Budgeting for success

The annual budget must surely be the time for collective groans and sighs from all those that have to partake in what can be a lengthy process. But signs suggest that budgeting and forecasting in the legal profession is not just improving, it may also be getting easier.

By Caroline Poynton

For many finance teams, it is that time of year once more for compiling the annual budget in readiness for the new financial year. It is unlikely that even the most ardent finance professional would profess great joy at the thought of the laborious process that culminates in the publication of the firm’s 12-month budget. Even for those who salivate at the thought of being immersed in spreadsheets for three months might little appreciate the other side to the role: getting partners and practice group heads to contribute their thoughts and figures to the piece. Indeed, in the last issue of FD Legal (Dec/Jan 2007/8), David Greenwood, head of operations at Watson, Farley & Williams, graphically recalled the horrors of the budgetary all-nighters, sitting surrounded by spreadsheets, and feeling pressured by an impossible deadline caused by practice and office heads failing to deliver their figures on time... “You feel tired, your wife thinks you are having an affair with your computer or worse, your assistant accountant. Your mind is between buzzing from the fifth coffee you had this morning and the overwhelming desire to sleep... It’s all too horrible and inside you are worried that some calculation is wrong and you have just produced absolute rubbish.”
No doubt, if you have any involvement in putting together your firm’s budget, you will empathise. Even before getting into the spreadsheet details of compiling the data, you have to consider what the budget is trying to achieve. “One of the problems we’ve had is that however sophisticated your budgeting tool is, different people in the business have different views on what the budget should be,” says Mark Carter, CFO of the London office at Allen & Overy LLP. “Some would view it as a stretching target, others see it as aspirational, and a few will see it as something that just needs to be beaten. If you set the target too high and it can’t be beaten, then it has a demotivating effect on the business.” At Allen & Overy, the goal is to set the budget at a central level, so that all areas of the business are budgeting to reasonably common standards. But in order to set such a balanced and credible budget, it is not only necessary to involve practice groups and partners, but also to fit the overall budget into wider performance measures, so that it can become a worthwhile benchmark for the firm’s progress. Fail to do that and your budgeting efforts might prove nothing more than a waste of time.

Finding the right budgeting method
For Kay-Uwe Bartels, director of finance at Mayer Brown LLP, the budgeting process can be managed through a top-down, bottom-up or combined approach. “The major advantage of the bottom-up approach is that everybody who is a decision maker in the firm is contributing their knowledge of the market and the competition into their part of the budget,” he says. “By asking practice group leaders for their input into the budget, for example, it forces participation and forward planning. It also makes people accountable for their part of the budget, making them more likely to meet objectives.” A purely bottom-up approach, however, has obvious disadvantages in being time-consuming. “It requires an awful lot of information gathering – you need to talk to each partner in each practice group or at least each practice group leader, and in Mayer Brown, that’s a huge task spanning 15 offices,” says Bartels. A top-down approach, by contrast, is a far more simplified model driven by senior management. “The top-down method is faster but there’s also a heightened risk of mistakes because the small group of decision makers creating the budget have a limited knowledge of the specific needs of each practice group,” say Bartels. “That is why, at Mayer Brown, we have chosen a combined approach.” In putting together the annual budget, senior management agree the firm’s overall strategic guidelines, communicated in a three-year plan that focuses on industry and practice groups. Practice group leaders are then brought in to help meet these goals by working with management on the budget, agreeing targets and taking responsibility for their practice goals. “We don’t want to lose the overall, three-year view of certain strategic developments, driven by top management, but we want to use the knowledge and experience of the firm’s practice group leaders to reach these strategic goals,” he says. Proof of the method’s efficacy is perhaps best illustrated by the fact that this combined budgeting approach has now been practised within the firm for ten years.
Carter agrees that a budget is only credible if it has the buy-in of the partners. “It takes significant time and resources to do that, but if you don’t then your budget lacks value. At the same time, however, if you try to involve everyone in the budget and try to be all things to all men, you achieve nothing,” he says. “We try to involve a small group of partners in each area in putting together the budget and we don’t consult too widely. But we do publish the budget to a wider audience at a later stage and invite comments that sometimes lead to changes. Doing that sensibly and well is chief to making the budget work.”
As with the budgetary process at Mayer Brown LLP, Carter also sees the importance as well as challenge of aligning the budget to the firm’s strategic goals. “We have a six-year plan, which looks at what markets we may go into – either new business or geographical areas, depending on client needs” he says. “We put together our budget for each area bearing in mind what investment in new business or geographic areas we would like to make over the coming year. We then add all that up, see what it gives us, and we’re left with what effectively becomes the first year of the strategic plan. We then adjust the following years based on what we see happening in the first year. In other words, the budget drives, in terms of numbers, the strategic plan, rather than the other way around.”

