On the critical list
17 July 2006
8 November 2004
7 March 2005
19 December 2005
29 June 2006
1 August 2005
Richard Burns has gone missing. The former senior partner of the UK's most troubled firm, Hammonds, officially stepped down from his management role at the beginning of May; but since then little has been seen of him.
In Burns' absence, managing partner Peter Crossley has just about managed to hold the firm together - thanks to an 18-month partner lock-in that expired at the end of June.
While former managing partner Chris Jones has retreated to comfortable semi-retirement in Ilkley, Yorkshire, Burns is still at the firm he used to run. Indeed, his picture still appears prominently on the homepage of Hammonds' website along with Crossley. However, for all practical purposes he has been out of the management picture for a year.
Hammonds' bid for recovery is now being led by three people: Crossley, finance director Laurence Campbell and strategy director Bernhard Gilbey.
Hammonds sources say that Burns has overcome his partners' suspicion to morph back into a senior fee-earner. In a discussion with The Lawyer last year, Crossley insisted: "He's our most talented corporate partner. This is no spindoctoring: over 25 years that guy has delivered in terms of his client work. He's working on two of the biggest deals around at the moment."
That said, according to a comprehensive 2005-06 deal list provided by the firm, Burns' name does not appear once. Corporate head William Downs claims that Burns is back in charge of half-a-dozen client relationships, but declines to name the clients.
What is certain is that Hammonds will need all of Burns' client and fee-earning skills to get it out of the mire. Its corporate department - formerly the jewel in the national firm's crown and a bellwether for its fortunes - has only just about maintained its revenue, despite the bull market. There is a very long way to go.
Hammonds announced its year-end results last week with a modest fanfare. The spin was this: that the firm was coming out of its bad period and could begin a renaissance. Cautious as ever, Crossley described the 61 per cent increase in profit per equity partner (PEP) and 4 per cent turnover rise as merely a "staging post" in Hammonds' recovery. The legendary Hammonds overdraft - first revealed by The Lawyer three years ago - has finally been reduced, from £25m to some £10m.
But is it too little, too late? Crossley has every reason to be circumspect. "There was imprudent financial management," he admits. "The truth is, there was always a seriously good business buried beneath the fact that our accounting procedures had not kept pace with the growth of the firm and that we'd allowed things to get out of control."
Even those results relied largely on cost-cutting and refocusing. While profitability was significantly up, it was starting from a low base. The firm's average PEP of £328,000 is among the lowest in London of the top 50, according to the preliminary results published by The Lawyer last week (10 July). The profit margin is still a woeful 23 per cent.
Even more worryingly, turnover increased only slightly, from £127.6m to £132.6m. Just six firms in the UK's top 50 saw slower growth last year, and this in a market gripped by M&A optimism. And for Hammonds, corporate and M&A has always been one of its key planks.
The firm's biggest cost-cutting exercise was a redundancy programme that saw a net loss of 60 members of staff and fee-earners. The UK had a net loss of 64 people between 2005 and 2006. A number of salaried partners also left of their own accord, meaning that Hammonds ended up with 19 fewer partners than in 2005. (The 14-month lock-in, which ended on 30 June, prevented any equity partners from quitting the firm during that time.)
In relative terms, London, where Burns and Jones tried to build up by merging with Edge Ellison and then a string of niche boutiques, is still one of the weakest in the network. Turnover in London went up by 9 per cent to £39.5m, but it is the first time in years that it has even made budget.
Hammonds' foreign offices are more profitable than the UK by a long stretch. If the UK is taken out of the equation, the firm's offices in Belgium, France, Germany, Hong Kong, Italy and Spain made a profit of £10.3m in 2006, a margin of 33.4 per cent. This compares with a global profit margin of 23 per cent and a UK margin of 20 per cent. Average PEP in the foreign offices would total a healthy £429,000 if Hammonds did not operate a global partnership structure.
