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Special relationships In 2003, more than $30bn was invested in Britain by US corporations. City of London law firms must catch what they can of it CLAIRE SMITH
US INVESTMENT IN BRITAIN represents about 40% of the total spent by US companies in Europe, according to Thomson Financial. Most of the accompanying legal advice was channelled through the City of London in the hands of American law firms. Many English advisers, such as Sunil Gadhia’s Stephenson Harwood, get much business this way. The Americans are increasingly in charge when it comes to this raft of inbound investment. English law firms have developed various ways of endearing themselves to US firms for a piece of that work and, to a lesser extent, wooing US clients. The challenge now, as the US firms’ encroachment into the English market continues apace, is to sustain the levels of work. Expecting the Americans to simply hand it over is looking increasingly presumptuous. However, it’s a hugely welcome income stream for the moment. At Wragge & Co, for example, it amounts to roughly £3m of the firm’s £80m turnover. Rowe & Maw, meanwhile, gave up £2m in annual referral income when it merged with Mayer,
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> Brown & Platt. Significant stuff – but the fact is, these figures can only shrink. Pinsents is one firm that has realised that things have to change. Corporate partner Paul Finlan is now five months into a firmwide campaign to target US clients direct, after realising that referrals from the City’s US lawyers were drying up. It’s not easy. ‘You
don’t arise with sufficient frequency, or are not worth the investment in a full-time lawyer because we can’t achieve the profitability we are looking for, then we will refer work out.’ The London office of Cleary Gottlieb Steen & Hamilton does
‘When we refer work to other firms we keep them on a pretty tight leash, and I don’t want to be kept on a tight leash by some US firm.’ Alastair Dickson, Dickson Minto can’t just go and see them once and expect something to happen,’ he says. ‘Targeting the law firms is the easy option, because lawyers tend to be happier talking to other lawyers.’ There are now over 100 American law firms practising in London, and every year more arrive. What’s more, those firms continue to add English lawyers to their ranks, and move ever closer to full-service capability in the City. ‘The referral market has diminished,’ says Finlan. ‘It’s a much better opportunity if you can pick up a corporate looking to go on an acquisition programme across the UK and Europe, and use you direct.’
Hidden economy The sheer volume of work American law firms spread around in the UK has sustained large numbers of English firms for so long as to be taken for granted. Those not paying attention to the new trends are in for a nasty awakening. Weil, Gotshal & Manges’ London office refers employment work to Barlow Lyde & Gilbert. ‘It’s not a matter of us saying we won’t service this because we’re not capable,’ says London-based Weil Gotshal corporate partner Jeremy Dickens. ‘Where issues
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the same, though referrals are doled out on a pretty ad-hoc basis. Amongst the beneficiaries are Herbert Smith for litigation, Travers Smith on a raft of miscellaneous matters, Lovells in employment, and Slaughter and May or Wragge & Co in Birmingham for real estate. ‘We get solicited all the time by English firms,’ says Cleary’s London head Glen Scarcliffe. ‘They see us as an opportunity, for specialist tax advice, specialist real estate advice or whatever. I’m not sure I’ve ever followed up on one of those.’ Sidley Austin Brown & Wood farms out litigation work to Barlow Lyde or Travers Smith, while antitrust work goes to Margaret Chamberlain, also at Travers. Eversheds picks up employee benefits work, which it deals with mostly out of its Birmingham office. Gibson, Dunn & Crutcher sends pensions work to Finlan: targeting US law firms is the easy option
Sacker & Partners, a 20-partner City boutique, Stephenson Harwood picks up litigation, employment and IT work, Barlow Lyde gets IP/IT and employment, and Pinsents also does some employment work. That’s just four of the largest players in the capital. But this hidden economy on which some of the English firms are so reliant is under threat. A referral recession is on the way.
Changing times It wasn’t always so. Cast your mind back to the start of the year 2000. You’ll remember that the new century kicked off with one of those mega-deals that seemed so commonplace back then, Citigroup’s £1.4bn acquisition of Schroders’ investment arm. Representing Citigroup – probably the world’s biggest purchaser of legal services – on this deal were Skadden, Arps, Slate, Meagher & Flom and Norton Rose. It was Norton Rose’s first ever deal for the bank, and not a bad opener. Its involvement was at the behest of Skadden Arps, which at the time had just one English-qualified corporate partner, Michael Hatchard. Brilliant though Hatchard is, one man was not enough. Four years on, and things have changed – fewer and fewer English firms are going to get lucky like Norton Rose did. Skadden, for one, is now home to about 100 lawyers in London, half of them English, covering not just corporate but also things like litigation, acquisition finance and tax. When the mega-deals come along these days, it handles them all internally. Take Doughty Hanson’s $600m acquisition of Balta Industries, where Mark Darley’s recruitment from Lovells meant that Skadden kept the finance piece in-house. Norton Rose’s schmoozing efforts paid off with a big oneoff, but in the long term its chances of wooing such big American clients look slim. Though times are changing, some midtier City firms now receive up to half their total instructions via US referrals, and are finding themselves incredibly vulnerable.
