Change in the legal climate: Budgeting and project management

Why budgeting and project management are more important than ever

The top three demands from chief legal officers, according to a 2013 survey by Altman Weil, are “more efficient project management,” “improved budget forecasting,” and “greater cost reduction” — all of which can be controlled by budgeting and project management. General counsel are under more pressure than ever from management to “sell” their budgets, and every budget is being cut in the current economic climate; thus, they have become savvy about strategy, costs, and managing their litigation and outside counsel like any business project.

Yet, if pressure from clients and costs is not enough, perhaps court intervention will motivate law firms. In the United Kingdom, through the Jackson reforms implemented in April 2013, courts intervened in the budgeting process by requiring counsel to submit budgets for approval. The Jackson reforms should encourage law firms in the U.S. to manage and budget more effectively before it becomes a government priority.

Now more than ever, clients demand transparency and increased communication from outside counsel regarding legal costs. Consider the following scenario where upfront-cost communications increase transparency and eliminate client dissatisfaction. Imagine that a homeowner hires a plumber to fix a plumbing problem. Upon inspection, the plumber finds additional problems — one of which is attributed to a city code violation. Before the plumber fixes the code violation, he communicates the cost and necessity to the homeowner, who appreciates the plumber’s transparence even though they may be disappointed about the incremental cost. By providing clear cost communications on the front end, the plumber is more likely to be paid in full and rehired for future work.

Counsel similarly should make budgeting and project management a priority. Overall, clients can and will require greater predictability, transparency and accountability from outside counsel.

Part 1: The actual budget

The first step in providing clients greater predictability is to deliver an actual, realistic budget.The client’s goals will shape the litigation steps and the related cost.For each possible activity in the case, counsel will need to determine the benefit to be gained and the likelihood of succeeding.The actual budget can provide financial hygiene and profitability to both the client and the firm.

For clients, budgeting can provide more cost certainty through accurate forecasting, which can help achieve the joint goal of law firms and clients — high-quality legal services at a lower overall cost.Counsel also should consider the client’s broader business implications that transcend the dollars at risk.

For law firms, budgets may be viewed as a marketing advantage from which they can build a benchmark database for future budgeting.Like any business, law firms must stay profitable, even when dealing with tighter constraints from clients.One way to make this happen is for law firms to produce budgets that demonstrate their high value. By breaking down the steps into their component parts, firms can increase utilization and focus on the overall profitability of matters at hand.

Much of the increase of litigation costs is due to the exponential growth of data and the corresponding costs of discovering and analyzing that data. Counsel should coordinate and integrate their budgets with vendors to understand the interconnectedness of the strategy decisions and related discovery costs. Counsel should consider whether such costs will be part of the budget that they manage, or if the client will interface directly with vendors.

NEXT: Managing the budget

Risk analysis is a powerful tool that also can be used to increase the efficiency of business litigation. Theoretically, businesses should be able to calculate the point at which it makes economic sense to settle rather than litigate. In analyzing such risk, counsel and the client should analyze the probability of liability, the range of damages and the fees necessary for the desired result. Because no perfect risk assessment model exists, counsel should consider employing a combination of tools, including statistics, intuitive judgment based on experience, and quantitative analysis using decision-tree or simulation-modeling techniques.

Part 2: Managing the budget

Although clients may obtain greater predictability from firms that provide an actual budget for litigation or transactions, those firms that appropriately manage the budget during project terms can provide clients with greater transparency.The budget and case management plan can serve as a useful reminder of the realistic expectations at the outset of litigation.

Traditional project management theory defines three constraints — scope, time, and cost.

ConstraintsFirst, the scope is defined by identifying the goals and deliverables. Next, counsel carries out the litigation or transaction within the established parameters, making adjustments as required.In managing the budget, counsel should carefully manage the “people” side of the project by facilitating appropriate and timely use of experts and attorneys who are assigned to the litigation. No company wants to rack up expert costs or attorney time early in the litigation when the suit could settle or, conversely, wait too late for experts to be effective. Counsel should execute the project in accordance with the plan while continuously monitoring, controlling, and adjusting as necessary.

Part 3: Communicating the budget

Communication and management of the budget provides the final piece in the project management tool: accountability. If counsel initiates the conversation early about fees and costs, including expert costs and the potential for high discovery costs, then their client can make more informed decisions and should not be surprised when such costs are incurred.

Communication of the budget improves service to the client.Additionally, the budget itself can serve as a communication tool for counsel with the client.With each bill, counsel should advise the client of the necessary revisions to the budget and report regularly on actual, versus budgeted, expenditures. Counsel should communicate to the client that the budget is subject to revision and is not a cost guarantee since such a guarantee would induce inflated budgets rather than a more realistic cost analysis. Overall, the budget can serve to eliminate surprises between counsel and the client when an invoice is delivered.

Conclusion

Progressive clients want the law firms they hire to efficiently handle matters; engage in good process management; provide staffing with the appropriately priced talent; use technology to increase efficiency and reduce cost; and recommend cost-effective measures. Project management and budgeting will help to achieve these goals while providing clients with greater predictability, transparency and accountability.

Contributing Author

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Michael W. Stockham

Attorney Michael W. Stockham practices in the Dallas office of Thompson & Knight. He regularly represents business clients in litigation matters involving securities law, class...

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Contributing Author

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Joshua Johnston

Joshua Johnston is a forensic accountant with Deloitte Financial Advisory Services in Dallas, including expert services in litigation, investigations of fraud and embezzlement, bankruptcy and...

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Mackenzie S. Wallace

Attorney Mackenzie S. Wallace practices in the Dallas office of Thompson & Knight. She regularly represents business clients in litigation matters involving securities law, class...

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