Lovells: The comeback bid
1 October 2007
19 October 2007
18 February 2008
17 December 2007
10 September 2007
25 June 2007
Lovells has been through its share of troubles in the past few years. Sliding profitability and disruptive management election contests, not to mention high-profile client and partner losses, have all taken their toll on the firm.
And in spite of a 2004 partner cull continuing into the last financial year, muted average profit per equity partner (PEP) and turnover growth in the 2006-07 period left a lot to be desired on the financials front.
That said, managing partner David Harris feels the worst is now behind the firm, and with a lateral hiring spree bringing in 20 partners so far this year, he says Lovells is finally positioning itself to play to its strengths.
"The growth in numbers is very much reflective of our focus on particular areas of the practice in terms of where we see opportunities and where we need to add capability," Harris explains. "We have a much more focused approach to the development of the practice than in the past. A few years ago the focus was on international expansion. As we grew and opened new offices the work came in and market conditions were very favourable.
"We're in a much more competitive climate now, clients are much more sophisticated and the range of firms we compete with varies. We need to be clearer in what we need to achieve and therefore are more rigorous in assessing our priorities for investment."
But after a six-month international hiring spree, is Lovells really clear on what it wants to achieve?
Virtually all the momentum this calendar year has come internationally. Lovells opened in Dubai with an established team poached from Denton Wilde Sapte and headed by Shibeer Ahmed. It also strengthened its restructuring and hedge fund capability in New York, while making a string of partner additions across Europe (see box).
For Harris these moves have been taken with the view of improving profitability very much in mind. Looking to Dubai, he says the improvement in economic conditions across Asia has resulted in huge capital flows to the Middle East, with the firm picking up Islamic finance and infrastructure work as a result.
But with every man and his dog now looking to cash in on the Middle East boom, does this, and Lovells' wider lateral recruitment drive, just represent too little, too late?One former partner certainly thinks so. "Lovells sacked 25 partners in one go in 2004, but it was too little, too late - that kind of thing should be ongoing," he says. "With the lockstep model, points are created and people just move up through the passage of time. Firms have to grow the top line just to stand still in terms of profitability.
"Lovells hasn't got the ability to grow the top line because it hasn't got the kind of people who can generate that kind of business."
For another former partner it was precisely Lovells' inability to gain instructions on big-ticket deals, having had numerous top-flight clients in the past, that prompted his departure.
"The big-ticket transactional work was moving away from Lovells and going toward a smaller group of law firms made up mainly of the magic circle," the former partner says.
This, coupled with the fact that the firm promoted into the partnership "just to make up the numbers", as another former partner claims, meant it was no wonder that financial performance suffered.
It is a classic law firm response: with revenue remaining stagnant, one way to improve the numbers is to get rid of partners. Another is to reverse their position on the equity ladder, as has been done on a number of occasions in the past few months. And while making lateral hires will always be an expensive business, hiring partners that take two to four years to enter the equity also has the potential to boost turnover without impacting the pool in which profit is shared.
However, for Harris the current growth strategy is really about drawing a line under the firm's past troubles and moving on as opposed to trying to massage the figures.
"PEP is one of a number of measures of performance, but we didn't do this as a way of enhancing our financial results," insists Harris. "We're focused on the growth of the practice. We'd restructured the practice in 2004-05 and since then we've been ensuring the practice remains aligned to market movements. That's the driver behind the lateral hires."
This urge to align to market movements means keeping an eye on developments on a global scale - but another area that proved problematic for some former partners was the firm's obsession with its international footprint.
"I felt they were taking their eyes off the ball in terms of London to concentrate on the international side of the business," says one. "They were concentrating on sticking flags in the map and really didn't focus on competing much more effectively in the London market. As a consequence the London office's reputation has suffered."
Certainly the firm's London corporate practice can be viewed as something of a lost sheep, missing out on big deals to the magic circle while the smaller transactions were swallowed up by the likes of Addleshaw Goddard, Ashurst and Simmons & Simmons.
Although Lovells has been reappointed to a number of major panels, Barclays' and John Lewis's among them, its distinct back-seat position in the Barclays-ABN Amro deal is in stark contrast to what might have been had the transaction been announced seven years ago.
On the flipside, the firm's fall from M&A grace has gone hand-in-hand with its rise in a number of specific areas, not least on the international scene.
"We have to play to our strengths and that to some extent means choosing our turf," Harris emphasises. "One of the things we can do is build off our strong international capability, and a lot of the growth we're achieving is focused around that."
