What are you going to have for dinner next August?
Often, we view preparing the annual legal department budget as an impossible task (like knowing what you're having for dinner in ten months' time).
Yet, as the demand for legal services increases and resources available decrease (or at least remain the same year-on-year), it's more important than ever to prepare a budget that reflects the practical ambition of the legal department.
Without a solid budget in place, the legal function is at risk of under-delivering and causing the company legal or financial harm, as well as operating in a higher-pressure environment.
But fear not, it is possible to prepare a budget that will empower the legal department and the business.
In fact, preparing a top-notch budget can actually save time, reduce friction and unlock a more strategic approach as you move into the next year.
To help you achieve this, let's explore how to prepare and execute an effective annual budget as well as the opportunities it presents and the common pitfalls. We've also created a legal department budget template to help you get the ball rolling.
Departmental budgets are required to enable strategic financial planning that helps to forecast future profits and minimize shortfalls. Yet, in addition to the obvious necessity of it in terms of cost control, your legal department budget actually presents a number of consequential benefits.
For instance, crafting the budget is an opportunity to plan ahead to meet the needs of the legal function and to reevaluate what is actually possible within the year. The process forces you to define priorities and, therefore, helps to ensure legal resource is best spent.
Annual budget discussions present an opportunity to collaborate with the Finance team and relevant executives to set expectations and avoid surprises throughout the year. Building these relationships can also raise the profile of Legal within the business and increase the likelihood of legal matters being prioritized.
Moreover, the process of working on your budget means you have the evidence (in the form of historical and forecasted spend) to negotiate more legal resources with the higher powers that are Finance and the executives. Showing the spend of an activity vs. the cost of hiring a new in-house resource to execute the same work can result in a convincing argument.
So when you're setting out on your budget drafting journey, do so with the view that it is in fact not a chore but a mechanism of opportunities.
There are several tools that you should have to hand in order to craft an effective annual budget for the legal department. The idea is to estimate the cost of each line item (a sum of money allocated for a particular use on a separate line of the budget) as accurately as possible.
Your toolkit should consist of the following.
Before drafting the budget, be sure that you're clear on what the legal department is hoping to achieve over the next year. Of course, this must be aligned with the company's plans for the coming year. If there's something big on the horizon, it's likely your budget will need to pivot or be allocated differently than previous years.
So, what are your priorities? What is your direction of travel and what will you need to change or adopt to get there?
Preparing the budget with your objectives in mind will help you understand what is realistic and whether there are any gaps in funding. It will also ensure that you create a budget that will remain relevant over time.
Using historical spend data (from the last year or two) can help gauge the cost of certain line items. One of the biggest items on your budget is likely to be outside counsel and vendor fees. To make these forecasts as accurate as possible, look at external legal spend from the current year and use this to project costs for the coming year. For instance, if you've spent $20,000 up until September, you can divide this by nine to find a monthly average spend of $2,222. If you then times that by 12, you'll find that you're likely to spend $26,664 over the course of one year. You can use this as a starting point to estimate next year's spend. You may also wish to consider adding a small percentage on top of this cost to cater to potential rate inflation.
For line items that you can't cost for certain, it's important to inform estimates with the support of benchmark data. To do so, you can gather information online, speak with in-house legal departments from other companies, or speak directly with potential service providers.
For instance, if you plan to implement a contract lifecycle management platform like Leeway within the year, be sure to explore the pricing page and ideally speak with the provider to gauge costs for your particular use.
The Finance team is the keeper of the keys when it comes to budget. For benefits that will stretch across much of your work, you should create a strong relationship between the finance and legal departments.
You can foster this relationship by catering to their requests, listening to their suggestions (and implementing them where appropriate) and inviting them to your spending review meetings. This will evidence your willingness to collaborate as equals and create trust between the departments.
You should also remember that your colleagues in Finance may not have an understanding of how the legal function works. Therefore, you should take the time to explain matters to them and explore why a certain legal activity is over-spending.
Building this relationship takes time but when you have an ally in Finance, you'll find they're more inclined to support your budget requests.
Whether there's one or many people in your legal department, your team can offer valuable insights into spend requirements. With different experiences and varied responsibilities, each team member will be able to approach budget creation from a different angle. This way, you're less likely to miss anything out and more likely to avoid mistakes. They will also be able to explain any surplus or shortfall in terms of budget for the year to date which can inform your planning.
Engaging the entire legal team is a great way to create a sense of collective responsibility overspend. With better awareness and having input into the legal budget, each team member will have more ownership of activities and their associated costs.
To streamline the process over time and to become as accurate as possible, you should consider investing in a spend management platform. If you're not ready to invest in a system quite yet, create a budget template that you can use for years to come. Before preparing your legal budget, run your template by Finance to confirm that you'll provide the information in a way that suits them too (including understanding how they need costs split out).
