Revenues grew substantially for some independent Nordic firms in 2015 and dropped for others, according to this year’s The Lawyer Euro 100, but behind the mixed results is a seismic change in the major firms’ internal structures.
The motivation is simple: survival. Independent firms can no longer afford to be unattractive to partners if they want to keep their talent, managing partners tell The Lawyer.
Some have opted for extra bonus structures; others have favoured a two-tier model. All are reviewing their options constantly.
A prime example of this is Euro 100 firm Bech-Bruun, which operates a two-tier partnership with its equity partners remunerated via a seven-year lockstep. Until 2015, the firm operated a modified lockstep but felt that remunerating partners according to personal performance did not enhance collaboration across the firm. As of 2016, it has moved to a pure lockstep, again with seven rungs.
Within its salaried ranks are some partners who will never be admitted to the equity because their practice area is not considered profitable enough, and others who are on the track to equity status. Those in the latter group will typically take three years to reach the equity.
But it is hardly alone in implementing change. Hannes Snellman operates a modified lockstep that has a bonus element in addition to an eight-rung equity ladder, and partners can be moved up or down the ladder depending on their performance.
Wikborg Rein has traditionally remunerated equity partners via a pure lockstep with nine rungs, but has recently introduced modifications to allow it to pay bonuses as well as halt or accelerate partners’ positions. This is all part of the firm’s plan to improve profitability.
Having previously been an all-equity partnership, Arntzen de Besche now operates a two-tier system. That said, at 93 per cent the vast majority of partners are owners of the firm.
Steenstrup Stordrange operates a two-tier partnership system with around 80 per cent of its partners having equity status. The firm revamped its remuneration system at the beginning of the 2016 financial year to move away from a pure to a modified lockstep model.
In fact, the only firms in the Euro 100 that have appeared to not alter their remuneration structure are those that already operated a modified lockstep or merit-based system.
And it’s not just about the lockstep – Nordic independent firms’ strategies abroad have also changed in the last year. A notable example is Magnusson, which backtracked its investment in Berlin in 2015 with an office closure, and in the same year set up shop in Hong Kong.
Kromann Reumert, which boasts the highest revenue out of the group in the Euro 100, is coming to the end of a three-year strategy that has seen it focus on internationalisation, specifically by trying to follow its clients abroad.
As part of this,the firm sent an equity partner to London for the first time in several years in a bid to both attract more work into Denmark and to follow its Danish clients with interests in the UK. Partner Søren Skibsted and two associates relocated to the City at the start of 2016. The firm is likely to ramp up this agenda in the next three years.
But will these changes truly put law firms ahead of the game? The trend to look within to improve structures and outside to improve ties to key markets certainly seems to make a point: if you don’t change, you’ll be left far behind.
Snapshot: The Nordics in the Euro 100
Figures for the Nordic firms in the European 100 are invariably skewed by the exchange rates between their jurisdictions’ respective currencies and the euro. The annual change means that figures are often significantly skewed one way or another. We convert any figures provided in Danish, Norwegian or Swedish kroner to euros using an average annual rate.
The picture across the region in 2015 was mixed.
Norway is the biggest Nordic market with nine firms featuring in the European 100.The general trend is for flat revenues but Steenstrup Stordrange, providing figures in euros, says its turnover has dropped 9 per cent to €34.5m. Meanwhile Wiersholm also reported a drop, down 5 per cent to NOK608m.
Of the five Swedish firms in the ranking, three saw a decline in revenue while Mannheimer Swartling and MAQS – the biggest and smallest Swedish firms featuring – both reported a rise.
Mannheimer is the largest Nordic firm in the European 100, and generated turnover of SEK1.4bn last year, up 15 per cent from the previous year.
Only two of the five Danish firms in the European 100 provide turnover figures. Gorrissen Federspiel says turnover has risen 9 per cent to DKK600m, while Lett’s revenue was stable at DKK364m. There are also five Finnish firms in the rankings. Borenius and Castrén & Snellman both had flattish years with revenue nudging down marginally, but the other three firms all had strong years with double-digital growth.
Collectively, the 26 Nordic firms in the European 100 turned over €1.7bn in 2015.
Q: Many Nordic firms have made changes to their partnership structures during the last financial year, introducing bonus structures or two-tier partnerships. What do you believe has motivated this? Have you decided to make any changes within your firm?
