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Sutton’s City Just two of London’s top 50 law firms generate all their wealth from the Square Mile. And only Macfarlanes does so without any formal link-ups around the globe. Talk about taking a risk… CLAIRE SMITH Last month Legal Business published the list of London’s top 50 law firm offices. This month we examine the tiny minority who generate all their fee income in London, devoid of the headaches and complications that tend to accompany investment in international offices. Only Field Fisher Waterhouse and Macfarlanes aren’t spending money on foreign real estate. Field Fisher has instead set up an alliance of six European firms to offer clients a one-stop-shop service; Macfarlanes, meanwhile, stands alone. It has no global outposts and no formal relationship with
another law firm anywhere in the world. Many would say the firm risks looking parochial. Its deal flow tells a different story. Macfarlanes has stood by as many of its top 50 competitors have busily stamped their brand across the planet. It tried something similar, and then u-turned. Now, the firm doesn’t even have a best friend, à la Slaughter and May; it just works with a raft of independent firms
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LONDON’S TOP 50, BY TURNOVER Firm
Abell: firm needs European capabilities to survive
> in every jurisdiction. ‘We are a service business,’ says senior partner Robert Sutton. ‘You have to go back to what the clients want, not what you think they want, and not what you want them to want. If our clients wanted us to open offices elsewhere, then of course we would think about it, but they never have. ‘I have spent most of my career acting for English companies buying other companies all over the world. They all said, “Go and do the deal for us.” They never said, “Go and open an office”. There is a role for the international law firm and I respect all of them and admire most of them, but I think it’s quite wrong to believe that is the only model.’
Money for something Sutton can afford to feel pretty comfortable. He presides over one of the richest partnerships in the City – the partners at the top of the Macfarlanes equity took a profit share of around £950,000 last year. In five years, the firm’s average equity partner profits have increased 55%, from £475,000 in 1999, to £735,000 today (see table, page 43). Compare that to arguably the most successful global firm outside the Magic Circle: Lovells. There, the top partners took a
40 Legal Business October 2004
1 Clifford Chance 2 Linklaters 3 Allen & Overy 4 Freshfields Bruckhaus Deringer 5 Slaughter and May 6 Lovells 7 Herbert Smith 8 Ashurst 9 CMS Cameron McKenna 10 Denton Wilde Sapte 11 Norton Rose 12 Simmons & Simmons 13 Berwin Leighton Paisner 14 SJ Berwin 15 DLA 16 Baker & McKenzie 17 Mayer, Brown, Rowe & Maw 18 Clyde & Co 19 Barlow Lyde & Gilbert 20 Nabarro Nathanson 21 Macfarlanes 22=Eversheds 22=Taylor Wessing 24 Olswang 25 Lawrence Graham 26 Jones Day 27 Shearman & Sterling 28 Richards Butler 29 Addleshaw Goddard 30 Weil, Gotshal & Manges 31 Stephenson Harwood 32 Field Fisher Waterhouse 33 Reynolds Porter Chamberlain 34 Hammonds 35 White & Case 36 Travers Smith Braithwaite 37 Dechert 38 Bird & Bird 39 Skadden, Arps, Slate, Meagher & Flom 40 Masons 41=Latham & Watkins 41=Sullivan & Cromwell 43 Withers 44 Sidley Austin Brown & Wood 45 Charles Russell 46 Kennedys 47 Holman Fenwick & Willan 48 Watson, Farley & Williams 49 Cleary Gottlieb Steen & Hamilton 50 Trowers & Hamlins
London headcount Partners Total lawyers 229 1,172 200 1,000 157 1,096 167 815 106 548 156 738 150 798 108 500 122 523 97 580 121 594 109 449 124 389 78 348 109 340 71 336 98 298 89 330 75 290 78 346 59 234 74 307 93 292 66 195 84 256 54 145 24 123 68 237 77 258 24 144 70 217 75 224 58 230 68 235 42 188 44 189 40 198 54 163 16 74 49 186 23 84 13 62 52 170 28 128 64 166 62 198 54 142 36 97 14 68 52 135
