Smarter legal budgeting

Budgeting is a critical concern for in-house lawyers, in terms of litigation and day-to-day legal work. While the Jackson reforms have forced parties to litigation to consider the costs element of dispute resolution, the fact that legal spend routinely represents a significant balance sheet item has led corporate legal departments to focus sharply on validating their budgetary requirements and getting the best possible value from those budgets. The answer is to adopt a strategic approach, supported by the right technology, to procuring and managing external legal services.

The global downturn forced businesses to look closely at their expenditure on external legal services. As Jack Diggle, head of Elevate Services EMEA consulting and former head of Barclays’ legal department’s strategic change agenda, told The Legal Review on 17 October, for many corporates, legal spend has risen from ‘a small component in the balance sheet to something big enough to attract the attention of the CFO.’ He added: ‘This is forcing legal departments to buy smarter.’

The Legal Week ‘Corporate Counsel Forum’ described the in-house legal challenge as:

‘… a perfect storm: managing legal issues in an increasing regulatory environment while maintaining control of costs.’

Notwithstanding the growing regulatory burden which is expanding their workload, over 60% of in-house lawyers responding to The Lawyer ‘In-House Attitudes Report’ 2014 expected their budgets to shrink or remain static in the next 12 months. This is a key driver for in-house legal departments to focus sharply on budgeting and to adopt a strategic approach to the procurement of legal services and the day-to-day management of legal spend.

Market liberalisation is expanding the choices available to purchasers of legal services beyond law firms and driving costs down. However, as well as choosing the right portfolio of legal services suppliers, in-house legal departments are under pressure to derive the best value from their suppliers.

An obvious way of reducing legal spend is to handle more work internally, which on a case-by-case basis is less costly than employing external counsel. Most businesses have not chosen this approach. Although 28.7% of respondents to the 
‘In-House Attitudes Report’ expect their teams to grow in the next 12 months, 52% expect their teams to remain the same size and 12.6% anticipate a reduction in numbers. The Lawyer GC roundtable earlier last year included the admission that GCs are regularly caught by the paradox whereby board members want to reduce legal spend while at the same time pushing more work to external counsel.

This may reflect the fact that expanding the in-house legal team is not necessarily the most cost-effective strategy, particularly, as in many businesses, its workload fluctuates dramatically depending on the timing of significant transactions, and is potentially unpredictable due to litigation. Another factor is that the legal function needs to remain close to the business, helping it deliver its strategic vision, so at times it is important to seek objective or specialist external legal advice.

Litigation costs have come to the fore following the Jackson reforms to the Civil Procedure Rules, which included the requirement that cases should be dealt with ‘at a proportionate cost’. This means that parties cannot throw money at litigation to win the case, and that the projected costs budget should reflect the value of the claim. With a few exceptions, parties are expected to file a budget at the outset of the case for the approval of the court – and once it is approved, to stick to it. The risk of failing to submit a budget on time or exceeding the approved budget is the inability to recover costs, notwithstanding the outcome of the case. A stricter regime has been imposed and the courts are enforcing it. For example, on 21 November 2014, The Law Society Gazette reported that a High Court judge penalised a party for late submission of its statement of costs. Consequently, budgeting has become a key consideration in litigation – however, compliance also involves costs, and cases can be delayed by budgeting issues.

The Litigation Futures website recently reported that the new budgeting regime has brought costs lawyers’ skills to the fore and the Association of Costs Lawyers’ annual survey indicates a significant increase in demand. Budgets play a valuable role across the spectrum of legal work. They clarify expectations between the law firm and the client about the level of activity, help secure agreement on overall strategy (eg in litigation, budgeting for work to reach certain potential exit points), and force everyone to spell out assumptions necessary to set the budget. The budget then provides a useful series of guideposts along the way to see if the project is proceeding as expected. Conversely, without a budget there is a serious risk of misaligned expectations about cost/strategy between firm and client, and 
much less accountability for costs.

GCs generally agree that litigation can blow the budget. Michael Ellis, group general counsel at Abercrombie & Kent is among those who believe that budget forecasts should exclude M&A and litigation, as these may require exceptional expenditure on the best advice.

