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EVENTS AND ROUNDTABLES

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EVENTS AND ROUNDTABLES

ROUNDTABLE: Leadership and management

Heavy hangs the crown – our leadership roundtable finds confidence amid testing times

  • Tim Eyles, Taylor Wessing

    Difficult to achieve scale through greenfield expansion in Asia

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  • Peter Crossley, Squire Sanders

    Investment in Korea is not solely about Korea but about securing access to the wider market

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  • Roger Parker, Reed Smith

    A consensual approach to integration and cultural development will make or break a merger

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  • David Kerr, Bird & Bird

    There is more innovation in the City and Magic Circle than has been acknowledged

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  • Melinda Wallman, Major, Lindsey & Africa

    It’s difficult to incentivise partners if profits aren’t shared

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  • Peter Strivens, Baker & McKenzie

    Clients are reducing the number of law firms they use globally

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  • Charles Martin, Macfarlanes

    Independent firms are working better together across jurisdictions than before

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  • Lynnsey McCall, Major, Lindsey & Africa

    GCs increasingly expect law firms to be more innovative

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  • Duncan Weston, CMS Cameron McKenna

    Clients have little interest in law firm models

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  • Peter Hasson, Clyde & Co

    Merger is not a viable strategy in itself

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  • Caroline Hill, Legal Business

    The real challenge is ensuring quality is good across all jurisdictions

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A diverse mix of leaders from major international firms attended our first management round table to discuss global growth strategies. While tough economic decisions have raised the pressure on law firm chiefs, most were in a positive mindset

Whatever the strategic and business model employed by international law firms today, the market remains challenging, leaving only the most effective, energetic and focused players to thrive. That was the key message from a recent gathering of senior management figures from leading City-based international firms assembled in the Red Room of 1 Lombard Street restaurant for the first Legal Business round table on leadership and growth strategies in collaboration with Major, Lindsey & Africa (MLA).

As we are more than two-thirds of the way through a year again dominated by significant strategic deals by law firms, it was inevitable that the discussion would turn quickly to market consolidation. This round table took place just weeks after the 3,800-lawyer merger of Norton Rose and Fulbright & Jaworski went live and followed other significant tie-ups in the past year, notably the three-way merger that formed Dentons in March and the Herbert Smith Freehills union in 2012.

Form or substance

‘We have never seen so many discussions going on, either on the merger front or the hiring front, as everybody is trying to position themselves for what is now an increasingly global market,’ says Melinda Wallman, partner and head of the partner practice group EMEA at MLA. ‘Most firms are now conscious that they need to figure out what they are going to be and how they are going to differentiate themselves, ie whether they are going to be a global elite player, a global business law firm, a niche player or an industry-specific firm.’

All of the firms represented, with the exception of Macfarlanes, have been through transformative mergers or associations in the last ten years. Clyde & Co’s 2011 union with Barlow Lyde & Gilbert (BLG) was one of the more recent examples but chief executive Peter Hasson says that despite the recent run of consolidation among major law firms, pursuing such deals should never be a strategy in itself.

‘You cannot have a strategy of merger,’ he says. ‘If you try to pursue that – and there are some firms who have tried to do that – it just ends up completely distorting what you are trying to do. You therefore have to be clear about what you are trying to achieve. I would certainly prefer to achieve strategic ends without mergers because they are much more difficult to pull off than, say, team moves or hires.’

It is this difficulty of pulling off a full merger that has recently led to the Swiss Verein structure becoming the preferred route of pulling two or more major practices together. Of the most significant tie-ups since the beginning of 2012, three of the most high profile – King & Wood Mallesons, Dentons and Norton Rose Fulbright – involve multiple profit centres. Of the round table participants, three firms – Baker & McKenzie, CMS and Squire Sanders – use vereins or similar models.

‘There is a lot more innovation in the City and in the way law firms have been behaving than has been acknowledged.’

David Kerr, Bird & Bird

‘We have not really done mergers,’ says CMS Cameron McKenna managing partner Duncan Weston, whose firm is part of the European group CMS. ‘We have done acquisitions and what we call convergence. The trend has become to converge real firms, not just in Europe but globally. It is easier to do, but to implement it and to make it effective takes time.’

