Just a few years ago, if you brought up the topic of value or alternative billing with a law firm you’d get a deer-in-headlights response. Now, you get head nodding.
“How much are they really doing and how much they’ve implemented varies, but rarely do they not know (about value billing),” says Peter Gutelius, assistant general counsel at RBC.
While value billing — and technology such as e-billing and legal case management systems — is still not widely used by internal and external counsel in Canada, it’s starting to gain some traction, albeit slowly.
To date, RBC has had success with value billing in its auto insurance portfolio, as well as its retail broker litigation in the U.S. Value billing is, in part, linked to cost, “but I always want to ensure that when we’re structuring something that cost is not the only factor,” says Gutelius. “Cost is a component of value, but it’s not the only component.”
At a certain spending threshold, RBC must issue an RFP. “Before we took that path, firms didn’t spend as much time, I don’t believe, thinking about what they would need to do to take a file toward the conclusion of the objectives of the client,” says Gutelius. “They realized they need to engage in a discussion with the client to identify what those objectives are.”
The difficulty with the historical hourly rate model is that the incentive to maximize revenue is to maximize hours. And that creates a watchdog effect where someone on the other end has to review the bills, line by line.
In RBC’s insurance program, however, the in-house team no longer receives itemized bills and no one has to do a line-item review or question whether something should have taken one hour or two. As part of its value billing arrangement, the annual fee is based on volume over a monthly basis.
The perception of many law firms — at least the first time you have a conversation about value billing — is that they’re being asked to do the same thing for less money, says Gutelius.
But a value-billing proposal is really about being more efficient. “If a law firm is given the opportunity to create efficiencies, then they will be able to increase profit margins while charging less — charge me 90 per cent (of what you used to charge) but spend 80 per cent of the time you used to spend on it,” says Gutelius.
And, when both sides are not focused on the docket sheet but on the depth of the relationship, it’s much easier to use external firms in the role of trusted adviser, he says.
In many value-driven programs, the relationship is really with the firm, rather than a specific lawyer or two. And that changes the dynamic of the relationship. “Bad performance in a file hurts the whole relationship with the firm because it’s a program,” says Gutelius. “It’s about losing that 100 or 200 or 400 files in the program.”
Corporate legal departments that deploy an enterprise legal management platform are able to gather data that can be leveraged for insights, says Mark Poag, senior vice-president of the combined enterprise legal management Wolters Kluwer business of TyMetrix/Datacert.
The company’s technology platform, Datacert Passport, allows corporate legal departments to unite systems that manage legal, risk, and compliance activities onto a single, collaborative framework.
Corporate counsel can use their own data to examine similar matters to determine expected costs and staffing on matters, says Poag, helping to set the right budget or to determine and track alternative fee arrangements.
Matter management tools (like TyMetrix Matter Analyzer) can also be used to gather information such as budget compliance or matter length for the evaluation of firms that work on similar matters, helping to make decisions on which firms to use. Benchmark data can be found in many forms (such as LegalVIEW), which allows organizations to compare the staffing and costs of similar matters to their industry peers.
Dominic Jaar, partner and national practice leader with KPMG’s Information Management Services, started his career as a litigator, moved in-house with Bell Canada, then started his own consulting company, which he later sold to KPMG.
During his time at Bell, he introduced the concept of value billing — a “flat-fee, results-based billing arrangement.” He also took a lead in rolling out a legal case management system in order to do analytics, not only to assess internal performance, but also to assess the performance of external counsel.
There is an interesting link between e-billing and LCM systems, he says. An e-billing system provides financial data in a structured, electronic format. An LCM or matter management system provides detailed information about cases or matters. When the two are connected, data flows from the e-billing system into the LCM system, which provides a comprehensive set of data that can be analyzed for trends and insight.
With litigation, for example, in-house counsel can generate a report to see if they typically win or lose against a particular firm during litigation. “You get a wealth of information and that’s using just one pivot,” says Jaar. “You can take it one step further and enter the name of the lawyer or judge: Are we winning cases before this judge? Are we losing cases?”
During his time at Bell, the in-house team was asked for reports on any cases worth more than $1 million. All of these reports were manually compiled and would take one or two days to prepare.
An assistant was then tasked with the job of aggregating all of the data. But with the LCM system, that process was automated and the same data could be accessed in about a minute.
“That’s where I think the rubber meets the road, being able to derive value from the information you’re getting rather than seeing an invoice as I have to pay X amount,” says Jaar. There’s a wealth of information available, he says, not only about financial matters, but also to find out who is efficient and who’s not.
Many corporate law departments are still attached to billable hours; right now, it’s mainly banks and insurance companies that are forcing value billing on their outside providers. “I don’t see a general movement in that direction,” says Jaar. “It’s really only a few that have done it.”
And it’s typically in-house counsel pushing their external partners into value billing arrangements or bringing them onboard LCM systems. “I seriously doubt that law firms by themselves have the incentive to move toward a value-billing approach — why fix something you don’t perceive to be broken?” says Jaar.
When there’s a demand from clients, however, it’s a different story. “It’s very difficult for a law firm to say no and turn down the money,” says Richard Stock, legal department management consultant with Catalyst Consulting. He agrees there still aren’t many companies in Canada doing this — mainly banks and insurance companies.
While he says e-billing systems are not yet common here, “matter management, if it’s going to make any sense, has to include legal project budgeting, not just managing the number of matters,” he says. If you’re using dozens of firms around the world, it’s essential to have systems like this, simply because there are thousands of matters on the go at any one time.
