Focus Germany: Going Deutsch

Germany’s industrial economic strength means its lawyers are optimistic despite the downturn – and the German offices of UK firms are coming good too

Focus Germany: Going Deutsch The word bullish was not made to describe German lawyers. Natural Teutonic reserve does ;not ;quite allow them to crow over their English partners. And the German gesture to signify mocking superiority – the two index fingers being rubbed together like a boy scout with ­firewood – would not survive the translation into the City and Canary Wharf.

According to Juve Rechtsmarkt’s recent research, the top 30 firms in Germany managed almost 11 per cent growth in turnover on average. It is more than last year, if slightly less than 2005-06. As always in Germany, there has been steady, if unspectacular, growth. And the downturn will ­probably be just as unspectacular. Lehman Brothers and Bear Stearns did not have huge practices in ­Germany; what is more important is how many widgets are being exported to Shenzen.

Last year’s figures in Germany seem to provide some comfort for Latham & Watkins, Skadden Arps Slate Meagher & Flom, Sullivan & Cromwell and WilmerHale, which were among the firms with the strongest improvements in revenue per lawyer (RPL).

But small operations such as these, at the beginning of their lifecycles in the German market, ought to be posting encouraging figures, or they might as well pack up and go home. DLA Piper jumped from position 44 to 24 in just two years. Simmons & ­Simmons is another smaller unit that has made the breakthrough in the German market, with a growing ­corporate practice in Düsseldorf and a finance team in Frankfurt that has found highly profitable niches.

Simmons, led by young managing partner Hans-Hermann Aldenhoff, posted a 36.4 per cent increase in revenue – an excellent result under any circumstances when no large team has been taken on. Instead the firm has recruited senior associates piecemeal from leading firms such as Freshfields Bruckhaus Deringer and Linklaters.

Another strong performer is Ashurst – few would have predicted 22 per cent growth there.

Lateral growth

But if you take a longer view of what has happened in the German market, then there are some surprising results. The fastest-growing firms over the past five years are, not ­surprisingly, foreign firms that ­started with small units in Germany but which have grown through ­lateral growth.

But many would be surprised to see Bird & Bird as the clear leader in
the top 30 for growth (see table, ­opposite). The only German firms in the top 10 are ­Beiten Burkhardt and Taylor ­Wessing – and the latter has not grown in Germany because of its merger with its UK office, which is not yet fully integrated. It has been all its own work.

The really interesting figures are, however, the comparative RPL ­figures from today and five years ago.

Taylor Wessing once again sticks out as a firm that has made real progress over the recent past, albeit from a relatively low level: RPL in 2003 was weak at less than e300,000 (£237,228).

But the other firms in the top five are all magic circle firms in the UK that started out at reasonable levels in 2003-04, but which have taken ­dramatic steps to improve the ­productivity of their German offices. With Clifford Chance, Freshfields and Linklaters this has come through taking a hard look at their partnerships in Germany and making dramatic changes. Although the restructurings at ­Freshfields and Linklaters was high profile, the quieter, more behind-the-scenes efforts at Clifford Chance were also far-reaching, as are witnessed in the RPL figures.

But it has not just been achieved by de-equitisations.

“A few years ago we looked at our business and how we could make it more profitable,” says Michael Lappe, German senior partner at Linklaters. “You can do it just by increasing the gearing, but we called that the ‘low road’. You can be more circumspect with the gearing and try instead to improve the quality of the work and thus the billing rates, and then use your people as efficiently as ­possible.”

That would probably not have been possible in what was a far more ­heterogeneous partnership a few years ago. But now, emphasises Lappe, “the whole partnership saw that our ­strategy had to be based on this high road of ever better instructions from more prestigious clients, and not just upping the gearing”.

The progress made by Linklaters over the past two years has indeed been impressive and is summed up by Freshfields rainmakers Achim Kirchfeld and Ralph Wollburg ­joining the firm last autumn. And a final seal of approval was given last week by the decision of Reinhard Marsch-Bahner, ;formerly ;at Deutsche Bank and one of the most respected and best-connected
in-house lawyers in Germany, to ­further beef up Linklaters’ core ­corporate offering.

