It is a risk that some collusion may occur between the inside lawyer responsible for approving the matter budget of a firm and the firm that submits the budget. Neither lawyer nor firm wants to look bad so a fatter budget serves both. But that pattern rolled up for the entire department bloats the departmental budget.
The built-in tension, however, is hard to suppress (See my post of March 24, 2005: what proportion of initial budgets from firms prove to be too high; Oct. 19, 2007: inherent tension between firm and department on budgets; June 11, 2008: matter budgets: inside accountability and the principal-agent tension; March 25, 2008: how to handle budgets from external counsel; March 29, 2009: problem of inflated budgets in anticipation of cuts; Nov. 3, 2009: twists and turns when GCs assess accuracy of budgets; and Nov. 21, 2008: performance in relation to budgets should determine whether a panel firm gets more work.).
Some ideas for you to consider if you want to reduce the incidence and severity of budget manipulation:
- Compare accuracy of budgets between your in-house lawyers
- Require inside lawyer to record what could be done to reduce each budget
- Impose an overall budget on the inside lawyer for outside counsel spending
- Rely also on burn rates and unit costs rather than just budgets
- Boost other incentives to control costs so that budgets declined in relative salience
- Move to fixed fee arrangements or alternatives to hourly billing on budget
- Implement peer review of budgets, or review by the general counsel