Strategic Budgeting in Law Departments: 5 Tips for Getting Started

In our previous post, we looked at high-level and day-to-day benefits of making matter-level strategic budgeting an integral part of the legal department’s strategy, and we proposed a few basic considerations for GCs to keep in mind as they engage in that process.

Here are our top recommendations for getting started to maximize effectiveness and avoid missteps.

• Don’t reinvent the wheel. Instead, improve on existing processes. Discuss with colleagues which external firms are better at budgeting and identify the factors that make them so. Document these findings, and then develop processes that require outside counsel to provide appropriate data for different practice areas and matter types. If your finance department is already working well with established processes and tools, use these as templates as you move forward.
• Determine which matters will benefit most from having a detailed budget. If your primary focus is cost management, start with higher-cost matters. But if achieving greater forecast accuracy is the goal, start with those firms or matter types that consistently exceed expected costs. For high volumes of similar matters, consider taking an aggregate approach.
• Define the budget time period. While it might seem obvious for GCs to align their budget timeframes with their organization’s fiscal periods, in some cases, a life-of-matter approach may make the most sense. This is especially true for smaller-dollar, higher-volume matters. It may also be the case if one of your primary objectives is to create an ongoing dialogue with law firms or if you have reason to expect frequent forecast updates.
• Identify key metrics. Hone in on the matter-level measurements that support your objectives. Commonly used metrics include a comparison of what was spent versus the original budget, or actual spend versus the most recent forecast. The most important metrics are likely to vary according to the nature of the matter, the practice area and the law firm(s) involved. GCs will need to sit down with key internal and external stakeholders to identify the data points that have the most impact on costs and outcomes. It may also be helpful to provide a “cheat sheet” for outside counsel once you determine which relevant metrics help keep them on target. Capture and analysis of metrics can be complex and time-consuming if done manually, so now might be the time to consider automation.
• Make budget discussions an integral part of matter management. Regularly communicating budget information and expectations will improve cost management by outside firms and will also strengthen your long-term relationships.

For more helpful tips, go to Top 10 CounselLink strategic budgeting tips.

Approval and Reporting

Let’s say you’ve now requested detailed budgets from all your outside firms. How do in-house counsel or legal operations decide what’s reasonable in a budget? If the budget submitted is sufficiently detailed to create confidence that it’s realistic, that’s a great start. Even so, you will also find it helpful to compare these latest budgets to historical budgets and spending in matters of a similar type, timeframe, and cost range.

It’s also important to be realistic about how strictly the budget will be enforced—and communicate those expectations. Will invoices be automatically rejected if the totals exceed a certain level, or will each invoice be reviewed on an ad hoc basis? If a firm consistently under-budgets, the first step should be a conversation that stresses the importance of budgeting, then look into the specific reasons the firm’s processes are coming up short.

This is a place where robust tools can provide real value and insight. One of the most important long-term benefits of capturing matter budgets within an enterprise legal management system (rather than doing it offline) is that it provides the opportunity to conduct detailed reporting and analysis. You can choose from very basic matter-level reports to highly sophisticated and data-heavy multi-matter reports. Reporting provides a real-time window into the fiscal status of current matters, but it can also generate valuable historical analyses that help you pinpoint recurring bottlenecks, oversights, and workflow issues that end up inflating budgets and producing overruns. Exception reports, matter dashboards, and scorecards can all provide information that will help you spot problems early as well as inform ongoing practices.

Conclusion

Establishing and implementing a successful budget process requires a combination of planning, cooperation, coordination, and commitment. We know from years of experience working with hundreds of corporate law departments that the GCs who have invested the time, energy, and oversight required to budget strategically at the matter level found it well worth the effort.

You can contact us to learn how we can help your department implement and improve legal spend budgeting and forecasting.