The basics
It is one thing to work hard to reduce the external legal fees , it is another thing entirely to prove that your all efforts are having the intended effect. There is no way around it. We will need to speak about the fun folk in Finance.
Let me start with to core differences between external legal costs, and all other costs. Those can cause tension when you participate in the Finance process at your company. But no need to panic. I’ll follow it up with some practical pointers on how to stay on Finance’s good side. Today we’ll cover the financial planning basics. Next time I’ll cover some areas in more detail.
Financial years vs legal years
The Finance department will see everything through the lens of the fiscal year, and the months and quarters leading up to its end. This has a big impact on how you manage the financial side of things when it comes to external legal spend.
To use a simple example: Finance will ask for a budget for next year around September of the running year. You submit the budget at the end of October and beginning of November a completely unexpected litigation rears its ugly head. If the work takes off with a vengeance, it will already put pressure on the budget for the running year. It will also have singlehandedly blown the budget for next year out of the water. Before the year even started.
The opposite also happens. A matter that looked like it was going to be a long and drawn-out affair, suddenly gets settled and it is pens down for everyone. The expected spend for that matter in Q4, drops to zero creating some space in the budget.
Legal matters are not tied to calendar or financial years but come up quickly and either go on for a long time and then peter out. Or they flame out as quickly as they barged onto the scene. Either way, there is no way that you can budget for all the unknown unknowns in the future. Although Finance ideally would want you to.
Linear vs erratic
When you think about it, most spend in companies is fairly steady and linear. Salaries, rent, the consultants that are in for a few months. Even some of the litigation costs, like hosting fees, are predictable enough.
The real exception are the law firm costs. Even if you have done a great job and the matter is fully scoped and all phases of the project are capped, from a Finance perspective it is still pretty erratic.
Most projects see peaks and lows in activity and the firm will bill monthly until the cap is reached and the project is completed. Finance will think of this as unpredictable because different amounts come in every month. I would see this is the pinnacle of predictability. We know exactly what the whole project is going to cost. What more could the possibly want?
Not all these issues can be resolved but some will get you a long way there and I can assure you that the Finance peeps will really appreciate the effort.
Get your actuals sorted
The first thing you will need to get under control is is the reporting. You will have to be able to tell the organization how much you spent on legal fees at the end of each month / quarter, and year. This doesn’t change the numbers but getting a system in place that will tell you the actuals reliably is critical. If your organization starts to lose trust in in your ability to put out reliable numbers, it will be a long way before they will trust you to control them. Getting your actuals right will likely mean a few things.
You are using eBilling but your organization will use SAP, for example, to process the invoices further. This means that the relevant data about the matter and the invoices, ‘lives’ in two systems. You will need to be able to link the data in the two systems up. Finance will blindly rely on what is in SAP. If your eBilling data does not match with what is visible in SAP, it will be very hard to have reliable reporting on legal fees on a matter basis.
The other thing you will need to get under control are the accruals. Accruals have two parts: Work in Progress (services provided but not yet invoiced) and Debtors (invoices submitted but not yet paid). The first you will need to collect from your firms monthly. I know, boring. There is no other way.
The debtors should be in your eBilling system as pending invoices and in SAP as invoices pending payment. Be careful, though, not to ignore rejected invoices. Many rejected invoices with only smaller or technical issues, will return as pending invoice one day. You will therefore need to keep track of those as well, and accrue for them if you think they will come back.
Get your dates straight
Although legal matters don’t adhere to the fiscal calendar, your spend reporting will have to. As an invoice goes through the various steps and systems, you will need to understand the significance of the dates involved.
In ‘order of appearance’ you will have the (i) the service date – the time period the services described in the invoice covers; (ii) the invoice date; (iii) ebilling invoice submission date; (iv) ebilling system approval date – this is normally the moment the invoice get sent to SAP; (v) SAP submission date; (vi) SAP approval date; (vii) SAP booking date – all approvals gathered and invoice is slotted for payment on the; (viii) due date; and finally (ix) the payment date.
Especially at the beginning and at the end of the year, it is important to fully understand the Finance process and its obligation to allocate service costs to the year the services were received. This is why you should follow the service date across all platforms (and not the invoice date, for example).
Let’s take the beginning of 2024 as an example. Finance will have accrued all services provided in 2023, in December. That entire accrual gets booked out on January 1st of 2024. That means that the year starts with a big negative number. Then the invoices in January come in. They all relate to 2023 so they get set-off against the negative number you started the year with. Many of the February invoices will also be related to work done in 2023. When asked at the end of Q1 ‘where we are on legal fees’ it would be a gross mistake to look just look at the invoice date and ignore the service date because the majority of those invoices, related to services provided in 2023.
In summary, when reporting on legal fees, it is important to ‘translate’ each report to the reality in Finance. In their universe years, quarters and months have clear closes and costs are allocated accordingly. It is also important to keep in mind that Finance only sees what is in SAP. Everything before that, you will need to give them.
These are the basics to get under control to be able to answer the more straightforward questions. Next time, I’ll write about steps you can take to increase the predictability of your matter spend and integrate that into the Finance process. This will include such fun classics as matter forecasting, budgeting and cost tracking.