More than 70 percent of companies use the calendar year as their fiscal year, according to Audit Analytics. That means that right now – in the third quarter – your clients are budgeting for 2018. But sadly, there’s a traditional disconnect between companies and their law firms, many of whom won’t communicate about their rates until the new year….long after business budgets are finalized.
Savvy lawyers should talk to their clients during the budget process. It’s an opportunity to learn about your client’s goals and pressures, and to show that you are a true business partner. How do you do it? We visited with Elizabeth Duffy, vice president of Acritas Inc., a leader in client feedback and the force behind Sharplegal, the most comprehensive annual study of the global legal market.
In your feedback discussions and legal department research, what pain points do you hear about the annual budget process?
Duffy: In our annual general counsel survey, Sharplegal, we found that in 2016, 76 percent of general counsel are setting an annual budget. Of that number, 29 percent exceeded their budget.
In our interviews with general counsel each year, the topic of budget, cost and fees come up regularly. Where general counsel are spending more than they would in a typical year, two-thirds attribute the overspend to the unanticipated complexity of work (deals and litigation both responsible).
While it may be impossible to perfectly predict the path that a dispute may take (and therefore the ultimate cost to the client), by taking steps to help the client manage internal expectations and plan ahead for increased legal fees, the pain of the final bill will be much reduced.
We are also hearing frequently that clients are under pressure to reduce their legal spend each year too – additional pressure to protect the organization from risk on an ever-reducing budget.
What kind of friction exists between corporate legal departments (which have to submit formal business budgets by 4Q, typically) and law firms (which push through rate increases in 1Q)?
Duffy: We hear most often that clients don’t like surprises. It is important to remember that general counsel have to report to the CFO and their boards on at least a quarterly basis. While they understand that sometimes the unexpected may occur, they need to be able to get out in front of anticipated overspend and communicate early and effectively to their business partners:
- “Everybody has individual objectives and goals based their assigned tasks. Mine, for instance, would be the litigation that I manage, making sure it comes in under budget whenever possible. That’s not always possible, but [I can] provide guidance to subordinates, provide timely responses to the business leads who rely on us internally, things like that.”
The earlier that general counsel learn about an anticipated overspend, the better that they are able to offset the increased fees for a litigation matter that overran by pulling back on spend in other areas:
- “There has been a cost overrun for patent litigation because we have spent over the budget, but then we compensated by reduced costs on other items; therefore, it has actually been neutral.”
In a perfect world, how would law firms and legal departments work together on this important business process?
Duffy: Law firms should be giving transparent access to all their matter bills so that a client can review at any point how much things have cost in the past and where they on current matters. At budgeting time, relationship partners should sit down with their clients and have a holistic conversation about all areas of work they could be considered for – how can they help the client to drive more value and keep control of costs. This may take a few iterations and the general counsel should brief the firm on what they have planned for the year ahead.
What should law firms know/recognize/do about the in-house counsel budgeting process?
Duffy: Start with the simple step of speaking with clients proactively to find out when their budgeting process takes place.
What’s your advice for how a proactive lawyer can initiate a healthy and productive budget discussion?
Duffy: Ideally, this should be done in person. General counsel are increasingly sophisticated and engaging with data to measure and manage their resources, so offer them some relevant benchmarking data (for example, Acritas) to help them see if they are in line.