Stephenson’s strengths Take Stephenson Harwood, for example, which every year receives millions of pounds in US firms’ handouts. It remains
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YOUR CHOICES: THREE OPTIONS UK FIRMS HAVE ON BUSINESS REFERRALS
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HEAD DOWN, KEEP ON DOING IT, DON’T WORRY Example: Stephenson Harwood What it does: In all, 10% to 15% of the firm’s income comes from the US (some £7m a year). The vast majority of that is referred from US firms, encompassing both big-ticket litigation and corporate support. What it says: ‘I don’t see a radical shift in the market place – there are more US firms doing litigation, but we are not seeing it having a dramatic effect on us. It’s more competition but nothing more than that. It hasn’t affected our referral work.’ Sunil Gadhia, CEO LB predicts: The market is changing, and sooner or later Stephenson Harwood may have to start meeting those US clients face to face.
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POSITIVELY WELCOMING IT, AND NOT WORRIED Example: Fox Williams What it does: Employment, partnership work, real estate and litigation for US firms. Specifically targeting the Americans as a source of referrals. What it says: ‘It’s not right to look at the arrival of the American law firms as a threat – it’s an opportunity, particularly for firms like ours. The vast majority of these firms have no intention of building full-service capability in London, and the way forward for a firm like ours is to develop a lot of specialist niches. We have targeted to grow our referral work.’ Ronnie Fox, senior partner LB predicts: For a firm like this, referrals make sense – they’re the best chance a 20-partner City firm has at the big deals. The bigger firms can’t afford the same reliance on US power brokers.
He says that the firm has opted to focus on referrals rather than targeting clients in the US directly because it is a more effective use of resources, and by working with a handful of US firms there can be an element of reciprocation. Stephenson Harwood handles both major litigation work referred from the US and corporate support for the London offices of US firms, and Gadhia says he sees no signs of that work diminishing as the Americans grow on the ground here. ‘I don’t see a radical shift in the market place,’ Gadhia insists. ‘There are more US firms that are doing litigation but we are not seeing it having a dramatic effect on us. It’s increased competition but nothing more than that – it hasn’t affected our referral work.’
Diminishing returns
The Americans tell a different story. The merger of Wilmer Cutler Pickering and Hale and REALISED THE GAME’S UP, AND MAKING TRACKS Dorr is a case in point. The comTO HIT THE US DIRECT bination will dramatically reduce Example: Pinsents the amount of work being What it does: Has given up on referrals and is targeting the clients direct, referred out in London. Wilmer with lots of visits to general counsel on the back of the firm’s sectorhad the smaller UK presence of focused ‘chosen markets’ strategy. the two firms, and used to refer What it says: ‘Normally American businesspeople and general counsel are real estate and immigration work relatively easy to get to see. They are always happy to give you an hour of to Penningtons, as well as emtheir time. Obviously, the real trick is then converting that into something ployment to Taylor Wessing and substantial.’ Paul Finlan, corporate partner. tax to Burges Salmon. That will LB predicts: Pinsents is not the only firm to have realised that direct now diminish: ‘Hale and Dorr contact is the way forward. For many of the national firms, it is now paying has tax and labour law covered,’ dividends. It has to be the future. says UK-based partner Gerry Cater, ‘so we will be using those (in public at least) unperturbed by the internal resources now.’ Penningtons will be apparent vulnerability of its workflow. OK – Cater says the combined firm will con‘We do have a lot of experience of working tinue to send out real estate work, for now. on matters referred to us by US firms, particuAt Sidley Austin, London managing larly in litigation,’ says Sunil Gadhia, chief partner Drew Scott summarises: ‘In terms of executive of Stephenson Harwood. ‘Our the gaps we plan to plug over time, approach is very flexible and we tend to work certainly competition will be brought inin whatever way suits the relationship house, and litigation. Long term that’s between the US lawyers and their client. always been the plan.’ Bad luck Travers Some would want to remain pretty involved Smith, bad luck Barlow Lyde. and pretty active, so we would be more in the Judith Shepherd, London corporate background. Other lawyers would drop out of partner at Gibson Dunn, concurs. ‘In the the process and let us run the work.’ long term we would definitely hope to
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Payton: Clyde & Co is a net exporter of referrals
build all these support areas in-house, as the M&A practice grows,’ she says. ‘We are pretty close to adding employment now, pensions would probably be a little further away, but in IP/IT we have looked at opportunities and that could come relatively quickly. ‘Given that the firm is 45% litigation in the US, it would be amazing if we didn’t have it in London at some point.’ It’s becoming increasingly impossible to miss the trend. Clyde & Co’s senior partner Michael Payton notes: ‘It’s not a big part of our business now, because so many of the people in our areas have got their own London offices. The firms that do major litigation and transport have all set up offices here.’ Such is the reduction that his firm is now a net exporter of referral work to America. Roger Parker, managing partner at Richards Butler, is also feeling the pinch. ‘It tends to be that we’ll get a big one-off case come to us from a US firm, because the London office doesn’t have capability or is otherwise unsuitable. Most US firms don’t have a sophisticated disputes capability here in London, so obviously that’s been an opportunity for us, but whether they will have in due course? I suspect they will.’
