Improving the Certainty of Budgeting for Legal Fees: Seven Simple Strategies

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Successful organizations invest time and resources to create, monitor and manage budgets. Budgeting for outside legal counsel is vastly different from, and usually more complicated than, budgeting for virtually any other product or service because of the esoteric nature of legal fees and law firm economics.

The budgeting process for outside counsel ideally should resemble a collaborative effort where clients and outside counsel share information and draw upon practical experience to reach a mutually acceptable economic arrangement. In practice, the budgeting process with outside counsel can be time-consuming and frustrating and often produces fee estimates that lack certainty.

This paper examines the legal budgeting paradigm, offers practical fee reduction strategies that value-conscious clients should consider using to improve legal fee budgeting certainty and results, control outside counsel costs and bring outside counsel cost overruns back within budget.

A Familiar Scenario

A Client asks a relationship partner at one of its law firms to help generate a budget for a discrete matter. From the Client’s perspective, the description of the matter and advice sought from outside counsel is clear and unambiguous – for instance, issuer-side representation on a $500 million bond financing.

Far too often, the relationship partner’s response to the Client a week or more later is not a certain and quantifiable fee estimate, such as $375,000 to handle the entire bond financing. Instead, the proposed legal fee budget winds up being a wildly oscillating estimate ranging from $350,000-$700,000 which comes with innumerable assumptions, disclaimers and limitations designed to afford the relationship partner the flexibility to submit a bill to the Client that exceeds budget if there are overruns.

The paramount objective sought by the Client – legal fee predictability – remains unmet because of the relationship partner’s disinclination to set a budget and live with it.

Without question, client frustrations during the legal fee budgeting process are almost always justified. By understanding the budgeting paradigm and capitalizing on the seven strategies discussed below both at the commencement of the budgeting process and ex post facto upon final budget reconciliation, frustrations can be minimized and an intelligent budget can be set and followed.

The Budgeting Paradigm with Outside Counsel

The metaphysics of the budgeting process have been the subject of exhaustive academic research and dialogue. Distilled to its most fundamental aspects, the legal fee budgeting process involves (is) defining project scope, (ii) pinpointing and allocating external contingency risk and (iii) staffing to optimize execution.

When complications and frustrations creep into the legal fee budgeting process, it is usually because clients and outside counsel approach one or more aspects of budgeting process from a differing perspective or, in some cases, a polar opposite mindset.

Defining Project Scope

Properly defining scope requires a client and its outside counsel to articulate an objective, identify tasks and sub-phases, and set timing milestones and deadlines. Unlike in the other aspects of the budgeting paradigm, intellectual disconnects over scope rarely occur between a client and outside counsel because usually goals are clear, tasks are discrete and timing is easily fixed at the outset.

Obviously, scope is dynamic and over time as a matter proceeds, scope can expand or contract depending on a client’s strategy and objectives. At the very outset of the budgeting process, however, defining scope is a relatively straightforward exercise.

For value-conscious clients, data analytics and aggressive timelines should be key tactical drivers of project scoping because when used effectively, they can afford a client considerable leverage over outside counsel.

Pinpointing and allocating external contingency risk

External contingencies are events or circumstances outside of the control of a client or outside counsel that can frustrate, derail or delay a project and overtake its budget. Pinpointing external contingencies and allocating risk for contingency-based cost overruns are core aspects of the budgeting process. It is also the stage in the budgeting paradigm where clients and outside counsel are most disconnected because they often analyze and gauge external contingency risk completely differently.

Clients are business people who face and take risks every day in their business lives. They focus on real and probable external contingencies and view risk taking as an accepted, pervasive part of doing business. Risk taking to a client is often viewed as the predicate to a favorable return on investment.

