20 YEARS OF THE LAWYER: INTRODUCTION
5 December 2007
5 December 2007
5 December 2007
17 December 2001
12 December 2011
11 January 1999
It is certainly the one by which all subsequent mergers are judged.
“It was clearly an event that caused many people to think hard about what their firms would and should be doing,” says Geoffrey Howe, managing partner at Clifford Chance between 1989 and 1998. “The single thing we did and were clear about wasn’t so much about size, but the one-firm model. Before that you had people who dabbled. In those days Baker & McKenzie was the only one, but they looked uneven at the time because they were weak in their home base. Our model was one integrated law firm, one management structure, one profit pool and practising not just English law. The initial driver was international.”
The first impetus was the creation of the Single European Market in 1992-93, plus the fall of the Berlin Wall in 1989, which effectively opened up Eastern Europe. Imagine the extent to which firms now get excited about Dubai, India or China, and then double it. In an era when cheap flights and easy telecommunications were a long way off, opening on Continental Europe was an awfully big adventure. In April 1988 the newly minted Clifford Chance was so enthralled at the prospect that it put out a publication, priced £25, called Takeovers And Mergers In Europe. Partner Simon Maclachlan told The Lawyer: “We’re donating the booklet to foreign clients, but I want people to come to me and say, ‘We’re thinking of doing this, can you help?’ Investment bankers, for instance.”
“It’s not available to lawyers because we don’t want to give away to lawyers how to do things,” he added with a little asperity.In 1990 Freshfields Bruckhaus Deringer managing partner John Grieves told The Lawyer: “My aim is that in five years’ time Freshfields should be indisputably one of the world’s leading law firms. Europe is [our] first priority. Soon we’ll open a Frankfurt office. And I’m proud that the head of our Paris office is a Frenchman.”
The commercial opportunities, particularly in Germany, were vast.
It is easy in 2007 to underestimate the difficulties of expanding into Europe. Even in the early part of the 1990s the very concept of Anglo-Saxon firms opening abroad was alien to many in other jurisdictions. Most law firms operated under strict bar rules (no advertising whatsoever) and the Berlin bar injuncted Mayer Brown & Platt from an office opening party.
The French bar rules on foreign firms setting up were fiendishly complicated: local lawyers were avocats with rights of audience, whereas foreign firms were deemed conseils juridiques, but there were all sorts of complex grandfathering provisions. In 1990 Watson Farley set up a New York office with seven partners from US shipping firm Burlington Underwood & Lord, but in order to do so it had to set up a second offshore partnership, as allowed by the Law Society.
The recognition of qualifications across Europe was fraught. As Bill Blackburn, a partner at Theodore Goddard and head of the Law Society’s international committee, said in May 1988: “It’s astonishing for any lawyer to think that a Greek will be able to become an English solicitor without having been to Guildford.” (Blackburn was, of course, referring to the College of Law’s outpost in Surrey – these were also the days before proper competition in legal education.)
Current Clifford Chance managing partner David Childs remembers debates early on in Clifford Chance’s existence concerning opening in Eastern Europe, even in the early 1990s, the beginning of the recession. “We opened in Moscow and Warsaw and [began an association] in Budapest – the partnership was prepared to take the long view,” he says. Clifford Chance’s role advising the Soviets (as it still was) on a Leningrad stock exchange in 1990 no doubt underlined the opportunities available.
Freshfields London head Tim Jones takes a personal view. “Yes, it’s client-led,” he says, “but it’s also because we like being in an international environment and get stimulated by the company of bright people from all around the world.”
But it was not just the magic circle firms that had to grapple with internationalisation. Firms in the midmarket - notably DLA Piper – have shown that global dynamics apply to them. “In our experience, clients are voting with their feet, they get it, and, therefore, consolidation will continue (and will probably pick up apace) and internationalisation of the provision of legal services
is here to stay – it is the most important transformational change in the provision of legal services ever,” says Nigel Knowles, managing partner of DLA Piper.
DLA Piper is not alone. Insurance specialists Kennedys, for example, now has offices in Dubai, Hong Kong, Sydney, Madrid and Auckland. Clyde & Co is in Abu Dhabi, Doha, Dubai, Hong Kong, Singapore and Shanghai, to name just a few.