London turnover 2004 £390m £378.6m £363m £341m £235m £222m £202m £151m £144m £139m £135m £106m £101m £89.8m £89m £84m £80m £76.5m £74.5m £72m £68m £64m £64m £54m £57.6m £55m £53.4m £53.3m £52m £49.8m £49.1m £47m £46.7m £46.1m £45.3m £44m £42.5m £41m £40.3m £40.1m £40m £40m £38.2m £36.9m £36m £35m £34.9m £33m £33.4m £30.7m
Turnover change on 2003 0% = 0% = 1% ▲ 3% ▲ 0% = 3% ▲ 1% ▲ -5% ▼ 2% ▲ -1% ▼ -5% ▼ 0% = 12% ▲ 0% = 11% ▲ -6% ▼ 12% ▲ 11% ▲ 8% ▲ 3% ▲ 3% ▲ 3% ▲ -2% ▼ 21% ▲ 5% ▲ -13% ▼ 9% ▲ -7% ▼ 4% ▲ 4% ▲ -1% ▼ 7% ▲ 17% ▲ -2% ▼ 24% ▲ 5% ▲ -11% ▼ 8% ▲ 0% = -2% ▼ 7% ▲ -2% ▼ 10% ▲ 18% ▲ 2% ▲ 14% ▲ 5% ▲ 2% ▲ 20% ▲ 4% ▲ Source: Legal Business
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share worth £633,000 last year. In the same five-year period, Lovells’ PEP has grown a more modest 17.5%. Building international networks comes at a price, and for every single firm that has forked out, the investment is yet to yield the anticipated fruits. ‘So far those English law firms that have aggressively pursued the global route have not appeared to make it terribly successful financially,’ Sutton says. ‘But then they might say that, without it, they would have been even worse off.’ Macfarlanes has direct experience of the international experiment. In the 1980s, the firm entered into a global alliance with O’Melveny & Myers from Los Angeles, Nörr Steifenhofer & Lutz in Germany, and Simeon & Associes in Paris. O’Melveny’s success in Tokyo led Macfarlanes to join them in Japan: it did so well that it opened there independently in 1990. However this was closed five years later. Similarly in Brussels, the four firms opened together in the 1980s, only to shut down after a decade. Simeon ultimately left the alliance as referrals from other firms dwindled, then O’Melveny jumped, and the whole thing came to an end. Lovells was later to acquire Simeon. Macfarlanes still regularly works with Nörr. ‘We were invited by O’Melveny to join them in some kind of alliance,’ Sutton recalls. ‘We gave it a go; that’s it. It was always a nonexclusive thing, but people misunderstood it. In the end we all just thought: this doesn’t seem to be doing much, so let’s can it. We went back to our original focus, which is to work with a number of very good independent firms in the jurisdictions that matter to us and our clients. To me now, an alliance is just a halfway house – you should either get in with a firm and get on with it, or you work with the best firm for the client in each case.’
‘It would be stupid of me to pretend our international strategy doesn’t have a price; it clearly does.’ Robert Sutton, Macfarlanes
LONDON VERSUS GLOBAL REVENUE PER PARTNER Firm
London revenue per lawyer 1 Sullivan & Cromwell £645,000 2 Skadden, Arps, Slate, Meagher & Flom £545,000 3 Slaughter and May £532,000 4 Cleary Gottlieb Steen & Hamilton £491,000 5 Latham & Watkins £476,000 6 Shearman & Sterling £434,000 7 Freshfields Bruckhaus Deringer £418,000 8= Jones Day £379,000 8= Linklaters £379,000 10 Weil, Gotshal & Manges £346,000 11 Watson, Farley & Williams £340,000 12 Clifford Chance £333,000 13 Allen & Overy £331,000 14 Ashurst £302,000 15 Lovells £301,000 16 Macfarlanes £291,000 17 Sidley Austin Brown & Wood £288,000 18 Olswang £277,000 19 CMS Cameron McKenna £275,000 20 Mayer, Brown, Rowe & Maw £268,000 21 DLA £262,000 22 Berwin Leighton Paisner £260,000 23 SJ Berwin £258,000 24 Barlow Lyde & Gilbert £257,000 25 Herbert Smith £253,000 26 Bird & Bird £251,000 27 Baker & McKenzie £250,000 28 Holman Fenwick & Willan £246,000 29 White & Case £241,000 30 Denton Wilde Sapte £240,000 31 Simmons & Simmons £236,000 32 Travers Smith Braithwaite £233,000 33 Clyde & Co £232,000 34= Norton Rose £227,000 34= Trowers & Hamlins £227,000 36 Stephenson Harwood £226,000 37=Lawrence Graham £225,000 37=Richards Butler £225,000 37=Withers £225,000 40 Taylor Wessing £219,000 41 Charles Russell £217,000 42= Dechert £215,000 42= Masons £215,000 44 Field Fisher Waterhouse £210,000 45=Eversheds £208,000 45= Nabarro Nathanson £208,000 47 Reynolds Porter Chamberlain £203,000 48 Addleshaw Goddard £202,000 49 Hammonds £196,000 50 Kennedys £177,000
> > > > > > > > > < > > > > > = < > > < > > < > > > > > < > < < > > > > > > < < = < > = > > > > > <
