E-Invoicing: A Law Firm Perspective

Getting Started

Any system implementation project can be more or less technically successful, more or less cost-effective, and more or less of a drain on the participants' bottles of aspirin, acetaminophen and ibuprofen. Generally, though, a law firm's access to e-invoicing is fairly easy to set up. (Even client organizations don't usually engage the extensive outside assistance described in the companion article.)

One reason implementation for a law firm is relatively simple is that much of the routine invoice processing is Web-based. That means invoice submission can be controlled through standard Internet browsers, making it unnecessary to install additional vendor software on the firm's machines.

It's also relatively easy to adjust major software time-and-billing packages (CMS, Elite, TABS, Timeslips, etc.) to switch from producing paper invoices to producing electronic invoices in an industry-standard format. [See the sidebar on page 5 on progress in developing invoicing standards.] In some cases, an add-on software component may be required. Software Technology's TABS III product, for example, employs an inexpensive add-on called TaskBill to convert regular TABS output to the LEDES 1998B standard format.

Implementation challenges of greater difficulty are more likely to involve conflicting data strategies, eg:

' Commitment by one party to a nonstandard invoicing format.

' Inconsistent use of data encoding, eg, if one party uses the ACCA-ABA standard UTBMS codes while the other prefers to use a different code set, possibly homegrown ' or no task codes at all. Supplementing the UTBMS set with extra codes poses less of a problem.

Experiences of Three Firms

The short reports below are from discussions with individual accounting-staff members at actual firms, not composites. To spare me the travails of clearing their statements with firm management, they kindly agreed to share their information without attribution.

Firm 1. The accountant of a small firm I spoke with was originally given this choice by the software vendor for its first client subscription: a flat rate of $3000/yr or a charge of 1% of the fees being invoiced. With this vendor's pricing options, the flat rate becomes attractive if the firm's annual fee billing to a client reaches roughly $200,000. The firm opted for the percentage payment, but negotiated a change to 1% of invoiced fees approved and paid.

Lacking an IT department, this firm found the conversion effort nontrivial but manageable.

By accepting e-invoicing, this small firm has kept its large client happy. The client still pays with paper checks, however, and is not yet paying quite as rapidly as promised.

Firm 2. A billing coordinator for a 700-attorney global firm told me she's extremely pleased with electronic invoicing. Most of her e-invoicing clients do pay electronically. Given the large dollar volume of her firm's billing, this firm inclines toward flat-rate rather than percentage-based subscriptions.

She reports that adapting the firm's CMS accounting system to produce LEDES 1998B records was easy, and that otherwise the transition to using DirectInvoice was mostly just a matter of updating their web browser software to 6.0 versions.

In addition to sending invoices in the LEDES format to several large clients using DirectInvoice, she sends invoices in that format to another large client using Serengeti Tracker. Using a completely different method, she also sends Adobe Portable Document Format (PDF) images of CMS invoices to a client who uses a proprietary system.

Firm 3. An accounting specialist at a 900-lawyer national firm (with an international practice area) uses the Elite accounting system and deals with several invoicing systems, including Direct-Invoice, ShareDoc/LEGAL, TyMetrix and Tracker. Many clients also pay electronically, and she personally does not find interfacing with multiple systems to be burdensome.

For each invoicing product this firm pays an annual subscription consisting of a flat rate or a percentage of billing. One vendor used to charge a combination of both, she says, but now instead charges 2% of the fees being invoiced; there is no cap on this stiff charge, but she thinks the firm is reluctant to complain out of concern for appearing uncooperative with its clients. (See discussion below.)

Discounts taken from bills, including those taken by the invoicing software vendor, need to be manually written off by a backend batch process through Elite. The additional processing has not been problematic, she says.

One DirectInvoice feature she finds to be a selling point with her attorneys is that it enables them to track in detail the progress of their invoices through the client organization. She noted that another vendor was looking into adding a similar feature.

Negotiating with Your Client

Overwhelmingly, the initiative for electronic invoicing comes from the client side. After a deal has been struck between the software vendor and a client organization, outside law firms are told of the upcoming changes. Firms are offered assistance with implementing the required software on their end, but generally told they are expected to bear whatever cost is assessed.

Firms seem to take such fiats in stride. Rather than brooding over the commoditization of legal services, I suggest we interpret this acquiescence favorably, as a sign of an improving culture of client service. Perhaps it also reflects an agile mindset, in which firms realize that being able to transact business using a variety of billing and payment methods increases a firm's engagement opportunities.

That said, several aspects of e-invoicing relationships do seem open to negotiation with the client ' which should of course be done with a broader view to strengthening the firm-client relationship:

' If the firm does only a small amount of work for a client, consider asking the client to exempt the firm from e-invoicing altogether.

' Negotiate the implementation schedule to minimize staff overtime.

