New Report Highlights Private Equity’s Changing Legal Spend Priorities
PE has a heightened appreciation for legal departments because of the pandemic; focus shifts to controlling legal spend from pursuing an absolute reduction in cost
London, UK – January 25, 2022 – Private equity firms value their legal departments more as a result of the pandemic – and it’s causing them to shuffle their legal spend priorities. That’s according to a new report titled, Controlling Costs in Private Equity: The PE Legal Spend Landscape for 2022. It reveals 71% of respondents – lawyers and finance professionals working in PE – say the legal team is more valued in the wake of the pandemic.
The heightened appreciation has been hard-earned because the in-house team’s work volume has grown too. Indeed, 73% of respondents say workload, headcount and legal costs have each grown over the last three years. Further, about one-third say those areas have increased significantly, which was quantified as growth of at least 20% or more.
“This is what’s so interesting – PE values legal more, even as spending, workload and headcount have all increased,” said Apperio Founder and CEO Nicholas d’Adhemar. “No one has a crystal ball in these uncertain times which naturally strengthens the appetite for legal expertise in risk management among the investing community.”
The balance between rising costs and the need for expertise has shifted some priorities. For example, when asked about legal spend priorities for the next year, respondents put controlling external legal costs (57%) and better leveraging data to make decisions (51%) at the top of the list. By contrast, reducing external (15%) legal costs, which has traditionally been a key focus area, was near the bottom of the list. These results point to an emerging effort to better control costs rather than strictly reduce them.
Challenges: data, complexity and autonomy
The report also bears out cautionary findings too. Some legal departments in PE lack visibility of accruals and struggle to gain a comprehensive understanding of what their organization is already committed to paying their law firms. It’s a problem that is liable to a compounding effect as legal work, headcount and costs grow.
This happens for several reasons inherent to the business of law, according to respondents. These include inconsistent data formats (54%), the volume or complexity of legal work (54%), and business units instructing law firms directly (52%), are among seven such challenges detailed in the report.
Some examples of what that means include the following:
- Inconsistent data formats. When in-house legal teams ask their legal service providers for budget status updates, they receive it in various formats. For example, data is often handed over in spreadsheets, presentations, phone calls, and emails. These disparate data sources make it difficult and labor-intensive to aggregate, collate and analyze.
- Volume or complexity of legal work. The intensity and scope of legal work can vary considerably in PE – even within the same matter category. For example, one PE firm previously shared a fundraising story where a review of the Employee Retirement Income Security Act (ERISA), cost $5,000 in legal expenses for one limited partner (LP) – but cost $250,000 for another.
- Business units instructing law firms directly. Investment managers in PE need to move quickly on competitive deals – and therefore often work directly with a law firm on a preferred list of legal service providers. This decentralized model puts the legal team in the delicate situation of being accountable for legal spend, without the means to control that spend effectively.
Underscoring all these challenges is a sense of fatigue among in-house legal teams in private equity. Notably, about four in 10 respondents said the “legal department is overwhelmed”, a notion that has also surfaced in other studies of the broader legal community.
“These barriers reinforce the sense that legal departments in PE often lack control of their legal spend, even if reducing such spend is not the main priority,” concluded d’Adhemar. “When you factor in both rising work volume and spend, it suggests the volume of work can’t be solved by solely throwing bodies at the problem.”
Other high-level findings in the report include:
- The most effective techniques for controlling legal costs. Alternative fee arrangement or AFAs (76%), specialized software for managing legal costs (68%) and centralizing all legal spend through the legal department (51%) ranked among the most effective techniques in-house lawyers have for controlling costs. Outside counsel billing guidelines came in last among a list of 11 possible techniques with 21%.
- Investment in legal technology continues. Eight in ten (81%) respondents believe their organization has invested sufficiently in legal technology. What’s more, 73% of respondents said the level of investment in legal tech would increase over the next 12 months. Among the top tech tools in which PE in-house legal teams plan to invest include risk management (64%), legal spend management (54%) and e-billing (46%).
- The top metrics law departments in PE are tracking. Most respondents (62%) say the in-house team is measuring the value they contribute to the business. The top measures legal departments in private equity are tracking include the “outcome of legal matters” (68%), the “hourly cost per lawyer” (60%), and “risk exposure” (50%).
About the report: Apperio originally commissioned the independent research firm Coleman Parkes to survey 300 senior legal and finance professionals, working in private equity (PE), venture capital, hedge funds and investment banking, among others. This report is based on the 100 legal (63%) and finance (37%) respondents who identified as working in private equity.
These 100 respondents work for PE firms based in the US (71%) and UK (29%) with between $3 billion and $15 billion in assets under management (AUM). Most respondents (63%) reported they were the decision-maker around legal spending, while the remaining 37% said they were part of a team of decision-makers.
Collectively, PE respondents in this sample work for, or with, legal departments that employ an average of 11 lawyers and allied professionals. These teams oversee between $3 million and $20 million in annual outside legal counsel spend.
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Apperio’s spend management software provides analytics and real-time visibility on external legal matters. This empowers in-house counsel to control and optimize their spend with law firms, ahead of the invoice.
Rather than accumulating legal bills, Apperio works by aggregating data directly from the sources of truth - law firms’ time recording systems. As a result, a greater level of granularity and analysis is possible - weeks before an invoice is received.
In-house teams can therefore work proactively with this data and gain confidence from an accurate picture of their spending. In turn, such insights can also improve the forecasting, budgeting and efficiency of the legal department.
for Apperio, Ltd.