Per Magnusson, managing partner, Magnusson: It’s the eternal question – the partnership model and how to reward partners. It’s built in within the partnership structure that you will have these conversations from time to time depending on the individuals and the markets. A good model is a model that works, and I think people need to be pragmatic about these things. It’s inevitable with globalisation and with new models being introduced in the market that law firms will have to revisit their model for rewarding partners. I don’t know if there is a perfect solution, but you need to look at whether it works within your firm. The legal market as an industry has become more complex, we see more players, business has become more sophisticated, firms evolve and this is a natural change.
At the firm, we have made changes and sometimes they are more significant and sometimes it’s just fine-tuning. We have a modified lockstep, for the lack of a better word. We have built in some elements of flexibility and we have a mix of salaried partners on their way to becoming equity partners and [non-]equity partners, with a bonus scheme. That has been working reasonably well for a few years.
Sverre Tyrhaug, managing partner, Thommessen: We generally believe in a partnership and compensation system that supports the culture, the vision and the strategy of the firm and thus different models suit different firms. We have not decided to make any changes to our partnership or compensation structure, and believe we have the correct structure to support a culture that is team-driven, results-oriented, reliable and enthusiastic – and where everyone takes pride in developing what we do as a firm and as individuals, and with a real willingness to invest in the firm, whether it is the close client dialogue or a pilot in artificial intelligence.
Gisele Marchand, CEO, Haavind: I believe different company cultures influence this choice. All models have pros and cons, but we strongly believe in a true partnership with equal profit sharing as a tool to work for common goals and in the best interest for our clients. Two-tier partnerships may eventually cause underperformance among the partners, and we have no plans to go in that direction.
“Two-tier partnerships may eventually cause underperformance among partners” Gisele Marchand
Tomas Haagen, managing partner, Gorrissen Federspiel: The legal profession has undergone significant changes over the past years and areas with a lower level of complexity have in particular been exposed. For a number of firms this may have led to increased differences in terms of partner performance which again could have triggered decisions for some firms to change their partnership structure. In Denmark the preferred structure for the leading firms is still the lock-step model. In Gorrissen Federspiel we are a strong believer in the fundamental principles of the lock-step model and we have no plans to change that.
Fredrik Rydin, managing partner, Roschier: The increasingly demanding competition for the best clients and the best assignments, combined with price and business pressures, is making many firms more concerned with their ability to reward and retain top performers. At Roschier, we have not decided to make any changes, and we will continue with a partnership that is based on strong cohesion among partners, meritocracy and one-firm principle.
“Firms are concerned with their ability to reward and retain top performers” Fredrik Rydin
Pauliina Tenhunen, managing partner, Castrén & Snellman: It’s difficult to give any general answer to this question. Each firm as well as their partners is unique. It depends on individual needs as well as the overall situation in which the firm is in. We have not planned to make any changes within our firm.
Mikko Heinonen, managing partner, Hannes Snellman: Hannes Snellman has for many years had a true partnership and a modified lockstep model. We think that it has and continues to work well. Perhaps some partnerships and remuneration models have been under pressure due to the dynamic market environment (for example new and sometimes niche practice areas relating to, among others, technology, compliance and alternative dispute resolution assignments) and emerging boutique firms.
Sven Iver Steen, managing partner, Arntzen de Besche: After many years of strong growth in the Norwegian law market, forecasts now indicate that the growth has weakened and is more neutral. The mobility among partners in the largest Norwegian law firms is higher than before and customer demand and competition for contracts increases. The result of this is changes in how law firms operate and how they are organised. In some firms this may create larger differences among the partners.
Jan Dernestam, managing partner, Mannheimer Swartling: We don’t want to speculate about what our colleagues in other firms in the Nordics have been up to, but you would probably find similar explanations as those from Anglo firms who have broken their locksteps or introduced salary partners, etc. As far as we are concerned, we are a pure lockstep firm and during my 13 years as a partner, we have never discussed any changes to our remuneration system, or what we call it – our culture.
This shows how robust our partnership is and all our 90 partners really buy in to our culture. We spend a substantial amount of time talking about our strong lockstep culture and it is reflected in everything we do. When we hire new associates, already at the first interview we want them to confirm that they want to be part of a strong lockstep-based culture — so I guess you could say we are quite obsessed with this. We are true believers in a true partnership.