Outside counsel’s approach to analyzing external contingencies, on the other hand, can be stagnating insofar as every contingency is identified regardless of how improbable or hypothetical. This approach almost should be expected because outside counsel is handsomely paid to envision the most remote risks affecting clients and then to mitigate and protect clients against such risks. Frequently, outside counsel’s natural inclination invades the budgeting process and unlikely external contingencies are imagined, such as unprepared and unresponsive clients, uncooperative counterparties, and unexpected court rulings, seismic changes in the law or economy and the like.

Because of the sheer number of external contingencies imaginable during the budget process, discussions about external contingencies and risk allocation can be insufferable. Outside counsel frequently resorts to giving a fee estimate with a myriad of assumptions and limitations on budget and/or proposing a wide ranging budget that accounts for unlikely circumstances.

The upshot of this paradigm disconnect is frustration because a budget with innumerable assumptions, limitations and a broad price range hardly affords a client predictability.

Staffing to Optimize Execution

Delivery of legal services by outside counsel depends mostly on efficient and effective execution by people, not on technology or a highly refined production methodology. The staffing mix of outside counsel personnel is critical to budget development and overall budget execution . The right personnel mix efficiently balances substantive legal expertise and experience level with practical cost constraints.

Value-conscious clients seek a staffing mix where the most cost-effective legal professionals are handling skillset appropriate tasks when executing towards the client’s goal. Only in rare instances do clients express a strong preference to have a matter staffed with specific non-senior attorneys or legal professionals. Clients ordinarily rely upon judgment of the relationship partner or other senior outside counsel to staff a matter so that legal work is performed by the lowest priced, competent legal professional. Such reliance can work well in many instances when it comes to staffing mix; however, blind reliance by clients or indifference as to the staffing mix can just as often become an impediment to effective budgeting.

When developing a budget with an optimal staffing mix, outside counsel’s ability staff a matter with the lowest priced, competent legal professional can be compromised by perceived uncertainties, institutional stresses and unarticulated motives. For instance, during the budgeting phase, outside counsel may be concerned that the most qualified and cost effective associate will be unavailable to work on a matter when it commences in earnest. The senior partner then confronts the post-budgeting dilemma of having to staff the matter with a very experienced senior attorney with a high billing rate or, alternatively, a very junior associate whose inexperience will result in excessive hours being spent on tasks. Relationship partners also may be motivated or instructed to assign work to certain attorneys in a particular office, group, and department or practice section to balance workloads or ensure the utilization and productivity of specific, “protected” personnel even though the individual may not be the most cost effective person for a matter. Finally, decreased business levels at law firms are making it more common for partners and other senior legal professionals to personally handle tasks below their “pay grade” instead of delegating work to less costly, more appropriately experienced junior personnel. This billable hour “hoarding”camouflages a senior attorney’s lack of true economic productivity and operates to a client’s disadvantage because higher cost, senior legal professionals wind up handling routine tasks which could have been completed by less costly personnel.

At bottom, staffing for optimal budget execution is critical to an effective budgeting process but organic challenges unique to outside counsel can pose real impediments.

Is Striving for Budget Certainty an Unattainable Goal?

This discussion was not meant to leave the impression that striving for certainty in a legal fee budget is a fruitless exercise. Indeed, framing a challenge in context is critical to overcoming it. Given the inherent challenges of the budgeting process with outside counsel, it is important to think of legal budgeting as an ongoing, dynamic process, not a static event. Today’s competitive legal environment will prompt low-ball budget proposals by outside counsel just to get engaged and then, inevitable budget overruns where clients are expected to bear the excess cost. Understanding the legal fee budgeting paradigm and following these seven simple strategies will help to ensure that a favorable budget is established and followed.

Seven Simple Legal Budgeting Strategies

1. Become Familiar with Outside Counsel Cost Control Companies.

The average hourly rate of attorneys has risen 9.3% over the last three years with a CAGR of more than 5.0% since 2004. Hourly rates for top partners have reached $1,250 per hour. These meteoric increases have been butting up against client efforts and mandates to reduce outside counsel spend. Today’s challenging economic climate has catalyzed the emergence of pioneering companies which are focused on outside counsel cost control services, e-billing tools, business process outsourcing and legal spend analytics and others. These companies can help bridge the legal budget disconnect between a client and its outside counsel.

