On the up or going under? How to health-check a firm
31 May 2011 | By Husnara Begum
27 January 2014
15 August 2013
2 September 2013
7 March 2014
31 July 2013
The financial crisis saw many firms defer their trainee start dates and some close their doors altogether.
With at least a two-year gap between bagging a training contract and actually starting your first seat it is crucial to ensure the prospects for your future firm are healthy. As Herbert Smith graduate recruitment partner Matthew White explains: “The past few years have taught us that there are a lot of unknown unknowns out there.”
Indeed, given the uncertain times we find ourselves in, you will not be considered daft for wondering whether your future employer will be able to honour your training contract or if it will even still be in business by the time you finish your Legal Practice Course (LPC).
If you think that sounds far-fetched, just look through the Lawyer 2B archives and read about the fate of the trainees who were due to join the now-defunct Halliwells. No fewer than 51 students were left jobless after the Manchester-based outfit called in the administrators last summer, although thankfully 31 were rescued due to an innovative scheme pioneered by Bristol-headquartered firm Burges Salmon.
Halliwells’ trainees were not alone in being left jobless. During much of 2009 a week would not go by without a law firm pushing back the start dates of its future trainees in return for a cash incentive. But one firm - Shoosmiths - was not feeling quite so generous and made the controversial decision of asking its trainees to defer or cancel their training contracts altogether without paying them a single penny of compensation.
Across the pond, Howrey finally announced its dissolution in March 2011 after 12 months of turmoil, which saw some of the US firm’s most high-profile partners jump ship thanks to its disappointing financial performance.
At the time Howrey chairman and CEO Bob Ruyak said in a statement: “The firm had experienced disappointing financial performance over the past two years and subsequently several partners resigned. This resulted in the conclusion that an orderly wind-down of the firm’s activities over time was the only practical alternative.”
Thankfully, Howrey did not run a graduate recruitment programme out of its London office, but if it had there may have been even more trainees left on the rubbish heap. Granted, the above are extreme examples and are not a common occurrence - the last time the legal market witnessed the collapse of a major law firm was in August 2005 when US-based Coudert Brothers announced its break-up.
In contrast, legal sector tie-ups are less unusual, with a number of high-profile nuptials being announced in recent months, including Hogan & Hartson with Lovells to create Hogan Lovells and Squire Sanders & Dempsey’s takeover of Hammonds. Fortunately, the merged entities plan to honour the contracts of all future trainees, but the graduates will clearly be joining very different firms to the ones they signed up to.
So how can you tell what fate awaits your future firm? As is the case with predicting most future events there is an element of crystal ball-gazing.
Herbert Smith’s White agrees it is difficult to predict the fortunes of a firm but says you should be able to tell a lot from talking to people at the firm and judge whether its identity and strategy fits in with your personal values and aspirations. “Look at how a firm has reacted to the downturn, whether it has worked and whether you agree with the approach it took,” he explains. “Past behaviour is a good indication of future intentions.”
There are number of ways of measuring the current, and therefore future, success of a firm - such as low newly qualified (NQ) retention rates or a significant reduction in the number of trainees a firm recruits. Other causes for concern, according to White, include negative comments from those currently working at the firm or a feeling that they are not telling you everything, or unwelcome media coverage.
White also recommends looking at a firm’s international strategy. “In an increasingly global economy, a firm’s approach to international business is important,” he
says. “Is the firm expanding and, if so, in which jurisdictions? Is this client-led and in keeping with the firm’s strategy or is it opportunistic?”
Under the microscope
Before deciding which firms to apply to do plenty of research around each one. That means looking beyond a firm’s eye-catching graduate recruitment website or brochure and reading both the legal and national press as well as going through the legal directories with a fine-tooth comb.
Indeed, when buying a car you would be foolish not to verify any details the seller gives you such as the mileage and date of last service. So why would you not do that when planning your future career, which is likely to be one of the biggest investments of your life?
With proper research you will be much better-placed to tell firms apart (one of the biggest complaints we hear from students is that all large firms look and sound the same). You should also be able to start spotting the typical danger signs that point to any future health problems a firm is likely to encounter and, as was the case for Halliwells and Howrey, if they are terminal.
The term ’too big to fail’ is often coined in debates surrounding the bank bailouts that resulted from the global financial crisis. Couple that with phrases such as ’bigger is better’ and “safety in numbers’, then working for the UK’s biggest law firm Clifford Chance or one of its magic circle rivals sounds like a pretty safe bet. Indeed, for many candidates a training contract with a magic circle law firm is the ultimate prize and, let’s be honest, it will look pretty impressive on your CV if you ever decide to move on following qualification.
