Qualitative Versus Quantitative Audits
A Comparison of Audit Approaches
David J. McMahon
Hinshaw & Culbertson LLP
Over the past 25 years David McMahon has been working together with Stuart Maue on large complex legal audits and related matters. Mr. McMahon typically provides his expertise in large complex litigation to provide advice and opinions about the necessity and reasonableness of the services performed in the qualitative side of the audit process and to provide testimony on those issues in appropriate cases. The Stuart Maue firm typically handles all aspects of the quantitative side of the audit protocol and the critical issues of data management, accounting, and calculation of the numbers.
A litigation management audit can reveal several different categories of information, depending upon the type of inquiry undertaken. The audit inquiry most typically utilized by insurance carriers is the quantitative audit, which examines the amount and breakdown of time that attorneys have invoiced. The goal of this type of audit is to determine whether the law firm has substantially complied with the billing guidelines imposed by the carrier. Such an approach identifies permissible payment deductions for invoice entries that deviate from the carrier’s guidelines, or from generally accepted billing practices. This approach can fairly be characterized as a “procedural” review of the billings involved.
A different audit approach, one that perhaps is ultimately even more meaningful, entails a qualitative assessment of the actual work reflected in the bills. This inquiry seeks to determine whether the bills incurred in the litigation and submitted for payment were in fact both reasonable and necessary, which is the dual standard required of legal billings articulated by the U.S. Supreme Court. This audit approach can fairly be characterized as a “substantive” review of the billings involved.
The Qualitative Audit
The ultimate goal of the qualitative litigation management audit is to ensure that attorneys hired to conduct litigation and other legal activities do so in a goal-directed, streamlined, and thus cost-effective manner. Through poor planning or neglect, attorneys can inadvertently bill for activities which increase litigation costs while doing little to resolve the litigation. A comprehensive qualitative audit is designed to analyze the strategy, staffing and overall approach utilized in the case. When we conduct a qualitative audit, we typically review the available work product, including the pleadings, motions, discovery requests and correspondence to identify wasteful practices and opportunities to increase efficiency.
The filing of questionable and/or unnecessary motions is one common misstep that tends to drive up litigation costs. While a motion might be plausible or legally colorable, that does not mean it necessarily benefits the client’s cause. For example, the time and expense associated with filing a demurrer might be wasteful where the attorney knows that a judge will virtually automatically grant leave to amend. The same might apply to a motion for a more definite statement, where the defense attorney has already been fully informed of what the other side is alleging. Any motion should be designed to accomplish a concrete and achievable strategic goal. The qualitative audit examines whether every motion filed is, at minimum, arguably supported by such a substantive justification.
A recent review we conducted raised concerns about attorneys engaged in extensive motion practice. The audited firm expended considerable time on Motions for Summary Judgment (almost 700 hours), Motions to Compel (more than 600 hours), Motions to Strike (more than 250 hours) and Motions to Disqualify (almost 200 hours). The qualitative review highlighted numerous strategic and staffing deficiencies, all of which contributed to inefficient billing. We were able to identify numerous examples of work which did not justify the time spent on it. For example, the firm spent more than 25 hours on drafting and revising an opposition to a motion seeking pro hac vice admission (which are routinely granted by courts under principles of comity), translating into more than $5,000 in billed fees. This activity was difficult to justify substantively, and we negotiated a significant reduction in the bill on this basis. The discovery and document production processes present many opportunities for utilizing litigation management efficiencies. Attorneys should keep depositions to a reasonable minimum, deposing only those witnesses whose testimony is central to the case. Similarly, interrogatories should be succinct, clearly directed to adduce important facts, and–most of all–few in number. The attorney requesting documents should limit the production demand to materials likely to contain critical information. Time spent combing through mountainous document productions and creating databases without a clear utility can result in needless costs being billed to the client. Likewise, the attorney responding to a production request, particularly electronic discovery, should do so without delay. The back and forth efforts expended over prolonged discovery disputes often constitutes little more than attorney bickering over inconsequential issues, which may have little benefit to the client. Accordingly, the qualitative audit examines the scope of discovery requests and focuses on the number and extent of potentially unnecessary attorney-generated disputes.