David Kerr, chief executive of Bird & Bird, agrees that full mergers are much harder to establish but says he has preferred an ‘old-fashioned approach’ of a single partnership model ‘where there was a common financial interest imperative that would drive behaviour and common practice standards’.

That said, he acknowledges the increasing popularity of the verein approach. ‘We were not that convinced that this type of association would work for us but I agree that for some organisations it is a perfectly valid model. We are seeing the success of CMS and Norton Rose, and it is a perfectly viable approach, just an alternative way of doing it.’

Clyde and BLG was one of the most significant single partnership mergers of recent times and Hasson says the two firms deliberately avoided going down the verein route because they believed it was more difficult to deliver an integrated service to clients in the absence of sharing profits across the whole of the network. One example of this is to look at the Big Four accountants.

‘You will get very different levels of integration even between different countries of accountancy firms,’ says Hasson. ‘One of the problems we always found with the Big Four was that if you were working in London or Hong Kong it would be fantastic, but the minute you try to go somewhere else it might as well be two or three different firms. Whatever model you use, the trick that everybody is trying to achieve is to pull together an integrated single culture across the firm.’

Achieving that single culture can be difficult without a single profit pool. From a recruitment perspective Wallman questions how firms can incentivise senior lawyers if they are not sharing profits, pointing out that MLA sees a lot of disgruntled partners, particularly in the multi-profit centre practices, because they feel like partners in other parts of the organisation are benefiting from the arrangement more than they are, at least in the short term.

However, Peter Crossley, European managing partner at Squire Sanders, argues that such issues will depend on the culture of individual institutions, rather than an inherent flaw among verein-backed firms generally. He describes how it works at his firm: ‘If a partner in New York refers work to a partner in London he gets the same amount of “credit” as if he had referred it to one of his “own” partners in the US. We completely revamped and changed our remuneration structures in order to fit within our new global firm, so everybody is marching to the same tune in terms of the principles underlying compensation and profit-sharing. On the basis that you get the behaviour that you reward, that goes to the heart of the one firm ethos you are trying to create in cultural terms.’

Roger Parker is managing partner for Europe, Middle East and Asia at US-bred Reed Smith, which merged with UK mid-tier Richards Butler in 2007. With subsequent unions between large UK firms and major US practices favouring the verein structure, he believes a single partnership merger similar to his would be hard to pull off now.

Attitude towards how the combined firm will look is key. ‘Is a lack of pragmatism a particular stumbling block to some mergers, particularly transatlantic ones, as often at least one of the parties to the deal refuses to recognise that they will effectively need to be acquired for the deal to work?’ asks Mark McAteer, national editor of Legal Business.

‘We talked to another client last week and they are giving out $75m worth of legal work to two different law firms; and they will probably not be Magic Circle law firms.’

Melinda Wallman, MLA

‘Richards Butler was smaller than Reed Smith, which was the dominant partner in terms of size,’ says Parker. ‘I am interested in the point about acquisition or merger and I think that is reflective of a mental approach, to some extent, to the issue. One is striving to achieve a genuine merging of cultures and convergence of thinking. Ultimately, size is material but a consensual approach to integration and cultural development will make or break a successful combination.’

Macfarlanes’ Charles Martin was the odd man out around the table as the senior partner of the only firm present to neither merge nor expand internationally. It doesn’t appear to have hurt the firm, however. Macfarlanes is easily the most profitable firm among the group with current profit per lawyer at £158,000 and profit per equity partner of £985,000. He says that the key to success is having a very clear vision of what clients you are trying to serve for what work types. Such a strategy requires firms to be ready to actively turn away business outside their chosen focus.

‘It is not for everyone, and it is not a segment of the market that could take very many players,’ says Martin. ‘However, that is also true of quite a lot of segments of the marketplace. As we move forward there will only be room for a small number of players in each of these segments.’

