Not a week goes by without another firm being pulled up for conflicts of interest. With firms becoming so big and deals increasingly involving more parties and becoming ever more complex, it is arguably the single most important issue facing law firms and their clients. The outsourcing sector is no different.
For law firms there are two possible clients in an outsourcing transaction: the supplier of services, such as IBM or EDS (although multiple suppliers can create multiple issues), and the customer. This is the end-user, which could be a bank, insurance company or government department.
Customers are outsourcing more than just IT nowadays. Business process outsourcing is in vogue as companies try to save money by outsourcing as many non-core businesses as possible. This has led to companies outsourcing their HR, finance, property management, procurement and catering functions.
Following extensive interviews with in-house lawyers at the leading outsourcing companies and with private practice lawyers, The Lawyer has studied which firms are advising which parties and in the process made the discovery that only one firm – Shaw Pitttman – has a strategy equipped to deal with conflicts of interest.
US firm Shaw Pittman is the only law firm in the UK that advises only customers. In the US, Milbank Tweed Hadley & McCloy adopts a similar customers-only approach, but with Milbank yet to export its outsourcing expertise to the UK, Shaw Pittman's model is unique here. Advising customers is very different from advising suppliers. The supplier has a great deal more in-house legal expertise and requires much less advice than a customer.
Gawie Nienaber, general counsel for Europe, Middle East and Africa at IT services provider CSC, explains: “I know my business. For customers it's a different story. You need a firm that understands the industry and understands the way suppliers work. That's why Shaw Pittman has established itself so well. They're people who understand how to drive a transaction forward.”
But Shaw Pittman's ambitions go beyond just providing legal advice. A number of consultants also work for the firm, which has occasionally caused some controversy. The US firm claims to have a clear understanding of the technical and commercial aspects of a transaction and how they fit together with the legal aspects. Partner Alistair Maughan says: “We have an ability to understand and advise a client on the implications of remedies, appropriate service descriptions and pricing models.”
It is an approach that is respected by many of the in-house counsel interviewed, but one that leads to some backbiting from rivals. Many believe there should be a division of roles between what a lawyer does and what a management consultant does. One partner at a rival firm argues: “I think that Shaw Pittman has trespassed into management consultant territory. I think that it's healthy to be commercially aware lawyers – but be lawyers. I think that independence is important.”
The US model covering conflicts in outsourcing transactions virtually precludes Chinese walls. The US has a very rigid conflicts model, which says that if you advise a supplier, anytime you come across that supplier when advising a customer you have to get an express waiver from the supplier in order to act. “In the UK we deal with conflicts more on an ad hoc basis,” says Chris Holder, a partner at Barlow Lyde & Gilbert.
But Maughan retorts: “I'm not quite certain how other firms manage to do it.” The Shaw Pittman model is unashamedly purist. “It would seem to me that if you have knowledge about the way a supplier does its deals, or prices its deals, or what it will accept in terms of limitation of liability, then that could be used against it when it's bidding into another customer,” concludes Maughan.
However, lawyers at other firms disagree. Harry Small, head of technology, media and telecoms at Baker & McKenzie, argues that you need to work for both customers and suppliers to understand what makes the other side tick. “I don't think conflicts are an issue,” he says. “I think clients are quite understanding about being on the other side of the table and often even welcome it.”
One head of legal at an IT outsourcer admits the potential for conflicts, but trusts law firms to erect appropriate Chinese walls. He agrees with Small. “If you can find a law firm that has the perspective of both sides, it's a very powerful tool,” he says. He recently broke from his normal panel to instruct one firm that was continuously advising customers on the other side of deals.
Another in-house lawyer agrees to the benefits of a firm advising both sides, but states firmly: “I wouldn't expect anyone from a firm that we're using to line up against us on a deal. It goes beyond the legal issues. You have to be aware of the impact on the business and the perception of the company.”
Bird & Bird and DLA are the only other firms to have built up a similar roster of clients on the customer side. Over half of the in-house lawyers interviewed mentioned Bird & Bird advising customers, and most followed this with the caveat “on Government work”. The public sector has become one of the biggest customers since the slowdown in IT spending has hit the private sector, and Bird & Bird's name has become synonymous with Government outsourcing transactions.
Working in the public sector, though, can have its downsides. Fees from the Government are around 15-20 per cent lower than in the private sector. Bird & Bird partner Roger Bickerstaff admits: “They're very efficient purchasers. It requires a lot of dedication from individuals. We probably have to bill more hours, but we actually think that it's quite important work and that it's worthwhile.”
