Proactive and precise financial planning is an essential capability and a strategic tool necessary for success in today’s organisations. Unlike other departments where expenses can be forecasted with a fair degree of accuracy, managing a legal budget is challenging given the evolving nature of legal matters.
Yet, it is this unpredictability that underscores the power of a predictable legal budget.
This article will explore several strategies and steps that in-house legal leaders can employ to embed structure and processes that mitigate risks and enforce the desired financial controls.
The Importance Of Predictable Legal Budgeting
First and foremost, a predictable legal budget provides organisations, and their CFO’s, with a sense of financial certainty. By accurately forecasting and allocating resources for legal matters, organisations can better manage their finances, streamline operations, and optimise cost-efficiency. This allows general counsel to proactively address legal issues, identify financial exposure, allocate resources appropriately, and avoid costly surprises that could strain the organisation’s financial health.
Transparency, Control And Accountability
At the heart of a predictable legal budget lies the trinity of transparency, control, and accountability. Essentially, General counsel need to clearly communicate the expected costs associated with legal matters to key stakeholders, such as executive leadership, board members, and business partners. This level of transparency helps build trust and confidence, as stakeholders can make informed decisions based on reliable financial projections, ultimately leading to a more stable and successful organisation.
Strategies for Effective Budget Management
1. Tracking Actual and Forecast Spend By Matter
Monitoring external legal spend against a budget is vital for identifying potential issues early and providing a basis for analysis. Having this information at a matter level, and aggregated to the law firm, business unit, and company level, will enable you to quickly identify where costs are blowing out and flag possible issues with outside counsel relationships.
Budgeting at a matter level starts with the provision of clear instructions and an agreed fee estimate or alternative fee arrangement for an agreed scope of work. For more complex matters, this may be broken down into phases, with appropriate budgets forecast. Tracking the spend then involves collating the invoiced spend and any work in progress that still needs to be billed and comparing that to the approved fee estimates.
These processes provide an accurate view of the financial commitment and exposure for the organisation and facilitates robust forecasting. This not only satisfies CFO demands for granularity and accountability but also strengthens the legal department’s strategic position within the organisation.
2. Managing Budget Changes
Once a budget is agreed for a matter, it isn’t a case of “set and forget”. Legal matters evolve over time, and both internal lawyers and engaged law firms are accountable for monitoring changes to the budget and scope of work. Adopting consistent processes for managing budget and scope changes, aligned with formal approval protocols, ensures financial discipline and prevents surprises. Incorporating approval workflows at critical stages of the matter lifecycle, along with escalation mechanisms, further enhances control and compliance.
3. Formal Approval Workflows
Most organisations will have internal policies in relation to delegation of authority and approval of spend. Within the legal function, adopting approval workflows at crucial parts of the matter lifecycle can also ensure that the proper process has been followed and that the spend being incurred is acceptable and appropriate. Some organisations have complex internal approval structures, so it is essential to reflect this in the approval matrix and include escalations.
Decision points where approvals are appropriate include:
- Prior to instructing a law firm/s
- Prior to engaging a law firm
- Change of scope and budget
- Invoice review
- Matter completion
4. Leveraging Technology for Efficiency
Technology plays a crucial role in achieving a predictable legal budget. It is valuable in automatically capturing and collating real-time estimates, invoices and approvals. Look for ways to remove the burden of manual data entry and automate all or some aspects of the workflows and reporting processes. As well as tracking spend and budgets, consider how technology can provide litigation registers and monitor exposure amounts. These tools will help promote data-based decision making and provide visual, accurate and specific reporting for senior stakeholders in your organisation.
Metrics That Matter
In addition to tracking actual and forecast spend against a budget, monitoring and reporting of outside counsel engagements and spend should include metrics that provide a comprehensive view of the legal function’s financial management.
Helpful metrics include:
- A breakdown of matters that are at 80% or more of the approved budget
- Change of scope analysis, fee variation and reasons for scope change, split by law firm and practice area
- A breakdown of the type of engagement (direct, RFP, secondment, off-panel) and fee structure of all matters split by law firm and business unit
- Average fees by matter type split by law firm and jurisdiction
- Invoiced spend split by law firm, matter type and business unit
Further, subjective information and reporting is also very beneficial. This could include feedback from law firms on the quality of the instructions received for example, providing a 360° view of the legal function and identify opportunities for continuous improvement.
Conclusion
The power of a predictable legal budget cannot be overstated. By integrating transparency with control mechanisms such as obtaining fee estimates, tracking budgets, and implementing approval workflows, legal departments can navigate the complexities of financial management effectively. Moreover, the incorporation of technology can enhance efficiency by automating processes and providing real-time data for informed decision-making. With strategic controls and a structured framework, legal departments can achieve predictability and operate with assured confidence.