Needlessly aggressive, or threatening, letters and emails to opposing counsel are warning signs that an attorney might actually be hindering, rather than facilitating, a quick and reasonable resolution of an issue or the entire case. Where such signs are present, the qualitative audit can then examine the strategy employed by counsel and the effect it had on bringing the case to a satisfactory conclusion. The unexplained rejection of settlement conferences or opportunities, or the creation of a poisonous atmosphere in which a constructive dialogue is unlikely to occur, might reveal an unnecessarily acrimonious, lengthy, and costly legal process. Similarly, warnings from judges or motions for sanctions also suggest that an attorney might be preventing a prompt resolution.
Where the quantitative audit focuses on adherence to established billing guidelines, the qualitative review examines each entry, in its greater context, for irregularities and wasteful practices. The time attorneys bill for each activity should result in a commensurate benefit to the client. Often, our audits have uncovered excessive time spent in preparing for contingencies that are unlikely, or reading legally tangential background materials. A recent audit in a mass tort case presents an instructive example: We noticed that 85 percent of the billing entries for one senior associate reflected ‘reviewing’ various documents, with almost no resulting substantive work product produced by him. These invoices illustrated the downside of keeping an attorney “on the bench” for the occasional email exchange or teleconference where his or her involvement might be beneficial.
In another audit, one of the firms whose work we analyzed spent significant time reviewing newspaper articles and periodicals, apparently as part of the monitoring function of a legal action. It was clear, at least in that case, that the such work was not necessary, nor was it appropriately billed to the client. At a minimum, it appeared that a paralegal at a lower billing rate could have capably handled the task, assuming it was actually necessary.
The qualitative audit should also address issues of frequent staff changes and “transient” billers. A revolving door of attorneys might result from firm instability, lack of strategic direction or poor leadership. More typically, attorneys who are newly assigned to a case often inflate litigation fees because of the substantial time necessary for them to get “up to speed.” The cost of their “start up” time may far outweigh the benefit of their work on the file. In addition, overstaffing a case with attorneys or paralegals, where a smaller number of attorneys can easily perform all of the required legal work, can generate excessive billing. In one large environmental case, our analysis found numerous examples of individuals with little or no active involvement in the litigation performing isolated tasks which added questionable, if any, value to the case. Of more than 100 billers on the particular matter, approximately 85 individuals billed fewer than 20 entries on the file; some far fewer. Perhaps more importantly a review of the work product performed by these “transient” billers appeared to have no demonstrable utility in the litigation, and their participation violated established billing guidelines. We recommended significant deductions for their work, which the audited firm agreed to accept, as it was unable to justify the time spent by these “transient” billers.
In addition, attorneys should not bill time for clerical work and, where possible, firms should assign lower billing rate associates tasks appropriate to their levels of skills. The qualitative audit looks skeptically on an expensive senior partner’s spending hours drafting pro hac vice applications or performing similar tasks more appropriately delegated to junior colleagues.
A related and recurring staff management issue involves billing for the unnecessary attendance by multiple attorneys at meetings and hearings. One firm we reviewed billed its client for weekly team meetings attended by four to six attorneys. We identified more than 200 hours billed by attorneys for attendance at these meetings, translating into a significant amount of fees. The client justifiably questioned these charges. Multiple attorney attendance at depositions can also unreasonably inflate fees. Another potential irregularity involves attorneys who bill implausibly, if not impossibly, high hourly totals. Absent some superhuman feat, attorneys can rarely maintain a pace of multiple double-digit hourly working days for more than a few weeks on end. We encountered an example of one such “superman” during a recent audit.
