20 November 2006
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For Lovells managing partner David Harris there was no such thing as a honeymoon period. Within weeks of taking the helm Harris was forced to make some very tough decisions to bolster Lovells' flagging profitability.
Indeed, just one month after Harris beat off fierce competition from rivals Andrew Skipper and John Pheasant to succeed Lesley MacDonagh, Lovells' management pushed through one of the biggest partner redundancy programmes ever witnessed in the City. As first reported on www.thelawyer.com (20 December 2004), the radical move saw the departure of 25 partners.
The restructuring pre-empted Lovells' woeful 2004-05 year-end results, which saw average profit per equity partner plunge by 21 per cent, from £541,000 to £427,000. Turnover, meanwhile, fell by 3 per cent to £366m.
The partner redundancy programme helped boost Lovells' 2005-06 financial results. The firm's profit bounced back during that period, with profit per point rocketing by a whopping 43 per cent to £12,000, meaning partners at the top and bottom of equity pocketed £718,000 and £287,000 respectively. However, despite the boom in the M&A market, turnover inched up by just 2 per cent.
Harris admits that the firm's financial performance during 2005-06 did benefit from the restructuring, but argues that the firm also witnessed a significant improvement in the business. "It's not all down to cost-cutting," he says. "You couldn't achieve those results on the back of cost-cutting alone. There's been a significant growth in the business."
Boosting profitHarris and senior partner John Young have been tackling profitability head-on, and have introduced a number of measures designed to boost profit, including the introduction of a new financial system to measure the profitability of matters and clients or client portfolios (The Lawyer, 11 July 2005).
The move marked a major shift in the way the firm reported financial information internally to partners. Historically, Lovells focused entirely on turnover and utilisation rates. This was followed by a decree ordering partners to work longer hours: partners' overall hours targets have been increased to 2,200 worldwide to encourage them to spend more time on business development and client relationship management.
Harris concedes that in the past the firm has spent a disproportionate amount of time on non-key clients and adds: "What you'll see is much more edge and greater hunger and determination. There's more confidence within the firm."
But one former partner argues that it is too little, too late. "The boat's left the port and they [Lovells] weren't on it," he states.
Indeed, the upturn in profitability has failed to stem the flow of partner departures, which include the likes of global head of private equity Marco Compagnoni, IP partner Nicola Dagg, head of EU and competition Pheasant, disputes chief Andrew Foyle and retiring Milan managing partner Paolo Criscione.
But Harris claims that Lovells went into the downturn later than many of its City competitors. "Our practice profile is different. We were very busy on both the transactional and the counter-cyclical side of the business. When other firms were suffering from the downturn we were active on major transactions and cases," argues Harris.
One such major case is the firm's role advising the liquidators of BCCI. That long-running case collapsed spectacularly in November 2005.
Harris also admits that the firm could have planned better for the downturn. "Yes, with the benefit of hindsight we should have been realigning the business. Part of our restructuring did contain an element of catch-up," he says.
Lovells is by no means out of the woods. As first reported on www.thelawyer.com (9 November), Lovells bucked the trend and reported a disappointing start to 2006-07, posting a modest 4 per cent increase in turnover of approximately £205m for the first six months of the current financial year.
But Harris, who has just returned from the firm's annual partner conference at the Hotel Arts in Barcelona over the weekend of 11 November, is surprisingly upbeat about the firm's half-year performance, arguing that during the second quarter the firm turned in its highest billings ever. Harris is, however, a pragmatist and admits that there is still a lot to do.
Corporate strugglesWhile other City firms' corporate practices have been basking in the sun, Lovells' corporate group has become the thorn on its side. Unlike the rest of the firm's practice areas, the corporate group posted a dip in revenue for the first six months of the current financial year.
Harris accepts that there is room for improvement in the firm's corporate practice, but argues that the loss of the private equity group has distorted the financial results. "Overall corporate is slightly down in the first half, but if you strip private equity out of the equation corporate revenue is up markedly," he insists.
The demise of Lovells' private equity group, which was once the jewel in the firm's crown, followed the departure of German partner Oliver Felsenstein to Clifford Chance in September 2005. His exit was quickly followed by the resignation in January of partner Derek Baird, who moved to Allen & Overy.
Compagnoni, the head of Lovells' private equity practice, delivered the final blow by quitting to join US firm Weil Gotshal & Manges in February. While at Lovells Compagnoni acted regularly for Advent International, the Barclay brothers, HgCapital and Terra Firma. His book of business has been estimated to be worth around £4m a year, leaving a major dent in the corporate department's turnover.
