Share and share alike
9 June 2008
Herbert Smith has had a very good year. A quick glance at its financial figures - a 25 per cent increase in fees to £418m and a 24 per cent hike in average profit per equity partner (PEP) to £1.02m - is testament to this.
But while the firm's 142 equity partners will be revelling in their riches - particularly as Herbert Smith broke the crucial £1m mark after seeing PEP dip marginally the previous year - for Herbert Smith's sizeable band of non-equity partners the news will not be so welcome.
Currently the firm has 101 non-equity or 'B' partners - meaning its equity is held by just 58 per cent of the partnership. This is a far tighter ownership model than the likes of Ashurst or Lovells, where the equity is held by 70 per cent and 69 per cent of partners respectively.
Internally this is problematic because the B partners, who can take several years to progress to the equity and ultimately have to wait for plateau partners to retire to free up some lockstep points, feel marginalised within the firm. Despite having the nominal title of partner, effectively salaried partners are little more than glorified senior associates.
As one recruiter says: "B partners aren't treated as partners. It says partner on their business cards, so clients don't know any different, but internally they are treated differently."
The ill feeling among the non-equity partnership is exacerbated by the fact that Herbert Smith operates a pure lockstep, which allows partners to progress regardless of their performance. Partners enter the equity on 43 points and automatically gain seven points a year (eight in the final year) over an eight-year period, regardless of their net contributions to the firm. It is not possible to stall or reverse the position of underperforming partners.
The ill-feeling reached boiling point during a partners meeting at the end of last year, when it was suggested that gateways be introduced progression. From the salaried partners' point of view this would have made it even harder for them to enter the equity, and they made their views known in no uncertain terms.
For salaried partners this can be a bitter pill to swallow, particularly as there is a feeling that a number of plateau partners take out far more in profit terms than they contribute in the shape of bills.
Bear in mind that plateau partners will pocket significantly more than the £1.02m average PEP, while the average salaried partner will earn around £300,000.
Senior partner David Gold has vowed to improve profitability by taking a tough stance on underperforming partners, with the likelihood that a number of those coming up for retirement will be encouraged to go sooner rather than later (The Lawyer, 29 October 2007).
That said, Gold stresses that not everybody should be judged on the amount of money they bring in, but rather on how valuable they are to the firm as a whole.
"Judging people on the size of their billings is crude and we don't do it. It's not advantageous and it's not fair," he says. "We need a more sophisticated set of measures to assess whether people are making the contribution we want them to make.
"We want to make sure we value their contribution to the wider business, looking at the benefit an individual brings to the firm. That includes looking at the numbers because we are a business. If an individual partner develops a team in a way that gives us an edge on other firms then we want to take that into account."
India practice head Nimi Patel is a case in point. While there is no suggestion that Patel does not pull her weight in terms of billings, it is widely recognised that her value to the firm is focused on her relationship with Ratan Tata, the chairman of India's Tata Group, which is one of Herbert Smith's' most treasured clients.
Over the years Herbert Smith has done a number of enviable deals for Tata, and while Patel is always named as one of the lawyers working on the transaction, her role is understood to be that of business-getter rather than deal-doer (see box, page 20).
The importance of the Tata relationship cannot be underestimated. Globally, the company's profile has rocketed, but within India its omnipresence has touched generations. As India group chair Chris Parsons points out, Indians in general are enormously proud of the fact that one of their biggest companies bought the UK's Tetley, not to mention Anglo-Dutch steel giant Corus.
Everybody in India knows about these deals - something that has given Herbert Smith a huge profile within India. And with Indian revenues increasing by several hundred per cent during the past three years, Patel's value to the firm is obvious.
It is interesting, and potentially damaging, though, that the bulk of partners within a firm which is broadly succeeding internationally still see London as the firm's major hub. True, Herbert Smith is a UK firm and London is by far its biggest office but, as the economic balance of power continues to shift, more and more attention has to be paid to its international network. And that means having some of the firm's best people do stints overseas.
As one recruiter says: "A lot of partners don't see beyond London - it's a cultural thing and also an age thing. A lot of older partners don't see the point. Some bigger hitting partners need to travel around a bit more."
