The market for legal services has changed dramatically, and most likely irrevocably. At least until such a time as demand for outside counsel services increases significantly (or the supply decreases), competitive pressures will continue to significantly dampen law firm profits. For the foreseeable future and for any particular matter, there will always be some very competent firms willing to do the work for less. You can see that more competitive market in the nature and frequency of Requests for Proposals (RFPs) sent out by clients, the degree of discounting of hourly rates, and the acceptance of capped fees by law firms. An interesting side effect, as documented by the American Lawyer magazine through their regular surveys, is that “the rich are getting richer” and the gap between the most profitable law firms and all the rest is getting wider.

Why are most law firms offering significant discounts or agreeing to bear the risk of a matter taking many more hours than they had estimated? Partly because clients have more leverage than ever before. Also, as law departments (and their procurement teams) come under pressure to show savings, discounts and caps are the easiest things to demand and for which to take credit. But it is primarily because most law firm partners fail to negotiate effectively regarding anything else.

In my experience many partners, especially those at the larger firms, find it difficult to negotiate with clients about what they should be paid for their services. Some of the problem has to do with the assumptions about what it means to “negotiate” and the need for there to be winners and losers in any negotiation. Some of it has to do with fears about putting the relationship at risk by bargaining about rates. A not insignificant part of the problem is that few lawyers ever receive much training on professional service fee negotiations – because many firms don’t consider such training relevant for associates and many partners find it embarrassing to acknowledge they might benefit from it. I suspect these negotiations even trigger identity issues for some partners, who resent having to explain why they are worth what they charge. Whatever the combination of factors that conspire to make fee negotiations challenging, otherwise highly effective negotiators, who are able to be creative and persuasive when they are negotiating on behalf of their clients, seem to forget all of that when they negotiate with their clients. To avoid feeling adversarial to their client, many partners instead grimace painfully and posture briefly about how low they will or will not go.

Clients have learned to capitalize on this discomfort. First, to gain a bit of leverage, they consolidate their spend with a smaller number of preferred firms through a panel RFP; to get on the panel, law firms typically have to offer some kind of discount. Then they bring their colleagues from procurement to the table to negotiate specific terms and conditions; to be seen as successful, procurement must also achieve some kind of savings, and discounted rates are the easiest metric they can use. Finally, when it comes time to award work to a particular firm, some clients will ask multiple firms on their panel to bid, creating one final opportunity for law firms to discount or cap their fees in order to get the work.

The problem with all this is what it does to the relationship between lawyer and client. When we expect to negotiate over the size of a discount, both sides tend to stake out positions that are more than they really seek to obtain; they then act as if making any movement from that position is painful and costly, and finally they compromise at some number in between. What does that negotiation strategy do, above all else? It teaches the other side (our clients, in this case) not to believe the first thing we say. It rewards them for exaggerating their initial demands, for using pressure or threats, and for being stubborn and uncommunicative. And it leaves them wondering, no matter how big a discount they got, if they shouldn’t have held out for more.

It does not help the lawyer-client relationship to have clients trying to uncover “just how low they will go” and law firms struggling to figure out how to preserve both margins and relationships. The more law firms have to try to claw their way back from unsustainably low realization levels, and the more clients have to worry about whether they fully squeezed the excess fat out of their legal fees (and to wonder whether and where additional law firm profits are going to sneak back in, buried in some incomprehensible bill many pages long) the harder it is to build a trusted advisor relationship. Both clients and outside counsel benefit when, instead, the conversation moves to what things lawyers do that actually deliver value to clients, and how to increase the proportion of time and cost that goes into those things.

This is not a call for more “alternative fee arrangements” (AFAs) for their own sake. I find AFAs are often just solutions in search of a problem. The objective of a constructive, collaborative fee discussion between client and counsel should not be to move away from the billable hour, but to find solutions to the real problems both are facing. This is a call for smart and creative individuals on both sides of the relationship to bring to bear what they know about effective problem solving and counseling. Instead of avoiding the fee discussion because it feels adversarial, partners should engage the parts of their repertoires that help them close a deal, settle a case, or work with a regulator to find a solution to a complex problem.

