Tracking Legal Spend: The Questions All Good Budget Reports Answer
In those answers, you’ll find all the most important measurements — and ultimately a stress-free formula for tracking legal spend.
What is our predicted legal spend for this year?
You’ve probably heard this inquiry phrased a few different ways:
“How much will our legal fees amount to this year?”
“What is our legal spend forecast for the remainder of the year?”
“How much have we spent so far and where does that leave us?”
The wording may vary but the meaning should never surprise you. Forecasting your expected expenses is a crucial first step toward effective legal spend management, though finding a system that works can be tricky. Smart starting points include referencing last year’s expenses, examining the accruals for work-in-progress, and reserving at least a small margin for potential surprises.
Who are we spending the most money with?
Your forecasted spend figure ultimately represents multiple law firm relationships — each of which requires individual attention. Confirming your spend by law firm helps highlight the people behind the data and will equip you with insights to inform any adjustments to your future external resourcing strategy.
Answering this question may also require some real-time reporting and tracking of the total spend across the organization and timekeeper rate increases. When you examine your timekeeper rate increases, you may find that some of them are higher than normal. But for high-risk matters like litigation, it might make perfect sense to hire partners who charge comparatively high rates.
If your colleagues are curious about how your rate increases compare to the industry average, there are several helpful tools out there that now generate benchmark data. And if it’s clear that your department is spending well below a given norm, you can prove your team’s cost-saving prowess to relevant stakeholders with accurate reports.
Lastly, be ready for questions about blended rate comparisons. Depending on their position, such as associates or partners, lawyers will charge different rates for different types of work. Answering this question may also require some reporting in order to display the blended rate comparison which will ultimately help improve your relationships with your law firms and inform future budgeting strategies.
What are we spending the most money on?
Knowing the type of work your panel of partner firms are engaged in is the next logical step. Contrasting spend by practice areas, such as Employment Law versus IP Enforcement, could reveal a number of insights that your future resourcing decisions.
For example, it might be more cost-effective to recruit an in-house attorney to address an area where outside spend has suddenly started surging. Such analyses will also put you in a better position to advise business colleagues on any emerging risks or potential hot-button issues. (And certainly those are answers you’ll want to have long before any questions are asked.)
Are fixed or hourly rates more cost-effective?
The alternative fee arrangement (AFA) vs. hourly billing debate can be confusing. AFAs, such as fixed-fee structures, offer more predictability than hourly rates, but that doesn’t necessarily translate to cost savings in every case. The correct answer for you lies in reviewing your historical trends and mapping out potential future scenarios based on those assumptions.
If you see that discovery phases take up a dramatically disproportionate percentage of your matter lifecycles, for example, it may be wise to pursue an AFA that effectively caps your spending in that area in exchange for faster reimbursement.
Is our budget still on track?
Now it’s time to see if expectations match reality. This real-time reflection of legal cost control should always be taken into account before committing to your next course of action. Due to the lengthy nature of most payment cycles, though, you should also be factoring accruals into your conclusion.
The conversation shouldn’t end at a binary “above” or “below” answer, either. There may be a very valid reason for overspending initial estimates. And conversely, coming in considerably under budget may not be entirely positive news. It often prompts the follow-up question of “why was our estimate so far off?”
Having the data in hand is only valuable if it’s paired with a nuanced explanation as well.
Where are our best saving opportunities?
Whatever your answers to the previous questions are, you don’t have to passively accept them as your fate. There’s a good chance you can actively carve out new savings if you know where to look. From stronger billing guideline enforcement to smarter pricing agreements, there are several influential variables already within your control.
Now that you’re prepared to tackle any questions your team may have, preview our legal spend analytics and reports for an idea of the best ways to express your answers.
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