Budget Pressures in 2023: The Best Defense is a Good Offense

While pundits debate the exact criteria of a recession, many in-house Legal Department budgets are already experiencing the squeeze of one.

Indeed, the median total legal spend in 2022 was $2.4 million, down from $3 million in 2021 – a decrease of 20 percent. This comes from a report from the Association of Corporate Counsel, which surveyed more than 400 in-house teams spanning 24 industries and 26 countries.

Maybe the budget cuts haven’t hit your Legal Department yet. Nevertheless, when nearly half of CFOs are “bracing for recession,” the odds are increasingly bad for getting “last year plus five percent.”

During times of economic uncertainty, it’s important to approach budget season with clarity and pragmatism – and smart, data-driven decision-making. Not only will this increase the likelihood that the Finance team approves your requests on the front end, it will ameliorate major pain later if your in-house legal team is asked for cuts mid-year. After all, who is in a better position to optimize legal budget for in-house legal teams: the Legal Department or an anxious Finance team?

A strategy behind the spend

Effective in-house Legal Department budgets are built around long-term business objectives. This requires proactive conversations with division leaders and the C-suite to learn about major initiatives and related legal needs. A new geographical territory, product launch or acquisition could significantly affect your spend, certainly – but the more closely your budget mirrors the company’s business goals, the more likely the Legal Department will be seen as a source of value, not cost.

From there, in-house legal budgets build out, accounting for people costs, outside spend, contingency collections, legal technology tools and more. Consult Xakia’s guide, 10 Steps to a Smarter In-House Legal Budget, for step-by-step instructions – and a sample template.

Once a smart budget is in place, your in-house team will be far better positioned to weather turbulent times.

Consider these two scenarios:

“I need to make my in-house legal spend go further.”

Across the board, in-house lawyers’ resources are unlikely to keep pace with their workloads in 2023; only 7 percent of CFOs said they planned to increase spending on the legal function.

With a well-constructed budget (and the critical thinking behind it), you can start scouting areas for new efficiencies or savings. For example, with law firm rates expected to increase by 5 percent or more, what practice areas or bundles of work may hit a tipping point where it makes more sense to insource?

“My in-house legal budget has just been cut.”

With a well-built in-house legal budget, you achieve insight into exactly where your money is going – which informs much better, albeit tough, decisions when the time comes.

It’s hard to achieve significant savings by cutting back Legal Department training or the holiday party. You will likely need to take hard looks at the two largest spend categories, inside people spend and outside counsel spend – or about 54 percent and 46 percent of the average 2022 budget, respectively, according to the ACC.

Diving into just the outside legal spend, take a look:

• Who are your most expensive firms? What work are they doing? If it is not truly the most strategic, complex, high-risk portfolio of matters, consider looking for alternatives. 
• What are your largest law firm relationships? Where do you have leverage to seek alternative fee arrangements, discounts or other considerations? 
• What work is being sent to law firms that does not warrant outside counsel expertise? What matters are of low strategic value, low complexity, and/or low risk, and could these be solved with a legal matter management solution or self-help tools for the business units?

Hope for the best, assume the worst

To be sure, no one is exactly sure how the economy of 2023 will unfold. However, as professional risk managers, in-house lawyers would be prudent to assume the worst – and to, step by step, build thoughtful budgets that ensure operations continue as seamlessly as possible, no matter the financial conditions.

If you are tracking your work in a modern matter management system and can quickly and easily demonstrate the value provided by the Legal Department, you will likely have easier conversations about preserving the headcount of your in-house legal team. Instead of being caught unawares with the "What does he do around here" question, you can provide a real-time report of current projects, as well as a historical recap of major achievements. Indeed, it's one thing to say the team is busy; it's another to show it.

What now?

Download our 10 steps to a smarter legal budget white paper and template to creating an in-house legal budget. This white paper includes 10 steps to ensure your budget will help you shape the department that is right for building your team.

References: 

In-House Spending Eclipses Outside Spending in New Legal Department Benchmarking Survey

Nearly Half of CFO's are Bracing for Recession