Last year we identified a group of firms facing significant challenges. Kit Chellel returns to the ‘problem firms’ to see what difference a year makes
It has been an eventful year for the problem firms identified in last year’s The Lawyer UK 200 Annual Report. There have been partner culls, merger rumours and disputes with former staff – and that is just at Hammonds. The other firms – Barlow Lyde & Gilbert (BLG), Bristows, Denton Wilde Sapte and McGrigors – tackled the recession with varying degrees of success.
But the five firms have performed better than you might expect, given the challenges they have had to overcome. Average profit per equity partner (PEP) was down by less than 20 per cent, while turnover actually rose overall as a group. Many top 200 firms would kill for these figures. But 2008-09 was a difficult year to transform a problem firm into a promising one. The range of results within the group reflect this.
Barlow Lyde & Gilbert
At first glance BLG had a pretty good year. Helped by its expertise in two of the most recession-proof practice areas, insurance and litigation, turnover rose by 6.4 per cent to £86.9m in 2008-09. And although PEP fell 8 per cent to £350,000, chief executive Clint Evans is right to be satisfied with his firm.
Behind the scenes, though, partner exits continue. Among those heading for the door in 2008-09 were former senior partner Richard Dedman, Hong Kong managing partner Camille Jojo who left for Norton Rose and a trio of insurance partners led by Roger Doulton who jumped ship to Clyde & Co. Not quite an exodus, but on top of the other big names to leave in recent years, including commercial litigation head Clare Canning to Mayer Brown, insurance partner Michael Mendelowitz to Norton Rose and insurance heavyweight Colin Croly, it amounts to a big problem.
A former partner says the talent drain has damaged BLG’s standing in insurance. “Where BLG has gone backwards is in coverage and reinsurance,” he adds.
Evans disagrees, but admits that the firm will have to invest in lateral hires to replace those who have left.
Five years without a significant rise in PEP in a virtually all-equity partnership must have been a factor in the departures. Insiders say there were too many partners not pulling their weight for too long, leading BLG to lag behind its rivals. Evans has responded by introducing a more flexible remuneration system. As of May 2007 partners can now move up and down the lockstep based on their performances.
There are other reasons to be upbeat. BLG is still the UK’s leading firm in professional indemnity insurance and retains a strong reputation in marine and aviation insurance. Evans is keen to focus the firm on its areas of strength, insurance and litigation, but BLG has to address its profitability if it is to hold on to its best talent and turn things around.
Bristows has responded impressively after being identified as a problem firm last year. Following five years of zero growth, it hiked turnover by nearly 20 per cent to £22.1m, helped by a boom in IP disputes. PEP, which last year slumped by 7.5 per cent, was up by 8 per cent to £226,000.
It is a welcome turnaround for the all-equity firm, which has been struggling to find its feet since five partners quit to form IP boutique Powell Gilbert in 2006.
The firm’s growth is largely down to a rise in IP litigation, which accounts for around half of the firm’s partners.
But Bristows joint managers Pat Treacy and Paul Walsh continue to invest in areas outside IP. In June corporate partner Ken Boehner joined from Kilpatrick Stockton, in part to boost ties with the US firm.
Meanwhile, Powell Gilbert has continued to act as an irritant, expanding quickly and eating into Bristows’ market.
With its all-star IP practice as the engine, Bristows was restored to the top 100 this year at number 94 (it dropped out last year). How far it can progress after that depends on whether it is prepared to be ruthless and focus on its most profitable area.
Hammonds managing partner Peter Crossley must have one of the most challenging jobs in law. Despite some impressive mandates, particularly in restructuring, the firm seems to stumble from one PR disaster to another.
The 2008-09 year was characterised by two bitter partnership disputes, dragging the Hammonds brand further through the mire, as well as by dramatic falls in both turnover and PEP. Crossley could be excused for wringing his hands in dismay.
The first partnership row, which saw the firm embroiled in a legal dispute with former partners over the repayment of drawings, rumbled on for three years, but is now all but resolved. As of March 2009 the firm has settled with all bar one of the group. “I’m relatively sanguine about this,” says Crossley. “It was an unfortunate overhang of the difficult period a good number of years ago and it was a necessary thing to do.”
