Take the Mystery - and Fear - Out of Budgeting Your Engagements

Reprinted from:
Published 11/06

A budget is essentially a strategy expressed through financial terms. Budgets reflect careful planning, experienced forecasting and can be a vital part of successful client engagements. This column addresses the importance and potential outcomes of developing a budget.

All companies do some type of planning. Global multinationals typically have detailed written plans, while smaller companies may have a "plan" in the head of the entrepreneur. Budgets are the essence of a successful plan, and any business can and should operate according to a budget - whether you're making widgets, or providing professional services.

Excuses for not budgeting

Unfortunately, lawyers too often tend to dismiss the importance or even the practicality of preparing a budget. Typically there are three reasons for this:

Lawyers believe that providing their services depends on too many variables that can't be anticipated - for example, what motions opposing counsel will file, or what problems might turn up when doing due diligence.

Lawyers want to excel at what they do, whether it's negotiating a deal, drafting a contract, or litigating. They don't want their quality of services to be constrained by budget limitations.

Lawyers, to some extent, fear that budgeting a matter is merely an attempt on the client's part to reduce the fees that they are willing to pay.

Reasons for budgeting

In reality, preparing a budget at the start of any matter ensures greater productivity and cost effectiveness for both sides. A budget can only be an estimate of what's going to happen. The lawyer should not strive for the highest possible fee; the client should not desire the cheapest lawyer in town. Creating a budget shows clients - whether they are individuals, small businesses or corporate counsel - that you are sensitive to their needs, and reinforces that you are providing a service of value and not just a block of hourly time. Also, by ensuring a budget that addresses events, time and money is part of every engagement letter, you significantly increase the chances of collecting your fee because the client understands what to expect.

Defined parameters

Budgeting begins by getting as much information as possible from the client about goals and expectations. Information should cover parties, issues, anticipated strategies and desired outcomes. Understanding the client's objectives is essential to defining the two crucial budget parameters: time and money.

  • Time. Use common sense, be realistic and communicate accurately about the amount of time it will take to complete any work. Err on the side of caution and be sure to build in more than adequate time. Except when you are dealing with statutory or deal making deadlines, the client is less concerned with exact time and more concerned about being hit by surprises.

  • Money. Clients should have in mind how much money they want to spend to resolve a problem, just as they know what they want to spend on a piece of equipment. In either case, a higher initial cost may be acceptable if the long-term return on investment justifies it. Sometimes a legal problem is large enough that spending big sums on it is justified. Most issues, however, involve everyday costs of doing business. It makes no sense to budget spending $2 million to try a case if a $100,000 settlement will meet the client's objectives.

Collaborative communication

Once the client formally approves the final budget, all subsequent communication about it must be a collaborative effort. Because lawyer and client will each have unique information at any given time, both must be in constant communication about developments to keep the budget on track. The budget document should be periodically reviewed, with the client being told how much they have already spent and being asked to approve any necessary changes.

Failure to communicate often means failure to get paid. A large law firm once engaged me to help end their write offs of litigation fees. I suggested creating a flowchart of the litigation process to determine where/how much the client had really been involved, with the result that there were very few points at which client were apprised of what was happening in the case. When the final bill came, they were shocked at the large amount and refused to pay. The lawyers defended themselves by saying, "I talked with the client frequently. We were preparing for depositions and constantly asking for documents." But, that's not the kind of interaction that gives clients a sense of where their budget stands.

Informed judgment

No lawyer wants to lose control and direction of an assignment, but making the budget a collaborative process by accepting informed client judgment can benefit both sides. An assistant general counsel for a major corporation told me that once she saved her company nearly half a million dollars in one lawsuit by budgeting. The law firm was concerned over potential accusations of negligence or malpractice if one or more of the canceled tasks (e.g., depositions, motions, etc.) proved to be a key information source. The client responded by accepting responsibility for the reduced depositions if something went wrong, calling it a reasonable business risk. The result was agreement, lower costs and a successful engagement - the objectives of any budget.

This Article is listed under the following categories: