Chapter 4: Financial Management (FinOps)

The Gatekeeper Competency

Financial management is the gatekeeper competency of Legal Operations. Every other initiative — technology deployment, vendor rationalisation, AI adoption — requires budget. Budget requires trust. Trust requires demonstrating that the legal function can manage its own financial house with the same rigour the finance department expects from any other business unit.

In most enterprises, legal spend ranks among the top five overhead line items, often ranging from 0.5% to 1.5% of total revenue. For a $500M revenue company, that is $2.5M to $7.5M annually — a figure that attracts CFO scrutiny. The Legal Ops leader who can forecast that spend accurately, explain variances clearly, and demonstrate cost optimisation over time earns the credibility to propose strategic investments. Consistent financial accuracy and transparency build trust that supports approval of technology roadmaps and new initiatives.

Budgeting and Forecasting

The Two-Bucket Model

Legal spend divides into two fundamentally different buckets, each requiring its own forecasting methodology.

Bucket 1: Internal Headcount. This is the more predictable of the two — salaries, benefits, training, and allocated overhead for in-house legal staff. It scales stepwise (each new hire is a discrete cost event) and is forecast using standard HR planning models. The key variable is the work-to-headcount ratio: how many matters, contracts, or advisory requests can each FTE handle per period? As Legal Ops matures and automation absorbs routine work, this ratio should improve — meaning the function handles more work without proportionally increasing headcount.

Bucket 2: External Counsel Spend. This is where forecasting becomes difficult and where most legal budgets break down. External spend is driven by matter volume (how many new matters arise), matter complexity (how much work each matter requires), and rate structures (how much each unit of work costs). All three variables are partially unpredictable — a single unexpected litigation matter can consume 30% of the annual external budget.

Building a Defensible Forecast

A defensible external spend forecast uses three inputs:

Historical baseline: Analyse 24-36 months of prior spend by matter type, firm, and practice area. Identify the recurring "base load" (the spend that occurs every year regardless of business conditions) and the variable "surge load" (the spend driven by unpredictable events like litigation or regulatory investigations).

Business pipeline intelligence: Engage with commercial and corporate development teams to understand the forward pipeline. If the company is planning three acquisitions in Q3, the M&A legal budget needs to reflect that. If a new product launch requires regulatory approval in four jurisdictions, the compliance budget must account for it. Legal cannot forecast in isolation from business activity.

Contingency modelling: Reserve 10-15% of the external spend budget for unforeseeable events. This is not padding — it is actuarial discipline. Present it to the CFO as a risk reserve, not a slush fund, and report quarterly on its utilisation. If it is consistently under-utilised, reduce it. If it is consistently exhausted, the base forecast needs recalibration.

Accruals Demystified

Accruals require close coordination between legal finance and corporate finance, where precision directly impacts financial reporting quality.

The Accruals Process

Law firms bill in arrears, often 30-60 days after the work is performed. This means that at any given month-end, the legal department has consumed services that have not yet been invoiced. Capturing unbilled work in progress (WIP) as an accrual ensures the financial statements accurately reflect the company's legal expenses and liabilities.

For publicly listed companies, accurate accruals strengthen audit outcomes. For all companies, consistent accruals support clean quarterly P&L reporting and build finance's confidence in legal's financial discipline.

The Solution: A Three-Step Accruals Process

Step 1: Monthly WIP collection. Establish a monthly cadence where every law firm on the panel submits a WIP report by a defined deadline (typically the 5th business day after month-end). The WIP report should state the total unbilled fees and disbursements for each active matter. Automate this collection through your e-billing platform if possible; otherwise, a standardised spreadsheet template and a firm deadline are the minimum.

Step 2: Internal matter owner validation. Each WIP report is reviewed by the internal lawyer responsible for that matter. They confirm the reasonableness of the reported WIP against their understanding of the work performed. This step catches errors, double-counting, and inflated estimates before they enter the financial system.

Step 3: Finance submission. The validated accruals are submitted to the finance department by a defined deadline (typically the 8th-10th business day) for inclusion in the monthly close. The submission should include a summary by practice area, a comparison to prior month, and commentary on any significant changes.

