
SimpleLegal (YC S13) Reduces Legal Bills With Machine Learning - outericky
http://techcrunch.com/2013/08/06/yc-backed-simplelegal-reduces-legal-bills-with-machine-learning/
======
grellas
Many may be unfamiliar with how legal billing practices have evolved over the
past years in the U.S. At the risk of boring people, I'll try to sum it up as
I understand it. It does have some interesting aspects.

In the days when law was more a "profession" than a business, blue-chip
clients would pay the bills of blue-chip firms based on, e.g., a $50K invoice
that said "For services rendered." In a typical case, no further explanation
given and none requested. This probably was a vestige of the "old boy's
network" by which top lawyers and top executives came from a similar elite
pedigree and it was regarded as undignified to question professionals about
the mysteries of how they worked their craft. (This goes back before my time
but I have it on good authority from senior partners with whom I worked circa
1980 in prestige firms).

That represented billing at the elite level of law. In the mundane, everyday
practice of law, the common practice in billing was indeed that of fixed-fee
services. In pre-Silicon Valley days of Santa Clara County in the 1950s, for
example, sole practitioners would bill for basic services based on a fee
schedule put out by the local bar association (e.g., "Preparation of will -
$400"). Those were the days when local bar associations held much more sway
than they do today and, in order to practice, a local lawyer had to do such
things as sign up to represent criminal defendants in murder cases as part of
an obligatory process (these were the days before the Supreme Court rulings
made the right to counsel in capital cases a much more involved process than
it is was back then). In any case, it was the courts that caused time-based
billing to be foisted on clients as a matter of routine when they struck down
the local bar fee schedules as illegal price-fixing.

The pattern above is pretty evident: in all cases, lawyers as professionals
were seen as part of a closed network by which they themselves set the rules
that everyone else simply had to accept. In billing, that meant that lawyers
billed as they deemed fit without much scrutiny and without much explanation.

The scale of law was also very different then: back in that day, a prestige
law firm in San Francisco, for instance, might have 20 to 25 lawyers at the
most. The work it did was sophisticated but a typical high-end practice might
have included heavy doses of such things as personal injury, maritime
practice, construction, and the like in addition to sophisticated commercial
and contract work.

As litigation exploded in the 1960s and 1970s, as law came to fill social
needs previously not considered within its province (e.g., non-discrimination
laws), and as mechanisms were adopted to promote large-scale legal actions
(e.g., class actions), law morphed from having been primarily a "profession"
to being primarily a business. The McCutchen (now Bingham) firm that I worked
for in the early 80s had about 250 lawyers then and was considered elite. In
1965, it has 20 lawyers, a level to which it had grown from its formation in
the 1880s. Today, it has well over 1,000 lawyers and is part of a conglomerate
firm with branches in many cities throughout the world. Along with this growth
came the rise of hourly billing practices that were typically "aggressive."
Demand was such that large companies sopped up the services and paid dearly
for the privilege: high rates, team-based billing practices with multiple
attorneys and paralegals typically staffing a matter while each billing every
minute of all their interactions with one another in meetings, chats, intra-
office communications, etc.

In the beginning, as this explosion in growth occurred, clients were reticent
to question the resultant high billings. By the mid-1980s, however, the
remnants of the old-style "profession" were rapidly fading and law was a big
business. Firms such as Finley Kumble were suddenly formed out of nothing by
defecting big-firm partners who saw large and fast profits as the primary goal
of their business and the billing practices quickly became abusive (Finley
became a poster child for this sort of thing and fell apart owing to client
revulsion at such abuses).

Thereafter, large companies began to question billings much more closely. The
rise of in-house lawyers was in part a reaction to the high cost of outside
services but, in time, those lawyers were also used routinely to "manage" the
outside firms by keeping their billings in line, among other things. After a
while, as the go-go years of the 1980s and 1990s culminated eventually in the
tech bubble of 2000, a funny pattern emerged by which a big-firm billing was
almost in the nature of an "opening offer." It would routinely come in very
high, the in-house people would demand it be reduced, and, after some back-
and-forth, "adjustments" would be made and it would be paid.

