Feature

posted 13 Oct 2003 in Volume 6 Issue 5

Competitive advantage through the legal network: An external lawyer review – one year on

In early 2002, Carillion decided to carry out a root-and-branch review of its external lawyer network. Cutting the law-firm panel by more than two-thirds, it targeted significant cost reductions and a marked improvement in service. Consequently, in October 2002, the Carillion legal network was formed. Richard Tapp, Carillion’s company secretary and director of legal services, describes the project and reviews the results one year on.

Carillion began life in mid-1999 as a construction-to-services company with key strengths in traditional major construction projects and building operations, but with the vision and ambition to develop both operationally and culturally. By late 2003, under the guidance of a strong management team, led by chief executive John McDonough, it has evolved into an integrated service provider, with major operations in facilities management, health, rail and road infrastructure, as well as construction. Perhaps unusually in the sector, it regards its culture and values as critical to its success, and has embraced sustainability and corporate social responsibility. This year, it has been named as Business in the Community’s Company of the Year (in its class), as well as receiving the prestigious Impact on Society award and a string of investor-relations plaudits.

By early 2002, shortly after I joined from Blue Circle Industries, Carillion had begun a review of many of its suppliers ranging from building materials to IT. We aimed to improve both cost and service, and at the same time, develop a longer-term relationship with a smaller number of providers.

It was a natural move to think about our legal work on the same principles, and on analysis we found that we used nearly 50 different law firms in the UK. Carillion’s legal work is complex and, in many cases, novel. Lawyers are closely involved in much of what we do and our legal spend represents a significant cost. We work in areas where the law is developing, as well as ones where disputes were traditionally the norm, but it had become difficult to manage both the cost and logistics of such a diverse panel. There were also concerns about the levels of service we received, and whether they allowed us to serve our own client base to the standard and pace we required.

Defining the review

We set out to review our legal needs: openly, critically and without preconceptions. We worked with managers throughout the business, aiming to speak to every major user of legal services across the Carillion group. As a priority, we sought to identify our business needs. We looked at the legal risks facing the business, its future size and shape and the skills we had in-house. We then defined what we should do in-house, and what was best outsourced. We identified that external legal resources were needed for a variety of reasons:

To provide additional support in our core areas, such as construction, private finance and facilities management;
To work on areas that we did not wish to cover in-house, such as employment, pensions, minor litigation and insurance work;
To represent our joint-venture and special-purpose vehicles, where funding requirements would not allow us to bring work entirely in-house;
To provide specialist advice in fields such as rail operations and property development.

Some nineteen different areas of work were identified. However, we wanted more than a simple review of our legal provision; we wanted to use our legal teams – both in-house and external – to help us gain competitive advantage.

The process

In common with many major companies, Carillion has significant internal supply-chain expertise, which we decided to utilise in designing and administering our process. This proved to be invaluable throughout the review and subsequent appointment work.

The first challenge was to produce a document to serve as our invitation to law firms to make a proposal to us. To do this, we had to define the criteria we sought, and against which we would judge responses. In our case, these were factors that we felt would facilitate a long-term and a mutually beneficial relationship in the spirit of partnering. We sought to assess:

Evidence of a “total-value” approach to service provision, particularly through the use of novel and innovative fee structures to align their interests to our business goals;
The capabilities of the firm;
Their use of present and future technologies;
Their approach to service management and integration with Carillion, particularly in relation to values, cultural fit and innovation;
The quality of their client base and experience.

Our detailed invitation document also set out a good deal of information about Carillion, our values and philosophy. We defined how we expected the chosen firms to work with us, set out the process that we intended to follow and asked for specific information. We particularly asked that applicants limited their response in length, and that they set out to differentiate themselves from the competition rather than send us their standard marketing presentations.

We sent the invitation document to around 60 firms, including most of our existing panel and a number of others chosen from experience within Carillion’s business and legal communities.

Decision making

We followed a two-stage process. In the first, written responses were reviewed by a working group consisting of members of Carillion legal and a representative of supply chain. They were scored against our defined criteria, which we had refined for the purpose into ten categories, which were weighted according to our view of their importance to Carillion:

Market reputation;
Price and value;
Brand;
Experience;
Accessibility;
Service and delivery;
Team membership;
Values;
Cultural fit;
Value-added services.

Having reviewed the responses, we grouped a number of our work categories together, and scored the responses to produce a shortlist of contenders. We moderated the scoring in some instances. For example, where scoring suggested that an incumbent law firm would not reach the second round, we discussed the response with the key users of that firm before deciding how to deal with the review.

