Financial management may not be part of the core curriculum at law schools, but it is very much an important part of the legal profession … especially for legal departments aligned with public and private businesses. To handle some of the more critical aspects of financial management, legal departments increasingly rely on Enterprise Legal Management (ELM) solutions. These software-based systems, like LexisNexis® CounselLink®, are often equipped with advanced financial and accounting features for e-billing, invoice processing, budget and accrual tracking, analytics and a variety of reports on legal spend and department performance.
Even with these capabilities, legal departments do not always use the same approaches to complete financial tasks required in their business operations. These points of difference and commonality were captured during a recent industry panel on Financial Management – Budgeting & Accrual Techniques to highlight real world conditions and common practices in government and corporate sectors.
Those perspectives will be shared in a multi-part series, the first of which features Pat Ryan, Director of Administration with the City of Chicago Department of Law (see biography after the Q&A). His department provides legal services in 18 practice groups covering contracts, complex and low-end litigation, real estate acquisitions, labor contracts and disputes, and other matters. With roughly 320 attorneys (and 130 support staff), most work is handled in-house; outsourcing involves primarily complex and high volume police litigation cases.
Q: Groups approach budgeting in different ways: some do it to manage vendors, or prepare forecasts, or compile matter-level assessments of work underway. What is your primary purpose in budgeting; and, do you enter those budgets into an ELM solution, like CounselLink, or a similar application?
A: P. Ryan – In the City of Chicago, we rely heavily on budgeting and actually require a budget on all matters. We are a heavy user of the budget component in CounselLink and maintain all of our budget data there.
“We rely heavily on budgeting and actually require a budget on all matters”
There are two different ways we capture information based on dollar levels. For any matter under $10,000, we don’t require a global budget … just a basic placeholder so we know the life of the matter spend. Matters over $10,000 require a global budget to be submitted that breaks down the litigation components. At any given time, this allows us to know what our actual spend is based on a compilation of our matters.
“Our firms are asked to provide a current year as well as a subsequent year budget.”
We also require annual budgets and encapsulate that information in CounselLink. Our firms are asked to provide a current year as well as a subsequent year budget. In the public sector, funding is different and relies on an annual appropriation approach. From that appropriation, we’re typically funded for outside counsel with general obligation bonds as well as enterprise bonds. Budgeting is very important and enables us to submit our projections to the budget office. Of course, with litigation, sometimes you’re at mid-year when a huge case comes in and we have to allocate $200,000 or $500,000. These situations are a challenge, but unavoidable as we have to defend the City. Therefore, our best approach is to obtain and provide as much detail as possible to justify the unanticipated spend.
Q:Do your firms input budget information directly into your ELM solution, or is your department handling that activity?
A: P. Ryan – We require firms to submit the budgets to us. Some firms want us to do the budgeting, but we have them do it because we want to hold them accountable for what their spend is. Not only do we have them enter the data, we also have them come up with assumptions. So, if they give us $100,000, we just don’t say, “Well, that’s what we think the case will cost.” The $100,000 needs to be broken out into the different phases for a litigation case, or the different components for a transactional case. They also need to break down the type of disbursements, and what have you; it gets fairly detailed.
“We have accountability being created on two ends.“
Firms will submit the initial budget once we send the request out, and then our staff will approve it. We have accountability being created on two ends, on one end from the law firm, and on the other end from the internal attorney(s). Then, my staff comes in from the administrative perspective to tweak things and make sure that the process is flowing smoothly and that it’s not so ambiguous. A lot of times, the information is hazy and we have to sift through it and make sure that it does make sense … that the numbers actually represent realistic data as much as possible.
Litigation can change and swing either way; we expect firms to update their numbers accordingly. We do that through quarterly updates that not only tweak the annual amounts, but also allow us to take into consideration those cases that occur midstream. As soon as cases are filed, we’ll make the decision whether to keep it internally or to outsource it. Once a case becomes outsourced, we have to accommodate spend. As for sudden spikes, cases that settle prematurely will likely have reduced spend, whereas cases with a surge
of unanticipated events may lead to significant increases. Overall spend may also remain static, although timing of costs may accelerate or slow down due to litigation activity; in these instances we have to adjust the cash flow up or down.
