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Linklaters: Touched by an AngelGlobalization, tight management have made firm big and rich. Can it maintain momentum after architect of its success exits?
2007-09-27 12:00:00 AM
For a generation, Skadden, Arps, Slate, Meager & Flom stood alone among law firms in combining mammoth size with regal wealth. Well, move over, Joe Flom. With revenue of more than $2 billion and profits per equity partner approaching $2.4 million, Linklaters has surpassed Skadden on both measures. As managing partner Tony Angel's nine-year tenure draws to a close, Linklaters is both big and rich. How big and rich? Chew on this: You could put together a three-way merger among Davis Polk & Wardwell; Cleary Gottlieb Steen & Hamilton; and Debevoise & Plimpton, and, on a pro forma basis, Linklaters would outstrip it in both revenue and profits per equity partner.
"The elite New York firms used to say that the big U.K. firms are so big that they can't get their profits up," says Tony Williams of the consultancy Jomati, who is a former managing partner of Clifford Chance. "Well, they can and they have. The last couple of years have shown that size is not an impediment to profitability."
Linklaters' wealth is no illusion, although there is room for quibbling. That headline-making profit number of $2.4 million is seen by only 280 full-equity partners. Throw in 145 "reduced-equity" partners in lower-earning jurisdictions, toss in another 84 nonequity partners, and average compensation for all partners comes to $1.88 million. On that measure Linklaters falls a notch below Skadden and Cleary -- but still a shade above Davis Polk and Debevoise. That's fine company. And however you slice them, Linklaters has boosted total profits by a mind-blowing 108 percent in three years. "Nobody was on the breadline in 2003–04," says Angel, "but what you've now seen is the result of those investments we made and the strategic decisions we took."
Angel took Linklaters to the superleague in profits by pursuing the holy grail of law firm management: globalization. In his first term as managing partner, he acquired a raft of foreign offices (not all of them well-chosen). Then he pulled off the real trick. In his second term, Angel transformed a firm that was global by virtue of having a lot of offices into a law firm that is global by virtue of doing global work for global clients. And he did it the hard way: by managing.
The success of Angel's strategy is only apparent in retrospect. He became a tax partner at the domestic corporate firm called Linklaters & Paines in 1984. In 1986 he campaigned for the management committee, and at 33 he became the youngest member in its history. Ten years later, Angel wrote the white paper on globalization that became the blueprint for the firm's expansion. In 1998 Linklaters formed a federation with a group of continental firms known as The Alliance of European Lawyers. The firm's then-managing partner, Terence Kyle, stepped up to supervise the short-lived federation, called Linklaters & Alliance, while Angel took on the more lasting role of managing Linklaters proper. Angel's reputation as a tax lawyer was such that his main rival, Steve Edge of Slaughter and May, wrote Linklaters a letter of thanks for promoting Angel out of the practice of law.
Angel might have been prescient on globalization, but the Alliance proved fragile. In 2001 Linklaters merged fully with only three of the Alliance's member firms: Oppenhoff & Rädler in Germany, Lagerlöf & Leman in Sweden, and De Bandt, van Hecke, Lagae & Loesch in Belgium. The four strongest firms in The Alliance of European Lawyers fell by the wayside. France's JeantetAssociés and Spain's Uria Menendez declined to even join Linklaters' federation. Gianni, Origoni, Grippo & Partners in Italy and De Brauw Blackstone Westbroek in the Netherlands withdrew when Linklaters pushed for full mergers with its allies.
Most of Angel's first term as managing partner was spent digesting what the firm had eaten. Although Germany stayed in the fold, it was the source of angst for Angel and schadenfreude for his foes. About 35 of 110 Oppenhoff partners left at the altar. Since then about 25 more have left, leaving less than half the original partnership. Angel argues that he kept the half he wanted. But the original departures included big names in tax, competition and M&A. The shell of Oppenhoff excels in finance -- but it lacks a German corporate client base, in contrast to the German partners of Clifford Chance and Freshfields Bruckhaus Deringer. As a result, Linklaters has yet to raise Germany to the level of the firm's profitability. "Tony will maintain to his dying day that Germany will get on full equity," says a former partner, "but it hasn't happened yet."
At the end of Angel's first term as managing partner, in 2003, the firm's profits stagnated, and Angel was widely demonized. But he persuaded his partners to keep faith in his global vision and to continue investing -- spending £25 million on a new computer system at the firm's lowest point. Angel laid out a new three-year plan. He aimed to focus the firm on premium cross-border work, to add financial clients to the firm's traditional corporate base, and to defenestrate any partners with a competing agenda. Oh, and by the way, to build a New York office. It is a strategy widely touted but rarely well executed.
