Post-recession innovative billing structures

As clients demand more value and efficiency from their law firms, Stephen Hopkins discusses Eversheds’ approach.

In November 2009, Eversheds announced that it had signed its third ground-breaking contract to advise global manufacturing giant Tyco on its legal needs across Europe, Middle East and Africa. The contract extends the relationship (first signed in 2006 when Tyco reduced its panel of 250 law firms to one overnight) by a further two years. The contract sees Eversheds advise Tyco on legal matters across 80 jurisdictions.

This ongoing partnership has set a new standard for the provision of legal services and client relationship excellence across international jurisdictions that, to-date, no other law firm has been able to equal. The focus of the relationship is delivery of a high-quality consistent international service uniquely coupled with a drive to achieve the greatest cost control and efficiencies for the client, both in terms of legal spend reduction and also how the work is managed. To do this, collaboration and innovation between both parties has been key to ensure total satisfaction for both client and law firm.

The contract has resulted in a 27 per cent reduction in fees for Tyco and the number of Tyco’s litigation cases fell by 60 per cent. At the same time, the proportion of high-quality work we service for the client increased by over 300 per cent, including M&A and IP work, achieving one of the objectives of the relationship, to deliver an improved and sustainable return on investment for the law firm.

The new contract builds on the principle of an annual fixed fee for all of Tyco’s work made possible by an innovative online management system called the ‘global account management system’ (GAMS). This ensures transparency at every step of the way and is a system we now use with other clients including FMC, Brady and Boeing.

The contract, first signed over three years ago, was ground-breaking for several reasons; the primary one being that Eversheds showed it could work differently, and more efficiently, when compared with other law firms. Using a project management approach (which involved scoping and costing a piece of work) and giving fixed estimates for completion of pieces of work before work could start, we set a new standard for legal sector relationships with its clients.

But the arrangement was not without its detractors – the traditionalists in the legal sector believed that the consolidation of law firms and the project management approach was risky and, given the choice, most clients did not want to work in this way. But we felt then, and still do, that the combination of quality, control, value, efficiency and transparency were what clients were increasingly demanding and that law firms had to innovate if they were to survive.

In 2008, we completed and launched a major study into the sector – ‘The law firm of the 21st century’. We asked both clients and senior law firm partners what their visions were for the legal sector over the next ten years. It was startling how many law firms were out of step with what their clients wanted – while law firm partners didn’t believe that value was a top priority for clients, clients argued strongly to the contrary.

Law firms were warned that they had to prove that they could add real value through their expertise to justify significant fees, or clients would only look for greater cost efficiencies elsewhere. While many predicted that this shift towards a more client-led market would happen over the next ten years, the results added real weight to our belief that the way we work with Tyco and other clients was the future of legal service delivery.

The key point to arise from this research was that clients wanted their legal providers to become more commercial and have a more transparent approach to billing. It suggested that the hourly rate as the only billing method would soon become an out-dated view and would be dumped in favour of alternative billing structures that focused on rewarding value, efficiency and control.

However, the UK, along with the rest of the world, then found itself in the grip of the worst recession since the end of the Second World War, and the legal sector was not immune to the impact of the downturn. With this in mind, the issues of transparency, greater value and the use of alternative billing structures were thrust to the fore.

The Tyco model came into its own – its focus on cost efficiency, control and cost reduction meant we were in a good place to help them manage their total legal spend as legal budgets came under greater and greater scrutiny.

The Tyco contract has evolved since it was first signed, with both parties committed to constant innovation and simplification. Working with Tyco for so long means that we have accumulated a wealth of knowledge about the client and its sector around the world. This is only beneficial to a client if it translates into benefits such as economies of scale and lower overall spend. New deputy general counsel EMEA, David Symonds, worked with us to review how the relationship had evolved and whether the all the mechanisms in the original contract were still relevant.

As a result, much of the original contract’s demands have been changed to recognise this evolution. It has been simplified to revolve around a fixed fee for all litigation and non-litigation work, leaving behind some of the previous bonus structures built in to reward certain outcomes like a reduction in litigation cases – the bonuses are now embedded in the culture of the relationship.

The real incentive in the contract is to increase the premium work awarded by Tyco. This now forms 60 per cent of the total work we do for the client.

The GAMS has also developed since its initial launch in 2007. Designed to ensure a consistent service across different jurisdictions and to increase transparency, the recession brought a greater focus on costs linked to performance. Therefore, we developed GAMS II, which switched the focus to delivery and measurement, so our clients could improve the service they, as in-house counsel, give and can demonstrate the positive impact they are making on their own company’s bottom line.

The key outcomes for the client with GAMS II are:

Cost control – the system ensures that the firm will not process an invoice that exceeds the costs estimate, allowing the client to predict costs extremely accurately;
Transparency – at the touch of a button, the client can identify on their computer screen how many ongoing matters there are on a global level, what costs have been accrued for each one and how much more there is to be spent on that matter;
Strategic analysis – the client now has access to invaluable management information allowing the legal team to forecast, for example, cost of litigation over the next 12 months. The client can also pull off a report at any time to see legal spend, or trends in the spend, by practice area, lawyer, case, country or business unit;
Risk management – managing risk has never been as important as during the economic downturn. GAMS II enables the client to better coordinate and manage international risk;
Key performance indicators (KPIs) – we work with each client to develop a bespoke set of KPIs. The use of KPIs is still relatively new in the legal world, so we pride ourselves in helping our clients meet their own internal objectives; and,
Measurement – we obtain pre-approval for the number of hours we spend on a piece of work, so the client knows exactly what needs to be done.

Currently, we have 11 global clients using GAMS II. The control and predictability of spend seen by Tyco has been replicated by other clients, with many general counsel finding that effectively managing their budgets has received very positive acclaim within their own business.

The recession has accelerated change in the legal sector, particularly when it comes to value billing. If the ongoing relationship between Eversheds and Tyco demonstrates anything, it is that we were not only ahead of the game in terms of recognising what clients wanted from their law firm, but that innovation and collaboration are key to success.

The enquiries we receive on a daily basis show that clients want a quality product with a transparent project management approach, greater value and a law firm that is has the commercial knowledge to recognise the cost and efficiency pressures many in-house lawyers face. Clients now have the power to not only demand value for money from law firms but to be able to demonstrate that value too. It is those that can deliver that and provide accurate alternative billing structures that will continue to succeed.

Stephen Hopkins is a partner and head of international operations at Eversheds LLP. He can be contacted at stephenhopkins@eversheds.com