The pattern lasted until the bust of 2008 and 2009, which bust sent the big
firms reeling and has caused a further re-evaluation of billing practices. The
reason for the further change was simply one of supply and demand. Pre-bust,
no matter what the abuses, the law firms held ultimate sway because even the
largest companies with the most sophisticated in-house staffs would be wary of
switching firms easily or of wanting to alienate their main outside firms in
any way. That changed with the bust. Suddenly, the large firms looked bloated,
overstaffed, and inefficient. And clients, who came to hold the leverage, used
it to demand billing concessions: lower rates, caps, fixed-fee arrangements,
discounts, and the like. And the law firms had to adjust.

In the meantime, quite apart from the big firms, technology has changed law
firm billing practices generally. Owing to the widespread availability of
information today, clients are much more savvy about how legal billing works
and are not hesitant to ask for arrangements that make sense for the client
even while being fair to the lawyers providing the services. Thus, scrutiny of
legal billing is taken as a given and we have indeed come around 180 degrees
from where it all used to be.

What SimpleLegal is doing is thus very timely and interesting. Honest and fair
billing should be the goal of both lawyers and clients and this seems like an
excellent model for helping to promote this. I wish them well in their
endeavors.

~~~
nwenzel
Great write-up. My big concern is that legal billing goes the way of medical
billing where the whole thing becomes a game. Our goal is to get to clean and
fair bill where the client is happy to pay for services rendered and the law
firm feels well compensated for a job well done.

Not sure if this link is behind a paywall, but this visualization of Profit
per Partner for the top 200 law firms show why people may feel legal billing
has gotten out of control:
[http://www.americanlawyer.com/PubArticleTAL.jsp?id=120260182...](http://www.americanlawyer.com/PubArticleTAL.jsp?id=1202601823260)

~~~
rayiner
I'm not sure what the visualization is supposed to demonstrate. PPP is a
function of supply, demand, and leverage.

As an economic matter, billing methodology cannot have an impact on the
overall profits of law firms as a group. At the end of the day, the clients
pay for a service--hours are just an imprecise way to allocate "scope of work"
risk between the client and the service provider.

If your software says that one firm is charging 10% too many hours relative to
the other comparable firm that also does work for you, that can save you money
in that instance. But it cannot save you money if it says every firm is
charging 10% "too much." Then that's just the market price of the service--if
you cut down those hours, hourly rates will just increase to achieve the same
price, at least in the long-term equilibrium.

In economic terms, the real value of your service is reducing transaction cost
inefficiencies by offering better information and allowing clients to better
allocate "scope of work" risk between themselves and outside counsel. But real
reductions in legal bills, not achieved through finding efficiencies in the
billing process, must be rooted in supply and demand: either increasing
effective supply by considering a broader range of law firms for work, or
reducing demand by bringing work in house.

The reference to medical billing is interesting, but I don't think your
explanation is economically sound there either. Medical bills are not high
because hospitals charge $200 for an asprin. That's an artifact, not a root
cause. Medical bills are high because supply is limited and demand is high and
inelastic. Software that checked medical bills for high-priced pills would not
reduce bills--the prices would just rise in other parts of the bill. Because
at the end of the day the customer is not paying for the pill or for a stent,
he's paying for an overall result and the price of that result is dictated by
economics, not the specific costs of specific billing items.

------
nostromo
Instead of charging by the month or by the total percent billed, it'd be cool
to charge a subset of the amount saved.

I've seen this work with other companies. For example,
[http://www.sourceconsulting.com/](http://www.sourceconsulting.com/) which
monitors FedEx and UPS bills for errors and refunds.

There's also a legal company in New York that courier companies use to fight
all of their traffic tickets (which really add up). Whenever they lose the
appeal, the legal company gets nothing, but if they win, the courier company
pays something like half of the ticket price to the legal company. It really
makes it a no-brainer to sign up.

~~~
nwenzel
Co-founder here. Charing a percent of savings is an interesting model. We
approached customers with it and they pull back from it fairly quickly. It
sets up a conflict of interest in that there is an incentive to reduce more
than is appropriate. Our goal is not simply "less." We believe customers
should pay what they owe, but not more.

We also believe that the relationship with your law firm is important. Just
cutting a bill doesn't help that relationship.

~~~
rayiner
Law firms have an incentive to support a product that makes billing more
predictable. Right now, they engage in a lot of ad-hoc discounting and writing
off of hours to meet ad-hoc budget targets, and at the end of the day clients
don't pay a substantial fraction of their bills (15% or so industry-wide).