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massive 10% from US clients directly, including Ford, Heinz and McDonalds. already added its own pensions capability, and it’s not Sacker & Partners is a 20-partner pensions boutique in Though 2% of revenues from the only one. Close, though, doesn’t see that as a the City. It is making active efforts to build business by corporate support might look serious threat. ‘There are some firms, UK and US, that piggybacking on the Americans – it even has a like a tidy sum – it helps that have tried to bring it in-house, and some have been ‘Services to Other Law Firms’ unit, dubbed ‘Stolf’, you can charge the client at the successful but many have failed because not only have aiming to build on the ties. same rate that the US firm is – they not got the throughflow of work, it’s not attractive Partner Chris Close says that roughly 15% of the there are plenty that shun it. for a good pensions lawyer to just be doing transaction firm’s revenues come from corporate advisory work, One regional managing partner after transaction. We see this as being a growing part of and 80% of that comes from other law firms, both UK says that his firm has taken a our business.’ and US. But US giant Weil, Gotshal & Manges has conscious decision not to do real estate due diligence work in the regions for US firms in London. > Major donors It might boost the immediate bottom line, They are taking more and more his thinking goes, but it does nothing to work in-house, and what they The only instance where referrals look like a engage the brightest young assistants. It’s all are willing to refer to you is viable long-term strategy is in the kind of very well for niche firms to mutate into often third-tier work, where best friends networks favoured by those referral boutiques for US firms, but it’s not a they are in the driving seat. American firms who don’t practise English long-term strategy for a larger firm, he says. Furthermore, it can be very law. Slaughter and May is a beneficiary of At Hammonds, about 15% of the firm’s difficult to actually get US firms this – in all, a quarter of the firm’s new turnover now comes from US clients. Those to deliver. As Quentin Poole, clients come in through referrals from its clients come in 50/50 from referrals and senior partner at Wragge & Co, best friends. direct marketing to companies. explains: ‘The trouble with But these are the big-money exceptions – David Hull, who heads up Hammonds’ selling to the US firms is that Slaughters has strong relationships with the efforts, says: ‘We have a long-term view that, they are not organised, they are very best that Wall Street has to offer. It’s in the absence of merger, what we should do very autonomous. Partner A the quality of the work that matters, and if is try to have close working relationships would regard it as a complete you’re being referred the mega-deals that with as many people as we can. We spend a affront if partner B told him these guys are, you can afford to smile lot of time in the US, not just with lawyers who to refer his work to.’ sweetly at the Americans and cross your but also with in-house counsel. The legal The only answer is to get on fingers. It remains the case that the profession has a much higher status than that plane and start knocking on Americans will increasingly take the work it does here, so if you can establish a conthe doors of the American in-house – Sullivan & Cromwell and structive relationship with a US law firm companies you want to work for. Simpson Thacher & Bartlett now both have or US lawyers, it goes a lot further.’ It sounds pretty daunting, but it UK partners – but it’s nice while it lasts. can pay off. Poole says: ‘We have Still, Alastair Dickson, senior partner of found the most fruitful source of corporate finance boutique Dickson Minto, Get out there work is selling direct to the US and earning more than anyone else in the Osborne Clarke is the only mid-tier UK firm corporates. We have one partner Legal Business 100 this year, is not rushing to to have taken the plunge and opened on the who, since 1985, has not sold target the Americans. He says: ‘I’m not really one hour of legal advice interested in doing the EngTHE CITY’S TAKE ON US REFERRALS to anybody – he has lish subsidiary bits of deals, so been US salesman to we have never really pushed both corporates and law for referral work. I guess that ‘It isn’t a big part of ‘We are doing less firms. We go to clients, we like to run a deal rather our business now, corporate support we impress them, and than work for another law because so many work now than we then we say: “Can you firm. When we refer work to of the people in our did. That’s not the introduce us to other other firms we keep them on areas have got their thrust of what we corporates around the a pretty tight leash, and I own London are trying to do. We US?”’ don’t want to be kept on a offices. The firms wouldn’t market to The firm now gets tight leash by some US firm.’ that do major litigathe London offices 2% of its revenues from tion in insurance of the US firms, we US law firm referrals and transport all go to the HQ.’ End game Stateside, 2% from have offices here.’ David Hull, For the majority of English corporate support Michael Payton, Hammonds firms, the strategy of relying referrals by US firms in Clyde & Co on referrals from the London – and a Americans has had its day. Shepherd: building capacity in London
