PE firms embrace legaltech to optimise their costs
Legal bills are never much fun when they land in the inbox. This is especially true for private equity firms, for whom legal costs can be among their single biggest areas of expenditure.
But a flurry of cloud-based technologies is transforming the way the industry handles its legal work – and the trend may only just be getting started, says Nicholas d’Adhemar, founder of legaltech firm Apperio.
A former in-house private equity counsel, d’Adhemar understands all too well the ease with which legal costs can mount during a deal, especially when unforeseen complications arise.
“What rankles PE managers is the unexpected, unpredictable nature of legal costs,” says d’Adhemar.
A law firm might expect the cost of a deal to be GBP300k, but a plethora of factors could cause that figure to spiral, perhaps due to delays getting the deal over the line or bringing in additional legal partners. The next thing you know, the cost has doubled before the deal has even been completed.
“In-house legal counsel might not necessarily be surprised, but the CFO might well ask why they didn’t have visibility on the cost so that they could better plan for it,” adds d’Adhemar. “It’s the knock-on effect that it has on the rest of the business and being caught unaware - that’s the problem.”
In a white paper penned last year entitled “Rocketing scrutiny, eroding trust … the changing PE legal spend landscape”, Apperio found that while 92 per cent of PE legal executives across the US and UK believe that their legal spend is predictable, only half of them trust their external legal advisors to bill them on time or accurately.
Singing off the same hymn sheet
Legaltech platforms, such as the one developed by Apperio, are taking strides to address this lack of transparency on legal spend. Receiving data directly from a law firm’s internal systems allows GPs to get a real-time view of all the transaction work their external law firms are involved with as it happens.
“We provide in-house legal, deal and finance teams with a forensic visibility of their external spend in real time,” states d’Adhemar.
The “real time” element is a key differentiator as it means both external and internal legal counsel can stay on top of the deal fees, as and when they are incurred, getting ahead of the invoice. This avoids the shock of getting a larger-than-expected invoice at the end of the month and potentially having to negotiate with external counsel, which can lead to acrimony and a situation where neither party is left satisfied.
“The platform enables in-house counsel to get ahead of the invoice and take control of the work being completed. This leads to an informed, proactive conversation with the deal partners and law firms to decide how to proceed with a deal or re-prioritise some of the work involved. It’s all about effective oversight,” explains d’Adhemar.
For example, say a buyout manager is using five different law firms. Apperio connects with each of the law firms’ systems, receives the clients’ legal spend data and then presents a consistent, detailed view back to them in an aggregated format. At the same time, each law firm benefits by reducing invoice friction and improving the quality of data they are sharing with the client.
Having this data-driven, aggregated view on legal spend means that everyone sings off the same hymn sheet.
Not only can greater transparency on legal spend avoid potential awkward conversations with external legal providers it can, at the same time, improve how private equity firms appraise those relationships. Is a law firm providing true value? Are they billing accurately, and on time? How do they compare to other law firms?
In that regard, Apperio’s platform helps private equity firms to monitor what d’Adhemar refers to as the ‘iceberg effect’.
An in-house legal team might only consist of one or two people. As such, they can’t expect to constantly monitor the details and spending for every deal. While they have the legal expertise, they might only be communicating directly with two or three people inside the law firm. In reality, there may in fact be a team of dozens of lawyers beneath them, whose involvement can rapidly accelerate costs.
“Oftentimes that’s incredibly valid, but it’s useful to understand the make-up of the team and the specific people that are involved. Apperio’s platform gives the legal team that oversight and control – they can spot potential anomalies and manage by exception, instead of waiting for the law firm to send their invoice. It allows them to have a constructive discussion,” adds d’Adhemar.
The platform’s visibility doesn’t end there, though. By offering an instant snapshot of the legal work under way for every deal, private equity firms can start analysing and managing their legal costs in a much more detailed and effective way.
For example, by determining average costs based on a firm’s historic flow of deals, the system can automatically flag up amber or red early warnings if legal costs are mounting unexpectedly on a specific project. That in turn allows in-house legal counsel to spot anomalies and intervene at an earlier stage in order to address the problem.
“We can take all the historical data that the fund has and look at all their deals over time to make sure that in future, deals are not deviating too much from the mean,” explains d’Adhemar.
“Some law firms have really embraced it,” states d’Adhemar. “Fundamentally, it is making their lives easier. They can focus on doing the legal work and actually start to improve payment cycle times for their clients.”
Legal technology is only one example of how digitisation can bring cost efficiency to what has, traditionally, been a manual and labour-intensive task for the industry.
With many private equity firms playing an increasingly prominent role investing in software and technology companies around the world, many are starting to look more carefully at their own internal processes – and are keen to apply lessons in-house.
“Legal has tended to be viewed as a bit behind the times and slow to change but today, partly as a result of the Covid-19 pandemic, there is a realisation that technology can really help private equity firms practice what they preach and introduce digitisation tools in a similar manner to their portfolio companies.
“Managers are saying: ‘Hang on a second. We’re investing in these businesses that are disrupting industries, driving change and making improvements but we aren’t doing it internally ourselves,’” says d’Adhemar. “We should walk the walk as well as talk the talk.”
As Bain and Company point out in their 2021 global private equity report: “PE firms have become expert in diagnosing the need for digital change at their portfolio companies. Becoming more competitive in the years ahead will mean bringing those lessons home”.
As legaltech continues to make advances and improve how legal spend is managed and controlled, the penny is starting to drop.