Have you ever prepared a great legal department budget only to find out three months into it that your company’s services group has decided to expand to Singapore? They want US personnel to assist in delivering the services by logging in to computers in Singapore. They also want to hire some local team members and move some over from other countries. Finally, they are servicing local companies so they need a new set of contracts. On top of all of that, they are launching in four weeks and IT, HR, and finance are all coming to legal to create new contracts and for advice about privacy laws, immigration laws, and local laws. In the blink of an eye, there goes your legal department budget (as well as all your free time for the next month).
Financial management of legal departments is a fundamental skill of the legal operations function – check out CLOC’s legal operations competency table. That means the above scenario now falls to legal operations to not only figure out how to pay for it all, but, more importantly, how to be prepared for the unexpected in the next budget cycle. Having managed budgets in all aspects of a business, including as a GC, I learned some tips that helped me prepare for budget-busting scenarios. In this post, I will share my top five tips for preparing your legal department budget. In my next post, I will discuss the management of your budget – both during the year and learnings from looking back.
Tip #1: Start with Strategy
It is always helpful to pull together the relevant stakeholders within legal and work out your strategic plan for the upcoming budget period. This strategic plan should include high-level goals for the upcoming period as well as a discussion about any big changes in the way the department operates. Once you have this strategic plan, you can create a well-informed budget for the legal department.
Note, that often times, the GC will pull together the above information and it may not fall onto legal operations. If that is the case, be sure to get that information from your GC. If it is not something your company does, as head of legal operations, you can pull something like this together by bringing together the relevant stakeholders for a half or full day to work through the upcoming period’s strategy. If you have never put together a strategy session, look out for my upcoming post on how to do that.
Tip #2: Don’t Reinvent the Wheel
Once you have this strategy, you can get to work on the budget. Start with the direct legal department expenses that will come from the goals. Don’t reinvent the wheel here – start from last year’s budget. If you can get a hold of several years, use multi-year trends. You don’t have to focus on every detail, but do look at the following categories:
- For a legal department, people costs are typically the biggest item. Make sure to work with finance to understand your fully-loaded salary (i.e. salary + benefits) as well as to incorporate any new headcount requested. Think about the level of people you need, their likely salaries, and the timing of those additions.
- Do you need any department or individual training?
- What about travel – the same or more than prior years?
- What technologies does your department use now and will you make any changes this coming year? Will license fees stay the same? Will you need to add more users?
- Third-Party Expenses
- Law firms, filing fees, outsourced providers, and consultants. Make sure to leverage their expertise. They should be able to prepare an annual budget estimate for you that you can just incorporate into your template.
Then ask how will this year’s strategies impact expenses?
- More or less litigation
- More or less patent filings
- New strategic initiatives
Next ask, are there any changes in the law that will require either additional third-party expenses or additional people.
Finally, if any of your direct expenses come out of other department budgets (for example, IT owns the computer systems for new people or owns the technology budget) be sure to also get a copy of the prior year(s) spend allocated to your department. Once you ask the same questions about those expenses, you should provide input to those departments about whether your needs will be more or less than prior years.
Tip #3: Be Curious of Other Departments
Once you have considered the areas that legal has direct knowledge of, you need to account for the unexpected. The best way to do this is by understanding how the rest of the business will change during the upcoming period. I always build in several weeks of discussions with other budget owners about what strategic initiatives they are undertaking so I can understand what to expect. More specifically, asking them about their strategies and goals for the upcoming year and how they are being measured. The reason the latter question is so important is that they are likely to have more strategies and goals than they will be able to achieve, but if you understand which of those strategies and goals tie to how their department is being measured, you will have a better understanding of which ones will be a priority. Once you know what they might do and the priorities, you will have a lot more information about how legal may be asked to support. Here are the key areas where surprises often come up:
- M&A – If you don’t have a separate division for M&A, go to the finance team as they will have information around the M&A plans.
- New Product Release/Service Expansion – Whether it is a new drug, a new piece of software, or a new set of services, diversifying your company’s business can have implications for legal including regulatory, contractual, and other.
- New Technology – Is IT planning any new technology rollouts that change how business is being done (e.g. a move to the Cloud)? This could impact contracts with your customers or implicate new laws and legal is often needed to support. It could also have privacy implications and there are potential implications with how legal can access data for ongoing reporting needs or discovery.
Tip #4: Review, Edit, Review, Edit, Review
Once you have worked through the budget and put pen to paper, you will need to do a review. Put on your critical thinking hat and see if the budget makes sense. For example, if you are adding people, did you put them all in January? Is it likely that you will hire them all right away? Similarly, if another department told you there would be M&A in July, did you account for those expenses several months prior or are they all in July?
This review phase is particularly important if you’re pulling together information from other people. They may not know that all 6 of them asked for a new employee to start in April and you can only see that by pulling it all together. Don’t be afraid to make lots of changes during this phase.
Also note that depending on how your company works through its budgeting process, you may also have to re-work your budget based on required cuts directed by the finance team. Get an understanding of what that process looks like and factor that into your edit timing.
Tip #5: Allocate Ample Time
Doing all of the above takes time. You have to rely on other people and their schedules. You want to give yourself and others time to think through the possibilities. You also want to review the budget several times. I would recommend allocating at least 6 weeks but more like 8-12 if you are part of a larger organization or will be expected to provide input multiple times.
To discuss this topic more or to ask questions, feel free to reach out to me at firstname.lastname@example.org.