Walk through the process of readying an annual legal department budget
If you are in-house counsel, there is one particularly thankless task you face each year: preparing an annual legal department budget. One difficult challenge is that you must figure out in October what you’ll be spending in August of next year. It’s not an easy process, and not one law school prepares you for. Fortunately, it can be done.
Spend management is a complex puzzle
See how you can fit the pieces for the right fit for your legal department
Read the whitepaper ↗What goes into the legal department budget
Know the company’s plans for next year
Move the cost of special projects off budget if possible
What goes into the legal department budget
To start, you must account for all the different items that make up the budget. If you forget something, you can end up with some costly holes. Consider the following:
- Salaries & benefits – that is, salaries, benefits, bonuses, 401k match, and anything else that goes into the “fully loaded” cost of each employee in the department.
- Allocations – this accounts for the legal department’s share of rent, utilities, technology, copiers, phones, and any other operational costs that are spread among the different business units and staff groups.
- Department-specific technology – besides technology generally provided by the company, the department may have its own specific technology such as a contract management system, e-billing system, matter management, etc.
- CLE/training – a cost all legal departments have.
- Travel – be realistic here. Travel involves a lot more than the cost of airfare. Think about each month of the year and who will travel where and what they will realistically spend per trip.
- Bar fees/legal memberships – this includes state bar fees, and membership in organizations like the ABA, CLOC, or ACC.
- Subscriptions/books/newspapers – these cover things like Westlaw, Practical Law, and any other subscriptions or books/periodicals, etc.
- Outside counsel fees/contractors – other than salaries/benefits, probably your biggest line item.
- Team events – having a holiday lunch, working a charitable event, or planning on an offsite? You need to account for it.
- Postage/office supplies – those costs add up and need to be accounted for.
- Miscellaneous – basically, everything else, like translations, notary public license fees, trademark watch services, corporate secretary services, mobile phone reimbursement, etc.
Look at historical spending
Look at your spending for the current year and then project a simple “run-rate” for the full year by the taking average monthly spend to date times the number of months remaining in the year. You can use this number as a starting point for estimating next year’s spending. Next, look at all your open matters and determine which one will likely roll into next year. Work with outside counsel to estimate next year’s fees for those matters. Then look at your historical averages over the past several years (if you have that data). This will help you ballpark your expected range. Be sure to discard any unusually high numbers, for example a massive antitrust case, that are not likely to repeat. Finally, work with your team to use everyone’s knowledge of what’s coming trends, their gut, and their experience to estimate the new matters that might arise in the new year.
Take your historical spend and create categories for the different types of matters, for example, litigation, employment, IP, commercial, corporate secretary, real estate, privacy, regulatory & compliance, and so forth. With the data you have gathered, you can estimate numbers for each area based on the analysis above. When finished, you will have a pretty good estimate of next year’s legal spending.
Involve the entire department
If you want to create a more accurate budget, involve the entire legal department in the process. Ask everyone who manages spend for their ideas on what they will need to spend next year in their area. It will not be perfect, but it will be in the ballpark. Also, other than individual compensation numbers, the budget should not be a secret to the members of the department. They should know how the budget was built, what choices were made and why, and their responsibilities around managing and forecasting spend. By doing this, if mid-year corrections are needed it will be much easier to explain “why” and “how” because they will have been fully vested in the process.
Don’t forget about accruals
Want to compromise your elaborately planned budget in the first few months of the year? Just forget to properly accrue for some of the prior year’s legal invoices. Law firms can be notoriously slow in sending their bills to you. When there is a delay between when legal services are provided and when they are actually billed and paid, you must “accrue” for that spend. All of the unbilled services for the prior year should have an accrual and the bills charged against the accrual as they come in. If you forget to accrue for something (especially for the end-of-the-year invoices) and a prior year invoice comes in during the new year, it hits the new budget and not the prior year’s budget.