' While the client will be able to process e-invoices faster than paper, the main cash flow speedup for the firm will come from electronic payment. If a client initially doesn't couple e-invoicing with e-payment, press them to do so.

' Some e-invoicing packages (eg, TyMetrix) support audits that challenge individual line items without holding up payment for the rest of the invoice. Strongly encourage clients to use that feature if available.

' If you prefer an e-invoicing service for its features, cost, or technical support ' the latter being vital ' recommend it to clients who are shopping for one.

' Negotiate whether the firm will accept any client-initiated discounts (for prompt payments, delayed invoices, etc.). Also negotiate whether the firm will accept having such discounts being applied automatically.

' Offer to collaborate with the client on automatic auditing for duplicate invoices, mathematical flaws, unauthorized billers, spending limit violations, and other errors.

Understanding and Negotiating Costs

Be sure as well that your costs for e-invoicing software are kept reasonable:

' Negotiate, typically with the vendor rather than your client, on the annual subscription charge. (See the pricing model discussion below.)

' If additional subscriptions to the same service are needed later for other clients, make sure the vendor provides a multi-client discount that appropriately reflects its lower incremental costs.

The following background information should help you negotiate more effectively.

Who pays for e-invoicing? Although e-invoicing vendors deal primarily with client organizations, they follow three different payment models.

' One vendor I spoke with uses a pricing model in which the client organization and its outside firms all pay. The more the client organization pays, the less the law firms have to pay. Presumably that's why Firm 2 above pays only $2500/yr for the same product that the much smaller Firm 1 would have paid $3000 for on a flat-rate basis.

' Another vendor I spoke with basically gives its product to the client, shifting all the cost to the client's law firms. That's why Firm 3 is paying an uncapped 2% of the fees processed by that vendor.

' A third vendor pursues the opposite approach. As detailed on its Web site, Serengeti prefers to focus all charges for its Tracker product on the client organization, leaving it to each client to work out cost sharing with its outside firms.

Why are percentage charges based on fees? From the client perspective, pricing the invoicing service on a percentage-of-fees basis makes some sense: firms that get most of a client's legal business wind up paying most of the cost.

Law firms have reason to see the matter differently. To the extent that e-invoicing eventually leads to faster payment, it's true that the benefit to the firm will be proportional to the size of the payments. But considering that e-invoicing is transactional, a firm can legitimately ask why it should pay more to get a high-fee partner's invoice processed than it does for an associate's similar but lower-fee invoice. (Imagine if the phone company or your Internet provider proposed that.)

From the law firm's point of view, it would make much more sense for vendor charges to be based instead on the number and complexity of the invoices processed, and perhaps on the level of technical support required by the firm.

Here's another objection to vendor pricing based on lawyer fees: it seems likely to have a feed-forward effect that works to the detriment of everyone but the software vendor. Because lawyers aren't allowed to seek reimbursement from clients for their billing expenses, they eventually will have to raise their base rates to accommodate this additional overhead. Such rate increases challenge the client's legal services budget and strain the lawyer-client relationship. Meanwhile, the firm's increased rates mean the vendor will get paid more for providing the same service.

How much is too much? Leaving aside the fairness of how vendors price their products, the firm should challenge a price that just seems unreasonably high.

The uncapped 2% of fees that Firm 3 pays one vendor seems outrageous ' one would think the vendor was guaranteeing payment! That vendor claims its product commands a high price in part because it provides superior analytic reporting and benchmarking. But that information is directly available only to the client organization. The law firms who foot the entire bill for that product only benefit to the extent that the client organization chooses to share their findings.

Conclusions

One bright note in my interviews was being told by a Tripoint implementation specialist about the serious concern many client organizations show for the wellbeing of their outside firms. That said, it must be noted that the much applauded win-win attitude is not universally embraced. For a thoughtful plea to us-versus-them holdouts, in legal cost management generally and e-invoicing specifically, see DataCert vice president Jeff Hodge's Legal Director article at www.legaldirector.net/ViewItem.asp?id=14270.

This article has suggested several ways in which firms should more actively collaborate and negotiate with their clients and with the vendors of e-invoicing software.

Finally, firms should not let the tolerability of current technology lull them into needlessly accepting nonstandard data formats. Apart from reducing software product costs, standardization improves reliability and security, while also reducing recruitment, training and administrative costs. Clients and law firms both have much to gain from participating in the work of standards groups such as the LEDES Oversight Committee (LOC)

Joe Danowsky is the Editor-in-Chief of this newsletter.

As argued in the accompanying article on one corporate law department's initiatives, implementation of electronic invoicing software should ideally be a win-win improvement benefiting outside law firms as well.