For the second stage, we set up a series of presentations, generally allocating one or two days for each of our groups of work categories. To those presentations, we invited the key users of legal services in those groups, together with a selection of other senior managers from across the business, as well as members of the Carillion legal team.

We then asked the shortlisted firms to make a 30-minute presentation, and allowed a further 30 minutes for questions. Each Carillion team member was invited to score the firms, their written and verbal presentations, and their responses, against our defined criteria. At the end of each group of presentations, we reviewed impressions and views, as well as collating the numerical scoring. To ensure we had the right answer in each category, we had allowed scope for a further stage, and, in some cases, we sought further clarification from firms or invited them for another discussion.

The Carillion legal network

We invited our chosen firms to join us to form the Carillion legal network. Initially, they were:

Altheimer & Gray – facilities management;
Ashurst Morris Crisp – PFI/PPP;
CMS Cameron McKenna – PFI/PPP;
Clarks – employment, environment;
Dickinson Dees – work for Crown House, our mechanical and electrical engineering company;
D J Freeman – property development;
DLA – insurance, health and safety;
FBC – minor litigation, property;
Linklaters – PFI/PPP;
Masons – construction;
MacRoberts – Scotland;
Reynolds Porter Chamberlain – construction, FM;
Sacker and Partners – pensions (acting for the trustees);
Slaughter and May – public company, corporate, competition, pensions (acting for the Carillion group).

Since then, following the dissolution of D J Freeman, we have moved our property-development work to DLA, and have followed the London team of Altheimer & Gray to their new partnership at Kilpatrick Stockton.

The network firms were formally appointed with effect from 1 October 2002. From then on, no new instructions were given to any other law firms, and existing instructions were reviewed and moved where necessary.

Inevitably, there had to be some unsuccessful contenders, including a number with whom we had enjoyed relationships for many years. We tried to manage those issues with sensitivity and responsibility, and offered formal debriefs to anyone who asked.

Making the relationship work

Carillion’s values are central to all that we do. They are:

Openness;
Collaboration;
Mutual dependency;
Professional delivery;
Focus on sustainable, profitable growth;
Innovation.

In the same way that we had used the values as a key differentiator in the review process, we used them to underpin our strategy in beginning to work with the firms. We had a mix of lawyers, some of whom had worked with the business for many years, while others were entirely new to us. We needed to ensure not only that everyone understood what we wanted from them, but also that we got the best of their legal and commercial expertise.

We agreed a formal protocol with each firm, which set out in writing the key arrangements between us. As well as covering the areas of work involved, it deals with instructions, review and reporting, and contact and emergency arrangements. It also deals in detail with the way in which we assess and conduct litigation, allowing us to approach disputes in a standard and methodical way.

Inevitably, it also sets out our fee arrangements, which vary across the firms and areas of work. Very little of our work is done on hourly rates, but there are a range of fee structures to meet our goal of aligning our interests with those of the law firm. Finally, the protocol deals with communication and conflicts, where we take the general view that the relationships we seek are incompatible if a law firm is acting against the business in any form of dispute.

Our aim in using a protocol was to reduce the possibility of misunderstanding, and to set out a solid basis for our future relationship. In each firm, we have established both a contact partner and a Carillion team, who are responsible for our work and get to know us well. We set up a number of initial meetings between law firms, Carillion legal and key legal users to establish the ground rules of our relationship.

To build on this foundation, we ran a conference in Birmingham in January, where more than 50 lawyers from our network firms met together with a similar number of people from Carillion, both from Carillion legal and elsewhere in the business. We sought to tell the law firms about Carillion, and to work with them to define how our relationships should develop.

Our group chief executive, John McDonough, set the tone for the day with a keynote address, and we then interspersed short presentations from key business-group managing directors with interactive workshop sessions. In one workshop session, we aimed to think through issues specific to the particular specialism of the law firm. In the second, we used a case study to look in the round at aspects of Carillion’s operations. In the third, we aimed to define how best we could work together.

We approached the conference with a degree of trepidation, since a number of people had said that it seemed to be unusual, and that there was a risk that firms would not welcome it. On the contrary, it proved an outstanding success, both in informing people about Carillion and in establishing relationships that are now beginning to stand the test of time. It is something that we intend to repeat in 2004 at the request of many of the firms.

In addition to the normal arrangements for regular reporting and review of work, we have established a pattern of formal review, twice yearly, where we ask each law firm to assess its performance and provide feedback from the business. We also work through the action plans developed following the conference. Crucially, we see these review meetings as a two-way process, where we also seek feedback from the law firm on our performance, both legally and operationally. This is very valuable as they are frequently with us at bid or client meetings and can offer a useful insight into our work.

