Budgeting and forecasting spend for legal matters is nothing new. But in the current environment of economic challenge, there is greater emphasis at many companies on corporate law department budgets. As a result of this increased scrutiny, legal departments are demanding ever more predictability and accuracy in budgets from their law firms. It has even become common for legal departments to scorecard outside counsel based on their ability to hit their budgetary targets. When forecasting spend on legal matters and setting budgets, the most powerful tool that a law firm or legal department can have is information. As an in-house attorney, you should gather and understand your own historical information, along with industry data that sheds even more light on similar work. And you should demand the same of your firms if you expect accuracy in their planning as well.
There was a time when law firms understood that they could think of budgets as approximations. They were targets, which could be moved or adjusted as cases wore on or circumstances changed. But with legal departments now expected to manage their budgets much like other organizations do, without exceeding preset levels, this is a luxury you can no longer afford to your firms. In today’s world, it is only possible to succeed when both in-house attorneys and outside counsel share the goals of predictability and certainty.
Start with a clear strategy
When working with outside attorneys to set budgets, you should have a clear strategy about what you want to achieve with a particular matter, taking care to ensure that this strategy is in alignment with your company’s overall business goals. Consider what outcome you want to achieve and who you think is best suited to achieve it for you. Would it actually be best handled by your attorneys in-house? If not, who in your portfolio of firms has the right talent to meet your goals? Considering these questions explicitly on each matter will help to start you on the right path, which is an important component of accuracy in forecasting.
Next, you should gather the data that will help you put realistic numbers on your budget goals. Looking at your historical spend on similar matters with the desired outcomes will help you to get a baseline understanding of how much the matter is likely to cost. If available, analyze your data by business line and practice area, and include in your reports parameters such as number of cases, case importance, risk level, amount of spend, hours worked, staffing levels and duration. Be sure to include any additional drivers that you have previously identified in your particular business.
Get some context
For better detail, further clarity and increased reliability, you should also seek industry data from a reliable third party legal analytics provider. Use this data to find out how firms generally bill for similar services and leverage it to your advantage. You may find, for instance, that you’ve historically spent more than the industry average for this type of matter and there may be an opportunity to recognize some savings.
Understanding current market pricing for similar services will help you determine whether an alternative fee arrangement (AFA) would be appropriate and, if so, which one. For certain types of predictable work, a monthly retainer or fixed fee might be appropriate, whereas a fee cap may be more practical for litigation where you know you don’t want to go beyond a certain spend level. There are several AFA models that can greatly improve matter predictability, particularly if you include meaningful risk sharing with the firm.
One piece of the puzzle
These steps will help you toward an accurate forecast for your matter. But keep in mind that accurate budgeting must go hand-in-hand with an effective overall strategy. Be sure that the plan you arrive at:
- Allows for predictable costs, so that your executive team knows they can count on your budget management skills.
- Promotes favorable outcomes, so that your larger business goals are met.
- Improves the overall outside counsel results, so that you can demonstrate the value you brought to the plan.
- Ensures firm profitability, so that the matter is part of a long-term, win-win partnership with the law firm.
When accurate budgeting is a focus, it is important to have ample internal and industry legal performance data. It’s crucial that both you and the law firm you’re working with have visibility into competitor and market pricing during negotiations on budgeting. This data-driven understanding is the only way to have a reliable starting point from which to optimize your spend. This is particularly critical when negotiating discounts and alternative fee arrangements that can help to improve the accuracy of your budgeting.
As an in-house attorney, you have increasing access to industry data that provides insight and predictability into pricing and spend across a huge array of practice areas. This data helps you to ensure fair pricing and good value, but also lays the groundwork that makes budget predictability more achievable than ever.