Legal Budgeting 2024: Trends and Best Practices

Introduction?

In the changing area of legal departments, the perpetual challenge persists in making a persistent legal budget with enough space for every spending necessary, such as the technological infrastructure to keep pace with the escalating workloads.

As Laura Clayton McDonnell, President of the Corporates segment for Thomson Reuters, aptly observes, "Corporate legal departments continue to face challenges in making the up-front investments in technology needed to keep pace with expanding workloads."?

This struggle is accentuated by the contemporary landscape reflected in the Institute's Legal Department Operations index, which reports a staggering 65% surge in legal work for lawyers over the past year. Despite this surge, a concerning 60% of legal departments find themselves grappling with stagnant or reduced budgets.?

This dissonance between heightened work demands and constrained budgets has led to a notable 28% expressing dissatisfaction, ranging from discontent to strong dissatisfaction, regarding budget and resource allocation within their legal departments.?

Thus, underscoring the critical role of the budgeting process, this article delves into the heart of legal budgeting for 2024, emphasising that a well-conceived budgetary method transcends mere numerical allocations. It emerges as the linchpin, transforming the budgeting process into a strategic endeavour with the potential to align financial resources effectively and strategically plan for the challenges ahead.

What Are The Current Trends Shaping Legal Budgeting?

Legal departments and firms preparing their 2024 budgets closely monitor key trends to ensure the strategic allocation of resources. One significant trend is the increasing reliance on technology, with investments in legal tech solutions to enhance efficiency and streamline workflows. Cybersecurity measures are also a priority as the legal sector navigates the evolving landscape of digital threats.

Additionally, legal departments have a growing emphasis on diversity, equity, and inclusion initiatives. This reflects a broader societal shift towards fostering diverse and inclusive work environments.

With the rise of remote work, legal leaders anticipate a continued need for support in managing virtual collaboration tools and addressing related legal considerations. In-house legal teams are gearing up for complex regulatory challenges, particularly in data privacy and compliance areas.

Overall, legal budgeting in 2024 is shaped by a dual focus on technological advancement and a commitment to fostering diverse, inclusive, and compliant legal practices.

How Do Legal Managers Budget For Their Legal Department Expenses In Their Companies?

Legal spending among companies has surged by 29%, rising from $2.4 million to $3.1 million in just a year. The spike is particularly pronounced among businesses with over $20 billion in revenue, witnessing a 57% increase from $50.8 million to $80 million, according to the 2023 Law Department Management Benchmarking Report. Interestingly, legal teams, once viewed as costly obstacles, are now strategic partners in business scaling, with lawyers adopting innovative, data-driven approaches. This shift presents opportunities for companies to leverage legal insights.?

That’s why legal managers must grasp the full scope of legal costs to avoid mismanagement and wasted resources, emphasising the importance of quick access to information for informed decision-making.

How Do You Prepare A Legal Budget?

Having delved into the challenges confronted by legal departments regarding their expenditures in our previous blog, let us now shift our focus to the essential considerations that firms and departments should bear in mind when formulating their annual budgets.

Drafting A Comprehensive Budget:

Start developing a budget that addresses various crucial elements, including salaries and benefits, allocations, department-specific technology, CLE/training, travel, bar fees/legal memberships, subscriptions/books/newspapers, outside counsel fees/contractors, team events, postage/office supplies, and miscellaneous expenses. Prepare a list of all the areas where the department has to look in respect to legal spending.?

Tally All Costs:

Begin by calculating the total costs incurred by the legal department over the past several years. This past spending is a baseline for estimating the upcoming year's budget. Further, dive into key metrics, such as average hourly rates for in-house and outside counsel. This analysis provides a solid foundation for understanding cost structures and helps make informed resource allocation decisions.