Steady expansion

Allen & Overy (A&O) is another firm that has posted similar growth ­figures, but without undertaking any major restructuring. The firm has grown slowly, occasionally taking ­laterals when the chance arises.

At the beginning of the year it ­captured Rolf Koerfer from ­Shearman & Sterling (formerly co-head of M&A worldwide), who immediately ­presented A&O with its biggest breakthrough in M&A. He led his new team on the spectacular public takeover by the privately held ­Schaeffler of DAX 30 corporation Continental.

Cornelius Fischer-Zernin, A&O senior partner in ­Germany, sees the success of his firm as being based on three factors ­(hinting also that times were, ­perhaps, different a few years ago).

“We have excellent lawyers who work with, not against, each other,” he says. “We don’t make any ­compromises in the quality of our advice. We provide substance not arrogance. And we’ve also just worked very very hard for our clients. In the end, that pays.”

The comparison with more traditionally managed German firms is not particularly flattering for the ­latter. Even though the productivity of some was not particularly high in 2003, the gains have been modest.

Nörr Stiefenhofer Lutz stands out as a firm that has done much to improve its results over the years. A 31 per cent increase in RPL is highly creditable and does not take into account that over the past year the firm has had to recruit large numbers of junior associates to replaced mid-level colleagues (in itself, not a ­particularly welcome development). Over the past year RPL retreated by 10 per cent. If Nörr had managed to maintain its figure of last year, the gain over 2003 would have been 47 per cent.

Those firms whose strong profitabilty is not based on leverage have not seen such strong growth. ­Hengeler Mueller, at 20 per cent growth, is still highly respectable, but Gleiss Lutz at 3.2 per cent growth is woeful. But then, if you operate with a margin of around 65 per cent as Gleiss does, they will not necessarily be having sleepless nights in Stuttgart.

But the figures clearly do not allow such firms as Gleiss and Hengeler to relax. The gap between Hengeler and its most important competitors is closing (see graph, below). It may well be the case that the current ­economic climate will see that gap remain ­constant over the next year.

But Hengeler’s RPL in 2003 was 51 per cent more than that of ­Freshfields and 86 per cent more than ­Linklaters’. Last year that ­difference had shrunk to 21 per cent over Freshfields’ and 42 per cent over Linklaters’. Gleiss was neck-and-neck with Freshfields in 2003, but is now some way behind and has also seen ­Linklaters overtake it.

Stable market

But in many ways the German ­market is remarkably stable. One of the most surprising statistics is that the share of the largest 10 firms in the collected revenue figures of the top 30 firms has barely changed over the past few years. It remains at just over 60 per cent. The UK tells a very ­different story, where the magic circle firms in particular have grown their share of the market since the early 1990s.

But in Germany the smaller firms have produced far quicker growth than those at the top to retain their market share. Growth at the top end of the market is, indeed, restricted. One senior partner at an international firm admits that jurisdictions such as Germany have to compete with Asia for partnership prospects, which inevitably slows growth in Frankfurt or Munich. So that figure of 61 per cent is likely to change in the long term.

There are considerably more growth prospects for those firms serving the mid-market. Firms at the top will continue to improve ­productivity and profitability, but their market share as a whole ought to decrease gradually over the next few years.

That stability – and the proof that growth of mature international firms will be restricted in Germany – is also provided by those figures showing what share the German practice has in comparison with the firm as a whole worldwide.
Clifford Chance and Freshfields have remained stable over the past five years; Linklaters’ German practice after its restructuring last year has shrunk to 11 per cent of the firm’s worldwide turnover; Lovells and Taylor Wessing have each put on 4 per cent.

But that, too, could change over the next year. With London and New York running into difficulty, ­attention will turn to the offices serving export-orientated industrial economies. ­German lawyers could be much in demand over the next three years. The potential election of Harald Seisler as managing partner at Lovells would just be a sign of things to come.

Click here to view Juve top 30’s turnover in Germany