28 April 2003
Accountancy-tied firms certainly love their jargon. Ernst & Young's (E&Y) associated law firm Tite & Lewis wants to push forward in MORES (to the uninitiated, that is M&A, outsourcing, real estate and structured finance). KPMG's law firm divides its offerings into plain 'vanilla' law and 'raspberry ripple' multidisciplinary services; while PricewaterhouseCoopers' (PwC) Landwell has its legendary 'corporate transformation and transactions group' (the corporate department to the rest of us).
If Tite & Lewis, KLegal or Landwell are ever abandoned by their accounting parents, law firms may need to have a whip-round to pay for all those indoctrinated into the cult of the accountant to be deprogrammed, or at least sent on a plain English course.
A love of acronyms aside, however, what KLegal and co have in common at the moment is that, despite soothsayings from the harbingers of doom, their doors are still conspiciously open for business. UK accountancy-tied firms have not yet been killed off by regulators such as the US Securities and Exchange Commission (SEC), nor have they been abandoned en masse by clients.
Nevertheless, to varying degrees, the three firms are still bankrolled by their accounting parents, with a combination of subsidies and referrals. This is increasingly true in today's economic climate, where most of the accountants have had to make their own redundancies.
Since the collapse of Andersen Legal, the two key trends at the accountancy-tied law firms have been their willingness to make redundancies and the re-entry of their top management into actual real life fee-earning, or at the very least client-facing activities. Behind both trends there is a strong implication that the accountants are viewing their investment in the law with increasing commercial realism.
Certainly, if the accountants were looking to establish a law firm today, lawyers would not be offered the generous terms they were offered in the late 1990s. Not least at Tite & Lewis, which reputedly secured an amazing deal from an E&Y board desperate to get into the legal market. On the other hand, there is no evidence yet that an accountancy-tied law firm that is well-managed and profitable will not be able to survive, thrive even, although any challenge to the magic circle, or even the top 10, is a long-forgotten pipe dream.
KLegal got the ball rolling on redundancies in July when it axed 42 support staff in London and Scotland and 20 fee-earners in London. The move came as part of a KPMG-wide cut of around 10 per cent of UK staff, and at the time KLegal's managing partner Nick Holt attributed the cuts to the economic climate.
Simultaneously, however, KLegal and its Scottish merger partner McGrigor Donald were making more strategic changes - identifying partner redundancies with a tartan scalpel.
McGrigors' London office may have lost its name in the merger, but it did not lose much else. Unlike the support staff, all the partners chosen for the chop had one thing in common - they were legacy London KLegal partners. Out of 21 KLegal partners in London at the time of the merger, just 13 are now left at the firm.
A KLegal source says: "There was a degree of bitterness that partners were hired by KLegal on the basis that they'd do work given to them by KPMG, then axed because they weren't the sort of lawyers who bring in work."
A senior KLegal partner still at the firm concedes that he understands why some former partners might feel aggrieved by this. However, he claims the focus of accountancy-tied firms has changed so much post-Enron that the redundancies were inevitable. "The partners still at the firm are all client-winners and are extremely capable," he says.
As a result of the painful process, KLegal has also lost partners it would prefered to have kept. A senior management source has admitted to The Lawyer that he cannot guarantee there will be no further defections.
A further source of tension and embarrassment within the firm was the furore over payoffs for trainees. The 2002 trainees who deferred voluntarily last July got a groundbreaking £10,000 settlement to take a year out - a tactic subsequently used by other law firms, including Norton Rose and Linklaters.
However, 30 2003 trainees randomly selected for deferral last November were offered just £2,500. Following a storm of protest, KLegal's management realised it had messed up, and the two sides struck a compromise at £6,000, although some of the trainees no doubt still felt agrieved.
Much of the last 12 months has been painful for KLegal and managing partner Holt. The firm was given a subsidy by KPMG to cover merger integration costs, which one source claimed was between £5m and £10m. However, the subsidy has now run out and KLegal is expected to be self-financing.
The good news for the firm is that it is meeting tough monthly budgets and its half-yearly profit figures look rosy, given the current economic climate, according to one senior source at the firm.
