Capitalising on a crisis - Claire Coe Smith

Some managing partners are spotting opportunities in adversity. To say the last 18 months have been tough for law firm leaders is to underestimate dramatically the pressures to which even the strongest businesses have been exposed. The headlines in the international legal press have been dominated by redundancies and salary freezes, but as the focus now turns to life after the worst global economic crisis since the Second World War, some law firms look to be in comparatively rude health. It is easy to talk of the opportunities created by a downturn, and much is made of the chances created to snap up undervalued investments and otherwise gain market share. But putting such ideas into action is not simple. ‘How you approach a recession is significantly reflective of your own view of recession’, says Peter Martyr, the chief executive of London-headquartered international firm Norton Rose. ‘If you haven’t experienced one before, it’s all too easy to become spooked by events and what’s going on around you. To survive, you need to have confi dence, and a deep understanding of your own organisation and where its strengths and weaknesses really are.’ A year ago, as Lehman Brothers collapsed and the effects of the credit crisis began to have a real impact on the legal market, Martyr concluded that his firm must pursue two objectives. First, the business should seek not only to maintain but improve its competitive position, and secondly it must stick rigidly to its existing strategic plan. Under strain By Christmas 2008 his resolve was already under strain, as rumours of large-scale redundancy programmes swept the London legal market and the reasonably strong performance still being delivered by Norton Rose began to look shaky.

Martyr says: ‘One of the worries for me at that stage was that we needed to be careful not to take medicine for someone else’s illness. In other words, did we really have the same ills as some other, much bigger, law firms who were taking decisive action? They were driven by the fact that a lot of their banking practices were tied into high-risk, high-volume products, and our banking practice was quite different.’

In January the Magic Circle firm Clifford Chance announced a redundancy programme that would see as many as 80 London lawyers leave, and a month later Allen & Overy said it would lose 47 partners and almost 200 other fee-earners in a cost-cutting exercise.

Norton Rose chose a different route. Aping the accounting firm KPMG, the firm asked staff to vote for a flexible working scheme that would allow it to ask staff to work four days a week on 85 per cent of base salary, or take a sabbatical of four to 12 weeks at 30 per cent of salary. Partners were included, and 96 per cent of staff voted in favour of the plan.

Martyr says: ‘We gambled that the recession would last 18 months to two years. If we made redundancies, in two years’ time we would have to start employing and training people again. If the recession lasts two years, the overall cost to us of the flexible working programme will be neutral, but the social impact will not be neutral. We will have maintained a highly loyal and motivated staff that are respectful of what we have done and think we have behaved decently.’

Norton Rose hopes to emerge stronger from the recession as a result, and is not the only firm with ambitious and optimistic intentions.

People business

Another large, London-headquartered firm, Simmons & Simmons, was facing a similar quandary in relation to its trainees. Managing partner Mark Dawkins admits that managing the pipeline of future trainees was becoming challenging, because decisions on recruits have to be made three or four years in advance of their arrival. He saw rival firms asking their September 2008 intake of trainees not to turn up, and in many cases paying them a lump sum to defer their start dates.

Dawkins says: ‘We were looking at that in the context of the credit crunch and global recession a year ago, and trying to think of ways in which we could preserve our pipeline of talent, while recognising we may not have the levels of work in the firm we had been used to in the past.’

Instead, the firm decided to develop a bespoke MBA programme focused on legal services, in conjunction with BPP College of Professional Studies, to occupy trainees for a year and give both sides a tangible benefit. ‘We thought rather than just flinging cash at people and saying go and have a nice time for six months, we could do something more constructive’, says Dawkins. ‘The trainees get a benefit, and have a real MBA at the end of it, and we will get trainees who can hit the ground running, understanding what the law firm does and what our clients need.’

‘To survive, you need to have confidence, and a deep understanding of your strengths and weaknesses’ Peter Martyr Norton Rose

The course is optional, but out of a total of 55 trainees due to start in September 2009 and March 2010, 29 have chosen to sign up. As well as having their course fees paid by Simmons, the students receive a £15,000 maintenance grant to cover living costs.

Other firms have resisted cutting back their training programmes and embarking on redundancy programmes and chosen to take the pain. Pierre Raoul-Duval, the senior partner of Paris-headquartered international firm Gide Loyrette Nouel, says his partners decided against staff cutbacks.

‘We didn’t have to proceed to numerous lay-offs because we had suffi cient work for the associates’, he says. ‘We took the position very early on that we would not freeze the hiring process or the pay rates for the associates or the staff. We believe we have a good team that should be rewarded, and the management should, when times are difficult, give a sign that we trust our people and believe in them. Of course that means, for a time, substantially less profit for the partners, but it’s not unreasonable given the current environment we are operating in.’