A comparison of sector breakdown between 2005 and 2006 is difficult because Hammonds has recently changed the way its practice groups work. According to figures provided by the firm, corporate and litigation are its two largest groups nationally, with property close behind.
After the rejig, corporate makes up nearly half (48 per cent) of UK revenue and 47 per cent in London. However, this is not the true picture. What Hammonds now defines as 'corporate' also includes three finance-based groups - asset-based lending, banking and restructuring/insolvency - plus competition on top of that.
Furthermore, according to figures provided by Mergermarket, Hammonds has slid down the deals tables in the past three years (see box, left). In 2005-06 the firm managed only 27th place for UK deals volume and was ranked 166th by value.
By contrast, property now accounts for 22 per cent of London income, in response to a drive put in place by new London managing partner Paul Groobey. In other words, London is now relying on real estate, not corporate, to make up the gap - and this in the biggest bull market for years.
Hammonds' difficulties in relaunching a corporate practice in London are compounded by the ferocity of its competition, in particular from more successful national firms. DLA Piper Rudnick Gray Cary, Eversheds, Osborne Clarke, Pinsent Masons and Wragge & Co are all after similar clients, and firms higher up the chain are happy to chase midmarket deals too.
There is little Hammonds can seriously do to differentiate itself in this market, although Downs argues that his firm is distinguishable by being "client-centered" and by being focused strongly on three sectors: energy, chemicals and media.
"In London we've grown the revenue line for corporate reasonably well," he says. "Our private equity revenue has grown significantly. Yes, it's from a low base, but it's a market entry and we've made decent headway."
Downs adds that most of Hammonds' work is in the £20m-£300m deal bracket. The deal list bears this out, although most of the published transactions are at the lower end of that bracket. "We're a midmarket law firm and we're somewhere in the middle," he says. "I want to be somewhere nearer the top end of that grouping."
Hammonds' UK footprint has remained unchanged for the past six years since its merger with Birmingham's Edge Ellison in 2000. The move gave the firm a new office and added significant bulk in London.
Since the merger London has been Hammonds' weak spot, and until this year it struggled to hit budget. In comparison, its Leeds office is the most profitable and is where the roots of the old Hammond Suddards still lie.
Leeds managing partner Ian Greenfield says the office has exceeded its budget for the past two years. "There's plenty of good work going on," he claims. "Everybody's in pretty good spirits."
The office has always picked up work from clients based outside the region and has just won a pitch to handle Tesco's employment work (beating DLA Piper's Birmingham office). Indeed, Hammonds' national employment team has a strong reputation and includes veterans such as David Whincup.
Leeds has the best profile in the market of any of the firm's regional operations, with one regional managing partner conceding: "In view of what they've been through, they've managed to maintain quite a reputation."
Birmingham comes in for the heaviest criticism. While office managing partner and pensions specialist Ian Forrest, property partner Anne O'Meara and corporate partner David Hull are singled out for praise, local observers say the office is otherwise almost invisible. Although Hammonds is pushing its property team, O'Meara's regeneration and redevelopment work is the only area that has caught the attention of rivals.
The corporate department's struggling performance does not help Crossley's argument that the fundamentals of the firm were always sound. At least his leadership has restored the faith of its own partners and staff. The difference between his and the failed Jones/Burns regime is palpable. "The prospect of being hanged wonderfully concentrates the mind," says Crossley. "Adversity can create a kind of esprit de corps."
Hammonds has survived for now, but its long-term prospects still look uncertain. It is behind its competitors on every measure and Crossley candidly admits that there is a mountain to climb.
"Where will the firm be in two years? The honest answer is I don't know," he says. "The key point is that in the midmarket there is a huge range of firms in London. We've lost some ground, but there's a hardening at the top of the midrange. Are we going to get back up there?"
Crossley has applied first aid, but Hammonds is still in intensive care.
but with turnover flatlining and its profit among the lowest in London
can it really make a comeback?