2 Problems With Shadow Bills

Bills?

We hate ’em.

We hate recording time. We hate double-checking bills before they go out the door. We hate reviewing bills after they come in the door. And we hate paying bills.

Nothing good about ’em.

Want something worse (or at least less reliable)?

Shadow bills.

Suppose we have an alternative fee agreement: The client pays a flat fee for the law firm to handle a specified set of cases.

Since there’s a flat fee, there’s no need to record time.

But both sides want time to be recorded anyway: The law firm wants to know its realization rate; how much is the firm actually being paid for each hour worked? The only way to calculate that is to record time.

And the corporation wants to know how it’s doing on the fixed-fee deal: Is the client doing better or worse paying the fixed fee instead of paying standard hourly rates? The only way to assess that is for the lawyers to record their time.

So the law firm maintains “shadow bills” — records that track time for accounting purposes, even though the resulting bills are never paid.

What could be wrong with that?

Two things.

First: Everyone knows that shadow bills aren’t actually paid; they’re maintained only for internal accounting purposes. If there were ever a time to cheat (and, of course, there isn’t), this is it! The lawyer can “round up” — or worse — the hours that he or she worked, and thus achieve a billable-hour target, or just a higher number of hours billed, without doing any real harm. The client isn’t going to pay the bill, anyway, so no one is hurt. And if the internal accounting records — the firm’s calculation of its realization rate or the client’s assessment of the value of the fixed-fee deal — aren’t quite right, that’s a pretty small price to pay for you having met your target. If there were ever a place to press your foot a little heavy on the accelerator, shadow bills are it.

But that’s just the first problem with shadow bills.

There’s also a second: The partner who’s responsible for the shadow bills also knows that they’re never going to be paid.

Suppose the partner with the client relationship is a responsible person: The partner reviews every bill that she will actually ask the client to pay. For big bills, that’s a lot of effort. Many partners turn this over to “billing assistants” and figure that the partner personally will get involved only if there’s a dispute. But my hypothetical partner is more responsible than that: My partner actually reviews every bill (that will be paid) before it goes out the door.

What will that same partner do with shadow bills?

File ’em.

Going through bills is a pain in the neck. And cutting hours, because it took too long to perform a task, requires a little bit of thought. Why should the partner do that for bills that will never be paid, for heaven’s sake? This is just an accounting exercise; shadow bills can be filed away and later relied upon for whatever internal purpose the firm (or client) has in mind.

Think what that double-whammy does: These bills are already inflated, because they’re such a handy place to conceal hours that weren’t actually worked. And there’s no double-check — the billing partner’s sense of the time that should be spent on a task — because these bills don’t matter enough to be reviewed.

The end result is that shadow bills are inflated. The firm doesn’t have a true sense of its realization rate, and the client is never sure of how the alternative fee arrangement actually compares to a straight hourly rate.

Do I have a solution for this?

I do not. I can’t control deception or understandable lethargy.

But perhaps when firms or clients look at shadow bills, they should consider that those bills are probably a few percent too high; the actual time that would have been worked and charged if these were real bills is somewhat lower than the shadow bills suggest.

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Mark Herrmann is Vice President and Deputy General Counsel – Litigation and Employment at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at [email protected].