Casper Herler, managing partner, Borenius: The increasing amount of lateral hires may force some partnerships to look after the remuneration of high-performing individuals. No changes in this respect have been made at our firm in recent years.
Q: How important do you think an international presence is for Nordic law firms?
Magnusson: Our core strategy as a firm is very different from other Nordic firms. We are committed to serving a region and we may have offices in different places from time to time, but our strategy is to be a one-stop shop for clients looking to do business in the region. We will look for other opportunities if it makes business sense for clients.
Tyrhaug: We think it is very important to have an international presence in terms of relationships, knowledge and cultural awareness. In the connected world we are living in and with our strategy as being the No1 Norwegian law firm, we do not think offices around the world is important – but we are committed to maintain our presence in London, which is a very important hub for the globalised legal and financial industry.
Marchand: The extent of a firm’s international presence is of course dependent on its client base. I believe, however, that all major law firms need to have good relations with international law firms as partners to solve client needs in the best way. We live in a global economy where more and more clients have business outside their home country, and it is important to be able to assist them where they are.
Haagen: The world has become smaller and cross-border activities is an integrated part of business for many companies and therefore should also be for their advisers. Strong international relationships and the ability to offer a cross-border seamless service is key to being able to serve your clients in the best possible way. For a Nordic firm I don’t see international presence in the sense of multi-jurisdictional offices as important, but to have strong well-established relationships with leading firms in other jurisdictions. For us it is more an issue of mindset and actually knowing the people than physical presence.
“Well-established relationships with leading firms in other jurisdictions is more important than having multi-jurisdictional offices” Tomas Haagen
Rydin: We believe that in order to continue to succeed, Nordic firms need to deliver value to the clients on as broad a basis as possible. Today, much of the business, clients and assignments are international, so internationally competitive capabilities and experience are a must-have. For us, though, a presence where decisions are made is what matters the most. Implementing the advice can then leverage a combination of digital tools, travel as needed and our network of valuable local good friends.
Tenhunen: As the world in which our clients and we operate in is changing very fast, this question is every day less important. Digitalisation is affecting all companies and changing the way they work. You have to be able to get the job done regardless of your physical presence. Virtual teams are the new normal in global companies and they expect the same way of working from law firms. Businesses are also building new bridges and co-operating much more with others to reach their targets – new ecosystems are being introduced all the time.
We think that all this is very a very positive step and definitely want to be part of this development in the future.
“Virtual teams are the new normal in global companies, and they expect the same way of working from law firms” Pauliina Tenhunen
Heinonen: As each Nordic country is a relatively small market, it certainly helps to increase the size of the home market to have a presence in several jurisdictions to keep up with market trends and practices as well as with new technologies. Our experience is that it is a significant benefit for our clients that we can offer seamless services in complex cross-border transactions and disputes from our offices in particular in Stockholm and Helsinki, but also from Moscow and St Petersburg.
Steen: We have no offices abroad, but we are focused on attracting business from foreign companies. Our focus on this has increased particularly in the past five years and we receive more instructions from foreign companies now than previously, and in fact a significant part of our turnover comes from foreign clients. We often assist foreign companies doing business in Norway and Norwegian companies doing business abroad.
We are committed to and are well-structured for developing relationships with our business relations and we work closely with industrial companies, law firms, investors, banks, consultants, organisations and others. We focus on understanding their needs, challenges and analyse the opportunities they have. One of the most important things we do in order to get to foster our relations, is to meet face to face to discuss business development.
Dernestam: We consider this very important. However, the concept of an international presence does not necessarily mean that you have to have a big number of your own international offices. Even though we are probably the Nordic firm with the largest number of international offices, we do not want to become an international firm, but remain a Swedish firm with an international presence, either through our own offices or through the network of our good friends around the globe.
We have always been and will always remain an independent firm which means that we invest a substantial amount of time in developing a close relation with two to three leading firms in each jurisdiction on a strictly non-exclusive basis. The reason for this is, of course, that our core clients are the leading Swedish multinational companies with production and sales in more or less all the countries of the world.
Herler: Having offices in major financial capitals gives additional credibility in the eyes of some clients. As the main Nordic firms are independent, it seems hard to increase the international footprint while at the same time maintaining close relationships with other leading firms in the jurisdictions of the foreign offices. It demands a lot of financial resources to build as credible and successful practices and presence abroad as in the Nordic home market. Hence this is not likely a direction in which many Nordic firms will be moving.
