Learn the myths and realities of budgeting

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One of the most important factors in getting paid is to establish a budget before beginning an engagement.

Budgets ensure greater productivity and cost effectiveness for both sides, show clients you are sensitive to their needs and reinforce that the firm provides value and not just a block of hourly time. You significantly increase the chances of collecting your fee because the client understands what to expect in terms of events, money and time, and agrees to the process you’ve outlined.

Unfortunately, lawyers too often tend to dismiss the importance or even the practicality of preparing a budget. Typically there are three reasons for this:

Lawyers believe that providing their services depends on too many variables that can’t be anticipated – for example, what motions opposing counsel will file, or what problems might emerge in due diligence.

Lawyers want to excel at what they do, whether it’s negotiating a deal, drafting a contract or litigating. They don’t want their quality of services to be constrained by budget limitations.

Lawyers to some extent fear that budgeting a matter is merely an attempt on the client’s part to reduce the fees that they are willing to pay.

Such concerns are myths. Budgets define successful business planning, and any business can and should operate according to a budget, whether you’re making widgets or providing professional services.

The process means getting as much information as possible from the client about goals and expectations. Information should cover parties, issues, anticipated strategies and desired outcomes. Understanding the client’s objectives will define the two crucial budget parameters:

Time. Be realistic and communicate accurately 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 deal-making deadlines, the client is less concerned with exact time and more concerned about being hit by surprises.

Money. Clients should have in mind how much money they want to spend to resolve a problem, just as they know what they want 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 big 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.

Because lawyer and client will each have unique information at any given time, both must be in constant communication about developments to keep the budget on track. The budget document should be periodically reviewed, with the client being told how much they have already spent and being asked to approve any necessary changes.

This provides a benchmark for the firm’s work as it is completed and billed. A bill that describes promises made and kept, complete with examples of value and service as defined by both parties in the budget, eliminates “sticker shock,” and the client is more willing to pay promptly.

Ed Poll is the principal of LawBiz Management, a national law firm practice management consultancy based in Venice, Calif. Visit his Web site at www.LawBiz.com, or e-mail him at [email protected].