Tyco's groundbreaking contract with Eversheds has been overhauled in its second year. Richard Lloyd asks if the new deal can meet its grand aims

Step into Trevor Faure's corner office at Tyco International's London base and read the writing on the wall. Quite literally. Half of the wall space in Faure's office and the adjoining conference room is covered with floor-to-ceiling whiteboards. He has plenty of space, therefore, to outline the makeup of Tyco International's 40-strong legal team in Europe or brainstorm the latest management theory to catch his attention (currently, neurolinguistic psychology).

But if Faure, Tyco's general counsel for Europe, the Middle East and Africa, were to use his whiteboards to diagram his company's outside counsel relationships, it would be a fairly simple picture. At the beginning of 2007, Faure radically overhauled Tyco's legal function and handed Eversheds the vast majority of the company's external work in Europe. Now, after 18 months and another review, Faure has not only renewed the Eversheds contract but fine-tuned it, building in a new range of targets and incentives aimed at bringing the law firm into tighter alignment with its client's goals. It is not surprising, perhaps, that a lawyer who is interested in theories for better engineering human behaviour would have little patience for the established, cosy law firm/client relationships that have long characterised Europe's legal market.

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 US in the 1990s. Increasingly, the law firms that are winning so-called 'convergence' assignments – such as DLA Piper and Eversheds – are being asked to provide broad international coverage and demonstrate an ability to deliver more bang for a general counsel's buck.

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 US from 350 to 34. Yet DuPont has never implemented this model in Europe – at least, not on any grand scale. Its preferred counsel list, now up to 41 firms, includes only one European firm, Eversheds, which was appointed after working for DuPont on a series of acquisitions from ICI in the mid-1990s. Instead, across the European continent, DuPont still uses a range of firms, usually on a country-by-country basis.

A major reason for the difference is the lower risk of litigation in Europe, giving a company like DuPont less motivation to pull outside firms into close relationships to get more value from legal fees. When Patrick Shriber became DuPont's European legal head three years ago, he reviewed the company's approach and decided to make only slight changes.

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 UK firm struggled to manage the deluge of instructions that landed on its plate. But, he adds: "We learned a lot and ultimately the challenges we faced were overcome." Eversheds put in place information technology to log new cases, obtain client approval for each matter, and predict costs. Since Faure began taking a more hands-on role in managing the relationship last summer, the number of new matters has levelled out at around 100 a month, giving the relationship more predictability.

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 Europe, due to conclude in July, that will see it scale back its current list of 200-plus outside firms. "We want to reduce costs, form better and deeper relationships with firms that include things such as training and secondments and ultimately select firms that want to invest in us as a client," says GE's European head of legal, Mark Elborne. How many firms? More than one, says Elborne: "One firm cannot possibly service every need in the business. I think that creates a greater administrative burden and makes the relationship
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 UK academic and consultant Stephen Mayson. That is in theory. "[Law firm] mergers rarely work," he adds.

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.

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