Although law departments often tend to think of budgets as primarily tactical tools, budgets do have significant strategic value – as long as they’re the product of thorough planning and proper implementation.
When thinking about implementing a budget process, it’s necessary to consider the various implications that stem from different strategic objectives. Corporate law departments can attack the challenge of budgeting from any of several different angles. And while no single approach will necessarily prove to be more or less effective than another, there are several caveats to keep in mind that will help you avoid potential missteps and allow you to optimize both the efficiency and the effectiveness of the budgeting process.
1. Don’t Reinvent the Wheel
Many corporate law departments already request budget information from their firms, albeit informally. In these situations, it’s a good idea to talk to in-house counsel to ascertain what amount of detail they ask for in budgets. Ask questions, such as:
- What is the most important piece of information needed in order to have confidence in a firm’s budget?
- What distinguishes the firms that do a good job submitting budgets from those that don’t?
Once you’ve determined what information is important to inside counsel, you’ll want to build a mechanism into a process or template that allows outside counsel to provide it. If inside counsel discovery sessions reveal that there is considerable variability by matter type or by practice area concerning what’s important in a budget, it’s useful to factor that into your process as well – or possibly even develop slightly different budgeting processes for different practice areas or matter types.
Moving back to the departmental side of the equation, if you already provide a budget file that’s configured to meet the specific needs of your finance department – and it’s working for them – make sure the budget process you design will feed into the existing file, so you don’t have to build that piece of the process from scratch.
2. Determine Which Matters Will Benefit Most from a Budget
Deciding what your primary objective for budgeting is will help you narrow the scope of your efforts. If your primary objective is cost management, for example, you’ll do well to focus on budgeting the matters that will likely have higher costs associated with them. Doing so will provide a higher return on the effort you put into managing the budget. On the other hand, if achieving greater forecast accuracy is the goal, it would be better to apply budgets to those firms or matter types that tend to catch the organization off guard with higher than expected costs.
If you have a high volume of commodity-type work, the most effective way to budget for those matters is in aggregate. Of course, if efficiency isn’t a high priority for your organization and your primary goal is to hold firms to a budget, this would not be the best approach. Instead, you might consider asking firms to budget every one of their matters to put them on notice that you intend to hold them accountable for variances.
Keep in mind that the decisions you make about matter budgeting can easily evolve. Many organizations start small and expand their matter-budgeting process as they become more comfortable with it. This type of pilot approach has proven very successful by allowing both the internal staff and outside counsel to adapt to the process slowly and incrementally. Once it becomes apparent to stakeholders that the process is indeed adding value, it’s relatively easy to implement more comprehensive budgeting across additional types of matters.
3. Define the Budget Time Period
This is an important consideration. In some cases, a life-of-matter budget may make the most sense – this is especially true for smaller-dollar, high-volume matters, or if one of your objectives is to strengthen the dialogue and collaboration about matters with your law firms. If frequent adjustments to the matter forecast are anticipated – when dealing with a complex matter, for example – implementing a life-of-matter budget will provide accommodation for updates and help to reinforce the message that outside counsel has a responsibility for helping to manage matter costs.
Other budget time period options include those that align with an organization’s fiscal period or, more rarely, monthly budgets, which make the most sense for very complex, high-exposure matters that have high visibility within the organization. Regardless of the budget time period selected, keep in mind that when you’re budgeting or forecasting for what’s billed or approved in a given calendar interval, there is likely to be a lag between when the firm actually performs the work and when they submit an invoice for it.
4. Select Relevant Metrics
The metrics used to evaluate law firm performance relative to budgets can vary widely between, and even within, organizations. Again, it all depends on the nature of the specific budget objectives. Examples of common budget metrics include measuring accuracy of what was spent versus the original budget or comparing the accuracy of the amount spent versus the most recent forecast. You could also measure whether a firm submits budgets for the matters they are required to and whether or not they do it in a timely manner.
The point is, what you choose to measure should support your budget objectives. You have to determine which metrics will be required as you set up your process and then ensure that you’ll have the data you need to create those metrics.
5. Make Budget Discussions a Part of Matter Management
Although incorporating budget topics into discussions about cases would seem like common sense, many companies miss the mark in this respect. Going to the trouble of requesting, reviewing and approving a budget without subsequent follow-through is wasting a valuable opportunity that should become an essential piece of the matter management process.
Communicating budget information and sharing relevant metrics with law firms is an effective way to improve the partnership and engage the firms’ help in anticipating and managing costs. On the other hand, don’t lose sight of the fact that if you ask for information you don’t use, it can be detrimental to the relationship. It takes a good deal of effort for firms to predict the volume of hours expected for certain tasks with an acceptable degree of accuracy. Discovering that the effort was wasted because the organization ends up ignoring it doesn’t help relationships and can potentially undermine the adoption of the budget process.
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6. Document the Process
Creating and updating a road map of your budget process is useful for thinking through the various decisions that go into it. Flowcharts are important tools with proven utility for guiding, documenting and communicating activities and progress related to processes.
7. Start Small and Scale Up
Starting with a pilot approach allows you to work through the details of the budget process, identify any problematic issues and resolve them before widespread implementation. It’s a good practice to select one in-house counsel or just a few law firms and test-drive your process first. Based on what you learn at this early, small-scale phase, you can make adjustments and then roll out the budgeting process more broadly across in-house counsel and your panel of firms. Doing so will eliminate the need to re-educate or re-communicate to the parties involved that you’ve altered your process.
8. Provide a Cheat Sheet
It’s a relatively small thing, but if you’re going to ask law firms to submit budgets, providing a cheat sheet that highlights your expectations can be very helpful. It not only saves the firm time and avoids confusion about the budgeting process but it also helps ensure that you will acquire the information you need to feed your analytics.
9. Plan Ahead
Having to introduce a number of post-implementation tweaks to a budget process undermines a law department’s credibility – in the eyes of its outside counsel and in the eyes of its organization’s management. This underscores the importance of planning, anticipating what’s needed, and avoiding the confusion and frustration that result when a series of changes are required to address problems that are identified after the launch of a budget process.
10. Determine What is Reasonable Before Approving Budgets
Failure to get a handle on what constitutes a reasonable budget for a specific matter or group of matters before approving it can lead to problems. If a firm knows it’s going to be judged harshly for going over budget, it may decide to sandbag the numbers to avoid ending up with a negative variance. But since the law department’s objective should be to pursue budgets that are accurate, that means instead of rewarding a firm for coming in under budget, it should treat the variance the same way it would if the firm had exceeded the budget.
The solution, once again, is to maintain effective communication. Make certain that law firms and the law department’s budget approvers understand that accuracy is paramount and work together to develop realistic budgets, monitor and manage them closely, and identify potential problems before they get out of hand. Having good management reports in place and sharing them with stakeholders is crucial in this respect.
A Worthwhile Investment
Establishing and implementing a successful budget process requires a combination of planning, cooperation, coordination and commitment. Based on our years of experience working with hundreds of corporate law departments to establish effective processes for matter management, budgeting and analytics, it’s clear that those willing to invest the time, energy and oversight required to succeed consider the effort worthwhile.
Note: This article was first published in the Metropolitan Corporate Counsel: Planning for Success: Top 10 tips for strategic – and successful – law department budgeting.
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