It is a view shared by German firm Hengeler Mueller. Markus Meier, a partner in the firm’s litigation department, says: ‘We did not need to implement policies for associates or other employees. We have continued on our path of quality development, looking for the brightest and most talented young lawyers. We have grown in the past and will continue to grow, very moderately and based on our longstanding policy of attracting and retaining top talent only. That is the path we continue to take.’

As a result, the firm has seen no fluctuation in its recruitment in the last two years, and has instead invested heavily in its career development programme. In May 2009, Hengeler launched an integrated degree programme in cooperation with the University of St Gallen in Switzerland, whereby associates will have the opportunity to obtain a certificate after three years and a diploma after five years. A change to the career path will now mean associates can expect a decision on partnership election after six years, and during their five years as an associate they will be able to achieve roughly half of the credits necessary to gain the pan-European Executive MBA degree.

Meier says: ‘The programme is going to cost us quite an amount of money, but it’s so important. We are absolutely certain that this is the right path for the future, and that we must carry on investing in our people.’

The programme had been in development for some time, and the firm decided against postponing its implementation because of economic conditions. Instead, it is hoped the investment will help the firm prosper in future, and will allow Hengeler to continue to attract the best young lawyers.

Closing in on clients

While human resources have been at the forefront of many managing partners’ minds, client relationships represent the other key to survival for any firm. A recession can present opportunities here, too, as many law firms have seen a chance to spend more time talking to the decision-makers at their largest clients.

‘The crisis creates an opportunity for management to look at the firm and really see where its strengths are’, says Raoul-Duval. ‘But for me what’s more important is the
opportunity to have a dialogue with the clients. The crisis is an opportunity to discuss in more detail not only the fact that we want to work together, but how we can assist with the legal aspects of a long-term strategy for the client, including foreseeing problems that could arise.’

The same is true at Hengeler, where partners have been more proactive in meeting clients and discussing their needs. Partner Rainer Krause says: ‘What is characteristic of Hengeler Mueller is that we have relied on our culture in the last few years. What has always been the cultural mantra here is that we rely on each and every partner to be an entrepreneur, to be close to the client and to speak with the client about their needs and demands. That has made us quite successful in the last few years, and this client focus has been central to how we have reacted to the crisis.’

At Simmons, the number of secondments of associates to clients has doubled in the last 18 months, allowing both sides to benefit from an enhanced relationship. Dawkins himself has taken the opportunity to speak to clients about their concerns, which are often around costs, and develop ways in which the firm can address those issues. He says the firm is now exploring three different areas of client service: different charging structures as alternatives to hourly billing; the development of online legal services; and reducing the firm’s cost base by exploring initiatives such as outsourcing.

Dawkins says: ‘What this market provides is a burning platform, because when things are good it is quite hard to get people to change. This market drives innovation, and creates a platform where the wider firm wakes up to the need to do things differently.’

Raoul-Duval says: ‘My belief is that clients have an immediate concern, which is to make the best of the crisis, and we are here to support them in their efforts, whether that’s cutting costs, restructuring their business, or really whatever measures management wishes to take. But more to the point is where do they go from there, how do they structure their deals and operations better for the future, and how can we best support them in their strategic objectives?’

Allen & Overy partner Stephen Denyer, who sits on the IBA’s Law Firm Management Committee, says the crisis has brought clients and lawyers closer and freed up capacity to
focus on business development. Furthermore, he says: ‘The biggest reminder if you’re running a law fi rm is the importance of flexibility. I think we have gone through a long period where lawyers have needed to be more and more specialist, and market forces have driven that. Clients wanted to deal with real experts in particular areas, but you can see the danger if one experiences a real drop in demand, that it’s more difficult for people to switch into other areas.’

He says that shift could fundamentally change the way law firms operate, at least in the medium term. ‘What I expect the management of major firms to be asking themselves now is how do we create future generations of partners who are credible in areas they focus on, but suffi ciently fl exible to cover a wider range. That’s what clients want, and it’s more sensible for law firms going forward.’

Going for growth

For the most brazen and ambitious of firms, the downturn presents even more of an opportunity, as a number of plucky practices have taken the chance to expand significantly. London’s Bird & Bird is a case in point, having signed an alliance with Chinese IP boutique Xiang Kung Law Firm, merged with Finnish firm Fennica Attorneys, opened offices in the Czech Republic, Hungary, Poland, Shanghai and Slovakia, merged with London firm Lane & Partners and entered an association with Alban Tay Mahtani & de Silva in Singapore – all during a global recession.

‘My thinking on recession is perhaps a bit different to others’, says David Kerr, the firm’s chief executive. ‘I have always felt that a downturn is actually quite a positive period of growth as long as you are careful about how that’s managed. It’s a time of movement of people, for example.’

