Budgeting Engagements: A Profit-Boosting Strategy for Law Firms
In recent years, the economic downturn has pushed many law firms to minimize profit losses by cutting costs. Now, as the economy shows signs of improvement and expenses are controlled, the time is ripe for law firms to shift focus and place emphasis on leveraging profit from the revenue stream in an effort to grow. Some law firms have tried to do so by raising rates, but have not succeeded, as raising rates remains exceedingly difficult in the industry. Budgeting engagements is a core strategy that can enable law firm executives to increase profits. There is no better way than budgeting to gain efficiencies needed to glean more billable time for associates, to drive competition by boosting service quality, to have stronger data for decision making, and to free up time to spend on business development.
Many professional services firms—apart from most legal practices—have been budgeting time for every engagement, down to highly granular details, and have gained greater benefits from doing so. Budgeting enables these firms to:
- Exercise a high level of oversight over professionals’ time;
- Create a detailed plan to manage employee workloads;
- Assist in evaluating a professional based on their efficiency, in addition to other variables;
- Quickly and precisely reformulate plans across multiple engagements based on unexpected events; and
- Build professional relationships with clients by making them a part of the budgeting process.
Despite the benefits, many law firms are loath to even test the benefit of proper engagement budget to their firms. Law firms often attribute their hesitancy to the following concerns of law firm partners: 1) too many variables are non-budgetable because they cannot be anticipated; 2) the constraints placed on engagements would lower the quality of performance; and 3) budgeting gives clients more leverage in fee negotiations.
While there may be strong arguments backing those concerns, law firms that have successfully employed budgeting are in a stronger position to mitigate the impact of their concerns and reap the benefits of new profit-building opportunities – as well as sharpen their competitive edge.
1) Are There Too Many Variables to Budget Work?
A full-scale conversion to budgeting engagements is neither necessary nor desirable. It is true not all work can be budgeted in the pre-engagement stages. For example, the professional hours required to serve as legal counsel throughout an entire litigation cannot be estimated. As an engagement progresses, unforeseen outside factors (caused by unreasonable arbitrators or opposing counsel with unlimited funds) exert influence on budgets. However, the early stages (including initial filings and depositions) can be reasonably budgeted and, as unknowns surface and become tangible, a manager can and should, reevaluate the budget, keeping the process flexible.
In the initial stages of budgeting, it is important to start with small engagements that can be reasonably estimated based on past performance. Engagements in practice areas such as corporate law and business, employment and labor law, real estate transactions, and tax law, are all common engagements that can be easily estimated for each professional required to do the work. While the firm begins budgeting these smaller engagements with new associates who are otherwise unencumbered and who have no attachment to a nonbudgeted system, other engagements can be observed. Over time, enough data can be gathered to begin reasonably budgeting larger engagements task-by-task until, eventually, a firm gathers a compendium of information that enables budgeting on a larger scale.
2) Is Budgeting Against Quality Inevitable?
Assuming budgets are based on reasonable assumptions and past performance, there should be enough data to ensure that sufficient time is budgeted to provide quality services. In fact, quality can increase as time is budgeted to be spent in areas that are deemed most important.
3) Will Clients Gain Significant Leverage in Negotiations?
Through proper budgeting, clients will be able to ask more targeted and specific questions regarding fees. This is not as risky as it seems; in fact, there is a hidden benefit to this risk. Budgeting, in its best form, is a collaborative process that engages the client in the decision-making process. In this way, the client agrees to a plan of action and understands its costs. This helps a firm manage client expectations; build a stronger, trust-based relationship with clients; and increase fee collections as “sticker shock” can be mitigated through early, collaborative communication.
A Competitive Advantage
Once concerns have been allayed enough to begin budgeting engagements, there will be frequent opportunity to work on increasing profits. As firms hone in on smaller, more easily budgeted engagements, the first goal should be to reach a high level of accuracy in determining, at a given moment, the professional completing each task, the amount of time needed to complete the task, when each professional will become available for another task, and what the average collected rate is across the board for the engagement.
The ability to schedule the work of new associates efficiently allows for a higher number of billable tasks to be completed. Understanding the historical basis for what it takes to complete a task allows for the right amount of attention to be applied to each. Applied correctly, hours are spent more efficiently, pulling in valuable billable hours for important tasks.
Since billable hours are more valuable to the firm, budgeting engagements would help firms reward associates who are working billable hours that contribute to firm revenues. In today’s culture, bonuses are driven by time logged, not by hours billed. Law firms that adopt budgeting engagements would have a basis of data to use as a variable for deciding bonus compensation for associates.
As discussed above, revenues can also be protected by the process of collaboration with clients. In addition to managing client expectations in the beginning of the engagement, budgeting can help a firm track time spent completing certain phases of an engagement, such that, if an issue arises that could cause more time to be expended, this feedback can be communicated to the client as lead partners become aware. The ability to discuss fees with clients in real time will help secure them year over year by earning their trust – and will thereby secure revenue streams, as well.
In addition, budgeting enables efficient decision making, allowing more valuable time to be spent focusing on increasing revenues. For example, efficiencies gained will lessen the burden on those managing engagements. These higher level professionals can spend the time gained in such areas as business development and marketing which can raise profits in the long-term.
Finally, the decision to budget often comes with the use of budgeting software – which, depending on usage, can prove invaluable to case and practice management. Software can help track historical data on budgeting, allowing for a wealth of readily available information to aid in budget decision-making. Scheduling software helps manage the time of professionals, as budgeted tasks can be shown on digital calendars. Essentially, employing budgeting software can lead to more free time, thereby opening the opportunity to generate an operating surplus.
What Does CohnReznick Think?
By understanding that the pressures that change billing culture (including savvy clients requesting fixed fees, reviewable budgets, and alternative fee arrangements) are everlasting, firms may be better positioned to find the opportunities to raise revenues through budgeting efficiencies. As the budgeting process is introduced to new associates, the culture will eventually take root within a firm, making these revenue-boosting efficiencies second nature.
For more information on employing budgeting techniques to raise top lines, fuel growth, and remain highly competitive, please contact Richard Puzo, Partner and Law Firm Industry Practice Leader, at 973-364-6675, or Rocco Marotti, Senior Manager, at 732-380-8676.
To learn more about CohnReznick’s Law Firm Industry Practice, visit our website.
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.