Wallman asked Martin how much of Macfarlanes’ client base is multinational versus European or domestic, pointing to the fact that Wall Street leader Davis Polk & Wardwell surprised many by launching an English law capability from its City practice through the hires of Simon Witty and Jonathan Cooklin from Freshfields Bruckhaus Deringer in early 2012.

‘One observation which may cause some surprise around the table is that we have seen, as a result of the downturn, a significant increase in cross-border work,’ responds Martin. ‘What is that driven by? Harder economic times are forcing leading independent firms around the world to focus on working really effectively with other like-minded firms that are committed to doing an excellent job for their clients. To compete against the international firms on quality with vigour and conviction. Greater client willingness to work with multiple firms on the same matter (when they engage with outsourcing providers for example) and widespread IT compatibility are helping too. So this sort of international alliance of the unallied, if that is what you want to call it, is working better now than it has ever worked.’

Martin argues that one advantage that his firm’s model has had over the last four or five years is the ability to adapt quickly, saying: ‘We are not a super tanker. We have also further emphasised to our clients that what we want to do with our stripped-down law firm model is to be very outward-looking and take advantage of the fact that we have less to run internally, less complexity, [and] less to manage internationally.’

However, he adds: ‘What I am hearing around the table is: whatever strategy you have, whatever model you adopt, it is tough out there.’

Everyone around the table concurs with this viewpoint. Whether a verein or a single partnership, a leading local player or an international giant, trading conditions remain tough and clients are prioritising value and quality they get over varying models and strategies that law firms deploy.

‘All the evidence points to the fact that clients do not care about how their advisers are structured,’ says Peter Strivens, partner and member of the London management committee at Baker & McKenzie. ‘What they care about is getting great service and quality in all their interactions with the firm. No matter what structure a law firm chooses to adopt, it has to have one that resonates with the culture of the firm and one that helps it to foster a performance-based culture. Having a focus on global practice groups is one way of doing this because that is more in line with how clients will experience an international firm. This has become even more important recently as clients have started to reduce the number of law firms they use globally and have opted for deeper relationships with a smaller number of firms.’

Weston likewise agrees that clients have little interest in law firm models. ‘They want a service and they do not care whether you share profits or not,’ he says. ‘In fact it is almost a rude word if you start talking about that to the client. They want a proper service with high-quality lawyers, everywhere they go.’

‘There is a major issue for the industry and the profession, which is that the global legal services cake is, by all accounts, shrinking.’

Roger Parker, Reed Smith

But Parker warns that unless there is a radical overhaul in how many law firms operate, then more will be swallowed up. ‘There is a major issue for the industry and the profession, which is that the global legal services cake is, by all accounts, shrinking. Clearly, it will not necessarily be shrinking in every geography or in every city and it will depend on the sector and the type of work. However, if that is right then the industry does have an issue; and either we adapt with techniques to deal with the need for greater efficiency by firm, industry, and sector, or the forces of nature will force greater change most likely by convergence and mergers.’

Asia is one particular area where advisers are struggling to achieve a return on investment. As reported in our Global 100 coverage in July, despite the surge of firms recently into Korea and Singapore, firms are starting to retrench in other parts of the region as growth fails to materialise.

Says Weston: ‘It was a long road for us in Europe but we do not have some of the pressures that other firms have had in Europe with people coming and going and offices going up and down, being profitable and not profitable. People are now experiencing the same thing in Asia: you set up an office, it might make some money in the first year but then it loses money the next three years.’

Hasson’s perspective: ‘The thing with Asia – and I know it differs for other firms – is that it is a longer-term return play, if you like. Obviously in any firm you have to have a balance between those investments where you are going to get a quicker return and those which are longer; but it is tough out there.’

‘There is such a small pool of talent out there that partners can demand very high prices,’ says London office managing partner at MLA, Lynnsey McCall. ‘Therefore, the investment that you make in the individuals, before they have even started to contribute to the practice, is quite significant.’

Korea is the most recent example of a ‘gold rush’ territory in Asia. Twelve Global 100 firms opened in Seoul in 2012/13, including Baker & McKenzie and Squire Sanders, while many more applied for licences. But Wallman says that there are signs of a few firms putting their plans on ice.

