As infrastructure giant Balfour Beatty signs up Pinsent Masons as its sole legal adviser for general matters, Legal Business asks why the trend for single-supplier deals hasn’t really taken off yet.
The single-supplier legal advisory model pioneered by Tyco International has resurfaced yet again. In April, infrastructure giant Balfour Beatty announced a radical overhaul of its panel arrangements, selecting Pinsent Masons as its sole adviser for all its ‘business as usual’ legal work. The three-year contract with Pinsents, which was agreed for an undisclosed amount, will cover all repetitive and predictable legal work that the firm faces on a daily basis.
The win is a major coup for the law firm, rewarding its loyalty and sensible pricing, and reawakening the single-supplier model that appeared to have stalled after spurts of activity up until last year.
Yet despite this latest example, the in-house community and law firms have yet to embrace the model with gusto, irrespective of the touted benefits for client and law firm.
Early promise
Six years ago Tyco signed a deal with Eversheds that looked set to revolutionise the way large companies outsourced their legal work. While other companies streamlined their legal panels, reducing the number of external legal service providers, Tyco took this to another level, culling its roster of around 250 law firms to just one.
The ground-breaking deal attracted a great deal of debate. Would Eversheds really have the capacity to service the quantity of work to come out of Tyco? Would Tyco manage the level of upheaval? How could a single law firm service every one of Tyco’s business needs? And what would happen if the arrangement failed?
But in the years since the deal was signed, the success and longevity of the relationship has largely silenced its critics. The arrangement has been extended several times, evolving each time to better suit both client and law firm – the two signed a new two-year extension in 2012. (The arrangement, with the majority of Tyco International in Europe, the Middle East and Africa (EMEA) following its internal restructuring, is worth around £16m for two years.)
Other moves
Despite the early uncertainties, in 2007 there were nonetheless widespread predictions that the Eversheds contract would lead the way for similar deals for other large companies with
a workload akin to Tyco’s. But while the economics of the deal – which was structured to align financial incentives of client and adviser – looked increasingly compelling as the global economy moved into a period of sustained turmoil, as yet there have only been a handful of examples of European clients adopting comparable arrangements.
A few months before Eversheds signed with Tyco, DLA Piper announced that it had been selected by The Linde Group as its main legal provider for the majority of its global work, with the exception of strategic corporate matters. The combined Linde/BOC organisation had previously used more than 150 legal providers following its merger in September 2006.
‘Business-as-usual work is perfect for this kind of single-supplier deal as well as strategic material work and big investigations.’
Stephen Allen, PwC
Eversheds itself, after securing the rights as sole provider to Tyco’s legal needs across its 900 legal entities in EMEA, went on to win several more similar but smaller deals with companies such as Orange, Rolls-Royce, Akzo Nobel and Samsung. In October 2007, it took on the majority of Severn Trent Water’s work alongside Herbert Smith, which continued to advise the water company on strategic and corporate matters, and in early 2008, struck an EMEA deal with US sign manufacturer Brady.
More recently, the firm signed a 12-month contract as sole provider of Italian energy giant Eni’s employment and recruitment legal advice in May 2012.
Other law firms have forged similar deals. In 2007, after a five-month request for proposal (RFP) process, Baker & McKenzie signed an initial three-year contract with Unilever to service its global trade mark and IT work for around £10m annually. Its global managed services scheme proved popular and Bakers signed an open-ended £10m-plus a year deal with Carlsberg in December 2010 for all corporate, commercial and disputes work, followed by a £3m, three-year contract with Colt in Europe in January 2012 to handle its commercial, IT, telecoms and regulatory matters.
Berwin Leighton Paisner (BLP)’s own Managed Legal Service (MLS) programme failed to win Colt’s favour but in 2010 it signed a £25m five-year deal as sole legal provider to Thames Water, which saw it absorb 15 in-house lawyers. It was a deal that perhaps seemed most closely matched to the Tyco contract, with an important distinction – BLP subcontracted some work to Ashfords and Pannone.
Two-way street
Reaching an exclusive fixed-fee agreement takes time to research and a great deal of investment on both sides, according to Baker & McKenzie London managing-partner elect. Paul Rawlinson. ‘The client needs to look at the internal data of their overall spend from the last two or three years,’ he says. The firm also needs to examine the data: once the scope of work has been defined, it is able to put a price on it (not without a spot of bartering of course).
