Strategy Spotlight

Liberty Mutual's Electronic Invoice

System: Combining Low Cost and

Differentiation Advantages Boston-based Liberty Mutual Group is a leading global insurer and the sixth largest property and casualty insurer in the United States. Its largest line of business is personal automobile insurance. Liberty Mutual has $112.2 billion in assets and $33 billion in annual revenues-rank- ing the firm 71st on the Fortune 500 list of the largest corporations.

In 2000, Liberty Mutual became one of the first com- panies to experiment with electronic invoices. It set up a pilot program with a few law firms to submit its bills through a secured website. These firms, for the most part handle claims litigation for Liberty, defending its policyholders in lawsuits. Its success with this program convinced liberty that it could achieve significant cost savings and also pass along differentiating features to its customers and strategic partners. Liberty now processes nearly 400,000 electronic legal-services invoices a year- 70 percent of the total invoices that the firm receives.

As expected, the initial transition was quite expen- sive. The company invested nearly $1 million in the first four years. However, Liberty estimates that the electronic invoice program saves the company $750,000 a year in direct costs by streamlining the distribution, payment, stor- age, and retrieval of invoices. E-invoices enable Liberty to move from intake to payment with half the staff that it had taken to process paper invoices. The firm has also created new efficiencies by cutting costs resulting from data entry errors, late payments, and overpayments. As a relatively minor issue, Liberty saves more than $20,000 per year on postage, photocopying, archiving, and retrieval costs.

The legal invoices are organized by litigation phase or task-for example, taking a deposition, or reporting a witness statement Work ls diced into tiny increments of

Sources: Coyle, M., & Angevine, R. 2007. Liberty Mutual Group reports fourthquarter2006 result$, February 26, wiv,d ibertymutual.com;Smunt, T. L., & Sulcliffe,C. L, 2004, Thcn:'sGold in Them Bills. Harvard Business Revie111 82(9): 24-25; and www.llberiymutualgroup.com.

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six minutes or less. A single invoice that covers a month of complex litigation, for example, can include well over 1,000 lines. However, by building and mining a database of law firm billing practices, liberty is able to generate a highly granular report card about law firm activities and performance. The new knowledge generated by this sys- tem not only increases internal effectiveness but also allows Liberty to provide detailed feedback to clients and other external stakeholders.

Online invoicing has also helped speed up both pro- cessing and response time. Liberty can instantaneously see how firms deploy and bill for partners, paralegals, and other staff, how they compare with each other on rates, hours, and case outcomes; and whether, how, and how often they send duplicate invoices or charge for inappro- priate services. The system also allows Liberty to instantly review all of the time billed for a particular attorney across many cases, enabling the firm to reconstruct the total time billed to Liberty during a single day. More than once they have found that attorneys have billed more than 24 hours in a day. Liberty is also able to easily expose prohibited formula billing patterns (wherein, for example, they are billed a set amount for a service instead of actual time spent). In two cases in which formula billing was used, Liberty found that there were

more than $28,000 in sus- pected overcharges. Liberty Mutual is in the process of developing a large Database of law firms' billing practices on different types of cases. The database should eventually enable Liberty to evaluate a law firm's billing activities and compare them to the norms of all of its partner firms. With such intelligence, it will be a rather straight forward matter to rate each firm's cost effectiveness in handling certain types of cases and match firms with cases accordingly,

Liberty's decision to use electronic invoices was initially based on the potential for cost savings. But the differentiating advantages it has achieved in terms of rapid feedback, decreased response time, and a knowl- edge trove in databases that can be electronically mined has provided the company with a fruitful combination of Internet-based strate9ic advantages

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