Focus: Macfarlanes: Mac to the future

Macfarlanes is changing – slowly. Gavriel Hollander discovers how the blue-blood firm is meeting the challenge of falling profits, no overseas network and a perennially stuffy image

 It is one of the great idiosyncrasies of the legal market that despite the sheer number of firms out there competing for the attention of clients, every single one seems to think its culture is unique. The quantity of competition means that, except to the nth degree of ­differentiation, this simply cannot be true.

Macfarlanes, however, exists as proof positive that some partnerships can stand out from the crowd. The firm has always worn its ’we’re not like the others’ persona on its sleeve.

The question now is whether the things that made Macfarlanes unique will continue to work to its advantage or create an isolated firm that is left behind as the industry moves on.

Knowingly understated

If one word could describe the way that Macfarlanes goes about its business then ’understated’ would probably fit the bill. The firm unveiled its new managing partner last month, with finance chief Julian Howard set to take over from Simon Martin in the New Year.

But instead of the pomp and ceremony of an election for one of the leading jobs at one of the City’s most profitable firms, the decision was taken behind the scenes and communicated to the world via a quiet telephone call to the trade press on a Friday afternoon.

The difference in approach compared with the magic circle firms with which Macfarlanes feels it competes in terms of both clients and talent could not be more pronounced. And for a long time, at least through the monochrome perspective offered by profitability, compete with the best is exactly what Macfarlanes did.

Until two years ago, Macfarlanes was one of only three top 50 firms (along with Ashurst and Herbert Smith) outside the magic circle quartet and Slaughter and May to boast a seven-digit profit per equity partner (PEP) figure.

The maxim that Macfarlanes punches above its weight became something of a truism. It meant that the firm could tout itself as a genuine alternative to the big five most profitable in terms of its ability to recruit the best people, particularly in the transactional space.

Profits, however, are on the wane. In 2009-10, Macfarlanes’ average PEP had dropped to £710,000, putting it firmly at the head of the chasing pack financially; but of a pack that has long become separated from the top table.

“Profit is not the only basis on which anyone should run a law firm,” insists senior partner Charles Martin. “We’re not going to take short-term decisions merely to influence our partner profits.

“If people want to say that Macfarlanes is in decline, that’s simply not the way we see it. We will be in the top handful of firms. The fullness of time will decide whether that’s an idle boast or reality.”

That said, the firm has taken the sort of action that would have been anathema to it in the past. Witness the fact that a number of partners have been de-equitised. Martin refuses to say how many partners were involved but insists it was limited to “a very small number”.

Sources suggest the total number of partners leaving the equity is seven, including up to three retirements. A small number, yes, but still a sign that the stresses of the recession are being felt.

Another change has seen Macfarlanes’ once standalone property team broken up and divided between the corporate, litigation and private client departments. Except for two retirements, partner headcount has remained steady but the move again suggests that Macfarlanes knows it cannot afford to remain static.

However, even to those outside the firm, the recent drop-off in profit is not being taken as a sign that Macfarlanes is in trouble.

“Their figures have dropped, like everyone else’s,” comments a managing partner at another firm. “But that’s not so bad when you consider what those figures were in the first place.”

But falling profitability for Macfarlanes has two effects, one of which would not be quite so keenly felt by its magic circle competitors. Specifically, much of the firm’s unique marketing cachet derives from its ability to generate huge profits, rather than from the name itself.

“We’re very serious about being the firm that’s widely admired and recognised as being focused on high-end work across the practice,” says Martin, by way of explanation. “This is all about being prepared to do the things that mean we still occupy that space. This has never been a lazy, complacent kind of place.”

And that space has to be high up in the league tables or Macfarlanes loses one of the things that make it different.

“We differentiate ourselves in terms of our quality and our profitability,” confirms one partner at the firm. “If you lose one, that makes it harder to prove that differentiation.”

