Planning the first budget for a new law department

This article is based upon “Building a Law Department Annual Budget Checklist”, one of the more than 65,000 resources available in Practical Law Connect.

If it’s your first time making a law department budget, the process can feel overwhelming. Not only are there enormous amounts of information that require careful consideration, but you will also likely have to make some difficult allocation decisions. As a result, it can be hard to know just where to begin.

Here are some key steps to help you start on a sound foundation

Tally all costs

Calculate the costs incurred by the department over the past several years and use that number to estimate how much the law department is likely to spend by the year’s end. Use this approximate number as the starting point for planning next year’s law department annual budget.

Analyze key law department metrics

Analyzing important metrics – such as the average rate per hour the law department spends on in-house counsel and outside counsel – will ensure a solid starting point for your new budget.

Involve key law department employees

Involving others in the budget preparation process will ensure that everyone’s needs and wants are considered when building the law department annual budget.

Meet with the Chief Financial Officer

Meeting with the CFO, other finance department employees, or the legal operations professionals assigned to review the law department, can help obtain current and historical reports on the law department’s spending.

During that conversation, be sure to:

• Ask questions about the format in which counsel should submit the law department’s yearly budget. It should follow the same format used by other company departments.
• Discuss any concerns that the company’s management may have about the law department’s spending while communicating the financial support needed to ensure that the company’s and the law department’s legal, business, and other priorities are met.
• Confirm the deadline by which the law department must submit its proposed annual budget.

Attend management meetings

In the weeks or months leading up to the law department’s budget preparation deadline, attend management meetings to anticipate better any significant company events that may strain the law department annual budget, such as acquisitions or major new product launches.

If the company is planning a major M&A transaction or new product launch, ensure that management understands how this may affect the law department annual budget and obtain approvals for an increased budget.

Determine who will absorb costs

Clarify what costs are included in the law department annual budget and whether another department or business unit may absorb some of those costs.

For example, if the marketing department routinely requests that the law department perform excessive intellectual property (IP) clearance work for new product launches, consider asking the marketing department to assume some or all those costs.

Anticipate a reduction

Anticipate that management may request that the law department reduce its proposed annual budget.

In that situation, consider:

• Having frank conversations with outside counsel and other vendors about the need to reduce costs and enlist their assistance in reducing their rates
• Replacing outside counsel or other vendors that do not agree to reduce their rates
• Strategizing how the law department could further reduce costs
• Building a cushion into your annual budget to minimize the effect of any requested cuts or unexpected challenges

Drafting a good, workable law department budget requires communication and vigorous attention to detail. Keeping to a roadmap like the one above makes the process go smoother without sacrificing comprehensiveness.