Four ways legal spend in private equity underscores broad challenges in corporate legal
Our CEO, Nicholas d’Adhemar, recently had the good fortune of being interviewed by Phillip Bantz. The interview centred on findings from our recent survey of 160 in-house lawyers in private equity for a story in Corporate Counsel. One of the questions raised was whether or not the findings are applicable to in-house legal teams outside of PE.
Indeed, Nicholas noted there are several parallels:
“They have the same problems. They might not have that same concept of the deal team, but they do have that relationship between legal and finance in a big way. The numbers will be a little bit different. But it’s still the majority that are doing this [data analysis] manually today. So the application is far wider than private equity.”
We’d encourage you to read the entire article – Why in-house counsel for investment firms are blamed for overspending they can't control – but the question got us thinking about the applicability more broadly.
We went back through the data and compared it to other trends we’ve seen and heard in our research and conversations with GCs and CLOs around the world. Below are some ways we think the findings are applicable.
1. The struggle for real-time legal spend data is real.
About half (45%) of in-house legal teams inside PE organisations say they feel disadvantaged by a lack of data to justify their external legal spend. Further, nearly nine in ten (86%) believe that a lack of real-time legal spend data prevents them from providing accurate forecasts of such costs.
While precisely how this problem manifests in PE has some differences – largely due to how PE firms are organised and divide authority – the problem is well known to in-house legal teams across vertical markets.
Think about it: How do clients typically get status updates from their law firms? They call the partner, who calls the assistant, who calls the finance team, who pleads with the associates working on the matter to enter their time so they can run a report – and provide the partner with the data to respond to the client.
The struggle for visibility into work-in-progress (WIP) and real-time legal spend data is a universal challenge.
2. Surprise invoices come at the end of the matter.
About 20% of in-house legal teams – one in five – say certain legal matters always go over budget, according to the survey. These matters include investment financing (28%), regulation (22%), fund structuring (17%), and litigation (21%).
In addition, another roughly 50% say these matters are sometimes susceptible to exceeding the budget. In aggregate, this means upwards of 70% of these matters are at risk of cost-overruns.
How does this happen? Invoices by nature come at the end of the process – as a matter is closed. Waiting for an invoice to inform you how much you’ve spent is risky because you won’t know how far over the budget you are until the invoice is published.
It’s worth noting here, the reliance on invoices underscores how and where e-billing and outside counsel billing guidelines fall short of corporate counsel needs.
3. Cost overruns and in-house credibility.
Our survey found that more than three quarters of in-house PE legal teams report that cost overruns cause friction between legal and finance (78%) and their peers throughout the wider PE firm (79%).
Expenses that go over budget will cause friction in any organisation because accurate forecasts are requisite to managing projects profitably. Cost overruns put in-house teams into the unenviable position of requesting more budget and re-forecasting expenses.
Most respondents to the survey value accurate price estimates over lower cost: 75% said predictability of legal spend is more important than an absolute reduction in spend. It’s reflective of sentiment across the industry.
4. Similarities in response and remedy.
How respondents to our survey are addressing, or planning to address, legal spend management, is reflective of what we’ve heard broadly across the corporate counsel community.
Here are a few examples:
- 76% frequently negotiate discounts in response to surprise invoices;
- 74% delay payment on legal bills that exceed their expectations;
- 72% regularly challenge individual line items in law firm invoices; and
- 81% are considering working with alternative legal service providers (ALSPs) in the future.
Finally, while just 15% of PE legal leaders are using specialist legal spend management software today – which facilitates real-time data and visibility – about half (51%) are planning to introduce these solutions in 2021. Another 20% are in the consideration phase now.
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The complete report, based on the responses from all 160 respondents across the US and UK – Responsibility without control? Challenges facing private equity legal leaders in 2021 – was published in January 2021 and is freely available for download.
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