Involving in Company Plans:

Engage key legal department employees in the budget preparation process. Their insights into department-specific needs and priorities are invaluable for building a comprehensive budget that aligns with operational requirements. Also, attending management meetings leading up to the budget preparation deadline is crucial. One must look into any significant company events, such as acquisitions or product launches, which may impact the legal department budget. If major transactions are on the horizon, ensure management comprehends the potential budgetary implications and secure approvals for an adjusted budget if necessary.

Determine Cost Responsibility:

Clarify which costs should be included in the legal department's annual budget. Explore opportunities for other departments or business units to absorb some expenses, particularly when specific tasks benefit multiple areas. For instance, if the marketing department regularly requests IP clearance work, consider negotiating for them to assume some or all of those associated costs.

Potential Cost Reductions:

Be prepared for potential requests to reduce the proposed annual budget. Engage in open conversations with external counsel and vendors to explore cost-reduction strategies. Legal departments can choose - Legamart, a leading online legal platform, that offers access to over 2500 qualified professional lawyers specialising in various legal domains across more than 150 jurisdictions. It is a valuable resource for connecting individuals and businesses with top-tier external legal experts. By this, firms can consider replacing the employees without compromising on essential services.

Strategic Alignment for Legal Budgeting Success?

Aligning Expenditures With Firm Strategy:

As we go with the crucial aspect of legal budgeting, a key imperative lies in tightly aligning financial planning with broader strategic objectives.

Elizabeth Miller, a trailblazing legal operations pioneer and Financial Planning and analysis expert, shared valuable insights on the legal budget annual planning process in an interview with Tanya Svoboda, Senior Content Marketing Manager at Brightflag. When asked about the challenges she faced, Elizabeth said: "Having a solid understanding of how the department operates, where we're spending, and how to improve cost control and predictability was a huge stepping stone to tackle new legal ops responsibilities like outside counsel management and drafting department goals and performance metrics that aligned with the Company's strategic initiatives."?

That's why Crafting a robust budget involves showcasing how each anticipated financial expenditure contributes to achieving the law firm's overarching goals. For instance, if market expansion into specific geographic areas is a strategic priority, a budget for a practice or industry group can illustrate how allocations support initiatives geared towards increasing market share and enhancing the firm's reach and reputation.

This alignment ensures that financial resources are directed toward initiatives fostering larger growth opportunities, thus establishing clarity regarding the firm's strategic vision through thoughtful investment.

Supporting Cross-Departmental Objectives:

An effective business case goes beyond individual departments, clearly articulating how financial expenditures support the critical objectives of other teams of legal departments within the firm. For instance, collaboration with the recruiting department can be leveraged to show how budget allocation for specific initiatives supports efforts to attract and retain high-value partners. Such partnerships are a powerful recruiting tool by positioning the firm as visibly well-positioned and supportive of lawyers' business development and marketing endeavours.

Data-Driven Precision:

In today's world, precision holds the utmost importance in the budgeting process. A robust approach involves thorough research, utilizing advanced tools like AI-based digital monitoring for accurate data. As also discussed by Paul Robert, COO at Howard Kennedy, which stressed the benefits of legal financial management software for providing transparency and detailed insights into billing and productivity of the team members. This data-driven strategy empowers decision-makers, optimizing resource allocation and directing investment towards high-return activities. Robert also said that the substantial efficiency and productivity gains as a major success for the firm.

Measuring ROI for Persuasive Budgeting:?

At the core of persuasive budgeting is articulating a well-defined and measurable Return On Investment (ROI). Legal budgeting involves providing data on expected benefits, whether from increased revenue, enhanced client retention, talent acquisition, or improved efficiency. Establishing a framework for tracking progress and success is essential, and evaluating the ROI of initiatives such as firm-hosted events requires a comprehensive approach.

For example, Incorporating social media metrics, website traffic, and online mentions into the assessment further paints a comprehensive picture of ROI. This approach quantifies the success of current initiatives, but also positions law firms to fine-tune their strategies for future events, maximising their overall value in the evolving landscape of legal budgeting in 2024.

