Budgeting and forecasting are critical financial exercises for the modern law firm. The top 100 US law firms generate annual revenues of about $90 billion and are multi-disciplinary and multi-national enterprises employing thousands of attorneys and managers. In addition, many law firms have substantial operations outside the US and need to control for foreign exchange exposures. The majority of law firms use modified cash basis accounting and are limited liability partnerships. Law firms are also increasingly focused on forward-looking data to make smart management decisions. Firms also have to contend with the external economic environment, changes to tax regimes, and the need to accurately estimate the financial impact of management actions.
Thus, the modern law firm needs smart, state-of-the art and flexible budgeting and forecasting systems to efficiently manage the enterprise. In effect, law firms have the same exacting requirements of their frameworks as other publicly traded large organizations; while having peculiarities specific to their industry.
Law firm budgeting is composed of two rather distinct efforts: estimating the revenue on an annual and monthly basis; and estimating expenses at a very detailed level. Individual attorneys are revenue generators, thus the revenue budget has to consider their annualized hours, rates, billing realization and collections. The expense budget has to track different kinds of operating and non-operating costs at a very granular level, such as compensation, benefits, occupancy, technology, research, communication, tax, insurance and operating expenses.
"The budgeting system needs to be flexible, open, distributable, easy to use, modifiable, and must integrate well with others firm systems"
During the year, firms also need to periodically create a forecast to include changes to the budget. This means gathering a new round of updated information from a variety of involved managers. The level of complexity, though not at the annual budgeting level, is still decidedly high. Budgeting systems need to have the option to handle these situations. Thus, smart budgeting and forecasting enables the modern law firm to make effective management decisions before the advent of the next year, and during the current year.
In terms of what is needed, law firm CFOs and CTOs have numerous demands of a world class budgeting system. It has to be necessarily state-of-the-art in terms of the technology foundation. It needs to be flexible, open, distributable, easy to use, modifiable and must integrate well with others firm systems, generate solid reports, and finally be very secure. Experience also shows that solutions popular in other industries are not that suitable for the legal environment. Thus, industry-specific frameworks are a key requirement.
Selection poses an obvious challenge and an inherent tension. The key question is whether to select a best of breed system which can be patched internally with existing systems, or select a vendor who can provide a suite of services. Both choices have their pros and cons, and the ultimate decision is driven by firm culture and resource availability.
At the micro level of the individual legal engagement, law firm clients have been increasingly insistent on creating specific budgets. This means that firms have to develop a method for budgeting at a very discrete level, which is quite different from firm-level efforts. Vendors developing solutions to address micro-budgeting are not necessarily those focused on macro-budgeting. The need for a single solution further complicates vendor selection.
Most law firms rely on Microsoft Excel for revenue budgeting, as it is very flexible for this particular requirement. Budgeting solutions based on SQL or Microsoft stack generally are not fully compatible with Excel; nor do they offer flexibility in creating templates and doing one-off analyses. Hence, any switch from Excel to a standard framework has to be weighed against loss of flexibility. Some vendors have offering Excel budgeting add-ins, and this seems to have some promise.
The increasing demands for smart budgeting, the prevalence of older generation systems, the tension of vendor and technology selection - all create challenges for management. Law firms have limited vendor choices, but the tough decision is balancing timing, availability of implementation resources, connectivity with other systems, and system capabilities.
In summary, law firms can gain immensely from smart budgeting. The industry welcomes investment from software providers to address complexities which are becoming increasingly prevalent.