Step into Trevor Faure’s corner office at Tyco International’s
But if Faure, Tyco’s general counsel for Europe, the Middle East and
Faure (pictured right) is one of a growing band of European general counsel who are radically overhauling the way they use external law firms. US multinationals Honeywell International and Brady Corporation, German chemicals maker The Linde Group and Swiss food giant Nestle have all, like Tyco, slashed the number of their preferred external advisers. At the same time, these companies have asked the chosen few firms to drive greater efficiencies and deliver better value in return for multimillion-pound annual fees. “You get greater accountability and value with fewer firms,” says assistant general counsel Thomas Sager of chemical manufacturer DuPont, who helped kickstart the concept in the
DuPont has been regarded by many as the leader in convergence since 1992, when then-chairman Edgar Woolard Jr challenged the company to achieve $1bn (£505m) in cost savings. The legal department played its part by reducing its number of preferred law firms in the
A major reason for the difference is the lower risk of litigation in
Still, even Shriber says he is focusing more work on fewer firms. Some general counsel have gone much further. Manufacturing conglomerate Tyco has arguably taken the principles of the DuPont US model to the next level. When it reduced its external firms from around 250 to one — Eversheds, which beat DLA Piper at the final hurdle — Tyco handed its new primary outside counsel a vast swathe of work from 33 jurisdictions. The assignments covered a range from basic labour, intellectual property (IP), and compliance work to litigation worth less than $1m (£505,000) and mid-market acquisitions and divestments. Bet-the-company M&A and litigation remain outside the scope of the Eversheds deal (Allen & Overy acted as international counsel to the company when it spun off its health care and electronics divisions in 2007). All in all, the bundle of work was forecast to be worth $20m (£10.1m) to Eversheds over the course of the two-year deal.
The change was driven in part by the pressures of globalisation, in part by circumstances specific to the company. Tyco had become a byword for accounting fraud under former chairman and chief executive officer Dennis Kozlowski. After Kozlowski’s departure and a major restructuring, compliance was high on the agenda for the new Tyco. So was boosting the effectiveness of the legal function. Lawyers who pitched for the work paint a picture of a disorganised legal group. “It was totally out of control,” says a senior partner with knowledge of the company. “They did not even know how many firms they were using.”
At first the Eversheds relationship did not appear to be much of an improvement. On day one, Tyco handed the 2,000-lawyer firm 1,000 live matters, followed by more than 100 new cases each month. The firm was also asked to provide nine mid-level associates to Tyco on a rolling secondment program. Partners and marketing consultants at rival firms privately questioned whether Eversheds had the capacity to service this demand. The workload was initially “very intensive”, admits the firm’s Tyco relationship partner, Stephen Hopkins (pictured left). “We rolled this relationship out across more than 30 jurisdictions. That had never been done by one firm before, so it was massively exciting and massively challenging.”
“I do not think that anyone realised how much was involved,” says Faure. According to Faure, in those first months Tyco came perilously close to pulling the plug on the relationship as the
One year on, both sides say they are happy with the relationship. Meanwhile, the experience in 2007 has given Faure the tools to further refine the model. Armed with reams of data on the volume and range of work handled by Eversheds, he has unveiled some intriguing changes.
“At the start we left much of the costing open for the firms themselves to propose,” Faure says. “Now, with 2007 data, we know how much this should cost.” Using that information, he has set challenging targets for the firm. The new agreement features incentives for Eversheds to control costs and work more efficiently. It also includes a range of supplementary bonuses tied to client satisfaction, reductions in litigation filed against Tyco and the firm’s diversity measures (see box-out).
Faure says he is trying to get away from what he describes as the “zero sum game” of a typical law firm/client relationship — firms bill high, clients negotiate for reductions, and the two end up meeting somewhere in the middle. In his incentive-heavy scheme, there is a little something for everyone. “We have tried to reach a deal that encourages the right behaviours from both sides,” says Hopkins, who points out that the new deal will encourage Eversheds to be more proactive in handling Tyco matters.
The two-way partnership ties the firm to the client but, just as crucially, ties the client to the firm. Through the first 18 months of the deal, Eversheds has built up detailed inside knowledge of Tyco and the specific risks it faces. Changing outside counsel now would mean that Tyco has to go through the arduous process of educating a new firm. Breaking up has suddenly become a lot harder to do.
Even if most corporations have not adopted the extreme convergence model of Tyco, many are reducing the numbers of their outside counsel by establishing a network of panels of favoured firms for certain jurisdictions and practice areas. GE, for instance, is in the middle of a wide-ranging panel review in
more expensive.”
It is a little early to say how convergence will affect the European legal market. “There should be more consolidation in the market to produce larger, more efficient deliverers of legal services,” speculates
Most general counsel also stress that for the big-ticket M&A and litigation, they are still more likely to turn to the magic circle or Wall Street elite. “When it comes to major strategic matters, a general counsel still wants to pick the best horse for the course,” says Michael Herlihy, former general counsel at ICI and now a legal consultant at Jomati. “When I was a general counsel I told firms: ‘I don’t care what it costs, I want it gold-plated and tungsten-tipped’.”
On the expanse of whiteboard in Faure’s office, the Tyco general counsel notes some of the psychological traits of a typical lawyer. Among them: scepticism and resilience. Both outside lawyers and their clients will need those traits in the new, converging world order. Plus, perhaps, the capacity for a small leap of faith.
Tyco — the new deal
For basic scope work that can largely be commoditised, such as data protection matters and some compliance work, Tyco has set strict targets for Eversheds. The firm is expected to handle all matters over a 12-month period in 10,000 billable hours at an agreed hourly rate, which Faure declines to specify. If the firm’s hours go over that target, it will be paid nothing for the next 1,250 hours and at a reduced rate after that.
However, to encourage efficiency, if the firm manages to complete all matters in less than 10,000 hours, then it can still bill for half of the hours that it did not actually work up to the 10,000 mark.
For all litigation worth less than $1m (£515,000), Eversheds is paid at an agreed hourly rate, plus a 25% success fee for all cases won and a deduction of 10% for all losses. For higher-value work, such as some acquisitions and divestments and restructuring assignments, the firm is paid at its standard hourly rate with a discount. In the first year of the model, Faure points out, over a third of Eversheds fees came from this higher-value work.
Bet-the-company mandates were not on the agenda but Eversheds would at least be given an opportunity to pitch.
Then there is what Faure excitedly describes as “pure added value for pure profit”: six-figure bonuses if the firm hits a number of additional targets.
Eversheds will pocket a bonus of more than $100,000 (£51,500) if there is a significant improvement in client satisfaction, based on the results of a survey of Tyco senior managers across Europe, the Middle East and Africa each October. The firm will also take home a six-figure sum if it manages to reduce the number of lawsuits against Tyco. In the first year of the contract there were approximately 600 cases; the firm will receive a full bonus if that number is reduced by 15%.
Finally, Eversheds will receive another bonus if it meets eight targets concerning the diversity of both its legal and non-legal staff. Among them: by 2009, 25% of the firm’s partnership must be female, 10% of new hires from law school must be from an ethnic minority, and the firm must be ranked 35th or better in the Black Solicitors Network annual survey of law firm diversity (last year it ranked 40th).
A longer version of this article will run in the July edition of The American Lawyer’s Focus Europe.
