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LegalJuly 23, 2021

The legal spend guessing game

The corporate law department budgeting process can be a guessing game—here’s how you can use that to your advantage.

A recent Wolters Kluwer poll showed only 10 percent of corporate law departments (CLDs) feel that they have a “high degree of control” over hitting their annual departmental budget. Just over 40 percent believed they had “some influence,” but it was mostly up to forces beyond their control. The rest fell somewhere in between.

These numbers go against the reigning legal ops narrative, which lacks nuance and says that legal ops can control outside counsel spend. Recent research from Wolters Kluwer's ELM Solutions LegalVIEW® Data Warehouse – the largest body of legal performance data in the world – indicates that narrative is probably untrue. Despite the advent of legal ops, annual outside counsel spend remains highly volatile, with 29 percent of CLDs experiencing a 90 percent swing up or down over any given 5-year period and 9 percent experiencing an even larger swing of 200 percent or more.

(Note: These wild swings are unrelated to the COVID-19 pandemic since similar changes are revealed even when 2020 data is excluded from the analysis).

Many will find these results unsurprising. After all, everybody knows the amount and type of legal services needed 12 months from now are hard to predict. On any given day a huge, unexpected investigation, transaction or litigation could emerge and cost tens of millions annually until concluded. If you dwell too long on these realities, it starts to look like CLDs are in the unenviable situation of having lots of accountability, but little control.

But that story, too, is oversimplified. It is true that demand for legal services is the primary driver for cost and that it is generally difficult to control. However, there is a lot that CLDs can do to influence the budgeting process and make it work better for them. Here are some:

Don’t predict next year’s spend; advocate for the resources you want.

Every year, law departments go through a departmental budgeting process in which they try to predict next year’s spend and get that approved by the CFO. They look at what they spent in the last couple of years, their anticipated matter mix, and other evidence and try to come up with a number. However, the volatility discussed above suggests there are going to be a lot of “unknown unknowns,” and these make reliance on a single number highly risky. Instead, produce various scenarios: Examine the data and say to the CFO, look, if you give us $X, then our modeling suggests a 60 percent chance of going over budget. But if you give us $Y, then the risk is only 20 percent. You might secure more cushion this way and, even if you don’t, you documented the risk of going over and can bring it up in next year when you’ll ask for more money again (always ask for more money—everybody else is!)

Ask other departments to pay for unreasonable and unanticipated costs.

Some CLDs pay all the outside legal costs, while others have a lot of that come out of the department that generated the legal work. When a business unit you serve creates a costly, unanticipated legal need, ask them to pay for it. Otherwise, you may go over budget, no matter how good your legal ops. Having the expense hit another department also makes them—rather than you-- feel the pain if they use outside counsel in a wasteful manner.

Harvest downswings.

The volatility in legal spend means costs can spike, but also means they can plummet. When that big case ends sooner than you thought, you’ve got millions lying on the table. Have a plan ready for that. For instance, you can move some of next year’s legal work into this year, putting yourself ahead on January 1. I even consulted for a CLD that negotiated a deal with the CFO where they would get to keep a percentage of any savings, which would be earmarked for legal ops consulting and legal technology. The entire department became more cost-conscious and eventually ended up with a couple hundred thousand dollars they ultimately used to upgrade their organization.

Admitting you aren’t totally in control can feel like defeat, but it actually brings you closer to victory. Legal ops still has plenty of influence and can save 10, 20 or even 30 percent in outside counsel costs. That still doesn’t guarantee staying under budget, but it is a significant amount of money, and you would have gone over even worse without all that hard work.

Nathan Cemenska
Director of Legal Operations and Industry Insights

Nathan Cemenska, JD/MBA, is the Director of Legal Operations and Industry Insights at Wolters Kluwer's ELM Solutions.

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