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Top 10 Tips for IP Budgeting

Over my career I’ve been surprised at the professional skills that we, as lawyers, need to have, for which law schools and law firms do not prepare us before we go in-house.

One such area is IP budgeting. Below are my top 10 tips for managing any size IP budget:

10) Know What a “Budget” Is. I know an obvious first step, but one that I have been surprised many more senior attorneys have not had to tackle. A budget typically is defined as “an estimation of expenses (and revenue if your legal group is more than a cost center) over a specified future period of time. Such a budget is compiled and re-evaluated on a periodic basis (e.g., fiscal quarters). Expect such budgets to be fluid and presume that budgets are more likely to go down over the year than up.  

9) Know the Difference between “Accruals” and “Actuals”. Quite a number of companies use the “accrual” basis of accounting where expenses are reported when the corresponding services are performed, not when the actual expense is invoiced or paid (“actuals”). The result of accrual accounting is that it better measures the overall pattern of incurring expenses and more importantly the profitability of a company during a specific time period. Be forewarned when a law firm says, “sorry that I blew through your budget this month… can I just bill you later to address the issue?” The answer is obviously “no” since the accrued expense is when the expense is incurred (e.g., services rendered). Invoicing is merely the final step in processing the payment and it is offset against the previously accrued expense that was recorded at the time the services were rendered.

8) Know Who Your Financial Contact Is at Your Company. The person who controls the purse strings should be one of your best friends.  This is your partner in ensuring that you are adequately funded for what you need to do. This person provides you a view into the finance group’s world and can be a vocal advocate for you, when you are not in the room during fiscal discussions.  Definitely take this person out for lunch and ensure that you have a rapport based on trust and transparency.

7) Don’t Pad Your Budget. Though a strong temptation and sometimes a necessary evil due to the relationship some have with finance, it is much more advisable to develop a level of trust with finance where they have confidence that your budgetary methodology and estimates are sound and accurate. You want to instill confidence with finance that you have strong and unwavering control over the management of your budget.

6) Understand How Your Law Firms Manage the Budget. Make sure that you know how your law firms assign work and track and report time and expenses so that you have confidence that they can adhere to the budgets that you have allocated to them.

5) Set Reasonable Expectations for Reporting. Sync up with your law firms to set reasonable expectations as to how you want your budget, accruals and actuals reported to you.

4) Communicate Clearly. Practice what you preach and deliver clear and predictable communication to law firms about budget amounts, work assigned, delivery timeframes and changes in your fiscal situation that may alter your future budget allocations.

3) Hold Yourself Accountable. Just as you would expect law firms to credit you back if they go over budget, you should similarly take on the responsibility if project creep occurs or if there is a change of circumstances where you have less budget than you had originally thought.  Fiscal discipline should flow both ways - you to the firm and the firm to you.

2) Always Be Transparent. Definitely give them as much of a heads-up as possible regarding any changes to your budget. Establishing trust between you and outside counsel is critical.

1) Treat Your Firms as True Partners. The more you treat the law firm / in-house counsel relationship as a teaming relationship, the better the efficiency in your interactions, the greater the trust and the less surprises you both will have.

These tips are obviously not comprehensive, but just some thoughts toward how to more effectively manage your budget and ensure that you optimize for fiscal success.

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