Consultants and others advocate applying general procurement principles to legal budgeting, procurement and costs management. These include reducing the number of suppliers – ie panel firms – who are likely to negotiate better rates in return for regular/volume instructions; negotiating alternative financing arrangements such as fixed or capped fees and scoping out work carefully in order to produce accurate budget forecasts. It is also about the use of competitive tendering on a matter-specific level. For example, some corporates seek multiple quotes from their panel firms every time they instruct external counsel.

Here technology can play a key supporting role. As The Lawyer reported on 10 November, Santander applied a live reverse auction process which lasted about an hour to its panel appointments whereby firms submitted hourly rates which could be revised and fed into an online ranking process which was updated every few minutes and included factors such as quality and price.

Responses to the ‘In-House Attitudes Report’ revealed that in many participating organisations, the executive team resented spending money on legal costs. Technology can help address two main challenges that general counsel face around budgets: getting them and tracking them.

For example, Serengeti Tracker has a workflow for requiring/submitting budgets for approval online. Once the client and firm agree on the budget, the system matches up bills as they come in, alerting the client when a bill comes in that goes over budget for whatever period is being audited.

As a result, technology solves the common problem of the budget being filed and then not checked until the end of the project when it is too late to do anything about significant cost overruns. Technologies like Serengeti identify issues early, when it’s possible to readjust activities/strategy before overspending becomes a much 
larger problem.

Technology has moved centre stage, supporting decision making around legal services procurement and budget management. Matter management and e-billing solutions which collect, analyse and process law firm billing data are shifting commercial power to the buyer side of legal services, enabling in-house counsel to audit law firm billing practices on a more rigorous basis. The Lawyer ‘In-House Attitudes Report’ reveals that 29.8% of participants use technology to capture information about their law firms and 28% use e-billing. However, few leverage the data produced by these systems to understand what legal services should cost in various areas of law. The granular nature of this data can benchmark the costs for particular matters, broken down by practice area, geography, industry sector etc.

Analysing historical billing data and industry data will provide a baseline understanding of what a matter should cost at the outset. It will also help produce more accurate budget forecasts based on previous similar matters and compare the performance of different law firms, thereby identifying which law firms are likely to be more cost-effective when it comes to handling particular types of work. Tracking spend against budgets on an on-going basis helps measure and compare the performance of different firms and creates benchmarks for future matters.

Visibility is critical when it comes to decision making. E-billing software can be used to track whether external work is being allocated at the appropriate level and highlights when an external firm has assigned additional fee-earners to a matter and the seniority – in terms of hourly rate – of each lawyer involved.

Technology is also helping in-house counsel to manage their internal resources. A legal department management system like Serengeti Tracker, which boasts automated budget tracking features, makes it quick and easy to see where the in-house team need to spend their time.

For example, all projects in a given area can be sorted by spending/budget percentage, quickly identifying those that are most under and most over budget, both of which may be a problem.

Serengeti Tracker can be programmed to run automatic reports around litigation risk – the ratio of budget/exposure. This report allows you to quickly identify those cases that you may want to resolve quickly because the budget (cost of litigating) represents a high percentage of exposure (what’s at stake). Conversely, cases where the ratio is low should be reassessed because spending may be too low given 
the high risk involved.

Budget negotiations are a key consideration, particularly given the popularity of alternative fee arrangements, fixed and capped fees. Research has shown that where budgets are set, tracked and managed, costs are controlled better and even reduced. E-billing systems such as Serengeti, which offer comprehensive reporting capability that includes transferring data from external panel 
firms into a single system, allow in-house counsel to compare billing data from different firms throughout the various phases of a matter. A dashboard view of billing data facilitates negotiation and collaboration with panel firms.

Monitoring legal spend enables in-house legal departments to keep budgets under control. Real-time reporting enables on-going costs to be tracked against forecasts and approved and phased budgets. This allows in-house counsel to measure and compare the performance of different firms against agreed budgets.

Automated validation checks that invoices are submitted in line with corporate guidelines and agreed rates.

E-billing data will also identify which 
parts of the business are generating the majority of its legal spend. Unless there is an obvious rationale for this, it is worth comparing spending patterns with industry norms to decide whether it would be 
more cost-effective to bring certain 
work back in-house.

Technology arms in-house counsel with a battery of data that they can use for external and internal negotiations: to achieve the best rates from their external legal services suppliers and to help the board understand how the business is deriving value from the legal budget that they see on the balance sheet.

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