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Season’s Greetings

by Learned Ham

Budget season for the in-house lawyer. Every Faustian bargain has a price tag. Sure, we kept lawyers never have to worry about billing and collection or client development, but we do have department budgets. I know, law firms have budgets, too: salaries and benefits, rent, copier leases, CLE in the Greater Antilles, receptions for summer clerks in the Lesser Antilles, retirement parties in the Leeward Antilles, partner retreats in the Windward Antilles, Christmas parties in the French Antilles, strategy sessions in the Dutch Antilles, and malpractice premiums. You will have noticed that I did not mention client entertainment in any of the Antilles. I appreciate the gesture, but accepting your offer would violate the Gifts and Gratuities section of the Code of Conduct you drafted for me. Thanks anyway. But back to budgets. I have to budget for all that stuff, too – plus your fees.

By the time you read this, budget season will be over. As I write this, I’m waiting for your responses to my emails asking you to predict: (a) what I will ask you to do next year; and (b) what it will cost.

If that sounds unfair, well, I’m happy to stipulate to that. I’ve raised the same complaint with my CFO. I’ve tried explaining that 95% of what I spend each year is determined by: (i) what customers and competitors decide to sue us for; (ii) what regulators decide to investigate us for; and (iii) what the supply chain and marketing departments decide to do that will cause (i) or (ii) (usually both). And all three of those can be hard to predict. CFO doesn’t care. CFO just wants a number. CFO not like words.

It’s an exercise in creative fiction. Theater of the Absurd. Samuel Beckett, Eugene Ionesco, name-that-GC. I will spend hours looking at what I spent last year, what I’ve spent so far this year, and imagining everything that will go wrong next year and assigning numbers to it. Then I spread-sheet it, total it up, and send it to CFO with pages of explanations that start to sound a lot like the qualifications you staple to your opinion letters. CFO doesn’t read explanations. CFO doesn’t care. CFO says everything will be fine so long as number = .93X (where X = last year’s number). Sisyphus pushes the rock back up the hill.

It’s part of the annual cycle.

In the springtime the forsythia turn yellow, and you get messages from me explaining that cash flow is tight and all non-essential work must be deferred until the second half of the year. We sell in the spring, so supply chain is bleeding money and our customers won’t be paying us until the fall.

In the summer the lawn turns yellow, and you get messages from me explaining that it’s budget season and CFO needs numbers. Little numbers. Smaller numbers than last year.

In the fall the aspens turn yellow, and you get messages from me explaining that I’m over budget and all non-essential work must be deferred until January. You’re not the only one suffering. I have dimmed the lights and cancelled the department retreat in the Antilles.

In the winter the snow turns yellow, and you get messages from me explaining that I need major concessions on hourly rates because we’ve retained cost-cutting consultants (again) who are: (1) making my life a living hell; and (2) urging me to outsource you to Bangalore.

The seasonal cycle takes place against a background of some things that, gratefully, remain constant throughout the year:

• You must submit bills by the 3rd day of the month following the month in which the work was performed. This allows CFO to accrue expenses in the correct period.

• There are no exceptions to the preceding rule, except two: invoices for work done during June and December must be submitted by June 20th and December 20th respectively. Yes, I know that’s impossible. What’s your point?

• I will not pay you for 120 days after receiving your bill. Pull out our engagement letter and you’ll see that I cleverly crossed out 15 or 30 or whatever unrealistic number you put in there and replaced it with 120. Or maybe 180 if I was in a real shareholder-value-creation mood. This is called “good payables management.” My mortgage lender would call it “an event of default.” Mortgage lenders don’t appreciate the concept of value creation.

Here’s the thing. I am rewarded, not for good results, but for minimizing what I pay you, and for delaying that payment as long as possible. Did you notice how quiet everything just got? Like all the air just got sucked out of the room. Like when Dave Bowman enters the stargate in 2001: A Space Odyssey. Like that day in second grade when Merlin Marcovecchio announced during show-and-tell that there is no Santa Claus.

But speaking of Santa Claus, a funny thing happens at the end of the year. As if visited by Jacob Marley and the ghosts of Christmas Past, Present, and Future, CFO suddenly sends me a panicked email to pay every invoice I’ve got before December 31, and pre-pay next year if possible. It’s not exactly an expression of good will toward all humankind. It’s our credit agreement (which is pretty much the same thing, according to lenders’ counsel).

The credit agreement has an excess cash flow sweep, and the last thing in the world we want to do is send cash to the banks. If we wanted the banks to have that money, why would we have borrowed it in the first place? If I give the banks all my money in December, how am I going to pay your bill in January? That would be your August bill, if you’re keeping score.

There’s a practice pointer here for the alert transactional lawyer. When the bank asks for a cash flow sweep, push back, but not too hard. You need to get a concession to sell it to me, but the cash flow sweep is your friend. It’s a way to ensure that after being strung along by me all year long, you’ll get brought current by year-end (which will get you a better room at the partner retreat on St. Lucia).

This might all sound a little depressing, where I pay you less so I’ll have more. And I grant you there are a few subtle hints in that direction, but I want to end on a high note. Something we can all agree on. And this is the trump card that changes the game from zero-sum to win-win. EBITDA. When they get around to re-making The Graduate, in addition to making Benjamin Braddock a martial arts action hero like the new Sherlock Holmes, the dialogue will be revised as follows:

Mr. McGuire: I just want to say one word to you. Just one word.

Ben: Yes, sir.

Mr. McGuire: Are you listening?

Ben: Yes, I am.

Mr. McGuire: EBITDA.

EBITDA is earnings before interest, taxes, depreciation, and amortization. But the devil is in the details. It can be before other stuff, too. And the more stuff it comes before, the bigger and better it is.

The calculation of EBITDA – being a non-GAAP financial measure – is truly elastic. As a result, what I am about to say might not apply to every definition of EBITDA that you are likely to encounter in your practice. Lawyerly disclaimer safely behind us, my EBITDA also comes before extraordinary expenses. EBITDA is reduced by ordinary expenses (bad), but not by extraordinary expenses (good).

This is the holy grail: my budget limits my ordinary expenses, but not my extraordinary expenses – and my compensation is tied to EBITDA. I think we can all agree that your work this year has been truly extraordinary.

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This page contains a single entry from the blog posted on November 12, 2012 7:17 AM.

The previous post in this blog was Red Mass.

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