A sliver of silver

Macfarlanes was one of a small clique of firms anointed by The Lawyer in 2005 with the tag ’silver circle’. What linked the members of the gang – which included Ashurst, SJ Berwin and Travers Smith – was impressive financial performance achieved on the back of the private equity boom. So, wither private equity, whither the silver circle?

The answer is that these firms ended up competing for a smaller cartel of clients, all of which are able to apply increasing pressure on the pricing front. It makes for a squeeze on the kind of profitability that has been Macfarlanes’ calling card for years.

“None of them is immune from pressure,” muses one recruiter, on the varying fortunes of the silver circle firms. “If you can’t set yourself apart with something – whether that’s your profits, your international network or whatever – you could be in trouble.”

It is probably fair to say that Macfarlanes has not been as exposed to this kind of trouble as other firms. Private equity is still important, but some of the biggest mandates over the past two years have come from the restructuring side of the practice.

The work on the Four Seasons Health Care debt restructuring is a case in point. The £800m deal was a sign that the firm is successfully diversifying away from its traditional sweet spot.

It is typified too by the growth of the debt finance practice, from two partners to seven in the past five years. The elevation of Howard, a debt finance specialist, to senior partner is a sign of the importance of that part of the firm.

Howard himself says that his appointment is not about pushing one practice in place of another, but rather confirmation that – like the firm’s spiritual big brother Slaughters – Macfarlanes lawyers have to be versatile.

“We’re not a firm that works in silos,” he says. “We’re not big enough to be able to do that.”

One of the enigmatic aspects of the Macfarlanes character is the firm’s desire to distance itself from the pack and run with the wolves of the magic circle. But that can cause its own problems.
“The magic circle [firms] have a brand name that we don’t,” concedes the unnamed Macfarlanes partner. “The only way we compete is by doing things better, and even then we sometimes don’t get the credit for it.”

The last comment unwittingly reveals another of the paradoxes at the heart of what Macfarlanes is trying to do. It wants to be seen as a genuine competitor to the big beasts of the market in a few selected areas, and yet simultaneously there is an acknowledgment within the firm that it is happiest when flying under the radar. Martin puts it another way.

“We like to be really focused on our clients,” he says. “We don’t publicise whether or not we’re on panels. Our firm has a reputation for quality and other lawyers know what we’re doing. The fact that there aren’t always headlines doesn’t bother us as long as people know that what we do is of real quality.”

In the news

The firm did, however, make a few headlines in April when veteran M&A dealmaker Tim Lewis left to join Clifford Chance.

In some ways it is a credit to the tightness of the Macfarlanes partnership that one exit should make people sit up and take notice, but it has left observers wondering if Lewis is an isolated case.

“It wouldn’t surprise me if a few of the old silver circle firms started to find it hard to keep their partners,” comments one City corporate partner. “I think Macfarlanes will be really robust – they’re a tight-knit partnership – but they’re defocusing on the private equity side, so who knows what the three or four private equity partners there will do?”

Internally, the loss of a partner – even one as senior as Lewis – to Clifford Chance is painted by the firm as being akin to losing someone to an entirely different profession. The implication is that the models of the two firms are so different they are not competing on the same field.

But then the fact that Lewis chose to go to a firm with such a vast international network highlights another issue that Macfarlanes naysayers tend to focus on – the exclusively domestic nature of the firm’s platform.

One magic circle partner sums up how many in the market see the Macfarlanes one-site model.

“When you have a significant change in the economy, as we have, you’ll always have winners and losers,” he says. “There’s always a shakedown, and those firms that are predominantly domestic and don’t get in the scrum with investment banks or big corporates will struggle. If you’re exposed just to the UK, you’ll always have to weather a storm.”

But Macfarlanes’ lack of international offices does not mean there is no international strategy.

“That’s a failure to understand how we work in other jurisdictions,” bristles Howard when the well-worn accusations of parochialism are put to him.

Instead of a network of offices spanning the globe, Macfarlanes operates amid what it has taken to calling “the international alliance of the unaligned” – a loose network of high-quality independent firms with non-exclusive referral arrangements.

