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How to Create and Execute a Strategy-driven Budget

Litigation Column
B udgets, budgets, budgets. Poor budgeting is a common business management problem. In their book Strategy That Works, Paul Leinwand and Cesare Mainardi observe how "only rarely does a company link its expense tracking and budget process directly to its value proposition or consider the budget's effect on distinctive capabilities.” It is a problem that litigation managers face as well.

The solution is to assess the value of each function and project as they relate to your strategy. For example, spending more in a class-action suit on issues related to the class certification decision makes sense. But investing in a motion for lawyers’ fees that will net less than the cost of litigating the issue does not. Although it sounds simple, when regularly applied across your team and cases, the results of such active management can be dramatic and result in significant savings.

Framework for connecting costs to strategy

Companies can view litigation cost as unpredictable and set a budget based on historical spend patterns. With such an approach, litigation can get caught up in across the board cuts that are disconnected from what needs to be accomplished.

A better mindset is that your litigation team is a business that must achieve a strategy to produce results. Like the best businesses, you ensure that you incur only those costs that are directly relevant to the activities and functions that you need to support your approach to litigation, with the remaining funds invested back in the business. This disciplined management approach also ensures that you, as in-house counsel, control what work is conducted in your cases.

In their book, Paul and Cesare recommend a “parking-lot” exercise that evaluates and categorizes each cost by the value received. This analysis results in a budget with no unnecessary costs — only items with value that are parked in your parking lot. They identify four categories of value:

•    Differentiation. These costs relate to activities that are "the few things you must do better than any-one else to excel." (Strategy That Works, page 152). Starbucks invests in people. Frito-Lay sustains direct-to-store delivery infrastructure that is better, but more expensive, than traditional distribution. For an in-house litigation team, this might mean spending more on hiring a senior litigator with special expertise in-house, retaining ace local counsel, or training paralegal staff to perform advanced functions.

•    Table stakes. This category of costs includes competitive necessities needed to keep up with others. Car producers use lean manufacturing techniques. Software developers use Agile Project Management. In the litigation context, table stakes include best practices such as using cost-cutting technology for document review, arbitration, and mediation to save litigation costs, and Westlaw or Lexis-Nexus for conducting case law research.

•    Lights on. These are costs that you need to operate. A business sees administrative and facilities costs as necessary operational costs. From a litigation perspective, this might include retaining court required local counsel and paying filing fees.

•    Not required. This covers costs that you don't need to undertake because they don't contribute.  Paul and Cesare evaluated a company where 40 percent of all spend fell into this category. A common culprit for unneeded spend is a legacy function that no longer serves a purpose. You should review all of your activity for spending that is not required, such as over staffing or unnecessary data storage.

This is a budget process driven by your strategy; what is categorized as lights on for another team may be your differentiating “secret sauce.” You should spend more on those differentiating capabilities, less on table stakes, and only the bare minimum on what you categorize as a lights-on activity that provides little strategic value. Nothing should be spent on what is not required.

Use the framework to manage your cases

The framework for connecting costs to strategy applies to management of litigation. The parking-lot exercise for litigation involves the same evaluation of each cost for the value you receive. Break the case apart into tasks you need to accomplish, sequentially month-by-month over the life of the case, and then evaluate how each contributes to your strategy. Here are some examples of how the four categories might commonly apply:

Differentiation
•    Developing any dispositive argument that resolves the entire case;
•    Developing an argument or issue that shifts the landscape of the case on the opposing side;
•    Obtaining or developing a physical demonstrative, model, or demonstration that makes your arguments easier to understand; or,
•    Providing damages or other discovery early to facilitate settlement discussions.

Table stakes
•    Investigating the background and motivations of the opposing side;
•    Retaining a damages expert and a jury consultant for a major case; or,
•    In a patent case, filing suit in a plaintiff friendly jurisdiction or using an IPR to invalidate an asserted patent and make a stay request.

Lights on
•    Responding to pleadings and motions filed by the other side. This increases in strategic importance where the issues are dispositive in favor of the opposing side;
•    Collecting discovery, engaging in discovery correspondence, and making objections to overbroad requests; or,
•    Appearing at scheduled hearings and trial.

Not Required
•    Developing theories or arguments your business has no interest in pursuing;
•    Completing table stakes or lights on work too early in a case;
•    Engaging in motion practice over issues that can be resolved without court intervention; or,
•    Outside counsel engaging in the wrong level of work.

The result of the exercise is your own month-by-month budget for the life of the case containing the costs needed to execute your litigation strategy. Again, plan to spend more on differentiation that matters, and less on activities that keep the lights on.

A key benefit of developing a budget this way is how it provides you a basis for determining whether outside counsel’s projected budget is reasonable and whether the right activities will happen in the month ahead and across the life of the case. If you obtain a case budget from your outside counsel covering at least the next 12-months, you can compare the budget you developed against the one provided by counsel. Mismatching budgets can suggest that there is a mismatch in priorities and cost expectations. You can discuss your budget with outside counsel to agree on pricing and provide guidance about what work needs to happen — or should not happen — to support the strategic objectives of the case. This can be a monthly discussion to adjust for changes as litigation progresses.

Conclusion

Admittedly, this is a lot of work. But by connecting costs to your strategy, you will have the information you need to guide the work of your litigation team and outside counsel. You will know what work they will do and how much it will cost in advance. And you’ll stand apart from your colleagues in other parts of your company who do not manage costs strategically or weed out unnecessary spend.

About the Author

Noah WebsterNoah Webster serves in a general counsel role for the AtHoc division of BlackBerry, which provides networked crisis communication to government agencies and leading commercial enterprises worldwide. He cares for the company's general legal needs and is a trusted business advisor for AtHoc management. Noah has previously held roles at BlackBerry managing the global compliance program and leading the patent litigation team.


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