Remember the essentials
Focusing on outside counsel fees is easy because these fees are the most obvious source of spending by the legal department. But, when planning your budget, you must also capture all the “essentials.” These are the things you absolutely must spend money on just to keep the lights on. And they can add up, which means if you don’t account for them, they can become a nasty surprise when they start rolling in. Comb over the current year’s bills and expense reports (and interview your team) to capture everything. For example:
- Fees to maintain patents and trademarks.
- Business license fees.
- Secretary of State annual reports.
- Fees associated with your registered agent or stock service agent (if publicly traded).
- Lawyer occupation taxes and attorney licensing fees.
There are typically many fees and costs needed just to run the department and provide legal services to the company, so look long and hard to suss them out. You might even find costs that you can cut because no one wants or uses the service anymore. Smart legal department budgeting does not focus only on outside counsel fees.
Know the company’s plans for next year
It’s hard to plan a legal department budget if you have no idea what the company’s business plans are for the next year. Is the company expanding into new geographies or new lines of business? Is M&A on the horizon? Will there be new products coming online (which may need trademarks, copyrights, or patents)? Whatever it is, you need to know about it now, because now is when you are planning your budget.
- First, be highly tuned into presentations and discussions at the executive level about the plans of the company for next year. Unless highly confidential, those plans should be shared with the department, especially with those involved in planning next year’s budget.
- Second, ask someone. You should have unfettered access to the business unit leaders and their chief lieutenants. Ask them to share their plans with you and use what you learn to help plan the budget.
Move the cost of special projects off budget if possible
Don’t assume that every legal-related cost must be borne directly by the legal budget. Depending on your ability to “make the case” it’s possible to convince finance or business units that certain costs should be borne on a special cost center or paid for directly by the business unit. For example, M&A work is something that should not fall on the everyday operating budget of the legal department. The cost of legal services related to a merger, acquisition, or disposition should be assigned to a special cost center where all the other expenses for that project are placed.
On a more day-to-day front, consider whether the legal department should bear the costs of immigration services; shouldn’t that be part of the cost of hiring the person (like moving expenses) and charged to the business unit? Similarly, should the legal department bear the cost of outside counsel services relating to sweepstakes and contests? Arguably, that should be a marketing expense tied to the ROI of running the sweepstake contest. In other words, go through your legal spend carefully and see if you can make a case for moving some of the expenses off of the legal department budget. It all adds up.
Be willing to move legal work
When planning your budget, account for the almost yearly increase in the billable hour fee from your law firms – or not. The annual budget planning process is the perfect time to take a good hard look at all the law firms you are using and whether you believe you are getting the right value for your spend. Don’t be afraid to tell your law firms “no” to any proposed fee increase. You don’t have to accept it.
Second, do not hesitate to move the work. If you are unwilling to move legal work to a firm that can provide better value, you are doing a disservice to your client. Similarly, if you are faced with a requirement to reduce your budget by 20%, changing law firms may be a necessary strategy to achieve this goal. Don’t fear, there are a lot of amazing law firms out there that have high-quality lawyers doing great work at significantly lower rates vs. Big Law. Vote with your feet and your money.
Moving work also means moving it back in-house. Each year you should review your outside counsel spend and consider whether there is additional work you can move in-house. Typically, this will be to the team you already have in place. But, if the numbers add up, could you add a new head to the team and have them handle the work at a lower cost than outside counsel? If so, make the case as part of the budget process. The budget process is the best time to make the case (with math) for more resources.
There are many ways to prepare an annual legal department budget. The key is doing the legwork to make sure you are gathering all the necessary information to help you plan and forecast (and that you have no loyalty to who does the work, as long as it gets done correctly). If you use Practical Law, you have access to many different resources to help you plan budgets, from individual matter budgets to an overall legal department budget. It can also help you bring more work back in-house.
Practical Law Quick Expert Answers
Get quick, expert answers to your ‘how do I’ legal questions
Get answers ↗
