KLegal tops £6m in start-up salary costs as KPMG wages war on City

After the City's assistant salary hikes, the accountancy giants have been forced to compete. Catrin Griffiths reports

KPMG has invested more than £6m in KLegal on fee earner remuneration alone, taking no other costs into account, The Lawyer can exclusively reveal.

"We're paying competitive salaries," says KLegal's managing partner Nick Holt. "You've got to build it for [clients] to come. I'm conscious of costs but you've got to get to a certain level of size - you can't expect work if you're spread too thin."

For years, the accountants have been trying to attract lawyers with the idealistic notion of the multidisciplinary partnership. But it is time for the bean counters themselves to succumb to financial logic.

The accountants - led by Arthur Andersen, and KPMG in particular - are finally putting their hands in their pockets. Given the swollen pay packets across the City, it is no surprise that accountancy firms have begun to pay higher market rates.

The Lawyer understands that the original team which joined KLegal from Arnheim Tite & Lewis (now Landwell) had their packages renegotiated not long after they joined.

James Hodgson, who led the Arnheim Tite lawyers to the accountants, is understood to be earning somewhere in the vicinity of £450,000 per annum, with other partners such as Tim Johnson and Patrick Martin on some £350,000.

And then came Nick Holt from Weil Gotshal & Manges. Partners from US firms do not come cheap - Holt is understood to be earning £600,000. And then last month, rising digital media star Mark Haftke joined KLegal on a package understood to be nearing £500,000. KLegal's nine directors (essentially salaried partners) are each on approximately £150,000.

KPMG is not the only one that has had to rethink its remuneration levels. Garretts, part of Andersen Legal, never offered super premiums to recruit its lawyers, and for several years got nowhere.

Having never managed to attract the number of stars it had hoped for, Andersen Legal performed a U-turn earlier this year with the recruitment of former Clifford Chance managing partner Tony Williams for some £1m (The Lawyer, 10 January).

A closer look at KPMG's figures suggests the scale of the firm's ambition. To reach the accountant's firm-wide figures of £1.68m revenues per partner, KLegal will have to turn over £18.5m - which is clearly in the distant future.

And to cover the £6m outlay alone, the firm will have to bill some £133,000 in fees per fee earner.

This compares quite adequately with fees per fee earner in the accounting side. But accountancy firms gear in an entirely different way. Leverage ratios can reach a giddying 15 to one, while even the most highly geared law firms (notably DLA and Hammond Suddards) will only manage six to one.

KLegal's current leverage ratio is just a little more than three to one.

Comparing Andersen Legal and KLegal is instructive. According to The Lawyer 100, Garretts, after six years of existence, billed £28m last year, equating to £127,000 worth of fees per fee earner. While some of that work would have been transacted outside London and at lower rates - KLegal has no plans to establish a national network - it nevertheless shows the difficulty of ratcheting up revenue per lawyer.

Meanwhile, the former Arnheim Tite team is understood to have been responsible for between £1.5m and £2m in billings. This is perfectly respectable, but hardly outstanding.

The firm will also be heavily reliant on KPMG's internal market. According to Holt, after a few months of existence some 75 per cent of KLegal's work is cross-referred.

"The IP and IT areas are natural disciplines that complement KPMG," he says. "Sure, it's not as profitable as multinational cross-border takeovers, but it makes sense," he says.

Indeed, KLegal's latest recruitment drive strongly demonstrates that it is targeting the new economy, where the barriers to entry are lower.

"[We want to] end up with e-commerce running through the firm like Brighton through a stick of rock," says partner Mark Haftke, who joined from Bird & Bird in May (The Lawyer, 15 May).

KPMG is unfazed about its investment. "We're in it for the long term, it's not an overnight sensation," says KPMG partner Nigel Platts. "It's a major commitment for us."

Holt adds: "I want to build, and KPMG wants to build a law firm that is profitable in its own right."

This longer-term approach makes a nice change from the US firms, at least.

Additional reporting by Claire Smith.