After computing the total hours he reported each day on a variety of cases, it became apparent that he had billed more than ten hours almost every working day for an entire month. Further research uncovered similar patterns in previous months as well. The client demanded an explanation for such prodigious billing, and a discount was negotiated, simply because the hours were impossible to justify under those circumstances.
Optimally, the qualitative audit can be utilized to evaluate the quality of an attorney’s work. This results-oriented approach looks to factors including the case’s ultimate disposition. It asks whether the client could reasonably have achieved a more beneficial settlement for less money. We ask hard questions focusing on the strategy employed and the results obtained, such as, were motions typically granted or objections sustained? A more probing inquiry might look to the quality of legal reasoning and writing in memos or pleadings. It is also “fair game” to evaluate an attorney’s performance during trial. The goal impelling such an inquiry generally is not to demonstrate ineffectiveness of counsel, but rather to highlight strengths and weaknesses in the attorney’s performance and to identify specific opportunities for improvement.
As described above, the qualitative billing audit seeks to evaluate the audited firm’s billings with respect to the following objectives:
The extent to which a client’s goals and objectives are being achieved;
- The relative ability of alternate approaches to yield more efficient performance or eliminate factors that inhibit the firm’s operational effectiveness;
- Whether the firm is up-to-date on modern technology, e-discovery and whether the firm used these tools to streamline operations;
- Whether a firm accomplished intended results or produced unintended negative effects;
- The extent to which a firm’s internal systems duplicate, overlap, or conflict with each other;
- The validity and reliability of internal performance controls and evaluations concerning program effectiveness and results, economy, and efficiency.
The Quantitative Audit
Unlike the qualitative audit, a quantitative analysis focuses on the amount and the components of time that a law firm bills to the client. Such an approach is designed to determine whether attorneys and other billers have complied with commonly accepted billing practices as well as the billing guidelines promulgated by the client. The audit frequently results in recommendations for deductions from invoice entries that fail to comply with industry norms. Where the qualitative audit often requires educated subjective assessments, such as whether an attorney performed efficiently and effectively, the quantitative audit tends to rely on more mechanical measures of compliance. Thus, it is important to establish reliable, straightforward protocols before undertaking a quantitative evaluation. These might include determining the minimum amount of billed time necessary to mark a deduction and establishing how many deduction categories should be utilized. Among other categories, we typically deduct for block billing, vague and ambiguous entries, administrative and clerical tasks, and excessive conferencing or travel.
The practice of “block billing,” also known as “bulk billing” or “aggregate billing,” has been universally discouraged by courts and prohibited by virtually all client billing guidelines we have reviewed. “Block billing” is the practice of lumping two or more tasks into a single billing entry. Time is not allocated between the tasks and a single total amount of time is stated for all tasks contained in the blocks. Confronted with time that is block billed, the client or fee-paying third party is effectively prevented from making a reasonable determination of the time actually spent on any of the individual tasks listed in the block. Our audits routinely uncover the inappropriate use of the block billing format. For example, an invoice we recently reviewed contained a tenhour block of time for which the attorney reported participating in a meeting, writing a letter, researching legal theories, and exchanging phone calls and emails. Where this billing style is utilized, the client has no way of determining whether the time spent on each task was reasonable. Another entry contained a twelve-hour block, more than a full day, during which the attorney reported drafting a complaint, conducting legal research and reviewing documents. Such entries are common, despite the fact that this billing style has been criticized by knowledgeable commentators for years.
An attorney’s or paralegal’s time entries should be recorded in sufficient detail so that the work performed is clearly described and precisely communicated in a meaningful way. Courts require such precision in evaluating the reasonableness of fees billed by counsel. Accordingly, we typically take an estimated percentage deduction for “vague” entries, where through no fault of its own, a client is unable to determine the nature and/or scope of services claimed. An invoice we recently audited included a sixteen-hour entry for an activity described as “Work on documents.” Another attorney reported twenty hours of work under the pithy heading “Review documents.” These entries provided the client little indication of the attorneys’ actual work and merited deductions.
