Adviser focus | Winter 2018
It is dominated by mid-sized firms while global players and City leaders lag far behind. Watson Farley & Williams (WFW) sits in the third spot. You must scroll down nearly 40 positions before finding the likes of Linklaters and Clifford Chance.
It is not the chart for revenue, profits or partner earnings. It is a table of major British law firms’ organic growth over the last ten years, marking the period since the financial crisis.
True, adding £350m to your top line over a decade only gives you 35% growth if you are Freshfields Bruckhaus Deringer (in 38th place), but it is more than twice the 2016/17 turnover of Mishcon de Reya, which leads the table having nearly quadrupled revenues since 2007.
The 1990s and 2000s were defined by the City elite dramatically pulling away from the herd, year-on-year for a generation. The banking crisis fundamentally changed those dynamics. Our starting point is a table that excludes Legal Business 100 (LB100) firms that have conducted major mergers, had not yet entered the group in 2007 or were taken over, leaving 53 remaining. While London’s big four Magic Circle firms have grown by 40% on average over the ten-year span, 16 largely mid-market firms have more than doubled their size in terms of revenue. Only two of that camp would now sit in the UK top 25 (see below).
Many of the firms excelling were previously held up as symbols of the mid-tier malaise supposedly gripping the globalising legal industry. The scale of that revival among a number of firms strongly suggests something that has provided firms generating between £70m and £200m with a winning formula for a more uncertain world.
The In-House Lawyer put this assumption to the test by looking at three mid-tier players that have sustained dramatic financial performance over the last ten years… often hardly noticed by the wider market: Osborne Clarke (OC), Fieldfisher and WFW.
The second-highest ranked firm in terms of revenue growth among this trio, OC turned over £209m in 2016/17, making it one of the only three players in the current UK top 100 that more than doubled their size since 2012. Lacking a clear direction or identity only five years ago, Fieldfisher, meanwhile, posted one of the strongest performances of 2016/17, growing its top line by 36% to £165m. And finally WFW, still a mystery for many in the market, today generates nearly three times the revenue it did ten years ago, with income of £159.8m in 2016/17. What lies behind these numbers? And, more importantly, what lessons do their stories teach the legal industry?
It was a very different picture a few years ago, especially at OC and Fieldfisher, with the pair going through near-crisis situations. The Bristol-bred OC trailed an unusual path during the 1990s, focusing on transactional work in the digital business sector and riding the late-1990s dotcom boom. The firm was expansive and despite its small size set up an international alliance in Europe, only for the early-2000s tech-slump to ravage its practice, leading the then 350-lawyer firm to shed nearly 15% of its fee-earners. Having over-expanded, the firm’s cost base was a mess and one of the strongest legal brands forged outside the Square Mile was in serious trouble.
For its part, as recently as five years ago Field Fisher Waterhouse looked like the poster child for mid-tier drift. Through 2012 the firm had been hit by the failure of merger talks with Lawrence Graham and OC, suffered the loss of well-regarded chief operating officer Charlie Keeling, and seen profits per equity partner (PEP) drop 20% to £410,000, its lowest since 2004.
In comparison, WFW was facing less stark challenges – it had a clear market position as a shipping finance specialist that launched in 1982. Yet its size put it awkwardly between boutique and a genuine force in the City, and operational grip was lacking. Over recent years merger talks with larger firms as varied as Simmons & Simmons and Chadbourne & Parke underlined its uncertain path.
All three were to change their fortunes after going through some form of purposeful reinvention. Of the trio, OC took the first steps.
The key architect of that revival was corporate partner Simon Beswick, who went on to build a reputation as a standout law firm leader among his peer group.
Beswick took over as managing partner in 2003 from the flamboyant Leslie Perrin and had to spend several years restructuring the firm and dealing with costs.
Such work was achieved with minimal fallout in the partnership, a testament to his deft handling. ‘The people who built this firm conceived the idea that it would not be a traditional, hierarchical law firm: it would be run as a business and constantly adapt to the environment; it would not be afraid of change but embrace it,’ says Beswick, now OC’s international chief executive.
