31 October 2005
This September Taylor Wessing made it into the top 20 largest firms by revenue in the UK, claiming the number 18 spot in The Lawyer UK 100 Annual Report 2005. This seismic jump in the rankings and in revenue (the year before the firm actually dropped two places, from 29th to 31st) is due almost entirely to the fact that, for the first time, fee income from all three of Taylor Wessing's jurisdictions - the UK, Germany and France - was combined rather than considered separately.
The firm operates three separate legal entities (for "tax reasons", according to the firm) and separate profit pools (more on that below). But it wins work, advises clients and shares revenues as one unit across the three as much as any other international outfit. Consequently, this year it was treated as such.
Taylor Wessing's £127.2m gross fees just failed to gain it a spot in The Lawyer Global 100, published on 7 November. But do not bet on it not being in the table next year. Revenue for the UK end of the business at the half-year point is up 12.6 per cent, from £68.8m at the end of the financial year in 2005 to £77.5m. Cash collections are up 15 per cent, while average profit per equity partner (PEP) was also back up in the UK, breaking through £400,000 ahead of schedule. At the German end in August, three-quarters of the way through its year, revenue was up 21 per cent, while profit has rocketed a staggering 38 per cent.
The external effect of breaking into the top 20 was a raised profile, plus internally it brought a recognition that the firm should be competing in similar markets with firms such as Berwin Leighton Paisner, Norton Rose and Simmons & Simmons. It aspires to the Silver Circle, as identified in this year's top 100, although Taylor Wessing's relatively low global PEP of £345,000 puts it closer to the group of internationalists that includes Simmons and Norton Rose, along with Denton Wilde Sapte and Lovells.
And this is the nub of the firm's problem. Critics say that the real reason Taylor Wessing operates separate profit pools is that, if it were to share across the piece, Germany would be too much of a drag on average PEP. The most recent demonstration that Taylor Wessing was prepared to get tough in order to raise profit was a partnership review this year, which will result in 12 partners leaving the equity over a two-year period. The irony is that this was a UK-only review.
"We respect each other's cultural differences," says the firm's managing partner for Germany Wolfgang Rehmann. Each jurisdiction operates an entirely different model, which is why, according to Rehmann, there was no need for a replication in his local market of the partner performance analysis and de-equitisation process that UK managing partner Michael Frawley oversaw in the UK. "That process was primarily about how to open the equity up to the younger talent," Rehmann says. "It was solely a UK issue."
The dilemma for Taylor Wessing is that, if it wants to be taken seriously as a major or emerging European player, it should surely behave like a single firm. Instead, for remuneration purposes, the firm operates a "complex mathematical formula", in the words of Frawley, to arrive at three separate PEP figures (with Germany last year lagging considerably behind the UK). Plus the the multi-modal approach is not just evident in the variety of financial year-ends or PEP. Each of the three jurisdictions operates on a significantly different leverage, with the UK at around 1:3.5, Germany at 1:2 and Paris, almost certainly home to Taylor Wessing's best-paid partners, running at 1:6.
Surely, it is either one firm, or it is not. And as a source close to Taylor Wessing puts it: "If it's really competing at a higher level, it needs to generate higher profits in Germany, similar to the way Freshfields [Bruckhaus Deringer] has done."
Practising what is preached
Taylor Wessing sees it differently. "We're in the process of rolling out the Taylor Wessing concept across Europe," says Rehmann. "That means we take into consideration the conditions of the local market and pay our lawyers accordingly. No German client is willing to pay local UK market rates of, say, £400 an hour. That would be ridiculous."
In other words, the firm charges less and pays its lawyers less. Buy into that culture or go elsewhere - that is the Taylor Wessing concept. "We discussed having one profit pool years ago," says Rehmann, "but we thought trying to remunerate everybody on the same system may be fundamentally flawed. We're not Freshfields and we're not trying to be Freshfields."
Instead, the three profit pools are kept separate although Taylor Wessing uses common criteria across the firm to remunerate its lawyers. The remuneration committee considers factors including the extent to which partners have been proactive in introducing work to colleagues in other jurisdictions, which partners they have worked for and what the fees generated by a particular deal were.
"The type of behaviour we're looking to reward is the firmwide concept of teamwork," explains Frawley. Three units, but a common culture, if you like.
Certainly, it would be hard to overstate the enthusiasm with which Taylor Wessing's management welcomed September's public recognition of its growth and unity. "It confirms that our strategy is right and means we have to start acting like it," says Frawley.
It is true that both of the major ends of the business, and Germany in particular, have begun attracting the kind of laterals that would have been all but impossible three years ago. The most recent examples are its raid on German rival Haarmann Hemmelrath to capture its head of M&A Heinrich Rodewig and corporate restructuring partner Thomas Krempl.
It has also won work that the firm claims neither pre-merger part on its own could have picked up, including June's €37m (£25.2m) sale of The Music Group to French private equity house Argos Soditic and a technology rollout deal with Vodafone for California-based Visto Corporation.
The firm also now boasts a number of joint clients such as Johnson Matthey, Finisar and Villeroy & Boch. In the last year, the firm reckons it has brought in €14m (£9.5m) generated by referrals between its various groups that it would not have won pre-merger. All of which points to significant cohesion.
Reversal of fortunes
Taylor Wessing has travelled an at-times bumpy road since the 2002 merger between the UK's Taylor Joynson Garrett (TJG) and Germany's Wessing (followed in November 2003 by the Paris launch with eight partners and more than 20 associates from Landwell, which in contrast has grown exponentially). Both the UK and German ends have lost lawyers, while the firm's name recognition all but disappeared in the UK, so strong was the TJG brand.
A handy sponsorship of this summer's Ashes went some way to putting it back on the map, and there is little doubt that the last 12 months has seen the firm's strategy of European growth vindicated, not only by its position in the tables, but also by the spate of quality laterals it has attracted and the kind of work it is now winning.
"To be honest, we didn't expect to be in the top 20 at this stage," admits Frawley. The strategy has so far comprised three stages. Stage one involved the integration of the three practices; stage two involved generating fees from common clients and a review of the success or otherwise of practice integration. Stage three is what Taylor Wessing does next.
The firm is in the process of selecting a practice management system that would include a number-crunching accounting system. It would allow the management to produce combined accounts from the three legal entities at the push of a button, banishing the problem of marrying cost-based and accruals-based accounting. The system is likely to be in place next year, although even then the remuneration systems are unlikely to be merged into one.
"I'm not convinced by a combined remuner-ation system," says Frawley. "We use common criteria for remuneration and operate a combined remuneration committee, but each jurisdiction is responsible ultimately for the re- muneration of the lawyers in that jurisdiction."
Equally, Frawley is not convinced by the need for one firmwide managing partner. "We don't need it," he says. "We're not big enough yet - the three of us can manage it. But as we expand, we'll have to."
"The laterals have to buy into the concept of each other's culture," asserts Rehmann, to which Frawley adds: "The highest-paid partners may be in Paris, but that doesn't worry anybody. The whole firm benefits, provided that office is profitable and we're not coughing up money to keep it afloat." They have a concept and they're sticking to it. The signs are that it's working.