The second concerns Hammonds Direct, a volume spin-off that went into administration in January. It is a separate business, but one that concerns several current Hammonds partners. Crossley, who is a partner in the failed business, has steadfastly refused to comment on the matter, but neither case will have helped improve the firm’s tarnished public image.
As for financial performance, there was more bad news. Turnover was down slightly to £125.4m and PEP fell to 2004’s level, £276,000. Over the past five years the firm has made no progress in terms of revenue or profit.
Crossley is well aware of the task ahead. “What I’m aiming at this year is to achieve no less than a real turnaround in the profitability of this firm,” he says.
The firm has already taken decisive action, trimming the partnership and shedding 77 junior lawyers and support staff. The final step in its turnaround plan is client-facing – ie investing in successful areas such as planning in the renewable energy sector, pensions and litigation.
Crossley will be hoping this is enough; he is unlikely to consider any sort of merger until the firm is in better shape.
“Everybody thinks there’s a silver bullet out there that will transform their fortunes overnight,” he says. “It just isn’t like that. A merger must create value and deliver strategic advantage.”
Denton Wilde Sapte
Another of our problem firms would do well to take note of Crossley’s comments. As we predicted last year, Dentons has continued to be the subject of wild merger speculation, with US firm Squire Sanders & Dempsey heading the list of suitors.
In spite of its troubles Dentons remains an attractive target for a US firm. It has a heavy-hitting energy practice, a decent presence in emerging markets and some good finance partners.
Chief executive Howard Morris’s task is to whip the firm into the sort of shape that attracts the biggest US players.
The firm has already started this process: it cut 76 jobs and has asked partners to put up to £90,000 each of additional equity into the firm.
The partnership has also begun to take on a more streamlined shape, with half-a-dozen partners leaving the partnership between March and June this year.
But more needs to be done. Dentons’ historic lack of ruthlessness has left a bloated partnership. Indeed, as our introduction looking back over the past decade reveals, the firm’s history of mergers has done little to move it forward.
The firm’s financial showing in 2008-09 might also put off potential merger partners, with PEP decreasing by 36 per cent to £300,000.
Firm chairman Martin Kitchen blamed adverse economic conditions and investment in new offices in Kuwait and Singapore, but the drop-off in profitability was the largest on the problem firm list.
A major question is: what would happen should a merger fall through (which could easily occur if reports that Squire Sanders is wooing other firms are true)? Does Dentons have a plan B?
Kitchen says the plans are not dependent on a tie-up. “A merger would need to be able to support this expansion and is not a prerequisite of it,” he says.
Revenue has increased for three consecutive years since 2006, he would argue. But the firm now has the second-lowest PEP in the top 25 (the lowest is Hammonds). It is going to take more than steady growth to change that.
Is McGrigors any closer to achieving its aim of becoming a UK powerhouse? The firm has a September year-end, so a definitive answer is difficult, but the provisional answer has to be ‘no’.
The firm has failed to add to its London offering with more bolt-ons and has actually lost partners in the City. Last year corporate partner Christopher Shaw departed for US firm Mintz Levin Cohn Ferris Glovsky and Popeo, following capital markets head Martin Finnegan (Nabarro) and corporate partner David Mandell (also Mintz Levin) out the door.
The baffling merger with litigation boutique Reid Minty last year was never going to transform the London office, although it did bring a role on the Wembley Stadium roof litigation, bringing in nearly £7m in fees.
Managing partner Richard Masters remains optimistic, pointing to the tax, litigation and energy practices which have held up well.
Masters has set a target of reaching a £100m turnover in two years. It looks unreachable from the firm’s current position at £63m.
“It’s fair to say, in the current environment, that hitting £100m in two years, certainly organically, is going to be challenging,” he says. “But we’re sticking with the strategy of growing via appropriate acquisitions. This market’s likely to deliver more of those.”
The same old problems need to be addressed though. A PEP of just £280,000 is not going to be enough to attract a decent bolt-on, especially with US firms one again circling the market.