LaJean Humphries is the library manager for Schwabe Williamson & Wyatt, a multi-service, regional law firm headquartered in Portland, Oregon. Her firm was one of several beta sites for a new software product from LexisNexis developed to validate a firm’s client matter numbers and improve online cost recovery. She regularly provides Internet training for attorneys and staff. LaJean authored a chapter, How to Evaluate a Web Site, in the new book, Web of Deception, from Information Today.

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Its Budget Time, and You Get More Money!

Can’t happen. Think again. This is the story of one firm’s experience with a cost recovery (otherwise known as a chargeback realization improvement) project.

Online research is not only perceived, but is one of the highest costs in a law firm today. It often comes right after personnel costs as the highest overhead item in a firm’s budget. Online research is thought of as a cost center, not a revenue opportunity. And because online research is generally managed within the library’s budget, the library is viewed as a cost center.

Lawyers are notorious for not managing the practice of law “like a business.” The current economic climate is causing all areas of business, not just law firms, to rethink their billing and pricing strategies. Consequently, many firms are rethinking their approach to billing for online research. Firms that have never billed or ceased billing several years ago, are now beginning to bill clients for online research. Firms that have been billing all along are scrutinizing the efficiency and profitability of their billings.

Nonetheless, for many law firm librarians it’s an uphill climb to create a law firm culture where billing for online research is routine and write offs of online research charges are rare. However, the most efficient firms have not only developed a billing strategy but have also communicated it firmwide and put procedures in place to enforce the strategy.

Why Is It So Difficult?

Law firms frequently lack a centralized focus, policy, or approach to billing for online research. The partnership may be unaware of individual practice area billing “strategies.” Often a significant amount of research expense is absorbed by the firm that could/should have been billed to clients. In many firms senior partners never perform any research, online or otherwise. Because they delegate the “hands-on” work, they are unaware of all aspects of online research. While they may be aware of the costs as a total line item in the budget, they are unaware of the effectiveness of online research in saving lawyer time, improving client service, and providing a better work product.

Individual practice areas or attorneys may be unaware of the ramifications of their actions to the firm’s bottom line. Especially in larger firms, an individual attorney may consider his or her amount of online research insignificant in the larger budget picture. There is a lack of incentive to record client matter numbers on some searches. Individual practice groups often say that they can’t bill a particular type of client for online research for any of a host of reasons, some which are valid and many which are not valid. Consequently, online research is not charged back to a client.

Why Should the Librarian Take Charge?

No one understands the cost of online research like the librarian. The librarian is the person called upon to explain why a particular research session costs so much, to explain what research was done, and even to explain why the research was necessary. If online research is in the library’s budget, the librarian not only should, but also must, take charge.

Taking the lead on cost recovery redefines you and the library as a contributor to the firm’s profitability (bottom line). It can improve your relationship with the management of the firm and positions you as an integral part of the management team. It also demonstrates your “core and specialized competencies” as you:

• Exhibit leadership skills including critical thinking, risk taking, and creativity, regardless of position within management structure.
• Demonstrate commitment to working with others to achieve common goals.
  
• Exhibit an understanding of the importance of a multidisciplinary and cross-functional approach to programs and projects within the organization.
  
• Communicate effectively with publishers and other information providers to advance the interests of the library.
  
• Provide leadership within the parent organization to ensure that the library is vital to the organization.

Who Are You Going to Call?

You can’t succeed alone. Four groups are critical to the success of any cost recovery project: your accounting/finance department, your online vendor representatives, your firm’s management, and your IS department.

If you are going to try to improve your firm’s cost recovery, you must partner with your accounting department and have a good understanding of your firm’s business practices. Some things you need to know include: Who has the authority to “write off” research charges? Why do they write off charges? If a client disputes part of a bill, what happens? Does the accounting department allocate what is paid first? Which is paid first: attorney fees or disbursements? All of these issues can dramatically affect the realization rate.

Analyze your current cost recovery: determine what percentage of your online research costs is billed back to clients, what percentage is absorbed by the firm as administrative costs, and what percentage of administrative costs really should have been billed to clients (legal research masquerading as business development). Determine what percentage is lost because it is allocated to invalid client matter numbers. Next, determine how much of what was billed was actually collected. Finally, determine the profitability by practice area and/or lawyer.

If you are not proficient in using and interpreting PowerInvoice, QuickView, or other online research statements, your online vendor representatives can help. Not only can they show you the most efficient ways of obtaining billing information, they can help you understand the details and provide a broader view of billing strategies used among firms nationwide. Most representatives are willing and able to talk with a firm’s management about billing/cost recovery. Leverage their expertise and knowledge of your firm. Sometimes having an articulate outsider will reinforce your cost recovery message.