The medium-term response was to recalibrate its business, beginning to expand a disputes practice that generated only 5% of its revenues, against 20% currently. There was also some widening of industry focus. This took some trial and error as the firm initially spread itself too thinly. ‘We went too broad,’ recalls Beswick. ‘In 2008/09, after the financial crisis, we realised we could not have insiders in every sector, we were not big enough. We needed to focus on just a few sectors.’
Beswick’s successor as UK managing partner, Ray Berg, the down-to-earth corporate lawyer who cut his teeth at Allen & Overy, is seen to have had a strong handover, with Berg sustaining the firm’s reputation as a progressive and imaginative outfit.
‘[Berg] is a superstar. He has real drive, real purpose and great vision for the business,’ says Greg Leyshon, head of the business transaction practice. Adds Leona Briggs, head of real estate litigation: ‘Bumping into Ray at the pub, you would not say he is the typical managing partner. He is very firm in his view but very approachable. He has really had an impact in driving our sector focus forward.’
If OC was on a much sounder footing by 2012, Fieldfisher was near a tail spin, a painful comedown after having ridden the 1995 to 2007 boom in the City when everyone made money. ‘It’s no secret the firm went through some difficult times,’ says head of corporate Andrew Blankfield. ‘We were right not to pursue those mergers [with OC and LG]. We came out of that with a degree of self-examination.’
The firm was also riven by strong personalities and personal rivalries – which contributed to a bizarre partnership provision that prevented three of its then partners, Mark Abell, Nick Rose and Peter Stewart, from running for managing partner until 2022. Abell quit for Bird & Bird to head its franchising team in 2013 and former litigation head Stewart passed away in 2015. Rose still heads its IP and tech litigation group.
It was the energetic and entrepreneurial Michael Chissick, then heading its tech, outsourcing and privacy group, who provided a good deal of the momentum. Chissick took over as interim managing partner in 2012, taking the role on permanently in 2013, the same year Matthew Lohn assumed the senior partner role.
Current head of tech, outsourcing and privacy Rob Shooter says the firm’s leadership is very much ‘the Michael Chissick show’. ‘He has been exceptionally focused. One of his mantras is that there are only finite resources to do stuff, so what are we going to focus on?’ He describes Chissick and Lohn taking over the reins as ‘fundamental’ to the firm’s success. ‘I’m not sure how strategic a firm we were back then. Everyone at the firm now is aware of the strategy.’
Chissick overhauled the firm’s ‘virtuous triangle’ strategy introduced in 2010, which focused on clients able to feed work to its corporate, TMT and regulatory practices, and implemented a shake-up internally dubbed ‘the strategy on a page’.
A shift into Riverbank House in 2014 heralded investment in tech and infrastructure, while the firm acquired Manchester outfit Heatons that year and, one year ago, opened in Birmingham.
Governance was also overhauled, with management split into two roles: an executive committee run by Chissick, responsible for strategy implementation, and an oversight board headed by Lohn. ‘We transformed from an old-fashioned governance procedure to a reasonably standard form of executive management, partnership supervision which we hold today,’ notes Lohn.
There is a sweet spot in law firm size to secure economies of scale but allow for tactical agility.
‘We’ve made some really good calls,’ says Chissick. ‘Manchester, Birmingham and the investments made in technology, have all come good for us.’ The firm is also investing in its tech-driven New Law business Condor. Initially targeted at financial services clients looking for support in handling contracts and compliance issues, Condor has rapidly grown since its launch in January, being currently on track to generate £2m for 2017/18.
Chissick sums up the process: ‘We literally reinvented the firm.’
WFW’s change of tack was more subtle. Under the long-term leadership of Michael Greville, its growth had been well behind trend for years. Between 1997 and 2007 its top line grew just 61%, a boom period in which it was even outperformed by a then struggling Stephenson Harwood and many top 50 firms typically were at least doubling their income.
By the time co-managing partners Chris Lowe and Lothar Wegener took over from Greville in January 2014, the firm had already settled into considerably more confident form, in part because its practice was relatively unaffected by the post-Lehman slump then wreaking havoc on larger City peers.
While the firm stayed tightly-focused, it was also now expanding more internationally and broadening its practice beyond shipping into the energy and trade work, a shift Lowe and Wegener championed. The pair also invested in its business services and operations.
Head of disputes Andrew Savage comments: ‘The change of managing partners was a good opportunity to emphasise the recognition of the importance of energy as a sector alongside transport. There is investment going on there that people appreciate because they see there is a real commitment.’
