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The art of legal budgeting

Are legal budgets adaptable estimates or fixed targets? David Moran of Wolters Kluwer TyMetrix says that intelligence can provide the answer.

Legal budgeting is an art if you have the right intelligence Ai825

Traditionally, law firms considered budgets to be targets which could be moved or changed according to circumstances. They were relatively flexible approximations that could be adjusted, without notice to the corporation, should the projected circumstances change. But, as a legacy of the financial crisis, general counsel are now under as much scrutiny as any other department head to manage their expenditure. The financial challenges facing the legal profession have increased to the point that certainty is a necessity. Luckily, tools and procedures now exist to achieve the certainty that GCs crave, and law firms need to deliver.  If legal professionals follow a series of clear steps, a reliable forecast can be reached for any matter. 

1. Scope: Define the boundaries of the project and the results it will produce

Before beginning the budgeting process, consider that success will only be possible when both in-house lawyers and outside counsel share the two goals of predictability and certainty. When setting budgets corporations should have a clear idea of the desired outcome with a particular matter; how does this align with the company’s overall business goals? Who is best suited to handle the matter? Is it necessary to hire an external law firm or could this be better handled by internal legal department?

2. Baseline: Determine the known state of past performance so it can be measured and compared.

The most powerful tool that a law firm or legal department can have in the budgeting process is information and it is more readily available than ever. In-house legal departments should gather and understand proprietary historical information, along with industry data that sheds even more light on similar work. The first point of call should be historical spend on similar matters. An Enterprise Legal Management system can help pull this proprietary data.  

Comparing what a corporation has spent in the past when the desired outcome has been achieved will provide a baseline understanding of what the matter should cost. Think of previous successful cases and analyze the data by business line and practice area, and examine parameters such as number of cases, case importance, risk level, amount of spend, hours worked, staffing levels, and duration.

3. Benchmark: Gain intelligence into how others provide the same services and value.

Context is also key. Industry data from a legal analytics provider can keep you in touch with how firms generally bill for equivalent services. But selecting data from actual paid invoices – rather than survey data – will always be the most robust and reliable source. It’s important that both the corporation and the law firms that serve them, have visibility into competitor pricing and the current market rates during negotiations on budgeting. 

With this data in place, the available options will become much clearer. It may be determined that an alternative fee arrangement would be more appropriate than traditional billing methods, and for certain types of predictable work, a fixed fee or monthly retainer might be ideal. 

Relevant, up-to-date industry data can provide you with insight and predictability into appropriate spending across a huge array of practice areas. While cost pressures are up, the tools to keep costs down are better than ever.

Ultimately, the start and end point for successful data management, and thereby accurate cost control, is your legal department’s Enterprise Legal Management platform. This can be the ‘nerve centre’ that drives a new way of doing business in law, achieving budget predictability, better transparency, intelligence and results.

Moran Moran

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24 July 2014

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