Linklaters v Freshfields: the arms race starts here

Linklaters’ shock ‘New World’ partner cull sparked by magic circle fight for supremacy

Linklaters’ plan to trim its partnership by up to 70 has sparked furious debate across the profession.

As exclusively revealed by last week (23 January), the management is considering cutting up to 70 partners and 10 per cent of associates in a bid to become a smaller, more profitable operation.

The programme, understood to be called Linklaters’ New World, will also see redundancies among support staff. The firm’s offices in Western Europe are thought to be most vulnerable to the cuts.

The plans are in their early stages, with managing partner Simon Davies and senior partner David Cheyne still thrashing out the details.

A source close to the firm said: “The approach is to ensure that the firm remains the market leader and to do whatever it takes. You’re not going to maintain profitability at boom levels, but you can maintain relative profitability. It’s a directed business. The job of the management of this business is to manage the f***ing thing.”

Last year Linklaters started pruning its client base from 11,000 to 6,000 in an attempt to reduce conflicts and focus its business on large global entities. It also closed its Cologne office and spun off its Central and Eastern European network.

Linklaters declined to comment, but Clifford Chance managing partner David Childs said: “The reality is that every firm is looking at the shape of its partnership, because no one expects the world to return to normal any time soon.”

Paul Olney, practice partner at Slaughter and May, said: “Linklaters has moved to a more corporate model in the last few years and this move is a reflection of that.”

He added: “We look at our profitability. It’s an important feature for a strong partnership. Some of the magic circle firms in the past have looked for growth and headline turnover, which could be seen as a strange goal.”

However, the roots of the restructure are embedded in the long-held rivalry between Freshfields ;Bruckhaus Deringer and Linklaters, which are pulling ahead from Allen & Overy and Clifford Chance in the race for global dominance.

Former Linklaters managing partner Tony Angel’s ‘Clear Blue Water’ restructure, which saw a thorough shake-up of the firm, was occasioned by the fact that Linklaters’ profit per equity partner (PEP) had fallen behind Freshfields’ in 2002.

It triggered a wholesale streamlining of Linklaters’ equity partnership, from 410 in 2003 to 353 in 2006.

The firm’s PEP rocketed past that of Freshfields. The two firms had equal PEPs in 2004, around £675,000. But by 2006 Linklaters had steamed ahead, breaking £1m ;in ;PEP, ;while ­Freshfields’ ;stood ;at £830,000. Then in 2008 Freshfields ;overtook ­Linklaters once more.

Freshfields still boasts a higher margin than that of its rival. It increased its ­profit margin from 45 to 51 per cent between 2004 and 2008, while Linklaters’ margin remained static in 2007 and 2008 at 44 per cent.

If Linklaters’ management is successful with its New World programme, the firm could overtake Freshfields on margins by 2010 and be ready to capitalise on any upturn in the economy.

The programme will also make the firm more attractive to a US merger partner. Such a deal is still of interest, according to sources close to the firm.

One said: “The plan in the US is to continue with our current model, make sure we’re profitable on our own, but also be open to merger. We can’t wait for a merger to happen. It’s too dangerous.”