Metrics That Every Legal Departments Should Track: Metric 1 – Spend to Budget

April 12, 2013

This is Part I in a series discussing the 10 powerful metrics that all corporate counsel should use to manage their legal departments.

Today’s metric: Spend to Budget. To track spend to budget, you first must track spend – and track it accurately (what good is having a budget if you can’t tell when you exceed it, after all). In consulting with hundreds of legal departments on best management practices, one thing that surprised me is that many, many legal departments don’t have an accurate idea of how much they spend on outside counsel (what other business unit can do this?). It ranges from having an exact real-time number of total legal spend, to a ballpark idea, to having zero idea of the total spend.  For the sake of this post, we’ll assume that a legal department is in fact tracking their spending accurately. Now each of these matters, or at least non-trivial matters, need to have a budget. Does this seem elementary? Well, it’s not.  Even many progressive legal departments that have e-billing and matter management software to help manage their department do not use budgets.

So why is tracking budgets important? It’s a valid question. Lawyers aren’t trained to use budgets (or manage people – but that’s a different post) and it doesn’t come naturally to them. But it’s important because, in my experience, tracking budgets is the single most effective way to predict and control costs for legal departments.  Single. Most.  Effective. I won’t attempt any deep arm-chair psychology to try and explain why it works, but the simplest explanation is that the lawyers billing the hours know that they’re being watched and the client will notice and hold them accountable if they go over budget. For anyone that’s read lately of DLA Piper’s billing woes, this means that there will be no “churning that bill baby” if there’s a budget in place. You can also see which firms accurately predict budgets, and possibly more importantly, the ones that don’t (“This bill will know no bounds!”).

Now you may be thinking you’ll experience resistance from your firms when you ask them to create budgets. This objection always brings to mind a construction client of mine. When one of his outside attorneys balked at creating a budget for a litigation matter, he elegantly replied, “If I can create a budget for building a skyscraper, you can create a budget for a legal matter.” Your firms can create budgets; they just don’t always want to. They want to practice law, which is fair – that is what they were trained to do. But legal departments are part of a business, and businesses have budgets, so this is what outside counsel needs to do to give their clients the fabulous service they market.

Having budgets in place is one matter – staying on top of them is another entirely. And if you were tracking all of this through emails and spreadsheets and adding up bills, it would indeed be a pain. This is precisely where e-billing and matter management software enters the picture. With such a system, all the legal spend, budget and matter information is in one place and both you and your outside counsel have access. Real-time spend-to-budget numbers are in the matter and reportable across all matters. Furthermore, corporate counsel will get alerts when the matter spend has gone over-budget, so there is little to no effort in tracking the budgets. The only effort for outside counsel will be coming up with the number. Once that’s done all she needs to do is enter it in the system and track it against spend, just like corporate counsel. Genius.

Once you have a budget for each matter, all of those budgets can be rolled up to a total budget for the department so the spend for the fiscal year can be estimated. Because it’s really no fun to have the CFO or CEO call the you in and ask what you spent last year and what you expect to spend this year (again, this is what other business units do – it’s not an outlandish request) and to have nothing more than a guess and your charm to defend yourself.