“I’m not sure the banking partners know what’s in store for them.” The comment, courtesy of a current senior Denton Wilde Sapte (DWS) partner, is the clearest indication that what other sources at the firm describe as ‘a review’ may actually prove to be a root-and-branch restructuring.
Last Monday (5 March) The Lawyer exclusively revealed that DWS managing partner Howard Morris had instigated a major review of the firm’s once-flagship banking department in an attempt to raise the City firm’s under-par profitability.
The review is presently underway and is not expected to be completed until the end of the current financial year. Only then is Morris likely to offer any detail on what it will mean for the banking partners, who are currently in the dark.
“We’re only part way through the process,” says Morris. The fine detail of the review, which he is conducting alongside banking head Matthew Jones and finance director Stephen Watson, will have to wait until it is completed ahead of the year’s close. Only then will the market discover what Morris might have in store for his partners.
But talking to The Lawyer last week, Morris was not shy about revealing that the changes may well involve cuts. “Am I prepared to jettison parts of the practice if they’re not profitable? I wouldn’t be doing my job properly if I wasn’t,” he says.
There is a very simple reason why Morris and co are currently shining their management light on banking: it is underperforming.
Not only that: the financial institutions group, as it is more properly known, is DWS’s largest group. Last year it generated around 40 per cent of the firm’s £147.5m revenue. Unfortunately for the banking partners, it was under par in terms of profitability.
Last year firmwide average profit per equity partner (PEP) at DWS stood at £375,000. Certain high-performing parts of the business were considerably above that. The high-leverage real estate department, for example, had a PEP of more than £700,000, while litigation’s was more than £500,000.
Even DWS’s formerly poor-performing energy, transport and infrastructure group bettered the firmwide average.
In contrast, there are parts of DWS’s behemoth of a banking practice that are not firing on all cylinders. Banking partner Ian Roberts describes the group’s PEP as “pretty close to the average” – as good a hint as any that there are components within it that could do with a tweak.
DWS has suffered more than its competitors from the increasing commoditisation of the banking business. While Allen & Overy, Clifford Chance and Linklaters have held on to the premium-billing business, DWS has slid down the food chain in comparison.
The leveraged finance practice is barely visible compared with its glory days at the end of the last decade (a Wilde Sapte finance diaspora that has been documented by The Lawyer elsewhere). The firm’s grip on the old NatWest (now Royal Bank of Scotland) relationship has all but eroded. There is work from Citibank, HBOS and Lloyds TSB, but the midmarket leveraged crown now belongs to DLA Piper.
Pockets of excellence still exist. DWS continues to be a major player in insolvency, as its role on the mammoth Federal-Mogul restructuring indicates. (Indeed, DWS is better placed than many should there be a downturn.)
Trade finance, led by partner Geoffrey Wynne is a traditionally strong suit of the firm, but the practice area – even in the developing nations of Africa – is inevitably under price pressure. The trade finance group is reputed to have among the highest leverage in the department to counteract the lower hourly rates.
DWS was early into Islamic finance – its role advising the underwriters on the financing of Dubai Ports’ acquisition of P&O was a fillip to its banking practice – but it has become a target for headhunters. Last month Lovells netted DWS’s global Islamic finance head Rahail Ali, who was joined by banking associate Rustum Shah and capital markets associate Imtiz Shah, with the latter two joining as partners.
Although Morris will not give details about exactly how the banking group may change in terms of product offerings, he readily admits that the basics of law firm management need to be addressed.
“We need to look at leverage, utilisation and how we can take advantage of our reputation,” says Morris. “Some parts of banking are already responding to market pressure, but it’s true that some parts haven’t done as well as hoped.”
Although Morris’s review of banking may be the most eye-catching initiative currently underway at DWS, it is only part of the story. The wider context is that of a firm that in terms of partner numbers and total revenue has been going backwards for years. It is Morris’s job to turn its trajectory around.
Sizewise, DWS is roughly back to the size of the pre-merger Denton Hall. At the end of the 1999-2000 financial year, Denton Hall had 458 fee-earners and 140 partners. Wilde Sapte had 306 fee-earners and 67 partners.
The merger, on 1 February 2000, created a £162.4m firm with 810 fee-earners and 194 partners and was placed eleventh in the The Lawyer’s UK 100. By last year DWS had dropped to seventeenth place with 658 fee-earners and just 148 partners and a turnover of £147.5m.
