. Sadly, the court found that the only “reasonable portion of the Application [was] … [the] hourly rate [of] $375.00 an hour.”[8] While on the higher side for this attorney’s experience in the consumer bar, the court felt it “was still a reasonable rate.”[9] This, of course, left many other issues for the court to contend with. The following is a nonexhaustive list of the attorney’s practices or requests that the court found unreasonable:

1. charging $450 an hour instead of the agreed-upon hourly rate;
2. repeatedly overcharging for even the most routine tasks;
3. exaggerating time for all charges;[10]
4. charging for an opening statement for a motion that did not warrant an opening statement;
5. charging several hours for preparing an order that was never submitted and that the court had directed need only state “for the reasons stated on the record”;
6. impermissible lumping of time entries;
7. charging for drafting 26 amended plans — virtually all arising from calculation errors or when only minor changes were made to the preceding plan;
8. charging hourly rates for services when the no-look flat fees were applicable;
9. inflating fees and overdoing responses in the Garcia litigation; and
10. requesting reimbursement for tax-preparation software.[11]

The court concluded that the attorney exaggerated his time significantly, or took far more time than was appropriate. Moreover, the attorney performed many tasks that were not necessary or provided no benefit to the debtor.[12]

Ultimately, the court determined that a good portion of the work performed by the attorney fell under the no-look fees and allowed compensation as appropriate under the Chapter 13 Fee Guidelines. As for the litigation related to the disputed plan confirmation, the court agreed that it did not fall under the norm for a chapter 13 case and therefore was not subject to the no-look fees. However, the court still determined that the litigation fees were excessive and reduced them from the requested $83,0000 to $26,662.50.  3/3 total, the court reduced the attorney’s fee request from $125,467.50 to $34,075.00.

Conclusion

While there was no specific finding of ethical violations for the unprofessional billing practices, the court did find that the attorney “clearly over exaggerated time and over stated time.”[13] The court admonished the attorney to “make an effort in the future to accurately record his time,” because his failure to do so was an “imposition on all parties and on the court.”[14]

[1] In re Villaverde, 2016 WL 1179343 (Bankr. S.D. Fla. March 25, 2016).

[2] 11 U.S.C. § 330(a)(1)(A)-(B).

[3] See, e.g., Bankr. S.D. Fla. Local Rule 2016-1(B)(2)(a) (the Chapter 13 Fee Guidelines).

[4] In re Younger, 360 B.R. 89, 94 (Bankr. W.D. Pa. 2006); see also In re Howell, 226 B.R. 279, 281 (Bankr. M.D. Fla. 1998) (finding flat rates reasonable as cases are fairly standard and much of work is routine and capable of being performed by paralegals).

[5] See supra, note 3.

[6] 11 U.S.C. § 330(a)(4)(B).

[7] Villaverde, 2016 WL 1179343 at *2 (citations omitted).

[8] Id. at *5.

[9] Id.

[10] The court made an assumption that most time was double the time actually incurred. Villaverde, 2016 WL 1179343 at *5.

[11] Id. at *5 n.12.

[12] Id. at *5.

[13] Id. at *7.

[14] Id.

Today, one of the most popular methods of cost savings in the area of legal spend management is e-billing. Some of the key drivers for selecting an e-billing system are invoice savings, efficiency, and the availability of metrics and reporting. In addition, the low cost of many e-billing systems (around 1% of legal spend reviewed) has made it a viable cost management tool for both small and large legal departments.

However, when reviewing invoices, it is not enough to depend solely on an e-billing system. Regardless of what might be touted by e-billing vendors, there are items that a software review alone cannot catch. Whether you have an internal staff dedicated to bill examination or you use an outsourced bill review vendor, it is important to have an attorney review in conjunction with the computer-based analysis. This 2-part article provides a general overview of issues with e-billing software, why an experienced bill review professional is needed, and then dives into the specific areas that cannot be identified by software analysis alone.

General issues with e-billing

Two common issues with e-billing reviews are the inaccurate flagging of items and the failure to identify items that are non-compliant with billing guidelines. Inaccurate flagging results when an otherwise payable fee or expense entry contains a “trigger” word and is flagged by the e-billing software. Alternatively, failure to identify items occurs when non-payable items do not contain trigger words and therefore are not identified by the software search.

