Making Transparency Count in Client Billing

Topics: Billing & Pricing, Client Relations, Corporate Legal, Efficiency, Law Firm Profitability, Law Firms, Midsize Law Firms Blog Posts, Peer Monitor

rate setting

I read a recent entry on BTI Consulting’s Mad Clientist blog with great interest. Who wouldn’t want to learn how to charge clients “whatever you want”?

The article points out that 80.1% of recently surveyed general counsels questioned the value of their outside counsel’s services because they could not easily understand what it was they were being billed for.

It’s no secret that law firm invoices can be a veritable warren of fees and disbursements, often kept intentionally vague in an effort to avoid client questions and objections. Ironically, it may well be this exact behavior that is in fact encouraging such questions and objections.

As today’s legal services market continues its incontrovertible shift to one where power resides in the buyers’ hands, clients are flexing their buying power by demanding greater transparency in the costs they pay to outside counsel. As I’ve written before, one way clients are seeking this transparency is through the practice of “shadow billing.”

But law firms need not wait for clients to demand a look behind the curtain to introduce transparency into the relationship.

BTI points out a list of 12 communication practices that can help a law firm shift from being one whose bills are always questioned, to one whose invoices represent true value to the client. To paraphrase a few of my favorite suggestions:

  • Share a detailed strategy for the matter prior to commencing work and then provide regular progress updates;
  • Provide a budget before the work begins — and before the client asks — and stick to it or update the client of the need for possible changes;
  • Outline potential problems and how they could impact the scope, budget and timing of the matter, and notify the clients if and when these events occur; and
  • Explain unusual or unexpected items in the invoice.

I would take the last bullet point even farther. It’s not enough to explain just the unusual or unexpected items. Even common items need clarity, or firms risk delays in realizations as clients try and sort out whether the bill is worth paying.

Disbursements & Cost Recovery in Client Billing

Cost recovery disbursements are an excellent example of items in need of clarity. Law firms routinely include them on invoices. Clients are used to seeing them. Yet rarely does the invoice convey what exactly is being recovered and on what basis. In fact, many if not most firms I’ve consulted with over the last few years with regards to their cost recovery have a long-standing practice of providing as little information as possible when it comes to how online research charges were generated. Some will include the number of transactions or minutes spent conducting online research along with the total cost, but many more will simply include a single line item for research charges with no explanation.

 


I hear time and again from partners and CFOs at law firms that, every month, more and more clients are presenting the firm with billing guidelines specifically excluding certain items from what the client is willing to pay, such as research cost disbursements.


 

If firms took such an approach with regard to hours billed, they would rightly expect the client to raise some objections about the lack of clarity in the bill. Yet firms readily take this approach with costs they consider to be less consequential to the client. Clients, however, do not seem to agree that these charges are not as important.

I hear time and again from partners and CFOs at law firms that, every month, more and more clients are presenting the firm with billing guidelines specifically excluding certain items from what the client is willing to pay, such as research cost disbursements.

Last August, I co-authored an article with Rob Mattern, of Mattern & Associates, a cost recovery consulting firm, which was published in The American Lawyer entitled “Reimagining Cost Recovery.” In it, we discuss an emerging cost recovery model wherein law firms focus their cost recovery efforts on transaction types that can be done through an online legal research vendor, but which inherently convey a greater value to the client than typical legal research. Several firms have adopted this approach, with good success.

But a key element to this cost recovery model is to clearly communicate exactly what types of transactions will be charged to the client. Once the client understands the type of work represented in the charges, they show an increased willingness to pay the associated costs. If the firm fails to clearly communicate the value of what is included in the bill, or does not continuously reinforce that message by providing clear, detail billing, the message is lost and the client views the charges as simply another research charge.

Cost recovery is but one example of where law firms could stand to be more transparent in how they bill their clients. Instead of being afraid that too much information may lead to too many questions, law firms should instead face the reality that current practices are simply discouraging clients from paying the bills at all.

BTI’s suggested practices are no guarantee of success. But failure to clearly communicate with clients on billing matters is a recipe for delayed realization, increased headaches and lost profits.