A survey conducted by Apperio says smaller firms are better at managing costs – especially legal ones.
When it comes to managing legal costs, mid-sized firms outperform, according to the UK firm, which helps monitor and manage expenses.
The survey, taken last year and which will be published on Monday, is based on responses from in-house lawyers at 46 mid-market private equity firms with assets of $3 billion-$10 billion and at 60 large firms with assets of more than $10 billion. Respondents were based in the United States and United Kingdom.
Apperio says it hired an independent research concern to conduct two separate surveys last year. The result of the research was a report published in January.
Bigger firms spend more on outside counsel – 70 percent of those surveyed spend between $10 million and $25 million annually, compared with $2 million-$10 million for the bulk of mid-market respondents. As a result, they often get better deals from law firms.
But that doesn’t mean they are more disciplined about costs, the survey shows. Firms with assets greater than $10 billion are significantly less likely to actively manage their legal spending or monitor expenses across the organization. Twenty-two percent say they make no effort to manage fees, even though around the same amount, 20 percent, said they are “often shocked” by the size of their legal invoices.
Such behavior can lead to unwelcome surprises. Seven of 10 large firms reported billing that was either unnecessary or redundant. And more than half (55 percent) said higher than expected invoices cause them to reforecast budgets, “which leads to widespread friction among legal, finance and investment teams,” according to the report.
A smaller portion of mid-market firms (41 percent) reported that they had to reforecast budgets due to surprise bills, and only 4 percent said they don’t actively manage legal costs.
Here, smaller size is an advantage. Mid-market firms tend to monitor the situation much more closely. More than 7 of 10 mid-market firms have formal budgeting procedures for legal costs, compared with five of 10 for large firms. This explains why 20 percent of the big firms say they plan to start budgeting in the coming months.
Though they are often surprised by hefty legal bills, bigger firms typically have more bargaining power when it comes to negotiating legal fees.
According to the survey, the average size of an acquisition for large PE firms averages $724 million and produces legal expenses of $410,000. By contrast, mid-market firms’ acquisitions average $455 million, and cost $331,000.
Survey costs are a growing concern for both mid-market and large firms, the survey shows. Among mid-market firms, 54 percent expect their legal spend to decrease this year, compared with 38 percent for large firms.