Accruals management part I: why are accruals so important?

Lauren Lee | June 6, 2017 | Articles

Last month, hundreds of legal operations professionals gathered at the Bellagio in Las Vegas, taking part in the 2nd annual CLOC Institute, the largest legal operations event in history. The organization hosting the event, the Corporate Legal Operations Consortium, has quickly grown from a small group of like minded legal professionals to an influential forum made of the industry’s leading thinkers and change makers.

The three day event was filled with more than 70 informative sessions, each focusing on a distinct problem. SimpleLegal CEO, Nathan Wenzel, led one of the sessions on the topic of accruals management. The session received such a positive response, we wanted to recap it on our blog for those of you who couldn’t make the trip out to Las Vegas.

Part I of this recap series will focus on the importance of accruals, while part II will highlight how legal departments can take control of accruals and implement the right processes both internally and externally.

Why Are Accruals Important?

Because finance said so.

Many legal operations teams don’t deal with accruals firsthand. Nathan explains, legal operations teams are given a budget which they allocate across various projects and law firms. Work is sent to the law firms, and in turn, the law firms send invoices to bill for the work completed. Finance pays the bills and then it’s on to the next project. Easy, right? Not always.

Costly Accruals Mistakes Arise from Lack of Legal Involvement

During this part of the session, Nathan passed the conversation to Nigel Hsu, Head of Legal Operations at Waymo. He echoed Nathan’s opening words, saying legal operations often doesn’t deal directly with accruals. In his experience, finance had told him accruals were important, but his team wasn’t really concerned about what was happening on the back end and how finance was ensuring estimates from law firms matched the amounts charged on invoices. If this sounds familiar, you’re not alone. But, there is a better way.

As teams within Nigel’s company became more sophisticated and legal operations became a more established group, finance got more involved and started generating monthly finance reports. Despite a few discrepancies between what Nigel’s legal team thought they were spending and what finance was actually reporting, Nigel felt his budget was mostly on track.

When the end of the year came, finance dropped a bomb. Legal was over budget…by a lot. Long story short, one of the law firms fat fingered an error that went undetected by both the legal and finance departments, ultimately blowing the budget out of the water. Managing accruals more closely would have prevented this.

Shifting Ownership of Accruals to Legal Departments

Going over budget was an eye-opening experience for Nigel. Legal operations and finance weren’t working together, and neither group knew whether the numbers on the invoices were right or wrong. Nigel realized his legal team needed to start caring about accruals.

But it’s not enough to say legal departments need to care about accruals. Nathan challenged session attendees and legal operations departments to take control of the accruals management process. It’s the legal department that knows what’s going on with outside counsel. They’re the department that’s closest to the matters and spend amounts. They’re the ones that should own accruals.

Because numerous groups touch the accruals process, it’s important to provide each group with the right information and training on how accruals should be handled within the organization. We’ll be covering this topic in more depth in part II of our recap series on best practices for improving your accruals process, but if you’re eager to get started, download our customizable template for how to train your law firms on accruals. Check back soon for part II, or subscribe to our blog!