Firm-wide revenue per lawyer £573,000 £491,000 £339,000 £449,000 £409,000 £426,000 £337,000 £325,000 £300,000 £468,000 £298,000 £323,000 £266,000 £276,000 £286,000 £291,000 £404,000 £232,000 £247,000 £338,000 £218,000 £259,000 £321,000 £251,000 £233,000 £196,000 £219,000 £233,000 £298,000 £213,000 £247,000 £236,000 £230,000 £189,000 £183,000 £201,000 £223,000 £219,000 £245,000 £225,000 £217,000 £337,000 £155,000 £210,000 £153,000 £202,000 £200,000 £181,000 £167,000 £178,000 Source: Legal Business
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It is this attitude that sets Sutton apart from the other top 50 firms in London. Even the other entirely UK-based top 50 London firm, Field Fisher Waterhouse, is investing much of its time in the alliance route on the continent. Other firms with 99% revenue out of London – often just with a small practice in Brussels – are of the same voice. Strange though it is, no other law firm considers Macfarlanes’ logic good enough.
RATIO OF LONDON TO FIRM-WIDE TURNOVER Firm 1= Field Fisher Waterhouse 1= Macfarlanes 3= Berwin Leighton Paisner 3= Reynolds Porter Chamberlain 5= Lawrence Graham 5= Travers Smith Braithwaite 7 Slaughter and May 8 Barlow Lyde & Gilbert 9 SJ Berwin 10=Kennedys 10=Olswang 12 CMS Cameron McKenna 13 Stephenson Harwood 14 Herbert Smith 15 Nabarro Nathanson 16 Charles Russell 17= Clyde & Co 17= Denton Wilde Sapte 19 Trowers & Hamlins 20 Ashurst 21=Watson, Farley & Williams 21=Withers 23 Holman Fenwick & Willan 24 Norton Rose 25 Masons 26 Richards Butler 27 Taylor Wessing 28=Lovells 28=Simmons & Simmons 30 Bird & Bird 31 Allen & Overy 32 Linklaters 33 Freshfields Bruckhaus Deringer 34 Addleshaw Goddard 35 Clifford Chance 36 Hammonds 37 DLA 38 Eversheds 39 Dechert 40 Mayer, Brown, Rowe & Maw 41 Shearman & Sterling 42=Baker & McKenzie 42=Sullivan & Cromwell 42=Weil, Gotshal & Manges 45= Cleary Gottlieb Steen & Hamilton 45= White & Case 47 Jones Day 48= Latham & Watkins 48= Sidley Austin Brown & Wood 50 Skadden, Arps, Slate, Meagher & Flom
London turnover as % of firm-wide turnover 100% 100% 99% 99% 98% 98% 96% 95% 91% 90% 90% 86% 84% 83% 82% 81% 80% 80% 79% 77% 73% 73% 72% 66% 65% 62% 60% 59% 59% 57% 56% 53% 43% 42% 41% 34% 32% 22% 17% 16% 12% 10% 10% 10% 9% 9% 8% 6% 6% 5%
The closest of allies
Source: Legal Business
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Take Field Fisher Waterhouse, which has not invested in overseas offices: it launched the European Legal Alliance three years ago, signing up six member firms on the Continent. Buse Heberer Fromm in Germany; Dubarry Le Douarin Veil in France; Beauchamps in Ireland; Harper Macleod in Scotland; Jiménez de Parga in Spain and La Scala & Associati in Italy – each firm has vowed that, when Eisenberg: Macfarlanes route is ‘worrying’ referring work, they will make the other firm their first choice. This is, effectively, the one-stop shop without the cost base. ‘Our belief is, if we haven’t got European capability in these main economies, we are going to find it very hard to survive,’ says Mark Abell, head of the firm’s TMT practice. ‘We felt we had to secure Europe, so what do we do? We looked at all the options, and the feedback was that what clients want is very simple, three things: a single brand, a single partner in control, and a single bill. How you share out the money is a matter of immense boredom to them. ‘We decided the way was not a merger, and not to open offices, which amounts to basically headhunting and sounds silly to us,’ he says. ‘This is an exclusive agreement, and we are all committed to convergence. If ultimately the clients want us to merge, that is where we’ll be looking, but we will see what the market wants.’ It’s certainly an efficient option. In five years, Field Fisher’s average PEP has jumped
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UK VERSUS GLOBAL – FIVE-YEAR CONTRASTS GROWTH IN FIRMS WITHOUT INTERNATIONAL OFFICES Firm PEP* 1999 PEP* 2004
Change
Macfarlanes Berwin Leighton Paisner Field Fisher Waterhouse