“City firms are much bigger and much more global,” says Clydes senior partner Michael Payton. “It’s one of the City’s greatest exports. Who would have thought that legal services would become a City export?”
Games without frontiers
“In the ’80s international firms had international outposts, but not an international strategy,” says Lovells partner Graham Huntley.
Indeed, in the early 1990s the fad was all for alliances – a cheap and cheerful method of saying to clients that a firm had an international capability. Virtually none still exist and most turned out to be faintly comic. Berwin Leighton showed poor judgement when it hooked up with US firm Finley Kumble, which collapsed spectacularly in 1987; Nabarro Nathanson got on fine with Weil Gotshal & Manges until the US firm unexpectedly opened in London on its own; Ashurst had a joint venture in Tokyo with Sidley & Austin, which folded in 1992; Theodore Goddard operated a joint Eastern Europe operation with Dewey Ballantine from 1991 to 1996. The list goes on and on: Bryan Cave and Baileys Shaw & Gillett in 1998 (the latter was eventually absorbed into Speechly Bircham); Clifford Chance and Gleiss Lutz; Macfarlanes and O’Melveny & Myers; Ashurst and Sidley Austin. Honourable exceptions to the comic rule are CMS Cameron McKenna and its European alliance and Herbert Smith.
But UK firms have always been unsentimental about using alliances and then cutting loose when need be. Allen & Overy’s (A&O) capital markets alliance with Paris firm Gide Loyrette Nouel foundered in late 1998 when, frustrated at the lack of flexibility in the arrangement, it raided the firm instead. It then absorbed half of alliance firm Loeff Claeys Verbeke in 2000.
Linklaters dumped Hamburg firm Schön Nolte in 1998 in order to hook up with Oppenhoff & Rädler in Germany. More recently, Berwin Leighton Paisner (BLP) ditched its four-year alliance with New York’s Kramer Levin this year.
Hierarchy, then and now
And yet, although consolidation has happened and the size is very different, in many ways a similar hierarchy exists. There was no magic circle as such; instead there was a group of top firms that included Ashurst Morris Crisp, Clifford Chance Freshfields, Herbert Smith, Linklaters & Paines, Norton Rose, Slaughter and May and Stephenson Harwood.
The top tier of firms is not so very different from what it is now. Linklaters and Slaughters are still at the top of the pile. Herbert Smith and Norton Rose have managed to retain positions within a larger group of leading London firms, but Norton Rose has had a very bumpy ride and is no longer first choice for top M&A work. Freshfields was among the group of good also-rans in the 1980s, but managed to ride its opportunities in the privatisation and M&A boom, so that when John Grieves was given unprecedented executive power as managing partner in 1989 he was able to articulate a distinct vision for the firm. “Europe is Freshfields’ first priority,” Grieves told The Lawyer.
The informal club of firms that used to meet – Allen & Overy, Ashurst, Herbert Smith, Freshfields, Linklaters, Lovells, Norton Rose, and Slaughter and May – ejected Stephenson Harwood in 1996.
It was final confirmation that the 1980s order had changed. At around the same time, the ‘big five’ – A&O, Clifford Chance, Freshfields, Linklaters and Slaughters – started to become known as the magic circle (a phrase hitherto confined to the elite matrimonial firms such as Withers and Manches, and a phrase which still, as a matter of fact, holds sway). There have been firms that have declined in status, usually through rigid and old-fashioned management.
“Denial about competition was rife in the 1980s and early 1990s,” says consultant Alan Hodgart. “A senior partner of a large London firm said in response to my comments about competition, ‘You do not understand the legal profession. Lawyers will never compete with other lawyers.’”
That management could either be dictatorial or overconsensual and weak, but either way some firms did not react quickly enough to events. Stephenson Harwood saw too late what its position was. From the late 1990s until the early part of this decade it underwent horrible turmoil, including a merger with Sinclair Roche & Temperley, which had technicolour fallout, from sex discrimination suits with former partners and messy negligence cases to weak finances and a lack of partnership glue. It has now recovered under Sunil Ghadia.