Partner mobility is an issue for all firms, particularly as London workloads continue to get lighter. The workload issue is expected to be a temporary phenomenon, but magic circlers Clifford Chance and Freshfields Bruckhaus Deringer are among the growing number of firms that have instigated programmes designed to ensure partners play significant roles internationally. For Herbert Smith this will also become crucial.
While the firm is recognised as being strong in Asia, and is seen by some as one of the few UK firms to have really cracked that market, in Europe its dependence on its alliance with Germany's Gleiss Lutz and Dutch firm Stibbe can be as damaging as it is productive.
As one partner, who is keen for the alliance to progress to the point of merger, points out, for investment bank clients an alliance will never take precedence over a one-firm approach. And for Herbert Smith, which is desperate to build up its banking practice, the opinions of investment banks matter.
While corporates are more open to working with the alliance, the model itself throws up difficulties around areas such as billing.
A source within the firm says it can be difficult to coordinate billing between three independent firms, adding that there is no uniform way to do this.
In some instances Herbert Smith will send out a bill and then be billed itself by Gleiss Lutz and Stibbe, but this can prove unpopular with clients as it seems like the work of the European firms has in some way been hidden.
Another option is for each of the three firms to send out individual bills, but that can get complicated given that lawyers from across the firms do work together as a team on deals and it can be difficult to separate which firm should bill for what. This all works against the seamless, one-firm image the alliance is supposed to create.
Regardless, there is a recognition within management that work needs to be done to strengthen the firm internationally - and that this will involve the movement of personnel.
New managing partner David Willis says: "The cultural change is a work in progress in terms of moving staff around. We've got to the point where we have to be mobile.
"We definitely see a change in the younger generation of lawyers, but we want people to understand the opportunities that are open to them and don't want to force them."
It is almost flippant to say that the future of the firm lies with its younger partners, but for an organisation like Herbert Smith it is vital that this is recognised. If the younger generation - the salaried partners - find ownership of their firm to be out of reach, the sense of loyalty and pride that comes with ownership will also be beyond them.
Externally, Herbert Smith is doing well - its finance practice needs more work but corporate is winning some class instructions and litigation is powering ahead. But internally it is a bit of mess, and that will not change until its partnership is shaken up.
The Herbert Smith model is old-fashioned, and there is no escaping that. For the modern law firm there is no place for underperforming partners. They disillusion rising stars and damage profitability - just ask Freshfields.
Gold has introduced a managing partner to the firm, which is a sign he is looking to the future. Maybe now it is time he got tough. n
-Tata: a lucrative relationship
Herbert Smith's relationship with India business giant Tata has been incredibly successful for the firm, and is driven by India practice head Nimi Patel's (right) relationship with group chairman Ratan Tata.
While a range of partners have worked for Tata, it is widely recognised that Patel has played a critical role in institutionalising the company as a client, making herself invaluable to the firm in the process.
The firm has acted on several high-profile Tata deals since 2000, when it advised Tata Tea on its £280m purchase of Tetley Group's share capital and the subsequent £187m refinancing. Corporate partner Henry Davey also played a leading role on that transaction.
In 2005 the firm advised on the non-US aspects of Videsh Sanchar Nigam's (VSNL) acquisition of Tyco Global Network. VSNL, in which Tata was the largest single shareholder, was advised by international communications head Nick Elverston.
The real coup from the Tata relationship came in 2006 when corporate partners David Paterson and Malcolm Lombers advised on Tata's £6bn acquisition of Anglo-Dutch steel giant Corus.
The icing on that very lucrative cake came a few months later when the firm's finance partner Clive Barnard was mandated with advising on the long-term financing of the deal.
#gold: the maverick
"There's no other firm like Herbert Smith in terms of culture and how it's run. It's anachronistic and full of mavericks." At least that's the view of one recruiter who has observed the firm for a number of years.
Maverick it may be, but there is none more maverick than the firm's senior partner David Gold (left). Loved and loathed in equal measure by his partners, ultimately Gold is respected by all within the firm.
A true litigator, Gold is seen by some within the firm as dissembling at best and divisive at worst. But with just less than two years of his five-year term left to serve, he has appeased calls to have a corporate lawyer at the helm again by creating the role of managing partner, which has been filled by corporate partner David Willis.
Crucially, at a time when internationalisation is key, Willis has extensive experience of overseas work, having previously headed the firm's Hong Kong practice.