Beyond Biglaw: Zero-Based Budgeting And Law

What is "zero-based budgeting," and how can this concept be useful to law firms? Columnist Gaston Kroub explains.

Fifty years ago, at a company called Texas Instruments, a gentleman named Pete Pyhrr came up with a new approach to the yearly ritual of corporate budgeting. Rather than starting from the prior year’s budget and adding anticipated “new” costs, Mr. Phyrr advocated an approach whereby the entire departmental budget for the upcoming year would start from zero — an approach where managers would start their yearly budgeting process as if the prior year’s budget had never existed. In short, as part of the budgeting process, managers would have to justify every expenditure as if it was part of a brand-new project. This technique soon became known as zero-based budgeting. Companies that employed the technique ensured there were no sacred cows in their organization immune from the harsh light of a yearly cost-benefit analysis. The fact that the idea originated at a well-respected behemoth like Texas Instruments (even though most readers, like myself, only think of the company as a supplier of grade-school calculators) helped ensure its acceptance by a broader audience.

Even though zero-based budgeting quickly became an accepted model for justifying corporate and governmental expenditures, in times of plenty it became easy for private and public organizations to revert to less-challenging approaches to their budget process. As a result of the regression to “traditional” budgeting, it is now appropriate to speak of a current zero-based budgeting renaissance, as Pyhrr’s innovation has been rediscovered by companies large and small. Considering the new business reality facing companies in many industries, it is not hard to see why zero-based budgeting has a newfound appeal. In fact, the approach became the subject of media discussion in light of the acquisition of Kraft by the investment group that had previously purchased Heinz. Even if you don’t agree with the approach, there is no doubt that it is being advocated by some very sophisticated players. And it promises to have real-world ramifications for plenty of people at Kraft, at a minimum.

At bottom, zero-based budgeting is a technique that is useful in ensuring that “cost creep” and inertia are not allowed to squeeze hard-earned profits — from companies and governmental agencies that are forced to decide how to allocate scarce resources. Which is basically any company. Of course, law firms are not immune. The past few years have seen a parade of Biglaw firms boast both internally and publicly of their “cost control” chops. In the Biglaw milieu, however, cost control is usually limited to certain categories of “acceptable” costs to squeeze — improving “assistant to attorney” ratios is an easy example, and a perennial favorite target for the cost-cutting axe. Likewise, reining in associate bonuses, or trimming the size of associate classes altogether, are hailed as prime examples of “discipline” or prudent financial management by Biglaw firms.

There is no doubt that expense management is a critical skill for the management of a law firm of any size — and that it makes sense for law firms in particular to consider adopting a zero-based budgeting approach. Each expenditure, whether it be rent (though leases tend to be sticky, and thus important to get right when entered into), staffing, or technology, should be looked at with a critical eye. The department responsible for incurring that expense should justify why that expense should be authorized for the upcoming year. The value of such an approach grows in periods of business stress, such as the current one, where firms are competing for business on the one hand and competing for the best talent on the other. Less money spent on redundant document hosting systems, for example, can mean more money to keep current partners and associates happy, while increasing the kitty for attracting lateral talent.

But there is also an elephant in the room. There is one expense that is considered sacrosanct, or nary an expense at all — at firms of all sizes. And that is partner salaries. At many firms, there is a presumption that partners are somehow entitled to make more money than the year before. Their salaries, or draws, are therefore usually automatically set to equal the prior year’s compensation. I know that there are exceptions, and that firms have become more ruthless at “cutting” partner compensation for lack of performance over some band of time — sometimes dramatically, and suddenly as well. But there is also an attitude among both partners and firms that partner compensation should not be treated as an “expense” line item — even though it is often the single biggest expense of the firm.

I am not begrudging partners at any firm their entitlement to enjoy the rewards that come from managing and contributing to a successful practice. Only those that have been in that position know how difficult it is to have a profitable practice in the first place, and how unrelenting the pressure to continue generating profits can be. I also know that lockstep firms tend to be profit-generating machines that are immune from a discussion like this one. But in all the recent discussion of the benefits of zero-based budgeting, I also wonder whether a healthier approach for firms big and small would include asking partners to justify why they should be compensated at last year’s level. I know that some firms are already trying to create a similar type of “attitude shift” in their partnership. And I also know that treating partners as a cost center can be detrimental to morale, and decrease loyalty to the firm as an institution. At the same time, it would be silly to ignore the fact that law firms are subject to the same “business rules” as businesses in other service industries. So even if you carry the title of partner, make sure that you are easily able to justify your worth — hopefully at more than a value of zero.

Please send any comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome. For those interested in the intersection of intellectual property litigation and investing, I have also started a new blog/newsletter, “The Markman Note,” which is being hosted at Mimesis Law. There will be a video component to the project that will be launching soon as well. Feel free to check it out and let me know of any thoughts or suggestions.

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Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique. The firm’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

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