Many law departments hire outside counsel at “discounted” rates without determining the major tasks expected, the amount of hours to complete the work, the appropriate level of resource performing the work, and possible events that could change the legal work plan. We have seen numerous examples, when comparing similar matters, where the total cost of matters with discounted rates were higher than those with non-discounted rates. Focusing on rates alone, without controlling hours, does not lead to cost savings or containment as the formula for total cost of a matter based on hourly fee matters = (rates) x (hours).
This article continues the series on how a general counsel can create and foster a law department culture that excels in the business of practicing law. Matter-level budgeting is one of the most important components of outside counsel management cost containment.
Matter-level budgeting bias
Matter-level budgeting involves two key steps: articulating a budget and managing to that budget. Most outside counsel guidelines require matter-level budgeting; most e-billing systems have matter-level budgeting functionality. That said, it seems that a small number of law departments enforce matter-level budgeting (requiring initial budgets, managing budgets and reporting on budgets). Some of this is attributable to the general counsels’ bias towards matter-level budgeting.
One general counsel indicated budgeting only works for non-litigated matters as “litigation matters are too unpredictable.” Another stated, “budgeting only works for litigated matters as the ABA UTBMS litigation codes are much more granular than the non-litigation codes.” Yet, all outside counsel matters can and should have matter-level budgets.
For many law departments, a successful budget is a budget-to-actual accuracy to the initial budgetary figure. Budgeting is never a single, solitary event or a big reveal of a single number. Rather, law departments that are successful at matter-level budgeting have implemented an effective budgeting program involving several elements and check-points.
Elements of a successful budgeting program
A successful budgeting program is comprised of multiple elements:
- Reviewing past budgets and budget-to-actuals for similar matters (if possible)
- Starting the early case planning discussion on expected legal work, by whom, by when, at what rate
- Determining the appropriate level of budget granularity for each individual matter (i.e., life of matter budget, annual budget, phase budget, phase/task budget)
- Obtaining the initial budget within the first 30-60 days within the e-billing system
- Migrating any Excel or Word matter budgets into e-billing or an electronic system
- Managing to the budget/adjusting budget when necessary
- Preparing periodic budget-to-actual reports (i.e., within 25 percent of budget limit, matter conclusion budget-to-actual)
- Conducting lessons-learned discussions to alter future behavior
- Identifying best-in-class budgets as an aid for future matters and AFA templates
Training and reporting
Internal lawyers should be trained on the budgeting roles of inside and outside counsel. This training includes: how to evaluate the initial budget, when/what events will signify that a budget review is necessary, how to evaluate and what to communicate to outside counsel on the budget performance. To ensure the budgeting program is more than a guideline, there should be regular electronic reporting on budget-to-actual performance while the matter is active. Ideally, the budget should be created and managed within the e-billing system. If the budget is created in an Excel or Word document, at least the life-of-the-matter budget should be captured in the e-billing system. A legal operations resource should produce the necessary budget management reports, such as non-compliance and budget-to-actuals.
Why matter-level budgeting is important
Matter-level budgeting encourages communication on all of the practice of law elements: intended major tasks, for how much time, by what resource, and with what expected result. The budgeting process reveals differences in tasks needed and the level of detail required for completing the work before the legal fees are incurred. Many general counsels we have worked with would argue that the greater the matter budget granularity, the better the overall quality of outside counsel lawyering.
From an operational standpoint, budget-to-actual performance should be a comparison factor in determining which law firms and outside counsel receive future matters. Many law departments are increasing the percentage of AFAs as opposed to traditional hourly billing relationships. Without knowing what the typical hours and budget would have been for a matter, how will you know that entering into an AFA will save you any money? Is an AFA preferable just because it is a non-traditional hourly fee arrangement or for the expected fee predictability and cost containment?
Matter-level budgeting is one of the most important elements of outside counsel cost containment and savings. Implementing a law department budgeting program that contains internal training and budget reporting accelerates effective matter-level budgeting. No longer can the outside counsel and the inside lawyer rely solely on a positive matter outcome. The current cost-cutting law department climate requires the internal lawyer to demonstrate that s/he was successful in the cost of resolving the matter — the business of practicing law.