+54.7% +63.5% +44%
£475,000 £260,000 £225,000
£735,000 £425,000 £324,000
AND, BY CONTRAST, SOME COSTS IN GOING GLOBAL Firm PEP* 1999 PEP* 2004
Change
Lovells Simmons & Simmons Norton Rose
+17.5% +29.1% +0.7%
£445,000 £213,000 £402,000
£523,000 £275,000 £405,000
Turnover 1999 £43.5m £50.7m £28m
Turnover 2004 £68m £102m £47m
Turnover 1999 £156m £115m £117m
Turnover 2004 £377m £178.3m £205m
Change +56.3% +101% +67.9%
Change +142% +55% +75.2%
Source: Legal Business *PEP is profits per equity partner
44% to £325,000. ‘We know how big we are,’ Abell says. ‘We know what resources we have, and we see little merit in spending an undue amount of money on this if we don’t have to.’ A further four firms after Macfarlanes and Field Fisher get over 95% of their income from London (see table page 42); three of these firms have taken the most tentative of international steps. Berwin Leighton Paisner has set up in Brussels, Lawrence Graham is now in Monaco on the back of private client work, and Travers Smith Braithwaite has a presence in Berlin. The fourth, Reynolds Porter Chamberlain, has branched no further afield than, curiously, Tiverton in Devon. Neville Eisenberg, managing partner at Berwin Leighton Paisner, sees exclusive international alliances as the future. He has signed up a New York firm and an Italian firm, and is now scouring Germany. ‘We would worry about going the Macfarlanes route,’ says Eisenberg. ‘Professionals who know each other and work together regularly work together best. If you work with a firm in Milan for a couple of years and then they end up going and becoming part of an American firm, you lose all that you have invested in getting to know the
partners and getting to know the clients. It was because we were worried about that, and we had experienced that in a number of countries, that we thought the alliance route was necessary.’
you go? There are all the international firms, and then some high street cats and dogs, but there are only ever one or two independent firms who are up to this sort of work.’ Then you come back to the argument about clients demanding one firm to handle a cross-border deal under one roof. This criticism is often levelled at Macfarlanes in The world is not enough private equity, where the firm has, for many Sutton has no shortage of comyears, been one of the leaders. A rival petitors looking on and waiting private equity head says: ‘The sort of market for his cost-free international share that Macfarlanes has got, and the sort plan to fail; indeed the snipers of deals they are doing now compared to are queueing up. five years ago, has changed. It is used much As one corporate partner at a more on domestic work. Clients who have firm with many overseas offices international operations, and most of them puts it: ‘Quite apart from the do, buy into the idea of the one-stop shop fact that we all know each other for their legal services. The private equity and work together so much clients are looking for firms that will take better in our own firm, the away all the stress and worry of other jurisproblem with a Macfarlanes dictions and just do it for them. They model is conflicts. That is what perceive that things fall through the gaps in absolutely cripples it for me. If best friends networks.’ there is really only one firm in Some clients will nod their heads; but each jurisdiction that is indenot all. Ian Fitzsimons, general counsel at pendent, and they are taken Pernod Ricard, one of Macfarlanes’ largest because they are already acting clients, notes: ‘In some cases a one-stop for someone, what do you do? shop might be nice, but I feel we are quite If it’s Spain, and Uría & capable, in this company, of managing a Menéndez is gone, where do number of law firms in different countries on a transaction. We choose the right law firm in each country.’ He regularly instructs Macfarlanes on major cross-border Mark Abell, Field Fisher Waterhouse matters, and will often ask them to work alongside continental >
‘How you share out the money is a matter of immense boredom to clients.’
