Creating a legal operations budget is a crucial step. We will look at the most common mistakes and avoid them to set for success.
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Creating a legal operations budget is a crucial step for any legal firm to keep costs under control. However, some pitfalls can happen if you do not take the time to plan and prepare your budget. This article will look at the most common mistakes and avoid them. Creating a good, intelligent, objective-oriented, and easily repeatable process is the final goal for success.
In this article, we will cover the following:
Preparing your legal department budget
The essential component is setting objectives for your legal department on time. The best way to do this is to create a strategic plan for your legal department. You can create your sample plan (or get one online), including a list of the expected expenses sorted by category, and the work will be almost done. Do this work in less stressful periods, for example, in August.
The main categories to include in your plan can be:
- mandatory education
- office space
- employee salaries and benefits
- external legal consultant
You can add all the categories that fit your organization, such as M&A costs, sponsorships, joint ventures, trademarks, and patents.
You can call this your “strategic plan” and then use it to guide your legal department budget through the proper steps. Creating a top-notch budget can be an excellent way to reduce friction and improve your corporate legal operations. For example, it will prevent the legal department from getting out of economic resources to carry out its activities, which can be a source of stress and pressure on work. At the same time, a well-designed budget is fundamental to building a reliable and transparent relationship with the management and financial departments, which will be aware of the resources needed by legal operations.
Consider all the costs for your legal department, including some extras such as out-of-pocket consultants, and never underestimate the possibility of buying new software tools.
Nowadays, all legal professionals know the importance of streamlining legal operations with lower costs and increased ROI. Structured businesses rely on many software, which is also helpful for the legal department. In my experience, any legal department works at least with an office suite, contract management software, a private network used by the organization, and, sometimes, a ticketing tool. All those instruments allow legal professionals to concentrate their work on billable hours. Technology is continuously improving, competition is high, and pricing differs from year to year and different solutions. Being lazy to check new possibilities on the market would lead to a loss of money. On the other hand, saving some money can positively affect the efficiency of the legal department.
The best practices also benchmark data to estimate your spending on specific line items based on historical balance. For example, the main expense through legal departments is always for external consultants, which sometimes results in out-of-pocket costs. If comparing data between different years emerge an upward trend of single paid requests, it can be an excellent solution to opting for a forfeit regime or hiring a new employee.
This can help you avoid a budget deficit, which is one of the common pitfalls. Underestimating during the budget process may result in a denial of extra resources from the management during the year because they are out-programmed resources. However, overbudgeting is a practice to avoid because it leads to blocking possible valuable resources for other departments.
What to include in your legal department budget
Legal departments can create a budget based on revenue, growth opportunities, or perceived needs. With the benchmark approach, the legal department can cooperate with the financial department, asking for data related to the previous years or tailored reports of their economic performance. In particular, objective data related to reached results can show possible weaknesses or areas where more investment is needed. During the last years, many legal departments bought contract management software and document assembly software, also known as “legal operations technology”. With those instruments, the legal work can be done by spending less time on repetitive tasks and focusing on substantial work, such as designing a good compliance process and being informed on relevant legislative updates to the business.
Law firms should consider their cash flow and seasonality. Cash flows include payment delays, litigations, and fee payment structures during the year. Typically, legal departments are not affected by seasonality, but the business they pertain may be. In this case, it is a reasonable point programming expenses with the financial department also considering seasonality to be sure always being able to pay the amounts due.
If you want to increase the compliance process, you should create a proper budget tailored to your specific needs, for example, audit expenses.
This can include spending more money on consulting firms. These agencies can help you save time and avoid overhead costs passing you the expertise to design processes and mandatory documentation. If you have never considered a scenario budget for compliance, here are some aspects you should highlight to the general management of your business:
- There is a growing trend of compliance requirements not only by law but also about security requirements, certifications (e.g., ISO, SOC), preventing industry crime
- Being compliant means that you need a complete view and understanding of different matters
- In a small or medium-sized company, this cause investing much working time in generating specific new knowledge to accomplish legal and technical requirements.
- The lack of expertise may expose the company to higher risks of non-compliance and administrative consequences such as fines.
Why it is essential to have a law firm budget
The budget should be prepared in a way that helps the business demonstrate the value of the legal department. It should also show the importance of working with other departments within the company and avoiding silos.
Developing a budget helps companies improve their productivity and reduce costs. It can also support companies to make smarter decisions faster.
The strategic plan can help the legal department identify expenses that could be avoided, for example, if you understand that the resources invested are not generating good concrete results. The business can benefit from a significant return on investment, saving money and shifting legal professional time from non-billable to billable tasks and programming payments according to positive cash flows.