The supplier specialists
Allen & Overy (A&O), Baker & McKenzie and Barlow Lyde & Gilbert have all increased their focus on advising suppliers, but due to the inherent conflicts involved in advising too many suppliers, all are trying to bolster their client lists with more customers, which throws up its own conflict issues.
Barlow Lyde has built up its reputation advising suppliers, but the partners have had to be careful. Simon Shooter advises Cap Gemini Ernst & Young and Kit Burden advises PwC Consulting (now part of IBM). Both have had to operate quite separately. Beyond conflicts of interest there are some fierce rivalries. Like any market competitors, the IT outsourcers are not keen for their legal advisers to be working for their rivals.
Barlow Lyde also advises Fujitsu Services and has now reached a critical mass of supplier clients. Even if asked to represent others, the firm's current clients are unlikely to permit it. Of course, the flipside is that firms should be generating more repeat business from suppliers than customers. There is only so much outsourcing that a customer can do.
But one problem with having suppliers as clients is that they are extremely reluctant to instruct outside counsel at any stage. One in-house lawyer at IBM states: “IBM does not use outside counsel for transactions, because what IBM Strategic Outsourcing Services does is considered core to IBM's business.”
This means that when law firms are brought in to advise on a transaction, it is often at quite a late stage. “When brought into transactions at such a late stage you have very little influence over commercial drivers and don't necessarily know what's going on in the background, and so their ability to advise on the transaction is tempered,” laments Holder at Barlow Lyde. Firms advising customers are often brought in at a much earlier stage because the companies do not possess the requisite specialised knowledge for undertaking outsourcing transactions.
A&O is the only magic circle firm to be featured prominently in our survey of in-house counsel, although David Griffiths at Clifford Chance is widely respected in the field. “I know magic circle firms say that they're full service, but historically they're corporate or M&A-driven. The other areas are almost support services,” says Laurence Guedes, head of legal at LogicaCMG.
Our interviews with in-house lawyers show that conflict is just one of the issues. Value for money is, as always, key. “Typically, I feel I don't need to go to City firms, because they're absolutely unaffordable,” says Nienaber at CSC.
In addition to Barlow Lyde and Baker & McKenzie, Nienaber uses Wragge & Co and V-Lex, a niche IT firm founded by former IBM in-houser John Yates. V-Lex has just seven lawyers based in the relative obscurity of Worksop in Nottinghamshire. Guedes at LogicaCMG says: “It's all well and good trying to charge £450 an hour on a corporate deal, but on an outsourcing deal it just doesn't cut it.”
Nienaber voices the thoughts of many in-housers when he expresses his desire for a standard set of contracts. “There's no interest from user lawyers in setting up standard contracts. Maybe in five or 10 years we'll have standard contracts and I won't need to spend £450 an hour on that,” he exclaims.
The industry may be here to stay, but perhaps the lawyers should make hay while the sun still shines.
IBM Global Services
Head of legal Europe, Middle East and Africa (North) for strategic outsourcing: John Franklin
Legal capability: 7
Law firms: Addleshaw Booth & Co, Barlow Lyde & Gilbert
Deals: $5bn (£3.1bn) IT infrastructure outsourcing for JPMorgan Chase; $1.1bn (£682m) IT services contract with Boots
Top advisers for customers:
Bird & Bird
Top advisers for suppliers:
Leading private practice lawyers:
|The law firms|
Allen & Overy
Lawyers: 25 in the UK, 88 worldwide
Estimated turnover: £15m
Star players: Lawrence Jacobs
Clients: EDS, Accenture, Unisys, Lloyds TSB, Barclays, HSBC
Deals: Advising EDS on the e1.5bn (£1bn) outsourcing of ABN Amro's IT services; advising Accenture on Sainsbury's IT outsourcing
Profile: Led by Jacobs, Allen & Overy (A&O) made a conscious decision to focus on the outsourcing sector around six years ago, when it won work from two suppliers. “Because we recognised the strategic importance of these transactions for our clients, both suppliers and customers, we've dedicated more resources and given more focus to it than perhaps other firms have,” says Jacobs.
The firm decided to target more suppliers than the couple it already had, as the survey shows. As the group has expanded, so has the client base. A&O is now working for more customers, particularly in the financial services sector. While some clients, such as the Royal Bank of Scotland, have been gained from a wider A&O relationship, Jacobs claims that most, including all four of the major UK retail banks, have come from working for suppliers on previous deals involving the banks.
General counsel comment: “Allen & Overy are good, but they tend to work on things that are out of the ordinary or the ginormous deals.”
Baker & McKenzie
Barlow Lyde & Gilbert
Bird & Bird