The colours to the mast
The most obvious common ground the trio share is a relatively tight industry focus and practice slant that takes them far from the conventional full-service model that dominates in the mid-market. None have much focus on mid-market generalist corporate and finance work.
‘After the financial crisis, we started using the sector focus as a way to market ourselves,’ recalls OC head of digital business sector Adrian Bott. ‘Having a sector-first approach was something which made us different back in 2008.’
WFW’s Lowe says: ‘The way most firms approach sectors is by asking “who in this firm is interested in this sector?” and they end up listing 27 different sectors on their website. Here, we set more of an agenda.’
OC focuses on six industry areas, though just three – digital business, financial services and real estate and infrastructure – generate 69% of its UK revenues. In truth, digital business remains the rock on which OC built its church. ‘We invented the concept of digital business,’ says Bott. ‘The digital revolution has surpassed the traditional TMT concept. It has made everything much more connected and interdependent.’
Fieldfisher has narrowed its sector focus since the turbulent years: from 11 to five first, then down to three. Says Lohn: ‘We’re bold enough to say: here are our three areas.’ The financial sector accounts for 26% of the firm’s revenue, followed by TMT at 21% and life sciences at 14%.
In relative terms, WFW broadened its focus, but from the starting point of a near-boutique model and is still the most specialised of the three – what Lowe and Wegener framed as their ‘super sector focus’.
Transport – which includes WFW’s work in maritime, aviation and rail – accounts for 41% of revenue. Energy and infrastructure – renewables, oil and gas, power and natural resources – for 30%. Real estate for 7%. The running joke is that you can boil WFW’s business down to just two industries: transport and energy. ‘We regard ourselves as Magic Circle quality in our sectors,’ says Lowe.
OC’s Beswick adds: ‘The competitive advantage of mid-market firms is we adapt more quickly. The disadvantage is we have less money to invest. Those who can do both will win. The way for us to accomplish both is by investing in the areas in which we focus.’
Focus brings another less discussed advantage: firms operating in highly segmented sections of the market are far less prone to predatory recruitment from larger rivals, both City and US, as they operate in adjacent markets, outside core transactional and disputes.
Lowe, when pushed for a non-puffy answer to why few partners quit WFW, says: ‘Where else would they go? Who
else is as strong as us in our sectors?’
All three have strong records on partner retention, while being able to target the right laterals to fit within the strategy. ‘Knowing what we’re selling and having the ability to articulate what we want, we’re not out there for finance lawyers – we’re out there for a specific breed of finance lawyers,’ says Lohn.
OC and Fieldfisher have lost 16 partners each in the last three years, while bringing in 57 and 71 laterals respectively. WFW has seen eight departures to competitors and recruited 27 partners. Lowe, when pushed for a non-puffy answer to why few partners quit WFW, says: ‘Where else would they go? Who else is as strong as us in our sectors?’
In 20 interviews conducted for this piece with current and former partners, even the trio’s critics describe cohesive partnerships with good morale. One former OC partner says: ‘A lot of partners have landed there from bigger firms and they like the culture, it’s a place where people like to work. If someone moved for that reason they are less likely to move again.’
The formula does not obviously mean a particular pay model, beyond the obvious point that partners like to work in growing, successful businesses. OC has the flattest model using a modified lockstep, paying between £395,000 and £930,000. The other two have more aggressive spreads and models, with WFW using a modified lockstep ranging from 25 to 100 points, with a discretionary bonus pool for high performers. Earnings ranged from £255,000 to £1.45m in the last year. The model includes discretionary gates requiring a partners’ vote to cross.
Fieldfisher’s system ranges from £230,000 to £2m, though the vast bulk of partners earn between £300,000 and £800,000. Profit allocations are assessed annually. Chissick observes: ‘It’s merit-based, not eat-what-you-kill. If a partner has a tough time, we support that partner.’
All three have equity/fee-earner leverage over 5:1 and generate PEP over £550,000, ahead of the current average of £495,000 for the LB100 26-50 peer group. But neither are their results merely financial engineering – all three firms have revenue per lawyer over the LB100 second quartile average of £272,000.