THE SACKER’S WAY
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UK FIRMS AND THEIR US PAYMASTERS: THE GIBSON DUNN EXAMPLE Gibson, Dunn & Crutcher 241 equity partners, 0 non-equity partners, 747 total lawyers
Average PEP: £851,000 Average RPL: £536,000 Profit margin: 51% WHERE THE WORK LANDS: A variety of litigation, employment and IT work goes to: Stephenson Harwood 37 equity partners, 44 non-equity partners, 291 total lawyers Johnston: cold calling is a difficult business
Average PEP: £234,000 Average RPL: £201,000 Profit margin: 15% Employment and IP/IT work goes to: Barlow Lyde & Gilbert 75 equity partners, 6 non-equity partners, 312 total lawyers
Average PEP: £412,000 Average RPL: £251,000 Profit margin: 40% And some employment work goes to: Pinsents 80 equity partners, 75 non-equity partners, 562 total lawyers
Average PEP: £270,000 Average RPL: £163,000 Profit margin: 24%
ground in America to try and win lucrative referrals. Still, only 25% of its Silicon Valley office’s work comes from referrals, and firmwide it is just 2% of the total, around £1.5m. The idea has been to focus on
‘Most US firms don’t have a sophisticated disputes capability here in London, so obviously that’s been an opportunity for us. Will they have it in due course? I suspect they will.’ Roger Parker, Richards Butler
‘We have found that by far the most fruitful source of work is selling direct to US corporates.’ Quentin Poole, Wragge & Co
technology companies and venture capitalists, and it has proved a success. Meanwhile, Nabarro Nathanson generates between 25% and 30% of its revenues outside the UK, and the vast majority of that comes from the US. The firm had a referral relationship with Weil Gotshal until 1996, but when that ended it began a concerted effort to target US clients. A team of 15 partners regularly visits the States, splitting the task both by specialist areas and geography. The secret of the success was starting out with referral relationships with law firms, but then getting out there and turning those referrals into relationships.
‘US corporates will use US lawyers for domestic work but will come direct to us over here because they know us. Our practice has always been about knowing US lawyers and US firms.’ David Kent, Taylor Wessing
‘Whilst we are very happy to work with our US law firm friends, wherever possible we do like to have a direct relationship with the client.’ Alan Jenkins, Eversheds
Simon Johnston, Nabarros’ senior partner, says: ‘On the whole, looking back, it came on the back of referrals from other law firms, and then we built them into our own clients. We now get new clients when general counsel move from one place to another. We have got partners going regularly, seeing the firms and seeing the clients, and then often the clients will lead you into other areas. ‘I would say it’s easier to start relationships with law firms who are going to recommend you, because cold calling is still a difficult business, but what’s key is a mixture of both.’ Alan Jenkins, one of the partners leading Eversheds’ international efforts, where 30 of the firm’s top 100 clients are now American. ‘Whilst we are very happy to work with our US law firm friends,’ he says, ‘wherever possible we do like to have a direct relationship with the client. If it’s always done through the law firm, you can’t get the same relationship, and it may be that subsequently the in-house counsel decides to use one of your competitors.’ In the last year, Eversheds has won work for Cisco Systems on commercial and HR projects, for Harley-Davidson on commercial and financial services regulatory work, and some corporate commercial instructions from American Standard. All were won using the direct approach. The moral of the story: don’t wait for the Americans to call you, get up and play them at their own game. Or as they might say: ‘Get off your butt and get out there.’ LB claire.smith@legalease.co.uk
‘I think normally American businesspeople and general counsel are relatively easy to get to see. Obviously the real trick is converting that into something more substantial.’ Paul Finlan, Pinsents
‘I would say it’s easier to build relationships with law firms who are going to recommend you, because cold calling is still a difficult business, but what’s key is a mixture of both.’ Simon Johnston, Nabarro Nathanson
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