By Pieter van der Hoeven.
No one likes a surprise at billing. Whether or not AFAs are the new normal, most major law firms have engaged in some sort of predictive pricing practices to avoid these surprises. So how do we reconcile this drive for predictability against the hidden cost of disbursements and expenses? These outsourced costs are often poorly analysed, unreliably tracked, and rarely transparent for the client. In turn, law firms fail to learn from the insights this data stream can offer, thus undermining their hard-won internal client value efforts.
Law likes certainty. It’s baked into the rule of law itself and forms one of the core tenets of legal practice. Every firm may have different processes or goals, but the fundamental deliverables are the same. We even have a system of (arguably over-complex) UTBMS codes because the majority of matters consist of well-defined steps and activities.
So, what are disbursements? Ask one firm and they’re basic costs like printing or scanning documents.
For others, they include expert fees. Yet more stretch the definition to outsourced core matter work, like due diligence performed by a third party. In short, there is no definitive answer. What is clear is the knock-on effect for clients - confusion and a surprise at billing.
Not only is this negative for the drastic improvements firms have made in offering their clients transparency in recent years, but it also detracts from the increasing oversight firms have in pricing and profitability. By defining and monitoring disbursements more closely, firms reduce uncertainty at billing and increase oversight for process improvements in the long term.
Transparency without disbursements isn’t transparency
Imagine you head out for dinner to a nice restaurant. They provide you with a menu, with prices and descriptions from which you order. The food arrives as promised and everything is great until the bill appears. While the price for the food was accurate, you now find out that the bread came from a different location and the costs were not included in the menu price. The bread increases your bill by 25%. Worse still, the waiter didn’t even know the price of the bread at the beginning of the meal, and you couldn’t opt-out of it.
While no one is going to award prizes for this unsubtle metaphor, it does a pretty good job of highlighting the challenge disbursements pose to client transparency. Law firms have made leaps and bounds in working closely and openly with clients. We regularly host webinars listening to the innovative ways pricing and LPM teams deliver matters as promised to clients. Strangely though, disbursements are seldom featured in this picture.
Arguably, this lack of oversight is a relic from a less transparent era: When disbursements were passed directly on to clients without challenge and often without being written off. But in a world where a pandemic still looms over in-house legal team budgets, and where the legal services market is even more competitive, hidden costs can be a motivating factor behind a change of legal representation. In 2020, as many as 68.4% of firms reported losing business to companies in-sourcing more work. Whenever budgets are stretched, one of the priorities for in-house teams is in having predictable legal bills that can be clearly reported to their own CEOs. Unexpectedly high disbursement costs are simply not compatible with that kind of oversight.
Garbage in, garbage out
So how can law firms change their approach to disbursements? First, it is key to be able to identify them. This series has already covered the relationship between good data and the formation of bespoke pricing blocks, all the way to the innovative pricing strategies that build on them. One of the core messages running through all the articles is that transparency depends on the insights that accurate data offers. Namely, if you don’t understand the past, you can’t predict the future.
For many firms, the first hurdle is in tracking disbursements. It is impossible to monitor a disbursement if it isn’t tied to your existing matter management and billing system. It is essential when an invoice is logged, it is attached to the relevant matter. Equally, each cost should be tagged as pass through or not, to indicate whether it will impact firm profitability. More generally, firms should always be able to tell clients which disbursements the firm will pass on directly, and which ones will likely incur costs.
Beyond that, firms should be able to set budgets for disbursements, alongside their matter budgets. At Clocktimizer, we can track when disbursement costs are logged to a matter and can create alerts to notify a user when a budget threshold is about to be met. In doing so, disbursements can be tracked, and firms can start a conversation with a client about these additional costs before they get out of hand. This gives cost certainty to clients, resulting in a closer and more transparent relationship. Setting a budget also requires the owner to manage expectations and set price and scope with the supplier as well as with the client.
A more transparent future?
Reporting and monitoring of existing disbursements, however, is still a short-term solution. In the long term, more sophisticated monitoring of disbursements presents an opportunity for more sophisticated pricing structures. Particularly in evaluating whether outsourcing certain activities is more cost-effective.
During one of our recent webinars, Royale Price noted that “there are huge opportunities in using alternative resources, especially where you are using fixed fees”. Currently, very few firms tag disbursement invoices with the activities they represent. However, if they began a more granular categorisation of these costs, firms could use tools like Clocktimizer to compare the cost of an outsourced activity, with one performed in-house. In turn, these insights could inform firm strategy in selecting which activities should remain core processes, and which are more profitable when performed by a third party.
On a wider scale, firms could also use this insight to track international matters with greater oversight. Currently, it is possible to use a disbursement construction to outsource portions of work to a third-party law firm in a multi-jurisdictional matter. Because this work is invoiced but not categorised, firms do not have the same matter oversight that they do with internal work. This means updates and client reporting require regular calls and additional admin work to gather the data from their partner firms. However, in tagging the activities, firms could generate the same matter reporting insights that they do with their in-house matters. With the same categorisation, the same matter progress reports can be generated, including the work of sub-contracted parties. Not only does this drastically reduce the amount of time taken to report to clients, but it also increases transparency in budget and matter oversight.
A new form of LEGO block
Disbursements, then, need not be an invoice black hole. Their greatest restriction at this moment is in how poorly they are defined and monitored. However, as firms have learned to categorise and analyse the work performed in-house, so too can firms turn this exercise outward. Initially, defining the scope of disbursements and setting budgets for them offers an immediate win in billing certainty and transparency for clients.
Looking forward, a more sophisticated analysis of the activities making up disbursements could lead to like-for-like comparisons of in-house and outsourced work for long-term profitability. Additionally, this increased level of oversight will enable firms to manage multi-jurisdictional matters with the same matter data as in-house work. The bottom line? Why stop at measuring what happens internally, when the external work can have equally as big an effect on client satisfaction and service delivery.
About the Author Pieter van der Hoeven, a former M&A lawyer with 15 years of experience in the legal industry, is the co-founder of Clocktimizer, which is now part of Litera. Clocktimizer is an award-winning legal technology company that helps law firms to understand who is doing what, when, where, and at what cost. Global 100, Am Law 100, and Am Law 200 law firms use Clocktimizer to make data-driven decisions around matter management, budgeting, and pricing. Before starting Clocktimizer in 2014, Pieter was an M&A lawyer at DLA Piper and earned his MBA from Rotterdam School of Management and IE Business School. Pieter can be contacted at firstname.lastname@example.org