How to prepare a corporate legal department budget properly
Creating a corporate legal department budget is no small task. Most corporates are looking to save money, but more than that, they are looking to understand what outcomes result from the money they do spend. This has important implications for legal departments developing a yearly budget.
The best place to start when deciding how to prepare a departmental budget is to look at and analyse past expenditure. Hopefully you already have robust cost tracking in place and understand what you’re spending as a department, but if not, it is worth considering using one of the budget tracking and forecasting solutions available in the market.
Assuming you can accurately identify current expenditure, it’s worth breaking that expenditure down into separate types. You may have predictable costs for a given matter (a trademark application or renewal for example) and easily be able to extrapolate those costs to arrive at a relatively accurate forward-looking figure for future expenditure. This matter-level assessment will also allow you to easily see whether you can make savings, since if the unit cost of a particular matter can be reduced, that may have positive ramifications for your yearly budget.
Creating a department budget is likely to be more difficult when it comes to more complicated matters. If you use external legal counsel for open-ended tasks, identifying accurately your likely spend on a particular matter will be challenging. It may be worth exploring alternative or fixed-fee arrangements with external counsel in order to achieve better predictability on cost (and, potentially, to identify savings).
And just as you should look to technology solutions to aid you in your budgeting and forecasting process, so technology may be able to save you money in a wider sense – exploring alternative legal services solutions for things like document management, portfolio management and docketing, for example, could save you substantial costs, freeing up your budget for more challenging matters.
Perhaps the key challenge associated with creating a corporate legal department budget is being able to demonstrate and justify that budget to the wider business. Engaging other parts of the business in your budget process at an early stage is a sensible way to get buy in from the business and will help ensure your forecasts are more accurate.
Questions you should ask of other business departments include requesting information on any new products or brands in the pipeline, possible M&A activity or joint ventures, significant new licensing initiatives and so on. All of these could have unpredictable ramifications for your corporate legal department budget, but understanding the potential will improve your ability to accurately budget for these eventualities.
Similarly, while litigation is always likely to be the big unknown of your budgeting process, looking at historical trends and understanding any new risks that are likely to arise (a new technology launch, for example) will help you be more accurate in your estimates. Consulting with your external counsel at this point is also likely to be helpful, since chances are that they will have a clearer idea than you of the likely costs associated with different potential risks.
Indeed, balancing risk and cost is an important part of the budgeting process. If you have a new product launch that arguably increases your risk of facing litigation. However, the risk of that arising is not 100%, so your budget should reflect that. It might be worth pricing out alternative scenarios as part of your budgeting process, so that when you are seeking sign off on your yearly budget, you are able to provide greater justification for the various contingencies it is likely to contain.
All of this activity will help you get your budget approved, not least because it demonstrates how the legal department adds value to the wider business. When you present that to the CFO or board for sign off, being able to demonstrate that value will be key.
Creating a corporate legal department budget can be a daunting experience, but in fact, good budgeting makes your life easier, not harder. Far better to do the hard work now than have to face your board with a huge overspend this time next year!