Law Department Budget for Unplanned Spending (United States)

This Wisdom of the Crowd (ACC member discussion) addresses how law departments budget for unexpected or unknown potential activities. This resource was compiled from questions and responses posted on the forum of the law Department Management and Litigation ACC Network.*

*Permission was received from the ACC members quoted below prior to publishing their forum comments in this Wisdom of the Crowd resource.

Question:

We are seeking information from other law departments about whether or not you budget for unforeseen legal spending.

1. Does your law department budget for unknown spending at the beginning of the fiscal year for possible litigation or other potential activities? Does your law department pay for legal spending or is it (or some of it) allocated to the business function?

Wisdom of the Crowd:

• Response # 1: We budget on a consolidated basis but push most of the costs (excluding department overhead costs) into our business units, with some general spend in our central service entity for work that is not specific to a business unit.

• We have divided our budget into buckets based on type of activity (i.e. litigation, regulatory, contracts/commercial, etc.). We identify specific budget line items for specific major known matters and then include a general matters/contingency fund for smaller and potential matters. [At budget time, we allocate this general fund across the business units.] We don't include a large contingency "just in case" but base it on past spend, expected issues and a general idea of where management wants the budget to come in at. This is done on the understanding that if a major litigation hits that requires additional significant spend, we may go over the budget and shouldn't be reflected in our KPIs (Key Performance Indicators). We don't budget for acquisitions or project financings but we create a budget for each major transaction as it arises.

• We track actual spend against the various buckets (and pull budget funds from one business unit to others as necessary) but the focus is to remain within the total budget. We review the spend on a monthly basis and update our forecasts as best as we can so that management is kept informed for cash management and reporting purposes.ⁱ

• Response #2:

1. We do budget for unforeseen spend. Our reasoning is this - Although we may not know at the time we do our budgeting for the next year exactly what issues will arise, it is guaranteed that something will come up that was unknown at the time of the budgeting. So, we include a contingency fund for those areas that are most likely to arise, such as unanticipated litigation. In the event we are fortunate enough not to have that unanticipated litigation, we almost always end up using that contingency fund on something else that was unanticipated, anyway. Our law department pays for legal spend. The only exception is for immigration-related expenses (H-1B, AOS, etc.), in which case the business area pays for the costs.ⁱⁱ

• Response #3:

1. We do not budget for unforeseen legal spend, for litigation or otherwise. Throughout the year we meet regularly with Finance and alert them of surprise projects that require additional resources. Finance manages any contingencies and variance reporting. Our legal spend is partially within the law department budget (which we call "on budget") and partially allocated to business units ("off budget".) On budget spend includes salaries & benefits, travel, outside counsel spend for recurring legal processes, and some law department costs. Off budget spend includes most of our litigation fees & settlements, and major legal projects. Despite the fact that the legal costs reside in different budgets, we are accountable for managing the whole amount (with close assistance from Finance.)ⁱⁱⁱ

• Response #4: In almost all instances, our law department allocates legal spend-mainly outside counsel fees and expenses to the business unit involved.^iv

• Response #5: Much like bad debt or theft adjustments, we typically take into account past history and determine if we need a "litigation contingency" bucket, meaning if we average three or four suits a year for the past few years (regardless if claims are based upon contract, employment, etc.), we reserve some funds in anticipation of litigation for the upcoming budget year. It gets a bit tricky when tying it with any insurance coverage, but we just try to get some line of sight so there are no big surprises during the year.

• We do have legal budget for general legal support, but for any Merger & Acquisition or other specific business ventures (patents, localization efforts, etc.), we ensure it is part of the approved business plan and measure it separately from the general legal budget.^v

• Response #6: We do not budget for unforeseen spend, but in the middle of the year reforecast based on what the legal department has actually been asked to handle, which more often than not includes many matters not anticipated when the budget was put together. This happens every year - the better practice may be to add a cushion to your budget from the get-go, but given the pressures there are to keep expenses down, this is often hard to do.^vi