When planning its arrangement with Pinsents, Balfour Beatty looked back to its work with the firm during 2010-11, according to head of group legal Keely Hibbitt. ‘We looked at the usual run-of-the-mill legal work we did in that period, for example, compromise agreements or employment tribunals,’ she says. ‘We took that spend and instructed Pinsent Masons to take care of it. It’s the sort of work that is repeated and is all of a relative size.’
The expectations within any agreement of this type have to be well managed from the outset, emphasises Paul Gilbert, chief executive of legal consultancy LBC Wise Counsel. ‘Work that is said to be there should be there, the level of service should be there,’ he says. ‘There must be real transparency on both sides, particularly around process. Both parties must invest significantly in ensuring that the information flows are correct and accurate, along with sound project management and really good relationship development skills on both sides.’
For work that goes beyond the fixed-fee arrangement, a transparent cost management system is important. Eversheds’ secret weapon in the Tyco deal is an e-billing software package dubbed the ‘Global Account Management System’ (GAMS), which calculates add-on hourly rates on a case-by-case basis. It also tracks data from around the globe, breaking down a company’s legal spend by country, jurisdiction or practice area, effectively providing a spending map. It gives Tyco complete control of costs.
‘It is very effective,’ says Eversheds’ Tyco relationship partner Stephen Hopkins. ‘The principles behind the approach included a much more effective scoping of all matters between law firm and client. With a little more investment up front into discovering how the client wants things handled, the law firm is making sure it manages its own resource to ensure the quality and the predictability of cost the client wants.’
Hopkins says the model allows the relationship between law firm and client to evolve beyond a simple supplier-type arrangement to a genuine relationship. Another Eversheds’ client, Severn Trent’s senior legal counsel Stuart Kelly, agrees. ‘Our mindsets are aligned to seeking continuous improvement, with a legal adviser who is treated as an extension of the in-house team and has great insight into our business,’ he says.
This level of commitment takes time and certainly doesn’t come from nowhere. While the Pinsents-Balfour Beatty partnership has only recently been announced, the law firm, in one shape or another, has been advising the infrastructure conglomerate on legal matters over the last 35 years. Says Baker & McKenzie’s Rawlinson: ‘Where we have sole supplier arrangements these are typically with clients that we have built a relationship with over a period of time. The discussions that have built up to these deals have been systematic over this period.’
This type of close relationship certainly seems to deliver. Thames Water says it has saved 30% on its legal spend since signing with BLP, while Tyco claims it saved 50% between 2007 and 2012.
Reassuring predictability
But direct cost savings are not the only advantage with these deals. Financial certainty comes high on the list of benefits to clients as well, as annual capped fee arrangements from one supplier mean that companies are better able to forecast their legal spend. Additionally, without a large panel arrangement to organise, general counsel (GC) can spend more time looking at bigger picture issues, risks and trends, according to Kelly. ‘It eliminates the inherent inefficiency of interrogating traditional commercial arrangements, providing us with genuine added value, which is now demanded,’ he says.
The efficiency of using a single supplier means firms can improve client processes, says Gilbert. ‘It also leads to better management of information for both the law firm and the client,’ he adds.
‘This data-management provides a client with metrics and trends in the workflow, which leads to quality control and adds to the predictability and efficiency of the work,’ comments Rawlinson.
Naturally the benefits of this type of arrangement for law firms are evident as well. ‘The benefit of having a trusted adviser relationship is that there is some degree of flex,’ says Rawlinson. ‘You won’t get everything right at once, your way of working changes and becomes more effective through close engagement and day-to-day experience.’
Lack of appetite
Of course, not every client is suited to this kind of exclusivity. One real estate GC says that while they considered it at first, there was soon the realisation that they didn’t have the volume of standardised work to make it worthwhile. They feel that the varied nature of their work means sticking to a fixed-fee panel arrangement makes more sense. The view of most clients and law firms is the model needs a large volume of predictable work to function effectively.
