<strong>The truth behind Linklaters’ cull </strong>
You will all be aware of the redundancies currently going on in the City. The Lawyer has been keeping a tally of the number of people in consultation and who have been made redundant on our website’s Legal Job Watch page (TheLawyer.com/job-watch).
Up until Christmas the hardest-hit firms seemed to be the ones based in the regions and those with large property developer practices.
However, just before Christmas things took a dark turn, with Clifford Chance and then its magic circle rival Linklaters announcing substantial redundancies in their London offices.
The good news – and there isn’t much of it – is that trainee intakes have not been affected. Firms have learnt from their mistakes in the 1990s, when they slashed trainee recruitment only to find themselves perilously understaffed when the upturn came.
The lawyers bearing the brunt of this recession are the associates – up to 80 in Clifford Chance’s London office and up to 120 in Linklaters’ London office (as well as up to 130 non-fee-earners).
But what is behind all this? At Clifford Chance average profit per equity partner (PEP) was £1.17m last year. The Lawyer reported in December that the management was preparing its partners for a 30 per cent drop in PEP to £900,000. At Linklaters, where PEP reached a whopping £1.4m last year, PEP is not, on current projections, expected to go below £1m.
So why are these two global giants resorting to redundancies? Clifford Chance’s move is a direct and very basic response to the recession. Much of its PEP growth was fuelled by banking, structured finance and private equity – the very sectors struggling in the current climate.
But Linklaters is a different matter. Since the autumn it has been the clear winner in terms of getting work, with the administration of Lehman Brothers being the most obvious. So when The Lawyer revealed that the firm was planning to slash its partnership by up to 70 and its London associate base by nearly 15 per cent it sparked furious debate on TheLawyer.com. Its move is much more about preserving PEP, and hence status, in the global legal marketplace.
The plan is dubbed internally ‘New World’. Managing partner Simon Davies gave a clue about this thinking when he commented: “The context in which we’re working has changed. There’s been a huge deterioration in financial markets and that’s inevitably having an impact on our clients. We have to respond to that.”
The attempt to go back to basics and look at the traditional law firm model has been shared by other firms. As Clifford Chance managing partner David Childs told The Lawyer: “The reality is that every firm is looking at the shape of its partnership, because no one expects the world to return to normal any time soon.”
Incidentally, Clifford Chance is undergoing its own restructuring, which will see an unspecified number of partners exit the firm.
Last year Linklaters started pruning its client base from 11,000 to 6,000 to reduce conflicts and focus on large global entities. It also closed its Cologne office and spun off its Central and Eastern European network.
The roots of Linklaters’ restructure are embedded in its long-held rivalry with Freshfields Bruckhaus Deringer. And it is the second internal shake-up at the firm this decade. Former Linklaters managing partner Tony Angel’s ‘Clear Blue Water’ restructure, which saw a thorough shake-up of the firm, was occasioned by the fact that Linklaters’ PEP had fallen behind Freshfields’ in 2002.
It triggered a wholesale streamlining of Linklaters’ equity partnership, from 410 in 2003 to 353 in 2006.
The firm’s PEP rocketed past that of Freshfields. The two firms had equal PEPs in 2004, at around £675,000, but by 2006 Linklaters had steamed ahead, breaking £1m in PEP, while Freshfields’ stood at £830,000. Then in 2008 Freshfields overtook Linklaters once again.
Freshfields still boasts a higher margin than that of its rival. It increased its profit margin from 45 to 51 per cent between 2004 and 2008, while Linklaters’ margin remained static in 2007 and 2008 at 44 per cent.
If Linklaters is successful with its New World programme, the firm could overtake Freshfields on margins by 2010 and be ready to capitalise on any upturn in the economy.
The programme will also make the firm more attractive to a US merger partner. Such a deal is still of interest, according to sources close to the firm.
One source told The Lawyer: “The plan in the US is to continue with our current model, make sure we’re profitable on our own, but also be open to merger. We can’t wait for a merger to happen. It’s too dangerous.”
<strong>BLP ventures abroad </strong>
And there is other news, not just redundancies. Mid-size City firm Berwin Leighton Paisner (BLP) got very enthusiastic about international expansion last month. It opened a rare overseas office when it poached around 70 lawyers from top Moscow firm Pepeliaev Goltsblat & Partners. Given that BLP has barely any foreign offices at all, this is a big cultural gamble.
But then, the Russian firm does act for the likes of oil giant Gazprom, which was undoubtedly part of the attraction.