Clients have come to expect their law firms to share certain transaction risks and establish fee structures that encourage efficient delivery of legal services, but most firms continue to bill on an hourly basis.
Many are just starting to adopt project management principles that other professional services firms embraced years ago. Legal project management (LPM) and value-based pricing represent a shift in the lawyer-client relationship. Law firms are re-evaluating their service delivery and fee models to more closely align with clients’ expectations, interests and demands. M&A transactions are a natural place to begin implementing these strategies.
While every M&A transaction is somewhat unique, most progress through a familiar lifecycle and process. Lawyers, however, have historically focused more on the uniqueness of their role in the deal and protecting the client’s interests, rather than on standardizing the acquisition process.
M&A lawyers increasingly are developing and implementing measures such as formal due diligence policies and procedures, standardized (but customizable) transaction documents, and dedicated lawyer teams familiar with a particular client’s inclinations in order to reduce overall costs and increase value for clients.
Process improvements alone will not satisfy increasing demands for efficiency. LPM provides a framework to modernize the delivery of legal services performed in an M&A transaction. It’s more than just a management philosophy—it’s a practical toolkit to:
- Identify and evaluate the uncertainties and risks that can impact an engagement’s cost;
- Create a realistic, detailed and reliable budget;
- Monitor performance against budget during the engagement’s full course;
- Improve attorney-client communication; and
- Promote a meaningful post-engagement review of services provided during the deal that assists in improving performance in subsequent engagements.
LPM changes how lawyers and clients budget for M&A engagements. Rather than a “back-of-the-napkin” fee estimate, complete with a laundry list of exceptions and assumptions, LPM delivers the sort of meaningful budget that business people expect from nonlawyers.
LPM principles guide the law firm to ask about the deal’s importance to the client’s overall business objectives, the client’s risk tolerance, and the role of the client’s internal team, all of which can impact scope and cost.
In addition, law firms have access to a tremendous amount of data regarding the costs of M&A engagements. While the most active client may complete 30 deals in any given year, law firms with sophisticated practices assist with hundreds each year. If properly harnessed, data collected from these deals helps firms create detailed, accurate budgets based on actual fees from prior transactions.
Value During M&A Engagement
Unlike the traditional fee estimate, an LPM-based budget can be valuable during an M&A engagement, and not just at the outset. Using an LPM system, a firm can monitor performance against budget and offer this information to the client in real time. The system also enables the lawyer and client to spot a potential cost overrun before it occurs and identify problems in the deal that may lead to an overrun.
Comparing actual fees against budget following an engagement can pinpoint tasks where efficiencies can be gained, as well as aspects of the transaction where the law firm adds the most value. In each case, an LPM-based budget provides the client greater transparency regarding the nature and amount of legal services rendered.
While LPM can improve the delivery model for legal services in transactions, it doesn’t always change how lawyers price their services. Investment bankers, accountants and other M&A professionals have used value-based pricing for decades, but most lawyers rarely deviate from the billable hour.
Many clients are uncomfortable with fixed fees or other fee arrangements if they feel they are relying on law firms to determine how much legal work is required or how much it will cost, or if they believe a fixed fee encourages lawyers to cut corners or maximize profitability at the expense of quality and client service.
LPM provides the tools to bridge this information gap. A law firm that adopts an effective LPM program can be confident in the budget it helps develop and comfortable using that budget as the basis for a fixed fee, broken-deal discount, closing premium or other value-based pricing arrangement to align law firm and client interests.
Similarly, pre-budget discussions and the transparency offered by performance monitoring and post-action reviews give clients the information they need to confirm their lawyers are spending time in a way that maximizes value.
Effectively using LPM and value-based billing in M&A transactions fosters a “trusted adviser” attorney-client relationship by positioning lawyers to add value rather than simply billing in six-minute increments. As more law firms develop and rely on these strategies, clients likely will have increasingly higher expectations of firms and will ultimately be more satisfied with the value of the legal services they receive.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Frank D. Chaiken is a partner and the leader of Thompson Hine LLP’s Corporate Transactions & Securities practice group.
Tony Kuhel is a partner in Thompson Hine’s Corporate Transactions & Securities practice group and serves as chair of the firm’s M&A subgroup.