Why your law department needs a budget 

Information for this article was taken from the Practice Note “Law Department Operations: Overview”, one of the more than 65,000 resources in Practical Law

Law departments increasingly must conduct themselves as a business. They’re expected to contribute more to their organization’s cost-cutting efforts and to aid in strategic initiatives.

Drafting a formal annual budget is a necessity, no matter the size of your department. A well-defined budget that breaks out your major cost centers enables you to assess your department’s condition better and can even improve your department’s standing within your company.

A law department roadmap

Creating an annual budget identifies critical details of your department, including how it operates and how you can better achieve both short-term and long-term strategic plans. Budgeting enables a law department to anticipate upcoming challenges and prepare for any substantial cost increases and better aligns your department-specific goals with those of the overall business.

There are three primary ways a budget can improve a law department’s effectiveness:

1. Building up strengths
   Analyzing costs and results of various segments of your department can determine where your strongest values lie. Are your employees productive, beating company-wide or industry averages? Have any parts of the department been particularly skilled at holding down costs?
2. Identifying weaknesses
   A line-item budget highlights opportunities for improvement in your department. If there’s a larger-than-expected cost center (say, in outside counsel expenses), it could merit a thorough investigation and possible rethinking of such practices.
3. Cultural examinations
   The budgeting process shines a light on previously-obscured issues within your department’s culture. For example: has your employee turnover been higher than average? That’s not only an expense issue; it’s also a sign that something could be amiss in your leadership or management structure.

Getting more aggressive with costs

Many companies still regard their law departments primarily as cost centers. A budget can help your department better demonstrate its value to the overall organization, allowing you to find ways to reduce costs and improve your productivity and efficiencies.

Personnel costs will be your biggest line item. Breaking these down gives your department insights into optimal headcounts, how to better distribute responsibilities among your staff, and how to optimize their work priorities.

For example, having a more accurate analysis of employee costs will improve hiring decisions. If an attorney leaves your department, you’ll be able to assess whether it’s best to replace them with a full-time hire, to eliminate the position and divide responsibilities among other staff, or to employ outside counsel.

Budgeting also gives you a sharper perspective on outside counsel costs, typically your department’s second-largest line item. Determining the most cost-effective outside law firms lets you direct more business to them. You’ll be more informed when you negotiate rates and volume discounts, and you’ll be better at holding outside counsel accountable if they exceed budgets or don’t adhere to billing guidelines.

Using budgets to reshape strategies

Law department budgets can also provide a strong argument for structural change.

One example is trademark and copyright research. Say the law department currently carries the costs of this work. A budget estimating the time and expenses this work requires might lead to several good outcomes, including shifting relevant costs to the marketing department, and a policy requiring marketers to submit briefer, more prioritized lists of trademark names – both of which would reduce lawyer hours and outside expenses spent on these tasks.

More broadly, a budget is a foundational tool that will strengthen a law department’s project management initiatives. By better defining staffing needs, noting your cost and value centers, and what sort of deliverables you can achieve, the law department plays a more integral role in helping a company achieve its strategic objectives.