This happens almost every year. Even though the company’s budget has grown, the legal department’s budget overruns again… why is that? Why does the legal department repeatedly produce expenses that aren’t taken into account in the yearly budget meeting

Experience teaches us that legal counsel is a hidden financial clause that influences the company’s net profit dramatically. However, paradoxically, in most cases the company’s executives aren’t familiarized with managing legal matters

Instead, they quickly “roll” the legal budget responsibility over to the GC’s door. This, in turn, leads to many general counsels managing huge budgets with little to no managerial supervision

What is the cause to this “spillover” of legal expenses? The potential reasons are diverse

1) General disregard to legal input and costs in the company’s departmental budgets: The yearly departmental budgets are usually determined without incorporating the GC in the process. This way, many cardinal budget-related issues are overlooked, such as the legal services every department needs, foreseeing potential torts, and deciding which services will be provided by the company’s in-house legal department and which by an outside law firm

Leaving the legal perspective out of yearly departmental budgets makes cost overrun very likely

2) Insufficient preparation for routine and special events: Indeed, the legal department’s raison d’être is executing everyday legal actions for the firm, including labor law, contracts, regulation etc. However, during the year there are also possible M&A transactions, litigation lawsuits, new product launchings and other dramatic events in the company’s activity that aren’t necessarily planned for. Ill preparation for future potential costs may very well damage the legal department’s budget

3) An inexperienced or inadequately-guided GC: Hiring a young General Counsel may be “affordable” for the company in the short term

However, lack of experience and knowledge may create substantial damage in the long run. Complex situations, such as a major change the company is undergoing, require a GC with vast experience and knowledge base, in order to build and provide a competent legal framework for the new business setting and avowing costly legal pitfalls

Indeed, from the executive’s point of view, looking at the legal department as a reactive instrument is natural. But in order to decrease costs and increase efficiency, the legal department must play a different, more active role in your organization

A few steps can be taken in order to transform the legal department into a proactive strategic partner

– Incorporating the GC in the annual divisional budget meeting

– Drafting hourly billing agreements for the services the legal department provides to the rest of the company’s departments. This way, the legal expenses are monitored and internalized by each department

– Training and mentorship programs for the legal department. By proper legal and managerial training of its GC, the company can spare itself the cost of outsourced legal counsel, receive a greater output from its lawyers and avoid future legal risks

Summarized here are a few suggestions that, once instilled, can dramatically trim a company’s legal yearly expenditures. In order to venture into this mind-changing process, the company’s managers must first decide what sort of legal department they envision – a “supermarket” for legal products or an influential player within the company’s strategy?

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* Adv. William Weisel heads the division of Strategy & Consulting for Legal Departments and Companies at Robus

* William served as GC and member of senior management of four publicly-traded, multinational, hi-tech companies over the past two decades, and he is a lecturer at the Haifa University Graduate School of Management and teaches a course entitled – Business and Law Convergence