A Blueprint for Legal Department Budgeting and Forecasting – Part 1

Are you accountable for tracking your legal department’s spend?

Are you currently using matter budgets, but don’t feel that you have a good way to predict your organization’s future legal spend accurately?

Or, is your legal department maybe one of the approximately 40 percent that don’t do any budgeting at all? If you fall into any one of these groups, I encourage you to read on.

I had the opportunity recently to address the South Central Texas Chapter of the Association of Corporate Counsel on the topic of corporate legal department budgeting and forecasting. In my presentation, I shared a number of insights related to these very issues. In this and a subsequent blog posting, I summarize my recent presentation for Business of Law Blog readers who are similarly challenged by the issues of budgeting and forecasting.

“Regardless of the reason, establishing a matter budget offers several benefits.”

Why Budget?

Legal departments that create budgets do so for a variety of compelling reasons. One of the more obvious motives is to allow the department to control its costs. For others, the driver may be the desire to improve planning or improve predictability. Still other departments may embrace budgets so that they can make more informed decisions, measure outside counsel performance or collaborate with outside counsel better. Another motivation to budget is the desire to strengthen the relationship with Finance and the rest of the organization.

Regardless of the reason, establishing a matter budget offers several benefits. These generally include the ability to manage legal spend, better allocation of resources and improved communication and collaboration with both corporate finance and outside counsel. I take a closer look at these and other benefits below.

“Because the value of a budget extends beyond simply the cost savings that can result, it is advantageous to create a budget no matter what the size of your legal spend.”

Six Key Benefits of Budgets

Because the value of a budget extends beyond simply the cost savings that can result, it is advantageous to create a budget no matter what the size of your legal spend. Having conducted numerous customer visits to understand their processes and challenges first hand, I’d like to share my observations regarding the key benefits of budgeting.

1. Better Cost Management: The most important benefit of budgets relates to cost management. If you think about a legal matter as analogous to financing a large consumer purchase you might make – a new car, for example – it’s clear that it would be foolish to agree to buy a particular model without having a sense of what it’s ultimately going to cost. Having a budget up front gives you the opportunity to evaluate potential options for managing costs.

2. Better Planning: Budgets help you improve planning by applying specified limits to legal spending. With these limits in mind, the legal department is better equipped to evaluate risks and litigation strategies.
3. More Predictability: Budgets can help improve financial predictability if you are tracking your spend vs. your budget carefully. For example, if you have a process for budgeting all of your litigation matters on an annual basis, you would be able to predict how much additional resources you might need for a similar litigation matter that spans more than a year.
4. Improved Decision Making: Tracking your legal spend against a budget helps you make more informed decisions. Suppose a law firm tells you that an M&A matter requires 15 depositions and a lot of research. That may get you thinking, why 15 depositions? Maybe three would be enough – and then you might want to get into a detailed conversation. Or, what if the law firm advises you that the SEC may not agree with an M&A filing and that the firm may have to write a detailed application/letter to them. This might prompt you to ask, “How likely is that to happen?” The law firm may say it’s very likely – so then you dig into the details to get a better understanding of the risk.

The bottom line is, because you were tracking spend against your budget, you were able to engage with your outside counsel early on and now have a better understanding of the risk involved before you decide which way to proceed. To get the most out of budgeting, you have to track and analyze your results.  That’s where reporting and analytics can help when it comes to predictability and decision-making.

5. A Better Measure of Law Firm Performance: You are already talking to your outside counsel about your matters status. Adding another dimension to those discussions for budgets makes it even more robust and useful to both you and your outside counsel
6. Improved Relationship With Finance: Finance folks are numbers people. The ability to budget and forecast with greater accuracy goes a long way toward helping to establish the legal department’s credibility in the eyes of department heads and upper management. It can also help to foster better intra-departmental communication and cooperation.

Investing the time and effort required to establish matter budgets is critical for successful legal operation departments. In Part 2 of this article I’ll cover best practices for effective budgeting.

Deepro Basu is a Product Manager for LexisNexis CounselLink.