Types Of Budgeting Methods And Their Impact

As budgeting is a critical aspect of financial management for law firms, selecting an appropriate approach is also essential to ensure financial stability, strategic alignment, and effective resource allocation. In the legal industry, where uncertainties and variations in case volumes can be common, adopting a hybrid budgeting approach that combines different methods can provide a more nuanced and adaptable financial strategy. Let's explore how the mentioned hybrid budgeting methods could be applied to legal budgeting and identify the most suitable approach.

Traditional/Incremental With Zero-Based Budgeting (ZBB): A hybrid approach could involve employing traditional or incremental budgeting for routine expenses and recurring costs while periodically implementing Zero-Based Budgeting (ZBB) for specific departments or practice areas. Zero-based budgeting (ZBB) requires a detailed justification of all expenses. This means a rigorous examination of resource allocation, ensuring that every legal activity and associated cost aligns with the firm's strategic goals.

Rolling Forecasts With Traditional/Incremental Budgeting: Legal departments dealing with dynamic caseloads and changing legal landscapes could adopt traditional or incremental budgeting at the beginning of the fiscal year. Concurrently, implementing rolling forecasts throughout the year enables the firm to adapt its budget based on the evolving nature of legal cases, ensuring that financial projections remain accurate and aligned with real-time developments.

Rolling forecasts enable firms to adjust their budgets dynamically, reflecting changes in activity levels and allowing for better resource allocation based on the evolving needs of legal cases.

By incorporating this method, they can make informed, real-time decisions. This is crucial in a legal environment where unforeseen developments or changes in legal regulations can impact the firm's financial outlook.

Participatory Budgeting With ZBB or ABB: Engaging legal professionals in the budgeting process through participatory budgeting ensures that the unique insights and needs of different legal departments are considered. This approach can be coupled with either Zero-Based Budgeting (ZBB) or Activity-Based Budgeting (ABB). ZBB would require departments to justify every expense, promoting efficiency, while ABB focuses on evaluating the cost drivers of specific legal activities, aiding in resource allocation based on case complexity and requirements.

Participatory budgeting fosters collaboration among legal departments. This ensures that the budget reflects the unique needs and insights of each department, improving overall operations.

Integrating ZBB or ABB with participatory budgeting allows legal department to align budget decisions with the strategic priorities of individual departments. This results in better resource allocation based on the complexity and requirements of specific legal activities.

Project-Based Budgeting With ZBB or Rolling Forecasts:

General counsels often handle various legal projects, each with its unique requirements. Project-based budgeting, where costs are justified for each new legal project, can be complemented with Zero-Based Budgeting (ZBB) for a thorough review or rolling forecasts for ongoing projects. This ensures that the budget remains aligned with the progress and changing conditions of individual legal projects.

Choosing The Best Method?

Going with the most suitable hybrid budgeting approach for legal departments depends on factors such as the firm's size, practice areas, client base, and the nature of legal work. For instance, larger legal departments with diverse practice areas may find participatory budgeting combined with ZBB or ABB more effective, ensuring that each department's needs are met while maintaining fiscal discipline.

Hence, adopting a hybrid budgeting approach tailored to the unique characteristics of legal department is crucial. Legal entities can construct a budgeting framework that is robust, adaptive, and aligned with their strategic goals by combining components of traditional, participative, and dynamic budgeting methods. The objective is to balance the stability of old procedures and the flexibility of more dynamic ways, ensuring that the budget remains responsive to the constantly changing legal context.

Conclusion?

Hence, the impact of these hybrid budgeting approaches is substantial. The legal industry's unique characteristics, including fluctuating caseloads, diverse practice areas, and the need for strategic resource allocation, make adopting a tailored budgeting approach essential. Moreover, as legal departments are now important parts of business scaling, incorporating innovative, data-driven approaches becomes imperative for informed decision-making on legal expenditures. By selecting the appropriate hybrid method, legal manager and general counsels can enhance their financial management, improve operational efficiency, and better position themselves to navigate the dynamic legal landscape.