Procurement | Summer 2018
Commitment. Marriage. Honeymoon. Divorce. Conversations about single-supplier legal advisory mandates are rife with relationship-strewn analogies. While no two arrangements are the same, most begin with a commitment from a company and its in-house legal team to reduce external legal spend and get a better handle on its multitude of legal connections.
Marriage follows when a company is brave enough to put all its faith in one law firm. The firm will handle a company’s day-to-day legal work, with first dibs on the racier stuff, while providing transparent pricing structures and promising to invest in the relationship. This marriage, however, often brings break-ups and acrimony. Tens – in some cases hundreds – of often long-held relationships have to be discarded as one firm becomes the exclusive suitor.
It is an obvious analogy. DLA Piper intellectual property (IP) and technology partner John McKinlay, who manages his firm’s principal legal adviser relationship with Heineken UK, knows it is becoming stretched when he says there is no time for a honeymoon.
‘Different parts of the business will have become very attached to their lawyers, so for certain people, quite rightly, they just want things to carry on. Maybe in somebody’s world this is a good idea but, my god, this is making their life difficult. You’ve got to justify to them why this is for the greater good.’
The greater good is what proponents of the sole-adviser model preach. The In-House Lawyer looked at two arrangements: the groundbreaking coming together of Tyco (now Johnson Controls International (JCI)) and Eversheds Sutherland and the more recent Heineken UK iteration with DLA, to assess how the sole-supplier theory has evolved in practice.
As it turns out, remaining faithful and investing for the long term is the key, not just knocking down hourly rates.
JCI EMEA general counsel David Symonds comments: ‘You hear a lot said about the importance of driving external law firms to reduce cost. Fine, but there comes a point where if you try and screw them too much, the service level will disappear.
The trick in the relationship throughout has been trying to ensure we balance giving Eversheds some of the bigger-ticket items to compensate for the very competitive rates they give us on the day-to-day work.’
Keeping it exciting
The history of Tyco’s tie-up with Eversheds more than a decade ago is well documented: the security provider, which in 2016 merged with industrial company Johnson Controls in a $16.5bn deal, cut its law firm advisers from more than 250 to one in a radical take on reducing its legal costs.
The arrangement, led by Symonds’ predecessor, Trevor Faure, originated from the fact Tyco sent out a lot of work it felt any competent law firm should be able to do.
It was not universally popular as different business units each had preferred firms and lawyers. Eversheds won the mandate, which has been extended several times, ahead of a handful of other firms, because of its project management proposal. The firm’s head of global client development, Stephen Hopkins, is Symonds’ point man.
Hopkins says it is a misnomer to call it a sole-provider relationship because the firm, which has 66 offices, uses between 90 and 100 law firms globally for the deal, putting an Eversheds wrapper around them to provide a consistent service to Tyco.
You hear a lot about the importance of driving law firms to reduce cost, but there comes a point where if you screw them too much, the service level will disappear.
David Symonds, Johnson Controls International
The biggest headache for Hopkins was managing all of these firms in a way that could provide the consistent approach it was promising – leading to a consolidation of its relationships to one or two firms in each country. The firms each have to detail the work they will do, its scope, the cost, how they will do it and how they track invoices – some firms would bill matters every few years, but the deal requires monthly billing. Most work on the Tyco deal is carried out on hourly rates, although fixed-fee arrangements are used occasionally. Eversheds now accounts for half the revenue of some firms it has no financial interest in. Hopkins comments: ‘That gave us leverage in terms of quality, in terms of rates and just our ability to get to them to perform when we needed them to.’
On Symonds’ side, it took time to convince the company that Eversheds should do the legal work ahead of rival providers: ‘Once we start saying “alright, you can use that firm down the road”, the whole relationship will break down. We have to be very firm internally as well at ensuring that we do our bit in this relationship.’
Bonus provisions in the early years proved particularly problematic. There was no specific pot for them when individual business units met the cost of their external legal advice. There was also a success criteria for litigation matters based on whether Eversheds had met, exceeded or not met expectations. Symonds comments: ‘The fact you only get, say, 90% of the fee if you don’t meet the criteria – well, maybe you should get none. We’ve gone to a more simple formula where effectively they get paid for the work they do. We still have a target in the agreements, because it helps the focus on bringing the cost down.’
Other changes also developed thanks to the relationship’s longevity and Symonds’ preference for what he calls ‘advice on a page’. He does not want to know how qualified or clever an adviser is – that is why it has the mandate in the first place.
However, the biggest advantage for Symonds, who has a 38-strong legal team with 19 lawyers, is the ability to track what is being spent. Eversheds produces monthly reports that help him identify where his team can upskill, with employment law being one example. Litigation and corporate are the two major work streams Eversheds handles.
Hopkins says this is true for similar sole-supplier mandates. Another client, which little more than a year ago had 350 employment claims being handled by multiple firms, has seen new claims drop by 25% after the matters were brought into one work stream, analysed, and training was implemented.
Eversheds uses Connect, a centralised team of more than 50 people to manage its sole-adviser mandates, including Turkish Airlines, the International Air Transport Association and Severn Trent, and more widely between 80 and 100 multi-jurisdictional clients. Clients deal with a single Eversheds contact, while Connect helps with basic administration.
Getting clients to pre-approve the budget and scope of every matter has upped the game of its law firm network, with poor budgeting previously leading to a loss of trust. The mindset had to shift from negotiating to win work, to how matters should be managed.
‘This is preventive law. That’s what we’re about. What we’re using the data for is not to glibly knock 10% off rates, which it is almost impossible to measure the success of that reduction; it’s to get sustainable change in process so that the appetite in the business for external spend reduces sustainably.’
Overall, Symonds estimates the sole-adviser relationship with Eversheds has saved the business more than £10m. Annual external legal spend fell 60% prior to the Tyco-JCI merger, which Symonds attributes to the Eversheds relationship, better management of external counsel and internalising more work. The deal with Eversheds is thought to have previously been worth between about £13m and £16m over two-year terms, although was less than that before the merger. The drop was dramatic at the beginning, but there will always be a base level of spend.
The biggest hurdle is to ensure complacency does not set in, but logistics can also prove challenging: Eversheds’ German offices are not right on the doorstep of JCI’s presence there, for instance. Personnel changes can also impact the relationship when knowledge walks out the door. Having the ability to take the bigger-ticket work elsewhere helps keep the firm on its toes, however. Eversheds has first rights to any work, but Symonds can take it elsewhere if they do not have the required expertise.
Hopkins says it has been easy on his side because of the scale of the clients: ‘The quality of work has to be spot on because if it drops anywhere it affects the entire relationship. That’s the leverage the model can bring on all the offices around the world.’
Don’t baulk when it’s not sexy
Similar conclusions are drawn from the relatively new relationship between DLA and the UK arm of Heineken, first instigated in 2015 and renewed for another two years in 2018.
The company’s departments could previously individually instruct work, meaning there was a raft of advisers used with mixed quality. Instructions were not always clear and there was the occasional duplication of work. Heineken UK acting head of legal Lynsey Nicoll says she and former head of legal, Graeme Colquhoun, were in 2014 given control of the total legal budget and charged with getting a better handle on it. ‘We were using a large number of firms and in that there were over 25 firms that more than £25,000 a year was being spent with.’
From there the question became: how low can you go? They spoke to two other pioneers in sole-supplier arrangements, Eversheds and Pinsent Masons – which has similar longstanding deals with Balfour Beatty and E.ON – and believed Heineken’s large amounts of commoditised, repeat work would make it work.
I’ve now got confidence in the work that’s done that I never used to have.
Lynsey Nicoll, Heineken UK
DLA was the winner from two strong candidates. The firm had not previously done much work for Heineken, but Nicoll says: ‘There was a genuine effort to understand our business and get their heads around the importance of bulk, high-volume, low-value work, alongside the sexier stuff we’ve got going on as well, and to not baulk at that.’