That article deals specifically with Tripoint's DirectInvoice software (www.tripoint.com), but similar success stories can presumably be told for competing packages such as DataCert's ShareDoc/LEGAL' (www.datacert.com), Serengeti's Tracker (www.serengetilaw.com), and TyMetrix (www.tymetrix.com).

This win-win orientation is certainly in line with modern business thinking on agile supplier relationships. That thinking stresses the efficiency and necessity of electronic data interchange (EDI) and mutual accessibility to shared online data.

Getting Started

Any system implementation project can be more or less technically successful, more or less cost-effective, and more or less of a drain on the participants' bottles of aspirin, acetaminophen and ibuprofen. Generally, though, a law firm's access to e-invoicing is fairly easy to set up. (Even client organizations don't usually engage the extensive outside assistance described in the companion article.)

One reason implementation for a law firm is relatively simple is that much of the routine invoice processing is Web-based. That means invoice submission can be controlled through standard Internet browsers, making it unnecessary to install additional vendor software on the firm's machines.

It's also relatively easy to adjust major software time-and-billing packages (CMS, Elite, TABS, Timeslips, etc.) to switch from producing paper invoices to producing electronic invoices in an industry-standard format. [See the sidebar on page 5 on progress in developing invoicing standards.] In some cases, an add-on software component may be required. Software Technology's TABS III product, for example, employs an inexpensive add-on called TaskBill to convert regular TABS output to the LEDES 1998B standard format.

Implementation challenges of greater difficulty are more likely to involve conflicting data strategies, eg:

' Commitment by one party to a nonstandard invoicing format.

' Inconsistent use of data encoding, eg, if one party uses the ACCA-ABA standard UTBMS codes while the other prefers to use a different code set, possibly homegrown ' or no task codes at all. Supplementing the UTBMS set with extra codes poses less of a problem.

Experiences of Three Firms

The short reports below are from discussions with individual accounting-staff members at actual firms, not composites. To spare me the travails of clearing their statements with firm management, they kindly agreed to share their information without attribution.

Firm 1. The accountant of a small firm I spoke with was originally given this choice by the software vendor for its first client subscription: a flat rate of $3000/yr or a charge of 1% of the fees being invoiced. With this vendor's pricing options, the flat rate becomes attractive if the firm's annual fee billing to a client reaches roughly $200,000. The firm opted for the percentage payment, but negotiated a change to 1% of invoiced fees approved and paid.

Lacking an IT department, this firm found the conversion effort nontrivial but manageable.

By accepting e-invoicing, this small firm has kept its large client happy. The client still pays with paper checks, however, and is not yet paying quite as rapidly as promised.

Firm 2. A billing coordinator for a 700-attorney global firm told me she's extremely pleased with electronic invoicing. Most of her e-invoicing clients do pay electronically. Given the large dollar volume of her firm's billing, this firm inclines toward flat-rate rather than percentage-based subscriptions.

She reports that adapting the firm's CMS accounting system to produce LEDES 1998B records was easy, and that otherwise the transition to using DirectInvoice was mostly just a matter of updating their web browser software to 6.0 versions.

In addition to sending invoices in the LEDES format to several large clients using DirectInvoice, she sends invoices in that format to another large client using Serengeti Tracker. Using a completely different method, she also sends Adobe Portable Document Format (PDF) images of CMS invoices to a client who uses a proprietary system.

Firm 3. An accounting specialist at a 900-lawyer national firm (with an international practice area) uses the Elite accounting system and deals with several invoicing systems, including Direct-Invoice, ShareDoc/LEGAL, TyMetrix and Tracker. Many clients also pay electronically, and she personally does not find interfacing with multiple systems to be burdensome.

For each invoicing product this firm pays an annual subscription consisting of a flat rate or a percentage of billing. One vendor used to charge a combination of both, she says, but now instead charges 2% of the fees being invoiced; there is no cap on this stiff charge, but she thinks the firm is reluctant to complain out of concern for appearing uncooperative with its clients. (See discussion below.)

Discounts taken from bills, including those taken by the invoicing software vendor, need to be manually written off by a backend batch process through Elite. The additional processing has not been problematic, she says.

One DirectInvoice feature she finds to be a selling point with her attorneys is that it enables them to track in detail the progress of their invoices through the client organization. She noted that another vendor was looking into adding a similar feature.

Negotiating with Your Client

Overwhelmingly, the initiative for electronic invoicing comes from the client side. After a deal has been struck between the software vendor and a client organization, outside law firms are told of the upcoming changes. Firms are offered assistance with implementing the required software on their end, but generally told they are expected to bear whatever cost is assessed.

Firms seem to take such fiats in stride. Rather than brooding over the commoditization of legal services, I suggest we interpret this acquiescence favorably, as a sign of an improving culture of client service. Perhaps it also reflects an agile mindset, in which firms realize that being able to transact business using a variety of billing and payment methods increases a firm's engagement opportunities.

