Legal spend is more predictable than you might think and even when it’s not, there are best practices you can follow so the organization isn’t caught by surprise, says Kevin Cohn, chief customer officer at legal operations software company Brightflag.
Your department’s costs to prepare contracts and outsource commercial legal work, for example, is almost entirely a function of the number of customers your company expects to have over the course of the fiscal year, something that will be known within the broader organization early in the planning process, Cohn said in a webcast.
“These are all foundational assumptions in the overall company plan that you can leverage to make an estimation for legal,” he said.
Same thing with employment-related legal work. That amount can be predicted based on the number of employees you have and the new-hires expected to be brought on board over the next 12 months.
You can also look at the kind of business your company is in to help you gauge what your other predictable spend will be. If you’re in retail, for example, you can come up with a relatively accurate projection based on the number of locations the company is planning to open in the year.
If your company tends to grow through acquisitions, then you can predict the legal spend associated with that based on the number of deals planned for the year, leaving room for opportunistic acquisitions that aren’t on the radar screen at the beginning of the fiscal year.
“M&A is a function of your corporate development plans,” he said. “If you’re an organization that tends to make a number of acquisitions every year, then there’s an assumption built into the entire company’s plan about what that M&A activity is going to look like and you can use that to make an informed guess about how much legal spend is going to be required to support it.”
Law firm estimates
Litigation remains the biggest unknown for the typical legal department, but even here you can get a reasonable estimate by reaching out to the law firms you work with early in your organization’s annual planning process to get estimates of what they expect matters to cost.
“If there’s ongoing litigation, maybe it’s going to be settled or dismissed or maybe it will keep going,” he said. “You can’t know for sure. But at this point you know most likely how big it is. You can use that historical data and partner with your vendors who are working on the matter to get a pretty good estimate into the budget.”
To be sure, litigation, even after going through this exercise, will be hard to forecast, but just having a number can help the broader organization.
“You can’t say, ‘We have no idea,’” he said. “You take your best guess with the available information and that’s what you put into the budget.”
Working with finance
Cohn recommends legal operations staff cultivate a close relationship with the organization’s finance team, particularly those who work in financial planning and analysis (FP&A), a function that every large company will have. In smaller organizations, the function is probably handled by the vice president or senior director of finance.
The FP&A function has responsibility for managing the organization’s annual planning process and preparing, and updating, the budget.
“By partnering with FP&A, you’re going to have more success at positioning legal as being that value creator and value defender and an inseparable and invaluable part of the business,” he said.
Most organizations revisit the annual budget on a quarterly basis but Cohn recommends going beyond that and operating as if it’s managed on a monthly basis. That way, if costs are exceeding what’s been budgeted, you can catch that early and be prepared with adjustments before the next quarter comes to a close.
“When the quarterly re-forecast time comes, you can update your budget to account for it,” he said.
In most organizations, as the person overseeing the legal department’s operations, you tend to meet with finance on a monthly basis anyway, so use those meetings to ensure legal and finance are operating in tandem with one another.
“You probably have a monthly budget review with finance on your calendar,” he said. “Maybe you look forward to it. Maybe you don’t. But the reason that meeting exists is so you have that early warning, the ability to take a look at what’s happening prior to the end of the quarter and if it’s necessary make some quick adjustments.”
By understanding how legal spend can be more predictable than you otherwise might think, you can give the FP&A team more accurate projections at the beginning of the planning process so quarterly adjustments are less necessary.
“Most legal spend is predictable,” he said. “It might be outright predictable or it might be predictable beneath the surface. For the spend that isn’t predictable – matter budgeting being one of the most important ones – best practices exist to manage it effectively. So, if something truly new comes in, just go through the matter budgeting best practices and when the quarterly re-forecast time comes, update your budget to account for it.”