Starting the budget process with a strategic look at both your external spend and your internal workload will result in a better financial picture.
Legal Department Budgeting for 2023: Three Key Considerations
How can you prepare for the year ahead, amid stagnant budgets, growing workloads, and economic uncertainty? Here's three tips for an in-house legal budget.
From COVID-19 to The Great Resignation to a worldwide surge in inflation, it’s hard to remember exactly how things worked in “precedented times.”
And what used to work for a Legal Department budget – last year’s budget plus a few percentage points of padding – will no longer suffice.
Indeed, in-house lawyers’ resources are unlikely to keep pace with their workloads in 2023. In a Gartner survey of more than 200 CFOs, only 7 percent said they planned to increase spending on the legal function.
Legal Departments are feeling increasing budgetary pressure, to be sure; in Thomson Reuters’ 2022 State of Corporate Legal Departments, when asked the most important metric for their teams, 48 percent said total spend – an increase of 15 points over 2015, and nearly double those who cited work quality (27 percent).
It’s clear that in this new, unpredictable era, cookie-cooker budgeting won’t suffice.
How can in-house teams prepare for the year ahead, amid stagnant budgets, growing workloads and the new ever-present economic uncertainty?
Here are three tips for an in-house legal budget in the new abnormal.
One: Get comfortable starting over
Depending on your Legal Department, your budget could be a relic from times long since past (before your team went remote, before double-digit inflation, so on and so forth).
While we always recommend starting the budget season with a clean slate, a fresh approach is more important than ever before. Xakia’s complimentary white paper, 10 Steps to a Smarter In-House Legal Budget, will guide you through a bespoke budget process that not only anticipates next year’s expenses, but advances the organization’s legal strategy.
Two: Get real about your people costs
Unless you are very, very lucky, your Legal Department will have some turnover: According to BarkerGilmore’s 2022 In-House Counsel Compensation Report, in-house mobility jumped 50 percent from 2020 to 2021, and this has largely held steady. Meanwhile, total compensation increased by 21 percent.
It is probable that you will need to recruit talent, and that talent will be more expensive. (If you are in financial services, brace for impact: That sector led in-house compensation increases, at a whopping 27 percent.)
Meanwhile, your outside counsel are likely poised for hefty rate increases. In 2022, firms increased billing rates by nearly 6 percent, according to Law.com, which continued: “That amount is less than projected, less than in the previous two years and less than inflation, but firms may compensate for it with larger increases next year.”
Do not wait until the annual fee increase letters to talk with your primary firms about next year’s numbers. (And there may be no time like the present to consider some new approaches, from insourcing to panels to automation to ALSPs – and use your matter management data to work out the right resource : work category mix for optimal return on investment.)
Three: Get back to business
The organization’s business, that is. The most effective Legal Departments are able to show how they add value to the organization; that is not possible without a clear understanding of the company’s goals and objectives.
What are your business division leaders planning that could affect your budget in 2023?
For example, let’s return to that Gartner survey of CFOs, and how their responses could affect your team:
- 40 percent plan to increase IT spending. What could that require in terms of contract review, vendor separation or cybersecurity?
- 35 percent plan to decrease real estate and facilities management expenses. Are lease renegotiations (or disputes) on the horizon?
- 29 percent plan to increase Research & Development. Is the organization prepared to protect new intellectual property assets?
- 16 percent plan to decrease Human Resources. How should you plan for RIFs, buyouts or potential litigation?
By talking to your business leaders now, you can better predict your staffing and your spend (and avoid flack for going over budget by Q3). This also provides you with an informed budget that is far more defensible to the C-suite than “We took last year’s spend and added a bit.”