Focus: Reed Smith, United we stand
16 May 2011
12 February 2014
11 June 2014
25 April 2014
16 December 2013
18 November 2013
Vereins may be the structure du jour, but Reed Smith’s unified compensation system helped make its merger with Richards Butler one of the smoothest ever
It was a good idea at the time. Back in 2004 Richards Butler - then a top 30 City firm with roots in shipping, asset finance and litigation - decided it was going to set its stall out as one of the few law firms prepared to sue banks.
The move attracted considerable attention. So extensive were bank panels in the early years of the decade that virtually all the major firms in the City were conflicted out of litigation mandates. It was a huge opportunity.
Yet within just a couple of years that policy - something that made Richards Butler the talk of City litigators - was abruptly reversed. For in 2006 Richards Butler merged with Pittsburgh-headquartered Reed Smith, a firm whose biggest clients included Mellon (now Bank of New York Mellon) and Bank of America.
All of a sudden suing financial institutions was simply no longer an option for the UK litigators.
The story of this U-turn is a textbook example of how a UK firm has had to shape itself to fit in with the ways of its larger US partner. The story of how Richards Butler became Reed Smith is part of a larger narrative of wholesale refocus, and one of the weapons deployed has been the latter’s unified compensation system.
What could have been a convulsion has ended up as one of the smoothest transatlantic mergers of recent times.
Reed Smith had form with London mergers before it took on Richards Butler. Five years earlier, in 2001, it had swallowed up corporate and employment boutique Warner Cranston. By 2006 its London operation was turning over some £17.5m. So Reed Smith managing partner Greg Jordan’s task in 2006 was to integrate not two legacy firms, but three: Reed Smith, Warner Cranston and Richards Butler.
Richards Butler already operated a wholly merit-based profit share-out, but aligning the profit pools was a priority. Essential to this was partner Michael Pollack, Reed Smith’s global head of strategy, who moved to London from New York in June 2006 to oversee financial and practice group integration.
Roger Parker, the managing partner of legacy Richards Butler, who has continued to lead the London office, was and remains a key figure. (Pollack has since moved to Hong Kong to lead a similar integration project.)
According to current and former Reed Smith partners, the compensation system has been key in engendering - even enforcing - global integration. Unlike Baker & McKenzie, DLA Piper and Norton Rose, all of which use the federated Swiss Verein structure, Jordan is an evangelist for an integrated profit pool.
“You get the Swiss Verein folks,” says Jordan, “but we run a single profit pool and a transparent model, and we think compensation has to be aligned with the right behaviours. It’s a matter of degree. Sure, there are some successful firms with closed compensation models, but for us it’s about driving so much of our strategy through teamwork and a transparent single profit pool.”
Reed Smith’s efforts to build cultural and financial incentives through teamwork take up an enormous amount of management time.
“There’s no formulaic, algebraic or mathematical system,” says Parker. “What we try to do is get behind that data and get as much information as possible on the way partners have contributed to the growth of the business. There are incentives in the network around cross-selling.”
He adds that the value of referral business moving between the US and Europe and the Middle East has risen from $65m (£39.5m) in 2009 to $70m in the 2010 calendar year.
Former partners agree that the Reed Smith remuneration system has been crucial to building a common culture.
“Their financial integration has worked very well,” says one, “and they have a pretty complex remuneration system that you either like or you don’t.”
“There can be disputes, but it’s self-corrected because team players are prepared to acknowledge other people’s contributions,” notes another, “which in turn means they get a good reputation for being the people other people want to work with.”
However, the system has not been without its challenges. Last year JoEllen Dillon, a fixed-share corporate partner in the US, reached settlement with the firm following a sex discrimination action in which she claimed that female partners at Reed Smith were paid less than their male counterparts. (Reed Smith declined to comment on the matter.)
All for one
The one-firm approach was something that Richards Butler’s litigators had to accept very quickly following the Reed Smith merger. The edict that stopped them accepting mandates against banks meant a complete rethink of the financial litigation practice, which had built up a reputation in the market for cases against financial institutions - notably acting on JPMorgan Chase Bank v Springwell Navigation Company (2008), one of the most important cases regarding the degree to which a bank might be liable for losses suffered by a sophisticated investor. Judgment was given in favour of JPMorgan in 2008.
“In the finance area we were pretty well-known as being more available than other firms to take on banks,” relates banking litigator Charles Hewetson. “When we merged we saw it was going to require some twisting round, because Reed Smith had some very significant bank relationships.”
The prospect of having to rethink the financial litigation practice was daunting, as Reed Smith UK partners freely acknowledge.
“To their great credit,” notes one former partner, “the leaders of that practice said, ’We know we have to give things up, but we’re doing it for the greater good and we’re committed for the longer term’. But meanwhile, in the first year or two, the running total of large matters had to be turned away and not immediately replaced.”
However, their task was helped by an acknowledgement in Pittsburgh that it was going to be a long haul.
“Greg isn’t some guy straight out of New York who expected immediate results,” says Hewetson. “Reed Smith had to work hard to build their position against white-shoe firms, so there was a recognition that we had to work hard.”
However, one former partner disagrees that Pittsburgh had endless reserves of patience with London, arguing that there was initially a cultural clash of expectations.
“US firms underestimate the time it takes to establish credibility with UK banks,” he says. “You need to take a stage-by-stage approach and Reed Smith were probably too ambitious to start with.”