It starts with listening. As outside counsel to a company, you ask questions about what they are trying to accomplish, what risks they are seeking to mitigate, what their priorities are, etc. with respect to the substantive legal problem with which you are helping them. Why not do the same thing with regard to their legal services problems? What does success look like? What is their nightmare scenario? What do they measure and for what purpose? If you have to change one thing about how you engage with clients early in the process of learning about a new potential piece of work, it is to “be more curious.” We are almost always in our roles as advisors called upon to “be expert.” But to be more effective in the fee conversation, we have to listen better.

Develop a fit-for-purpose solution. Fee negotiations should not be about percentage discounts, or about slapping some kind of generic AFA onto a client whose problems it may not solve. Effective fee arrangements are those that help the client address their most important objectives or manage their most worrisome risks – be those about total cost, appropriate levels of staffing, certainty, risk sharing, timing, internal politics, etc. – and do so with as nuanced an instrument as possible. Don’t try to solve a concern about staffing too many lawyers on a matter with a discount, or to address a fear about budget surprises with a cap. You have many more tools in your toolbox, some of which will cost a lot less while still meeting your client’s interests.

Get into the client’s shoes. After your client (be it the deputy general counsel, the head of legal operations, or even corporate procurement) finishes negotiating with you, they have to explain or justify to others what they have agreed to with you. Help them. In the current environment, they are under pressure to “get a better deal.” If they cannot defend your fees (or rates, or cap) they will either have to say “no” to you, or expend precious political capital for having said “yes.” If you value the relationship, then do the homework to help them articulate how you and your firm bring such value that your fees are worth it (and it’s not just that hiring and training associates is expensive), and try to structure the fee so that they are indeed paying for what they value (and not, or not as much, for what they don’t).

Think beyond “yes.” It is not enough that they agree to your proposal or sign an engagement letter. If you are going to deliver on your promises to them – to staff appropriately, be efficient, help them make good decisions about what is worth spending their money on and what is not, etc. – then you need to be sure you are aligned about how you will work together. The biggest part of what it takes to turn alternatives to the billable hour into effective ways to meet the interests of the parties is to figure out how lawyer and client must work together differently. Just moving from a billable hour to a fixed fee arrangement or one of its variants (caps, phased fees, collars, etc.) won’t work well if the parties do not discuss how they will make choices about how to handle the inevitable surprises along the way, and how they will decide whether they are within the scope of the fixed fee, or outside it. Similarly, just moving from a billable hour to a results-based arrangement (contingency fee, success fee, hold-back, etc.) will not meet the interests of the parties unless they articulate their assumptions about a range of plausible outcomes and the paths to achieving them, and discuss how they will measure success and share in the risks and rewards of the different approaches to handling the matter.

Help them consume less. Your clients are under tremendous pressure – from business unit leaders, CFOs, Boards, and others. Their budgets are static or shrinking, while the risks they manage are only growing. If they conclude they have to spend less, but at the same time have greater needs, guess what happens to your margins? Clients complain that law firms don’t practice law like it was their own budget on the line, and that’s been literally true under typical time and materials arrangements. To be responsive, law firms have to streamline processes, train their lawyers differently, and rethink some critical elements of how they practice law. They have to get better at estimating, managing projects, and delegating work. But reforms entirely within the four walls of the firm are not enough, because they invariably require trade-offs and introduce risks. Those are trade-offs that you should not have to make alone, but neither should you expect to be able to shift the choice (and all its attendant consequences) to the client. It takes an effective working relationship, and some tough conversations, to find better answers.

The next five years

Many more radical things may happen over the next decade and beyond. Technology will likely eliminate many of today’s issues, just as it first created the explosion in the number of documents to be reviewed in preparation for litigation (at least in the US and the UK). Regulatory changes and business model innovations will undoubtedly change the competitive landscape. But these things will take time. For the near term, what lawyers (and their clients) have to do is improve how they talk about fees and working together. These conversations have to be more than just about how much the partner thinks it will cost to handle the matter, and whether the client is willing to pay that.

When law firm partners and their clients set out to problem-solve, rather than posture about the size of the discount, they actually come up with some fairly clever arrangements. Those arrangements can exploit some of the synergies inherent in stronger, deeper working relationships, including providing both greater certainty about costs and revenues, offering associates better learning opportunities and clients counsel who know their business better, leveraging (or enabling) technology investments, and generally making it easier for in-house and outside counsel to deliver value to their shared clients together.