Say the general counsel at a F500 agrees with his outside counsel that a
particular motion needs to be filed in a litigation. Right now, he has an idea
in his head of how much it should cost, say $75k. Or he solicits an estimate
from his outside counsel how much it should cost. But that company has
probably filed hundreds of such motions in litigations over the years. There
is a lot of data to be used to make better guesses. If the software says: this
motion will cost $75k with a standard deviation of $15k, based on that
company's history with similar firms, then the company benefits from
predictability, and the firm benefits by having a realistic budget and some
objective reference they can point to when the bill comes due and they ask:
"please pay this in full."

~~~
nwenzel
I like your thinking! We believe that billing should be fixed, not just
reduced.

We're starting on the side where we have the most experience and have been
able to get the most traction. We see providing evidence-based billing as an
important part of the move to flat fee billing (or alternative fee
arrangement).

Our end goal is to fix the process. We want to make sure legal billing doesn't
become the joke that is medical billing.

------
grabeh
How does this interact with lawyers' terms of engagement? Under terms of
engagement you'll be incurring fees and by the nature of an invoice you can't
necessarily contest this after the fact.

Unless of course you agreed with your lawyers that any invoice would be
subject to review by SimpleLegal although I would suspect there would be some
opposition to this. Although of course doesn't take away from the value of the
service in allowing a company to monitor legal expenditure and to gain greater
insight into this (possibly with a view to obtaining leverage for future fee
discussions).

On a final point, your privacy policy already assumes that you will use data
to improve your service and to provide external reporting. This would seem to
imply a degree of aggregation. Although as stated this would be on an
anonymous basis, the very fact it happens may be off-putting to certain
companies.

~~~
bradleyjg
Right now it's a buyer's market for legal services. Regardless of what the
retainer says, if you call up the relationship partner and point out that you
were just billed $1500 by a second year associate for photocopying he will
work with you.

Beyond that larger clients are negotiating (imposing really) explicit
conditions into thier agreements to prevent abusive billing. Things like
minimum detail requirements (no more "5hr - lgl resrh"), no first year
associates, no clerical work, etc. Then there's capped and flat fee billing.

Definitely a time of big changes.

~~~
grabeh
Good points. It would definitely be a good feature if explicit retainer
conditions could be fed into the system to analyse bills, and certainly a
client is in a strong position where associates are photocopying.

The more interesting point would be like in the example provided in the
article (billing half an hour for mailing) where the system considers the
charge for the stated work to be excessive but the client may not be in as
strong a position to question it as with the clear cut example you gave.

Definitely interesting times though!

~~~
outericky
Most large companies (banks, insurance companies, large retailers) do have
strict billing guidelines as to what firms can charge for.

We (SimpleLegal) will work with those guidelines and train our models
accordingly.

Example: Walmart's Outside Counsel billing guidelines
[http://www.acc.com/advocacy/valuechallenge/toolkit/loader.cf...](http://www.acc.com/advocacy/valuechallenge/toolkit/loader.cfm?csModule=security/getfile&pageid=40433&title=Wal-
Mart%20Outside%20Counsel%20Guidelines)

------
rayiner
There is a lot of this sort of routine business communication the review of
which can be automated. I'm thinking of invoices, etc, of all sorts. I wonder
about their privacy story: if I'm CC-ing my bills to SimpleLegal, how are they
protecting that data? Are they aggregating between customers, etc? Sensitive
information about legal strategy can appear in bills, so it's important to
have a good story for potential customers of this service.

Also, there might be a business opportunity on the flip side. One of the
things law firms worry about is collection rate: the percentage of bills that
are paid. Industry-wide, the rate hovers in the mid 80% range. Could this
technology be used to get clients and firms on the same page and boost
collection rates (even if it resulted in discounts elsewhere)?

~~~
outericky
Co-Founder here - Security and privacy are one of our highest priorities. Our
encryption, storage and transfer policies are as good as you'd expect with any
other provider dealing with sensitive information (banking, contracts, etc).

CC'ing the bills is a convenience we provide since most companies already
receive their invoices by PDF via email (or by snail mail), we also support
direct upload by the firm or by the customer. No human eyes, except the
customers, see the data unless absolutely necessary, and that access is
limited to select, named, screened individuals.

We currently do not aggregate data or share data in any way. There may come a
time where we provide insights into billing practices or fraudulent activities
in aggregate, but that is a ways out.

While we agree that incremental billing (in 6 minute increments) [edit] is a
pain for both lawyers and customers[/edit], it's not a model that can be
wholly abandoned. However, we do plan to be in the forefront of fixing the
headache and process.