Although the firm will not concentrate exclusively on multidisciplinary offerings, practices that lend themselves to multidisciplinary partnership (MDP) work such as employment are doing well.
The firm also initiated a regional strategy last autumn, rolling out MDP offerings to KPMG offices across the UK. In some areas it has upset the national firms, which have existing referral relationships with KPMG accountants, but that in itself is proof that KPMG's lucrative non-London client base likes the services. KPMG's accountants have also been supportive of the scheme.
KLegal's vanilla - or for those who prefer more archaic terminology, 'black letter' - legal practice is housed mostly at McGrigors. The Scottish contingent in London has managed to hold on to trophy client Tom Hunter and his private equity firm West Coast Capital in the face of opposition from the investment banks.
Hunter is reported to be sniffing around Selfridges, but plenty of smaller firms have been ousted from public bids when investment banks have turned their noses up at them. Hunter's lawyer and chief operating officer (COO) Colin Gray, supported the KLegal merger precisely so he could get access to the London market, and the Scots will want to see more successes on this front.
Something else the legacy McGrigors partners want is more referrals from KPMG. Currently, lawyers north of the border get virtually nothing, but by the end of this year KLegal is aiming for an average of 20 per cent of its work in the UK to come from the accountants.
Holt paid a heavy price in KLegal P45s to get the McGrigors merger, and he has ended up with a firm in which the powerbase is tartan. However, in return he has got himself a credible law firm, which unlike the other accountancy-tied firms has a chance at going it alone should the accountants turn nasty.
Demonstrating that at the accountancy-tied firms even the managing partner is no longer too important for clients, Holt has handed part of his role over to Gray, who became COO last month. Holt will spend more time on winning clients and developing KLegal's embryonic hedge fund practice.
The same strategem has been adopted by Landwell in a change at the top that many inside the firm and at PwC considered overdue. Gone is Landwell's former managing partner Chris Arnheim, who spent most of his time on internal management issues. Arnheim, who is said to have been pushed out, was replaced in December by the firm's most rated lawyer Leon Flavell.
However, Flavell made clear to The Lawyer at the time that he would spend most of his time on client-winning. "We've got some excellent partners and I don't need to spend much time managing," he said.
More than the other two firms, Landwell has genuinely suffered under the US Sarbanes-Oxley regulations, which prohibit SEC-registered audit clients from using accountancy-affiliated law firms in key areas such as litigation. Because PwC has an unequalled audit practice, Landwell has been the hardest hit by the rules.
According to Flavell, the firm had 113 of PwC's SEC-registered audit clients on its books a year ago. This fell to 32 last year, many of which were represented by salaried litigation partner Simon Whitehead, who quit the firm for Dorsey & Whitney. Whitehead, a high-profile tax litigator, left precisely because he could not run his practice at an accountancy-tied firm. His practice had a turnover of £2m a year, although the firm has retained around £1.5m of general commercial litigation.
Landwell has also found itself handicapped by the fact that it cannot cross-sell corporate law to PwC's best clients because they are often SEC-registered audit clients. Instead, Flavell says that the corporate department will target PwC's smaller, sub-FTSE 200 clients going forward.
Other departures over the last few months have been unrelated to Sarbanes-Oxley. The firm lost banking and insolvency lawyer Celia Gardiner to Richards Butler, but her lender-based practice had few synergies with PwC. Flavell says he wants to replace her with somebody who wants to do borrower work and corporate support.
However, the firm finds it very difficult to recruit partners, both because of a poor image and because of a system whereby equity partner hires need to be approved by PwC. All apart from three of the firm's partners are salaried, and a senior management source concedes: "The salaried partner distinction has caused a lot of trouble here."
Landwell is the only firm of the three that has not been forced to make redundancies. Although Landwell derives many more referals from its accounting parent than the other two firms (which, according to sources, could be anything up to 80 per cent), Flavell claims it no longer recieves any direct or indirect subsidies from PwC. If this is the case, the firm's finances must be in decent shape.
But then PwC never stumped up the cash for a big merger like KLegal's McGrigors deal. If PwC has less ambition for its law firm than KPMG, then however good Flavell proves to be, his capacity to drive dramatic change will be limited.