The challenges of budgeting with lawyers
Whatever method you choose for compiling your annual budget, however, the chances are that you will face a familiar challenge: getting timely feedback from a partnership that has little knowledge or interest in financial matters. “Partners in all law firms put their clients first,” says Bartels. “Where the budget might be a mid or long-term obligation, it will always lose out to a client who needs to be serviced today. We need to find a way to give practice group leaders the room to discuss and agree not just strategic issues, but budgetary issues too, and that can sometimes be difficult.”
Carter goes further to explain how the finance team has to continue working with partners throughout the lifetime of the budget, so that corrective action can be taken if budgetary variances appear. “We produce monthly management accounts for each part of our business and those accounts are distributed to all partners, if they want it, but they will certainly go to each managing partner in each office and each practice group leader in London. We expect them to be conversant with the numbers so they can see what their budget was for that point of the year and what the variance is compared to the same period in the previous year. And we help them to understand whether the variance is due to having more or less people, a different mix of people, by having a higher or lower cost base than we thought, and understanding the reasons behind it. Then we can take corrective actions.”

The supportive role of technology
Once the budgeting method is approved and buy-in from the partnership agreed, the actual process of putting together the figures takes centre stage. Traditionally, the budget has involved the sophisticated use of Excel spreadsheets; and many legal finance teams would still argue that a good suite of spreadsheets can provide a comprehensive financial forecast for the year ahead. Several firms, however, are beginning to consider the role of specific software now available to automate the budgeting and forecasting processes. “As a large business, you just can’t budget effectively unless you have a fairly effective budgeting tool,” says Carter. “If you have several offices, and many ways in which information needs to be sliced and diced, it just isn’t possible to do it on a shoestring. We’ve invested quite heavily in a comprehensive budgeting tool that links in with our finance system, which has enabled us to budget more efficiently and effectively.”
And it is not just the magic circle firms that are taking advantage of such technological capabilities. South-West firm Clarke Willmott has also spent the past year implementing a budgeting solution from Tikit/Redwood Analytics1. The application, which the firm implemented over a four-month pre-budget period of September to December, has allowed users to create budgets based on past performance and ongoing hiring practices. The solution uses legal-specific templates to collect data direct from budget holders. The templates are updated throughout the process, which replaces the formerly time-consuming need to manually distribute spreadsheets at every stage. The application is also linked into the firm’s practice-management system, and allows for multi-dimensional analysis and multi-user functionality. Of course, such a system does not come for free, but the firm’s head of finance, Amanda Loran, has already noticed benefits, including more manager engagement in, and responsibility for, the budgeting process, and an improved ability in the business planning of recruitment.

The future of budgeting
With the influx of technology for both improved budgeting, as well as a probable rise in the use of business intelligence and competitive intelligence tools, which will provide better data for more thorough forward planning, it seems likely that the budgeting process will become ever more sophisticated in future years. Even now, there are several firms beginning to move away from the fixed annual budgeting process to a system of rolling forecasts. At Ark Group’s recent conference ‘Financial Planning, Forecasting and Budgeting for Law Firms’ (January 2008), David Greenwood, head of operations at Watson, Farley & Williams spoke about his firm’s introduction of rolling forecasts. Looking first at the traditional budget, he pointed to the disadvantages: budget creation usually begins three to six months prior to the relevant period; it cannot adapt quickly to internal or external changes; it is slow and expensive; and too internally focused. Instead, he argued that rolling forecasts could eventually replace annual planning and budgeting though being an ‘adaptive performance process’, in which planning becomes ‘continuous and inclusive’, and gives ‘an accurate forecast of profitability for management to act upon’.
Time will tell whether UK firms as a whole will move more towards a purely rolling-forecast model, but it certainly seems that the legal profession is taking the budgeting process more seriously than ever. At Mayer Brown LLP, the budgeting process is now a long-embedded and important element of its firm-wide financial-management strategy. “We were perhaps once a little over ambitious with our budget and underestimated the amount of time we needed to deliver on certain consultations or results,” says Bartels. “But we now take a little bit more of a conservative approach and we are very proud that we can now pull together a large part of the budget within approximately four weeks.” For the finance teams that are used to spending at least three months pouring over spreadsheets, this must sound like music to the ears. But it is, perhaps, just the shape of things to come.

Reference:
1. For full details of the implementation, see FD Legal, Dec/Jan 2007/8