A company’s in-house legal department can help rid itself of the reputation its costs are too unpredictable to budget by creating sub-budgets of matters that have relatively stable spends and use these small wins to flip the narrative that in-house attorneys are only a cost center, says Sinéad Kenny of Brightflag.
“There’s always going to be a particular practice area within your legal team where it’s more predictable in terms of cost,” said Kenny, customer insights manager at the legal CRM technology company. “So, what you should do is start with that particular area, get budgets going there, and then as you see success, it’s going to help you overcome the traditional mindset that you can’t budget for legal.”
A general counsel Kenny worked with improved the legal department’s budget coverage from about 22% to 98% over six months by using communication and feedback to instill in attorneys a sense of ownership over the budget process.
“Every month the attorneys had to report on their budget setting in an open forum – a safe environment,” Kenny said in a webcast hosted by the company. “It was helping people understand where they mis-stepped on a budget and how they can avoid it going forward. And the final thing was the rewards. They were called out when they did well on the budget.”
Simply starting a serious effort to get a handle on costs can go a long way in tightening the relationship between finance and legal, which is critical for the general counsel to demonstrate to the C-suite that legal is about creating value and not just spending money, Kenny said.
“If legal can come to the table with a really strong budget habit instilled, it makes that alignment conversation with other business units much smoother,” she said. “They’re going to these budgeting sessions and they’re asking how the legal budget can support their growth. That’s a really strong place to be.”
Litigation is by far the hardest part for a legal department to forecast, but it still makes sense to set a budget for it even if you know you’ll have to change it as you start to incur costs.
“Don’t let perfection be the enemy of the good,” Kenny said. “Each overrun is a lesson. What you can do is use that data context for the next budget you set.”
If you see a 20% overrun trend in intellectual property litigation in North America, for example, you can use that information to set more precise budgets going forward, she said. You can also use that information to make better spending decisions.
“Even from a strategic perspective and not just a financial-control perspective, if you’re seeing a lot of costs upfront in a case, that might be something you factor into settlement discussions,” she said.
Law firm buy-in
Any effort to wrap your hands around costs must include the law firms you work with, since they tend to be the biggest source of spend.
“It’s not enough to just put [an overrun policy] in the billing guidelines,” she said. “It must be surfaced in your regular meetings with the law firms.”
“One legal team we work with just said to the firms, ‘Look, we don’t want surprises,’” Kenny said. “Nobody wants surprises when it comes to spend coming in. So, they explained clearly, communicated effectively, that they wanted a no-surprises policy.”
It’s better to tell law firms upfront that you’d rather they start with a higher estimate than submit a low-ball offer to get the work only to overrun the budget later.
“The estimate typically turns into the budget, right?” she said. “So, tell firms to be more realistic, and even if it means coming in higher, do that.”
As part of that tactic, though, it helps to give firms access to the part of the budget that concerns them through an online portal so they can update costs themselves on, say, a quarterly basis. That gives you an early window into how costs are trending but it also gives the firm a sense of ownership of the budget, which helps get their buy-in to keep costs down.
“Because they’re having to go in and update the budget, if they’ve gone way off from what they predicted, that [can be a trigger for] a conversation that needs to be had,” she said.
Over time, you can keep a scorecard of how well firms match their actual costs to their estimates, and use that data when you negotiate work going forward.
“All of that goes towards when you’re making a big decision on a new case, and the firms that are doing well in aligning with the team on budget, they’re the ones that are going to get the new instructions,” she said.
In effect, you’re communicating to the firms that they’re an extension of the legal team.
“If they go way off on the budget, that’s going to land on the GC’s lap, and that’s going to be disclosed to the CFO, and that’s not good,” Kenny said. “Equally, if they can not surprise them, come in on budget or close to it as possible, that’s going to be a positive and it’s going to be rewarded with new instructions.”