Accruals and the Finance Relationship

Reliable accruals are the single most impactful thing Legal Ops can do to build a constructive relationship with Finance. When legal delivers consistent, validated accruals on time every month, it signals operational maturity and builds trust for strategic initiatives across the function.

e-Billing Implementation

The Case for Automation

Outside Counsel Billing Guidelines (OCBGs) are the contractual framework governing how law firms bill the organisation. Most enterprises have OCBGs that run to 20-40 pages, covering permissible rates, staffing requirements, task-based billing codes, pre-approval thresholds, and approved charge categories (economy airfare, proportionate research hours, business-appropriate meals).

The opportunity: OCBGs require consistent enforcement to deliver value. Manual invoice review — a lawyer or paralegal reading each invoice line by line — captures a portion of the available optimisations. Automated e-billing enforcement captures significantly more. Industry benchmarks from leading e-billing providers (including Brightflag, CounselLink, and BusyLamp/Onit) and research by the ACC consistently indicate that automated enforcement identifies meaningful additional savings — typically in the 5–10% range — compared to manual review alone.

Implementation Priorities

An e-billing implementation is a data normalisation exercise as much as a technology deployment. The priorities, in sequence:

1. Standardise billing codes. Adopt the UTBMS (Uniform Task-Based Management System) or LEDES codes and require all panel firms to use them. Without standardised codes, spend analytics across firms is impossible.

2. Digitise rate cards. Load each firm's approved rate card into the e-billing system. This enables automated rate compliance checks — flagging any invoice where a timekeeper bills at a rate above their approved level.

3. Configure OCBG rules. Translate your billing guidelines into automated validation rules. Common rules include: block charges (line items that bundle multiple tasks into a single entry), minimum time increments, prohibited expense categories, and staffing ratio requirements.

4. Establish exception workflows. Not every flagged item is a genuine violation — sometimes the context justifies the charge. Build an exception workflow that routes flagged items to the appropriate internal reviewer for disposition, with clear SLAs for resolution.

5. Deploy analytics. Once 6-12 months of clean, coded data flows through the system, activate spend analytics dashboards. The baseline views should cover: total spend by firm, practice area, and matter type; average cost per matter type; rate trends over time; and guideline compliance rates by firm.

In the Trenches

The Accruals Lesson

James Thornton, CFO of a publicly listed Australian resources company, initiated a priority review with the General Counsel in November. The external auditors had identified a $1.8M discrepancy between the company's reported legal expenses and the actual invoices that arrived in December and January. The legal department's accruals process needed strengthening — estimates had been running at $400K per month in WIP when the actual figure was closer to $550K.

The root cause was clear: the accruals process lacked ownership and structure. WIP reports from firms arrived sporadically and required dedicated validation before finance submission. Three firms on the panel were not consistently submitting WIP reports, causing delays in capturing work in the financials. Implementation of a structured process would have prevented this gap.

The outcome highlighted the importance of financial process discipline. The audit committee required a remediation plan. Finance implemented closer oversight of the legal department's budget going forward. And the GC's proposal for a $350K CLM investment — which had been tentatively approved — was made contingent on demonstrating financial process maturity.

The new Head of Legal Ops hired three months later made accruals process design her first priority: establishing monthly WIP collection from all firms (with accountability mechanisms), internal validation, and automated submission. Within six months, finance confidence in the numbers strengthened. The CLM proposal received full approval eight months later.

This experience demonstrated the strategic value of financial process excellence: the recovered investment capacity was approximately $500K, freed up after 200+ hours of disciplined remediation work, and the legal department rebuilt credibility as a financially mature function.

The Monday Morning Checklist

• Assess your accruals maturity. Answer honestly: does your legal department submit validated accruals to finance every month, on time, covering all external counsel? If not, this is your highest-priority financial management initiative — above all others.
• Request your e-billing compliance rate. If you have an e-billing system, pull the percentage of invoices that pass automated validation without exception. If this number is below 80%, your OCBG rules need recalibration (either too strict, producing false positives, or too loose, missing genuine violations).
• Build a 12-month spend forecast by matter type. Use historical data plus forward business pipeline intelligence. Share it with your CFO with the explicit message: "This is our baseline. I will report quarterly on variances." This single act of financial transparency builds more credibility than any technology demo.
• Identify your top leakage risk. Review the last quarter of external counsel invoices for the three most common billing guideline violations. Quantify the dollar value. This is your business case for e-billing investment or rule recalibration.