Law firms look for opportunities to enhance their client relations

It was a sunny September day two years ago, and Michael Hatchard, a partner with Skadden, Arps, Slate, Meagher & Flom, was having lunch with executives from insurance broker Aon at the law firm’s office at London’s Canary Wharf.

The group was discussing the fallout since a radical move by the Takeover Panel, the UK’s mergers regulator, two years previously to enact new rules to make hostile takeovers of British companies more difficult. This had followed the contentious acquisition of food group Cadbury by US rival Kraft in 2010.

“Break fees had become unavailable, which left the bidder exposed to costs,” Mr Hatchard says. Without those incentives for first bidders, an unsuccessful bid could end up costing tens of millions of pounds in some cases. The Skadden lawyers and Aon executives worried that the change was putting at risk a nascent revival in mergers and acquisitions in the UK, discouraging private equity bidders in particular.

The result of the brainstorming was “topping insurance”, a new product that would act as break-up coverage for potential acquirers in deals, and pay the bidders any costs incurred — up to 1 per cent of the bid price — if a competing bidder emerged and won. “It’s about using insurance as a mechanism to reduce risk for both parties,” Mr Hatchard says.

It is a rare instance of lawyers coming up with the idea for a commercial product for a client, and it helped Skadden by providing more work, boosting its standing with Aon and providing security for the sort of deals Skadden is often hired to advise on.

It is also a sign of the times — lawyers are realising that to maintain and strengthen their relationships with clients they have to find innovative ways of providing value after a deal is done. That is especially true for mandates such as M&A, where the billing rates are highest.

Increasingly, law firms are also being asked to leave their egos at the door by collaborating with other lawyers so that the client has the benefit of a wider range of expertise.

A £1bn technology project to facilitate a move from a prime-contract to a multi-supplier model led Royal Mail Group to instruct Slaughter and May in 2011 to work with its in-house legal counsel, leading a team of up to 18 lawyers from Royal Mail’s panel law firms, including secondees from Addleshaw Goddard and DAC Beachcroft. The group was headed by Rob Sumroy, a Slaughter and May partner, and Sarah Draper, Royal Mail’s legal director for technology on the project.

Pinsent Masons and Axiom have taken a similar approach with two of their clients, which effectively outsource part of their bulk legal work to the firms, which in turn allows the companies’ in-house departments to concentrate on strategic issues.

Pinsent Masons has been working with one of its clients, the consultancy Mercer, a wholly owned subsidiary of professional services group Marsh & McLennan, to take on operational legal work, mostly on a fixed-fee basis. As a result, the company has saved more than £1m a year since the programme began in 2012.

The partnership, dubbed “Getting Certainty”, came about after discussions on how the firm could help Mercer do some of its day-to-day work in order to free up its in-house legal department to focus on areas such as developing new consumer-facing products, de-risking pension schemes and improving internal risk and compliance systems.

Up to 30 lawyers at the firm, across eight offices, may be working for Mercer at any given time, says Isabel Nurse-Marsh, a pensions litigation partner at Pinsents who has worked with the consulting firm for about 15 years.

Pinsents has also signed up to conduct an annual review of hundreds of Mercer’s standard contracts with clients at a fixed price. This is to give the company easier access to information and allow it to assess risk more easily.

“There’s an awful lot of collaboration,” Ms Nurse-Marsh says. “We would see ourselves as an extension of them: they have secondees from us; they have recruited people from Pinsents. We know them really well.”

The arrangement means Mercer knows in advance how much the work will cost. The client will also pay Pinsents bonuses if the work meets certain efficiency targets.

“It’s about sharing the risk,” Ms Nurse-Marsh says. “The more efficiently we do it, the better it is for Mercer and that ends up being better for us.”

Lisa Tolaini, chief legal counsel at Mercer, says: “We believe we have developed an innovative approach to managing our legal spend without compromising the quality of the advice we receive, and which will also allow the legal function to focus more time on those areas such as product development that really add value to the business. We particularly like that our lawyers are sharing the upsides and downsides of our risk with us.”

It’s about sharing the risk. The more efficient we are, the better it is for the client and that ends up being better for us

Axiom, a firm whose lawyers are seconded in-house with clients on a project basis, is working with BT, the telecoms company, on a multi-million-pound project where a team of more than 30 lawyers in Northern Ireland, England, India, Singapore and the US is trying to transform BT’s contracting operations.

The work of Axiom’s lawyers frees BT’s in-house team to focus on deals. The firm is using its proprietary technology, Iris, to provide BT with dashboards that allow the company to view the contracts the Axiom team is working on by type, geography, counterparty, originating requester, source of terms, business line, legal entity and date, and the status of each.

The volume of work handled by Axiom has risen about 250 per cent since it launched the programme. The complexity of work handed over has also increased.

Skadden’s Mr Hatchard and his team spent about 18 months negotiating with the Takeover Panel to approve the topping insurance. The product, which will cover deals with a value of up to £3bn, with potential for further coverage of up to £7bn, was packaged earlier this year along with support insurers. “It has deepened our relationship with [Aon],” Mr Hatchard says. “We can see it having applications in the US and elsewhere.”