As Morris admits, size matters. “The saying goes that revenue is vanity and PEP is sanity,” jokes Morris, “but revenue does matter. Perception is important.”
The good news is that, although the partnership is smaller, DWS’s current crop is more productive than in previous years. In 2002 revenue per partner (RPP) was £837,000. Last year it was just shy of £1m at £997,000. In other words, DWS may have shrunk, but it has become more efficient.
A major contributor to this improvement in RPP came on the watch of Morris’s predecessor Virginia Glastonbury. DWS shut down its offices in Hong Kong, Singapore, Tokyo and Beijing. Fifteen months ago it also offloaded its office in Gibraltar.
The firm also suffered the largest single group defection in legal market history, when 11 media partners and some 45 lawyers in total jumped ship for DLA Piper. Three years on, and arguably with the benefit of hindsight, not everyone is unhappy about that mass exit.
“Virginia [Glastonbury] was giving them such a hard time about their profitability,” remembers one DWS partner. “It was easily half of the average PEP of the rest of the firm. They felt unloved and unwanted. I don’t know how DLA Piper is making it pay, but media is old Denton Hall. In a sense it’s a market that’s gone boutique.”
Much of Morris’s past 12 months have been spent working with energy partner Chris McGee-Osborne to knock the energy, transport and infrastructure group into better shape.
“Energy was rocky two years ago, but is now in a purple patch,” says DWS partner Jonathan Tatten. “In particular it’s winning work in developing countries and emerging economies. There are no short-cuts. It’s a question of people getting off their bottoms and finding new markets. In energy they did. It’s a really good example of how to take a department and say, ‘get out there and deliver’.”
DWS has certainly upped its game in these areas. It has been involved on major mandates over nuclear decommissioning and is currently advising the Ministry of Defence on a partnering agreement between the department and BAE Systems. The firm is also targeting renewables, with work from new client Sindicatum Carbon Capital among others.
DWS’s future was to some extent evident in the record number of partner promotions it made last year. The technology, media and telecoms (TMT) group, now probably more accurately described as ‘T and T’ since the DLA Piper hires ripped the guts out of the ‘M’ team, did not get a single new partner out of the 26 made up. Banking and finance, in contrast, bagged seven.
“It was a one-off to an extent and it will be back to more normal levels this year,” says Tatten, who sits on DWS’s partner admissions committee. “My impression is that the large number was a combination of two factors. Irrespective of the TMT exits, the pressure had built up in the system with a large number of good people coming up to what they expected would be a glass ceiling.”
The second factor can be summed up in one word: growth. “The board decided that one of the imperatives was to grow,” continues Tatten. “We need to grow turnover to remain competitive and to get PEP up. Turnover’s going up too slowly, probably 5-10 per cent this year. We’ll meet budget and slightly exceed it, but it’s all a bit slow.”
The thinking behind the unprecedented number of partner promotions last year was that, to an extent, it heralded the future growth of DWS.
“We need to be in the top 10-15 in the league tables on turnover as well as being competitive on PEP,” says Tatten.
If the first phase of Morris’s term in office was to get DWS stabilised and comfortable with itself after a torrid time, then phase two is about implementation and execution.
“The real challenge now we’re comfortable, happy and in the right mood and getting turnover up will be to take us out of our comfort zone and get up to the next level,” Tatten emphasises.
So the wider context underpinning the current banking review is growth. It is the key word for DWS and its management right now.
“The point about the promotions was that the departing partners weren’t replaced,” says Tatten. “Not many of the newly made-up partners were in TMT.” (In fact, none were). “More, it anticipated and reflected the expansion in our Middle East practice, an area of great growth.”
The firm’s international office network certainly looks in better shape than three years ago, the odd Middle East departure aside. Morris claims that DWS’s overseas offices showed 20 per cent top-line growth last year, while the cuts have “given us an international footprint that makes sense”. (He argues that the firm was too small in Asia to invest the necessary management time and effort to make a return.)
The next stage for DWS, then, is all about growth. And nothing grows a firm like a merger. It is a road with with DWS is all too familiar. How close is it to the top of the agenda now?”The next stage is to continue building and investing,” says Morris. “This is the hard stuff. The easy thing would’ve been to have been absorbed into a defensive merger, lose our identity, then have someone cannibalise the practice.
“The road we’ve chosen is to pay attention to making more money and working more efficiently and to tough it out. And then, when we get to the next phase, with PEP sufficient to attract and retain talent, we’ll be in a position to make choices about our own destiny.”