The great gearing debate: corporate groups brace themselves for upturn

Mark Rawlinson

The ideal gearing for a ­corporate department is an inexact science. It is a fine balancing act between the competing demands of client expectations, associate development and the tyranny of the bottom line.

But with several firms forced to cut back on their associate levels over the past 18 months as dealflow has subsided, the remaining fee-­earners face a heavier workload and a more pronounced glass ­ceiling than ever before.

The effect of narrowed gearing on associates is twofold. While in some firms the scarcity of ­corporate work has created an experience gap for junior lawyers who will struggle to move up the ­pyramid, elsewhere associates could soon find themselves ­overloaded as the market begins to recover.

All firms trot out lines about the importance they have always attached to providing partner time, but the reality is that during the boom years associates handled much more deal work than many corporate partners might admit.

The clients may well be ­delighted at the amount of face time they are getting from ­partners, but the narrowing of gearing in corporate departments is having more far-reaching effects on ­associates.

“There’s the potential for a vicious circle if it gets worse,” says one corporate partner at a City firm. “Bad gearing is just a ­symptom of a bad market. There’s less work so there are fewer ­associates, and it also means it’s harder for them to progress.”

Not all firms have seen their partner-associate ratios decline. Of those that gave numbers to The Lawyer, Freshfields Bruckhaus Deringer, Norton Rose and ­Simmons & Simmons all reported roughly similar leverage levels for the past three years.

But the trend among other firms with large corporate practices is one of downscaling their ­associate numbers. Ashurst, for example, has seen its corporate gearing drop from 3:1 to 2.2:1, with others understood to have experienced similar drop-offs.

“It was probably 3.5:1 in the magic circle pre-recession,” says another City corporate partner. “Leverage is good in a rising ­market, but at the moment ­assistants are a cost and clients are more focused on the advisory stuff.”

Freshfields’ gearing of around 2.5:1 for its London corporate team seems to be about the norm for the magic circle in the current climate. The firm’s relative ­consistency can be attributed, to an extent, to forward planning.

“Before the recession took hold, we’d reduced gearing a little from the boom years,” says Mark ­Rawlinson, head of London ­corporate at the firm. “We’ve ­therefore kept associate numbers at a pretty consistent level over the past 18 months.

“It’s a balance. In a recessionary environment you want to retain as many people as you can. You want to keep them busy, and if you cut back too much and then get a big pick-up in work it’s impossible to recruit the right ­people to plug that gap.”

The firm says it is looking to recruit good-quality associates (although admits this is difficult in the current market) and plans to bring in three or four newly ­qualified lawyers for each of its ­corporate teams in February.

However, the numbers do not always tell the full story. The tale of the Freshfields corporate associate collapsing at her home after allegedly billing more than 300 hours the ­previous month might suggest that workloads are being affected.

The incident has sparked a ­reaction among some associates, who feel that staffing levels have become an issue for some teams at the firm, while a partner on the corporate team is understood to have been on leave since the ­accident came to light.

Freshfields insists that the ­incident was unrelated to an ­excessive workload and that ­associate headcount is at an acceptable level. Indeed, the figures have remained virtually identical for the previous three years. However, the question is whether the rewards for the slog are the same as they were pre-recession.

The key difference between then and now is not that associates work more or fewer hours, but that it is harder for them to get either the experience or the client ­relationships necessary for them to progress.

Chris Hale, head of corporate at Travers Smith, agrees that there are serious consequences for falling associate levels.

“If they’ve been cut quite ­heavily it means two things,” he argues. “As soon as there’s an upturn those who are left will be overwhelmed, while in terms of development there’s a reduction in partner ­numbers and equity partners ­getting promoted.

“The business case has to be more convincing than it used to be, but there’s no ban on making partners.”

Hale’s department has a gearing of around 2.6:1, down from 3.1:1 in recent years, although the firm is now recruiting at one to four years’ PQE levels.

Simmons, meanwhile, has seen numbers stay relatively steady at 1.5:1. Such a small number of ­associates is unusual among ­corporate arms, but according to corporate head Mark Curtis it is the result of a deliberate strategy.

“We’ve always had a high level of partner involvement and had positive feedback from clients about that,” he insists. “We’re conscious that from time to time some firms have had a lot more associates, and that involves shedding associates as times get tougher.”

Norton Rose has managed to retain a UK corporate gearing of around 2.3:1, with 42 partners assisted by 97 associates. Head of corporate Tim Marsden sees the issue differently, with rising leverage potentially just as damaging.

“What usually happens in a recession is that your people turnover goes down,” he says. “The problem that firms have is that people need to look at recruiting trainees from two to three years out, so there are commitments to take on new people when there’s less work.

“A good department should have a consistent gearing in good times and bad if they have a sound ­business model.”

On the plus side for long-­suffering corporate associates is that those who survive might get thrown in at the deep end a little ­earlier than expected.

“The positive thing is that they do get more partner time if there’s less work,” says the City partner. “And because there are fewer ­senior associates, more work gets pushed down to juniors.”

Whether pushing work down to juniors while dispensing with their ­senior colleagues is a viable ­strategy remains to be seen, but for the moment corporate ­associates are feeling the squeeze.

gavriel.hollander@thelawyer.com