It’s your company’s “budget season,” and for many inside lawyers, that used to mean watching your business clients buried deep in financial numbers, worksheets, trend lines, forecasts and metrics. Today, most law departments, big or small, participate in this ritual along with their colleagues in other business units and departments.
Law department leaders should know and be able to account for every item in their profit and loss (P&L) statement. On the cost side, they should know their internal and external costs. Internal costs often include salary, benefits, travel expenses and overhead for your internal legal staff. External costs typically come from outside counsel and other legal vendors. These costs may reside in the law department’s own P&L, or may be allocated to the respective business units or departments. Regardless, the law department should closely track and be able to explain that legal spend.
Importantly, a law department’s P&L should not always be a reflection of cost, as there is often revenue or offsets that should be captured too. Examples of such revenue may include case positive settlements your team has negotiated, or reimbursement for matters your legal staff has secured from your insurance carriers.
Law department leaders also need to become adept at setting their annual budgets and at forecasting where their finances are headed. Although this may seem daunting, it doesn’t have to be. Here are some tips for more accurately forecasting your department’s finances:
Know and be able to defend your headcount. Because the key driver of internal legal spend is the cost associated with your personnel, keep accurate track of the number of employees—both current and anticipated—in your department. If you have an open position, or think it is likely that you will need to add or downsize during your fiscal calendar, then be sure to put those increased or decreased headcount costs into your forecast. Law department leaders also must be able to defend their personnel, so it is important to show the contributions of each team member.
Track external legal spend by category and business unit. For most in-house lawyers, external legal spend is the most unpredictable. It does not always have to be. It is easiest to manage your external legal spend when you know what you’re spending it on. At Kaplan, for example, we code our invoices so that we know on a monthly basis how our legal spend breaks down by business unit and by each of the following categories: litigation, labor and employment, commercial contracts, intellectual property, real estate, mergers and acquisitions, regulatory, compliance and general corporate. Within these nine categories, we maintain backup data that shows our monthly and year-to-date spend for every case and matter we handle.
Tightly manage your legal invoices. The No. 1 cause of law departments missing their external legal spend forecast is not knowing the amount of their legal invoices in a timely fashion. At Kaplan, we require that all of our external legal vendors send invoices on the first business day of every month. We therefore are able to code, pay and track, or properly accrue for, our external legal spend in “real time.”
Require and analyze cost estimates and legal trends. Inside counsel should require reasonable cost estimates from legal vendors on all cases and matters. They also should study and analyze both their own historical spending trends and trends in their industry (such as increased regulatory or litigation activity in certain areas). We cannot always know about a truly unforeseen case or matter, but we can use this analysis to bring us closer to predicting legal expenditures.
Law departments with tightly managed P&Ls will find that they are best positioned to control their costs and demonstrate their team’s value, and to strengthen their relationships with their key internal constituents and clients.
Janice Block is executive vice president, general counsel and chief compliance officer for Kaplan Inc.