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> firms of his choosing. ‘We have never looked at it and thought we could get the same service and get it cheaper if we went to a single firm,’ he says. ‘In some of these large international firms there are differences in quality between the offices – you might get a great London office, but they’re not so good in Amsterdam, or whatever,’ he adds. ‘The thing we like about Macfarlanes is we get a very good service, very close attention from the partners that work on our files, and a very quick response rate.’ There’s some merit in sticking to what you know, and doing it well.
Bargain business Proving the merits, or otherwise, of international expansion is nigh-on impossible. Sutton concedes there are deals that go elsewhere because of the Macfarlanes strategy, but says he’s witnessed no discernible drop in the quality of work. ‘In 1999/2000, three of the biggest deals we did were for non-UK companies. In 2003/04, three of the biggest five things were either for non-UK companies or for UK companies doing something significant outside the UK. Do I feel that because we only have an office in London we have become an increasingly domestic firm? No, I do not. Many of the deals we do, the relationships we have, and the clients we look after are international,’ he says. In so far as the deals tables can prove instructive, there is no drop in Macfarlanes’ market share since 2001, according to Mergermarket. That year, the firm was ranked 14th by both volume and value of deals, where there was a UK target or acquiror. In the same table for 2003, the firm ranks 16th by value and 13th by volume. ‘If a private equity client is going to do a deal in Germany, for example, some of our clients might not ask us to help them,’ says Sutton. ‘It would be stupid of me to pretend our international strategy doesn’t have a price; it clearly does. Not only can we not do a domestic German deal, there are types of work that some clients think are better suited to the global firm. But the key thing to me is that it doesn’t seem to have resulted in Macfarlanes ceasing to have a big international practice.’
Last year, Macfarlanes advised Atos Origin on its €1.2bn acquisition of SchlumbergerSema’s core IT service business – a very international piece of work. Some choice instructions arrive on the back of relationships with similar firms across the world who adopt the same international strategy. New York’s Sullivan & Cromwell called in the firm to help Goldman Sachs and Société Générale on the €7bn global tender offer by France Telecom for the remaining shares in Orange. Client Michael O’Brien, general counsel of Omnicom Group, the largest advertising and marketing services group in the world, says of Sutton and his colleagues: ‘They do a tremendous amount of work with us throughout the Continent because Robert knows the issues and he has got the relationships in these countries with people to help us. He’s much more than a lawyer; he’s a business adviser, and he’s our first port of call on anything in Europe. Macfarlanes knows several firms in each country. I ask who’s the best firm and who’s the best firm for Omnicom, and I get a very objective opinion.’ Similarly, Field Fisher and BLP show no evidence of losing market share as a result of sticking to their London roots.
