An Evolutionary Approach to Budgeting

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While the legal industry has rebounded to a degree from the 2008 financial crisis, client demands for transparency are here to stay. This reality is forcing many firms to rethink how they manage client relationships and how they manage their internal processes—especially budgeting. More and more, firms are looking for technology that will support those goals. The three questions Prosperoware gets the most often are, “Does technology exist that can facilitate how we create detailed and accurate budgets?” “Is technology available to run different scenarios based on staffing and deal-specific assumptions?” “Can we make this process transparent to clients?” The answer is yes, yes, and yes. But some considerations need to be taken into account.

Budgeting is an evolutionary process

First, partners must realize that budgeting is an evolutionary process. As you do it over and over, and as you collect data that tracks the “who, what, and for how much,” you train yourself to monitor matters and understand the numbers/ hours required to achieve specific tasks, essentially managing matters in a more effective and cost efficient manner. Most lawyers start with top-down budgeting. In other words, they typically start by establishing an estimated fee amount and specifying a staffing model, the person or fee earner class and percentage of entered time.  This type of budget can be done at the matter level, phase or sub-phase level.    Phase and sub-phase are called task codes in the legal industry.  This terminology comes from the UTMBS e-billing standards.  As the lawyer grows more experienced, the budgeting process can be performed bottom up, specifying hours and task code.  With this approach and over time, lawyers will reach the ultimate goal; a task-oriented approach to creating a budget by selecting pre-defined task templates.

The budgeting process needs to support two processes: budgeting for existing matters and budgeting or pricing for new opportunities.  With an existing matter, the firm and the client have already agreed on the hourly rate for the matter.   In essence, the budget provides the top end price for the matter.  An opportunity is where you are focused on negotiating the rates and the fee arrangement in attempting to win the work.  Many more clients are focused on getting competitive bids.

Firms who are more mature in their pricing process have typically formed a pricing department and established a set of minimum metrics based on either matter profitability, realization or leverage.  Realization is simply the discount from the standard rate and leverage is the ratio of partners to non-partners.  The pricing department will work with the lawyers in helping negotiate and model new opportunities
and help them form budgets for matters. Typically during the budgeting process, the pricing person will create different scenarios for each deal; what happens if you change staffing, modify the rate structure, make a different fee arrangement or redefine the effort?  Each of these scenarios needs to be compared side-by-side before presenting a budget to a partner for approval.

Harvesting data

To facilitate in this negotiation and budgeting process, firms need to be able to leverage the data they already collect from past matters.  The challenge across the industry is that the matter profile information – matter type, area of law, industry, etc. – is incomplete or simply poor.  Typically, this data is gathered during new business intake and then never updated.  Since these new business intake forms are filled out by the secretary on behalf of the partner, many times they pick the partner’s typical answer or current practice as the type of matter.  This case of garbage-in will certainly result in garbage -out.

If you centralize, consolidate, and improve the collection process around all of the critical information the firm has around lawyers, staff, costs and matter profiles, you can easily ascertain who is most qualified to take on the work, what similar matters and engagements have cost the firm to deliver, and the appropriate budget for delivering services to new clients. In other words, take this critical data out of the shadows and give yourself a single location to aggregate and view all the data your firm has accumulated around clients, vendors, employees, and matters—and how that information interlinks. This puts you in the driver’s seat with clients, allowing you to showcase your experience and price services more effectively.

Monitoring is a must

One of the realities today is that most partners in the firm are probably already providing clients a budget, but not sharing that information internally in any consistent way. A sure sign of this trend is an ever increasing request for ad-hoc reporting to the accounting departments.  Once a partner has given a budget to their client, it is critical that they know what people are doing from day-to-day on those matters.  The goal is to avoid the end of the month pro-forma surprise – nothing worse than an associate doing a great job on the substance of an assignment but spending too long performing the task.

To enable effective monitoring of matters, two things are required: (1) change the timing of when time entry needs to be submitted to  ideally daily or at least every couple of days and (2) effective reporting.  For the reporting to be effective for the partners, the partner needs to be able to see all of the activity on the matter.  This doesn’t just mean getting access to invoices, collection and other financials, but must include other matter details down to staffing and time entry narratives.  The ability to read and consume the narratives is critical in day-to-day management as it provides real insight into what everyone on the matter team is doing.  In addition, monitoring should also provide email notifications on current status and budget threshold warnings.

For any monitoring system to be truly beneficial, it needs to be within the same system you use for budgeting.  It must have an intuitive interface that not only provides partners with all the data in one place to monitor actual work against budgeted fees, but that also lends itself to making partners want to dive in and understand how their matters are doing and ultimately how to manage matters better.

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