A class apart
7 February 2011 | By Margaret Taylor
The UK200 2011
11 January 2010
The UK200 2011
23 November 2009
2 January 2012
Herbert Smith’s management team believes elite international status is the firm’s destiny. And with rivals progressing their offerings, the time to prove it is fast approaching
Like the firm it leads, Herbert Smith’s management team is pretty hard to pin down. In a literal sense that manifests itself in the fact that to gain an audience with managing partner David Willis and senior partner Jonathan Scott requires several months’ notice, with each half of the duo insisting on the other’s presence before agreeing to commit.
At a more intangible level, while the pair’s conversation is witty and engaging, with no subject seemingly out of bounds, in truth it communicates little.
Geopolitical observations are reduced to banalities - “there’s been a power shift in the world from the West to the East” - while attempts to articulate a coherent international strategy are peppered with evasions - “Our Africa practice? Well, there are 53 countries in Africa…”.
But here’s a thought: are these tactics symptomatic of a firm going through a mini-identity crisis rather than a management team bent on defying scrutiny?
Certainly, Herbert Smith is not always easy to classify. Ask its partners where they see it fitting in the market and the answer will invariably be “in the magic circle”.
But while the firm managed to increase the share of turnover from its international offices to 38 per cent in the past financial year, its global footprint is such that it does not sit comfortably alongside the magic circle quartet, all of which have seen London revenue fall to less than 50 per cent in recent years. Practice mix and profitability bar Herbert Smith from entering that particular fold too.
“They [Herbert Smith] have a very different model in that most of the big four are seen as very strong in M&A and corporate, but also in finance,” says one law firm consultant. ”Herbert Smith’s strength is litigation; it’s good in the M&A space but quite a way behind on the finance front.
“In previous years Herbert Smith was there or thereabouts on profitability, but last year [2009-10] they were some way off, even compared with Clifford Chance, which was lagging well behind the rest of the magic circle.”
Scott and Willis agree that the magic circle tag does not really do it for Herbert Smith, with the former claiming that “we aspire to be one of the elite law firms in the world”, and the latter adding that “ultimately we think what’s best for us is quality and not size alone. Quality will out. We think in the same way as Slaughter and May on this.”
The Slaughters analogy is one that Scott returns to often, and there is a sense that the firm has turned its inability to effect a merger from its decade-old alliances with Gleiss Lutz and Stibbe into a virtue in this respect.
Slaughters may have snapped up German leader Hengeler Meuller for its top-flight best friends network, but Herbert Smith can now boast that its German ally Gleiss Lutz was named Law Firm of the Year 2010 by German legal magazine Juve.
Appetite to drive through a merger is certainly on the wane within the firm. One senior partner, who says there is now little “groundswell of opinion” in favour of the move, reveals that “20 years ago I’d have said Europe was the most important place bar none for the firm to be, but now there are other places that are more interesting”.
This makes it easy for Herbert Smith to paint its alliance network as a Slaughters-esque design, although one source points out that the firm has “shown schizophrenia in the past about whether they want it to be a merger or not”.
Just as the magic circle tag is unsatisfactory, the Slaughters analogy does little to help define Herbert Smith.
“I don’t think they’re like Slaughter and May,” says one source close to the firm. “If you look at Slaughters, it’s a much smaller firm - it’s less than half the size of Herbert Smith [by partner headcount] but has more than double the profitability.”
That said, how Herbert Smith defines its international strategy is key to understanding its identity. With Willis acknowledging the shift in economic power from the West to the East, the firm is keen to point out its credentials in South East Asia. It is no coincidence that Willis was head of the firm’s Asia practice from 1997 to 2001 and, according to Scott, is known in the firm’s Jakarta office as one of the firm’s ’godfathers’.
Herbert Smith’s coverage in Asia is decent - it has bases in China, Indonesia, Japan, Singapore and Thailand - and it arguably has the strongest India practice of any international firm, picking up several choice mandates for Indian powerhouse Tata in the past few years and last year landing a referral from Clifford Chance’s now ex-best friend AZB & Partners on Bharti Airtel’s $10.7bn (£6.7bn) acquisition of Zain’s African mobile telecoms business.
Yet despite Herbert Smith India group head Chris Parsons stressing that the firm would be on the ground in India if it could be, Willis’s take is that, as current legislation prevents it from opening there, the firm has given no thought to what it would do if the rules were to change.