Norton Rose, which has stabilised under Peter Martyr in the last two years and which has been given breathing space by the boom, had a terribly rocky time. It was bombed twice in 1993, which nearly put it out of business; in 1998 it lost its foothold in Hong Kong when its 22-year association with Johnson Stokes & Master was terminated, which kept it out of Hong Kong for three years; it entered into an absurdly ill-judged alliance with the five regional firms in the Norton Rose M5, only to redefine itself in 1994 as a European law firm. Similar indecision has bedevilled Simmons & Simmons. It has variously considered merging with Andersen Legal, an alliance with Fried Frank Harris Shriver & Jacobson and even the most cursory glance at The Lawyer over the last two decades shows that it has tinkered more often with partner pay than virtually any other firm.
An overly autocratic management does not connote leadership in any way. Stephenson Harwood in its old form was afflicted by this, as was Hammonds, which got into a whole heap of trouble in 2005. The then management team of Richard Burns and Chris Jones was very good at snapping up apparently cute boutiques, but rather less good at integrating them, and spectacularly bad at attending to management basics; hence the £8m shortfall in the accounts in 2004.
The firms that have helped change the shape of the UK, and indeed the global, market have had one thing in common – effective leaders rather than consensus-driven partnerships. (Slaughters is the exception, but then its fundamental organisational culture has changed the least of any firm over the last two decades, although it is a far less stuffier place than in 1987.)It was something that A&O, led by Bill Tudor John, learnt early on. “I remember partnership meetings at which people would stand up and say, ‘We’re lawyers, not tradesman.’ It used to be quite a strong belief – usually used as a reason not to do something sensible,” says current A&O managing partner David Morley. “The turning point was probably the recession. It was a dawning realisation that we needed to smarten up our act.” Tudor John quietly drew up Project Alpha, which removed underperforming partners. “It was a revolutionary act,” says Morley.
Tony Angel’s reforms of Linklaters redefined the magic circle and have led some to argue that Linklaters and other magic circle firms have more in common with an institutional investment banking model.
In fact, magic circle firms spend more time agonising about partnership than virtually any other issue, and all their crises – Clifford Chance in 2003, Linklaters in 2004, Freshfields in 2007 – have a lot in common. The convulsions of each have produced less tolerant places, but their very adherence to lockstep has continued to be an effective glue. What has differentiated the most successful firms over the last 20 years or the most successful mergers is a clarity of vision and ambition. Nigel Knowles of DLA Piper and Neville Eisenberg of BLP are two managing partners who created outstanding practices from not altogether promising mergers and successfully redefined their own market segments. None of the constituent parts of their firms were high in the rankings a decade ago; now they are seen as among the most successful of their kind.
The allure of the regions
As the City crashed, the regions looked strangely attractive. Norton Rose M5, where the City firm joined the five-strong regional alliance, may look bizarre now, but in the early 1990s City law firms were in dire straits. There was no transparent profit reporting culture, but anecdotally profits at many were down and redundancies were commonplace.
The regions had attracted City firms’ attention a while before. In 1988 The Lawyer reported that Theodore Goddard had launched an initiative to pick up more regional clients, opening a satellite office in St Albans and working in association with Birmingham firm Rigbey Loose & Mills.
Plenty of other City firms have opened outside London. Nabarros picked up the former British Coal Board legal team to open in Sheffield in 1996; Olswang took over Garretts’ Reading office jin 2002; and Taylor Wessing opened in Cambridge in 2002, to name just three.
The most successful regional firms were those that combined their low cost bases with aggressive London strategies. DLA Piper – originally a small Sheffield firm called Dibb Lupton Broomhead – explicitly rebranded itself from a national to a London firm with national offices in the late 1990s. Addleshaw Booth & Co managed its final breakthrough when it took over Theodore Goddard in 2003. It could be argued that one of the reasons Pinsent Curtis (now Pinsent Masons) lost ground in the early part of this decade was that it fudged the London issue.
Although the past two decades have seen the rise of second-tier national firms such as Shoosmiths, Halliwells and Cobbetts, there has not been any apocalyptic consolidation in the regions. However, The Lawyer’s 1987 launch coincided with a major sea change in Scotland’s legal market, with one of the country’s largest players McGrigors extending its reach south of the border into England the following year.
It has taken the best part of the last two decades for the firm, whose London presence was temporarily bulked up via an
ill-fated 2002 tie-up with KLegal, to make its mark outside Scotland. That said, its strategy is one that continues to divide the Scottish legal market.
