Focus 2006: A year of change

Four major issues hit the headlines in 2006. Associate retention, law firm flotations, case management and China were the hottest topics of the year


Retention topped law firm agendas in 2006 as the associate drought kicked in. Allen & Overy (A&O) tackled retention problems head-on by overhauling career paths for associates in April, including the introduction of the level of managing associate for the equivalent of four, five and six-years’ UK-qualified PQE.

Several firms, including Berwin Leighton Paisner (BLP), DLA Piper and Herbert Smith quickly followed A&O’s lead. BLP created an associate director position, while DLA Piper introduced a legal director role (The Lawyer, 9 October). Herbert Smith created an of counsel role for senior associates with typically nine years’ PQE as an alternative to partner status (The Lawyer, 22 June).

During 2005 Herbert Smith suffered from an exodus of associates from its disputes department amid accusations that career progression was unclear. Herbert Smith HR head John Lucy says: “Because demand for resource has been so high, most of the leading law firms have been struggling to hire people, so retention has become just as important, if not more important, than recruitment.”

A&O coupled the restructuring of its associate career path with a radical overhaul of its remuneration scheme, which saw the introduction of a performance-related bonus, as reported on (12 October). But the first bonus, which is linked explicitly to the value of a partner’s profit, has a vesting period and will not be paid out until July 2008.

A&O managing partner David Morley says: “Pay grabbed the headlines, but it’s delivery on our plans for career flexibility, performance appraisals and career development that will make the difference.”

Slaughter and May also jumped on the bonus bandwagon and introduced a discretionary 15 per cent bonus for its trainees and associates, as reported on (31 October). Unlike most of its rivals, Slaughters’ bonus is not linked to chargeable hours.

Senior partner Tim Clark says: “A flat bonus is the right approach for us because we don’t have chargeable hours or billings targets.”

However, exclusive research revealed that Linklaters offers the most generous associate bonuses. It is the only top 10 City firm to offer both its trainees and associates bonuses of up to 40 per cent (The Lawyer, 23 October).

SJ Berwin, meanwhile, unveiled a new bonus structure, as reported on (24 November), which saw it offer increased bonuses for utilisation of up to 60 per cent. However, the move attracted criticism from both inside and outside the firm, because associates have to bill a whopping 2,500 hours to be eligible for the highest bonuses. The move forced SJ Berwin to promise to match its salaries to those paid by the magic circle in April.

Legal Services Bill
This time next year it is possible that one of the stories in the review of 2007 will include ‘the first law firm float’. Possible, but unlikely.

The first deal of this kind might take a little longer, but the publication of the draft Legal Services Bill on 24 May (as reported on brought it a step closer.

Within days The Lawyer reported news of the first firm to confirm publicly that it was considering selling a stake in its business to a private equity house (The Lawyer, 29 May). Taylor Wessing managing partner Michael Frawley said the firm’s plans for a new office may include raising funds via private equity.

“Yes, we’re looking at it,” Frawley said. “But we haven’t gone through it in any detail yet and it raises a whole lot of questions that need answering.”

Two months later the appetite for a deal of this kind appeared to be growing. In a groundbreaking feature The Lawyer (3 July) profiled five firms (Addleshaw Goddard, BLP, DLA Piper, Shoosmiths and Halliwells) and posed the question: what would they be worth if they floated?The hypothetical exercise was tongue-in-cheek, but it highlighted some serious issues and flushed out several of the growing number of consultants that were already positioning themselves to capitalise on the nascent market.

Later the same month The Lawyer (24 July) reported that one of the legal market’s best-known management consultants, Alan Hodgart, had formed a Chinajoint venture with corporate finance house Lexicon Partners aimed specifically at advising firms on potential IPOs and fundraisings.

As the year ends, it appears that the current position of many UK managing partners is a cautious ‘wait and see’. As Addleshaws managing partner Mark Jones puts it: “It will happen, there will be a law firm that does an IPO. We’re not saying ‘never’, but we deliberately don’t want to be at the cutting edge. We’d rather be interested observers and let someone else make the mistakes.”

