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How to Budget an Engagement: Creating a More Satisfied Client

By Edward Poll

BudgetingAll companies do some type of planning:  global multinationals typically have detailed written plans, while smaller companies usually have a "plan" in the head of the entrepreneur.  

Lawyers usually fall into the latter category.  They tend to be technicians who want to do what they love doing, whether it’s negotiating, drafting a contract, litigating, or some other task. They don't want to run a business, and they especially don't want to do business planning. 

Yet, as highly successful basketball coach John Wooden once observed, failing to plan is planning to fail.  That is particularly true at the start of a new engagement with a business or corporate client.

Understand Corporate Counsel’s Perspective

Sample Letter/Agreement

Save and adapt this sample Engagement Letter and Retainer Agreement, graciously shared by Dale Doan of Cleveland Doan LLP in White Rock, B.C.

If you serve in the role of outside counsel, you work with a general counsel who reports to a CEO, who understands budgeting and whose life is governed by budgets.  The General Counsel is likely to tell you that today’s business environment requires a budget for his or her department and the matters they handle.  That includes every major litigation and transaction.  You as outside counsel must understand this requirement, or the General Counsel will get someone who does.

Some lawyers resist budgeting a matter because they believe it’s merely part of corporate counsel’s attempt to reduce the fees they pay.  Actually, preparing a budget at the start ensures greater productivity and cost effectiveness for both sides. 

Several years ago I did an interview with a multinational corporation’s General Counsel, who expressed the corporate perspective quite succinctly:  “[We aren’t] just looking for a discount.  We actually want to pay firms a higher effective hourly rate.  We just don’t want to buy as many hours and we want [our purchase] conditioned upon the firm’s performance.  Performance is a factor of many different things:  communication, satisfaction of our business objectives, use of technology, their overall knowledge. … We’re helping to improve the firm’s performance and they should embrace that [because] they live in a world that favors and rewards continuous improvement ...”

Realize the Budget’s Purpose

Budgeting the representation does not translate to a fixed fee.  A budget can only be an estimate of what's going to happen. The lawyer should not strive for the highest possible fee, the client should not desire the cheapest lawyer in town.  Creating a budget shows in-house counsel that you are sensitive to their needs, and reinforces that you are providing a service of value and not just a block of hourly time.  Also, by making a budget that addresses events, time and money be part of every engagement letter, you significantly increase the chances of collecting your fee because the client understands what to expect.

Make the Budget a Collaborative Process

Budgeting begins by getting as much information as possible from the client about goals and expectations.  Information should cover parties, claims, anticipated strategies and desired outcomes.  “Winning” may not be one of them.  A client may wish to delay the final outcome for political or financial reasons, believing that a continued threat of litigation may bring a negotiated resolution.

Understanding the client’s objectives is the prerequisite of the budgeting process. The key here is not just preparing the budget, but involving the client in the preparation.  The client should also formally approve the final budget. Without client buy-in, the process is meaningless.  The budgeting process, including all subsequent communication, must be a collaborative effort. If the parties can't trust one another, if the client and the lawyer behave as adversaries, the representation will likely be unsuccessful and there will likely be difficulty in collecting the fee.

Collaboration means communication.  Because lawyer and client will each have unique information at any given time, both must advance the process together.  Honesty, openness and candor right from the start will make the entire representation easier and more successful. 

Determine How Much Time is Reasonable

Use common sense and be realistic about the amount of time it will take to complete any work.  Err on the side of caution and be sure to build in more than adequate time.  Except when you are dealing with statutory or dealmaking deadlines, the client is less concerned with exact time and more concerned about being told one thing and delivered another.  Do not be afraid to communicate accurately about time that is required.

Determine How Much Spending is Reasonable

Budgeting for a legal matter is a business decision.  Clients should have in mind how much money they want to spend to resolve a problem, just as they have a feel for how much money to spend on a piece of equipment.  In either case, a higher initial cost may be acceptable if the long- term return on investment justifies it.   Sometimes a legal problem is large enough that spending large sums on it is justified.  Most issues, however, involve everyday costs of doing business.  It makes no sense to budget spending $2 million to try a case if a $100,000 settlement will meet the client’s objectives. 