The country’s largest players – Dickson Minto, Dundas & Wilson, Maclay Murray & Spens and Shepherd & Wedderburn – have all sought to reposition as UK nationals, eschewing their Scottish identities on the way. Back home, smaller firms such as Burness, Brodies and Tods Murray have stepped up to corner the Scottish marketplace.
At the same time Scottish firms have spent the past 20 years playing catch-up with their City counterparts, gradually spinning off their private client capabilities to focus purely on commercial. Notably, Dundas’s private client team left to set up Turcan Connell, which has enjoyed double-digit revenue growth year-on-year for a decade, in 1997.
Of course, the founding of the Scottish Parliament in 1999 played a big role in boosting the nation’s in-house legal ranks, but the growth and development of Scotland’s business sector has also helped.
Panels, beauty parades and privatisations
The driving force of panels has played a major part in shaping the dynamics of the market. With larger multinational clients increasingly controlling legal spend, consolidation inevitably arose. To the extent that some firms, such as DLA Piper and Eversheds, appear at first sight to be constructed around servicing medium-sized commercial and volume work, being able to service nationally and internationally through geographical resources. This came about gradually. Many larger clients deliberately opted for regional firms. The celebrated Allied-Lyons beauty parade in 1993 gave the general work to Bevan Ashford (since split into Bevan Brittan and Ashfords) and Edge & Ellison and was one of the first reviews to use an explicit procurement model, much to the lawyers’ disgust. ICI dramatically outsourced a huge volume of work to Hammonds.
What began in the early 1990s as a small attempt by Citibank general counsel Laurie Adams to manage costs became a model for virtually every company in the FTSE100. Some companies had operated panels before, but none had quite the clout as Citibank; and in the early 1990s Adams became the most visible general counsel in the City – closely followed by Stephen Ball at Bankers Trust, who also adopted the idea. (Adams went on to run ABN Amro’s legal function and is now a consultant at Outside Insight; Ball became general counsel of Nomura and Kroll via a short spell at Gibson Dunn & Crutcher, and is now chief executive of Mourant du Feu & Jeune.)
The Royal Bank of Scotland (RBS) panel review in 2003 was a byword for how not to conduct a beauty parade. What should have been a simple tender process degenerated into a bureaucratic farce as firms struggled to come to terms with the unnecessarily complex online system. The process was handled by a Brussels-based procurement company called Free-Markets. Things got so bad that one City firm even hired a full-time administrator just to handle the review.
RBS wanted to beat fees right down, trying to tie firms to a three-year price commitment and looking for 25 firms to work on transactions worth less than £100m and 10 firms to work on higher-value deals.
RBS realised that it had, perhaps, overstepped the mark when in a letter to its own law firm banking clients the bank admitted the process had created difficulties for its “law firm friends”. Strangely enough, it was quickly forgiven.
It is in the insurance sector where the use of panels has had the greatest effect, both among claimant and defendant solicitors. The buying power of the insurance companies, allied with changing litigation structures, has meant that the insurance firms have been among the first to embrace technology and commoditisation. The result is that the leading volume insurance firms are doing the most creative thinking about legal services in a post-Clementi age. The power of panels has indirectly forced the issue of alternative business structures. (For more on panels, see In-house on page 19.)
Meanwhile, the Dupont legal model – refined by Tyco and adopted by Cisco and Linde, will gain ground as other mid-market internationalists will ape DLA Piper and Eversheds and scramble to service major companies across jurisdictions. Again, client demand will shape new organisational structures within law firms. The buying power of the general counsel is not going away.
As Tony Williams of Jomati says: “General counsel are still facing pressure to reduce headcount and external legal spend. In the future lawyers retained are going to have to do more work for less money and there’ll be smaller and smaller panels.”
As we all know, the Legal Services Act provides that law firms may create alternative business structures. In 1996, when Tony Girling, the then president of the Law Society, suggested the notion of external investment at an international bar conference, he was virtually howled down. Australian firm Slater & Gordon has already floated, and firms with volume businesses such as Dickinson Dees, Irwin Mitchell and Russell Jones & Walker are already gearing up for change. Other partnerships are saying this is not for them. We would respectfully suggest that the pace of change in the legal profession has been such that it would be unwise to rule anything out.