Legal Budgeting: Budget Building for a Recessionary Economy
Budget building for a (potential) recessionary economy.
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What Will I Learn?
- Key budgeting models (PBB, ZBB, and ABB) and their differences.
- How transitioning from fixed to flexible budgeting enables GCs to build more adaptable legal teams.
- A step-by-step playbook for implementing Activity-Based Budgeting (ABB).
- The role of agility-based forecasting in enhancing financial flexibility.
- A practical guide for adopting agility-based forecasting (ABF). Why the time to start implementing these models is now.
Well beyond legal, budgeting is the yeoman’s work of any departmental and/or functional leader. It is a lengthy and laborious process with finance-dictated goals for spend optimization that often seem to run counter to the resource needs of your department.
For that reason, it’s no surprise that many of your functional peers prefer the lightest possible budgeting lift: Precedent-Based Budgeting (PBB). Also known in financial nomenclature as incrementalism, PBB takes last year’s budget as the default base and makes incremental changes to prepare the go-forward budget.
But be warned: that’s not what finance chiefs want... at least not this year. According to a recent Wall Street Journal article, many CFOs scouting for efficiencies are implementing Zero-Based Budgeting as they prepare for a possible economic downturn. Unlike PBB, Zero-Based Budgeting (ZBB) is a complex process, requiring managers to build their budgets from zero on an annual basis, justifying each expenditure.
Where has ZBB found renewed favor? GM, Honeywell, Coty, Hershey, HP, Diageo…and that’s just to name a few of the thousands of enterprises, both large and small, adopting this budgeting model.
Why the renewed interest? Per the same Journal article: “The uncertain economic outlook combined with high inflation are prompting companies to scrutinize costs. Finance chiefs are looking for more changes to bring expenses down permanently.”
What does this have to do with legal? Those finance chiefs are looking to implement ZBB-like rigor across the enterprise, but they are particularly keen at applying it to costs not directly related to revenue, like legal.
That’s a good thing, right? At Axiom, we have long argued that it’s time to change the legal resourcing paradigm. By rigorously challenging assumptions, ZBB should enable GCs to dramatically improve efficiency and transform their operating models.
But what’s good in theory, isn’t always so in practice. ZBB is expected to be bandwidth-intensive, time-consuming, and complex. What many finance chiefs do not expect, however, is just how much more difficult and riskier it will be for GCs to implement ZBB than it is for other functional heads. Unlike other departments, when the economy slows, legal risks soar and workload balloons. For a legal team already overwhelmed, overburdened, and resource-constrained (as most are), that can make ZBB an acute threat to managing ongoing enterprise risk.
So what’s an innovative GC (or CFO) to do? Apply Agility-Based Budgeting (ABB) to the legal department. ABB combines the best of PBB (its ease) and ZBB (its rigor and optimization-enablement), while avoiding the pitfalls and problems of each.
Given a volatile economy (at best) and a potential recession (at worst), the 2023 budgeting season represents an optimal time to shift dollars away from fixed costs and toward more variable spend in order to effectively mitigate against budget reductions, headcount freezes, workload spikes, and unanticipated legal matters.
This whitepaper provides GCs with a playbook to leverage both ABB — and its cousin, Agility-Based Forecasting (ABF) – for future years.