Breakaway Firms: Split decisions
27 October 2008
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Omnipresence used to mean the same thing as omnipotence to big law firms. But a sharp change in economic conditions has prompted the biggest firms to rethink their expansion strategies.
Most recently Linklaters and Reed Smith have hived off non-essential offices, creating breakaway firms. Linklaters’ central and Eastern Europe (CEE) practice has spawned the law firm Kinstellar, while Reed Smith’s Birmingham office is set to split and form Hill Hofstetter at the start of 2009.
There are two factors at play here. First, big law firms are finding that their clients, particularly in finance, are refocusing their resources on core markets and products, which means the lawyers have to as well. Second, Anglo-Saxon law firms have fewer resources to splash on exotic offices and overseas lawyers. Equity partnership places have always been few and far between for these outlying associates and partners, but now they are almost non-existent.
Nick Eastwell, head of Linklaters’ new emerging Europe, Middle East and North Africa (Eemena) group, was one of the architects of the Kinstellar breakaway.
“This has happened because there has been a change in the way our clients view the world,” he says, describing the thinking behind the move. “When we opened [in CEE] our big clients were falling over themselves to get in there. A lot of big privatisation deals were going on. Ten years later those same countries have become rather mundane European economies.
“In that same time we’ve seen a big increase in interest in the Bric [Brazil, Russia, India and China] economies,” he adds. “Our clients have moved their focus and we’ve had to move ours. There’s too much of a limit on resources to be in scores and scores of different countries.”
Eastwell also mentions that global conflicts were a big issue for the local CEE lawyers, who wanted to grow their domestic client base but were hamstrung by the emphasis on institutional client care at Linklaters.
This common problem has an impact on the career paths of local lawyers in the smaller offices of big firms. They have trouble generating their own work and so have trouble making a business case to make it into the firm’s equity, especially when the dealmakers in Dubai are rocketing ahead.
“Every year we’ll make up a limited number of equity partners. Lots of people were going for those slots and those in places such as London, New York and Moscow would take priority,” explains Eastwell. “With the breakaway, the lawyers in Eastern Europe have much more independence in terms of law firm prospects. And that means clients can tap into a deeper team out there.
“I think that’s a common concern. One reason why we haven’t had a big exodus of people is that the lawyers are intelligent people – they know that the same issues are there at Allen & Overy and Clifford Chance; they’re not giving away equity. It’s conceivable that more firms will do this. As they grow in other areas they’ll find it harder to manage the resources in the smaller offices.”
Law firms have spent the economic bull run of the past six or so years building abroad and merging with local firms, giving them some exotic names on the stationery that may now look a bit extravagant. Rather than closing down the minor offices completely, firms have hit on the breakaway firm model as a way to take care of their clients in those areas where they cannot give up their own resources.
Eastwell says Linklaters will continue to give training and IT support to Kinstellar because the new firm will continue to service the firm’s big institutional clients. Linklaters even has a team based in London to service Kinstellar’s marketing needs and will pay the new firm’s CEE rent until the start of next year.
The scheme is sort of like an amicable separation, rather than a dumping on either side. It is a model that has worked for other firms.
“Obviously [a breakaway] is an option when you’re looking at how to best configure your business,” says David Morley, senior partner at Allen & Overy (A&O). “It can be very beneficial for both sides when it’s mutual.”
A&O used it in Turin two years ago, giving local managing partner Carlo Pavesio the firm’s local office as a going concern. The firm has been able to keep in touch with finance clients such as Finmeccanica, Sanpaolo IMI and Toro Assicurazioni, without having to devote all the time and money necessary for managing the office.
Looking to the future, a lot of firms still have some rather extravagant names on their letterheads. A similar model could work for them too.
Simmons & Simmons boasts an office in Madeira, while A&O has a presence in Antwerp. Even more unusual is Scottish firm McGrigors, which has an office in Port Stanley, the capital of the Falkland Islands.
But not everyone is convinced that big firms will shed offices. Morley makes it clear that he has no plans to detach the Antwerp office, saying that some jurisdictions, such as Germany where the firm has five offices, clients act regionally and more than one presence is needed.
Meanwhile, Tony Williams, principal at law firm consultancy Jomati, thinks firms will use prudence, rather than the axe, when it comes to managing small foreign offices. Most firms will want to be in the top 12 financial centres of the world, which generate around 75 per cent of all deals, but beyond that they will maintain rather than cut offices.
“It’s relatively unlikely that we’ll see a mass culling of international offices,” says Williams. “People invested a lot of time and money into them. I think most law firms will be approaching it in a strategic way. My sense is that some offices won’t grow whereas other offices will.”
For most managing partners at big law firms, omnipresence still has a nice ring to it. The raft of office openings in the Middle East is testament to this.
But the legal industry has also discovered that when clients no longer need you to be there in body, you can be there in spirit.