In Part 1 of this 2-part series on legal department budgeting and forecasting, I discussed many reasons legal departments choose to implement matter budgets. I also identified six key benefits that result from implementing a formal matter budgeting process. This concluding installment explores proven best practices for ensuring the effectiveness of the budgeting and forecasting process.
First Things First
When thinking about implementing a budget process, it’s very important to take the unique needs and objectives of your department and organization into consideration and align your process with those objectives.
For example, if your primary objective is to improve legal spend forecasting and predictability, then you have to build a process that measures budget variances and takes action to minimize them.
If your objective is to measure the accuracy of law firm matter budgets against actual costs –either across your legal operation or by practice area – your process should include the ability to capture and track the appropriate metrics at the matter and law firm level.
The budget planning process requires you to make some additional decisions as well. For example, who will set up the budget? Your In-house counsel? Outside counsel? Or will it be a collaborative effort? You will also need to decide which budget period you’ll use and the level of granularity your budget will have.
Another important factor you should be taking into account is the type of industry in which your business operates. The financial industry, for example, is highly regulated and may therefore require more frequent updates using monthly or quarterly budgets. On the other hand, those in the manufacturing industry may find that budgeting legal spend annually or tracking the life of matter fees and expenses makes the most sense.
Once you’ve adequately addressed preliminary considerations such as these, you’ll be prepared to implement best practices for budgeting and forecasting.
Nine Proven Best Practices for Optimizing the Benefits of Legal Department Budgeting
The following best practices are drawn from budgeting and forecasting practices currently in use by CounselLink customers who have implemented their own successful processes.
- Determine Which Type of Budget Process Works Best
When it comes to matter management, there’s no such thing as a one-size-fits-all-budget period. For legal departments handling primarily smaller-dollar, high-volume matters, a life-of-matter budget may be the best choice. Because it requires a continuing dialog with outside counsel, this option requires close collaboration with your law firms and reinforces the idea that you expect them to help you manage matter costs. Complex matters, on the other hand, may require that you use annual, quarterly or even phase-level budgeting because of the risks and costs associated with such matters. Regardless of the budgeting parameters you choose, it’s wise to be flexible. Measuring effectiveness across multiple budget periods will help you refine your tentative strategy before rolling it out on a larger scale.
- Determine the Level of Budget Detail Required
For those just getting started with matter budgeting, implementing a Summary Level budget is often preferred. Legal departments that require more granular detail should consider implementing a budget of Fees and Expenses, or one that includes Phase levels of detail.
- Use Collaborative Budgeting for Matter Level Budgets
Starting with the information you currently have about typical matter costs, formulate a draft budget template based on typical known costs. Then share that template with outside counsel to gather feedback and work together to revise it. The process may require a few iterations, but the more closely you work with your law firms, the more realistic and useful the budget you ultimately arrive at will be. Once you have arrived at a budget process and template, update your billing guidelines to communicate the agreed-upon requirements and your process expectations to encourage collaboration and accountability on the part of your outside counsel.
- Manage the Budget
Once you have set up the budget, it’s time to think about how you will manage it. Notifications and Alerts that are triggered automatically by an Enterprise Legal Management system such as LexisNexis CounselLink are useful for keeping you informed about important matter milestones or budget thresholds that have to be managed.
- Be an Enforcer
There’s no denying that budgets are extremely useful for incentivizing outside counsel to manage costs. On the other hand, failure to enforce agreed-upon budgets undermines the entire process. It is imperative that budget conversations with your outside counsel include how you intend to enforce budgets. Common enforcement strategies range from simply flagging invoices for review and discussion with outside counsel to rejecting invoices when the budget is exceeded. Either approach provides an opportunity to work with the law firm to understand the cause of the overage and discuss ways to avoid a similar situation in the future.
- Track Assumptions
Your budget is dependent on the phases, tasks, and timekeeper effort required to complete the legal work. That information, in turn, drives the assumptions you will make regarding matter costs. As more information becomes available through your tracking efforts, your assumptions and your budget may change. Over time, these changes will help you refine your budgeting skills, enhance the accuracy of your budgets, and serve as reliable reference points when you’re budgeting similar matters in the future. Eventually, the body of proven and disproven assumptions you compile will help lead your future conversations about budgeting and frame strategy discussions.
- Use Reporting and Analytics to Gain Insight into Legal Spend Trends
Implementing a budget without tracking and reporting on its effectiveness is a like piloting an airplane without instruments or a map. Either way, your chance of ending up where you want to go are iffy, at best. By overlaying the budgeting and forecasting process with analytics, you’ll be able to identify what’s working and what’s not so you can adjust the process accordingly.Dashboards such as the ones illustrated below are useful for visualizing legal spend at a glance. They allow you to quickly roll up spend information by practice area, law firms, size of matter, your organization divisions/offices, and more.In the example of a basic spend dashboard shown immediately below (Figure 1), the blue column indicates the budget and the red column indicates the actual spend.In the second dashboard (Figure 2), green indicates that spend to date is still in line with the matter type budget. The red bar in the third column indicates that spend has exceeded the budget, as noted in the U.S. Intellectual Property matters bar. When implementing budgets for the first time, you should identify how much budget variance you will tolerate. We recommend adopting a 20 percent tolerance band to start and then building a process to lessen variance over time.
Figure 1. Basic Spend Dashboard
Figure 2. Matter Type Budget Dashboard
- Build Continuous Improvement Into the Process
Regardless of whether you’re taking your first tentative steps toward implementing a process for budgeting and forecasting or you’re a seasoned budget master, the goal should be to continually refine and improve your process. This is best accomplished by engaging with your outside counsel on a regular basis to solicit their assistance with process improvements. Doing so not only helps improve your ability to budget more accurately, but it also increases the accountability of your outside counsel.
- Manage Change
Whether you are just considering implementing a budgeting process or you are engaged in limited budgeting and want to expand the scope of your process, it is important to keep in mind that implementing change can be difficult and can be an added expense for your department. Piloting a budget program with partner law firms is a great idea to start in order to understand what will work best based on practice areas or area of the business. Pilot programs also generate feedback in developing the proper templates, processes and communications. Taking the time to formulate a change management strategy that factors in upfront administrative costs and includes updating outside counsel guidelines, a communication plan and training process is well worth the effort to help you avoid surprises, secure the buy-in of outside counsel and ensure the ultimate success of your budgeting initiative.
Deepro Basu is a Product Manager for CounselLink.