Abraham Lincoln famously said that a lawyer who represents himself in court has an idiot for a client. Unfortunately, every year General Counsel are put into a situation where they are forced to be their own lawyer: budget time. In any given year, some percentage of in-house legal departments can expect to have their budgets slashed and, as Murphy’s Law taught us, if you’re not prepared for that conversation with the CFO, it’s definitely going to happen.
Here are some tips to help that discussion go smoothly:
Have a system
The budgeting process happens every year, so there is no excuse for not planning. Develop a system for gathering metrics, reports and specific pieces of evidence over the course of the year that can be used when the time comes.
You should have a way of measuring the dollar value of what your law department brings to the table. Most law departments are not revenue-generating but still bring value in the form of risk reduction. Risk reduction is hard to measure, but you can come up with estimates by looking at things like:
- Risk assessments of your organization
- Change in legal reserves over time
- Specific examples where your law department prevented or mitigated major issues
- Incidents you tracked, investigated and resolved
- Your overall legal matter mix including both the number and type of cases and how they have changed over time
- Specific risks that are on the horizon for next year
Reduce all estimates down to dollar terms and acknowledge that they are estimates. The CFO understands that these estimates will never be exact, but if you show you have done your homework, they will be taken more seriously.
Innumeracy is like illiteracy, except with numbers. If you are advocating for your budget, you have to show confidence and mastery of the subject matter just as if you were in court, and the subject matter is largely math. If you don’t know basic financial terms like net present value and what they mean, you may be thought of as innumerate, and some financial people won’t take you seriously.
GCs who do not have time to understand business math should be accompanied by the smartest person involved in generating the numbers presented to the CFO. It needs to be someone who is very prepared, presents well, and is confident speaking with senior management. If you don’t have somebody like this on staff, get one. This person should not be pulled in at the last minute but consulted throughout the year as you carefully track the relevant metrics in preparation for pleading your case.
In some ways, the CFO’s job is to run a mathematical equation on your law department and budget for it to reflect the outcome of that equation. If your numbers don’t look good, another department with better numbers eats your lunch. So fluffy, non-results-oriented talk about how smart your legal team is, how they really work together as a team, and what a great job they are doing probably won’t get you very far.
Be concrete and talk in dollar terms whenever possible.
Just because you are working with numbers doesn’t mean you can’t tell a story. Tie your argument together with some themes you think will resonate. Potential themes include:
- Reducing our budget will impair X, Y and/or Z (list high-level strategic goals of the corporation).
- We reduced risk by X amount this year, and it only cost Y, meaning an ROI of Z. That’s higher than any other part of our organization. You should be giving us more money, not less (you will be challenged on this, so have good, hard evidence).
- We recovered or otherwise generated $X in profit last year, an ROI of Y.
- There is no fat to trim (again, have good evidence).
- The volume of work is growing and it is not a good time to make cuts (again, have good evidence).
- X case is coming down the pike and is already going to kill our budget next year—if you make cuts, there is no way we will hit budget.
- Other departments are generating too much of X, Y and/or Z legal work, and we should be able to charge the associated expenses back to them.
Don’t go it alone
Some parts of your organization probably depend more heavily on your support than others. Other parts may have critical issues, like a merger or important lawsuit, that might be impaired if Legal’s budget were cut. The interests of these departments may be aligned with your own. Explain your situation and how you are spread thin. Show evidence. Tell them how you can do more if they help you clarify your position. Their perspective adds credibility and can be particularly useful in helping senior management understand the strategic importance of the work Legal is doing.
Of course, your budget may be cut regardless of how well you plead your case, but that is life. The important thing is to learn from the experience and build a better process for next year in the event this tough subject comes up again. In the end, it is not just about demonstrating value to the CFO but about how much value your law department is delivering, where, and how that is changing over time. That is information you need to know irrespective of any budget discussion.