Format the Budget Efficiently

It’s important to know the physical form in which a client wants to receive and monitor a budget.  Some clients may prefer an Excel spreadsheet, others a simple text document.  A good rule of thumb is to find out how the client’s own operating budget is set up and then try to integrate with it.  Providing budgets and budget communication in a format that’s difficult for the client to use simply defeats the collaborative nature of the process.

Communicate Constantly

I did a long-term consulting assignment with a large law firm that had some difficulty with several clients in litigation, resulting in the write-off of certain fees.

To avoid this in the future I suggested creating a flowchart of the litigation process to determine where/how much the client had really been involved.   The flowchart revealed that there were very few points at which the client was apprised of what was happening in the case. When the final bill came, they were shocked at the large amount. The lawyers defended themselves by saying, “I talked with the client frequently. We were preparing for depositions and pleadings; we were asking for documents back and forth.”  But, that's not the kind of interaction that gives clients a sense of what's happening in their case. 

The budget document should be periodically reviewed, with the client approving any necessary changes.  Clients should also receive ongoing information of how much they have already invested in the litigation, negotiation or transaction. 

Accept Informed Client Judgment

No lawyer wants to lose control and direction of an assignment, but accepting informed client judgment can sometimes be essential for effective budgeting. 

A General Counsel for a major  corporation told me that creating a budget saved her company close to half a million dollars in one litigation. They created such savings by deciding during the budgeting process not to do things the outside counsel firm might otherwise have done.  For example, the law firm suggested taking 30 depositions.  The General Counsel reviewed the proposed individuals and decided that only 19 could provide useful information.  The law firm expressed a concern over potential accusations of negligence or malpractice if one of the canceled depositions proved to be a key information source.  The client responded by saying, “We are in the business of taking reasonable risks. If we agree on what should be and what need not be done, and something goes wrong later on, that's our responsibility, not yours.”  

The result was agreement, lower costs and a successful engagement – a win-win situation by anyone’s definition.

Edward Poll (edpoll@lawbiz.com) is a certified management consultant and coach in Los Angeles who coaches attorneys and law firms on how to deliver their services more profitably. He is the author of Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (ABA, 2002), Collecting Your Fee: Getting Paid from Intake to Invoice (ABA, 2003) and, most recently, Selling Your Law Practice: The Profitable Exit Strategy (LawBiz, 2005).

Comments/Discussion

Dear CBA:
I listened with great interest to the new podcast on collecting lawyers' accounts.

First, it is excellent in that it covers off the common sense steps and procedures that should all be followed without exception by all law firms, both small and large.

Second, it highlights nicely the requirement to have a collections policy, to go over it with every client and to consistently apply it. These are musts.

Third, however, it remains so conventional in its approach. One innovation that greatly enhances recovery in cases of overdue accounts is including in the Retainer Letter security interests over the client's personal property to secure all unpaid accounts and all enforcement costs if needed. We have included this in our engagements for many years, and we are aware of many other law firms who do the same. You must, of course, allow the client or potential client to consider the effects of this grant of security. Thus, the Retainer Letter should not be signed when you first meet the client. It should be fully discussed with your collection policy. Then, a cover letter sending it to the client and offering plenty of time for the client to consider it and obtain independent advice is essential. But, no work should be done until it is back, signed. Period.

Fourth, the podcast mentions credit card payment, but why not have automatic payment by credit card when the account is rendered. Again, we have done this for some time with great success and client satisfaction. The client may stop this process at any time, but at that time, a final account is rendered and paid using the credit card, then arrangements are made for future work before it is performed.

Finally, we benefit greatly from the CBA practice hints. PracticeLink is super. As a gift in return, our law firm attaches a draft blank copy in MSWord of our form of engagement letter that includes these features. It is easily revised to apply to commercial or litigation engagements.

All the best to you and your readers,
Dale Doan, Cleveland Doan LLP, White Rock, BC.

By: Dale Doan, Cleveland Doan LLP, White Rock, BC
Posted: 11-30-06
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