2. Use Data to your Advantage.

Data analytics and legal market insights are available to clients and outside counsel alike to assist with the budget making process. The data is available in many formulations such as: practice specialty; matter type, phase and duration; staff allocation; and timekeeper experience, hours and rates. Equal access to data by clients and outside counsel does not equate to equal utilization. Value-conscious clients are early adopters of legal spend data whereas outside counsel has largely failed to follow suit even despite better access to d a t a . Effective data use will be an important tool and strategic advantage to clients in a dynamic budgeting process.

3. Set Aggressive Deadlines.

The adage that “work expands to fill the time” could not be more true in the case of outside counsel whose billable hour based financial model disincentivizes efficiency and whose revenue generating attorneys are compensated and evaluated on meeting billing hour requirements. Establishing aggressive, near term deadlines in the budgeting process will drive greater working efficiency by outside counsel and less opportunity for fees to uncontrollably accumulate over an extended time horizon. If a matter is properly managed by outside counsel, aggressive time frames usually will not result in an overall increase in headcount on a matter, but instead enhanced efficiency from the correct headcount.

4. Focus on Real and Controllable External Contingencies.

The DNA of outside counsel will compel him or her to factor into the budget remote and hypothetical factors, which are usually “red herrings.” It is important for clients to resist the temptation to validate outside counsel’s hypothetical concerns as legitimate budget drivers. Billable rates typically are set at levels which account for external contingencies (whether theoretical or real) so clients should resist being lured into budgeting for additional hours due to unrealistic external contingencies.

5. View Budgeting as a Dynamic Process.

In our personal and professional lives, a budget is not immutable after it is established. Instead, it is a dynamic economic guideline that often expands and contracts based on the circumstances. This concept should equally apply in the legal budgeting process. After establishing a budget with outside counsel, the “final invoice” rarely arrives with a bottom line amount due that is under-budget. Almost invariably, a final invoice is presented by counsel in an amount that equals or exceeds budget, together with an explanation of why the invoice should be paid in full because the cost overruns fell within the myriad of budget assumptions, disclaimers and limitations. Insofar as budgeting is a dynamic process, invoices should be carefully and objectively analyzed to determine whether budget overruns are properly borne by a client. If not, budget re-calibration discussions can be justifiably initiated with outside counsel, even by using the services of an objective third party, before any invoices are blindly paid based on their face value. Recent articles i n w e l l -respected m e d i a outlets have reported that budget overruns are common and not always taken seriously by outside counsel (until widely publicized…).

6. Monitor and Re-evaluate Staffing Mix.

Clients deserve value and cost- effectiveness in their outside counsel staffing mix and should demand that tasks are always handled by the lowest priced, competent legal professional. It is important for clients to share input in the staffing mix, both during the budgeting process and upon project completion and final budget reconciliation. While a client should be able to rely on outside counsel’s staffing judgments and should never feel compelled to actively micromanage the staffing mix, invoices should routinely be analyzed to ensure that properly qualified legal professionals are efficiently handling appropriate tasks at current market rates. Outside counsel cost control companies can be a valuable and objective resource to re-evaluate the staffing mix and any resulting excess costs. If the invoice review process shows inefficiencies and cost overruns due to inappropriate staffing, reductions in the final invoices are merited.

7. Leverage Your Understanding of Outside Counsel’s Perspective.

Too often, outside counsel approaches the budgeting process like an attorney, not a business person. Changes in project scope, external contingencies, outside counsel staffing challenges will always be aspects of the budgeting discussion but should not overtake the process. Budgeting for legal fees should be a practical and efficient business discussion focused on legal fee predictability. It is important to understand how outside counsel approaches the budgeting paradigm because it informs as to when to tighten the reins to focus the discussion on the practical, probable, predictable and economic.

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