The corporate practice in Germany, for example, which suffered significantly following the 2005 defection of practice head Oliver Felsenstein to Clifford Chance, has become a far more homogenised group in the past two years, building on the strengths of the younger partners coming through.
A particularly strong relationship to have grown out of that is with steel baron Juergen Grossman, who is about to take on the chief executive role at Germany's biggest energy and utilities company RWE. This has the potential to benefit more than just the firm's Teutonic offering, given that RWE is the parent of the UK's Thames Water.
Although Lovells closed its Berlin office last year, that has not seriously affected the practice in the medium term. Firms such as Clifford Chance had already given up on the marginal Berlin market and the loss of an office in one of the key cities of Frankfurt, Düsseldorf, Hamburg or Munich would have hit Lovells much harder.
Paradoxically, however, from the start Lovells' success in Germany had a negative impact on the rest of Europe, with the euphoria surrounding its successful 1999 merger with Boesebeck Droste leading to less happy unions in the Netherlands and France. That in turn was damaging to the rest of the firm, as it required a disproportionately high level of management's time to sort out.
However, the US has been harder to read. The US side, originally established as an insurance and reinsurance outpost in the mid-1990s, has traditionally struggled financially until two years ago, when it turned in an impressive performance, which in turn led to the US partners flexing some muscle during the negotiations on the equity restructuring.
There are signs that Lovells is beginning to capitalise on its strong IP reputation in other regions to establish a foothold in New York.
US regional managing partner Marc Gottridge argues that the hire of former Orrick Herrington & Sutcliffe IP partner Veronica Mullally is just the first step in this process.
"If you look at the US market's IP litigation, particularly high-stakes patent litigation, it's a juggernaut," he says. "There's so much of this work and in our case it's very client-driven. In the UK and Asia our IP practice is highly regarded and the client base is anxious for us to enter the US market."
Of course, the firm's nascent alliance with nine domestic Chinese firms has the potential to benefit offices right across the network, although the potential impact on management time is horrendous.
In a sense, though, that is the crux of Lovells' troubles. As one partner at a rival firm points out, there is no point excelling in a number of niche areas if the firm as a whole is adrift.
"The perception is that there are pockets of excellence at Lovells in areas such as real estate, acquisition finance and insurance," he says. "The firm lacks strength and depth across all disciplines, however, and doesn't have the calibre of partners to be able to go out and rake in the big work. It has individual excellence in a number of areas, but beyond that it's just an ordinary mid-market firm."
Harris has stopped the rot. His next challenge is to knit the areas of excellence into a coherent whole. It is no small task.
Lovells' Lateral hires during 2007
(Partner, From, Office, Practice area)
- Rahail Ali, Denton Wilde Sapte, Dubai, Islamic finance
- Imtiaz Shah, Denton Wilde Sapte, Dubai, Corporate and capital markets
- Rustum Shah, Denton Wilde Sapte, Dubai, Banking and finance
- Shelley Motters, Linklaters,London, Banking and finance
- William Kane, Kane & Carbonara, Chicago, Commercial litigation
- Mark Halligan, Welsh & Katz, Chicago, Commercial litigation
- Dominic Pellew, Herbert Smith, Moscow, International arbitration
- Joaquín Ruiz Echauri, Ernst & Young, Madrid, Insurance and reinsurance
- Victor De Vlaam, Allen & Overy, Amsterdam, M&A and private equity
- Christopher R Donoho III, Stroock & Stroock & Lavan, New York, restructuring and insolvency
- Robin Keller, Stroock & Stroock & Lavan, New York, restructuring and insolvency
- Paolo Tanoni, EY Law, Italy, Corporate M&A
- James McDonald, SJ Berwin, London, Corporate real estate
- Dr Jürgen Witte, Aderhold von Dalwigk Knüppel Rechtsanwaltsgesellschaft, Düsseldorf, Corporate and commercial dispute resolution
- Pascal de Moidrey, Eversheds, Paris, M&A and private equity
- Gianluca Belotti, SJ Berwin, Rome, Competition
- Franz Joseph Schone, Simmons & Simmons, Düsseldorf, Corporate
- Christopher Norton, Baker & McKenzie, London, Corporate
- Veronica Mullally, Orrick Herrington & Sutcliffe, New York, IP
- Hermenegildo Altozano, Eversheds, Madrid, Energy (corporate)