In my first post on how to run your legal department like a business, I discussed how to manage your legal department’s workload, which is key to being able to allocate resources, evaluate in-house and outside counsel performance, and manage risk. In this installment, I’m going to discuss legal spend and budgets.
Know your spend and use budgets
The most basic question a stakeholder can ask any business unit, especially one that is considered a cost center, is “What is your spend?” Whether it’s the last fiscal year, this fiscal year to date or this quarter, every business unit in a company knows its spend. As a consultant who’s advised over 200 legal departments, I am surprised at the lack of ability of most legal departments to respond to this question; the most common answer I hear is simply “I have no idea.” The legal department used to be somewhat immune from having its finances scrutinized, but since the recession, more and more General Counsels have found themselves scrambling to answer this question when the CEO or CFO comes looking for numbers, which are provided by all other departments in a company.
The next basic question is “How does this spend compare to expectations?” To determine this, a legal department has to have a budget or way to measure expected spending. There are many ways to budget for legal matters: on a per matter basis, per business unit generating the work, per practice group or even on a department-wide level. Regardless of which type of budget is used, a legal business unit cannot determine whether it’s received good value for the money spent if there is no expectation of what should be spent in a given time frame. And again, budget questions are being asked more and more by the C-suite and boards of directors, so it’s important to have a systematic way to estimate and track budgets and get budgets from your law firms on particular matters so they can easily be rolled up into a budget report.
Having budgets also helps legal departments manage their law firms and matters. Going over budget is obviously a red flag, but so too is being well under budget. This may signify that the law firm is not giving the matter the attention that it needs. Red flagging matters that are over or under budget will help in-house counsel have meaningful conversations with their law firms about their matters and help keep from being surprised by large invoices out of the blue, one of the biggest pet peeves of in-house counsel everywhere.
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