To help get you started, we've created a simple template for annual legal department budgets. Access the free template here.
The legal department budget has evolved over time. Where once it included not much more than salaries and outside counsel costs, it now also includes the likes of legal tech and training costs.
Generally, the budget consists of these 12 categories:
1. Salaries and benefits - the full-package cost of each employee (you'll need to coordinate with HR on this)
2. Training - the cost of professional development activity such as courses and conferences
3. Professional memberships - the fees incurred from membership organizations or certification bodies
4. Subscriptions - the cost of regular publications or services such as legal media
5. Social fund - the cost of team building, celebratory occasions and off-site events
6. Operational allocations - the legal department's share of wider business overheads such as rent and utilities (coordinate with Finance for this)
7. Office supplies - the cost of any stationery or postage required
8. Travel-related expenses - the all-encompassing cost of any work-related travel such as to and from off-site meetings or training events
9. External legal support - the cost of outside counsel and contractors (likely one of your biggest line items)
10. Legal tech - the cost of tech owned by the legal department such as your contract management platform or e-billing system
11. Project-based costs - the cost resulting from the work of the legal function, such as translations or filing for a trademark, IP, litigation, etc. (be cautious though - this doesn't necessarily always have to come from the legal department's budget)
12. Miscellaneous - anything else
So, these are the categories that your costs should fall into. However, there is an advanced level that can really help position Legal as a strategic partner to the business. Scenario planning within your annual budget showcases great foresight and leadership.
Initially, you'll estimate the costs in the context of everything going to plan. However, it's a good idea to include a few scenario-specific alternative budgets to plant the seeds for future budget requests and adjustments should a particular scenario arise. To do this, ask yourself "what if?" and plan for a number of scenarios that could actually happen (don't waste your time on planning for unlikely scenarios).
To summarize, there are 9 steps to preparing and executing an effective annual budget.
1. Gather your toolkit - give yourself plenty of time to pull together the information mentioned above
2. Create your budget template - draft a template and run it by Finance to confirm they will be happy with the budget being provided this way (you can start with our free budget template here)
3. Estimate your budget - split costs by month and be as accurate as possible
4. Scenario plan - explore whether any other scenarios are likely and prepare alternative budgets for each of these
5. Sense check your numbers - share the draft budget with your team, outside counsel, Finance and any other relevant stakeholders
6. Request the budget and set your expectations - we're in a time of cost-cutting so set your expectations that you might not secure all of your desired budget
7. Reconfigure plans in line with the approved budget - if you don't secure your full requested budget, you must reevaluate the ambitions of the legal function and rejig priorities in a practical manner
8. Monitor progress regularly - set regular budget check-ins to ensure goals are being met in line with the budget (and track the reasoning behind any misalignment between the budget and actual spend)
9. Be ready to make adjustments - things happen. Keep building on your scenario planning as situations arise to be as prepared as possible
Budget season can be a little stressful. As a result, many legal department budgets are thrown together in a haphazard manner. Those who see the greatest success are the ones who create their budget in the context of their legal roadmap and goals.
While preparing your budget, you may identify gaps in funding. Even if it is only a small amount, it's important to re-adjust either the budget or your goals so that they are aligned. Otherwise, you risk underperforming or over-spending and the consequences associated with each.
As mentioned above, involving the wider legal department is an important aspect of budget creation. Without everyone's input and buy-in, you'll struggle to articulate the need for mid-year adjustments to them. Not to mention, with collective responsibility for the budget comes less pressure on any individual. "A problem shared is a problem halved" and all that.
In some (in fact, many) instances, projects will roll over from one year to another. If you forget to include these costs in your budget, it can result in a lack of available budget and be a real pain to overcome. This includes accruals (especially invoices from law firms!).
To avoid this, work with your outside counsel or other teams internally to assess any open matters and include the associated costs of any that will roll into the new budget period.
External legal fees can feel as though they just keep going up and up' chopping into your annual budget more and more every year. Most in-house lawyers get comfortable with their outside counsel and don't want to jump ship. However, in these times of tighter budgets, it's important to explore your options, be open to jumping ship and have the confidence to negotiate your legal fees. You can check out the 6 alternative fee arrangements in-house counsel need to know here.
The in-house arena is evolving at pace. It may be the case that you no longer need outside counsel to work on the same work as they did a few years ago. For instance, perhaps you've implemented a contract lifecycle management platform like Leeway in the last year. You've realized efficiencies, automated processes and empowered business teams to self-serve which has freed up some legal recourse internally.
Every year, be sure to reassess whether you can welcome some work back in-house.
All departments of the business are affected by legal matters, so it is possible to challenge whether it should be Legal's budget that needs to take the hit for certain spend. If approached in the right way, you may be able to convince Finance that it is, in fact, the responsibility of another business unit or even a special project budget (when that is actually the case, of course).