Another example involved an attorney who billed almost 10 hours of work under an activity “To be determined later.” The attorney never went back to complete the entry, and the client actually paid the firm for the time reported. The issue would have gone unnoticed without analysis. Where attorneys report various communications, we generally require the names of both parties and the subject of the exchange. Thus, we deem inappropriate entries reporting “Call with Joe Smith” or “Meeting re depositions.” Billing by attorneys and paralegals for the performance of “clerical” or secretarial” tasks is also inappropriate. These activities are generally considered part of a law firm’s overhead expenses, which are factored into the firm’s hourly rates for professional services. Clerical activities include those that do not require legal acumen and that secretaries, file clerks, messengers and other nonprofessional staff can perform effectively. A firm we recently audited billed ten hours at a paralegal rate for organizing files and three hours arranging for a messenger service. Another firm billed for the time spent faxing documents to court. Similarly, computer-related charges should not appear on an invoice for legal services. Our audits have uncovered inappropriate entries for transferring, managing and coordinating data, as well as creating specialized electronic queries and training for use of the Concordance database. In addition, the quantitative audit analyses questionable staffing decisions that may result in the inflation costs. We generally deduct for “multiple attendance,” meaning attendance at events by several attorneys where one could reasonably get the job done. We recently recommended deductions where a firm sent three high-priced partners to a routine motion hearing. A related category is “unnecessary travel.” An attorney should not travel (at a client’s expense) if he or she could perform the same work via email, fax machine, and/or teleconferencing. We recently noted an instance where a law firm sent an attorney across the country to a city where the client already had a local firm on retainer to handle that type of issue. Entries reflecting “multiple attendance” or “unnecessary travel” are not inherently faulty. However, we believe the client deserves an explanation as to why the expenses were necessary.
The quantitative audit also analyses the fronted costs and expenses for which law firms seek reimbursement. At a minimum, attorneys should always provide back-up documentation for the underlying invoices to support the costs they incur. As with attorneys fees, the test for evaluating disbursements is one of reasonableness. The expenditure must be necessary and the amount reasonable. General overhead expenses are not appropriate disbursements because the law firm should factor them into the attorneys’ hourly billing rates. Neither should an attorney engage in “gold-plated” treatment, such as first-class airline travel and meals in luxurious restaurants. These amount to self-awarded ‘perks’ and are almost always unnecessary.
Moreover, our audits have revealed instances of attorneys’ inappropriately billing clients for personal items on the road, including bottles of expensive scotch, excessive room service, video movies and souvenirs from hotel gift shops. Clients often simply fail to notice these and other cost drivers that can get buried within massive monthly billing statements. The quantitative audit weeds out and highlights these questionable expenses that might otherwise be overlooked.
Lastly, the quantitative audit takes into account miscellaneous items that might include unapproved billing rate increases, incorrect math, or even invoices or tasks billed to the wrong matter. All of the above can play a valuable role in reducing client costs as well as increasing attorney accountability. Before starting, the auditor must determine criteria for reviewing the invoices and strive for consistency. We also recommend meeting with both the client and the law firm regularly after the first few reports to make sure everybody understands the guidelines and expectations. The most favorable result is always to educate the parties and to foster a trusting, transparent relationship between the attorney and client.
The qualitative and quantitative audits are not mutually exclusive, but are complementary to each other. While it makes sense to discuss the two approaches individually, a combined approach is perhaps the best way to achieve a fully comprehensive audit. We often start with a quantitative examination of a law firm’s invoices, while keeping an eye out for anomalies or troubling entries that raise more qualitative concerns. Such a holistic process can result in significant cost savings to the client, although it is more time intensive than relying on only a single approach. The combined approach accordingly must be justified under the particular case circumstances, both practically and economically.