Balancing bills: How vendor e-billing can increase efficiencies

27 Jun 2011News

Hal M. Stewart, chief operating officer at Chadbourne & Parke, discusses how vendor e-billing can help law firms to reduce costs and improve operations

Three things you will learn from this Masterclass:

The challenges and risks of the traditional approach to advanced client invoices
Why vendor e-billing is the next step beyond outsourcing and insourcing payables
The benefits of vendor e-billing for both law firms and vendors

As the pressure to grow profits has increased over the past few years, many law firms have reviewed their administrative systems to identify opportunities to lower operating costs and improve accountability for financial transactions.

A few years ago, these efforts initially focused on the procurement function, which resulted in firms retaining contingency-based independent consultants who negotiated pricing for major products and services purchased by the firms. The fees for these services were typically based on a percentage of the amount incurred by the law firms which, in certain situations, represented substantial amounts.

Law firms have more recently embraced outsourcing and insourcing as a means to further reduce operating expenses by utilising lower-cost space and people to provide certain administrative services.

Some law firms have replaced in-house administrative departments with either people located at an offshore location or at a lower-cost geographic region onshore. This strategy has helped to reduce costs, given that people and space account for a substantial portion of a law firm’s operating expenses.

Technology has played a key role in helping to reduce the cost to provide support services in law firms. One area that has benefited from technological innovation is the reduction of paper received and retained by law firms.

The world has continued to embrace the elimination of paper, with an expanded emphasis on capturing data electronically at its point of creation. The full digitisation of business information has and will continue to substantially reduce the cost to house, manage and access information. In fact, most firms have noticed a substantial reduction in paper-based snail mail received by their mailrooms.

Over the past two decades, law firms’ financial software has evolved and improved in many areas. However, given the extent to which culture plays a critical role in how law firms operate, software vendors are focusing more on providing technological tools for firms to use in developing applications to improve their systems.

Law firms are information-based entities. The cost to operate an administrative department is directly proportionate to the nature and volume of the transactions it processes, as well as the number and types of individuals who need to interact with information. These factors point to a law firm’s finance department (or, as some firms may still call it, the accounting department) as being one of the most expensive departments to operate.

Vendor bill processing within a law firm – or, as it is typically referred to, accounts payable and litigation payable – represents one of the most labour-intensive areas within the finance department, as it requires daily interaction with most attorneys. Litigation payables handle clients’ advanced disbursements, which impact upon billing and cash receipts.

The challenge with processing clients’ advanced costs lies in the fact that attorneys and legal assistants directly retain outside parties to provide services. The retention of outside parties is independent of the finance department and the bills for these services are either typically sent directly to attorneys and legal assistants or to the finance department, without sufficient identification of the attorney or legal assistant who requested the service to be provided to the law firm. This poses several issues for law firms (see box: ‘Challenges law firms face with advanced client invoices’).

Challenges law firms face with advanced client invoices

An attorney holding vendor invoices for a client’s advanced services.
Identifying which attorney or legal assistant is required to approve a vendor invoice for a client’s advanced services.
Determining if a vendor invoice should be sent directly to a client for processing/payment.
Sending invoices to attorneys for review/approval and tracking the status of the invoices.
Obtaining an image of clients’ advanced vendor invoices for recordkeeping/client billing.
Responding to vendor calls regarding the processing status of their invoices.
In the United States, obtaining an executed federal form W-9.
Reviewing vendor statements to ensure all invoices have been received by the firm and are in process.
Submitting information to the billing system for a vendor invoice to be included in a client bill.
Missing a client billing deadline to recover advanced costs.
Billing the client for the third-party service prior to the matter being closed.
Identifying services that are provided within or outside of the US for tax compliance reporting.
Manually filing the vendor invoice.

Notwithstanding email having brought certain improvements to transmitting information to attorneys and legal assistants, the traditional approach to processing vendor invoices is very time consuming, prone to errors, does not provide accountability and involves substantial costs to the firm. It also carries the risk of non-recoupment of advanced expenses.

While vendor bill processing may appear to be nothing more than a required administrative service, it is a strategic component of a firm’s operations. This is supported by the extent to which firms advance costs with third parties on behalf of clients, which may not be recoverable if the bill is not reviewed, approved and submitted to the billing system prior to the matter being closed. This is especially the case for litigation engagements. The risks associated with this process can be substantial (see box: ‘Risk assessment of advanced client invoices’).