The third partner in cost recovery is the firm’s management. Firm management must be interested and committed for a cost recovery project to succeed. Management must communicate the firm’s billing strategy to all attorneys and staff. Management must help attorneys discuss research charges up front with new clients. The librarian can work with management to create policies and procedures that support the billing strategy and encourage appropriate billing behaviors. However, the librarian cannot implement policies and procedures that have not been first clearly articulated by top management.

Finally, you must have the cooperation of the firm’s IS department to load the necessary software on the network.

A Case Study

When I started at Schwabe Williamson & Wyatt over a decade ago, the firm marked up online research charges. Not only did we recover all of our online research costs from client billings; we made a profit although not enough to cover the total cost of the library. (We also considered books costing more than $75 to be “capital expense” items, but that’s another story.) Times change. In December 1993, the American Bar Association issued formal ethics opinion 93-379, Billing for Professional Fees, Disbursements and Other Expenses. After I brought this opinion to the attention of firm management, a decision was made to stop marking up any online costs. We continued to bill for online research, but we only billed the actual cost. Although the library and management made a concerted effort to educate attorneys about this change, to this day we still have some attorneys who think we mark up online research.

The effect on the library’s budget was immediate. The library went from making a small profit to becoming a huge overhead cost. It got worse every year as attorneys billed less and less. The library, not the attorneys doing research, was seen as the problem. Talking to attorneys and management was fruitless.

At the same time I was actively talking to online vendors seeking their help in improving our online cost recovery. Our firm wasn’t the only one with a problem in online cost recovery. LexisNexis was hearing from many of their customers and wanted to create a solution. A group was formed consisting of LexisNexis management and private consultants with a few large law firms brought in as beta test sites. LexisNexis made a commitment to create a software product to aid in client validation/cost recovery while the firms made a commitment to test the product and provide feedback.

Schwabe Williamson & Wyatt was one of the law firms partnering with LexisNexis on the cost recovery project. Once the initial commitment to participate in the project was made, extensive interviews were held with a broad range of attorneys and Schwabe management. There were interviews with practice group leaders as well as associates at all levels and accounting and IT personnel. Two facts became evident: 1) there was a strong senior management desire to improve cost recovery, and 2) there was a highly conservative anticipation of negative client reactions (in fact, the number of actual client objections to charges was small).

The second phase of the project combined categories of information, drawn from the firm time and billing program and LexisNexis PowerInvoice, against each other to establish:

percent realization by client/client matter

percent realization by content type

proportion of usage that was never assigned a valid client or administrative number

proportion that was assigned to an administrative number

proportion written off

proportion that proved uncollectable, and

proportion of usage assigned to administrative/non-client purposes by file

Some of the issues we faced were timing/matching between the firm’s time and billing program and PowerInvoice and the large number of new client matter files created during the study period (over 20,000 in twelve months). Extensive testing ensured that the data had high integrity. Because of the large number of new matter files, we worked off samples by department to facilitate data handling and analysis.

The most significant finding confirmed what the library had been saying all along: invalid or no client matter number drove over 80% of the variation in realization by content. This was a key factor.

The third phase of the project involved complete analysis of the data showing cost recovery by practice, content area, and stage in the administrative process, as well as showing differences in realization by content type, by department, and other categories. Once the analysis of interviews and usage/billing data was completed, two findings were obvious: 1) practice areas did an excellent job of billing and collecting client research charges, and 2) the major cost recovery issues related to charges to “admin” and disbursement write offs.

The study found a number of different reasons for non-recording of client matter numbers (the primary barriers to improved cost recovery). During the last remodel of the firm’s offices, the library space was reduced significantly and most case reporters were eliminated. To make this palatable to attorneys, a separate bill group was established for the “Enter a Citation” or “Get a Document” feature which required no client matter number and did not charge clients to pull cases or Shepardize. Heavy use of the Enter a Citation button on the firm’s intranet was a contributing factor in non-recording of client matter numbers. (This was acceptable in our firm because of the history of not billing for making copies of cases.)

Also, the study found a high volume of requests to library staff for research without client matter numbers. Some research was done during the period between opening a client matter and having a number assigned, although this was not a large factor. Some client matter lifespans and/or low billings (such as in the land use practice) made it difficult to track or bill research charges. In some instances, fee agreements precluded billing of research charges. Many newer associates were discouraged from billing by senior attorneys. An inordinate amount of firm time was spent “cleaning up” invalid client matter numbers.