That said, several aspects of e-invoicing relationships do seem open to negotiation with the client ' which should of course be done with a broader view to strengthening the firm-client relationship:

' If the firm does only a small amount of work for a client, consider asking the client to exempt the firm from e-invoicing altogether.

' Negotiate the implementation schedule to minimize staff overtime.

' While the client will be able to process e-invoices faster than paper, the main cash flow speedup for the firm will come from electronic payment. If a client initially doesn't couple e-invoicing with e-payment, press them to do so.

' Some e-invoicing packages (eg, TyMetrix) support audits that challenge individual line items without holding up payment for the rest of the invoice. Strongly encourage clients to use that feature if available.

' If you prefer an e-invoicing service for its features, cost, or technical support ' the latter being vital ' recommend it to clients who are shopping for one.

' Negotiate whether the firm will accept any client-initiated discounts (for prompt payments, delayed invoices, etc.). Also negotiate whether the firm will accept having such discounts being applied automatically.

' Offer to collaborate with the client on automatic auditing for duplicate invoices, mathematical flaws, unauthorized billers, spending limit violations, and other errors.

Understanding and Negotiating Costs

Be sure as well that your costs for e-invoicing software are kept reasonable:

' Negotiate, typically with the vendor rather than your client, on the annual subscription charge. (See the pricing model discussion below.)

' If additional subscriptions to the same service are needed later for other clients, make sure the vendor provides a multi-client discount that appropriately reflects its lower incremental costs.

The following background information should help you negotiate more effectively.

Who pays for e-invoicing? Although e-invoicing vendors deal primarily with client organizations, they follow three different payment models.

' One vendor I spoke with uses a pricing model in which the client organization and its outside firms all pay. The more the client organization pays, the less the law firms have to pay. Presumably that's why Firm 2 above pays only $2500/yr for the same product that the much smaller Firm 1 would have paid $3000 for on a flat-rate basis.

' Another vendor I spoke with basically gives its product to the client, shifting all the cost to the client's law firms. That's why Firm 3 is paying an uncapped 2% of the fees processed by that vendor.

' A third vendor pursues the opposite approach. As detailed on its Web site, Serengeti prefers to focus all charges for its Tracker product on the client organization, leaving it to each client to work out cost sharing with its outside firms.

Why are percentage charges based on fees? From the client perspective, pricing the invoicing service on a percentage-of-fees basis makes some sense: firms that get most of a client's legal business wind up paying most of the cost.

Law firms have reason to see the matter differently. To the extent that e-invoicing eventually leads to faster payment, it's true that the benefit to the firm will be proportional to the size of the payments. But considering that e-invoicing is transactional, a firm can legitimately ask why it should pay more to get a high-fee partner's invoice processed than it does for an associate's similar but lower-fee invoice. (Imagine if the phone company or your Internet provider proposed that.)

From the law firm's point of view, it would make much more sense for vendor charges to be based instead on the number and complexity of the invoices processed, and perhaps on the level of technical support required by the firm.

Here's another objection to vendor pricing based on lawyer fees: it seems likely to have a feed-forward effect that works to the detriment of everyone but the software vendor. Because lawyers aren't allowed to seek reimbursement from clients for their billing expenses, they eventually will have to raise their base rates to accommodate this additional overhead. Such rate increases challenge the client's legal services budget and strain the lawyer-client relationship. Meanwhile, the firm's increased rates mean the vendor will get paid more for providing the same service.

How much is too much? Leaving aside the fairness of how vendors price their products, the firm should challenge a price that just seems unreasonably high.

The uncapped 2% of fees that Firm 3 pays one vendor seems outrageous ' one would think the vendor was guaranteeing payment! That vendor claims its product commands a high price in part because it provides superior analytic reporting and benchmarking. But that information is directly available only to the client organization. The law firms who foot the entire bill for that product only benefit to the extent that the client organization chooses to share their findings.

Conclusions

One bright note in my interviews was being told by a Tripoint implementation specialist about the serious concern many client organizations show for the wellbeing of their outside firms. That said, it must be noted that the much applauded win-win attitude is not universally embraced. For a thoughtful plea to us-versus-them holdouts, in legal cost management generally and e-invoicing specifically, see DataCert vice president Jeff Hodge's Legal Director article at www.legaldirector.net/ViewItem.asp?id=14270.

This article has suggested several ways in which firms should more actively collaborate and negotiate with their clients and with the vendors of e-invoicing software.

Finally, firms should not let the tolerability of current technology lull them into needlessly accepting nonstandard data formats. Apart from reducing software product costs, standardization improves reliability and security, while also reducing recruitment, training and administrative costs. Clients and law firms both have much to gain from participating in the work of standards groups such as the LEDES Oversight Committee (LOC)

Joe Danowsky is the Editor-in-Chief of this newsletter.