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Common IP Budgeting Pitfalls

Managing IP budgets can be time-consuming and complex – and because IP budgets can account for up to 75% of all legal spend in some companies, we are talking about some pretty significant costs that typically receive senior level attention. Given the magnitude of the budget needing active management and time and resource constraints with competing priorities, it’s no wonder that IP departments fall prey to some common pitfalls when managing their IP budgets.

Guesstimating the Budget Numbers

When you don't have a high confidence of the current state of your portfolio and/or have limited visibility into future spend, often one has to rely upon a gut check to guestimate your budget needs. Such an approach, however, when observed by Finance / senior management often instills a sense that you really aren’t managing your spend, don’t understand your costs, and/or aren’t managing your vendors, whether true or not. Over time, not only will your budget likely be reduced or reallocated, but your credibility is likely to be questioned. While patent portfolio development, licensing and litigation fees can be highly variable in the short term, such matters often are more predictable when you have access to historical trends and predictive analytics.

Managing Budgets On a Quarterly Basis

Again, this seems like an innocuous approach. However, if you are waiting until the end of the quarter to reconcile expenses, it’s really too late for you to do anything because the services have already been rendered and you are now reacting to real costs, which have real impacts to your budget and/or your outside counsel’s bottom line. You are no longer managing the underlying resources, but rather negotiating with your outside counsel where someone will likely be negatively impacted. Not the sort of win-win scenario we should all be aspiring to. Instead, IP departments should be closely monitoring compliance with budgets on a monthly basis, so that they can adjust their spend within the current quarter where necessary to ensure a soft landing for hitting their committed budget numbers. For example, one can use the first month of a quarter to ensure that a law firm appreciates the need to strictly adhere to your budgetary instructions. The second month provides you with an ability to adjust the firm’s behavior and/or your spend to accommodate for unexpected resource needs. The third month should be to fine tune your spend so that you can confidently meet and not exceed your quarterly budgetary commitment.  

Relying Solely upon Invoices

There are no two ways about it. IP departments must rely more heavily on accrual management, rather than just focusing on the tactical processing of and negotiating down of the final law firm bills. Initial accrual reporting by law firms to Finance represents an early warning for inhouse counsel and a firm commitment from the law firm as to what services they’ve rendered for that month as well as what unbilled and billed (but unpaid) services are still outstanding for prior months. By tracking the monthly accrual commitments made by your firms and ensuring that such accruals are not any higher than the monthly budget amounts communicated to them you are sure to increase your confidence that you will not exceed your budget commitment with your firms being a constructive force to help you achieve this goal.

Trying to Manage Everything On Your Own

Many who are responsible for managing IP budgets attempt to gather and track everything on their own, with little assistance from their outside counsel, other vendors or even their own Finance group. The fact of the matter is that all of these groups are here to support you. You should expect firms and legal service providers to adhere to budget guidelines, report accurate accruals and provide you estimates on expected costs on recurring fees (e.g., annuities) on a monthly basis. You should expect your Finance or operations group to properly process invoices and manage/reverse accruals to ensure you have accurate data. Your team of cross-functional subject matter experts should be leveraged wherever possible.

Clearly not an exhaustive list (I could go on and on – as I’ve been known to do), but I would encourage those who have recently become responsible for managing IP budgets to give this list some consideration and compare notes with others.

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