Q: Capturing sufficient detail while preparing budgets is really important; how do you handle that for the City of Chicago Department of Law?
A: P. Ryan – We use a couple of spreadsheet templates – one for litigation matters, the other for non-litigation. Firms have the option of using the user friendly models we provide, or they can come up with a similar model of their own. Since ours is formula-driven, firms might go ahead and develop their own if they don’t have somebody proficient in spreadsheets.
When we ask for a global budget, the format is moderately complex and takes some time to populate. Once we have this, we use it as a basis for our overall spend. If there’s a shift in the case, we don’t ask firms to go back and update the template. Rather, we ask them to utilize the annual budget and the “note” component within CounselLink to explain what happened. At this point, we can reference all subsequent activity in CounselLink through the annual budgets and assumptions / notes that they submit, which are derived from the spreadsheet.
The global budget format we provide or expect firms to assimilate is complex due to the detail that needs to be broken out; the form also requires information that is straight forward. For example, the top of the litigation spreadsheet contains general information. We ask for the law firm name, matter start date, the anticipated end date to get a little knowledge on how long the matter will last, the matter name, and who the assigned billers are at that point.
“The global budget format we provide or expect firms to assimilate is complex due to the detail that needs to be broken down.”
Some firms will use a supplemental sheet for the assigned billers, biller levels and what their rates are. Next, we’ll add who prepared the budget in case we have questions, the type of matter, the period that the budget will cover, and total legal spend broken down by expenses (fees) and disbursements.
Collectively, we expect the template to be a fairly good compilation of what the overall costs are. That’s why the next section asks about the firm’s assumptions. What is their litigation plan and what resources are they using? How will they use staffing, partners and associates? If we have a blended rate, how will that come into play? We also ask about anticipated outcomes and how these align with how we want the case to conclude. All of this is highly confidential information once the budget is completed and submitted.
“Firm are estimating hours so we get a general assumption of attorney times which are the largest cost drivers in our litigation cases”
The initial values at the top are important because they’ll drill down into the base of the spreadsheet, which breaks into five different components of the litigation plan. Basically, firms are estimating hours so we get a general assumption of attorney times which are the largest cost drivers in our litigation cases. The first phase is case assessment, development and administration; then, pre-trial pleadings and motions; and next, discovery. Then, they’ll go into trial preparation and the actual trial itself.
If there is an appeal, they’ll also break out that component at the end of the first four phases. We do have a very strong appeal group with the city, so it’s very seldom that the outside counsel firms will do any appeal work themselves. Mostly, it’s a collaboration to get the initial information to our appeal folks and letting them take it from there.
Once they have the general case costs entered, there’s a rollup of the totals by component phase. Then, we break down disbursements and expenses on the backend of the sheet and add a comment column. For example, it can help clarify that a very high court reporter number is due to a class action suit. We require outside counsel to put in all their disbursements through CounselLink. One reason is for funding purposes, but another is to capture all the case costs that we’ll look at in post analysis. We have all the litigation costs as well as the disbursements right there.
“We require outside counsel to put all disbursements through Counsellink….to capture all the case costs that we’ll look at in post analysis.”
As previously noted, law firms can use our litigation template or their own, but we do require the submission of a global budget. If they don’t want to use ours, it has to pretty much match our format so that we understand the basis of it. To back up a bit, there is one important way we enforce our budget component. If the matter does not have a current year budget, CounselLink will kick the invoice back and there’s no way to get charges into the system. Obviously, the biggest motivator is being paid; so that works well.
Q: How is the non-litigation template and process different?
A: P. Ryan – Non-litigation matters also require budgets, with a simpler process to follow. The outside counsel firm basically breaks out the phases themselves. It could be whatever prep work they have to do, or research on a particular transaction. They might be doing high-end, complex contract work, or IP work, or acquisitions. We give them the liberty of breaking out the phases; sometimes it’s one, sometimes more. They follow a similar format of identifying how much junior or senior work, partner work and paralegal work is being performed. At the end, they’ll enter their disbursements as the other spreadsheet does and that’s basically it.
