When legal fees and value spiral out of sync.
Shortly after the untimely death of Princess Diana, the well-known British actress Joanna Lumley mooted the idea of a “Diana memorial bridge”, a pedestrian ‘park like’ crossing to the Thames in central London. The idea was then not taken up and had been rejected several times since, until the moment Boris Johnson became mayor of London. From then on things moved swiftly and on 30 October 2013 The Garden Bridge Trust was incorporated to build and own the bridge, as private space in the public realm. I must admit that I am quite sympathetic to the concept of such a garden bridge. As you can see on the picture above, it resembles the High Line in New York and Paris's Promenade Plantée, with the exception that these are existing old structures that are converted into a park and the Garden Bridge had to be constructed from scratch. Fast forward, on 14 August 2017 after months of uncertainty the Garden Bridge Trust entirely abandoned the project after having spend a whopping £53 million of public funding on a bridge that never left the drawing board.
Last Sunday, 17 February 2019, I read a lengthy article “An absurd vanity project for our age – Boris Johnson’s garden bridge” in The Guardian. Interestingly the article included a link to an itemized list of all the money that had been spend on this project. This cost overview shows that out of the £53 million, no less than £3.510.447 had been spent on legal fees. That’s right, 3.5 million Pound or 4 million Euro spent on legal fees for a project that has never materialized. That means that in this no litigation scenario, 6,6% of the whole budget has been spent on lawyers, just for reviewing documents and drafting some contracts. This must be difficult to grasp for all of you who have to work with clients who do have a business to run. No company bidding for an infrastructure project would spend 6,6% of its budget on lawyers (project finance not included). This is legal la-la-land and totally out of touch with reality.
There have recently been more reports on excessive legal costs in the press. After Carillion, a UK facility management, civil engineering and construction company with 43.000 employees went bankrupt on 15 January 2018, a report by the House of Commons showed that Carillion was billed £6.9m by Slaughter and May over the last seven months before its compulsory liquidation commenced. That is 1 million pound in legal fees per month! On the merger between pharmaceutical companies Takeda and Shire that was closed on 7 January this year, Takeda’s lawyers will be paid $44 million, while the legal team for Shrine will invoice $77 million. That is $121 million for the lawyers doing the paperwork. Back in 2015 New York firm Cravath billed $100 million in fees for its legal assistance to AB InBev during the takeover of rival brewer SABMiller. For 99% of all law firms these kind of figures must take place in a parallel universe.
Within the next two months my new book ‘Data & Dialogue, a relationship redefined’ will be published. This book details the present and future relationship between clients and their law firms. I have had the privilege of writing this book together with Vincent Cordo, jr. who is Central Legal Operations Officer at Shell. Working on this book and talking with many in-house teams and with many law firms, we know that for law firms and clients who have to operate on planet Earth, the situation is very different from what I have described above. The vast majority of companies is cost conscious as it comes to legal spend. What clients are looking for is value.
There is no academic definition on what exactly value is and how it can be measured. I have been discussing this with Harvard and other leading institutions, but no one has a workable answer. We at TGO Consulting have spent some of time thinking about this and have now developed the TGO Value Matrix©.
As the graph shows, there is a clear and direct relationship between the Return On Investment that the client can expect and the preparedness to spend money on the legal advice needed to get to the ‘profit’. The more money the client can potentially make (or prevent losing), the more he is willing to invest. The second relationship has to do with the number of available experienced lawyers that can do the job. The more choice the client has, the more competition, the lower the price that represents value for the client. We call this commoditization. The graph illustrates under what conditions clients expect low rates in order to get value, and in what situations a high fee will be acceptable. For lawyers value depends on the legal complexity of the matter and on the amount of time spent. For clients it is all about return on investment. Is legal spend part of opportunity or part of cost, this makes all the difference.
Is legal spend part of the opportunity or part of the cost?
Back to the examples mentioned before. In excess of $100 million in legal fees for a merger is an astounding amount of money, but in a situation of a $50b business opportunity it is just a small part of the costs that need to be made in order to successfully do the acquisition. The number of lawyers that have ample experience in handling this kind of processes is extremely limited, so there is a clear combination of business opportunity and limited availability justifying high cost. Whether that cost should be $100m is debatable. In the case of the Garden Bridge or the last days of Carillion, the situation is entirely different. There is in both situations no business opportunity and no shortage of competent and experienced lawyers. The amounts paid to legal fees seem to make no sense. The UK parliament and the press both have come to that same conclusion, be it in hindsight. The clients involved better had studied the Value Matrix...