Start planning 2016’s budget cuts

Time for in-house legal departments and law firm practice heads to start thinking about 2016’s budget cuts.

I don’t say that lightly. I had a few conversations before Christmas with people who were in the process of finding out how to deliver cuts imposed on them for 2015.

It is, of course, worst of all to be on the receiving end of cuts – something those doing the planning know and admit.

But the planners have a hard time too. The process is bruising, affects morale, and leaves those in charge worrying about risks they now suspect are not covered.

For that reason it’s important to avoid the temptation of a lie down in a nice darkened room at this point, and think about cuts in 2016. Cuts in 2015, lawyers tasked with delivering them note, have been especially tough for two key reasons.

First, many have been cutting back since 2009, starting with the easier cuts.

Secondly, in the limited time available to decide and make cuts, far too many items are fixed or immovable costs. There are time-fixed leases on office space. Supplier contracts that include terms it would be expensive to get out of. Commitments have been made to individual staff, staff associations and unions overlap with the calendar/financial year.

The effect is to reduce down and down the choice of things to cut. That headache in itself can push back the point in the year when cuts can be made – perhaps placing the entire burden into the second half of the year.

That’s how a 10% cut – sold as ‘saving just £1 in every £10’ can become thoroughly brutal.

It’s not untypical in these scenarios to realise that 50% of what you do can’t be altered in the time frame – doubling the percentage saving needed in the remainder.

Through a mixture of resistance and hand-wringing, cuts won’t start ‘til Q3 – so spending carries on at 2014 levels, meaning the 5% saving notionally allocated to Q1 and Q2 didn’t happen.

So if it is to be achieved, the full ‘10%’ cut is borne by things you can cut in half the time and across half the items the finance director has in his or her head.

Small surprise that many find a 10% cut is one that cuts into ‘bone’, damaging the organisation’s ability to perform basic tasks. After all, the section of what you do that can be cut will see not £1 in every £10 spent slashed, but £4 in £10.

Across a longer time period, more things become ‘variable’ costs, and cuts can be more evenly spread across all you do. Put like that, it sounds obvious – and in a sense it is.

Yet what is set out above is an incredibly common scenario in organisations of all sizes.

Perhaps you don’t even need to tell the FD about most of what you’re thinking could be cut in the longer term – after all there’s a risk the FD will think ‘excellent – they can take another 10% on top of that’.

But start planning – even if the good times are about to roll again in your sector, there are plenty of people out there who make a name for themselves by setting cuts and savings targets that other people then deliver.

Eduardo Reyes is Gazette features editor