This network has partly been responsible for two of the firm’s highest profile pieces of work in recent months: acting for Brit Insurance on its sale to a private equity consortium and the ultimately unsuccessful last-minute attempt by Singaporean billionaire Peter Lim to buy Liverpool Football Club.

The former deal was aided by a relationship with Dutch firm De Brauw Blackstone Westbroek, while the latter was the result of a referral from a local firm in Singapore.

The diversity of the practice means that Macfarlanes does not operate on the ’best friend’ system favoured by Slaughters, where a near-myopic concentration on corporate allows it to be more loyal.

“We couldn’t do the work we do if we had our own offices or were monogamous,” says Martin. “The firms we work with in private client are different from the ones we would use for employment work.”

While one partner at a rival firm dismisses the international strategy as a case of “waiting around for the phone to ring”, Martin believes that the alternative option of planting a flag in every jurisdiction under the sun does not guarantee landing the biggest fish.

“That’s a great business model that works brilliantly for some clients, but not for all,” he argues. “Many in the magic circle would probably admit that it works better in some jurisdictions than in others.”

Away from the problems inherent in declining profitability and the perceived difficulty of operating without an international network, the third prong of any attack on Macfarlanes is that the firm will increasingly suffer from its persistently stuffy image. However, efforts are being made to put a lid on this perception.

The firm’s management, true to character, shies away from using the word ’modernising’ but has introduced a number of initiatives that should help bring the perception up to date.

For example, corporate partner Nicola Richards has recently been appointed as Macfarlanes’ first partner with responsibility for diversity and inclusion.

The firm has one of the lowest proportions of female partners in the City and non-white faces are still a rarity. With a low churn rate, there is an acceptance that change will be slower than elsewhere, but it is coming.

This year has also seen the introduction of an associate committee which fed into a revamping of the firm’s training and development ­programme.

“It’s a reaction to the fact that we’re practising law differently now,” says Howard. “We have to change because how we work is changing.”

All of the subtle tweaking taking place at Macfarlanes is designed to feed into something that is unlikely to change: the desire to see itself as apart from the firms with which it competes.

“What we’ve got is very special,” Martin asserts. “What we offer the market is special and it’s all about maintaining that. That’s the essence of everything we’re doing.”

The challenge that faces Macfarlanes is how to adapt to the changing market while ploughing its own furrow. Despite being hit hard by the recession, this most protectionist of firms looks ready to make the big calls that will see it survive.

Staying focused on private client work

While the transactional parts of Macfarlanes’ practice have suffered during the downturn – as reflected in the firm’s financial performance over the past two years – one area has gone from strength to strength.

In the past 20 years most firms with aspirations to the biggest corporate clients have more or less abandoned their private client departments or folded them into other parts
of the firm. But at Macfarlanes, the practice has grown alongside its bigger corporate brother.

The team, led by Jonathan Conder, now boasts nine partners out of a total of 76 at the firm, up from just six in 2006. Add to this the recently incorporated private client property group and that figure swells to 12.

The group also brought in the third most lucrative piece of work to the firm in the past 12 months, which, like much of what Macfarlanes does, remains on the hush-hush side and cannot be reported.

The importance of Conder’s team is emphasised by how it is set up, with the composition more like a corporate department than a traditional private client group.

“If you look at the way we’re configured you can’t compare us with other private client practices,” he explains. “They are quite partner-heavy. We have a gearing of about 1:2 or 1:3, so our clients are getting the same approach as our corporate clients.”

The firm is ahead of the game when it comes to private client.

“Ten years ago everyone was getting out of private client work,” says one recruiter. “Now it’s trendy again so Macfarlanes are in a good position.”

“When it comes to non-residentials or non-domiciles, they have the cream of the crop. For complicated, tax-driven stuff they’re the tops.”

With the group bringing in around 15 per cent of firmwide revenue, private client is much more than a useful sideline.