Is it budgeting season already? Legal Operations are often asked to own the legal department’s budgeting efforts, and many find the process painful. Finance may provide a template to fill out, but it can be difficult to complete a budget with so many unknowns. The commonly used phrase – legal is different – holds some truth in this case, as there are consistent challenges with legal budgets:

• Not all spend is known. An unforeseen event like a new deal or litigation can spike the legal budget. Staying on top of something that hasn’t yet happened can be challenging.
• Changes in business strategy impact your costs – A change in strategy, such as an increase in patent filings or a new business line launch, will change costs. It can be challenging to know where these changes may occur.
• Outside Counsel spend is significant – 50% or more of the legal budget might be tied to Outside Counsel. It can be challenging to clarify what Outside Counsel is working on and what to expect in the coming year.

It may seem daunting, but legal operations teams have insights into their Outside Counsel billing data to help make more informed decisions. Here are some tips on using that data and some other strategies to help build more accurate budgets and speak the language of Finance.

Know the known, plan for the partially known

Last year’s spend data is a good starting point for planning next year’s budget, as it will give a clear line of sight into the matters in flight. With well-structured billing data, legal operations teams should know:

•  Total matters
•  The current phase of those matters
•  The remaining phases of those matters

If the legal department requires its law firms to submit budgets through the eBilling system or as a matter-level bid – then they already have the known costs calculated for their in-flight matters.

What about matters that don’t exist yet? Certain matters, like Employment and Labour, can be reasonably forecasted based on last year’s events and expected growth in the company. Similarly, some IP can be forecasted based on business strategy. If next year’s number of filings can be anticipated, as well as the average cost per phase, then those costs can be estimated as well.

Don’t forget rate increases

Big law firm rates in the US increased almost 10% this past year. Unless other control measures are in place, like Invoice Review or Matter-Level Bidding then similar increases should be expected. It’s important to bake those increases into budget estimates, and the known spend.

Don’t sweat the small stuff

Remember, Finance cares about the big picture. Itemising everything is helpful but may not be necessary. Hunting down every $200 technology purchase is not the best spent time for a legal operations team.

Make the business case for right-sourcing

The in-house and Outside Counsel budgets should not exist in silos; they should be managed in tandem. If significant work is being sent to law firms that support the operations of the enterprise (versus litigation), moving that work in-house results in more legal support at a lower cost.

Get a handle on your legal spend today

Legal operations can act on all of these recommendations by leveraging their billing data, but if the data isn’t clean, it will be challenging to answer budgeting questions accurately. It’s important to take time to do a quick data scrub to answer the high-level budget questions and consider a more thorough spend analysis to highlight where the budget can be reduced.

The budgeting process can be overwhelming, but with these tips, legal operations teams can avoid underestimating their budget needs and reshape their approach to spend in 2025.

Peter Eilhauer, Managing Director, has over 20 years' experience in the legal industry, working with corporate legal departments, law firms, and insurance companies to radically reduce costs and improve operations through spend analysis, process improvement, and workflow automation. Peter has worked both as a consultant, service provider, and in-house professional to manage legal operations and spend management programs. He has written and spoken extensively on data analysis, and has overseen the development of multiple spend analytics platforms. Peter holds a BA from Northwestern University and an MBA from the University of Chicago Booth School of Business.