“We manage to capture a good deal of the task-level data in CounselLink by cycling invoices through the SmartReview process.”
Again, once that global budget is completed, we don’t expect them to go back and update it. It’s a lot of admin work for them and definitely for our staff. Our deputies look at it when the matter opens and make sure everything looks good. If they have any questions at the onset, they go back to the firms and the firms will tweak it. We’ll give whatever administrative guidance they need, and once we have agreed on a global budget, we’ll go ahead and enter the annual amounts and start the litigation process or the legal work.
Q: Which elements from your spreadsheets get entered into your CounselLink solution?
A: P.Ryan – Most of our spreadsheet rolls up into attorney time and billable hours, which relates to the timekeeping module and reports on partner, associate and paralegal hours. The expense side is covered in the disbursements, whether it’s expert witnesses, filing fees, court reporters or what have you. One end looks at fees, the other looks at expenses.
We manage to capture a good deal of that task-level data in CounselLink by cycling invoices through the SmartReview® process. Other details on specific tasks are outlined in the assumptions, or are embedded into the phases covered in the template.
In some regards, the template is supporting documentation, but it really serves to stimulate the thought process with our firms to think logically about the different sequential components of the case and provide the most accurate data they can. “This is what we’re asking for; what is your spend to do these different tasks?” We don’t do an analysis on each line that’s entered into the budget sheet, or compare what they said and the actual spend and hold them to each line. Of course, if a specific need or situation comes up, we’ll go back and look at the details as the basis for a dialog.
Q:What volumes are you handling; how many templates go out and require approval by your group?
A: P.Ryan – Currently, we have approximately 450 cases that are active in the system. The volume isn’t too high or too great a burden on us; I would say on average we engage 10 – 20 matters a month although this is not static. It really depends on what events unfold during given time frames.
Q: Is the process iterative, where firms submit the budget and it goes back and forth a couple of times before it’s agreed upon, or are your firms accustomed to the process and pretty good at it?
A: P.Ryan – It really depends on the firm. Some are right on and have a good dialogue with our staff beforehand. They know what they’re doing, what the assumptions are, what the city expects, what type of costs we’re looking at spending, and what our anticipated outcomes are. Those are not high-end or low-end firms; it’s a handful of firms in between that are pretty much right on the mark 70% of the time so there’s not a large need to go back. For the other 30%, especially with new firms, there’s usually a learning curve. They’ll have to have their hand held through a lot of the process, but once they get reassigned cases they’re pretty good.
Is the process interative?
“It really depends on the firm. Some are right on and have a good dialogue with our staff beforehand. They know what they are doing,
what the assumptions are and what the city expects.”
Q: As you collect these budgets, and start seeing actual invoices coming through, what’s the process for tracking and reporting on the variances between actual and budget?
A: P.Ryan – Since we mandate that budgets are put into CounselLink, we definitely have a lot of current year data. Although we can monitor total spend throughout any matter by just looking at the screen within the matter itself, we don’t have the global data because there isn’t a module that captures that at this time.
We rely heavily on CounselLink reports and include conditional formats of our own that identify trends and percentiles of where we’re at in a given year. We run this report by division across all matters and give it to the deputies. In the variance column, it states the percentage of the matter so far, which makes time-of-year a consideration. If a case just started or if costs are front-ended or back-ended, the data might not be a reliable indicator for the fiscal year, but you can pretty much make a subjective decision once you see it.
Color coding is also used: green is a safe zone; yellow or orange tells deputies it needs to be looked at; and red is definitely a problem. We also set a threshold in CounselLink at the 70th percentile for the year. When that level is hit, emails are automatically generated by CounselLink to the respective firm asking that they look at their budget because the threshold has been exceeded. At year end, firms will see those a lot because that’s where they should be.
