The Perils of Zero-Based Outside Counsel Budgeting

February 27, 2009 | Filed Under Cost Control

There’s nothing quite like setting a stretch goal for next year’s budget. You set it realistically, and then you try to beat it, namely come in under budget.

Some years, 5-10% under. For 2009, many GCs are shooting for 10-20%, particularly for outside counsel spend.

If you’re really budgeting from a zero base (and not sandbagging) , sometimes you miss. Even a 1% miss puts you under the microscope. Go to 5% on the high side and you may find yourself quickly moved into a corner of the budget meeting conference room with a large pointy hat on.

What if you overshoot by 1254%?

A recent report shows this in concrete terms. It recounts how the Philadelphia city solicitor set a 2008/09 budget where she:

… initially expected to spend $566,000 on outside lawyers, budget documents show those costs will be closer to $7.1 million when the fiscal year ends June 30.

There were many reasons, staff turnover, an increase in litigation, major matters handled by higher-cost, larger firms. In recent years (since 2000), the city had spent between $2.7 million and $5.5 million annually on outside law firms.

So $566,000 really isn’t a stretch, it’s more of a moonshot.

Measure your budget projections twice, cut once, and then work like hell to beat it.

Managing Partners and the Yellow Brick Road

February 19, 2009 | Filed Under Change, Law Firm Trends

You have to wonder what it’s like to be the managing partner of a large law firm right about now. This wasn’t how it was supposed to be when he or she signed on for such a prestigious gig.

The old model had four E-Z levers for rising profitability:

1. Get more work.

2. Hire more lawyers.

3. Bill more hours.

4. Raise rates.

Now, during a downturn that’s increasingly looking like a @#$%%$ (insert D-word that must not be uttered), all of these levers seem stuck. Like when the wizard was exposed in the Land of Oz, managing partners have no simple tools at all save for layoffs.

And all layoffs are doing is buying a tiny bit of time, masking the inevitable restructuring and re-ordering of much of the AmLaw 200. Some observers speculate that last Friday’s bloodbath may not be the end of law firm layoffs.

Sadly, I don’t think it’s even really begun. (Update 20 Feb 09: Allen & Overy layoffs are Exhibit A of this. Managing Partner Wim Dejonghe was very forthright in explaining things: “There is simply not enough work to keep all our people sufficiently busy and we do not see that changing in the near to medium term.”).

Law firm staffing is the most lagging of indicators. Many firms are still living off the inheritance: toiling away on matters that were landed years ago from clients secured decades ago.

New work? Not so much.

And for this the typical managing partner had to give up most (if not all) clients?

Our hidden camera shows a BigLaw managing partner at work recently; go away and come back tomorrow!

Move along....

The Billable Hour, 2011

February 10, 2009 | Filed Under Law Firm Trends

Paul Lippe of Legal OnRamp has a great coda to the billable hour postings here over the last 10 days. From AmLaw Daily:

A typical law firm bill in January 2011 will generate the same dollars for partner work as it does today, but it will generate half the revenue for associate work. Consider a bill in July 2008 for $1,000,000, representing $450,000 of partner contribution, $500,000 of associate contribution, and $50,000 of ‘other’; in January 2011, the bill for an essentially identical project will be $800,000, reflecting $450,000 of partner contribution, $250,000 of associate contribution, and $100,000 of ‘other.’

That’s exactly what last week’s video posited, as far as law firm pricing going from cost-plus to value minus.

Transformation is also mentioned in this article, and sounds like more of an orderly process; what we have now is more akin to a cram-down. Perhaps that’s why bankruptcy practice is one of the few current bright spots.