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Shell Legal – Shadow Billing

Law Dept. Management Column
S hell is committed to diversity — internally and throughout its supply chain. One of the many ways in which Shell Legal pursues this company objective is to track and report on how much of the business sent to outside counsel is distributed to women and minority owned firms, as well as how much of the actual work is allocated to diverse attorneys and allied professionals. Shell measures not only the general diversity of its law firms, but also the actual diversity of timekeepers assigned to Shell work down to the percentage of total billing for which they are responsible. Measurement is central to management.

Although we will later write a full article on Shell Legal’s diversity efforts, this article focuses on a form of cost accounting that is sometimes referred to as “shadow billing.” There is a common belief that companies like Shell that have moved to appropriate fee arrangements (AFAs) should no longer concern themselves with billing data. The diversity imperative belies that belief. Indeed, there are many reasons why Shell will continue to be interested in as much data as is available.

First, however, it is important to explain what Shell is not interested in doing with the billing data. Shell does not intend to multiply the number of hours recorded by hourly rates and then compare the total to the agreed-upon AFA in order to compute “savings.” AFAs are intended to drive innovation. Law firms on fixed fees are supposed to be finding more efficient ways to be just as — if not more — effective. AFAs that remain bound by the billable hour do little to shift incentives.

Likewise, we have every expectation that firms on AFAs will continue to track time inputs not because time is a reliable measure of value, but because time is a cost. Time is finite. Time is a constraint essential to consider when managing projects and allocating resources. As Peter Drucker wrote, “Everything requires time. It is the one truly universal condition. All work takes place and time and uses up time. Yet most people take for granted this unique, irreplaceable, and necessary resource.”

Elsewhere, Drucker observed the importance of a buyer knowing the costs throughout its entire value chain:

Knowing the cost of your operations, however, is not enough. To compete successfully in an increasingly competitive global market, a company has to know the costs of its entire economic chain and has to work with other members of the chain to manage costs and maximize yield….
The legal entity, the company, is a reality for shareholders, for creditors, for employees, and for tax collectors. But economically, it is fiction.1 

Shell will continue to request billing data because it is available. Shell will also continue to analyze billing data because it is useful. As with measuring diversity, there’s a great deal of salient information to be gleaned from analyzing who is doing what work and for how long (i.e., understanding costs).
Law departments, for example, need to operate at the speed of business. Thus, it is important to measure cycle times. But it is also important to understand what drives cycle times. If work product is taking longer than seems necessary, there should be a discussion as to why. There are, however, completely different discussions to be had if the cause is (1) the law firm needing too many hours to complete the work, or (2) the law firm completing the work in a reasonably short number of hours but delaying the start of the work. If it is the former, it is worth investigating the misalignment of expectations and performance including the potential for better use of process and technology. If it is the latter, it is more productive to discuss resource availability, allocation, and utilization. In short, the discussion is informed by the empirical data.

In the same vein, granular data can help identify which firms are being innovative and doing an exceptional job. Best practices are also worth investigating and, where scalable, propagating throughout the legal value chain. Again, our focus is on system — not individual — efficiency and improving the overall value produced by the system over time. Like Shell itself, every firm should be committed to continuous improvement. Shell has a role to play in ensuring that improvement occurs. In most instances, improvement should be measurable. But there can be no measurement without data.

Indeed, how time itself is measured and reported can be a differentiating innovation. Why aren’t firms providing real-time reporting of their teams’ consumption of hours along with automated access to all of the appropriate data? The technology exists. In business, we are already accustomed to accessing this kind of data. Yet most law firms won’t meet these expectations and challenge any suggestion that they should. Law is different. Not really. Not different enough to be exempt from the basic matters of transparency and accountability.

The legal sector demands a radical overhaul of how legal business processes are being procured and reported. Firms and lawyers reborn in this new age are starting to transform the market toward rapid delivery of best in-class legal services with complete transparency paired with full access to advanced metrics and matter information. Digitization, organization, dashboards, real-time, and metrics engender a superior user experience that is compatible with — even an indicator of — competitive pricing. The underlying structural adjustments drive lower operational costs and better operational controls on lawyer utilization/realization, with less risk and larger upsides.

Finally, while just refreshed, Shell’s current work allocation will eventually need to be revisited. Decisions as to whom should handle what work will be reconsidered. This analysis will not only look at allocation of work among firms and alternative service providers, but also as between Shell and its external resources. Data, including data about costs, will be central to optimizing Shell’s legal value chain. Raw data, however, is not enough. Data needs to be organized in a way that is useful for decision making (i.e., data needs to be transformed into information). The information that we find most consistently useful takes the form of Key Performance Indicators (KPIs), the subject of many future articles.

1. Drucker, Peter F. The Essential Drucker (Collins Business Essentials) (p. 100). HarperCollins. Kindle Edition.

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About the Authors

Vincent Cordo serves as the legal team's Global Sourcing Officer for Shell. He is a member of the ACC Legal Operations section.

Casey Flaherty, a former in-house counsel, is the founder of Procertas. Casey consults with law departments and law firms on legal operations, service delivery, and technology. He is the author of Unless You Ask: A Guide For Law Departments To Get More From External Relationships, written and published in partnership with the ACC Legal Operations Section.

The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.