High tide for legal costs

In-house counsel at VC and PE firms expect legal costs to further rise next year, according to a new report.

Apperio’s, The pursuit of control in legal spending, highlighted rising pressure among lawyers to control legal spending in wake of increasing complexity and regulatory risks.

The company conducted a survey across 300 in-house lawyers at VC and PE firms in the US and UK. On average, the respondent firms spent $12m on outside counsel and employed five in-house lawyers.

According to the survey, 64% of VC and PE firms spent more on legal services this year compared to last and 66% expected costs to rise further in 2023.

Of all respondents, 86% stated a pressure to control legal costs, with 62% saying that the pressure had increased compared to the previous year. Further, 84% highlighted an increased scrutiny from LPs on legal spending and 62% stated they had observed this as a steadily growing trend over the last three years.

Key challenges
As per the report, the top three challenges amounted to unpredictability of legal work and associated costs said 57%, a lack of transparency surrounding time, billing and invoices was cited by 46% and occasional billing for unnecessary services by 40%.

Further, 81% indicated some matters were initiated without their knowledge, with one legal officer stating they found out about new legal matters from their investors.

About half of all respondents were significantly concerned about spending in specific areas:

• Overall legal spending
• Individual transactions
• Fundraising
• Operating costs

Respondents listed tax, employment and litigation as matters most likely to exceed budgeted costs. In the previous year top of the list were financing, litigation and regulatory costs.

Solutions
In order to combat the rising costs, 52% of respondents used alternative fee arrangements, 48% have brought more work in-house and 44% used a fixed fees structure.

However, roughly three-quarters said fixed fees sometimes exceeded agreed pricing, including 17% stating this happened always and 23% said this occurred often.

“Instead of more with less - the idea that the legal budget should be reduced - we need to reorient the conversation of more for less,” said D. Casey Flaherty, co-founder and chief strategy officer at LexFusion, on a podcast with Apperio CEO Nicholas d’Adhemar earlier this year which was quoted as part of the report.