Bird & Bird saw its revenues jump 30 per cent in 2008/09 as a result. Kerr says the key to success is ‘due diligence, making sure there’s a strategic fit, and making sure the basics are right’. While deals may take longer to do, if they fit the firm’s longer-term goals, there are opportunities to be capitalised on. Kerr says: ‘There is a lot more nervousness about the market, and so people are moving a lot more at the moment. Everything gets harder, and the pressures make people question their priorities and the priorities of the businesses they are in.’

In June 2009, Norton Rose signed a deal to merge with Deacons, the Australian firm with offices across Asia Pacifi c. Martyr says: ‘A year ago we were given the opportunity to look at the Deacons deal, and at the time most people were predicting that the part of the world that was going to do best was Asia, including Australia. It gave us the opportunity to do something that would put us in a really good position in a very important part of the world.’

Such propositions are not always straightforward, he says: ‘Sometimes you get opportunities to pick up failing businesses, and I’m not sure that is the way to go. Deacons is a vibrant, profitable business performing well, and I thought it was too good an opportunity for us to miss.’

With a downturn comes navel-gazing, and in many cases that presents strategic opportunities that might otherwise have been overlooked. Management in a crisis is more testing than ever, but for those firms that remain shrewd, resolute and focused, there are advantages to be gained.

 

Feeling the pinch No international law firm has been immune from the economic downturn that began in 2007. The following table demonstrates how the impact has hit the world’s largest legal outfits.
Firm	Turnover 2009 (US$m)	Change from 2008 (%)	Profit per equity partner 2009 (%)	Change from 2008 (%)
DLA Piper	2,262	+ 6	944,000	- 26
Linklaters	2,234.7	- 14	2,066,000	- 20
Freshfields Bruckhaus Deringer	2,215.8	- 6	2,484,000	- 14
Skadden Arps Slate Meagher &Flom	2,200	+ 2	2,050,000	- 10
Baker & McKenzie	2,188	+ 20	1,206,000	+ 13
Clifford Chance	2,159.7	- 19	1,584,000	- 31
Latham & Watkins	1,923	- 4	1,809,000	- 20
Allen & Overy	1,876.6	- 8	1,724,000	- 23
Jones Day	1,520	+ 4	874,000	+2
Sidley Austin	1,489.4	+7	1,432,000	+4
Source: Legal Business

Aligning interests A number of law firms have merged or teamed up in the last 18 months, hoping to position themselves for growth when the economy returns to form:

Appleby and Dickinson Cruickshank Offshore firm Appleby completed a merger in October 2009 with Isle of Man firm Dickinson Cruickshank, creating the world’s largest offshore firm in terms of partner numbers. The combined business will have 73 partners in nine offices worldwide, including Dubai and Zurich. Bingham McCutchen and McKee Nelson US national firm Bingham McCutchen completed a merger with New York and Washington, DC finance firm McKee Nelson in August 2009, adding 120 lawyers and strengthening its position in advising financial services and Fortune 100 companies on finance and regulation. Bird & Bird and Lane & Partners In October 2008 London’s Bird & Bird acquired 30-lawyer boutique Lane & Partners, adding expertise in aviation, travel, construction and engineering and boosting Bird & Bird’s domestic and international disputes practice. McGrigors and Reid Minty, L’Estrange & Brett As IBN went to press, Scottish firm McGrigors was cementing a merger with Northern Irish heavyweight L’Estrange & Brett following its August 2008 deal with London litigation practice Reid Minty. The firm will gain ten partners and 40 lawyers from L’Estrange, and four partners and four solicitors from Reid Minty. Norton Rose and Deacons In June 2009, London’s Norton Rose announced plans to merge with Deacons Australia at the start of 2010, creating a combined entity with a turnover north of £420 million with 12 offices across Australasia. Pinsent Masons and Salans In June 2009, the UK law firm Pinsent Masons signed an alliance with international firm Salans to collaborate across the United Kingdom and worldwide. Salans has 21 offices globally and is particularly strong in the CIS, while Pinsents will end its participation in the PMLG alliance of independent law firms in Europe. Rodés y Sala and Gómez-Acebo & Pombo Spanish firms Rodés y Sala and Gómez-Acebo & Pombo combined in July 2009, creating a 320-lawyer outfit under the Gómez-Acebo brand. Speechly Bircham and Campbell Hooper London firm Speechly Bircham acquired City rival and 23-partner Campbell Hooper in June 2009, creating an 87-partner UK firm and adding critical mass in key areas. The enlarged Speechly Bircham is now close to becoming a top-50 UK firm by revenue.

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Claire Coe Smith is a freelance writer and researcher, and can be contacted at claire.smith@clairelegal.com

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