But Lovells hit back. In July the firm attempted to rebuild its private equity capability with the appointment of three new partners. White & Case partner Alan Greenough was appointed as head of private equity to succeed Compagnoni in record time. Additionally, the firm hired DLA Piper London-based private equity partner Tom Whelan and Fried Frank Harris Shriver & Jacobson senior associate Stephanie Keen, who will join as a partner.
Falling behindLovells' public M&A practice (in London at least) would also benefit from a wake-up call. According to The Lawyer UK 100 Annual Report 2006, the group slipped behind Herbert Smith's corporate group in the rankings, having billed £120.8m during the 2005-06 financial year. Furthermore, it is possible to count the number of FTSE100 clients the group acts for on one hand.
Indeed, head of corporate finance Hugh Nineham must have all his fingers and toes crossed, hoping he receives the mandate to advise key client ITV, which is in merger talks with NTL. As first reported by The Lawyer (12 June), a row broke out between Lovells and Freshfields Bruckhaus Deringer over the firms' relationships with ITV. At the time, the FTSE100 media giant confirmed to The Lawyer that both firms advised the company on the aborted takeover approach from a consortium that included Apax and Goldman Sachs. But some Lovells sources insisted that the firm was the sole legal adviser on the takeover and that Freshfields was nowhere to be seen. ITV declined to comment.
Meanwhile, the group's relationship with Barclays has frankly seen better days, with the banking giant favouring Clifford Chance for its own account deals. The only glimmer of hope is in the form of brewing giant SABMiller. One can only hope that the loss of client relationship partner John Davidson to SAB earlier this year will strengthen its relationship with the company.
"Our corporate practice needs further strengthening and we need to develop further our corporate client base. We're working on that," insists Harris.
The fortunes of the equity capital market team have also been better. It has, though, bagged work from Lehman Brothers and JPMorgan. Meanwhile, leveraged finance has been touted as a solid performer despite the private equity losses.
Looking forwardIn addition to grappling with Lovells' financial performance, the firm's management has concluded a major strategic review. The findings of the study, which was kick-started in the summer, were presented to the partnership at the Barcelona conference.
The aim of the review was to help Lovells reposition itself as a serious contender to magic circle firms. The 'vision' of the firm, as Harris puts it, is twofold: Lovells wants to be a top-quality international firm handling high-end work for major international clients; and the firm wants to capitalise on its international network and areas of practice strength and reputation for top-quality work.
Sceptics may rush to criticise Lovells' 'vision', as it frankly does not sound that dissimilar to other firms' positioning statements. But Harris insists that the findings were received positively by the partners in Barcelona.
"We've looked very carefully at key elements of our strategy. We're prioritising our investments to ensure we target those areas which are important to servicing high-end clients," explains Harris. "We've also looked at cultural issues, not in some airy-fairy way, but in a very practical sense, distilling core values and strengths and identifying actions which translate into improvements on the ground."
To this end Lovells plans to manage profitability more actively and will be tightening up its performance management for partners. Indeed, the firm's Berlin office was the first major casualty of this new tougher regime. As first reported on www.thelawyer.com (30 August), the firm has pulled the shutter on its five-partner Berlin arm following a major review.
Lovells' management is under no illusion about the amount of work that still needs to be done to ensure the firm makes a full and sustainable recovery.
"We're making a lot of progress, but I'm a realist. This sort of stuff takes time," concludes Harris. n#lovells' lockstep reviewWhile David Harris has been focusing on profitability and strategy, senior partner John Young has been wrestling with Lovells' remuneration system. The protracted lockstep review entered a third and final phase earlier this month (November).
The most controversial management recommendation is to give the US practice the flexibility to pay, in exceptional circumstances, both existing and lateral hires outside the range permitted by Lovells' current lockstep ladder. Management is also in favour of giving the partnership council powers to increase the profit share of exceptional performers among the partnership.
This would entail awarding additional points to some partners and the creation of an additional band of points above the top of the existing lockstep. Lovells' lockstep historically ran from 24 points to 60 points, with an increase of three points every year over 12 years. However, in August the partnership council agreed to increase entry level points to 30.
The final proposal is designed to attract big-hitting lateral hires by allowing a one-off upwards adjustment of points allocated to those partners.
Lovells radically overhauled its remuneration at the start of the year, which gave the firm powers to move underperforming partners down the equity ladder or to freeze them on certain points, with the agreement of the partners concerned.
Young says: "It this were an easy review it wouldn't have taken so long. It would be nice to come to a conclusion soon."