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Business Case: Building a better legal budget

|Written By Jennifer McPhee

Are you spending more than your law department budget allows and bringing down the wrath of your CEO? Here are five tips for putting together a killer law department budget that will keep you in the good graces of your finance department, placate that CEO, and ensure your external law firm understands your company is not a money pit.

In-house lawyers are feeling increasing pressure from above to reduce their inside and outside legal costs, even as the price tag of running an in-house legal department continues to rise. This contradiction can leave in-house counsel stymied at budget time. Completing an inside budget is challenging enough, but for most legal departments, the wildly unpredictable cost of hiring outside counsel makes the process even more daunting. Not to fear, experts say. There are ways to develop an effective budget that keeps both inside and outside costs under control.


Communicate
Before you begin the number-crunching process, it’s crucial to communicate with department heads in your organization to find out what they are planning for the coming year. Next, check with senior executives to confirm what their annual goals and objectives are, and ask about any plans beyond what individual departments are doing. Once you have a good handle on what legal support everyone needs, you’ll be in a better position to develop a budget that effectively uses the resources at your disposal, says Deborah House, the Association of Corporate Counsel’s vice-president and deputy general counsel for legal resources and strategic initiatives. “If your client plans to take on a new line of business, do you need to hire a new lawyer and what will that cost?” she asks. “Or can you get the work done by a paralegal with lawyer supervision?”  


It’s also crucial to keep in constant contact with outside counsel, not just because it helps control costs, but because it allows you to keep senior executives apprised of any setbacks or changes. The more they understand how a significant case or transaction is unfolding, the more understanding they’ll be when you ask for more money because it won’t come as a complete surprise.


And when you present your budget to your higher-ups, it doesn’t hurt to remind them of the ever-changing nature of legal budgets, says Arthur Bode, corporate counsel at Hyundai Auto Canada. “I make a point of emphasizing that this is what we think is going to happen, and this is why we think it’s going to happen,” he says. “But be aware that things can and will change significantly, at least on a short-term basis.”

Keep a close eye on potential problems
Most internal law departments outsource litigation, which is a major reason that outside budgets are such unruly beasts. Experts say outside counsel expenses account for roughly half of a law department’s budget, and 60 per cent of this is spent on litigation. One unforeseen lawsuit can blow the entire year’s budget, so keep an eye on anything nasty that may be coming down the pipe. If you’ve received a threatening letter from a customer or former employee, make sure you budget for the resources to handle it, says Barry Fisher, general counsel and corporate secretary at SAP Canada Inc., and a Canadian Corporate Counsel Association (CCCA) board member.


Depending on the situation, it may be wise to make a potentially explosive problem disappear before it officially starts by offering, for example, a refund and a small amount of compensation to a disgruntled customer who is threatening a class-action lawsuit.

Ask outside counsel for budgets
When developing your outside counsel budget, don’t simply come up with a blanket figure that covers your entire outside expenses. Instead, ask outside counsel to provide budgets on a case-by-case or matter-by-matter basis. Bode does his own case assessment and then asks outside counsel to submit a budget with a breakdown and explanation of costs and an estimated timeline. He compares the two plans and looks for disconnects or big dollar differences. “It does force you to think about where you are going and how long you are likely to be at things,” he says. “And when you get the numbers, you start thinking about what you can make go away.”


Working with outside counsel to develop budgets can help you curb costs by revealing expenses that should be worked into a firm’s overhead, or at least provided at cost, says Fisher. “If we’re paying a substantial amount per hour, I don’t want to be billed $2.50 per page for photocopies,” says Fisher. “It can get out of control, and suddenly you’ll get a bill for $4,000 in photocopies. If there’s going to be an extraordinary kind of non-professional billing, those should be cleared in advance.”


And if outside counsel are exceeding your agreed-upon budget, they should notify you so you can discuss the situation. “The general rule for outside counsel is ‘I don’t want to be surprised.’”


Finally, when a case or transaction is complete, conduct a postmortem by tracking the budget against actual results to figure out what worked and what didn’t.

Be creative about billing arrangements
Entering into alternative billing arrangements with outside counsel is one of the most effective ways of reducing costs and increasing the predictability factor. Still, just 38 per cent of those surveyed for the CCCA 2005 In-House Corporate Counsel Barometer said they or their organization have dealt with alternative billing structures.


“Someone who says run with this and bill me as much as you want is going to get themselves into the same situation as the person who has no limit on their credit card,” says Fisher, a lead on the survey.
Savvy law departments often ask firms to bill per job or to work within a specified amount. To make this arrangement more attractive to law firms, inside counsel often guarantee a certain amount of business to law firms that offer reduced or fixed rates. Another option is negotiating a drop in hourly rates across the board, or, for simple matters, asking law firms to assign the matter to a certain level of lawyer to avoid paying top dollar. Or, if the job requires a partner, Deborah House suggests scrutinizing the bills to ensure the partner isn’t assigning important tasks to an associate. “You can say ‘I don’t want to pay for an associate’s learning curve,’” she says.


David Calabrigo, general counsel and corporate secretary at the Vancouver-based Canfor Corporation, also scrutinizes outside counsel’s billings. If he notices costs are creeping up for the same amount of work performed every year, he budgets for less and then manages the files to make sure costs come back in line.

Get help
One of the most difficult aspects of budgeting can be understanding the finance jargon and software programs associated with number-crunching, tracking budgets, and projecting future ones. While it’s necessary for in-house staff to create their own budgets, it never hurts to enlist the help of the finance or accounting department. This makes sense, says James Wilbur, a principal at the legal consulting firm Altman Weil,  because it keeps the work in the hands of people who are trained to do it, and frees up counsel to focus on work where they add the most value — handling legal matters.


Benchmarking surveys can also help with the budgeting process because they track average spending among legal departments, reveal how others organize their accounting, and even break down litigation costs, says Jonathan Bellis, a director at Hildebrandt International, which established the leading benchmarking and compensation survey in the United States.


Be aware, though, that every firm is different so benchmarking shouldn’t be used in a vacuum.


“That’s one of the challenges of benchmarking,” says Bellis. “Reality is as complicated as it is homogenous so you really do get different experiences with different companies.”


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