The detail we rely on for the budgets is very important. Unlike much of the private sector, everything we do is front and center, especially when it involves litigation. It’s not just the outside counsel spend; it’s judgments and settlements and more. The media is in contact with us all the time to provide this data, which has to be accurate and reliable. The turnarounds are pretty quick, too. CounselLink and the details help us; we need it for public perception, accountability and transparency, responding to freedom of information requests, and reporting to the budget office, Mayor’s office and city council. The firms have to be accountable and the detail helps us answer questions. Our attorneys are very busy, and we don’t want the deputies going to budget meetings. We utilize the justification, the details and the assumptions to explain the financial resources we need on certain cases. Of course, we provide a quick summary of the information, but if we need to drill down with additional questions, we can go back to that.
“The detail we rely on for the budgets is very important. Unlike much of the private sector, everything we do is front and center, especially when it involves litigation.”
For reporting, we typically send quarterly reports to the divisions right before the quarter hits. If there is a need to update or talk to the firms, they can have that discussion, and then corporate counsel will get the follow-up quarterly runs. Internally, we look at our monthly reports to know where we need to troubleshoot any type of issues. Since the fiscal year is how we budget, the reports we generate are based on a charge date which is very important. We have to know how much money we’re spending within a given a time, which means we’re basically looking at things from a cash basis.
“We utilize the justification, the details and the assumptions to explain the financial resources we need on certain cases”
Our reports will have the last charge date indicated so we can look at any matter and see what the current activity level is. If it’s an active matter, we expect that charge date to be within 30 to 60 days. Our outside counsel guideline requirement is that firms need to submit monthly, which lets us look at a few things: how active is the matter, how active is the firm’s billing, and is the law firm maintaining their agreement to bill on a monthly basis. It allows us to have reliable data in making our own assumptions in terms of where they’re at with billing and case movement.
“We have to know how much money we’re spending within a given time, which means we’re basically looking at things from a cash basis.”
At other times, we’ll pull matter summary reports and matter overview reports so people can know the overall status of a given case. We can just provide the report itself, or do a pie chart for a visual reference of what’s going on.
Q: Is “sandbagging” an issue, where people submit budgets that are bigger than they need to be to avoid questions about variances?
A: P.Ryan – Before we required the detail, we were getting general estimates quite a lot. Some firms, for example, would submit a narrative which broke out assignments into certain dollar amounts based on their historical trends with similar matters (e.g. $100,000, $75,000, $50,000). We had no true method of measuring how they were coming up with the numbers. However, we would still have this data entered into CounselLink and could run variance reports and analyze how their projections measured up to actual spend. We discovered that there was a significant level of variance, and looked at what approaches we could take in capturing more reliable budget data.
“It’s very important that we see the details to have a discussion with the firm, if needed, to see how they came up their numbers of if we disagree with them.”
So, it’s very important that we see the details to have a discussion with the firm, if needed, to see how they came up with their numbers or if we disagree with them. These numbers need to be fairly consistent as the year goes on. We don’t want to see a $100,000 case come in at $10,000; it’s not a good practice, at least in the public sector. We like to see those thresholds between 70 – 100%, and have notes to supplement any changes. Even with details, we may still get projections that are not on track, although with our current process we now know when there’s an issue that needs to be confronted.
Q: Some ELM systems have accrual features to capture financial details for work that has not yet been invoiced. Are you using those features, or do you have another process in place to get the information?
A: P.Ryan – Right now, we don’t use the feature. Because we do hold firms to more detail on the budgeting end, we rely on firms to be submitting in a timely manner and our annual forecasts. We do plan on looking at the accruals; it would be another accountability component to have in place. More importantly, I think the accrual might work well for us with the global perspective and actually being able to capture what our total spend is out there. Attorneys don’t like doing financial work; they’re there to litigate and they have blinders on which focuses their attention to litigate. We don’t want to be too burdensome, and any financial information we need will involve us holding their hands a lot. It comes down to finding the right balance.
Q: Is it correct to assume that your budgeting and accrual processes are based on a fiscal timeline and not the life of the matter?
A: P.Ryan – That’s right. We only do life of matter to get an assumption of what the spend is for that matter. Of course, that can fluctuate throughout and we use budget notes for that. The number is also a placeholder so we know the firm’s assumptions. At the end of the year, or at the end of the matter, we don’t measure the spend to budget projection in terms of cost savings. That would be too ambiguous with litigation. We look at it more as a management tool to hold firms accountable throughout the spend process.