Freshfields’ PEP woes belie stellar profit
Money is usually at the top of any law firm management’s agenda and October was no exception. Last Monday (30 October) saw the publication of The Lawyer Global 100, the annual and definitive list of the world’s largest firms by revenue.
And it was the unexpected finding that Freshfields Bruckhaus Deringer had made more profit in the period than any other firm in the world, including every high-rolling US rival, that grabbed the headlines.
The story initially smacked of nothing but success. But some digging soon highlighted a deeper issue that the firm’s management has been wrestling with in recent months.
Although Freshfields made a £432m profit last year with a 49 per cent margin, while its nearest rival Skadden Arps Slate Meagher & Flom made £396m with a 45 per cent margin, the latter’s average profit per equity partner (PEP) was significantly higher.
Indeed, Freshfields could only manage 23rd position in the table for average PEP, with £830,000 – behind Herbert Smith, Linklaters and Slaughter and May. By comparison, Skadden posted £1.04m for 2005.
But Freshfields’ management has been looking at how it can increase its profitability for some time now and, as reported by The Lawyer (23 October), it has already begun a radical partner de-equitisation programme in a bid to boost profit. It is understood that the firm is planning to de-equitise up to 50 partners, including some in London and Germany. As Tony Williams at Jomati puts it: “The figures suggest Freshfields hasn’t got its gearing model right.” Or to put it another way, its position in The Global 100 tables underscore just how much the partnership needed that overhaul.
Merger plans go into overdrive
The annual revenue rankings are always a good opportunity to review the year, notably in relation to law firm mergers, which for obvious reasons will affect the following year’s tables.
The financial period 2005-06 was no exception, with a succession of major mergers announced or signed.
In October alone three deals featuring US firms edged closer to fruition. Kirkpatrick & Lockhart Nicholson Graham revealed it was in talks with Preston Gates & Ellis on 2 October, while on 30 October Orrick Herrington & Sutcliffe and Dewey Ballantine virtually gave their deal the green light, when each firm’s management and executive committee recommended the firms’ merger to their respective partnerships.
And Reed Smith not only moved closer to the live date of its merger with Richards Butler, it also secured its long-sought-after Chicago merger when it completed a deal with 140-lawyer Sachnoff & Weaver (The Lawyer, 23 October).
Major mergers are often as much about the cost-saving possibilities as the practice area synergies, but a move by the world’s largest firm (as first revealed on www.thelawyer.com, 2 October) proved it is not only the only way to cut costs.
Clifford Chance revealed plans to save £10m with its proposal to transfer 300 jobs to Delhi next year. It is a move that is likely to be followed by many of the major international firms with significant back-office functions, and Clifford Chance’s move will only push the strategy further up firms’ agendas.
Clifford Chance is set to downsize its accounting and IT functions in various centres around the globe, with a service centre due to open in Delhi early next year.
The scheme is part of a wider push on overheads, led by managing partner David Childs, who has identified a total of £30m of new cost savings over and above the £40m taken out of the cost base over the past two years.
German regulator threatens MDPs with disbarment
At the end of October the Clementi Review returned to the headlines when the German legal services regulator warned UK firms to think twice before adopting new structures once the Legal Services Bill becomes law.
The Bundesrechtsanwaltskammer (Brak) told The Lawyer (30 October) that, under German law, a firm might be barred from practising if it adopted structures that allowed partnerships with non-legal professionals, such as private equity houses.
“While we’re careful not to interfere with another country’s national issues, we’re against the introduction of alternative business structures [ABSs],” said a spokesperson. “Anything which compromises the core values of the legal profession, namely independence and confidentiality, should not be legal.”
The issue to sell or not to sell once regulations allow has already featured at many a partnership meeting across the UK since it emerged that a law firm private equity sale or IPO might soon be a possibility.
Taylor Wessing was the first to break ranks and confirm publicly that it was considering a private equity sale once regulations allow. Managing partner Michael Frawley confirmed last month that the firm was continuing to receive advice on a sale. But he added a note of caution. “The current thinking on [the bill] is that the changes are more aimed at high street and commoditised firms than large City practices,” said Frawley. “However, it’s still early days.”
