Running Legal Like A Business - Ch. 5 - Constructing An Annual Budget
In chapter 5 of Running Legal Like A Business by Connie Brenton and Susan Lambreth, PLI Press, 2021, author Daniel Coll, Sr. AGC of Legal Operations at Jabil, addresses the process of developing an annual legal budget, obtaining approval and managing budget estimate updates. Jabil is a $27b manufacturing services company.
For legal departments the top two expenses are usually (1) internal salaries and benefits and (2) outside legal services, followed by technology. Coll recommends starting with the expenses for the first three quarters of the year, summarized by cost category, and estimating the 4th quarter. He recommends supplementing this data with information from the department's legal billing system with information organized by matter and/or vendor.
Ops in a Box, Legal Edition includes a template for creating your full department budget, as well as for month-end reconciliation, employee salary and benefits tracking and a matters budget report template, both of which have been validated across multiple companies’ Financial Planning & Analysis teams and divisional controllers. The matter management report can be built into your electronic billing tool, which allows the report to be run with one click on demand. Also included is a full guide on how to deploy these resources.
Once you are approaching one year in your role, for the annual budget submission you will be 80% or more at your goal simply from having reconciled the budget monthly. When you receive the line itemized financial results at month end, summarize them by vendor or employee. The latter is more useful for salaries and benefits, obviously, as well as for travel expenses, professional associations, and sometimes for publications. You’ll have good understanding of the cadence and makeup of spend.
Typically, the legal operations team provides a first draft based on spend YTD. In my experience, the finance team provides a template with approved positions and salary and benefits pre-populated. Each matter manager is provided with a list of his or her matters and offered the opportunity to indicate which will close by year end, which will continue into the new fiscal year and whether the budget will be consistent with the current year or require adjustment. Some matters are budgeted by category. A good example is patents or trademarks. One can have a bucket for applications and renewals. The Matter Manager can also add new matters at this time. So that Matter Managers can own this task with confidence, they receive matter budget training and coaching.
In Coll's experience the practice group leads are responsible for developing their budgets and the legal department develops its own budget justification presentation. In mine, the budget owners are more typically division GCs; the Financial Planning & Analysis team assembles the budget narrative in a set format and offers the Ops Lead an opportunity to review and fine tune the legal slide(s).
Each business unit controller receives the budget estimate for their cost center(s) in advance of the deadline for submission to Corporate and the Corporate CFO receives the consolidated estimate. Many companies adjust those budgets quarterly. I think that is a good idea for the small slate of significant matters. For the full budget, I think a mid-year check in as you start the budget process for the next fiscal year is generally sufficient.
Normally for the budget submission you will provide only the totals by object code and not the breakdown by vendor or employee. Finally, be sure to provide the budget owners with a copy of the final budget estimate submission and the variance executive summary. Within two years, you will likely be able to rely on coming in within 5% of the top line budget.