‘While the interest in international firms opening up in Korea continues to rise, we have seen a couple of firms put their plans on hold, particularly those whose Korea practices are focused on project finance,’ she says. ‘Our Korea practice team is of the view that most of these firms will go in eventually as it may be necessary to do so in order to maintain client relationships. We believe that the focus on saturation/competition is somewhat hyped. While competition on the ground has increased due to the attention of so many firms on Korea and aggressive marketing activities and discounting by new arrivals who feel the need to get traction quickly, most of these foreign qualified lawyers were already doing Korea work from other locations (Hong Kong, Tokyo, New York, etc) or at Korean law firms and simply switched their location or platform.’

‘The Koreans I have spoken to are quite fun to talk to about their impression of the numerous recent entrants,’ reflects Kerr. ‘In their view some firms think that they have a good relationship with major Korean clients but they do not.’

Crossley says Korea is an important springboard for a wider Asia practice. ‘I do not think any investment in Korea is solely about Korea itself, it is fundamentally a massively successful country and very integrated within the rest of the Asia-Pacific region.’

And despite Asia disappointing the expectations of some law firms, Taylor Wessing UK managing partner Tim Eyles – whose firm recently expanded in Singapore – says that further growth remains on the cards.

‘A lot of opportunities for us are coming out of Asia; we want to be bigger there. We’d like a Hong Kong presence and foresee expansion in other territories too. We’d prefer to find the right merger partners rather than doing it greenfield, which is just too expensive and would take too long a time to get the scale we need in time.’

Service delivery

One point on which all the participants agree is the belief that clients want innovation from firms in their service delivery. Wallman recalls a recent conference that she and Parker both attended where GE and Balfour Beatty spoke about distributing millions of pounds worth of work on an annual basis. GE talked about guaranteeing £20m worth of litigation work to one firm, leaving it to that firm to figure out how to do it and still make a profit.

She adds: ‘We talked to another client last week and they are giving out $75m worth of legal work to two different law firms; and they will probably not be Magic Circle law firms, according to the client. This is going down one level and, as long as the people are qualified to do it and there is not too much risk in it, I think this is a huge change in the market, particularly from a lateral hiring perspective as it changes the focus of the post-2008 hiring environment from book of business to expertise.’

McCall agrees: ‘We frequently hear from our general counsel (GC) practice clients that they expect the law firms that work for them to be doing more in terms of innovation and to help their business by bringing them business ideas. GCs want law firms to be proactive rather than waiting for them to ask for a more cost-effective solution to be delivered. That is quite a common complaint from the general counsel we deal with.’

Hasson observes that clients have reacted quickly to a changing dynamic. ‘Clients have adjusted to the “new normal” faster than law firms,’ he says. ‘Clients are organising themselves now and are becoming much cannier now in the way in which they are buying legal services.’

‘There is a lot more innovation in the City and in the way law firms have been behaving than has been acknowledged,’ says Kerr. ‘The big revolution in the last five years has been that the Magic Circle has moved more to the industry sector orientation and they have really aligned their business behind that. They have been much more innovative in pricing than people realise.’

That is one development that most of the round table – many of which are top 25 law firms in the UK – have noticed significantly; the growing appetite of the Magic Circle to compete with them for work, which historically they may have left alone, and pricing aggressively in the process. However, Weston argues that the work flows in both directions.

‘Maybe they are poaching our waters but are we poaching theirs too? The amount of big deals that we do now compared to what we used to do is much greater and we are pinching them off the Magic Circle. They are under huge pressure to get their pricing organised. Clients are demanding more from them and they are not able to provide it because they are geared towards high-price services.’

‘I was speaking to general counsel at one of the big banks and they said they would not go to a firm in a jurisdiction just because they had the brand, but that they would always go for quality,’ says Caroline Hill, news editor of Legal Business. ‘They said that that would be the real challenge, in ensuring that the quality is as good across all of the jurisdictions.’

But Martin says that every client needs to make a distinction between vanilla work and premium advice.