Necessity for an experienced bill review professional

The above stated issues with e-billing lead to a greater necessity to have a separate internal department (versus depending on the in-house attorneys in the legal department) or an outside vendor for invoice review. Inaccurate flags lead to more time spent by the in-house attorney on the initial review or alternatively, more time spent on appeals by law firms. Inaccurate flagging can lead to a potential loss of money as busy in-house attorneys may not catch all of the billing issues that an experienced bill review professional is trained to identify. In-house attorneys may have more pressing duties and obligations concerning their cases and do not have the time to stop and shift gears to review invoices. Additionally, an outside auditor or in-house bill review department will take the time to interact with outside counsel to explain, discuss, and resolve billing issues- a benefit not offered with pure e-billing. And with more exact classifications and categorizations, organizations will receive more accurate and detailed billing data which allows for more meaningful analysis and reporting.

We have just reviewed some of the broad issues with e-billing (inaccurate flagging of items and the failure to identify non-compliant items) and why it is necessary for an experienced bill review professional to review the invoices once they are run through an e-billing system. In Part II of this article, available next month, we will take a look at some specific billing issues where software will not accurately catch items, or where timekeepers can outsmart computer searches by avoiding certain “trigger” words.

Today, one of the most popular methods of cost savings in the area of legal spend management is e-billing. However, when reviewing invoices, it is not enough to depend solely on an e-billing system. Regardless of what might be touted by e-billing vendors, there are items that a software review alone cannot catch.

Specific examples of billing issues that require human review

Now that we have reviewed the broad issues with e-billing (inaccurate flagging of items and the failure to identify non-compliant items), let’s take a look at some specific billing issues where software will not accurately catch items, or where timekeepers can outsmart computer searches by avoiding certain “trigger” words. This is not an exhaustive list, but it is designed to illustrate how common items can be inaccurately flagged or missed altogether.

Position-Inappropriate Tasks

Often there is not a clear line between a role assigned to a timekeeper and whether the work performed is appropriate for that role. For example, a computer would not be able to determine when a partner is performing associate-level work (i.e., performing research on a basic area of law, drafting a deposition notice, etc.). Only human review would be able to make this type of distinction.

Excessive Time to Perform a Task

Given the wide spectrum of tasks and activities performed by legal personnel, it is virtually impossible for a computer to accurately determine the required amount of time for an activity. For example, some subpoena notices are simple forms while others are complex and/or more technical, litigation correspondence (including e-mail) may be a few words or many pages, and preparation of litigation binders may be substantive or clerical. Analysis by an experienced attorney identifies excessive time in particular entries as well as patterns of overcharges for repetitive tasks.

Duplicative Entries/Spread Billing

When a law firm handles more than one matter for an organization, duplicative entries and/or excessive fees can be disguised by spreading them across matters. The entries themselves are not questionable, but when they are spread across matters, the pattern (or the full extent of the pattern) will not be apparent to a computer.

Minimum Charges

A computer cannot decipher patterns of excessive billing. For example, repeated entries of 2.0 hours to attend a weekly conference call may or may not raise concern for this particular task. A computer cannot determine how much time is appropriate for different activities.

Travel Time

Many entries for attendance at events include “hidden” travel time. The time spent in transit is added to the attendance time and the word “travel” is not used in order to avoid detection by the computer. These entries pose a significant issue when billing guidelines limit compensation for travel. Additionally, computers cannot distinguish between local and long distance travel or identify what amounts to excessive travel time (i.e., billing 7 hours to travel 130 miles).

Billing Guidelines Issues

The term “research”

• Software can identify the term “research” but cannot evaluate the complexity or necessity of the subject matter.
• “Research” is used for more than legal research, such as “research for potential experts” which can lead to inappropriate flags.
• The term is both a verb (research venue issues) and a noun (review plaintiff’s Motion to Dismiss and the research cited therein). The computer cannot make the distinction between the noun and verb and may result in a false positive.