DLA’s McKinlay, who had previously worked at legacy McGrigors (now Pinsent Masons) in Scotland with Colquhoun, says the firm was excited by a brand like Heineken. There were questions about how well the two would fit, but they were 90% there, and hoped the momentum and energy of the new relationship would sort the rest.
Nicoll concedes Heineken did not devote enough internal time and resource into the transition, which she led alongside her day job. Some of the problems included not having the right information to give DLA, whether internally or from former legal advisers.
Heineken UK’s legal team is ten-strong, while 30 people within the wider business have regular contact with DLA. The company has retainers in place over a number of areas that Nicoll oversees, while her team handles a lot of commercial work unless it is particularly complex. On DLA’s side, about eight partners in different departments oversee a lot of the work, while up to 40 lawyers are working on Heineken matters regularly. It is one of the firm’s top-ten largest UK clients now generating more than £5m annually.
There is an electronic platform that manages the various instructions and provides live status reports, through which the bulk of commoditised work is done. In real estate, document-automation software has been implemented to reduce silly errors and speed up the process of hundreds of repeat contracts. The intention is to integrate DLA’s system in a wider business process improvement project at Heineken to provide end-to-end case management.
It is these conversations and potential investments that are one of the key benefits of sole-adviser relationships. McKinlay says: ‘You are looking at the longer-term relationship. Would it be worth thinking about them in a way you might otherwise not be when you have other fish to fry?’
The main work streams in the relationship are litigation, corporate, property and competition law. But in that last area, the Pubs Code’s introduction in 2016, which gives tenants more rights when dealing with large companies that own tied pubs – tied tenants are obliged to buy drinks from their landlords – is a specific example of key work.
DLA also advised Heineken on its £403m acquisition of a portfolio of around 1,900 UK pubs owned by Punch Taverns last year, effectively doubling the size of Heineken’s pub company. Nicoll says having the same law firm advising at the top end, but then also handling the commoditised matters afterward, means DLA can think about what the complex means for the day-to-day from the off and help advise on those ahead of time.
She comments: ‘That’s incredibly useful and we’re seeing that across every area of the business. Through that, DLA has become such a trusted adviser, not just to the legal team but also to a lot of senior stakeholders.’
There are also the same touted benefits around cost certainty and savings. Heineken saved more than £1.5m in the first three years of the arrangement, reducing its overall spend by about 30% on a like-for-like basis. The top categories of work have been in property and licensing for pubs, IP and employment – all on fixed-fee retainers – and specialist corporate and commercial advice, provided at capped fees per project.
The oft-cited concern of putting all your eggs in one basket is not a critique Nicoll agrees with. There is the obvious question of the difficulty of succession to another firm, should the need arise, but she argues it is harder to go from 25 to one. The benefits of the investment, she says, far outweigh any challenges: ‘I’ve now got confidence in the work that’s done that I never used to have in some areas.’
Observers have been predicting for years more sole-adviser mandates would come to market. The reality is that more than a decade since they first surfaced, only a handful exist. Those initial relationships continue, but the most recent example of a new mandate is Turkish Airlines linking with Eversheds in September last year.
But there is continued reluctance in the market, borne out of caution over the conflicting ideas of not knowing whether you have the best person dealing with a matter, or the knowledge there will always be another firm that can do it at a lower rate. Some point to pressures and sensitivities GCs face around their existing relationships with law firms and that, while many may want to go down this route, they lack the internal power to do so.
Although rare, the core hypothesis of single-supplier deals can be seen also in the wider trend of clients reducing panel firms, signing on sole advisers for specific areas of work, or just doing away with formal panels altogether – Barclays being a recent example.
But as existing sole-adviser relationships continue to mature, so does their value. Cutting costs is obviously inherent in such an approach, but the long-term gains being talked about post-honeymoon could see more companies looking to tie the knot.
McKinlay concludes: ‘If there is an issue with the legal service then if you’ve got a panel of law firms you can always just move on, whereas if you’ve got a single firm, you’re all in it together. You need confidence in your decision-making process, and I can see why some people upset their thoughts or pause because no process is perfect and there’s always a risk. But any small compromises have been massively overweighed by the benefits.’