The Energy Transactions Boutique: A New Legal Service Delivery Model [Gaille Energy Blog Issue 95]
- Posted by scottgaille
- On October 5, 2020
- 0 Comments
This Friday I’ll be speaking at SparkCon, a conference that focuses on innovations in the energy industry. One of the innovations I’ll be discussing is how GAILLE PLLC is challenging the legal service delivery models available to the energy industry. Over the last six years, we have been developing a new legal service delivery model that we call an “Energy Transactions Boutique.”
This model came about as a result of my broad perspective on legal services:
- as an outside counsel provider of legal services at Vinson & Elkins;
- as an in-house counsel provider of legal services at Occidental Petroleum Corporation; and
- then as a consumer of both outside and in-house legal services when serving as Director – Business Development at Occidental, president of a private-equity backed energy company, and the general counsel of a NASDAQ-listed exploration and development company.
Over the course of my 25-year career, I was frustrated by the availability of only two legal services models: (1) outside counsel from a large law firm; or (2) in-house counsel. Large firms offer high-quality legal services and energy expertise but are expensive and often lack business acumen. In-house counsel are commercially savvy, but often are trained to primarily manage and oversee someone else’s legal work. Even if in-house counsel routinely draft and negotiate their own documents, deal flow inevitably rises and falls in our cyclical industry. Trying to manage legal services for energy transactions primarily through an in-house service delivery model usually leads to inefficiency and waste, as the hiring and layoffs of in-house lawyers perpetually lag the enterprise’s actual needs.
As a result of the limitations I faced with the foregoing two options and my experience running my own law firm for 6 years, I have learned several lessons:
Lesson #1 – An Energy Transactions Boutique needs to almost exclusively service energy companies.
When I was a general counsel, I went in search of smaller firms that might be able to deliver services at the same quality level of transactional lawyers at larger firms. Smaller transactional firms existed, but I found both their partners and associates lacking in energy contract expertise (when compared to what we had in-house or what big firms offered). Some of this was a product of over-generalization. These lawyers were taking on too many non-energy clients and devoting too much of their time to non-energy matters. The practical result was that energy skills atrophied in previously experienced lawyers and were not sufficiently developed in younger ones. In order to maintain and cultivate the level of expertise needed for energy transactions, lawyers need to be primarily focused on energy contracts.
Lesson #2 – An Energy Transactions Boutique needs to be able to recruit associates from the same talent pools as the largest law firms.
I also discovered that there was a quality gap between the partners at these smaller firms and their associates. These smaller firms were failing to recruit and/or train associates that were of comparable quality to their partners. Energy contracts are more complex than other transactions because of (i) the technical overlay and (ii) the need to master many specialized provisions that have evolved over time through industry practice. Not all good lawyers can be good at energy transactions. It occurred to me that the principal reason there were no viable Energy Transactions Boutiques was that the founding partners of smaller firms lacked the ability to recruit and/or develop the types of associates needed to undertake complex energy transactions (at the same level of quality as the large firms).
Lesson #3 – An Energy Transactions Boutique needs to be managed by partners who have the time, patience, and teaching skill to mentor young lawyers in the many nuances of energy contracts.
I was in a better position than my potential competitors to overcome this barrier to entry. I teach the Energy Transactions Seminar every other year at The University of Chicago Law School, which gives me the opportunity to work closely with 20-30 brilliant law students who are interested in the energy industry. They get the opportunity to know me and glimpse what it would be like to work with me. Some of these students also sign-up as my research assistants, which provides a much longer period of mutual evaluation than would typically be possible during a summer associate stint.
Lesson #4 – Offer a clear path to partnership.
Unfortunately, familiarity is not enough to out-compete the Vinson & Elkins of the world and the rain of money that they pay to first-year lawyers. In order to offer my clients lower rates than the large law firms, I had to find ways to reduce my costs. This included more than the obvious lowering of overhead, such as non-downtown office space and the outsourcing of firm administration. Associate compensation also had to be somewhat lower than the big law firms. How does one persuade a young lawyer to accept less money to come work at a smaller law firm? Young lawyers starting at large firms are smart enough to do the math. They know that only a fraction of each starting class will ever make partner at the big firms. Whether or not an energy lawyer makes partner at a big firm is very much a product of where the commodity prices happen to be at that moment in time, and which senior partners may be retiring that year. No one likes to bet his or her future on 1-in-10 odds. So I developed a business model designed to support a partnership path for all associates (assuming each lawyer can achieve the required quality of service that goes along with being a partner).
Lesson #5 – Offer a better quality of life.
Many young lawyers want to practice law, but perhaps not seven days a week. I developed a “choose your own adventure” (these are the words of one of my associates) compensation model that allows associates to set their own hours and schedules. What I didn’t realize at the time was how valuable this approach would be to my clients. While lawyers usually bill by the hour, not all of those hours provide clients with equal value. Is the 12th billable hour in a day really as productive as the 1st. Is the 80th billable hour in a week really as productive as the 30th? I have come to realize that freshness of mind is tremendously valuable to clients—and that fatigue is incredibly expensive. Not only do our lawyers charge less per hour than their equals at the big law firms, but they can deliver more results and higher quality because they are not fatigued from working long hours.
Lesson #6 – Offer to share the risk with entrepreneurs.
The last lesson I learned came from when I started a private-equity backed company. I was negotiating a private equity funding agreement and turned to a large law firm for support. If I failed to close the deal, I would still have to pay those legal fees. This is the case for most energy start-ups, and such pre-closing fees often amount to $50,000, $100,000, or more. Energy Transaction Boutiques can offer transactional contingency fees to start-ups, thereby decreasing their downside risk.
Every day we are continuing to refine and adapt our business model to provide a third way between delivery of energy legal services by large firms and in-house counsel. The advantages of an Energy Transactions Boutique include:
- the same quality of service as large firms but at lower rates;
- more productivity per hour due to associates not being overworked;
- enhanced efficiency as a result of having a small, collegial environment where the partners know the capability of each associate (and thus there is less need for corrections of associate work);
- more amenability towards alternative fee structures, including contingency fees, flat fees, and reduced fees for guaranteed hours; and
- more personalized service and faster turn-around times as a result of having fewer clients.
The last six years have not been without challenges, and COVID-19 brought many to our doorstep in 2020. Several of our clients were unable to survive the price collapses and deal desert of 2020. For a small firm, the bankruptcy of a client represents not only a loss of future revenues but two or three months of invoices for past work that will never be paid. Nonetheless, we have managed to maintain our staffing levels—and even just hired a new associate who will be starting in June of 2021.
All of us at GAILLE PLLC believe in our shared mission of seeking to create a different kind of law firm. There is value to our industry in having options like the Energy Transactions Boutique. Legal services delivery models can and should be improved. We are doing it, and we challenge others to join and follow us.
About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 174,191) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development), and co-author of the award-winning travel compilation, Strange Tales of World Travel (Bronze Medalist, IPPY Awards for Best 2019 Travel Essay; ForeWord Magazine Finalist for Best Travel Book of 2019; North American Travel Journalists’ Honorable Mention for Best Travel Book of 2019).Image