According to recent data regarding the Italian M&A market, the 2008 financial crisis is over. Compared to the previous year, the Italian M&A market registered a significant increase of deals having an aggregate value of approximately 49 million euro. Out of over 500 transactions completed in 2014, more than 37% of the deals were cross-board transactions while Italian companies targeted domestic companies as well as investments abroad.[1] Just to name a few of the deals that took place in 2014, worthy of mention are the acquisition of Indesit by Whirlpool and Grom – a local ice-cream business – by the Unilever Group while Italian investments abroad targeted, for example, Ciments Français by Italcementi and more than 240 mergers among Italian companies took place.

Foreign investors have always displayed a special interest towards the Italian market. Italy is a gateway to the European Union. Investing in Italy means acquiring the possibility of taking advantages of the single market, including the freedom of establishment or the freedom to provide services thus overcoming the barriers that Non-EU entities are likely to face in order to do business in the EU directly from their home country. As a member of the Monetary Union, Italy has a strong currency – the Euro – which has a significant impact on imports and exports and that is not subject to the loss of purchasing power, as may be the case for weaker currencies. Further, by investing in underdeveloped areas, such as Southern Italy, an entity may become eligible to apply for state grants and non-refundable facilities.

Moreover, it cannot be denied that Italian craftsmanship is without rivals and that Italy offers a combination of state-of-the-art technology and creativity that make Italian products unique worldwide. This is a rare blend that will be difficult to find elsewhere in Europe and the “Made in Italy” brand gives a product unquestionable added value.

The awakened interest in the Italian market and the reprise of acquisitions by foreign as well as Italian investors have been triggered by a variety of factors such as monetary policies enacted by the European Central Bank and recent reforms of the Italian labour market.

The quantitative easing plan approved by the ECB has injected a significant amount of cash into the market and the supply of liquidity to banks and credit institutes has promoted lending to enterprises. Businesses now find themselves having easy access to funds that they are willing to invest in new projects, whether in Italy or abroad.

Also, rigid labour laws that have always been of concern to foreign companies doing business in Italy have been mitigated by recent reforms enacted by the government headed by Prime Minister Matteo Renzi. The primary piece of labour legislation passed by the Renzi Government, known as the “Jobs Act”, has deeply reformed the Italian labour market.

While the Jobs Act in its entirety is still being implement, it provides for new types of employment contracts and has simplified the hiring and firing process, streamlining the entire employment relationship and making it easier to dismiss employees. With a view at promoting employment, the Jobs Act offers tax breaks to companies that hire personnel with permanent employment contract and has reorganized existing social shock-absorbers. Since the implementation of the Jobs Act, indicators show that the unemployment rate has gone down for the first time in years. Labour Unions, however, continue to be key players in employment negotiations processes and their role and influence should not be under estimated.

The Challenges of Investing in Italy

The reforms introduced by the Renzi Government accompanied by the BCE’s monetary policies have certainly generated greater stability in the overall Italian scenario. Nonetheless, there are still many challenges that foreign investors must address within the context of an M&A deal.

Depending on the specific field of business, investors may unexpectedly find themselves tangled in red tape and authorization proceedings that sometimes discourage investors coming from jurisdictions that do not impose the same degree of government involvement. In this respect it is noteworthy to point out that while EU nationals – whether individuals or corporations – usually benefit from the same treatment reserved to Italians, non-EU nationals may be required to meet certain criteria of eligibility in order to be enabled to do business in Italy, for example they may be required to establish an Italian subsidiary. Also, foreign clients often approach the Italian market with a certain degree of mistrust that follows the many commonplaces on Italy.

Foreign companies are often trapped in the meanders of Italian bureaucracy that Italian themselves have a hard time dealing with. Foreign investors that are used to streamline processes in their home countries will have to cope with more complex laws and sometimes unreasonable, albeit mandatory, courses of action.

What is Our Role

In the face of these challenges, in addition to providing highly professional and qualified legal services, our goal is to lead our clients through the various steps of any mandatory processes in order to overcome potential obstacles in completing a transaction, whether this obstacle consists in obtaining a license to operate a specific type of business or dealing with unions to renegotiate workers’ rights. We lead our clients through the red tape and explain to them the legal scenario within which they will operate. In this respect, we assist our clients by dealing directly with government officials and regulatory authorities with which we have established sound relations, and provided detailed guidelines on how to do business in Italy. We adopt a comprehensive approach that addresses all the potential issues related to an M&A transaction and specific type of business, from legal to tax to regulatory and suggest a range of solutions that respond to our clients’ business needs and objectives.