Says Stephen Allen, former director of innovation services at BLP, now at PwC: ‘Business-as-usual work is perfect for this kind of single-supplier deal as well as strategic material work and big investigations, the kind that you know are going to happen but you don’t necessarily know when or what exactly. A single or dual supplier would also be ideal for this, depending on the scale.’
Given the apparent advantages to both law firm and client, one might expect greater market appetite for the model. However, the level of risk involved in putting all your legal requirements in one basket goes a long way to explaining this reticence. GCs are also put off by potential teething troubles.
‘People are always nervous about giving out lots of money,’ says the reluctant real estate GC. ‘You don’t want to give out £1m for work that might only be worth £400,000. It can be hard to calculate how much it’s going to be worth if you haven’t done it before.’
Gilbert agrees: ‘I think that companies are cautious of investing in something like this before the parameters of what works can be seen. We’re all in the foothills of the outsourcing of this work on a regular basis.’
This also impacts on the law firm, the GC adds. ‘The biggest risk for law firms is being overrun with work. It is a lot more difficult for the law firm to gauge what the workload is going to be – usually people will have a large panel of law firms so they haven’t got a feel for it and it is difficult to price.’
Preparation is key to getting this right, says Gilbert: ‘If the groundwork isn’t done well, you can end up with law firms feeling disaffected that the volume is too large.’ And with groundwork requiring a number of years’ worth of data analysis and department scrutiny, this adds up to a daunting project.
But even with a well-thought-out price plan in place, there may not be much appetite among law firms for alternative arrangements. ‘The risk is that deals like this are misaligned in some respects with the traditional law firm model where they have based their decisions on the bill. The driver of a law firm is profitability, so you have to learn new tricks,’ says BLP head of corporate John Bennett, who manages the Thames Water contract.
It is a way of working that may not suit the in-house lawyer either. ‘External lawyers don’t tend to take much risk,’ says the real estate GC, ‘which means there is a chance that in-house lawyers would get bogged down in reviewing their work and “interpreting” for their internal clients. As an in-house lawyer, I am able to make a commercial decision for the company but for a commercial lawyer it’s much harder because they have to explain their reasons as they go, so it slows things down.’
‘Companies are cautious of investing in something like this. We’re all in the foothills of the outsourcing of this work on a regular basis.’
Paul Gilbert, LBC
Despite these long-held concerns, there is still a great deal of positivity in the market.
‘In the last three years we’ve advised on 43 panel arrangements, set-ups or reviews. Each one of those has resulted in a smaller panel than there was before, so the trend is very clearly to reduce the number of law firms that in-house teams choose to use,’ says Gilbert. ‘The trend for using fewer law firms is almost irreversible: I can’t see anyone going back to the traditional old way of having large legal panels.’
And some believe there may be more of these exclusive deals being made than is reported in the media. ‘There have been more quiet deals happening across legal departments rather than major international arrangements,’ says Rawlinson.
Gilbert agrees: ‘There is a great deal of difference between deals that are done and deals that are announced. There are many more out there than are announced.’
What sets the Tyco deal apart from the smaller agreements that followed is that it was signed at the height of the boom. For most clients, the driving force behind leaning further towards single-supplier deals is the increasing need to keep control of the purse strings. ‘The “more-for-less” agenda is more relevant now than it ever has been,’ says Hibbitt when referring to Balfour Beatty’s recent deal with Pinsent Masons.
With this comes the incentive for companies to move away from the traditional hourly rate model which, Hopkins says, rewards inefficiency. ‘While this old model was good for thoroughness, leaving no stone unturned so to speak, now there are fewer and fewer of those situations. Clients want transparency and efficiency, they want different approaches which incentivise.’
While the legal market has been surprisingly slow in many regards to adopt the partnership arrangements of Tyco and Eversheds, ultimately there is a consensus that such pioneering work has had a wider influence on the buying habits of GCs. While there is still limited appetite for complexly structured deals tying major clients to a single adviser, there is agreement that such arrangements have encouraged in-house teams to shift their procurement in similar directions, albeit so far to a generally much less radical degree. That gradual but fundamental shift in how companies buy their legal services may not be great for headlines but it promises to keep significantly refashioning the legal industry for years to come. LB
francesca.fanshawe@legalease.co.uk