The fourth quarter of every year means lots of things to different people, but for law firm leadership teams this time of year brings with it the important — if tedious — process of establishing the firm’s budget for the year to come.
In most years, there is a temptation to just dust off last year’s budget, add a couple percentage points in dollars for each routine line item, and then maybe shift some dollars around based on where the perceived growth opportunities exist. But just as the 2021 budget process was thrown into unchartered territory due to COVID-19 lockdowns, the 2022 law firm budget planning cycle requires leadership teams to make some bold resource allocation decisions in a macro-environment full of uncertainty.
The good news is that most firms are heading into this cycle feeling optimistic about their financial performance in 2021. More than eight in 10 law firm leaders are at least somewhat confident that their firms can achieve their financial goals for the year, according to Bloomberg Law, as opposed to just six in 10 who expressed that optimism a year ago. The other good news is that their clients’ budgets may be less constrained. Law department budgets are likely to moderately increase (47%) or stay the same (29%), according to a July poll of general counsel participating in HBR’s Sounding Board series. (24% expected a moderate decrease.)
However, there are some tall hurdles confronting leadership teams in this budget cycle. Perhaps the biggest logistical challenge for law firms as they enter the 2022 budgeting process is that their year-over-year benchmarks are virtually useless. This is a rare budget planning season in which it is unlikely that any single line item will be able to be responsibly cut back from last year’s resource allocation. Every expense will need to increase.
Moreover, law firm leaders need to sort through some complex questions about what the practice of law will even look like in the year ahead. For example, tough forecasts must be made about talent acquisition expenses in a red-hot job market, investments needed to support an increasingly remote workforce, and resources required to support employee morale and productivity after an incredibly stressful year for everyone.
In conversations with law firm leaders over the past few months, there are a handful of major areas that appear to be the real movers for this budget planning season. Chances are that, if you spend plenty of time sorting through these items, you will get the big things right next year. Here are four specific issues to consider carefully as you build your 2022 budgets:
- Return to office. Firms need to consider the level of investment needed to obtain and maintain the infrastructure required to support the return of workers to physical offices in 2022. Of course, this will vary from one firm to the next based on each firm’s decisions related to an in-person, hybrid or remote workforce. But for most firms, there will be some level of return to the office. This means that office supplies inventories will need to be restocked, operational expenses will need to resume, catering will be restarted, and other day-to-day support requirements. The other wildcard to consider is the fact that supply chain disruptions are still a major problem worldwide, which is creating significant delays in the shipment of important equipment such as docking stations and laptops. Plan for those expenses and delays.
- DE&I investments. The focus on Diversity, Equity & Inclusion (DE&I) in the law firm workforce continues to accelerate. And while firms have been making progress on DE&I initiatives in recent years, they are moving more quickly in the aftermath of last year’s warnings from “a growing number of major global companies that . . . they’ll take their work elsewhere or cut fees unless they see more racial and gender diversity in the law firms they hire,” according to Bloomberg. Investments in DE&I need to be considered in the 2022 budgeting process as firms uncover a variety of new expense items to support this commitment.
For example, with as many as three different ways in how an employee prefers to be addressed, firms may need to reconfigure how they store names in their internal systems. For those firms that have already hired a full-time employee in the DE&I Officer role, there may be new expenses needed to support that position and/or the DE&I committees that have been created. Also, bear in mind these considerations are not limited to your employees; supplier diversity is also an increasingly important thing to track, monitor and address if necessary, which requires resource allocations.
- Real estate. Another sustained effect of last year’s COVID-19 lockdowns appears to be a new comfort level with remote working conditions in law firms. As a result, nearly 40% of the Am Law 100 are planning to reduce their office footprints in the future, according to a 2021 survey by The American Lawyer. At the same time, the survey found that 22% of firms have no intention of reducing their office space and some firms “may seek to use their vast footprint as a differentiator” in response to their competitors. What is clear is that most firms are reconsidering their real estate needs but are not necessarily downsizing immediately.
The bottom line is that partners want their firms’ associates back in the office. The questions that each firm will need to sort through based on their unique circumstances are: which locations need the most available space; how do we want to configure those spaces; and how often do we expect those spaces to occupied. These are the key considerations that will drive budget requirements for future real estate needs as the firm reassesses each individual lease renewal.
- Business development. This may be the toughest section of the 2022 law firm budgeting cycle. The COVID-19 pandemic effectively halted all overhead expenses associated with travel, in-person events and major sponsorships — the lifeblood of law firm business development. With the world slowly reopening earlier this year, law firm spending on marketing and business development increased 100% in the second quarter of 2021 compared to the same time last year, according to Thomson Reuters Peer Monitor data.
Even with the surge in business development spending this year, law firms are still spending roughly one-half of what they were allocating in the pre-pandemic months. So what is a good benchmark for firm leaders to consider for their 2022 budgets? The data we’ve seen would suggest that most firms should essentially disregard both 2020 and 2021 as baselines for business development budgeting. A more prudent guide is likely your 2019 spend levels, prior to the onset of all the disruption, and for most firms that will be a good place to start.
The significant budget modifications that law firms were forced to make in 2020 and 2021 have opened some holes in the processes by which many firms allocate resources, procure goods and services, and manage vendors and suppliers. HBR Consulting professionals advise law firm leaders through every step of the budget planning cycle and then work with firms to reduce supplier risk, control costs and improve operational efficiencies. HBR’s proprietary SpendConnect software solution provides a unique blend of technology and service to bring the power of procurement-based analytics to law firms and actively manage their annual spending.
For more information, please contact me at SSpringer@hbrconsulting.com.