Surprisingly easy globalisation
Much growth for all three has been driven by international expansion, unsurprisingly focused heavily on their core industries.
WFW was the first to focus abroad. The firm’s Manhattan branch dates back to 1990 and is now the second largest overseas source of revenue, bringing in £18m or 11% of the firm’s global turnover.
Its leadership reflects the firm’s international focus: Lowe had been based in Singapore and Wegener is currently in Germany. The German practice is now the firm’s biggest-earning non-UK base, generating £23m in revenue. While its most recent opening dates back to 2014 with the launch in Dubai, 61% of WFW’s revenue comes from outside the UK.
The Legal 500 rankings indicate the maturity of its foreign practice (see page 62). WFW has 18 rankings in Asia, against none in the region for OC and Fieldfisher. Its profile in EMEA has much improved in recent years, up from seven in 2012 to 38 currently.
As for OC, having opened in Silicon Valley in the late ‘90s, it also established a presence in Cologne and Frankfurt. But it was around the time Beswick assumed the newly-established role of international chief executive that the firm set out to expand internationally.
Between 2012 and 2014, OC merged with its local alliance firms in Italy and Spain, then added offices in Hamburg, Brussels, Paris and Amsterdam. ‘The initial focus was on building a European law firm,’ says Beswick. ‘Four years ago we decided to build a Eurasian firm.’ In 2015 OC entered Hong Kong, in 2016 Singapore and in 2017 Shanghai. The proportion of the firm’s foreign revenue reached 42% in 2016/17. The Legal 500 data shows dramatic development in its EMEA and UK practice, with EMEA rankings up from four to 40 in five years. While the German and Spanish operations (its two highest-earning foreign bases) along with the Italian arm operate in all six of the firm’s sectors, the other practices are more specialised. Beswick cites Sweden, where the firm launched in September to initially service its digital business clients.
Fieldfisher targeted its international business later than the other two, with Chissick admitting: ‘We were late to the European party. We have a smaller footprint.’ Its international strategy was uninspiring five years back. In the previous 12 years it had opened branches in Brussels, Germany, France and Silicon Valley, but generated just 20% of revenues abroad.
A partner who joined in that period says he was concerned about Fieldfisher’s global footprint and obtained reassurance from management they were taking expansion seriously before deciding to join: ‘If you work in the tech space, you have to be in a number of countries.’
Chissick was a strident supporter of international expansion. Under his management, the firm expanded its European footprint and, like OC, later entered Asia, most recently launching in Bologna in July this year. The firm also has a lucrative Russia/CIS team largely operating out of London.
Overseas revenue has grown from 20% to 35% in less than five years, with Paris and Brussels bringing in the largest amount at £11.78m and £10.57m respectively. It now has 25 EMEA rankings in The Legal 500, against 12 in 2012.
Despite the expansion, neither OC nor Fieldfisher carry significant debt. OC’s bank loans amount to £2.3m, but the firm has a cash surplus of £29.8m in the bank. Fieldfisher had loans of £3.25m as of 31 October: the firm is paying down the amount it took to finance the move to Riverbank House in quarterly instalments of £250,000, but has surplus cash of £4.8m.
WFW’s debt is higher. Borrowings went from £4.5m to £18m in the year to April 2016, when seven of its 14 offices relocated (most significantly in New York), took on additional space or refurbished. Debt has been quickly reduced: to £13.6m at the end of April and £9.9m at the end of October.
Lowe and Wegener had both moved to toughen up financial management, ushering in detailed metrics on cashflow and moving to slash lock-up. In came a red flag/yellow flag system on billing. Notes Lowe drolly: ‘People complained about being treated like school children until they saw the impact.’
Capable of reinventing themselves, galvanising the partnership and sharpening their focus, these firms have dramatically expanded headcounts over the past decade. OC has more than twice the number of lawyers it had in the early 2000s at about 720 today, while Fieldfisher has grown from 386 to 594.
And they all have plans to continue growing. WFW is the clearest on this point, Wegener saying he wants to increase partnership headcount from 146 to 250 by 2020.
This raises the question of how much they can expand – and sustain their competitive edge – before facing challenges seen by larger City rivals. Will the firms become too large to be coherent and what happens when partners accustomed to dramatic growth face the grind of a more mature business?
