Build up your budget defense and approach this budget season with clarity, pragmatism – and smart, data-driven decision-making.
Tips for Legal Department Budgets in 2023-24: Three Key Considerations
How do you prepare for the year ahead amid stagnant budgets, growing workloads, and economic uncertainty? Here are 3 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 corporate Legal Department budget – last year’s budget plus a few percentage points of padding – will no longer suffice.
Hint: Download our Legal Department budget template to help you get started.
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.
Corporate Legal Departments are feeling increasing budgetary pressure. 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 legal department budgeting won’t suffice.
How can corporate in-house legal teams prepare for the year ahead amid stagnant budgets, growing workloads and the new ever-present economic uncertainty?
Legal Department budgeting tips
Here are our top three tips for corporate in-house legal department budgeting in the new abnormal.
1. Get comfortable starting over with legal budgeting
Depending on your corporate Legal Department, your budget could be a relic from times long since past (before your team went remote, before double-digit inflation, generative AI was everywhere and 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 and template, 10 Steps to a Smarter In-House Legal Department Budget, will guide you through a bespoke legal budgeting planning process that not only anticipates next year’s expenses, but advances the organization’s legal strategy.
2. Get real about your people costs
Unless you are very, very lucky, your in-house 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 legal 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 legal data analytics to work out the right resource: work category mix for optimal return on investment). Check out our legal department budget template to help you get started.
3. 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 corporate Legal Department budget in 2023 - 2024?
For example, let’s return to that Gartner survey of CFOs, and how their responses could affect your team and inhouse counsel budgets:
- 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 legal spend (and avoid flack for going over budget by Q3). This also provides you with an informed legal budget that is far more defensible to the C-suite than “We took last year’s spend and added a bit.”
Bonus: Our top 4 tips for the execution of your legal budget
So you've done the planning, and now you need to implement your Legal Department budget. Sometimes things are easier said (and planned) than done - in fact, legal budget execution is the hardest component. These quick tips will help to keep you on track.
1. Monitor and track budget
There is no point having a legal budget and then losing track of how you are tracking against it. The last thing you want is to get to the end of the year, realize that you had a budget blowout in month three and then have to explain it to the CFO 9 months later.
To stay on top of your in-house Legal Department budget status, ensure that you:
- Track Legal Department spend in real time, particularly for your largest costs such as external counsel spend
- Set up simple, clear monthly legal reports that show your total legal spend against budget, broken down by departments, categories of work and external resources or law firms
- Establish an alert system that notifies you if budgets are going off track on particularly complex, large or company-critical matters
2. Prioritize budget spend
The one thing that is certain about any Legal Department budget is that it will be inaccurate, even if just a little bit. Whilst the smallest of costs might add up overall, the most impactful thing to note in your corporate Legal Department budget execution, is that you want to prioritize and keep control of the largest cost - your external counsel spend.
To address the risk of major external counsel budget blowout:
- Be very clear about which firms, company departments or legal matters are most likely to see a budget blowout
- Ensure you have implemented clear legal spend approval workflows on these items so that you can pay close attention if things move outside your tolerance level
- Ask for regular updates from your team members and law firms about anticipated changes to the budgeted costs
- See point 3 👇
3. Regularly review and adjust
A corporate Legal Department budget might be set at the beginning of the year, but it will be most successfully implemented if it is a living business document. Reviewing and adjusting as you move through the year will help you to understand where things can be tweaked or adjusted as the year unfolds with a "budgeted" and an "actual" set of data to compare.
By regularly adjusting your legal budget, you may be able to move spend priorities around to accommodate increased need in one area over another. To fail to regularly review, may mean that you miss this chance and you simply have to live with (and explain) your legal budget overspend.
Added bonus: this close inspection will ensure you are closely engaged with the operations of your legal team, and help you to prepare next year's budget with far more ease and accuracy.
4. Communicate continuously
Nothing speaks volumes to the C-Suite, Board and your peers like regular communication about the legal budget. Whether it's on track or off track, the simple fact that you are aware of it, tracking it and reporting on it will ease their minds that you have it under control. Key items to report on your your in legal budget communications include:
- How are we tracking against the budget?
- Do we foresee any change to the original estimates?
- What is causing the change?
- What are we doing to address it?
- Do we think it will impact our legal or risk position?
Download our guide to smarter legal budgeting planning and get your Legal Department budget template today so you don't have to start from scratch.