Recently I’ve become more aware of a bit of a phenomenon within law firms. It’s nothing new, it’s just something that hadn’t really caught my attention as much in the past as it has recently. It’s a phenomenon I call “budget paralysis.”
Like any business, a law firm is beholden to budget. This is, obviously, essential. Each business unit within the firm has its own budget; and everyone who controls a budget wants to come in under budget on their expenses if they can. There’s absolutely nothing wrong with this — we have to be good stewards of firm finances.
Where it can create a problem, though, is when questions over budget become something akin to a territorial dispute.
I’ve worked with several firms recently who were largely in agreement internally that certain investments needed to be made in order to meet strategic goals around such key areas as efficiency improvement, operations management, and service delivery. But the investments had completely stalled over the question of whose budget would fund the purchase. To be clear, no one doubted that it was the right purchase to make, but no one wanted to actually sign the check lest it possibly reflect poorly on their own budgetary management.
Ergo, budget paralysis.
To be clear, no one doubted that it was the right purchase to make, but no one wanted to actually sign the check lest it possibly reflect poorly on their own budgetary management.
Part of the problem comes from how these investments are allocated. To share one example from awhile back, I worked with a law firm that was looking to update their knowledge management strategy. The firm wanted to invest in better ways to keep best practice work-product current. The firm management settled on a solution, got pricing, and were ready to make a purchase, and it was to be allocated entirely to the library budget. The firm had examined potential business development, professional development, matter management, and pricing advantages to the new product, indicating that the purchase would create firm-wide benefit. But when it came to dollars and cents, it was decided the library’s budget would foot the bill entirely.
Understandably, the library staff balked out of concern for the appearance of a budget overrun. And as a result, the entire initiative stalled. Rather than reexamine how things were allocated and perhaps spreading the expenditure across different budgets, the firm essentially stepped back from a strategy it had already decided would be beneficial to the entire firm.
Budgets exist for a reason — they are important tools for effective management. But rather than allowing budgets to doom good ideas, law firms can examine how they allocate expenses or budget dollars so that no one group runs the risk of looking like a bad budget manager because they were asked to fund a benefit for the overall firm.
Our recent research indicates that, in fact, the most successful firms are often those that are making wise strategic investments to move their business forward, rather than those that are looking to hold expenses down across the board. The Dynamic Law Firms study, released this past November, showed that the most successful law firms grew their technology investments by 3.2% year-over-year, on a per lawyer basis in 2016 compared to 2015 (the most recent years available at the time of the study). In comparison, those firms that experienced the greatest struggles with growth grew their tech investments by only 1.2%. Accounting for inflation, this latter group of firms actually saw their tech investments contract by 0.9% in real dollars. (It is, of course, a chicken-or-the-egg question as to whether this decrease in investment is the cause or result of financial struggles, and the truth is it’s probably a bit of both.)
In a market where there is a large sample of firms who are making strategic investments, however, those firms that aggressively resist investments also risk falling behind quickly.