For years, general counsel have been frustrated by outside counsel cost. They’ve pushed law firms for discounts and alternative billing structures, while at the same time actively clawing back work as an antidote to Big Law expense.
However, the legal operating model has remained the same. Work either goes over the wall to a law firm, or remains in-house with a fixed full-time employee. The former is expensive. The latter doesn’t effectively accommodate the peaks and valleys of legal work.
Enter Covid-19. The pandemic has not only increased legal volume and risk, it has challenged this paradigm precedent.
GCs should dare to meet the moment. They must eschew precedent where it no longer serves them, and they can start with the budget. Using the Covid-19 economy as a forcing mechanism, GCs now have the opportunity to fundamentally re-examine how they build their budget and on whom they spend it.
Precedent is the traditional way in which most business leaders approach the budgeting exercise. They just call it incrementalism.
It’s an approach whereby last year’s budget is taken as the base. The go-forward budget is then prepared by making incremental changes to the previous year’s budget.
In a legal context, that budgeting approach would account for a myriad of broad categories, some significant, others more administrative, but all critical puzzle pieces accruing toward a final CFO- blessed number.
The benefits of incremental budgeting are clear. It simplifies a laborious process by not making its owner reinvent the wheel every year. But in that benefit also lies its burden. It assumes all current costs are still required without real re-examination. It’s an obstacle to any meaningful change, beyond discounts at the margin—which may save a dollar, but won’t put a dent into the foundational problems in the structure of the budget or the legal operating model it serves.
Moreover, because incremental budgeting looks backward rather than forward, it’s not conducive to a changing business landscape.
CFOs have long argued the efficacy of alternative approaches to traditional budgeting.
One of the more radical concepts is zero-based budgeting (ZBB). First introduced in the ’70s, it requires managers to build their budgets from zero on an annual basis, justifying each expenditure. It employs a complex methodology that breaks costs into decision packages, assigns each package to owners with differing perspectives, and requires decision-makers to force-rank priorities.
ZBB’s focus on exposing unproductive costs and understanding cost drivers has earned it a renaissance of late. It’s an interesting concept for the GC to examine as it’s particularly applicable to costs not related to revenue and given how it aligns budget to strategy and increases inter-department communication.
Because it rigorously challenges assumptions, it can also enable GCs to dramatically improve efficiency and transform their operating models.
Critics of ZBB will tell you it can be extremely bandwidth-intensive and complex. For GCs who are overburdened and resource-constrained, that likely makes it a non-starter.
But there are lessons to be learned from ZBB–principles that can be applied to specific parts of the legal budget. This hybrid model avoids the pitfalls of its exhaustive cousin, while still embracing a more innovative approach.
By leveraging concepts like decision packages, the hybrid approach enables legal to think about alternative ways to perform functions. It allows GCs to keep precedent-based line items where they make sense and build from zero where they don’t.
This approach does still require meticulous upfront planning. In fact, one might argue that because it targets only certain areas of legal spend, the upfront diligence required to identify those areas must be even more meticulous. That planning requires a re-examination of legal workstreams.
It’s impossible to recalibrate legal spend without re-examining how legal work can be broken down into more discrete workstreams.
Take, for example, an M&A engagement, where legal processes can be divided into individual matters: There’s the deal diligence, the deal structuring, and the contract negotiations. There are also high-volume matters like the post-merger contract analysis.
Dividing an umbrella legal matter into its components means GCs no longer need to throw the entirety of the project over the wall to law firms. It’s a model that addresses cost and competence. The right resources can handle the more sophisticated legal components, while other resources can tackle more process-centric work like contract analysis.
Dividing legal work into discrete matters allows GCs to create decision packages that provide more alternatives to the way in which legal matters are handled. Decision packages enable GCs to think beyond precedent by presenting a whole host of non-law firm, non-FTE resources that can tackle various legal matter components, thereby reducing overall costs and increasing operational efficiency.
This process also enables GCs to more effectively align resources, matching senior in-house lawyers to the kind of high-value work for which they are well-suited and for which they were hired (also aiding in the retention of the department’s most talented lawyers).
Innovative GCs can leverage the legal budgeting process, at this unique moment in time, to eschew precedent in favor of meaningful change. Alternative budgeting methods can create paths to better ways of accomplishing legal outcomes without sacrificing (and, in fact, by increasing) legal quality. And, it cements the GC’s reputation as a change agent, as an efficient operator, and as a true partner to the business.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Catherine Kemnitz is the global head of legal for Axiom, the global leader in high-caliber, on-demand legal talent. Prior to Axiom, she served as vice president, strategic integration and development for Thomson Reuters. She began her career as an associate with global law firm Shearman & Sterling LLP.