Tracking and controlling costs (Part 1 of 2)
Tracking and controlling legal costs is one of those topics that would require an entire book of its own to do it justice. This short overview is designed to outline a framework for an effective system. The practical details of how budget tracking works in your firm will depend on the approach of your finance department, and the tools they use.
In many firms, this is an area that is evolving rapidly as clients demand more timely and sophisticated information about spending. If you are not already familiar with the latest budget tracking procedures in your firm, our single most important piece of advice is to stop reading this post and instead talk to your finance or practice development staff about the tools and techniques that are currently available to you, and what is planned for the future.
This two part series provides a brief overview of four major steps in tracking and controlling costs.
Step 1: Define a baseline budget before the matter begins
If you have no idea what the total cost should be at the end of a matter, it’s pretty obvious that it will be hard to know where you stand. Yet we continue to be amazed at the number of lawyers we see who operate without sensible budgets.
If you need to improve in this area, you may want to see the posts from this blog on “Six steps to better budgets”. For important matters, you should ideally develop what we called a “high detail” budget in that series, in which you have estimated the cost for each phase. For example, in litigation you could have separate budget estimates for case assessment, pre-trial pleadings, discovery, trial preparation and trial, and appeal. (As noted in our recent series of posts on task codes, high level phases generally work better than detailed tasks for this, because it is so difficult to get lawyers to accurately code their time entries by tasks.) Many firms now require high detail budgets for all matters over a certain dollar threshold, even if clients do not request them. The threshold may be as low as $50,000 or less, or as high as $250,000 or more, depending on the size of the firm and the amount of financial control that is desired and practical.
Step 2: Obtain accurate and timely information about spending as the matter proceeds
In order to evaluate the financial status of a matter, you need to know how much has been spent to date. In coaching lawyers in LPM over the last several years, timekeeping practices is probably the area where we have seen the most change. Years ago, the standard at most firms was for lawyers to submit timesheets at the end of the month, which occasionally became an exercise in “creative writing.” And if a partner submitted a time sheet a month or two late, no one got too excited. Until the day that time was submitted on a matter after the final bill went out, and the firm had to write off the difference. There are still firms that live with this system, but the number goes down every year.
At the other extreme, there are now practice groups and entire firms that require lawyers to submit their time electronically at the end of every day. The next morning, the relationship partner can get a real time view of exactly how much has been spent.
Most firms fall somewhere in the middle and many are still struggling with systems to encourage timesheets to be submitted promptly. We have seen many approaches used by firms to induce compliance with prompt time entry practices, both “carrots” and “sticks.” The “stick” ranges from continually nagging and cajoling, to systems of either financial penalties (e.g. $50 per end-of week or end-of-month tardy time release) or evaluation penalties (e.g. reduction in the offender’s year-end evaluation for bonuses). The “carrot” systems offer evaluation or dollar awards for compliance.
One of the more creative systems we’ve come across was the CEO of an AmLaw 100 firm who suspended direct deposit on pay day for anyone whose timesheet was late. The individual had to then come to the CEO’s office to pick up a physical pay check. Another creative firm created a contest among administrative assistants, with cash rewards for those whose groups had the best record for meeting timesheet deadlines.
Regardless of the state of timesheet practices at your firm, if you are responsible for keeping a matter within budget, you will need to find a way to get complete and timely information on hours billed to your project. Without it, any subsequent analysis will simply be a matter of “garbage in, garbage out.”
This series was adapted from the fourth edition of the Legal Project Management Quick Reference Guide which will be published in October.