~~~
stephengillie
rayiner makes a great point about (and possibly created customer demand for)
the security of your service being a selling point. I'm wondering if billing
firms could fall under client-attorney confidentiality, but I doubt it.

On the other side, your firm has placed itself in the unique position of being
able to price-compare different law firms, and even different customers of the
same firm. You could pivot/expand into a price-shopping service (kayak for law
firms), a law-firm analytics provider (giving a/b testing results and other
demographic info to law firms, leading to better price stratifying), or a
service for law firms to gain pricing information about their competitors.

~~~
nwenzel
Co-founder here. Legal bills are not considered "work product" so the client
can share them if they choose.

The content of legal bills is very important to protect. We have technical
safeguards as well as management/process safeguards. The most important of
which is limiting the number of people with access to actual content.

We have data and can price compare across geographies and law firms. But it is
important to remember that each transaction is unique. That's why we don't
release any of that information currently. If we find the right way and the
right venue to share that aggregated information, we will do so if we think it
is in the best interest of our customers.

~~~
abziegler
Great concept, but not sure about the claim that legal bills aren't "work
product" \- it depends on what they say. And it's quite probable that the most
effective legal bills for data analysis purposes (i.e. detailed ones) would
contain work product or attorney-client privileged information. When I was a
practicing lawyer, I always redacted bills before filing them in court to
support fee petitions.

Separate issue whether disclosure of the bill to you as vendor, with a
documented expectation of confidentiality, would constitute waiver either of
WP or A/C privilege. No obvious reason that disclosure to your service would
be different than disclosure to TyMetrix, Serengeti, or Sky Analytics,
assuming your T&Cs are well-crafted. But obviously check with your lawyers on
that.

Also, purely from a business standpoint, you can bet that some lawyers will
raise the confidentiality objection to discourage/resist adoption.

All is to say, the issue is an important one. Glad to see you're taking it
seriously. Good luck!

------
jmduke
I think SimpleLegal is my favorite startup out of the batch; I'm an absolute
sucker for ideas that boil down to "apply common sense and technology to
verticals that are usually ignored by those things."

Really excited to see how things evolve for them.

~~~
nwenzel
Co-founder here. Thanks!

We just saw a ton of money being thrown at a problem that looked like it
needed some help being solved. We're seeing growth in insurance, banking,
patent heavy companies (hardware), and startups raising money. Even had a VC
ask about becoming a customer!

~~~
saucetenuto
Q: How do I get attention from VCs?

A: Make something that the VC, personally, himself, wants to use.

Love it.

------
gamblor956
If a client can't understand what he is being billed for by his lawyers, the
problem won't be fixed by machine learning -- he needs to call his lawyer and
ask what he is being billed for. _Lawyers are generally required to explain
their bills and itemize if requested by clients_ in nearly (but not quite all)
50 states.

Indeed, the larger problem faced by SL, and one that the legal industry as a
whole is now facing, is the shift from per-hour/itemized billing to flat-fee
for service arrangements which are becoming a significantly larger portion of
the market across all fields (and which already dominate legal markets such as
immigration, criminal, estate planning, and tax).

~~~
rayiner
They need to move up-market as quickly as possible. If you're a Fortune 500,
your legal bills can be extremely voluminous and be very painstaking to
review. There are already products to help review them, but they're probably
crap. At the same time, because of that volume and all those repeat plays, the
machine learning algorithms probably have a lot more to work with. But I don't
think $600/year for a business makes sense for such customers. If the service
is really useful, and if they can scale it up to be useful to a big company,
they need to charge a lot more.

~~~
gamblor956
If you're a Fortune 500 company, you have the legal staff to handle legal
billing--or even the legal work itself directly.

Otherwise, I agree--going upmarket is their most likely pivot. They're also
likely to switch to a %-saved fee model, which is what existing bill analysis
companies already do, quite successfully. (SimpleLegal isn't the first company
to tackle this problem, and it won't be the last.)