The great reshape
Building up a financial institutions group (FIG) and reshaping the banking litigation practice were post-merger priorities. Tasked with reshaping the group was Richard Spafford, a litigator who had arrived from Barlow Lyde & Gilbert two years prior to the merger.
The Pittsburgh connection meant that Reed Smith already had a long association with Mellon in particular, but also PNC Bank - plus it also had strong historical ties with Bank of America.
“We basically worked incredibly hard to build relationships [with existing Reed Smith clients],” recalls Spafford. “It’s still a work in progress and you can’t just snap your fingers, although there’ve been a number of significant successes.”
One of those successes was undoubtedly the role played by Reed Smith’s US and UK lawyers advising Bank of New York Mellon as corporate trustee in the Lehman Brothers bankruptcy - a team led in the US by Eric Schafer and in the UK by Simon Hart, Alex Burton and Ian Fagelson.
“You do all of this by relationships,” Spafford continues. “All law firm marketing is done by relationships - the magic circle guys rely more on their brand, but we can’t claim that same level of brand awareness. It’s a bit of a lesson in that you can change tack. Yes, we had a leg-up [with existing US relationships], but we’ve gone on and done it - and so far so good.”
Indeed, Reed Smith makes two appearances in The Lawyer’s annual Top 20 Cases of the Year for 2011 (The Lawyer, 3 January), both for financial institution clients. Spafford himself is advising claimants HSBC and HSBC Middle East against Ahmad Hamad Algosaibi Brothers, one of five actions claiming more than $220m in loans, swaps, Islamic finance facilities and trade finance facilities that are part of the worldwide litigation surrounding an alleged fraud.
Meanwhile, litigation partner Marcus Rutherford is acting for BC Capital against Société Générale on a $150m credit crunch dispute arising from the devaluation of a structured note programme.
Together as one
The FIG has seen more upheaval than virtually any other group in the firm. In 2003 Richards Butler’s finance practice accounted for just 6 per cent of total revenue, with banking litigation generating another 10 per cent. But in the years since the merger the FIG now accounts for 15 per cent of non-contentious revenue in Europe and the Middle East. Part of this is because of internal restructuring; all smaller groups with a FIG element were grouped together, something that caused some ructions internally.
“I don’t think they understood the London market on the transactional side as well as they thought they did,” says another former partner. “In the US, if you’re targeting financial institutions as clients on transactional deals, you go to the legal department; whereas here, if you’re doing specialisms, whether it’s asset finance, ship finance, media or real estate, you go after the institutions and the deal people in the institutions. They’re not the same targets but you’re being forced together to do that and that brings tensions. The FIG is trying to replicate what they’ve done in the US, which has worked very well, but it’s more fragmented in the European market.”
FIG practice leader Nola Beirne rejects the criticism. “The rationale behind creating a unified FIG was that last year 40 per cent of fees from the top 50 clients and six out of 10 of the firm’s global clients were financial institutions,” she argues.
What is undeniable is that the London practice simply did not have enough lawyers in the pipeline to attack the financial institutions market it had identified as a priority. Since 2008 it has made up just three internal candidates to partner in this group: real estate finance lawyer Charles Bezzant and restructuring lawyer Charlotte Moller in 2009 and hedge funds specialist Pano Katsambas in January this year.
By contrast, 2008 and 2009 saw a spate of laterals. In 2008 Reed Smith took on aviation finance partner Siva Subramaniam from Clyde & Co (who has since moved to Watson Farley
& Williams) and funds lawyers Oliver s’Jacob from Gibson Dunn & Crutcher, Dale Gabbert from Nabarro and financial services regulatory specialist Jacqui Hatfield from Herbert Smith.
In 2009 the firm made a concerted play to attack the UK bank market with two acquisition finance partner hires from Addleshaw Goddard, Lucy Newcomb and Philip Slater, while last year it brought in restructuring partner Georgia Quenby from McDermott Will & Emery.
Similar reshaping is being done on the energy and trade side, where practice leader Kyri Evagora - someone who is singled out by current and former partners as one of Reed Smith’s most prominent business builders - has built on Richards Butler’s traditional strengths in commodities and trade to build into the energy market, with some success.
“It’s required a lot of hard work and some recruitment,” says Evagora, who was instrumental in capturing four Pinsent Masons projects and construction partners Keith Hartley, Peter Cassidy, Gordon Bell and Vincent Rowan last year in an eye-catching move. Evagora also snared carbon trading specialist Sian Fellows from Shell, power trading partner John Varholy from Troutman Sanders and renewables partner Stefan Schmitz from McDermott last year.
The way Jordan sees it, the one-firm system operated by Reed Smith is what has driven this expansion.
“The way the merger impacts, we do see people accelerate their practices quicker,” he insists. “We have some partners in the energy group who were equity partners, but who are doing substantially better in the combined firm because they can originate relationships much better, and that has substantially improved their business.”
Back to basics
Reed Smith’s mergers did not redefine the transatlantic legal market in the way that Hogan Lovells or DLA Piper have done. Nor has the merger in London made the combined firm’s brand markedly more visible than the legacy Richards Butler’s. However, in focusing on the business basics - rewarding partners for cross-referring and harvesting increasing work from existing global clients - the Reed Smith approach is a persuasive counterpoint to the federal profit pools of the Verein structure favoured by Bakers, DLA Piper and Norton Rose.
“London is a mature and highly competitive market,” states one Reed Smith partner. “It’s all about doing more work for our big clients around the network. That’s where the growth will come, and it’ll be steady, not dramatic. It’s not about fireworks any more.”
Indeed, it is all in the execution.
(Click image to view large version)