Law Department Budgets - Internal Chargebacks
In the past few weeks, several colleagues have raised questions about typical law department practices with respect to charging legal expenses back to their internal clientele.
At the three companies for which I’ve headed legal operations, all external legal expenses have been charged back directly to the business client cost center via our legal billing system. This is why it is so important that firms submit invoices against the right matter. Each matter is set up to be charged directly to a business's cost center.
Several of the companies I have worked for also have allocated some portion of internal legal expenses back to the businesses. None have required internal attorneys to track their time for this purpose.
The one practice area for which there is some exception tends to be Mergers & Acquisitions (M&A). Typically M&A costs are carried at corporate until close. In most cases the costs are then charged to the benefiting business, but in some cases (usually large transactions) corporate may elect to retain a portion of the expense on its budget. Practice has not varied substantively across the companies I have worked for.
1. How do you provide an estimate to the internal business partner?
Best practice to for efficiency is one company-generated engagement letter for the relationship. The company can email updates to the agreement annually. One of the companies I've worked for does not typically have engagement letters, though when the firm requires one the company provides its letter. Ops in a Box, Legal Edition includes a sample engagement letter, as well as sample policies for legal billing and rates submission.
For two companies I've worked we budgeted every matter greater than $0. Firms are required to provide detailed budgets for those that exceed a threshold amount. For the third company, the internal attorney still provides a ballpark estimate to the business client (or client finance head) prior to engaging outside counsel. However, the budget may have been arrived at with the provider or independently based on experience.
2. Do you require outside counsel to enter and update budgets in your eBilling system?
Where the provider is required to provide a budget, the provider enters the information into the company matter management system and submits an Excel budget attachment. I have two templates for matter budgets. One for simple budgets and another for phase-based budgets. Both are included in Ops in a Box, Legal Edition. Where the firm is not required to provide a budget, best practice is for the internal matter manager to enter the budget, so that the total budget is forecast and to facilitate running budget reports.
3. Does the business's finance partner get notification of estimate, and do you require their approval before charging to that business's cost center?
For new matters, the attorney communicates the budget to the business client in advance of booking outside resources. The discussion may be with the client or with the client's finance counterpart. Often there is an exception for individual trademarks or patents. Because we are communicating portfolio spend, individual task costs don’t vary much, and the business client is familiar with the cost, it is not necessary (though for patents a forecasting tool is recommended).
For the companies I've worked for where each and every matter is budgeted, the ops team prepares an annual budget for the businesses’ finance teams and periodic updates (quarterly or mid-year).
For every company I've worked for we give finance team access to the invoice module of our billing system and provide training on how to run reports (typically, budget, accruals and spend).
4. Is the business or the business's finance partner part of the invoice approval workflow in your eBilling?
At each company I’ve worked for there has been a single exception in which a business approver is involved. In all cases the exception has been idiosyncratic. In most cases the workflow approval is entirely within legal. By policy no one outside legal has the authority to hire a legal services vendor and the Accounts Payable does not accept invoices from vendors tagged as legal unless the invoice comes directly through the legal billing system integration. Finance has access to invoice documentation and reports. Without exception we treat the matter budget like a Purchase Order. If the business has signed off on the PO/matter budget, no sign off is needed on the invoices against the budget.