‘Even for that client, that would be true only for a segment of their work; because, while they will have some work for which it is true that quality is of paramount importance, they will also have other categories of work where being able to integrate globally, or being cheaper, will be more of a driver than the quality.’

Performance management

A perennial strategic headache for law firm management is finding the best way of retaining talented partners and ensuring they are incentivised enough to remain at the firm. Most around the table agree that the majority of lateral moves are rarely a short-term financial generator but, despite this, McCall says there are a lot of disgruntled partners at major City firms.

‘I would say that a lot of partners are willing to talk at the moment,’ she says. ‘It’s partly to do with them not feeling valued and partly about not understanding where they fit within the firm’s strategy.’

A common complaint from partners at larger firms is that they are not able to be entrepreneurial in attracting new clients and if they’re not dialled in to large institutional relationships they can feel left out in the cold. ‘We see that a lot, actually – some clients that individuals can bring in not being valued as much as the big institutional relationships that they are trying to look after, which then leads to partners with their own clients wanting to go somewhere where those relationships are valued,’ says McCall.

Eyles agrees that a sense of ownership and feeling integral to any strategy is critical in encouraging people to remain. ‘It is about ensuring we have a sense of direction and everybody feeling they are participating in the journey. All of us want to feel engaged. If everybody feels they have a sense of influence and direction which they are bought into, and that applies to everyone at any level, then the money usually takes care of itself,’ he says.

However, Wallman says that firms should not ignore the issue of inequality of remuneration and how this is a key plank of performance management: ‘Partners often come to us because they have not been paid as much as they think they should. When you drill down into it, it is actually not so much about “I should have got x”; it is more “somebody else got more than x”. There is a famous Harvard Business Review study on open versus closed compensation, which supports our experience that dissatisfaction around money has much more to do with relative than absolute compensation.’

Aligned to the point of relative pay, Weston believes it is important to have some balance between partners in practice areas hit hard by market conditions and those who are not. ‘It is more about keeping things consistent. If part of the firm is highly profitable and another part is struggling in the recession, the challenge is how to even that out so that everyone is seen to be treated fairly.’

This also links to another significant issue affecting partnership morale: guaranteed remuneration packages to lateral hires. An issue that was central to the demise last year of Dewey & LeBoeuf, some firms have experienced diluted profits as they suffer the hangover of throwing too much money at lateral hires during the boom years. Kerr says that a striking issue that he is seeing with potential lateral hires at Bird & Bird is that in some cases there are some differences between what he describes as ‘the cash out-take’ and ‘the paper out-take’, which he says ‘probably reflects a much more troubled market than people are prepared to admit’.

However, Wallman says that it is unusual for firms to guarantee compensation for incoming partners these days, except in a new practice or new office situation, where they are still seeing big guarantees for up to three years.

Weston puts forward a final point. Although firms have been criticised and have been self-critical about finding the right strategies for growth in an increasingly abrasive market, the legal profession generally has proved itself able to adapt to changing circumstances and still maintain a financial health that would be the envy of many other sectors.

‘We knock ourselves a bit all the time but I would say in the last three years we have been quite progressive in many ways,’ he says. ‘We talk about the fact that the market is very tough; but it is also tough for our clients. I have not seen that many people around this table worrying to death in terms of profitability or revenues.’ LB

The Legal Business Leadership Roundtable was conducted in association with Major, Lindsey & Africa.

 

The Panellists

  • Peter Crossley European managing partner, Squire Sanders
  • Tim Eyles UK managing partner, Taylor Wessing
  • Peter Hasson Chief executive, Clyde & Co
  • Caroline Hill News editor, Legal Business
  • David Kerr Chief executive, Bird & Bird
  • Charles Martin Senior partner, Macfarlanes
  • Mark McAteer National editor, Legal Business
  • Lynnsey McCall London office managing partner, Major, Lindsey & Africa
  • Roger Parker Managing partner for Europe, Middle East and Asia, Reed Smith
  • Peter Strivens Partner, Baker & McKenzie
  • Melinda Wallman Partner and head of the partner practice group EMEA, Major, Lindsey & Africa
  • Duncan Weston Managing partner, CMS Cameron McKenna