The NY ACEDS Metro Chapter, the ARMA New Jersey Chapter, and legal and governance professionals have recently presented (in ACEDS’ 2024 webinar and ARMA’s INFORM 2025 conference) on budget topics that are not new: determining best practices for in-house legal project budgeting, refining the approach to budgeting and then incorporating those best practices into practical guidance.
Those discussions considered the budgeting process according to a temporal or “time-forward” view of budgets but also contemplated some rubrics for specific methods of approach:
- Advance Preparation – budgeting ahead of a project’s start when possible
- Clarification – setting clear goals, tracking progress and identifying required team members
- Tactics and Strategies – utilizing scenario planning, dealing with unexpected contingencies and incorporating flexibility
- Top or Bottom – how top-down and bottom-up budgeting approaches differ
- Zeroing Out – considerations regarding zero-based budgeting, where all expenses must be justified for each budgeted period
- Technology Assistance – utilizing technology and automation
- Keep Talking – the importance of communication
But what do those rubrics or general “statements of purpose or function” mean when it comes to a practical approach to legal budgeting?
Advance Preparation is accounted for when discussions on budgeting begin where most things do – at the beginning.
- This means a recommendation that budgeting should begin at least five to six months ahead of starting a project – or, barring that, as early as possible.
- The overall consideration for advance preparation is that applying forward-looking thinking grants flexibility in the budgeting approach, presents an opportunity to explore a goal-setting process and then provides for contingency planning – rather than treating every new item tactically or like an emergency.
Clarification applied to the budgeting process means simply that an ideal budget will be both clear and easy to follow for anyone affected or following it. The budget will identify goals, demonstrate markers for tracking progress and define categories of work. These metrics and ultimate work product inform the budget creator which team members may be most appropriate to collaborate with. People who are important to the process – such as experts, project managers and other support professionals – are often a given for larger projects. Between seeking the best results and expending the least on external legal resources, deciding on a firm archetype to hire can be a pivotal first decision. Understanding the demands of a project can inform the choice of which firm to hire. A smaller firm may cost less in general, but a larger firm may supply support professionals or specialization needed for the project.
Accommodating for both Tactics and Strategies appreciates how difficult it can be to anticipate the black swans of the legal world.
Tactics are involved when preparing for each scenario and contingency is simply not possible. However, planning for flexibility within the budget and accounting for the known unknowns (the event itself is unknown, but one is aware that an event shall occur) relieves the pressure of unexpected incidents. For example, cybersecurity incidents have increased at such a rate that the industry motto regarding a breach is “it’s not a matter of if, but when.” For companies that increasingly find sensitive data held on their servers, developing an incident response plan with external counsel or running tabletop sessions in preparation for a worst-case scenario can save valuable time and resources if the event ever transpires.
A Strategic approach considers consistent issues and accommodates the more cyclical “known unknowns,” such as changes in regulations. By extension, this can include enlisting external counsel for assistance in tracking legislation, to keep an organization abreast of upcoming laws. Changes in regulations may require drastic adjustments for compliance, occasionally in how the business operates. While new laws and regulations may provide a time to acclimate and adjust, the shorter timetable may increase costs. By keeping an eye on the legislation from the beginning of its life cycle, business managers can make decisions that integrate potential avenues to future compliance ahead of the time that such compliance is necessary. Additionally, external legal teams could begin working on a likely-to-pass regulation well in advance of its enforcement. This strategy allows the project timeline to stretch – creating less strain on resources by lengthening the time over which your team completes the project.
Top-Down or Bottom-Up Budgeting often depends on a given corporate or project strategy, as there are different methods that may be more suitable in creating a budget. A Top-Down Budget focuses on ease of implementation by relying on historical legal spend and new factors in the industry to create calculated assumptions about rate increases and strategically determine which matters take priority. This overlay of previous budgets enables greater contingency planning to cover any resource gaps by assuming the costs of previous years. A Bottom-Up Budget takes the opposite approach, for focused accuracy on each individual matter and project. With input from the legal team, the budgeter can make detailed assumptions regarding the number, types and costs of matters across business units. This method is time-consuming but captures known incremental projects and potential resource requirements, resulting in greater accuracy and control over which contingencies to account for.
Zeroing Out, or applying a zero-based budget, requires a detailed justification of all expenses. While a zero-based budget reviews planned projects and contingencies such as in the bottom-up budget, the budgeter’s rigorous examination of resource allocation ensures that all legal activity and cost remain aligned with specific strategic goals. Finally avoid using "peanut butter math" - determining what your company has spent so far on projects and then spreading proportional amount evenly over the remaining time. Getting specifics from individuals to apply to the future will leave you with fewer unwelcome surprises and a better overall plan.
Tips for Credibility in Budget Discussions
- Anticipate budget reductions, as the math often goes only one way.
- Do not obfuscate or hide the numbers. Have “get real” conversations with counsel and vendors about how to reduce costs, such as by limiting scope, reducing rates or deploying different resources.
- Recognize the sunk cost fallacy. Do not continue to pay in a losing situation because of past payments or relationships – consider replacing outside counsel or other vendors that are unwilling to discuss rate reductions.
- Remain aware of your cushion or other leeway to minimize the effect of requested cuts or unexpected challenges.
Technology Assistance or deploying technology to support or replace resources can mean different things to different stakeholders, but there is a broad consensus that specific software for legal budgeting can assist in automation and improving the ability of a company to budget accordingly. There are legal analytical tools that track chosen metrics, reporting progress toward your defined project success. Also, billing software can be set to reject inappropriate entries or even identify if there are missing entries that must be rectified. Leveraging technology verifies that the legal team conforms to the budget and that the budgeter tallies accurate numbers to inform the next budget. Automation does not require innovative technology; it can take the form of simply asking the provider to keep you informed of spend on a periodic basis.
While each of the above considerations is important to the creation and improvement of a budget, the importance of communication – or the admonition to keep talking – underscores the most important aspect of the implementation of a budget: communication. Maintaining clear lines of communication with external counsel and vendors as well as across business units aligns efforts toward completing projects and streamlines the work process. Communication ensures that the parties involved are not merely working together but are truly cohesive as a team. This involves understanding who reviews the invoicing, who is evaluating costs against the budget, how the billing codes or other allocations function, and more.
A budgeter must address these unglamorous yet vital components of distributing responsibility to ensure success. Establishing clear channels for answering any questions that may arise regarding the work or budget keeps projects within the bounds of the budget. Additionally, confirming “breaking points” across different periods of time – e.g., month, quarter or year – aligns the team by reorienting the project around the budget and enables course-correction as needed. Communication is especially important when there may be multiple parties involved, such as in the case of law firms working with technology companies or other vendors. The importance of the preceding tenets of distinction in responsibility, open channels of communication, and check-ins regarding the budget and work progress compounds as a project needs additional people.
When creating a budget, understand not only what you are asking for but also what you should have asked. As is the case with the underlying project, successful budgeting mandates careful planning, consideration and understanding across all the involved parties. Ultimately, one can only hope for the best and plan for the worst.
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