Until 1989, IT Net was the IT department of Cadbury Schweppes. Birmingham City Council was the company’s first non-Cadburys client, a local government niche that has endured until today. Since then, a management buyout in 1995 and a 1998 flotation have propelled the company on to the stock exchange. The company’s client base has diversified to include customers such as Equitas and the Law Society. The latter is a hint of a niche to be developed.
Head of legal Andrew Foster joined IT Net from AT&T’s main UK subsidiary in 1996 as the company’s sole lawyer. Since then he has grown the team to five. In addition to one part-time lawyer, Foster tempted former colleague and Edge Ellison (now Hammonds) partner Andrew Bachelor to join the team three years ago. “Taking a very successful partner from Edge was a big step for us,” says Foster. “It gave us a real heavyweight commercial contracts person.
“We’ve tried to build a multidisciplined team because the contracts we negotiate have elements of company law, commercial law, employment, intellectual property, property law and some elements of local government law. We even have to have some basic appreciation of accounting principles.”
Foster has brought in individuals with certain specialities to complement the team. A property lawyer has joined and last year the team was completed by the recruitment of a data protection specialist from Foster’s principal law firm Pinsents. “It’s quite a key element of a lot of our contracts because we do a lot of data processing,” explains Foster.
About half of Foster’s time is spent on company secretarial duties, including a major review of the company’s corporate governance programme following January’s Higgs Report. His strengths lie in company law, IT law and an increasing amount of employment law. “Between the team, we’ve got the range of skills that need to be brought to bear in a transaction,” says Foster.
IT Net handles a lot of deals with a value of £5m-£10m on which there is a relatively smal number of lawyers involved. Public sector work accounts for 60 per cent of IT Net’s business, with a specific focus on local government. On some of these deals, Foster will be faced with just one lawyer from the council.
In a relatively small market, conflicts arise. Pinsents is IT Net’s main corporate adviser and also advises the company on PFI deals, but because of the firm’s expertise in this area, it often appears on the other side of the table.
“There is clearly a potential for confidential information they have derived about your business being misused against you,” says Foster. “In practice, we tend to find that it’s a different office from the one we normally use. That’s an important difference for me. If it’s the same office and the same department that normally advises me that’s acting against me, then I’m going to be pretty concerned.
“One has to rely on law firms having a certain amount of integrity about these things, but I clearly accept that there’s a risk and you have to guard against that risk. The flipside to that coin is that we very frequently come up against law firms which seem to have the market covered, and seem to have an understanding of that market that no other law firm does,” Foster adds.
Foster had observed that nearly all strategic partnering deals in local government had been advised upon by Eversheds. Because of this he instructed Eversheds for the first time to work on a £100m strategic partnering bid for Peterborough City Council. “We will partly select our law firms on competence and partly on cost, but an increasingly important factor to me now is market knowledge and market penetration. If they’re pre-eminent in that particular market then we want to work with them because they’ll know what makes a winning bid,” says Foster.
Pinsents and DLA are Foster’s key outside advisers. Pinsents advises on corporate work and has advised on PFI deals. DLA provides dispute resolution services. In the constantly evolving world of IT, contracts that last 10 years need to be flexible, but disputes will always happen.
IT Net had one scare when the London Borough of Hackney publicly threatened to make a £30m claim. Freshfields Bruckhaus Deringer was chosen to advise on the dispute ahead of Herbert Smith, which was conflicted out. “It hit the press big time,” recalls Foster. “It caused a big fall in our share price and the board said, ‘let’s use a big-hitter City firm. This is about the future of the company’.” While the dispute is not dead, Hackney has never issued a claim form and Foster is confident that it never will.
Despite this one very public row, Foster is happy that IT Net has avoided having too many disputes. He has been with the company for seven years, worked with around 100 customers and had to deal with just a handful of disputes. The company’s local government focus has helped. While some suppliers have courted controversy in their deals with central government, the outsourcing market in local government is relatively mature.
Foster is flexible when it comes to using law firms. He has instructed a small local firm on the company’s headquarters relocation. He says that the choice was quite simple: “It provides value for money and an excellent service.
“We don’t have anything like enough legal resource to work on all the deals we’ve got, so we have to be quite ruthless with our commercial colleagues about where we put our resources,” says Foster. “Clearly, we’re going to put our resources into the high-value, high-risk deals.”
For lower-value deals, the team has a standard response that it sends out to a client to avoid the lawyer having to spend any time on it at all. Of course, if IT Net then wins the bid a lot more lawyer time is spent in negotiating the contract.
Perhaps Foster is tired of paying any fees at all. IT Net has turned the tables and is set to target law firms’ poor records on IT. Most law firms spend 5-7 per cent of their turnover on IT, compared with just 1-2 per cent in most businesses. “Our target client is ideally someone who spends £5m or more a year on IT. There are many law firms that spend much more than that,” he says.
Perhaps law firms need to spend 5-7 per cent on IT? Not according to IT Net, which after much analysis has found that very few law firms have the analytical models in place that measure the strategic value of IT. Discussions are happening with law firm IT directors and managing partners about whether they are getting value for money from IT.
“The magic circle tier is one that we would find it difficult to play in,” says Foster. Being a UK company, firms with a global presence will be too big for IT Net, but those with a turnover of between £50m and £250m would be valued customers.
“It’s hard work,” he says. “Law firms aren’t easy to persuade, but they’re big spenders and I’m sure there’s a very attractive return to be made in that sector if we get a foothold.”
Head of Legal
Organisation: IT Net
Sector: IT services
Turnover for 2002: £180m
Legal capability: Five
Annual legal spend: £500,000
Company secretary and head of legal: Andrew Foster
Reporting to: Chief executive officer Bridget Blow
Main law firms: DLA and Pinsents