LexisNexis showed several ways by which prices could be adjusted to improve cost recovery and calculated the likely Schwabe benefit. A rebalancing model was developed and presented that resulted in substantial improvement in cost recovery. Calculations of the impact of the new model on historical billings were completed for review with individual billing partners. In addition, other recommendations were made for non-system strategies for improving cost recovery and presented to Schwabe management. The Client Validator was adopted immediately. Client Validator is a software product installed on a law firm’s network that interfaces with the firm’s time and billing system to identify all valid client numbers. This creates a just in time, fully automated solution for associating online research costs to specific client matters.

LexisNexis Client Validator works with both lexis.com and the Lexis proprietary software. It requires the researcher to enter a valid client matter or utilize a validation lookup box that pulls client matter data directly from the firm’s billing table. Since it interfaces with the firm’s billing system table, Client Validator ensures only the firm’s most current client name/number/matter listings are presented to the user. It eliminates hours upon hours of guesswork in trying to track down research that had erroneous client numbers associated with the research. The Client Validator does allow the firm to establish a legitimate non-billable client matter number for use when appropriate. It also saves the last twenty client numbers in a drop-down box.

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Benefits

Since the Client Validator pulls data directly from our billing system table, researchers have easy access to the most current client matters. This ensures accuracy in matching both billable and non-billable online research to clients. It serves as an easy “look up” tool when the user doesn’t know the number. It also ensures valid client identification numbers for every research session thus saving hours of work tracking down valid research numbers. Because Client Validator allows for legitimate non-billable numbers, it is easier to manage non-billable activity and match it with the researcher/attorney. This all helps to increase recoverable costs.

The IS department likes the Client Validator because it does not require extra work or maintenance and does not make changes to any applications on the network.

Training Issues

There is no substitute for training if you want to improve online research efficiency. We tailor training for specific practice groups and individual attorneys. The library staff works with the account representatives to customize training. We have a regular schedule of training for online research services and provide specialized training at any time convenient for attorneys.

Attorneys and staff use the firm’s intranet as a starting point for online research. The library research page features the “Enter a Citation” box/button in a prominent position as well as direct connections to lexis.com, lexisone.com, and other online services. A library orientation slide show and colorful handouts reinforce the concept of cost recovery. Every new attorney and employee completes a course of training covering email, word processing, time and billing, etc. within the first days at the firm. We have partnered with the in-house trainers and they reinforce the firm’s policy regarding cost recovery and use of the Client Validator in the overall computer training.

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The Client Validator is very simple to use. Training is hardly necessary. Nonetheless, we have a “How-to Look Up a Number” PDF document on the intranet just below the “Enter a Citation” box/button. We cover the Client Validator in every online training session, in library orientation, in handout materials, and in every face-to-face training. The Help Desk has been trained so they can respond to questions and provide training if necessary.

The Carrot and the Stick

Attorneys and staff are rewarded for online research training and cost efficiency with favorable publicity, small gifts, CLE credits, lunches, and dinners. The library occasionally has “most cost efficient researcher” contests and the firm has given bottles of wine and gift certificates to favorite restaurants as prizes. At the same time, we also publicize the names of all researchers with non-billable research amounts in order of most expensive to least expensive non-billable user.

What Has Been the Result?

LexisNexis proposed two main recommendations – rebalancing and client validation. To date, we have only implemented client validation. Attorneys and management are divided about the concept of rebalancing and have agreed to wait before instituting that feature. (Other beta sites in the project have implemented rebalancing (watch for articles from them on this subject). PowerInvoice will allow for rebalancing, perhaps by the time you read this.) The Client Validator has been in place in our firm for about eight months. The immediate result of client validation was better data. We no longer get invoices with numerous faulty client numbers or invalid non-billable codes. Considerable staff time is saved “cleaning up” invalid numbers. Having reliable, valid client matter numbers enabled automated billing thus speeding up the billing process. The sooner a client is billed for a service, the greater the chances the bill will be paid.

Better Recovery

Client validation alone improves recovery. Research costs are no longer absorbed as overhead for lack of a valid client number. However, client validation cannot stand as the only tool to improve cost recovery. The firm’s management must define and communicate a billing strategy and create policies and procedures that support and implement the billing strategy. A firm’s culture must embrace and support the concept of billing for online research. It’s budget time again and no, I didn’t get more money to spend on books or anything else. However, the online research budget is looking better thanks to improved cost recovery!

FAQs

Why didn’t we work with West or other vendors? We presented the problem to all the major online vendors. LexisNexis was the vendor who offered to help us.

Will Client Validator work with Westlaw or other services? My understanding is that it will. So far, we have only implemented it with CourtLink, although we plan to implement it with other services next year.

*This topic was presented in the session “To Recover or Not To Recover” at the 95th AALL Meeting and Conference in Orlando, Florida, July 2002.