The art and science of legal bill review

The art and science of legal bill review
Legal bills often require clarification or explanation so reviewing them is key, says Dean Scaletta.
The mystery and minutiae behind law firm legal bills are things in-house counsel love to rant about, but those who have frequently been burned are finding ways to get clarity.

“Some of the activities that show up on legal bills defy belief, causing me to wonder whether anybody actually looked at the bill before it went out,” says Dean Scaletta, director, information and litigation, in the legal department of Manitoba Public Insurance.

Scaletta has an eagle eye when it comes to law firm bills and has worked over the years to create a system to quickly catch problems. The insurer has a standard retainer agreement that sets out tight parameters on how a file is to be staffed, what types of activities and disbursements will be paid for, and, perhaps more importantly, what will not be paid.

As Scaletta notes, there is typically an “event” that led to the inclusion of a specific “we will not pay for” clause with a firm.

Adjusters at Manitoba Public Insurance are responsible for the initial review of each law firm invoice, comparing what is being billed with what was agreed on. Invoices above a certain dollar threshold — about 125 a year — then go to Scaletta for review and approval.

“Not infrequently, I will ask the adjuster to get an explanation of one or more docket entries, or simply tell him or her to tell the firm that we are not prepared to pay for the time spent on those particular activities,” he says. “Because we tend to deal with relatively small firms, most concerns we have with billings tend to get resolved quickly and amicably.”

Given Scaletta’s example, perhaps it’s not a surprise the number of third-party advisers offering billing and fee analysis services to in-house legal departments is growing.

Last month, Sterling Analytics announced it was entering the Canadian market and joins others such as: Elevate Services, which operates in Toronto and also does bill review; Sky Analytics, acquired in January by Huron Legal Consulting; and Viewabill.

“We have never used this type of service, and I do not anticipate doing so in the foreseeable future,” says Scaletta. “We have a pretty good system in place here already.”

But Sterling and others say they can offer expertise and historical analysis to law departments that don’t have the resources or know-how to do so.

“We come in as an aid to in-house counsel,” says Jeffrey Campbell, executive director for Sterling Analytics Canada. “We know what charges look like and when we see an invoice if it’s vague. To have an in-house counsel spend valuable time going line by line — they should be focusing on what they do best.”

Sterling Analytics represents companies such as Groupon, Hertz, Fidelity Financial, and ACE Insurance.

Sterling’s fee structure “depends on the client,” but it generally works on a percentage of the legal spend per year or event. Generally, Sterling works with clients with annual external legal spends of $150,000 and up. Its' fees range from three to five per cent of the legal spend.

“We have saved our clients up to 20 per cent in annualized spending on legal fees. Our costs are modest compared to what their savings are,” says Campbell.

Often, Sterling will do an initial audit of a prospective client’s last three to six months of invoices for free, and present a report to the client. It then takes on monitoring of invoices on a monthly basis, and shows in-house counsel how billing guidelines should work, how to have compliance, and to spot irregularities.

“If we’ve done our job properly, we shouldn’t have to be there forever,” says Campbell.

While some might think putting a third-party reviewer in place could create an adversarial situation between the legal department and external counsel, Campbell says that’s not the intention.

“We’re not here to attack rates or put labels on what rates should be,” he says.

The most common issues detected in bills, says Campbell, include block billing and inter-office communications at the firm.

“It’s not that the amounts may be wrong, but how they are billed. It may be an explanation as to why they had five people acting on a case and e-mailing each other and all charging full rates. There should be a reason why and they should disclose it,” he says.

As well, querying a bill is not always going to signal that a client won’t pay — it may simply be about clarification in terms of what level of lawyer was on the file and billing for his or her time.

“It’s a matter of understanding what they are paying for. If it’s explained there were two lawyers integral to the case who were discussing a strategy, it may make perfect sense and it’s a bill that should be paid,” he says.

“Our experience is that a lot of our clients won’t pay for first-year lawyers.”

The other area of contention is quarterly hour of billing, something Campbell says is a no-no today.

“We’re seeing minute rates and 10-minute rates, which is more normal,” he says.

Many large organizations, especially those with a U.S.-based parent company, have internal audit services for legal billing review.

“We have our own internal bill review team in the U.S. who do reviews for us and send back audits,” says Laila Brabander, vice president, Canadian third-party manager (casualty and specialty), with Chubb Insurance Co. of Canada.

The “audit and cost-management services” team reviews invoices for compliance with Chubb’s litigation management guidelines as well as addressing the billing-related service needs of insureds, law firms, and claim staff.

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