These systems, over time, can provide incredibly detailed information. In-house counsel can see how much of their budget is being spent in various areas, which firms or lawyers are most efficient, and which aren’t up to snuff.
That’s why some law firms are jumping on this and trying to better leverage the information they have in their billing systems. “Don’t wait for your clients to know more about your business than you do,” says Jaar.
Indeed, firms like Gowling Lafleur Henderson LLP have responded to this shift. Gowlings is piloting a legal project management system called Gowlings Practical LPM, which is being rolled out in phases over the course of this year.
The system is rooted in project management principles and collaboration techniques to help ensure matters stay on track, on time, and on budget — which the firm says translates into more efficiency, predictability, and value for clients.
But, “there are no magic bullets here,” says Mark Tamminga, leader of innovation initiatives at Gowlings, who is spearheading the launch of Gowlings Practical LPM. There is no single software solution that will meet the needs of the entire industry.
“There are a number of internal and external pressures that led us to what we think is . . . a structured approach to legal services,” he says. “If larger clients are asking us to do this, we’ll try mightily to do it. The RFP process has become very much a part of the fabric of how work gets doled out.”
Value billing is effectively a fixed-fee quote. It’s like going to your general contractor; if they’re wasting time on the job or make a mistake, you’re either not going to pay or you’ll renegotiate.
“An hour of lawyer time has always been assumed to have a value,” says Tamminga. But, he says, an hourly rate is really a measure of cost and not a measure of value. So the project management discipline is about making sure value is properly delivered. If the client thinks a matter is worth $100,000, that shifts the risk entirely to the law firm, and it’s up to the law firm to source the work effectively.
“We understood that project management is a very specific discipline and methodology and it can in fact be artfully applied to the practice of law,” said Tamminga.
By spending time upfront planning what you’re going to do, you can actually reduce the end cost to the client, says Rick Kathuria, national director of project management and legal logistics with Gowlings. “We’ve seen cases where we were able to drop (the cost) by $100,000 by spending time upfront planning the matter.” A more efficiently planned process, he said, can see up to a 20 per cent reduction in costs.
While they’re still in the early days of analytics, they’re collecting data and key parameters on every matter. “We will get there; it’s definitely part of our plan,” says Kathuria.
Though there isn’t a magic bullet, Tamminga says the system has a “quasi magic feel.” Human realities are such that things can slip between the cracks. “With this system, all that is revealed immediately rather than weeks later when it’s too late to fix.”
While some are taking a lead, many others still don’t fully understand e-billing. They think it’s about getting a bill in electronic form rather than paper form, says Rob Thomas, vice president of the market development group with Serengeti, a provider of legal matter management, e-billing, and performance analytics for corporations and law firms.
“Most in-house counsel have heard about it — they’ve heard they need to do more with metrics and reporting and just aren’t sure where to get started,” he says, adding that it’s generally a year or two before they have enough of a data set to start seeing trends and gaining insights.
“It’s not just a picture of a paper bill,” says Thomas. There is a ton of data locked up in paper bills; by unlocking that data, the client can use it to run reports and analytics.
It’s designed to give in-house counsel more visibility and control. “Many feel like they’re flying blind,” says Thomas. “How many outside firms do you work with a year and how much do you spend with them? If you’re working with 50 law firms on 200 projects and you’ve got paper files and bills coming in from all over, how do you pull it all together?”
A conservative return-on-investment is five to 15 per cent savings, but for most companies it’s more than that, says Thomas. Down the road they can find savings of a different kind — such as using analytics to see which external lawyers or firms are top performers and reallocating the work accordingly.
“Many in-house counsel are not practicing law . . . they are managing the business of these projects being handled outside the company by other law firms,” he said. “This gives them visibility so they can be better managers of the legal work being done by outside counsel.”
It goes beyond analytics — it’s about insight, being able to dissect matters at a very granular level, and get instant visibility into your legal spend, says Doug Ventola, president of Sky Analytics, a provider of legal spend management software that allows clients to benchmark rates and matters against their peers.
“The interest is on the rise in Canada but our core success to date has been within the U.S.,” he says. “We’ve actually done some work with a very large Canadian organization and we have smaller ongoing Canadian clients.”
The system allows clients to identify where they’ve overspent in the past, but also to select lawyers and firms for upcoming matters in a smarter way because they have intelligence to support that decision, he says. “We have tools that allow you to investigate firms and/or attorneys for future matter planning.”
Historically, billing and matter management were handled separately, because billing systems tended to be more aligned with the accounting side of the business whereas matter management systems were more aligned with the operation of the organization.
But connecting the two makes more sense these days, and a number of LCM or matter management vendors offer integrated billing modules within their systems, which provides new insights to support decision-making.
Canada is not quite there yet, though.
“If we were looking at the spectrum of invoicing, hourly at one extreme and value billing at the other extreme, we’re very far from value billing,” says KPMG’s Jaar. Right now they’re seeing more task-based or phased pricing, he adds.
“From what we currently see there are very few organizations that have the maturity to do that,” says Jaar. “We’ve been in the beginning phase for the last seven years — the market has evolved extremely slowly.”
But it seems at least perspectives and attitudes are changing. “Firms will always say that they see this as a good development, it’s the right way to go,” says Gutelius, “but it is more in the last year or two where that’s not just a speaking note over the lunch table.”