The current situation is neatly summed up by Eversheds chief executive David Gray. He agrees that the Legal Services Bill is going to have an impact, but does not anticipate it having much of an impact on firms such as Eversheds. “The larger and more international the firm, the less the impact,” says Gray. “I think everybody will just be keeping an eye on who moves first. We’re not too proud to pinch other people’s ideas, but at the moment there doesn’t seem to be a sense that this will make a great deal of difference.”

The courts
More than seven years after the Woolf reforms, case management was back on the agenda with a vengeance in 2006. The BCCI and Equitable Life trials may have ended, but their shadow still hangs over the courts.

Some critics, such as the Bank of England governor Mervyn King, laid the blame for the cases and their cost on the lawyers. Others blamed the judges – or rather the system that prevents judges from best managing a case. On 9 October The Lawyer’s survey of Court of Appeal judgments revealed that a small number of judges, including Mr Justices Jackson, Kitchin and Langley, stood out from the rest in the way they handled cases.

But the judges did set about trying to make a change in 2006. In late October Mr Justice Steel chaired a unique symposium of the judiciary, court users and practitioners to bash out some of the issues. Most agree that the meeting was a good idea.

Lloyd’s of London general counsel Sean McGovern says: “As users we want to see much more active case management in the commercial court. I think this was a good step in getting the commercial court to recognise that it needs to listen.”

Lovells litigation partner Graham Huntley, a member of the working group set up to examine the issues raised by the symposium, adds: “I think the benefit of the so-called ‘super-cases’ is that people have started to deal with some big case management issues.”

“People can sharpen up and learn the lessons of BCCI and Equitable,” says Eversheds litigation head John Heaps.

However, some think that the fuss over BCCI and Equitable hides an efficient system that is better than that found in most other jurisdictions. Lovells public policy head Neil Fagan says: “I think the reaction is an overreaction, because I believe that the case management tools already exist to manage cases efficiently.”

Slaughters litigation head Elizabeth Barrett adds: “A lot’s been said about the BCCI and Equitable cases and it’s right to see whether our procedures can be improved. However, it would be wrong to regard those cases as representative of the English litigation process, which when viewed against dispute resolution processes employed in other jurisdictions justifiably remains the mechanism of choice for many who seek a fair and impartial adjudication of a dispute according to articulated legal principles and based on a forensic analysis of the evidence.”

Next year’s litigation forecast is for more of the same, but with bright spells of business ahead should the corporate boom begin its expected downturn.

2006 was when China shot to the top of the agenda at many international law firms. The region emerged as the key battleground for many of the world’s leading firms, a fact underlined by the succession of office launches, partner hires and licence applications.

Beijing and Shanghai began equalling Hong Kong in terms of importance for the first time during 2006. The raids on rivals only served to confirm the trend.

In September, Fried Frank Harris Shriver & Jacobson raided Simmons & Simmons‘ Hong Kong and Shanghai offices for five partners, including China regional managing partner Huen Wong, to open its first office, as reported on (27 September). The firm came back in December for a second raid, taking three partners, and may not be done yet, as reported on (12 December).

On 13 October The Lawyer reported that Mayer Brown Rowe & Maw was to open a Hong Kong office, finally getting the full Chinese legal offering that it has conspicuously lacked, as reported on (13 October).

And earlier in the year Orrick Herrington & Sutcliffe succeeded in its long-running bid to obtain operating licences for the mainland China offices it acquired from defunct firm Coudert Brothers, as reported on (13 September).

DLA Piper chief executive Nigel Knowles says his firm had seen “explosive growth” in China over the past 12-18 months. “The relevance of China is only now becoming clear and we’re delighted to be in there in a significant way,” says Knowles.

Clyde & Co senior partner Michael Payton says: “[China] remains a country of enormous opportunity if handled correctly. There will always be wobbles, and they can be quite severe wobbles, but overall the graph will definitely be going upwards.”

Hogan & Hartson partner Ray Batla says China is one of the firm’s “fastest-growing” markets and is “impossible to ignore”. Hogan has around 30 lawyers on the ground across Beijing, Hong Kong and Shanghai. As Batla puts it: “We’re recruiting like crazy. Not only is everyone going into China, but the Chinese corporates are increasingly taking their business overseas. It’s absolutely going both ways.” And so far there is no sign of it slowing down.