“Until we know what we’d be allowed to do we have no plan,” he insists.
The firm is similarly reticent about how it views the US. While Willis admits that recent deals such as Lovells’ tie-up with Hogan & Hartson and Denton Wilde Sapte’s with Sonnenschein Nath & Rosenthal have “made us think”, Scott says a similar proposition would not go down well with Herbert Smith’s partners.
Which is not to say that the firm would not consider some kind of US tie-up, but rather that the conservatism of the firms it covets, even when compared with the traditionalist Herbert Smith, would make any deal seem an impossibility.
With Willis pointing out that the firm’s US practice is managed via referral relationships with Cravath Swaine & Moore, Paul Weiss Rifkind Wharton & Garrison and Simpson Thacher & Bartlett, Scott insists that “the sort of firms we have relationships with are no more interested in a transatlantic merger than they were 10 years ago.
“We’re phenomenally well-placed should a top-tier firm change its mind - we’d bring our alliance relationships and we haven’t got any baggage, such as an underperforming Wall Street office,” he adds. “We’re like Slaughter and May.”
But if Herbert Smith is going to wait for a white-shoe firm to come knocking on its door, it can be taken as read that a merger will play no part in its future.
Despite this, according to one legal consultant, “Herbert Smith’s interesting in that its model is one US firms would understand much more than any other UK firm’s. US firms still have a 40 per cent litigation practice, so in many respects its model is more similar to US firms’.”
Getting its acts together
Herbert Smith certainly boasts many strengths. Its reputation in litigation continues to hold, with it appearing on a number of The Lawyer’s top 20 cases of 2011 (3 January 2011). Its corporate practice, which in the 2009-10 financial year generated 44 per cent of firmwide revenue against litigation’s 38 per cent, is stronger than it is given credit for, with the firm regularly winning slots opposite the global elite on big-ticket transactions.
Meanwhile, its ability to gain instructions on international mandates without the benefit of a fully developed global network is enough to make the likes of Hogan Lovells weep.
The difficulty the firm now faces is taking the seemingly disparate sides of its character - the near-magic circle and the not-really Slaughters traits, the litigation powerhouse and corporate pretender tags - and marrying them into a coherent whole.
In Scott and Willis it could have just the team to achieve that. Herbert Smith thrived in the five years it was steered by former senior partner David Gold, with average profit per equity partner breaking through the £1m barrier in 2007-08 and the corporate practice maturing into a solid City contender, but the veteran litigator was seen by some as a divisive presence at the helm.
Loved and loathed in equal measure, perhaps Gold’s smartest move was installing Willis as managing partner as he neared the end of his tenure.
A great pair
While theirs was always a classic chalk-and-cheese relationship, the pairing of Willis and Scott appears far more cohesive. The camaraderie between the pair is clear. While not quite at the stage of finishing each other’s sentences, in conversation they bounce off one another as only the best double acts know how.
Scott touches on the subtle but fundamental shift that has occurred.
“I might appear externally more relaxed [than Gold],” he says. “At the moment that’s what we need. David [Willis] and I are close. We’re totally different, but that doesn’t mean we don’t see things in the same way.”
Cohesion in management, though, has not quite translated into a solid identity. This much is obvious in that, despite saying that “Herbert Smith is rather more confident in its skin that its business model isn’t the same as everyone else’s”, Scott reaches for existing models by which to define the firm. Perhaps unconvincingly, the ones he chooses are those of top-flight US firms Cravath, Simpson and Sullivan & Cromwell.
And it is this paradox of striving to be unique while desperately trying to identify with the in-crowd that the firm must overcome. Putting profitability to one side, globally Herbert Smith is not joined-up enough to be a Clifford Chance, yet it has gone too far down the expansionist road ever to be a Slaughters. At the same time, comparisons with the white-shoe stable are hardly satisfactory.
When voicing the firm’s aspiration to be one of the “elite law firms in the world”, Willis stresses that Herbert Smith has “quite a lot of the components in place to justify that”.
There is some evidence to suggest he is right. But with Scott projecting that at least 50 per cent of the firm’s revenue will be generated overseas by the time his term is up in 2015, the test now is to prove it. Despite the firm’s apparent self-confidence, that could be no small task.
“[Scott and Willis] seem to have a clear handle on international development and there seems to be some clarity about what the firm wants to do,” says a source close to the firm. “But unfortunately they don’t always articulate that to the market very well.”