Originally Published in Inside Counsel | September 3, 2014 | By Paul Mandell
Creating and managing a legal budget is among the most vexing tasks handled by a general counsel. As lawyers, we are rarely trained to serve any sort of financial function, and few legal departments have their own internal finance staff. However, a legal budget is a must for any sophisticated legal team. Accurately preparing your business for the costs associated with legal work takes time and careful consideration, and doing so through the development of a budget is a critical part of professional legal-department management. Over the last few months, I have had a chance to speak to a number of general counsel and those who advise them regarding best practices for the in-house law department budgeting process. A few tips gleaned from those discussions are set forth below:
1. Start with the certainties
For better or worse, general counsel work in an unpredictable profession. The practice of law is typically dynamic, filled with occasional surprises both large and small that can limit budgeting accuracy. This can create anxiety for those general counsel tacking the budgeting process for the first time, as well as for seasoned general counsel looking to provide a more accurate picture of the costs required to complete the next year’s legal work. To ease the stress, keep in mind that while arduous, this process is invaluable — giving you greater control over your function. Moreover, “budgeting should be seen as an opportunity to demonstrate the value of the legal department to the business, not only what this function costs the company,” notes Olivier Chaduteau, managing partner of Day One International, an international consultancy that advises general counsel.
In thinking where to begin, consider that there are always certainties among law department costs — from salaries to licenses and more — and it is important to leverage these as a starting point. Review the last few years of expenses and identify the constants that are easy to rely on. And in doing so, be sure to take the opportunity to consider what non-critical recurring expenses are there purely out of momentum, rather than because of the value they provide to your team. Once you have locked down the certain expenses, you will have a foundation to begin tackling the more challenging expenses that are less easy to estimate.
2. Consider collaborative budgeting
Preparing a budget is a good opportunity to assess the current needs of your organization, and it provides the opportunity to share costs in a way that can reduce your own department’s outlay. Among the most obvious opportunities for companies in big litigation is the joint defense group. There is strength in numbers, and joint defense groups enable each defendant to reduce the costs associated with litigation. Keep in mind that such arrangements are not limited to large, multi-district litigations that last for decades; they have value in smaller matters where even simple efficiencies can spare your bottom line.
3. Budget early and often
Like legal work, the finances of a law department are subject to change. While it may make sense to get into the habit of producing an annual budget through a formal process each year, a budget should be referenced and evaluated often throughout the year, as you determine whether your assumptions were accurate and what if anything was inadvertently neglected. This habit will help to ensure that the next budget is closer to the mark, but it will also help you respond quickly in the event that a shortfall (or surplus) begins to appear on the horizon. On this point, Chauduteau notes that “budgeting should not be a once-a-year exercise. Rather, it should be embedded in the business and legal planning process, which will help position in-house lawyers as business partners.”
While there is always a certain amount of trial-and-error involved in legal budgeting, it is important routinely to spend the time and effort necessary to perform this task effectively. By identifying the certainties, seeking creative ways to share costs, and testing assumptions on a regular basis, you may surprise even your finance counterparts with your budgeting performance.