We have also established a range of other arrangements to work closely with our law firms. These include:

Secondments, of both qualified and trainee staff;
Training and development arrangements, both for legal staff and more widely in the business;
Joint working groups, involving one or more of the firms, on key legal issues;
Extranet arrangements, including one involving two of the firms who have collaborated to produce a single extranet for us in relation to the specialism for which they are jointly appointed;
Legal surgeries;
Know-how transfer;
Development of standard documents and procedures;
Regular, two-way communication flows about both Carillion and the law firms, including press releases, internal communications and publications, and a short bi-monthly note from Carillion legal about general developments in the business and network activities;
An exchange of views on employment arrangements from two of our law firms who were within the Sunday Times 100 best employers.

This is simply a selection of the arrangements we now have in place, but it gives an idea of the ways in which we can benefit mutually from closer partnering. The arrangements are designed to be two-way, so that we can help the law firms gain a better understanding of our needs.

Some personal conclusions

So has it worked, and has it met our objectives? Overall, one year on, we feel very positive.

We have achieved a much closer working relationship with our law firms, which has meant in turn that their lawyers are more integrated into our business. They work more closely both with Carillion legal and with our business and project teams. A measure of this success was the award to a partner in one of our network firms of a Carillion values award – an accolade that we reserve for those in our business who have particularly demonstrated outstanding achievement in accordance with our values. This award – on the nomination of a manager within the business, not Carillion legal – was the first to be given to someone who worked with us but was not an employee.

There has been a very good acceptance of the new arrangements within our business. Having changed the existing arrangements so comprehensively, one might have expected significant problems. As it was, we have had only two queries on the operation of the new arrangements since October 2002, and both were easily resolved without having to depart from the network.

We have “lost” two firms – D J Freeman and Altheimer & Gray, which is perhaps to be expected in these changing times. However, we were pleased that we were able to demonstrate the strength of the network by reallocating our property-development work to another of our firms, DLA. We have also followed the former Altheimer London team to Kilpatrick Stockton.

Our arrangements do not guarantee any work to a network firm or put a defined time limit on the appointments we make. This is deliberate. We hope that our appointments will stand the test of time, but we need to have the flexibility for both Carillion and the law firms to withdraw if for any reason they do not work. We have a choice of firms in our core work areas, which have so far worked well. Our overriding aims have been to develop stable, long-term relationships, while at the same time retaining the flexibility to predict and respond to the changing needs and shape of Carillion’s business.

So far, we have been very pleased with the way things have worked. Naturally, some relationships have initially worked better than others, and we’re working on a series of key performance indicators – in addition to the obvious one of cost – which will help us monitor and improve performance.

We have had some unexpected spin-offs. We had a much higher level of media interest than we expected, and this in turn has meant that we have received positive reactions from customers and partners who see that we are seeking to manage all aspects of our business to their advantage. We have also appreciated the level of interest in what we have done from other in-house teams and law firms.

The question everyone asks is about cost. Have we met our objective? The simple answer is yes – we have certainly met our target to date. We have done this not just by selectivity in relation to our law firms, but also by allowing greater familiarity with us and our work to reduce the need for fee earners to learn about us, our requirements and our business, and by using firms with proven expertise that do not need to research new matters so fully.

However, we are careful not to treat this with complacency – for two reasons. First, Carillion operates in a very competitive marketplace with low margins, high-quality competitors and the high level of transparency required by our many public-sector customers. As a group, we know that we must continually develop and evolve new ways of cost-effective working. This is as much the case in legal work as any other part of our business. Second, we have been careful not to confuse cost with value – some of the law firms we have chosen might appear to be at the higher end of their market. We need to ensure that we achieve high-quality advice, targeted at our specific circumstances, and reduce the cost by managing that focus, as well as by detailed planning and review of work and the costs incurred. As an overriding principle, our law firms ensure that we must receive, and be seen to receive, value from any piece of work.

So, one year on, we go forward with confidence that we have met and exceeded our initial expectations and demonstrated the way Carillion’s values can work in practice. We look forward to cementing our working relationships with the chosen law firms to develop our competitive advantage together.

Richard Tapp is company secretary and director of legal services at Carillion. He can be contacted at rtapp@carillionplc.com. He chaired the Law Society Commerce and Industry Group’s seminar on Managing an In-House Legal Team in a Cost Effective Way in London in September 2003.