Nobody likes asking for money – particularly lawyers - but it’s a rite of passage in the business calendar. Q4 is often the time when CFOs begin the process of reviewing the year that was and opening budgets for the year ahead, so now is a good time to talk budgets.
General Counsel are no different in terms of budgetary accountability, and they must consider two fundamental questions:
- With perhaps a last quarter to work with, am I on track to operate at or below budgetary expectations for this year, and therefore showing plenty of financial discipline?
- And then, how do I secure my budget requirements for the year ahead?
These are deeply intertwined. Legal budgets have a habit of increasing: stasis is not an option for any business, so the ebb and flow of commercial activity is almost certain to have a legal overhead. Your requirements are therefore likely to be, at best, similar if not increasing.
To successfully ask for money, you will need a clear and justifiable argument for your internal headcount and any external budget. You’ll also need a good idea of the interplay between the two which demonstrates why expensive external Counsel adds value in ways which internal won’t.
This debate can only be helped by a laser-sharp proof that the current year’s budgetary estimates were spot on.
Managing the CFO relationship
Both forward-looking and rearward-facing, having clear data to hand is invaluable. Good data is not just proof of spend and need, it is also the raw material for creating visualisations which will bridge the gap between the naturally narrative style of legal professionals and the spreadsheets of the finance professional.
It’s worth remembering that the departmental tussle between stakeholders (legal or otherwise) and the CFO for budget doesn’t have to be a tug of war. Handled intelligently, the CFO is not an adversary, but the intermediary for your needs to the rest of the board. Smart GCs don’t try to extract money from the CFO in an adversarial process, but rather nurture the CFO to become their evangelist in the broader finance discussion.
And the CFO won’t perform on your behalf without the comfort of concrete data. A GC must talk numbers and facts – the language of the CFO – in order to be heard.
Furthermore, the CFO won’t have great confidence in your budgetary abilities if, as is often the case, she is herself the source of your data because she has had to collate a year of paper invoices from a shoebox and present them back to you. Not only does this show that you have no direct understanding of your spend but also that this understanding is heavily retrospective - likely at least three months out of date given law firm invoicing delays. For a £10M annual spend, that’s £2.5M of unpredictability.
Besides, most law firms send out a disproportionate number of invoices at year-end; either to avoid the Christmas rush or to tidy up their cashflow before the end of the year. The end of Q3 is therefore likely to be the least reliable predictor of expenditure across the year.
If a GC is going to become master of their department’s destiny, they need to hold the data in the first place – and be able to articulate to the rest of the business what value has been achieved from that spend across the current year. Only then do you have the right to ask for next year’s budget with confidence, or expect your CFO to do so on your behalf.
Get what’s yours!
With the right data, the fourth quarter is also the time to right-size the value you receive from your legal firms:
- Rebates: Many law firms encourage a guaranteed spend across a year, particularly when they are on panel frameworks, by offering a rebate for achieving a particular volume of usage. For example, a firm may offer a 5% rebate at £2M, worth £100,000 – but a spend of £1.95M will generate no saving at all. With clear usage data, you can allocate work to take advantage of these rebate opportunities (effectively free work).
- Helplines and subsidiary services: Similarly, your arrangements with a law firm may include any number of bolt-on services –helplines, for example, are typical – with an entitlement to many thousands of pounds of value. And again, smart GCs will want to leverage these services properly.
But you can only get your free work if you know to ask for it.
We find that a lack of usage visibility means three things. First, many companies simply don’t claim the incentives and benefits to which they are entitled. They don’t engineer their usage patterns to take advantage of these benefits, because they don’t have the insight to understand the most economical allocation of work. If you have to wait for invoices in Q1 to understand what the last Q3 looked like, you won’t be able to optimise for incentives in Q4!
Second, companies would be hard pressed to prove their entitlement.
Because, third, their law firms have no reason to be proactive in applying these discounts.
Visibility of your usage of legal services will give you the chance to optimise your procurement behaviours; conversely, without the right data, potentially hundreds of thousands of pounds of value is being missed. Indeed, many of our clients find that just using the services to which they are already entitled represents a full ROI on the cost of using Apperio.
Bring in your A-team
As well as being the ideal time to produce budgetary forecasts, many GCs are finding that the fourth quarter is also a good time for a strategic review of their panel arrangements. That’s not to say that they are revisiting the panel constituents – that needs to be a three or even five year discussion.
Rather, they find that extracting leaders from their law firms out of day-to-day delivery for an annual discussion allows for better engagement and alignment to the business. When GCs take the time to brief their law firms on the commercial drivers of the business rather than individual matters, the firms can in turn be more commercial and flexible in their approach.
The firms can escape the instinctively transactional way they usually provide their services because they better understand the strategic contribution that they might make to the client company over the coming year. In turn, the business can present its objectives for the year:
- the matters it expects to cover
- any challenges on the horizon
- the strategy and commercial drivers of the business and any effect this will have on legal activity (e.g. expansion, M&A, consolidation, etc.)
In a modern business, the GC has moved from a reactive role to helping achieve commercial objectives. These reviews allow that role to extend to the firm’s external advisors.
But a key component of these discussions is financial. Both sides will be helped by having full visibility of past and expected spend, to optimise both expenditure by the company and resourcing by the law firms. Having usage data to hand disincentivises either side from taking an adversarial or competitive position and unlocks a collaborative and strategic relationship based on commercial outcomes.
Prepare for the year ahead
The GC is now expected to be a strategic contributor to any business, and must operate in a commercial and professionalised way. They equally then have the right to expect the same degree of commercialism from their law firms, whether on panels or ad-hoc.
The fourth quarter is the ideal time to look back in order to better understand what the future might look like and to make more accurate predictions moving forward. Conversations must take place with the CFO at least, if not the full board; along with parallel discussions with law firms. At the same time, BAU should be right-sized so that the year ends with maximum value extracted from each legal relationship. All these conversations are better managed, on both sides, with accurate, current and accessible usage data.