With PEP plummeting by 70 per cent, Blake Lapthorn is going to have to stop the rot. Is Walter Cha the man for the job?
This time last year Blake Lapthorn partners were toasting the success of the firm’s ambitious five-year expansion plan. Since merging with City firm Tarlo Lyons in 2006, turnover had risen by more than 50 per cent to £50.7m and the average profit per equity partner (PEP) figure was at an all-time high of £204,000.
“The plan we had in 2003 was to establish ourselves in the South, the Thames Valley and Central London,” senior partner Jonathan Lloyd-Jones told The Lawyer last year (21 July 2008), “and the mergers have achieved all of that.”
How quickly fortunes can change. Last week (27 July) The Lawyer revealed that some associates at the firm were earning more than its equity partners after PEP tumbled by 68 per cent.
Equity partners can now expect an average profit share of £65,000, which is less than half the sum they took home at the start of the firm’s five-year plan. Blake Lapthorn managing partner Walter Cha is philosophical. “Equity partners take the rough with the smooth,” he told The Lawyer last week. But it was clear the firm had entered troubled waters.
The news will resonate with equity partners across the country, many of whom have seen their incomes virtually cut in half, while junior colleagues’ salaries remained untouched.
But it was also an example of how seemingly unstoppable growth can suddenly turn sour in a recession.
At the start of the decade Blake Lapthorn was a relatively sleepy Southampton firm with a turnover of around £15m. Former senior partner David Russell was known for his disciplined and conservative approach. “He ran the firm with a rod of iron,” says one former partner.
Then came four mergers in as many years, first with 18-partner Portsmouth practice Sherwin Oliver in 2001, followed by a tie-up with Oxford firm Linnells in March 2003.
After a break of three years there were two significant mergers in 2006, first with Hampshire-based White & Bowker and then with 20-partner Tarlo Lyons, a move widely seen at the time as a bid to save the ailing City practice.
It seemed to have worked until cracks started to show last year. The firm had built up around £5m in bank debt during its expansion, including paying for new headquarters in Southampton.
In May 2008 equity partners were asked to put an extra £30,000 of capital into the firm and fixed-share partners an eye-watering £60,000.
More was to follow in May 2009, when equity partners put in £100,000 and fixed-share partners another £60,000.
“Walter’s been caught out. They’ve grown too fast,” insists a source close to the firm.
But asked whether he would alter the firm’s approach with hindsight, Cha says he has no regrets.
“I wouldn’t change any of those decisions. It’s mergers that have helped us to credibly deliver a different skill set,” he states.
Certainly, the mergers appear to have bedded down reasonably well culturally, barring a few exits following the White & Bowker tie-up and the departure of one City partner following the Tarlo Lyons deal.
However, they have left Blake Lapthorn with an expensive legacy – a large network of properties, the cost of which has made a huge contribution to its current profitability woes.
The firm’s habit of moving into new offices before the lease on the old space expired is particularly hard to comprehend.
Blake Lapthorn is still paying £400,000 a year to rent vacant space in its old office in Southampton, and will continue to do so for another 18 months.
Blake Lapthorn does have form on this – when it moved into its now vacant Southampton offices, it left two branch offices virtually empty. “They were a millstone around our necks for years,” reveals a former partner.
For Cha, the cultural and client-facing benefits of a new home in Southampton, which came into being at the end of last year, outweigh the costs.
And, he says, the firm did not foresee a crash in the property market. “When the decision was taken we weren’t in this economic uncertainty,” he says. “We did expect to be able to sublet.”
He will be hoping the commercial property market recovers swiftly – it is understood that a rent holiday on the firm’s new headquarters expires soon, adding another chunk to the property bill.
But perhaps the greatest legacy of the firm’s expansion is that, while its ambitions and its reputation were transformed, its internal structure was not.
At heart Blake Lapthorn remained rooted to its past as an old-fashioned south coast player.
“There’s no doubt that they’ve moved from a historically very conservative drawings policy and a low-profit business to a very aggressive growth process,” says an ex-partner.
Throughout its period of growth, the firm operated a fairly traditional lockstep, banded one to five.
The majority of partners were in the equity, with a handful of them salaried. A fixed-share rung was added in 2004, but the system was still top-heavy.
“The firm’s continued to merge since 2001 with almost a firm every year, and so the number of equity partners grew exponentially. Most of the partners are of the old school and don’t fully appreciate the concept of business development,” says a source close to the firm.
Cha admits that keeping the partnership fighting fit has been a problem, but the firm has acted decisively this year and given the equity a much-needed shake-up.
First it has shrunk the equity, shedding 12 lockstep partners through a combination of de-equitisation and retirements. There are now 36 equity partners, down from 48 three months ago.
Furthermore, as of May this year the old lockstep is no more. It has been replaced by a merit-based system that allows partners to move up and down the equity based on their billing performances. They will now be assessed annually and awarded between five and 100 equity points.
“It’s to recognise the uneven contributions within the partnership,” explains Cha.
This is sure to be a traumatic process, made even more difficult by the dangerously low PEP.
So why have more partners not left the firm, as has happened elsewhere when PEP dips below salaried income?
One explanation could be that those wishing to leave are likely to have to pay through the nose to do so. Because profit was so far under budget last year, partner drawings for many exceeded the profit share they received.
This has led to some of the partner accounts, held by each partner with the firm, being overdrawn. For those who remain with Blake Lapthorn the deficit can be made up when next year’s profit share is paid (assuming the firm meets budget).
However, those wanting out have been asked to cough up at least some of the money themselves. There are also reports of tax reserves being used to top up the current accounts and of departing partners being forced to foot a bill running into thousands themselves.
Cha said the firm had negotiated both these issues with the partners concerned. “For people who have retired from the partnership,
where there’s a shortfall we’ve had conversations with them,” he reveals.
Add this to the amount of capital invested and you can see why it would be a difficult decision for any partner wishing to pursue a career elsewhere.
For those who remain on board there are reasons to be optimistic.
While the corporate and real estate groups are suffering, Blake Lapthorn’s biggest practice is litigation, the only department to grow last year.
And the litigation boom, long predicted but slow to arrive, looks like it might be set to finally take off.
Prosecutions by regulators are a particular area of strength – the firm received a boost this month when it was appointed to the Solicitors Regulation Authority interventions panel.
Cha’s investment in the banking sector also looks to have paid off. The firm promoted two new banking partners this year and launched a City practice in May by hiring Clyde & Co head of banking Claire Wheatley.
Blake Lapthorn was rewarded with a place on one of the most sought-after panels around when it was appointed to Barclays’ lending and finance panel for the first time this month.
Cha is also grappling with the firm’s profitability. “We need to look at the cost structure without losing people,” insists Cha.
As well as revamping the equity, the management committee is seriously considering implementing a four-day working week in a bid to avoid more redundancies.
“All professional services firms, whether lawyers or accountants, have been hit, and badly hit,” says Cha. “It’s been a significant change for everybody.”
That is true. But Blake Lapthorn also brought its troubles on itself.
Blake Lapthorn’s Mergers
2001: Sherwin Oliver, 12 partners, Portsmouth
2003: Linells, 22 partners, Oxford
2006: White & Bowker, 15 partners, Hampshire
2006: Tarlo Lyons, 20 partners, London