My advice to SL? Since they're clearly going the website-based growth route
rather than the human interaction growth route, they need to work out
partnerships with other legal tech providers, i.e., Clio and various legal app
developers for iOS/Android.

~~~
bradleyjg
> If you're a Fortune 500 company, you have the legal staff to handle legal
> billing--or even the legal work itself directly.

I'd think that the general counsel of such a company is a prime target for
this product. Carefully reviewing millions of dollars worth of charges billed
six minutes at a time is extremely labor intensive. Having a product that does
a first pass to find anomalies is a great way to cut down on the effort
required.

~~~
bhousel
Actually you are right but for the wrong reasons. The general counsel at a
F500 company is not the one carefully reviewing the invoices, although his
approval authority may be required for only the most significant bills.

But general counsel do want to keep overall legal spend under control, and are
decision makers when it comes to purchasing several million dollars worth of
legal software. For the purposes of closing enterprise sales, these are the
guys you want to be taking out to fancy dinners.

------
dominik
Do you guys have a service for law firms so they can run their bill through
your algorithm and get a list of bill entries clients are likely to flag?
Could be useful for firms looking to maximize revenue and reduce client
complaints.

Partners typically edit bills substantially before sending them out to
clients, and I know a partner in my current job spends hours doing this every
week for our practice group; I don't think he has much love for the process,
so a way of automating it would be amazing, I'm sure.

~~~
rayiner
Yes! The alternative is often some very busy partner spending hours of
unbillable time every week making sure the bills match the client's required
formatting, often because whatever crappy software the client currently uses
gets confused when it sees commas instead of semicolons separating entries or
whatever.

------
dmix
Reading the homepage, I have no idea how it works other than it uses "machine
learning" on the invoices you upload.

~~~
outericky
In regards to how it works...

From a customers point of view... we provide a system by which you can receive
and review your legal bills in one place (instead of dealing with PDF's and
paper invoices). Then you can approve them, mark them up, and pay them.

In the background we provide categorization of line items, insights into what
they mean, if the they trigger any guideline flags / questionable charges. As
far as how that happens technically... well, that's our secret sauce. Can't
divulge it.

~~~
radicalbyte
You'll get 80% of the benefit just by looking at word frequency, highlighting
outliers and then a weight based on factors such as length and secret-sauce
weighting.

Bonus points if you're using multiple categorizations (using different weights
for different industries).

NLP / statistical stuff is fun ;)

Are you scanning / OCRing the documents? I never managed to get the OCR to be
good enough for invoicing, there always had to be a manual process to fix the
(machine-learning-flagged) errors.

Or don't you need accurate-to-the-cent invoices?

~~~
nwenzel
Word frequency is in use at many larger insurance companies today. You can
certainly find problematic bills with word frequency and the hours billed, but
you end up with a lot of false positives so you still have to manually review
everything. We get in deeper than word frequency.

And, yes! NLP + statistics is fun!

------
petercooper
How long till we can run a similar system over the invoices from IT
consultants and programmers? ;-)

Implemented contact us form in PHP: 6 hours, $720 .. _BZZZZZZT!!_

------
peteratt
> Although the business wasn’t sexy, it was profitable.

To these guys at TC it seems that _sexy_ is the priority. Glad to see that for
pg and co. sexy = profitable too. That's what business is about, please remind
crunchie folks.

------
hnriot
I don't follow the example given "the system flagged a line item where a
professional billed a half hour for mailing." \- that doesn't sound like an
outlier to me, possibly the smallest billable time is half hour, or maybe the
one page mailing had other complexities, like needed to be over-night
delivery, required trip to the PO etc etc. I would need to see the system
detect something more demonstrative of being useful.

~~~
nwenzel
The actual example was .5 hours to prepare a 1-page form and .5 hours to mail
the form. It probably did require return receipt.

That's one expensive stamp.

The lawyer probably didn't intend to bill that much, but filing out a time
card at the end of the week results in problems like this.

I'd love to see law firms publish total hours billed by lawyer. I think that
would solve a lot of over-billing if they did.

------
ZhangBanger
I've personally felt this pain. Even as an engineer, I never thought to solve
it myself. Massive kudos!

------
sinzone
They should use a Summarization API:
[https://www.mashape.com/mojojolo/textteaser#!documentation](https://www.mashape.com/mojojolo/textteaser#!documentation)

