As borders to international commerce continue to break down, companies realize the challenges of conducting business on a global scale.  The legal industry is no exception, as companies and law firms must grapple with the unique challenges of providing services to varied jurisdictions.  One of the biggest challenges for law firms continues to be the global adoption of electronic billing standards to help ensure proper compliance with jurisdictional-specific, or local, tax laws.

The Evolution of Global Legal E-Billing
In the United States, law firms have been using e-billing for more than a decade while international uptake has been much slower, finally coming into regular practice over the last three years.  This is due to three main factors.  First, the United States is the market where legal expenses represent the largest part of the corporate budget, while internationally, there is significantly less spend in this area.  Second, we saw a huge uptake in legal e-billing during the fall of Enron and the passage of the Sarbanes-Oxley Act because of greater government scrutiny of corporate accounting practices.  Finally, in the current economic climate, U.S. companies are challenging their legal departments to practice better spend management, putting e-billing more front of mind in the U.S. than elsewhere.

With the rise of globalization, the Fortune 10 and the Global 100 are becoming strongly interested in managing the totality of their legal spend, which involves a consolidated view of spend across a globally dispersed organization.  To do this, there must be an international standard for electronic invoices, one that accommodates the nuances in tax law throughout the various jurisdictions in which a company does business.  In addition, an international standard allows these organizations, and others that will undoubtedly enter the fray, to better track their costs through the use of technology.  Fortunately there is an international standard, one that has been nearly a decade in the making.

The Development of Legal E-Billing Standards
During the adoption of e-billing within the United States, the voluntary not-for-profit organization known as the LEDES Oversight Committee (LOC) approved an e-billing standard for the legal industry known as the Legal Electronic Data Exchange Standard, or LEDES 1998, to consolidate vendor- or client-specific formats law firms were using for electronic invoicing.  In 1999, LOC approved and published the LEDES 1998B standard, which quickly became the most commonly used legal e-billing format.  The LEDES 1998B standard later became the template for an international e-billing standard, ratified in 2006.  This international standard is known as LEDES 1998B-INTL.

LEDES 1998B and its equivalent international standard rely on the use of a flat file, much like an Excel spreadsheet.  Columns contemplate different data points while rows contain the specific invoicing information.  Working with such a static file presents problems when new invoice fields must be created for the unique requirements of a specific jurisdiction.  In addition, the 1998B-INTL format does not provide for internal calculations or "roll ups" of specific tax types within an invoice and does not handle complex billing arrangements well.

For example, unlike within the United States, Canada taxes various types of professional services differently.  In addition, each Canadian province has its own tax scheme separate from the federal tax.  Maneuvering through these various tax regimes is difficult enough.  Relying on a flat file to use as your electronic invoice is both time-consuming and risky.  Imagine having to manually add and subtract rows and columns within a flat file to adjust for taxes for each invoice, and think of the potential for human error you are introducing into the process.

Thankfully, there is a more efficient method of creating electronic invoices that eliminates the use of a flat file altogether.

The Introduction of the LEDES XML 2.0 Standard
In 2000, the LOC introduced a new standard, incorporating a more extensible language (XML).  This standard was known as LEDES2000.  The format was intended to better capture information concerning alternative billing arrangements and was the first format approved by LOC to include data fields for the collection of tax information.  The initial LEDES2000 standard was not widely adopted, however.  In 2005, the LOC undertook a rewrite of the XML standard to better capture tax and invoicing information that was common in markets outside of the U.S.  The LOC relied on industry experts to author this format and approved the final version of the new standard, LEDES XML 2.0, in 2006.  In 2008, the LOC, relying on feedback from international law firms and companies, approved and released LEDES XML 2.1.

The principle focus of the XML 2.0 and 2.1 standards is to allow law firms and their clients to handle complex tax scenarios in a more flexible way.  Specifically, this format supports multiple vendor tax identification numbers and provides law firms with the ability to itemize complex taxes by tax type.  In addition, it improves upon LEDES2000's handling of alternative fee arrangements.  Because the bill format is not locked down with a set number of rows and columns, it's more flexible; this allowing the law firm to talk to its own tax advisors and have them consult on how the file can best be used and what data fields are most important or legally required to be captured.

Added Benefits of Implementing XML 2.0
Although the main benefit of using the LEDES XML 2.0 standard is the flexibility needed to account for a variety of tax scenarios, there are other benefits as well.  In some tax jurisdictions, authorities mandate invoices use the currency of the entity being billed.  For example, let's say you are a French law firm doing business in the United Kingdom.  When billing the U.K. client, the law firm will draft the invoice using Euros in the data fields.  The United Kingdom has a requirement to display the tax in the U.K. equivalent.  XML 2.0 and 2.1 allow the law firm to include the fields to capture this tax information in both Euros and in British pounds. 

In addition, properly implemented, the LEDES XML 2.0 and 2.1 are the only standards designed to allow e-billing vendors to create jurisdictional specific "tax rules" for electronic invoicing.  Such rules result in fewer errors for the client or the payor within its accounts payable system.

The Path to XML Adoption
It is important to note that not all e-billing and matter management software can yet handle the XML 2.0 and 2.1 formats.  Although this limitation will be resolved with future releases of these software products, many U.K. law firms have taken the bull by the horns and written their own XML translators, which allow them to use their existing time-keeping software with this custom output formatter on top.  Many globally focused legal consultants believe that the XML 2.0 and 2.1 formats are the only path to a flexible and tax-compliant global legal electronic invoice. 

About our author :: :: ::

Roger Jarman serves as the director of client services and U.K. operations for CT TyMetrix.  Roger has more than 22 years of experience in professional services, supporting the needs of many global organizations in the manufacturing, distribution and finance industries.  In his 10-plus years working for a Chicago-based ERP software vendor, in Europe and North America, he developed a strong methodological approach to implementing global software solutions.  He can be reached at roger.jarman@wolterskluwer.com.