Ultimately, the firm still faces many of the problems it did last summer when The Lawyer revealed that it had failed to meet most of the goals in its own strategy document. Ironically, one which it has been able to overcome is the loss of confidence the European network had in the London office.
Unlike the UK's Department of Trade and Industry (DTI), the German and French governments have passed anti-MDP regulations that could be catastrophic to the international network of Landwell and some of the other accountancy-tied firms. They are no longer in a position to complain.
Tite & Lewis
Tite & Lewis, the smallest by far of the UK's accountancy-tied firms, also likes to boast about its international network. The firm is part of the E&Y Law Alliance, a network that Tite & Lewis senior partner Christopher Tite calls "a federal structure with a joint referral system".
Like Tite & Lewis, the group has only the loosest links to E&Y. Tite and the firm's senior partner Mark Lewis are at pains to stress the fact of the firm's separation from the accountants, listing different branding and the firm not being part of E&Y's tax and legal services as two unique selling points.
However, the firm still gets 40 per cent of its work through E&Y referrals, and more importantly, E&Y was making significant financial contributions to Tite & Lewis at least until last year.
Tite and Lewis both claimed that they received no financial assistance or guarantees from E&Y when they made redundancies last year. What the firm does get is a huge overdraft facility underwritten by E&Y, which was used to refund the redundances. The overdraft is non-recourse to Tite, Lewis or any of the firm's other partners, although perhaps the pair would argue that this is not financial assistance.
The other two firms also have overdrafts guaranteed by their accounting parents, but management at both were staggered by Tite & Lewis's reliance on it. According to one source close to the firm's finances, the overdraft level was substantial before it was used to fund last year's redundancies.
Lewis claimed that The Lawyer was in receipt of confidential information and when the overdraft figure was put to him he replied: "If anything suggests to me that there has been a breach of confidentiality it is that."
Tite & Lewis is younger than the other two accountancy-tied firms, both of which have had start-up or integration costs bankrolled by their accountancy parents. However, Tite & Lewis currently has only 12 partners. The question is, does E&Y think the firm is good value for money? In an official statement, E&Y's Chairman Nick Land claimed: "The continued growth of Tite & Lewis is central to our pursuit of E&Y's global law strategy and we are delighted with the progress Tite & Lewis has made."
Tite & Lewis cut 12 fee-earners, six support staff and three partners, primarily from the outsourcing and finance departments. However, as with KLegal, it has also lost people it would have wished to retain.
The Lawyer understands that partner Fiona Walkinshaw has quit the firm and will go to Reynolds Porter Chamberlain. A source close to Tite & Lewis said she left because the firm is "very political".
Another source close to the firm said it is exeptionally well placed with its accountancy parent, adding: "[E&Y chairman] Nick Land was under pressure to develop a legal practice. Tite and Lewis lost out badly on the Price Waterhouse-Coopers & Lybrand merger, so they negotiated a sweetheart deal with Ernst & Young."
Tite & Lewis has a very respectable client base, acting for serious clients such as the Bank of New York. The firm has also had some fantastic client wins, including BNP Paribas. Some of those who have departed talk of the firm's unique culture, and certainly its staff and partners are treated exceptionally well. Until last year, partners even got a bowl of fresh fruit outside their doors every morning. Which is nice, but somebody, somewhere has got to pay for it.
The mantra at all three accountancy-tied firms seems to be: 'Concentrate on client work and keep your head down until the bad times blow over'. All three face significant challenges over the next 12 months.
The trick at KLegal is for Holt to manage the difficult balancing act between the Scots and the accountants. Insiders give him credit for his closeness to the head of KPMG UK, Mike Rake, but he also needs to keep McGrigors on-side if he is to build what he calls "a real law firm".
Landwell has the biggest regulatory problems - and this is on top of the fact that the firm has the worst reputation of the three. Flavell's appointment is a big step forward, but he has a mountain to climb.
As for Tite & Lewis, once the firm loses Walkinshaw, it will be down to just 11 partners. To lose any more would be careless.
There is a place for well-run, profitable accountancy-tied law firms able to cross-refer work to the accountants, but value for money has got to be key. Eventually, the bean-counters will want to see a healthy balance sheet.