Interoffice Conferences/Multiple Attendance

• For a computer to accurately capture non-compliant entries, it would have to be programmed with names, nicknames, initials, etc. for each timekeeper, then confirm that 2 or more billed for the same meeting (as opposed to different meetings on the same day).
• Travel time or other issues related to multiple attendances are even more difficult for a computer to accurately identify.

Clerical/Administrative Tasks

• Limited vocabulary in computer searches miss non-compliant entries, while expanded vocabulary results in false flags. For example, a word search to identify the clerical task of copying documents would flag the following entry: “analyze revised copy of settlement agreement.”
• Software is not able to catch patterns of routine administration when there is no trigger word used. For example, a daily entry by a paralegal to “review correspondence” would not be caught.

E-billing can be an extremely useful tool in an organization. The software can increase efficiency through the electronic delivery of invoices, ability to track UTBMS codes, and automation of payments to law firms, just to name a few of the benefits. However, it is important to remember that e-billing is just one piece in a legal cost management program. Software searches can mistakenly flag items or altogether miss non-compliant items. If a company is serious about cost savings and data accuracy for reporting purposes, it is vital to include a layer of human review to the bill review process. But, assigning the bill review process to an in-house attorney places a large burden on their time, not to mention a potential loss of money as busy attorneys may not catch all of the billing issues that a professional dedicated to bill review may find. Ideally, an organization should have a group (or single attorney depending on the size of the company) devoted to review invoices or hire an outside bill review company. Relying on a team focused on bill review allows for a more consistent review methodology across the organization, permits in-house attorneys to focus on items at hand, and keeps law firms happy as they are consistently paid for legitimate fees and expenses.

 

The other day, I was experiencing some electrical issues in my house that caused the lights to dim and get brighter at random times. I called an electrician. After spending a few minutes at the fuse box, I asked him, “What do you think you need to do?” His answer, blunt and to-the-point was, “I don’t know. I can’t operate until I diagnose.” His statement made me laugh, I guess because I started to think about how many times we truly “operate” before we “diagnose.” I’ve actually noticed this often with customers and prospects in the area of metrics and reporting.

For the last few years, the buzz in the legal spend management industry has been around metrics and reporting. Metrics are a standard of measure and can assist you in determining items such as effectiveness, impact, and value. As helpful as metrics and reporting are, in some cases they can easily become overwhelming. Collecting metrics and reports for your department is valuable, but as my electrician pointed out, without a clear understanding of the problem or issue, you might just end up doing exploratory surgery- which equals wasted time and money for your department. You need a clear understanding of why you are gathering these metrics and reports, your plans for the data, and how you will go about collecting the data.

Why are you gathering these metrics and reports?

I often hear customers talk about how they need more metrics or that they want more reports. They want to know what types of data other clients are reviewing. Unfortunately, once we provide them with the information they request, they become overwhelmed and aren’t sure how to use the data. Of course, there are a handful of standard reports and metrics such as “Top Ten Billed Matters” or “Cycle Time” that are beneficial to all organizations. However, with the amount of data available, it is important to be selective about what reports and metrics are the most beneficial for your organization. Companies may use some of the same measures, but each organization will weigh these items differently. Start thinking about overall company objectives. What type of measurements do the CEO, COO, and CFO find important? Does your company have an overall goal/strategy? If the company has a cost-cutting, productivity (doing more with fewer resources), or risk mitigation mandate, the reports and metrics you should focus on will be quite different for each objective. With a clear, corporate-aligned objective, you will understand why you are gathering certain reports and metrics and it will be much easier to reduce your data down to the necessary components.

How will you collect the data for metrics and reports?

There are many different ways to gather data for metrics and reports. Matter management systems, legal spend management systems, internally created databases, business intelligence tools, and even your own firms can all be excellent sources of data. Recently, in the CLM (Claims & Litigation Management Alliance) Litigation Management Study, March 2015, almost 80 chief claims and chief litigation officers were asked to name, “one thing that you wish your outside firms did a better job of, that would make them stand-out in their peer group, and that would make your life easier.” The survey noted that for the first time, there was frequent mention of firms to “provide their own metrics about their performance/provide year-end self-evaluations using metrics/provide metrics that mirror how companies view performance” (p. 25). Having firms provide you with performance metrics may seem like a good option, but again, the client needs to define targets for the firm so it has a clear idea of how the company measures performance.

