Law department budgeting 101
Don’t just look to external firms to cut your costs. What does the business need from you?
If your in-house team is feeling squeezed for resources you might want to look in the mirror and ask how you’re already delivering value — before someone else does the asking.
For a long time the in-house legal department was insulated from the bean counters, largely immune from budgetary scrutiny. But times have changed. Transitioning from being seen as a value-add rather than a cost centre can improve how the executive team views the in-house team and additional resources may flow if lawyers can demonstrate they have a plan to help advance the goals of the organization.
“Corporate counsel have expanded their reach but now they need to have their own strategy plan. The presumption [from management] is they are going to do what they have done and a lot more but for less money. With that comes greater need for budget predictability,” said Joe Milstone, co-founder of Cognition LLP. “But there’s a lot of unplanned stuff that happens and it can be tough to manage it all efficiently and control costs.”
Milstone was speaking as part of a session from a Canadian Bar Association program last week entitled “In-House Counsel vs. the Annual Legal Budget: Are you up for the challenge?” Milstone, along with Bob Boron, senior vice president legal and regulatory with Public Mobile, and David Moore, chief financial officer of Sangoma Technologies Corp., presented their experiences in handling in-house legal budgets.
Many in-house departments are under pressure to reduce what they spend on legal work. One approach is to go beyond the much-talked-about alternative fee arrangements with traditional law firms, and change the way work gets done.
In a slide he called “The Wheel of Legal Outsourcing — Good CLOs vs. Great CLOs,” Milstone discussed the various ways an in-house law department can be staffed efficiently with the use of technology and managed services, contract lawyers, traditional law firms, in-house law clerks, and the use of legal process outsourcing both onshore and offshore.
“The LPO market sits at about $640 million and is expected to grow 85 per cent by 2014 to $3 billion,” said Milstone.
By using a variety of resources to trim costs, in-house can bring the budget under control and better manage unexpected projects.
“Sometimes LPO is perceived as a threat to in-house but it doesn’t have to be,” he said. “We’re put under the same scrutiny as other business units and with this comes the greater need for budget predictability, but there’s also a lot of unplanned stuff too. We have to manage efficiently and control costs.”
The next step is to help be a catalyst for the growth of the business by looking at addressable markets, profitability, and revenues.
When he was in-house counsel at Call-Net Enterprises, Milstone said he ran a report every quarter on the “added value” the legal department brought to the company’s bottom line. Typically he says he was able to demonstrate that the department earned back between 20 and 25 times the annual legal budget of about $1 million.
“We were able to show we lived the life of the business functions and we were aligned with company priorities,” he said. “Of course it became a situation of being only as good as your last quarter, but that’s the reality of business.”
From the moment he went in-house in 1990, Public Mobile’s Bob Boron has taken the approach that in-house departments should be a value-added function of the business, not “marginalized as a staff/head office” function.
Cost containment is critically important, but the paradigm to strive for is being a value-added adviser, said Boron.
“I think I’m better at understanding what I’m good at and should be focused on that rather than sending things out. At the end of the day, your value proposition is your track record of value.”
Boron listed value-added transaction areas such as regulatory proceedings, intellectual property (protection and procurement), M&A (negotiation, structuring), corporate finance, shareholder and stakeholder relations, and major commercial arrangements as key areas for returning value.
“I’ve always taken the position that you need to understand the strategy of the organization and be tactical around that,” he said. “My career has been almost entirely in the area of telecommunications, which is highly regulated and high growth so my perspective has flowed from that.”
David Moore, of Sangoma Technologies, said legal departments earn the respect of C-suite executives by managing their budgets according to the demands of the business.
Moore showed how he sees a legal budget breaking down for a small, publicly traded company by outlining four “buckets of activity” to consider and how much budget he would allocate — for example, for matters such as special one-off incidents.
“I don’t expect the internal person to understand the rules for terminating someone in Germany. In an average year, something like that would amount to 10 per cent of the legal bill,” he said.
In his view, 20 per cent of the budget should be spent on strategic activities such as M&A, with new business amounting to 40 per cent, and 30 per cent for baseline activities of a public company such as the AGM.
“With M&A, for example, I would be very involved in the term sheet but the actual work of documentation will be 60/40 [management/legal],” he said.
Other tips the panel offered were to gain credibility from the management team included making use of accounting principles in value reporting, including accruals and write-offs, clarifying management expectations around special projects, and demonstrating cost/benefits.