Risk assessment of advanced client invoices

How many vendor bills are being held by attorneys throughout your firm for clients’ advanced services?
What is the total amount of the vendor bills referred to in the first question?
What is the review/approval status for each client’s advanced invoices?
How many invoices need to be sent to a client to be paid directly to the vendor?
Which vendor bills received by your firm should be sent to clients for direct payment?
Have the vendor bills that should be sent to your client for direct payment actually been transmitted to the client?
Does the finance department have the required tax forms for all vendors?
How much is your firm paying staff to receive, research and respond to vendor calls about the status of their invoices?
Which services have been provided within and outside of the US for withholding tax compliance?
How are you escalating unapproved vendor bills to be approved?

Strategic investment in technology

Most law firms are reluctant to invest in technology during an economically challenging period. However firms are willing to consider technological opportunities which are based on a software-as-a-service (SaaS) platform, with a payback period of less than two years.

SaaS has gained popularity in that it does not require a firm to purchase or manage computer hardware or software. The scalable application resides on the software company’s systems and is seamlessly integrated with a law firm. This zero-footprint approach lowers the cost and risk for a law firm, while providing rapid deployment for new solutions.

Adapting e-billing approaches

Law firms have participated in client e-billing for many years. E-billing evolved as a means by which law firm clients have been able to analyse their legal spend and, more importantly, a means by which certain clients have been able to avoid the costs associated with receiving information from law firms and automatically transferring the information onto their proprietary internal computer systems. The ‘middleware’ feature of e-billing has provided a substantial benefit in reducing operating costs for clients.

Law firms have spent considerable time in automating the preparation of matter and billing data that is submitted electronically to clients for processing within their organisations. While the technological costs to comply with clients’ e-billing requirements has been incurred by law firms, it has also served to improve law firms’ internal billing systems.

Firms should take a chapter out of their clients’ books. The e-billing concept, as innovatively applied to law firm vendors, provides substantial benefits for law firms. It not only reduces the time and costs needed to capture information but also improves accuracy and eliminates the labour associated with accepting, processing, scanning and obtaining approval for vendor invoices.

Most importantly, it provides full accountability for all invoices and applies rules to determine if an invoice needs to be sent directly to a client to be paid, if the invoice should be automatically routed to an attorney’s delegate for approval, or if the invoice needs to be included in a client’s bill prior to the transaction being completed.

The system is paperless, thereby supporting a full digitisation initiative, which reduces the cost to file/retrieve paper-based bills and is in a format ready for electronic submission to a client within the firm’s bill.

Implementing vendor e-billing

Law firm vendor e-billing passes the labour and cost for capturing data regarding a vendor’s organisation and individual line items on an invoice to the vendor, which eliminates the need to employ bookkeepers either locally or abroad. This is not in any way different from what law firms’ clients have been doing for many years.

Vendors can access a law firm’s website and register to do business with the firm. In the US, the registration process includes capturing information required by the Internal Revenue Service, such as an uploaded PDF containing an executed federal form W-9.

The vendors then submit information into a rules-based, workflow system that automatically routes their bills for approval and, if necessary, escalates unapproved vendor bills that age beyond a specified period of time.

While there are a number of automated vendor procurement products in the market, as is always the case, a product designed by a software firm that is intimate with the legal industry is preferable in automating this important support service within a law firm.

As there are always certain parties who are an exception (such as a valued expert who may refuse to submit his bills for client advanced services), a designated bookkeeper can input exception vendor invoices onto the system from within the law firm and still gain the benefits of the application.

It’s a rare occasion when a law firm can eliminate an operating cost, while at the same time eliminating substantial risks associated with recapturing advanced client costs and improving the overall process. As with all other technological improvements, the implementation of the new system will play a key role in its success.

Access to the firm’s accounts payable and litigation payable website should be limited to authorised vendors and should require a username and password, which would be provided to vendors when they register to do business with the firm.

It is a simple process to incorporate existing vendors onto the website when it’s launched by sending a letter to each existing vendor which describes the programme (much like what clients do when they require law firms to use their e-billing programmes) and provides them with a pre-established username and password. This will eliminate the need for existing vendors to register on the law firm’s website.

As is the case with all new systems, there will be a slight learning curve. However, most vendors are comfortable with web-based systems, given that they typically shop and bank on the web. Unlike law firms, which may not have access to the processing status for their bills on client e-billing websites, vendors appreciate the ability to access a website to see the processing status of their invoices without having to call the firm. This is a win-win for the vendor and the law firm.

This innovative opportunity is but one example of how law firms can re-engineer certain administrative processes and incorporate technology to reduce costs while improving operations.