“Budgeting is telling your money where to go, instead of wondering where it went”. This quote, by the nationally syndicated talk show host and author Dave Ramsey, is a perfect introduction to this week’s article.
In my post of March 19th, I discussed the first part of the Continuous Improvement Program focused on financial management – namely managing outside legal expenses. This post will deal with the second part of the financial management component dealing with budgeting. I will address the concept of reserves in a subsequent post.
While both budgeting and reserves deal with planning and estimating money spent by the law department, I will differentiate how these terms apply to financial management of a law department:
- Budgeting – deals with planning for any money spent with outside counsel
- Reserves – is associated with money spent in the settlement of litigation and claims.
I will mention one caveat. Law departments typically deal with two types of budgets – one dealing with outside legal expenses and another with internal expenses such as staff salaries and travel. This post only addresses budgeting related to outside legal expenses.
Surprises are nice for birthdays, but not when it comes to spending money. At the end of the day, budgeting is, first and foremost, a planning tool to help avoid surprises. We all know we do not live in a perfect world. Unforeseen events will still occur. But budgeting for future events will go a long way to avoiding unnecessary expenses.
The primary benefits of asking outside counsel to provide a budget when they are retained on a matter are:
- Outside counsel must think about what they have to do before commencing work. This may seem obvious, but it adds a layer of accountability on the law firm that otherwise would not necessarily be present.
- The law department has a metric (the budget) to monitor progress as work on the matter proceeds.
Budgeting Legal Expenses – Art or Science?
I recently attended a seminar on managing legal expenses and alternative fee arrangements. The panelists were discussing the concept of having outside counsel do work on a fixed fee basis. One of the panelists said estimating costs in the earlier stages of a matter (e.g., case assessment, motions and discovery) could work on a fixed fee basis, but once a matter progressed to the trial phase, it would not be possible to accurately predict costs. To that point, Steven Greenspan, associate general counsel and head of litigation for United Technologies Corporation in Hartford, CT, stated that if his outside counsel, after having worked on a matter for several months, were not able to estimate costs for the trial, than he would need to get a different outside counsel.
One Size Does Not Fit All
When it comes to budgeting, it is important to realize that one size does not fit all. For example, if the company was faced with a major problem that posed a threat to one of its products or markets that could in turn require a significant expenditure of outside legal fees, the law department would most likely request a detailed budget for various phases of the work such as case assessment, motions and discovery. On the other hand, a simple warranty claim might merely require one summary budget for the matter.
Similarly, the nature or severity of the matter should also dictate the timeframe in which budgets are specified. So, if a matter is going to incur significant expenditures, a budget by month probably makes the most sense, whereas a matter of lesser significance might only need to be tracked on a yearly or “life of the matter” basis.
The LEDES standard – Matching Budgets with Expenses
As many of you are most likely aware, the industry standard for coding legal expenses (www.LEDES.org) has enabled law departments to also improve the budgeting process of outside legal expenses. Leading matter management solutions such as Lawtrac and Team Connect from Mitratech enable law departments to enter budgets according to the same phase and task categories associated with the LEDES coding format. This makes it very easy to track budget to expense as invoices are rendered.
To summarize Dave Ramsey’s quote at the outset of this article, budgeting is a useful planning tool to control expenses. The return on investment for the time spent managing the budget process will pay off handsomely in terms of the money saved by proper planning of effort and resources.