Consequently, it is part of the work of the legal manager to analyze economic data together with KPIs (Key Performance Indicators). In a business context, KPIs are helpful indicators of performance and should be tailored to the specific activities of the legal department within the business organization. In truth, there are some difficulties in designing objective and measurable KPIs for legal people, but we can outline some guidelines based on my work practice:
- Customer satisfaction
- Timely answer to requests
- Number of internal audits per year
- Improvement actions for compliance weaknesses
- Correct budgeting
Especially the well-defined budget is significant and helps legal departments identify ways to improve their performance and ensure their resources are focused on the defined objectives.
Doing audits means you have the resources and capacity, a policy, and a process in place. Since part of the compliance is running internal audits, as a rule of thumb:
- 0 audit, you might have some problems having under control the effective compliance of your business
- 1-2 audits, you are on a safe path
- 3+ audits, there is a company culture of being compliant and improving weaknesses
Avoid common pitfalls
First, you must set your goals for the coming year, plan economic resources related to them in your budget and remember that you must be realistic with the resources in place.
A budget built strategically allows you to make informed decisions. You can also leverage benchmark data from other legal departments to estimate costs. This can be done online or by talking to prospective service providers, such as big consultant corporations (KPMG, Simmons&Simmons).
The most significant aspect of your budget is likely outside counsel fees, which you might consider outsourcing to new software tools.
You can build a strong partnership with the Finance and IT Department to get this part of the budget under control. You can increase trust and collaboration by inviting crucial stakeholders to your spending review meetings and maintaining communication on further steps. Take the time to evaluate different solutions already in place in your company or through a demo of new software.
When creating a legal operations budget, you should focus on your departments/team goals. Usually, the first goal you think about is getting the best results in terms of reaching the KPI and working efficiently at the lowest cost. It is better to allocate the right amount on the right expenses, the ones that allow you to reach the KPI efficiently. A clever idea might be to include all your team or department heads in the process if your legal department is large and structured to have a general and clear overview of their requests. Make them evident in your team goals but be open to listening about needs and try to find a compromise that can fit the whole team. For example, you may discuss new hiring if the team is not able to timely answer requests or consider a software management tool if the real problem is tracking those requests.
Finally, a good practice might be introducing KPIs which help you and your colleagues to focus on the objectives and measure them objectively and analytically.
The only way to succeed is to plan, prepare and execute.
Using a strategic legal operations budget can be the catalyst for a successful legal career as a manager. It also helps to keep your eye on the revenue margin of the business, ensuring a final bonus for your department. This may seem obvious, but many legal department lawyers forget their surroundings and the company. If you are looking to grow your legal department, it pays off to consider all your options before spending. Stakeholders always want reasonable explanations for economic choices. It is best to be proactive and armed with the right tools; you can make a name for yourself in your company and your clients.
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Whether setting up a legal operations budget for the first time or looking to improve your current legal department, you cannot go wrong by following these key steps. Get a clearer picture of your current spending and find areas to improve and save money.
Legal ops managers analyze and manage data across several business areas. Their job is to identify areas of opportunity and streamline repetitive processes. They also work to optimize financial resources and improve the delivery of legal services.
Legal departments analyze data related to billable hours and revenue generated, reducing non-legal work. They translate the data into intelligent case-assignment strategies and best process practices. They also monitor the use of legal technology to improve business strategy planning.
Legal ops teams have been focusing on creating a digitally ensured repository for years. This allows teams to manage all their matter-related information in one place. In addition, it keeps all information secure. They can also track the progress of matters, including the amount of time spent at each pivotal point in the case and allows legal operations teams to flag cost-saving opportunities.
Use of Software
Having a legal operations budget may sound like a given, but there is no denying the growing pressure on legal departments. Legal teams have to manage contract terms and compliance policies manually. A well-thought-out and implemented legal operations strategy increases your firm's efficiency and productivity, but it should not be only more work.
A legal operations software solution can help you get there. A well-designed product will help optimize your billing, document management, and time-tracking processes. The software also enables legal professionals to track your budget spending. With modern all-in-one solutions, your legal department is more productive and reliable, investing the 70% average of non-billable hours in getting the work done.
A correctly implemented legal operations platform will help your firm meet the ever-increasing legal industry demands. You can focus on the work that matters most, only efficiently managing repetitive and collateral tasks to legal department work.
There is a lot to consider when implementing a legal operations solution, and it is essential to be aware of the pros and cons of your options. For example, while a legal operations solution may be cost-prohibitive, it could have a silver lining if it can improve your firm's operational efficiency and overall client satisfaction. With your legal operations budget, you can quickly determine whether to choose a tool license on a monthly or yearly basis, which usually is cheaper. Better results with technology, saving costs and time, what can be more?
About this article
Lexology (2021). How To Improve Legal Operations With Contract Management Software
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Ironclad. Legal Department KPIs: Which Ones Are the Right Ones?
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Xakia. 10 Steps to a Smarter Legal Budget White Paper | In-house Legal Software
Indeed (2021). 8 Reasons Cash Flow Statements Are Important | Indeed.com