Bridging the gap: in-house private equity lawyers share solutions to 5 sources of surprisingly high law firm invoices
A recent report we published revealed 42% of large private equity firms ($10B-$25B AUM), at times, lose track of legal expenses. Consequently, one in five are “often shocked” by the size of their law firm bills.
That shock reverberates throughout the PE organisation. More than half of large PE firms (55%) say higher-than-expected invoices cause them to reforecast budgets. This leads to widespread friction among legal, finance and investment teams.
It’s not just the big PE firms that wrestle with this problem. While mid-sized PE firms ($3B-$10B AUM) are less likely to lose track of accrued legal costs (26%) they are more likely to be surprised by the size of their legal invoices (33%). As such, the effects among this smaller class of PE firms are much stronger: 80% say higher-than-expected legal invoices are a source of friction.
So, how do in-house lawyers working in private equity address these problems? We recently had a chance to ask a few during a roundtable discussion that I co-moderated with Matt Byrne, deputy editor of The Lawyer magazine.
The participating lawyers worked in a cross-section of private funds – big and small – with investments in both the US and Europe. In many ways the discussion served as a focus group – adding new insights and qualitative detail to the quantitative findings in our report.
Five sources of surprisingly high law firm invoices
The panelists all seemed to agree on the central finding of the report: they had personally experienced the shock of an exceedingly large law firm invoice.
While law firms bear some responsibility for this, the panel didn’t just place the blame on law firms. Instead, they saw this challenge as a shared responsibility and articulated some of the steps they are taking to mitigate the problem.
1. Charging full price for untailored advice
Friction over large legal bills tends to come from spending on matters that aren’t tied to revenue, such as compliance. This can be exacerbated when a law firm charges fees at a premium rate, where “you feel like it’s not the most tailored advice you’ve ever had”. The in-house team must then spend their time making that outside counsel advice “practical and workable” for the wider PE organisation.
Solution: The panel suggested addressing this issue with the law firm sooner rather than later. Having a proactive conversation alleviates any potential friction by allowing both sides the opportunity to acknowledge the issue and redress it.
2. Paying to train law firm attorneys
The panel unanimously agreed they were willing to pay for good counsel, but they didn’t want to be charged for training law firm attorneys.
One example a panelist offered was regulatory filings that need to be re-done. That’s when she picks up the phone and tells the firm she’s not comfortable paying for that work.
This isn’t exclusive to junior attorneys either. The panel noted it sometimes occurs when a senior litigation attorney may not be familiar with the nuances of PE. As a result, they bill you for a few hours of research, when a 10-minute call with the in-house team – or the law firm partner that leads the private equity practice – would have brought the clarification needed to complete the job.
Solution: Be clear on what you will and won’t pay for in your outside counsel billing guidelines But also remember to be approachable and ensure it’s culturally acceptable for your firm to ask basic questions.
3. Losing track of WIP and accruals in the heat of a deal
It’s easy to lose track of work-in-progress (WIP) and accruals in the heat of a deal. The panel noted when PE firms are pursuing a transaction, they rely on their law firms to work at whatever pace is necessary to enable the deal to close. However, that’s not a license to completely lose track of costs either.
Solution: The panel sees this as a shared responsibility. Law firms have an obligation to provide the PE firm with a weekly or bi-weekly update about the status of WIP and how much “time they have on the clock.”
Similarly, the in-house team is obligated to make time to review the matter and follow up with the law firm about priorities. The goal here is to modify the priorities of work as needed in real time – and before a deal closes and it’s too late to course correct.
4. Junior staffers run up the legal tab
Sometimes junior staffers on both the law firm and PE firm side will “reinvent the wheel five times” trying to figure out issues that could be solved with “a simple conversation from someone more senior”. One panelist noted that last year the legal department had to “position” themselves between the deal team and the law firm “because the junior investment guys were asking all sorts of questions and driving up costs”.
Solution: The remedy here is equal parts legal spend process and culture. The panel noted less experienced members of a deal team “don’t want to look stupid in front of their bosses” and they drive up costs trying to figure it out on their own.
PE firms can address this by fostering a culture that encourages junior staffers to route questions internally – and before going to outside counsel. In addition, good law firm partners will recognise when “two junior guys ran up the tab” and proactively offer a solution for addressing those fees.
5. Non-standardised instructions to outside counsel
This is a source of surprise invoices that the panel placed directly on their own organisations. Many investment teams directly instruct law firms on new matters. This provides the organisation with the agility to pursue deals quickly, but it also means no one has visibility into the totality of legal work and spend the organisation is accruing. This invariably leads to invoice shock when the bill is received.
Solution: Implement a centralised process to instruct outside legal counsel that’s run through the legal department. The lawyers on the in-house team have the knowledge, skills and experience to manage legal work efficiently. PE firms are catching on to this idea too – more than 50% of both large and mid-sized firms have implemented or plan to implement a formal process to instruct legal counsel for new matters.
Data collection is crucial as a PE firm grows
As PE firms grow, so too does the number of law firms working on their behalf. A “data driven analysis is critical” because it’s impossible to “have a strong relationship with every firm” you are using.
It’s here that spreadsheets may well have outlived their usefulness for managing legal spend. Many PE firms are turning to specialised legal tech tools to collect data and bring visibility to legal spend management. The panel cautioned in-house teams to avoid using technology in a way that “weaponises” data to squeeze law firms too hard. Doing so will become an obstacle to a healthy professional relationship and efficient completion of work.
It’s worth noting these are all challenges Apperio hears a lot even outside this survey and panel conversation. Our software has helped PE firms ranging from boutiques like Epiris (see case study) to global giants like EQT (see case study) tackle this exact challenge. See for yourself and schedule a live demo by emailing firstname.lastname@example.org.
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