Linklaters v Freshfields: the arms race starts here
Related images
Linklaters’ shock ‘New World’ partner cull sparked by magic circle fight for supremacy
Linklaters v Freshfields: the arms race starts here" class="inline_image inline_image_left" src="/pictures/web/images/15864_tedBurke90.jpg" />Linklaters’ plan to trim its partnership by up to 70 has sparked furious debate across the profession.
As exclusively revealed by TheLawyer.com last week (23 January), the management is considering cutting up to 70 partners and 10 per cent of associates in a bid to become a smaller, more profitable operation.
The programme, understood to be called Linklaters’ New World, will also see redundancies among support staff. The firm’s offices in Western Europe are thought to be most vulnerable to the cuts.
The plans are in their early stages, with managing partner Simon Davies and senior partner David Cheyne still thrashing out the details.
A source close to the firm said: “The approach is to ensure that the firm remains the market leader and to do whatever it takes. You’re not going to maintain profitability at boom levels, but you can maintain relative profitability. It’s a directed business. The job of the management of this business is to manage the f***ing thing.”
Last year Linklaters started pruning its client base from 11,000 to 6,000 in an attempt to reduce conflicts and focus its business on large global entities. It also closed its Cologne office and spun off its Central and Eastern European network.
Linklaters declined to comment, but Clifford Chance managing partner David Childs said: “The reality is that every firm is looking at the shape of its partnership, because no one expects the world to return to normal any time soon.”
Paul Olney, practice partner at Slaughter and May, said: “Linklaters has moved to a more corporate model in the last few years and this move is a reflection of that.”
He added: “We look at our profitability. It’s an important feature for a strong partnership. Some of the magic circle firms in the past have looked for growth and headline turnover, which could be seen as a strange goal.”
However, the roots of the restructure are embedded in the long-held rivalry between Freshfields ;Bruckhaus Deringer and Linklaters, which are pulling ahead from Allen & Overy and Clifford Chance in the race for global dominance.
Former Linklaters managing partner Tony Angel’s ‘Clear Blue Water’ restructure, which saw a thorough shake-up of the firm, was occasioned by the fact that Linklaters’ profit per equity partner (PEP) had fallen behind Freshfields’ in 2002.
It triggered a wholesale streamlining of Linklaters’ equity partnership, from 410 in 2003 to 353 in 2006.
The firm’s PEP rocketed past that of Freshfields. The two firms had equal PEPs in 2004, around £675,000. But by 2006 Linklaters had steamed ahead, breaking £1m ;in ;PEP, ;while Freshfields’ ;stood ;at £830,000. Then in 2008 Freshfields ;overtook Linklaters once more.
Freshfields still boasts a higher margin than that of its rival. It increased its profit margin from 45 to 51 per cent between 2004 and 2008, while Linklaters’ margin remained static in 2007 and 2008 at 44 per cent.
If Linklaters’ management is successful with its New World programme, the firm could overtake Freshfields on margins by 2010 and be ready to capitalise on any upturn in the economy.
The programme will also make the firm more attractive to a US merger partner. Such a deal is still of interest, according to sources close to the firm.
One said: “The plan in the US is to continue with our current model, make sure we’re profitable on our own, but also be open to merger. We can’t wait for a merger to happen. It’s too dangerous.”
For more on the Linklaters-Freshfields arms race, see the leader.
To receive our free Lawyer News Daily news and comment email, click here. Or get the latest news, features and comment as it’s published with our free RSS feed.
Readers' comments (9)
Anon | 26-Jan-2009 9:41 am
End of an era
This ruthless culling has changed the culture of magic circle. If I were a Linklaters junior, I would be viewing this action with caution. Whilst this action does provide an opportunity, it comes with a risk that I could be one of the seventy if something does go wrong. It looks like the days of camaraderie amongst the partners of Magic Circle firms has come to an end and not before long we will see Magic Circle partners holding on to their clients and creating their own fiefdoms to save themselves from the axe.
Unsuitable or offensive? Report this comment
Ben | 26-Jan-2009 10:00 am
False profits?
"...Freshfields Bruckhaus Deringer and Linklaters, which are pulling ahead from Allen & Overy and Clifford Chance in the race for global dominance."
By what token? Your article mentions PEP, but surely there's more to "global dominance" than profitability figures?
Without further justification, I find the comment a bit misleading.
(Not a lawyer/PR, by the way - just curious about your reasoning.)
Unsuitable or offensive? Report this comment
bish | 26-Jan-2009 4:21 pm
in answer to Ben
I suppose you could argue that Links is pulling ahead by virtue of being top-rank in both corp and finance, but you can't say that about Freshfields.
Unsuitable or offensive? Report this comment
Joe | 26-Jan-2009 5:18 pm
also to Ben
But Linklaters are behind Freshfields in Germany, and that's a really lucrative market in a country which still happens to make things.
Unsuitable or offensive? Report this comment
Anon | 26-Jan-2009 8:06 pm
CC partner cuts?
David Childs' comment: “The reality is that every firm is looking at the shape of its partnership, because no one expects the world to return to normal any time soon.” May be out of the loop on this, but is that the first official suggestion that CC partners will be involved in the current round of redundancies? Also, when Links talks to partners leaving, what's the breakdown between equity and salaried?
Unsuitable or offensive? Report this comment
Jack | 27-Jan-2009 10:53 am
Anon
I am forced to agree. This is a step in the direction of an "eat what you kill" mentality. This is true for the partners but also for staff members, who may try to increase their chargeability and possibly not share work and knowledge anymore in order to stick to their job.
Unsuitable or offensive? Report this comment
Anonymous | 27-Jan-2009 11:35 am
Sad!
It is greatly worrying and sad that the biggest firms in the city are being driven by numbers rather than by quality. They will pay for this "restructuring" when the market changes direction.
Unsuitable or offensive? Report this comment
Mr T | 27-Jan-2009 12:12 pm
Why bother with law anymore?
Echoing comments posted below, I think it is naive to simply compare this restructuring to the 2006 Freshfields one. Linklaters have already reduced and trimmed their partnership around the last recession, and have been ruthless in culling underperforming staff since then. Add on the well-documented use of performance reviews, and it is clear that Linklaters have taken fully to hear the Harvard-MBA-infused-psychobabble that they preach without recognising how much is expected of their associates without long-term gain. This is just one reason they've struggled to get as high a retention rate (in boom times) as the other MC firms - people want to cut and run.
Two questions emerge from this announcement:
(1) Is Linklaters preparing itself to go public / take outside capital? Look at the signs - it is simulatenously removing salaried partners and reducing partners altogether.
(2) Why did Freshfields not release their mid-year results? Had they gone down, or was it a deliberate ploy to prevent Links having the hard data?
Unsuitable or offensive? Report this comment
Ben | 27-Jan-2009 1:34 pm
To Bish and Joe
Bish: You could, and you'd have a point. Even so, surely you'd be arguing that Links is in the same top-tier league as CC and A&O, rather than "pulling ahead" of them?
Joe: True enough, but it still doesn't justify the "global dominance" hyperbole.
Unsuitable or offensive? Report this comment