Investment time For every firm operating internationally, be it through its
‘We didn’t want to spend the next 15 years building up this international network.’ Neville Eisenberg, BLP
44 Legal Business October 2004
own offices, through alliance or through referrals, a lot of effort is needed to ensure the client gets a truly joined-up service. Mark Abell at Field Fisher says: ‘The European Legal Alliance isn’t just a dinner party for bored lawyers. In every practice we have cross-border working groups that meet on a very regular basis, and it’s about getting knowhow sorted, getting protocols, common marketing materials and so on. We are as much a merged firm in the sense of working together as perhaps some others who one might think of as merged. The fact that we are merged or not is irrelevant; if two banking lawyers in two offices don’t get on, it doesn’t work either way.’ Sutton says: ‘You don’t deserve to have an international practice unless you work at it and invest in it, and we do that. We spend a lot of time talking to and visiting overseas law firms, and discussing with other law firms how to produce an efficient and seamless product for the client. And we do that outside of a client retainer situation. Clients quite rightly have come to look for the best of both worlds. They want the bestquality advice and they also want a highly efficient, seamless service.’ The firm regularly sends lawyers on secondments, and receives them, plus many of the partners have spent time working overseas. Then there are things like joint seminars and training programmes, and investment in compatible IT systems, compatible billing systems; the list goes on. ‘The independent firms have really got their acts together over the last ten years,’ Sutton says. ‘They have become much more efficient at working together, much more intelligent at working co-operatively, rather than slightly competitively. We have all got used to the fact that we will ring up X firm one day and ask them to do something for our client one way, and the next day they will ring us and ask us to do something an entirely different way for their client.’ The investment is large whichever way you go, but for Neville Eisenberg at BLP, the alliance route is just far more attractive than global mergers. He says there were three reasons not to merge: ‘We didn’t want the financial uncertainty for one. A number of firms have been quite hard hit by the performance of other countries, and we didn’t want that. ‘We were also worried that we wouldn’t get as good a firm if we were seeking merger
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rather than alliance,’ he says. ‘And the third thing is that mergers take a long time to negotiate and to bed down, and we didn’t want to spend the next 15 years building up this international network. We wanted to move faster than that, and we didn’t want to devote all our time and resource to international expansion when we felt we still had a lot to do in London.’ When you look at it like that, and you look at the most recent Legal Business 100 stats, you see these firms have a point.
London first Keeping it lean and mean makes sense. Running one office spectacularly beats running ten offices reasonably, no matter what the client’s view of one-stop shopping happens to be. ‘I think, in clients’ minds, what’s most important is the value for money proposition,’ Eisenberg says. ‘Over the last couple of years, when things have been tight, it’s been more important to get a really good value-for-money service than the luxury of a firm that has its own offices all over the world. Those firms that were able to respond to that quickly benefited. We didn’t have the infrastructure and the rigidity that the bigger firms have. They have massive IT investment, overseas office expenses, international training costs – it all dictates them charging a certain price in the market.’ ‘Because we’re mainly London and we don’t have 20 offices around the world, it’s much easier for us to move quickly,’ he
Macfarlanes in 2000, from left to right: Robert Sutton, Paul Phippen, John Rhodes, Simon Martin, Chris Field and Willie Manners
adds. ‘If we can give clients a sense that they have perhaps a little more access to partners here because we are not flying around the world looking after an international firm, and if we can give them some flexibility on price, and service that stops them in their tracks, we can really grab some market share.’ Rivals may wish they were BLP just now. Many firms that invested heavily overseas took their eyes off London and suffered when the downturn hit – look at Simmons & Simmons, for one. Some partners in London are heading for the door, or else they’re asking tough questions. As are clients. ‘No one could ever convince me that you can grow to 500 or 1,000 lawyers and maintain the quality control of a firm like Macfarlanes; you just can’t possibly,’ says O’Brien at Omnicom. ‘I came into this job in December and I would have loved to have gone to one firm that had offices in every major country where we have operations. The problem is, I can’t find the
quality of Macfarlanes in every country if I just use one firm. It makes life a bit more difficult because I am dealing with more rather than less people, but it’s worth it because I get a better quality of work.’ It’s music to the ears of Macfarlanes. ‘If you look at the US, France, Germany, Italy, Holland: amongst the very best firms in all those jurisdictions are independent law firms,’ Sutton says. ‘The American law firms certainly are very experienced and shrewd, and if you talk to them they are pretty clear about what they do and what they don’t do. The very best American firms have the intelligence and confidence not to need to pretend to their clients that they can do more than they actually can,’ he adds. And would anything drive Sutton to start establishing Macfarlanes outposts across Europe? ‘I think there are two things that would cause me to change my mind,’ he says. ‘One is if there was very clear evidence that clients wanted a one-stop shop, and the other is if firms of the right quality were no longer available to work with.’ He pauses, then adds: ‘Actually, even on that second point, does it matter so much if we ask Freshfields in Buenos Aires to help us on something? Why should it? As long as they are the best firm available. ‘So long as clients want to use us, we are getting our fair share of interesting work, and people here are happy, we will carry on with this strategy.’ Macfarlanes won’t be breaking out of the City any time soon. LB claire.smith@legalease.co.uk
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