Senior in-house lawyers at large private equity (PE) firms are responsible for the cost of instructing law firms but lack the power to control it, a study has found.
While general counsel (GCs) were in most cases responsible for selecting law firms, comparing their relative value was mostly carried out by deal teams, while surprise bills was a significant problem.
At most PE firms, GCs were responsible for selecting preferred law firms (62%) or instructing them (56%). However, at 31% of firms, deal teams instructed the lawyers.
GCs had responsibility for tracking the costs of legal matters at 51% of firms, with the finance team dealing with this at 30%. At just under half of firms (46%), GCs approved budgets for new matters.
It was mainly deal teams (59%) that measured the performance of external law firms; GCs did this at just 28% of companies.
Things were little better for in-house lawyers when it came to comparing the relative value of law firms. At most companies (54%), this was done by the deal teams.
A minority of GCs (38%) had responsibility for benchmarking costs associated with legal matters, while finance teams were most likely (52%) to be the ones responsible for retrospectively analysing legal budget overspending
The report Responsibility without control? Challenges facing private equity legal leaders in 2021, commissioned by London-based legal spend analytics and matter-tracking platform Apperio, polled 160 senior in-house lawyers at US and UK PE firms with an average of $14bn under management.
The survey found that costs overruns were a “significant problem” for in-house lawyers, with 28% of investment financing matters, 22% of regulation and 21% of litigation matters “always” going over budget.
A large majority of GCs (79%) said “surprise legal bills” created friction between the legal team and the wider business.
Almost half (44%) said they “regularly have to replan budgets” due to unexpectedly high legal bills, while 26% said their legal spend was “not transparent” and they were “often shocked” at the size of legal bills.
Researchers said the lack of control over legal spending experienced by in-house lawyers at PE firms would, in most cases, have “a negative financial impact on external law firms”, with payment for work already completed subject to write-downs and delays.
Most GCs (79%) said having access to accurate accruals data from law firms before invoices were sent would “reduce the surprise” of legal bills.
Three-quarters of GCs (74%) said optimising legal spending was a priority for 2021, with 81% considering working with alternative legal services providers.
Similarly, large majorities said they had adopted “more robust processes” to control spending or were using technology.
Three-quarters said predictability in spending was more important than an “absolute reduction”.
Nicholas d’Adhemar, founder and CEO of Apperio, said GCs were in a “tough spot” because the finance team was “leaning on their lawyers to control outside law firm costs, but the deal teams are frequently instructing outside counsel directly and comparing their relative value in isolation”.
Mr d’Adhemar, a former City lawyer and PE investment manager, went on: “Deal teams ultimately have the power and incentive to make changes that will achieve efficiency gains, but they don’t have the benefit of oversight and deep legal knowledge to manage this alone.”