Thus, our job is to conduct our clients through the written and unwritten rules on doing business in Italy and we help create a sentiment of complicity between the client and the new business environment it is called to operate in.

Our team is composed of attorneys from different jurisdictions that are able to understand our clients’ cultural background and, hence, to mitigate the impact that doing business in Italy may imply.

Our lawyers’ solid legal training represents our primary asset that is complemented by their academic preparation and practical expertise in the various fields of law we operate in. Also, we work in our clients’ language: our lawyers are mother-tongue professionals that are qualified either in Italy and/or in their home countries. This allows us to understand our foreign clients’ specific needs and to establish a constant and professional relationship while building up a relationship of confidence with our clients.

[1] KPMG M&A Report 2014

When you put your business up for sale, or entertain an approach from a prospective buyer, due diligence will play a key role in determining the final price achieved.

So what are the key considerations in getting the due diligence right, and how do you manage the process while maintaining business as usual?

The formal  accounting ‘bricks’ such as maintainable earnings, asset value, cash flow and multiples can really only provide a benchmark against which to base and measure an offer. The integrity of the data behind the valuation will be tested during the due diligence process, and personal and professional judgement will be required.

The prospective purchaser will typically be looking for synergies, future income flow or capital growth or a combination of these; and the price needs to represent a better return for them than would be achieved from investing the same amount in another business.

In short, a valuation from a vendor’s perspective will often focus more on the science of valuation, and from a purchaser’s perspective will often focus more of the art and emotional ties.  At the end of the day, the objective due diligence (DD) process is king and should resolve any conflicting ideas.

In an ideal world, the sale of the business you have put your heart and soul into will be part of your long term planning, and it will already have been groomed for sale. Your processes and records will be in good order and due diligence will not be disruptive.  In practice, however, this is rarely the case.

Due why?

DD is often the least favourite part of the deal process. It can be stressful and time consuming and by the end of it you can often be left wondering why you decided to sell the business and put yourself through this. But remember, the purchaser will need certain information in order to be comfortable completing a deal at an agreed price and so thorough DD cannot be avoided.

In my experience, a buyer is often more worried about the risks of making an unsuccessful acquisition than they are excited about the potential gains from a successful deal. So getting the DD right will pay dividends if you want a smooth sale.

Do’s and Don’ts of Due Diligence

Do:

• Plan ahead. Bring the ‘housekeeping’ up to date – formalise contracts, HR matters, records etc. – all the things that make the business less risky to the potential purchaser.
• Maintain open channels of communication with your professional advisors as well as the purchaser and their advisors to both speed up the process and build a level of mutual trust and respect which helps a deal progress more smoothly.
• Agree the timetable upfront, establish responsibilities for providing information, and allocate the time needed to do so.
• Use your advisors to do the legwork and reduce the impact on the running of the business, and choose an experienced team.
• Agree fixed fees, if possible,
• Ensure your advisors set up a Data Room to share information with the purchasers and their advisors (preferably electronically which minimises the cost of and time involved in providing such information).
• Discuss the findings with the purchaser as they arise – there may be misunderstandings or more information required to clear any issues arising.
• Always remember a deal may fall through and as such ‘business as usual’ is key throughout the whole sale process. You may need some help from your finance team but it is always advisable to keep knowledge of a deal to the minimum to avoid a detrimental effect on the business (uncertainty, distraction, job insecurity, potential to lose key staff etc.)

Don’t:

• Spend time and money on detailed vendor DD until asked. The purchaser is unlikely to rely on this and you will still need to spend time presenting the information in the manner required by them and their advisors.
• Assume the deal is done before it is actually completed – DD results can have an important impact on the price and also the decision whether or not to proceed
• Don’t allow the lawyers to spend too much time on matters that aren’t of high importance to the overall deal.
• Don’t be rushed. When discussing the DD findings ensure you are allowed time for a thoughtful and fact-based response. Don’t try and hide any issues within the business until the last minute but ensure that you provide this information with supporting narratives and explanations.
• Don’t agree to changes to the contract too early. Something arising out of the DD later may offset any issues, and even support a higher price.

Above all, get it right. Be quick but don’t hurry.