OC is the obvious example here, as the one which is more likely to face both these challenges sooner rather than later. Like Fieldfisher, the firm used a verein structure to expand quickly into other jurisdictions, and has just moved into the UK top 25 in revenue terms.
Management insists the firm does not perceive itself as a verein. ‘In Germany, Spain and Italy we have worked together for a long time – there are personal relationships going back 20 years,’ says Berg. ‘For the new offices, we have all been actively involved in recruitment: these aren’t faceless people in a different office. These are partners well known to everyone.’
Berg says OC will not open international offices at the same pace in the near future. One former OC partner comments: ‘Their challenge now is consolidating their operations and providing meaningful growth from new clients, stepping up the food chain in terms of the quality of the work. That’s the real test to see if they can challenge their competitors higher up the table.’
Berg professes to be bullish on OC’s ability to sustain momentum but concedes that growth must ultimately slow. Fieldfisher, for its part, uses a verein for its offices in China, Italy and The Netherlands, while its German, Belgian, French and US offices come under its core partnership.
If OC and Fieldfisher have arguably kicked potential problems down the line by using multi-profit centre mergers globally, WFW has always maintained a single profit centre.
Judged on the recent trends in financial performance, it looks perfectly conceivable for the trio to each reach the £250m revenue region while maintaining their agility and pace. While full-service players have struggled in recent years beyond that scale, the continued momentum of global insurance player Clyde & Co, whose global profile and heavily-focused practice bares some comparison to the trio, suggests specialisation in law firms can counter the inertia that has engulfed many top 25 firms. With revenues of £508.1m, Clydes has still grown its top line by 77% in the last five years, by some margin the best relative performance in its peer group.
‘Life is dynamic’
It is hard to overstate how fundamentally the dynamics of the UK and global legal markets have changed since 2007, at the expense of many large legal firms still essentially using a strategy forged in the 1990s.
Our analysis reveals a number of factors these three standout performers have in common. All share a tight focus and an outright rejection of the full-service model. Reviewing 20 years of LB100 data indicates a delicate practice balance that supports high performance. These firms are not boutiques, they can hedge out industry and practice lines, as well as global markets against the UK. The degree of specialisation and focus has to be pitched just right to support sustained above-trend growth; boutiques have as many vulnerabilities as large, sprawling generalists.
The wider point comes back to law firms struggling with complex businesses. Our analysis indicates there is a sweet spot in terms of law firm size – large enough to back investment and secure central economies of scale but small enough to keep partnerships aligned and allow for tactical agility. For UK law firms that suggests there is something potent about operating in the £70m to £200m range. Law firm leaders may be able to effectively expand beyond this scale by avoiding full service. But, the data suggests that a complex, multi-service law firm is usually a drifting one.
The performance of these firms is also a reminder that partner morale and retention goes a long, long way. Another pay-off of specialising, at least in the UK legal market, is that it segments their business and greatly limits exposure to predatory recruitment.
The trio also benefits from well regarded and articulate leadership, the latter virtue far from a given in the law, which took coherent decisions at points when the firms needed to make them. But then, midweight law firms are easier to shift direction than their larger equivalents.
The final point is crass but worth repeating. These firms are successful now because they have been successful before. Law firms have a propensity to replicate super-growth well above trend… or years of inertia. They hit self-sustaining cycles for better or worse and nothing begets success like success.
And all of these observations, if ultimately borne out in the years ahead, are ominous for larger City players, which are being hit from above and below and, in the shape of US firms, face more profitable rivals with more specialised business. That is extraordinarily hard to counter and many will be sceptical that current attempts to overhaul the partnership models of the Magic Circle will be up to that task.
There has been some luck in where this trio placed their bets – WFW benefited from upheaval in the maritime sector during the global downturn as most firms stalled, while the tech focus of Fieldfisher and OC is well suited to the age of disruption.
But the trio has shown an ability and agility to adapt with the times. Concludes Berg: ‘Life is dynamic by definition and business is dynamic. Successful people and businesses are those willing to accept and embrace change.’
Practice rankings – a five-year overview
Number of practice area rankings. Source: The Legal 500
LB100 firms – the top 20 for organic revenue growth
1997 to 2007
2007 to 2017
Classed by revenue in LB100 in 1997 and 2007