There is no denying that size does matter when deciding on a future employer as it will affect a number of factors - most notably the culture. Your pay and benefits, the number of trainees in your intake and the type of deals and cases you get to work on will also be influenced by the size of the firm you train at.
It is understandable that candidates focus on size when deciding which firms to apply to but it is important to appreciate that ’size’ can be measured in a number of ways, including by turnover, profit and headcount. When looking at turnover alone, Clifford Chance led the pack during the 2009-10 financial year, but when measured against average profit per equity partner (PEP) Slaughter and May topped the rankings.
CMS Cameron McKenna’s graduate recruitment partner Simon Pilcher admits that even though students do focus too heavily on turnover, provided you look for patterns over a longer period, it is a good indicator of how well a firm is doing.“It’s important to look back over a minimum of three years,” explains Pilcher. “If turnover has either increased or not dropped significantly over that period that is generally a positive sign.”
But he adds: “Profit is perhaps much more relevant because if partners are making more money it shows the firm is getting a lot of work. But again it’s important to look at three-year trends, especially in the current economic climate.”
During the last year’s financial reporting season, several of the UK’s leading law firms, including the likes of Burness, Blake Lapthorn, LG, and Travers Smith, posted almost unbelievable jumps in partner profits of 94, 60, 50 and 70 per centrespectively.
Although the latest financial results are not available for the UK’s leading law firms, we do not expect many firms to post such huge jumps in partner profits. Indeed, if any of the above firms do, they will have a lot of explaining to do.
Another factor related to size is the ratio of assistants to partners. “The leverage is likely to vary across different departments in any firm, but this will give you some idea of the quality of work you would be dealing with as a qualified solicitor. Practice areas that rely on commoditised or volume work will typically operate with higher leverage,” explains White.
As the collapse of Howrey demonstrates, significant partner departures can in some circumstances be catastrophic for a law firm. But some exits may not be as detrimental as you might think, as some partners often leave with mutual consent because they are underperforming. They may also lead to opportunities for the promotion of senior associates, which in turn makes room for junior lawyers to come up through the ranks.
“Meritocratic law firms need room for talent to be nurtured,” White says. “Sometimes partners leave to take in-house roles with clients, which also gives firms opportunities to strengthen client relationships.”
A high associate attrition rate is often viewed negatively as it typically points to low morale. At the height of the last boom, magic circle firm Allen & Overy (A&O) hit the headlines after 25 per cent of its associates resigned. The story was so big that it forced A&O to roll out a series of initiatives aimed at boosting associate retention rates.
Another good barometer for measuring the a firm’s success is the number of partners it promotes to the equity. “If a firm is willing to move partners into the equity that is a good sign,” says Camerons’ Pilcher. This is because a firm can keep its PEP higher by keeping a tight rein on its equity.
A firm’s NQ lawyer retention rates are just as important a measure. But Pilcher argues that a high NQ retention rate is not necessarily a positive sign. “There could be two negative reasons why a firm recorded a high retention rate,” he claims. “Firstly, because it didn’t hire enough trainees in the first instance and secondly, it rolled out a major redundancy programme, which resulted in a shortfall of junior associates.”
Expansion, either through lateral hires or the launch of a new office, is generally viewed positively, but if done too rapidly may result in future problems. As noted earlier, a move into a new jurisdiction to follow a client is likely to be more successful than opening a new office simply because everyone else is doing so.
Placing your bets
The business of law firms is complex and will become even more so thanks to the Legal Services Act and the birth of ’alternative business structures’. No one expects would-be lawyers to gain an encyclopaedic knowledge of the sector before taking their tentative steps onto the career ladder - this is something that will develop as you gain more experience.
But with plenty of research, most of which can be done by keeping an eye on the legal press, you should find it just a little bit easier to decide which firm to place your bet on.
Telltale signs that all may not be well at a law firm
- Falling profit and/or turnover over more than a year, especially if peers are doing well
- Partner resignations, especially the departures of any notable rainmakers
- Overdependence on any of the practice areas that have been hit most severely by the recession
- Office closures
- The loss of key clients/deals to rivals
- Over-ambitious growth targets
- High levels of associate attrition rates
- Low newly qualified lawyer retention rates
- Fewer people wanting to join at any point in the career cycle, from partners through to trainees
- Negative press coverage over a sustained period