Intelligent Office: Eight big calls for law firms’ 2022/23 budgeting

At Intelligent Office, all the parts of our business and our 850 people are focused on helping lawyers and other professionals get better at running their support processes and delivering efficiency and value. So, we are often at the heart of the purchasing and annual budgeting process in law firms. No surprise, then, that these early months of 2022 have been marked by a lot of effort to help firms pull together credible budgets for the 2022/23 financial year. And no prizes for guessing that dramatic inflationary pressures, given another twist by the horrendous events in Ukraine, have dominated the focus of many budget holders in firms. What are the dominant trends and big decisions that we see coming out of this unusually complex budgeting round?

We can’t do justice to all of the issues in a short blog piece (but are ready and happy to do that with firms individually) however we have identified 8 trends and decisions law firm leadership teams need to clearly understand and then act on. If you’re a Managing Partner, Chief Operating Officer, Finance Director or budget holder you’ll want to confirm these have been properly addressed in your own budgeting.

1. Don’t under-estimate how much the war for talent might cost

It’s an obvious place to start: the legal press have used screaming headlines about rampant pay inflation for lawyers for a year or more now. But it is easy to misjudge the likely impact on your 22/23 budgets and that could be an expensive mistake. Many firms are having to respond to spiralling pay awards with double-digit percentage rises for key lawyers and eye-watering packages for new recruits. But these individual awards leave pay parity issues and dissatisfaction across the rest of the legal workforce – and expectations for fair annual awards to make up the difference are high. Disappointment will certainly fuel departures. Firms who are thinking an across-the-board 5% or so is the right budget number may well find that 5% is the base level and the real average increase, factoring in individual exceptional awards and special deals is much higher. Some firms also felt obliged to make interim increases and that pressure may well return later in 2022; is there any contingency for this in the budget? Finally, don’t forget the other professionals and support staff in your firm – there is a general war for talent out there, not restricted to lawyers, and all of your staff are being impacted by 7%+ increases in the cost of living and further shocks due to the war in Ukraine. Take a second or third look at your recruitment budget too: it is an area where budget optimism tends to fester. Does it really reflect the intensity of the war for talent and the rising salaries you will have to pay to new hires?

2. Be clear how each department will mitigate and recover higher staff costs with fee increases

Charge-out rates are an obvious start-point; in a period of pretty much across-the-board inflation, law firm rates need to reflect input costs too. But we all know that pushing up headline rates doesn’t necessarily equate to higher fee income. Departments need to have a clear and documented plan for making rate increases stick, fixed fees and tariffs need to be revised and increased as well as hourly rates and firms need clear and timely communication on price rises for ongoing as well as new matters.

3. Factor in general price inflation in some big categories

One often overlooked and ‘invisible’ impact of raw material prices. Raw material prices affect lawyers too! The cost of paper as an example had already soared before the Ukraine conflict and we are now seeing supply squeezed. UK demand for paper fell by 33% 2019 to 2021 and capacity fell by over 20% as a result. Paper manufacturing costs increased by 65% in the last year and are still rising and related freight costs have risen six-fold. The message here is to re-examine these budgets again before signing-off and ensure they reflect these rises. And then to take active steps to control your usage; a sheet of A4 is becoming something of a luxury commodity and a failure to establish effective and adhered-to ‘paper-lite’ processes is a good way to throw money away in today’s world.  We would also point to inflationary pressures from a continuing hardening Professional Indemnity Insurance market, where some firms are reporting 25%+ increases in premiums and a dwindling band of insurers are concerned about multiple risk factors and also suggest you take a look at your exposure to rising interest rates on borrowings and overdrafts.

4. Price in the return to the office

Based on our experience around our UK sites, you are probably already seeing more people coming into your buildings than you’ve been used to in the last few years. The result will be higher energy costs (only initially mitigated by spring / summer), stationery and office supply usage spikes and higher volumes of everything from tea and coffee to binders to whiteboard pens. At the same time, the unit price of almost every item is rising rapidly; the classic double-whammy. Your budget estimates could be way off if they are based on last year and firms should also be taking active steps to manage demand and usage, rather than just ‘wait and see what happens’. At Intelligent Office we are regularly asked to inject essential controls over ordering, utilisation, buying and stock management into the way firms work and these can have a big impact on these costs compared to a default laissez faire approach.

5. But don’t abandon the cost and productivity benefits you had from remote and hybrid working

The previous points suggests you guard against complacency and build in inevitable cost-hikes from a return to more office working. But, conversely, firms are at risk of letting out a big sigh of relief and trying to turn the clock back to 2019. Operations and Finance leaders will want to preserve some of the streamlining and efficiency achieved under pandemic conditions and ensure that staff (and partners) who achieved new levels of productivity don’t see those improvements pared away by non-essential travel, meetings and interruptions.

6. And do price in the re-opening of the economy and society

We all recognise that the pandemic period saw activity that involved being out and about in the wider world plummet. Assuming a continued return to higher levels of face-to-face business contact, even if it may not be as smooth as we would hope, then firms should expect much higher spend on marketing / networking, events, sponsorships and business travel. As in other categories, rising volumes of these activities are accompanied by higher prices – travel fares are higher than ever this year. Particularly watch out for ‘hidden’ cost codes like departmental and partner expenses, where spending has been at historically low levels since 2020 and that are easy to overlook and understate when preparing budgets.

7. Effective resource management is going to be critical

Gaps in your fee earning and support resources can be expensive to deal with if you haven’t planned and considered putting in place a permanent flexible resource solution ready to plug those gaps, rather than reacting each time; which results in high costs of churn through recruitment fees, escalating starting salaries and expensive temp solutions. These gaps are an almost-inevitable outcome of the intense talent war, increased incidence of headhunting and poaching and the ‘great resignation’ after-effects of the pandemic. Using your fee earning lawyers for admin and wrestling with ineffective or poorly understood tech, overloading relatively expensive experienced paralegals and legal secretaries with mundane, repetitive tasks, assuming that all of your support resource should return to sit in your offices – occupying ever more expensive prime real estate when the last few years have proven to most of us how effectively many things can be done remotely and flexibly.

8. Don’t overlook the drive for, and costs of, sustainability

It can be hard to maintain a positive future focus on carbon neutrality and a wide range of other ESG aspirations during a period of such intense inflationary pressure and unrest. But this time genuinely does feel different; those non-financial goals are much more fundamental to strategies now and there are short-term costs to taking a greener approach to running the business. Note, too, that your supply chain make up a substantial percentage of your firm’s overall impact on climate change and ESG factors, suggesting it should be an area of greater focus in order to address climate change as a whole and our negative impacts on it. At Intelligent Office we are already working proactively with a wide range of suppliers to enhance their sustainability impact.