What are your plans for the data?

Once you know the overall corporate objective for your department and have the metrics and reports in place, it is important to design a strategy for what you will do with this data. For example, if your corporate objective is to cut costs, you may collect data regarding your most non-compliant firms, firm rates, cost per matter, and staffing mix on matters. Now the question becomes, how will you use this data? Creating a plan to act on this data is important. After reviewing firm rates and staffing mixes on cases that went over budget, will you have a discussion with the law firm about cost? Will you re-evaluate how you assign cases in the future? Will you track any savings derived from your new plans?

So, remember, before you jump on the metrics and reporting bandwagon, running reports and gathering metrics are only as good as the issues they help you solve. Avoid the approach of gathering certain types of data just because you know that is what others in the industry are evaluating. Having a thorough understanding of your company’s objectives and departmental objectives should be the driver behind your metrics and reporting. Once you come up with a plan on what to gather and how to pull the information, make certain you put your findings to good use. You can have all the information available at your fingertips, but not taking action on it renders it useless.

 

You are sitting at your desk when you see an e-mail from one of your law firms requesting a rate increase, no explanation, just a rate increase. This is the third request from one of your law firms this month. That all too familiar scene from Jerry Maguire where Jerry screams, “Show me the money!” starts going through your mind. Trying to deal with rate increases is just another headache when you are juggling multiple cases, budgets, and firms on a daily basis. Rate requests are almost impossible to track and what about the firms that send you invoices with higher hourly rates without an approval request? Is there any good way to control rate creep with law firms?

Some organizations have decided to do away with standard hourly billing and rate increases completely, and focus on alternative fee arrangements. Unfortunately, alternative fee arrangements don’t work well in every situation and hourly billing is still very prevalent in the industry. Many general counsels feel more comfortable with the billable hour that outlines who is billing for their work, what work is being performed, and how much the work will cost. Many outsourced matters don’t have the complexity or severity required to necessitate a large law firm with exorbitant rates. So, when working with a multitude of firms and cases, how do you control who is raising rates, when are they raising rates, and by how much?

Process

One of the best ways to keep rates under control is to have a good internal process surrounding rate increases. Make certain you clearly spell out in your billing guidelines under what circumstances you will allow rate increases. For example, some companies allow for rate increases once a year at the beginning of the new year. By restricting rate increases to once a year and at certain times of the year, both you and your law firms will be able to budget without fear of fluctuating rates.

Another useful method is to have one person within your organization manage and control rate increases, especially if you work with several law firms. If you have a legal spend management application in place, it may include a rate request function. Usually, with these types of applications, law firms are able to request a rate increase along with an explanation of the increase. Clients have the ability to accept or reject the rate increases online as well as track and archive requests.

Multiple Rate Sets/Restrict Staffing

Some organizations have multiple rate sets (different rate sets for different categories of work). This tends to work well with firms and clients because higher rates are pre-determined for more complex types of matters. Clients have also gone so far as to restrict staffing and rates on matters. For example, a matter will be restricted to 1 partner and 2 associates with assigned rates. If someone other than the identified biller with an agreed upon rate sends in time, the invoice will be rejected. Another possibility is to move work to different geographical locations in order to keep rates low or automatically discount an invoice by 10% if the bill is paid within 30 days.

Benchmarking and Metrics

Firms should provide some type of justification for rate increases. As a client, it is important to know that an increase in hourly fees comes along with a commensurate value add. Make certain to do your homework. Review market data for average rates for firm location and size. Historical data is important as well. Viewing historical rate information for various firms can illustrate staffing and time issues as well as disproportionate rate increases. If you are working with a legal spend management vendor, they should be able to provide you with the necessary historical rate information.

Conclusion

The skills of an attorney are far from a commodity and they should be properly compensated for their work. Clients must look not only at the rate itself but the efficiency of the firm in completing projects. However, firms should offer clients a justification for increases and clients should do their research and have procedures in place for accepting the increases in order to keep rates under control.

For more information about how Stuart Maue can help you effectively manage your legal spend, contact us at: 1-800-291-9940 or e-mail: info@smmj.com.