To an astonishing degree, Angel has reoriented the firm around cross-border work. Three years ago, he began to track the proportion of billings involving more than one country and asked each practice to set ambitious moving goals. On his computer dashboard Angel tracks the firm's performance, on a rolling annual basis, on this and other nifty metrics. If the firm is moving in the right direction on a given measure, and meeting its current target, an arrow on Angel's screen points up, and a light glows green. Since he began tracking the proportion of billings involving more than one country, that number has jumped from 30 percent to two-thirds.
Now Angel is asking his practice heads to meet ambitious moving targets for billings to the firm's 40-odd biggest clients, and another 40-plus preferred global clients. Currently, these clients account for 52 percent of firm billings. The dashboard arrow for that statistic is pointing up, the gauge is glowing green, and the face reflected in the computer screen is smiling. Over the course of last year the firm advised its targeted global clients from an average of 20 offices, across an average of 16 practice areas.
More global, Angel has found, means more profitable. For every extra office involved, the effective billing rate rises, because clients demand fewer discounts and agree to more premium fees for cross-border deals. "Number of offices," he explains, "is a proxy for complexity." If a matter is too small, simple and domestic, Angel sniffs.
Global banks are very much on Linklaters' target client list. In the London legal order, Linklaters and Freshfields were long seen as the dominant corporate firms, with Clifford Chance and Allen & Overy cast as the lords of finance. At the start of Angel's term, Linklaters set out to break the financial duopoly, and largely succeeded. (Freshfields pursued the same goal later and with less success.)
Overall, financial institutions accounted last year for 15 of the firm's top 20 clients. Since 1999 the share of firm revenue derived from financial clients, defined to include private equity and hedge funds, has skyrocketed from 27 percent to 46 percent. And in the past four years, the finance division (including capital markets and insolvency) has pushed its share of firm revenues from 30 percent to 35 percent. The corporate division has consistently generated 40 percent of the pie. Finance's surge has come at the expense of everything else.The popular impression in London is that Linklaters cut real estate and litigation, but that is misleading. Despite partner losses, the litigation group remained stable, the real estate group grew, and both became more profitable. "Real estate has been transformed," says commercial division head John Turnbull, "into a finance practice where property happens to be the underlying asset."
Although finance can spin money, big-ticket mergers remain the ultimate cash cow. A finer finance department serves to stabilize a firm whose historical core is M&A. In the rest of the world, or so the theory goes, finance can play the countercyclical role that litigation plays in the United States. "If a real downturn sets in, then we've got a fantastic insolvency practice," says the finance division head, John Tucker. "If volatility continues, we've got derivatives and structured finance."
Those partners who do not serve the lucrative cross-border needs of priority clients are superfluous. Last year intellectual property was the only firm practice with profits more than 15 percent below average, because it was dragged down by the German trademark group. Auf wiedersehen, German trademark filers. Overall, 125 partners left or retired in the last four years -- how many left under duress is impossible to know.
Angel worries about losing lawyers only if they are highly appraised by the measures he has refined. In appraising partners financially, he focuses on the "gross margin per partner standard hour," or GMPPSH. This number subtracts each partner's share of salary and overhead from the profit that he or she generates. Think of it as the law firm equivalent of a newfangled baseball statistic, a sort of Magic Circle "moneyball."Angel's passion for management sets the tone firmwide. Like other Magic Circle leaders, he relies on legions of nonlawyer managers, including 14 on the firm's "strategy team," several recruited from elite consultancies and paid on a profit basis. Last year Linklaters devoted 22,000 lawyer hours to training. In the past three years it sent 300 partners on a crash course designed for the firm by Harvard Business School.
Angel finds it ironic that the nation with the world's best business schools has so little regard for law firm management. "We've come to see that real management is phenomenally valuable," he says. "U.S. firms still confuse management and bureaucracy." Angel is bemused when U.S. firms boast that their managers have time to practice. "People thought I was a pretty good tax lawyer," says Angel. "But I hope they also see that I contributed far more as a manager than I could ever have contributed as a tax lawyer. I don't think lawyers in the U.S. understand that yet."
However lightly managed by comparison, American firms remain pesky rivals, and the jury is out on Angel's U.S. strategy. A U.S. corporate base is needed if Linklaters is ever to pass Skadden and Sullivan & Cromwell in the global merger league tables. But no U.S. firm seems eager to be swallowed by a British behemoth after Clifford Chance botched the absorption of Rogers & Wells. Although Linklaters remains open to a U.S. merger, it resolved in 2003 that it couldn't count on one and needed to build an office from the ground up.
It's not an easy task, for, despite Linklaters' new wealth, the lateral math is tricky. Linklaters has a compressed lockstep, where 10th-year partners make 2.5 times the level of a first-year partner. Last year the pay ranged from roughly $1.2 million to $3 million. At American firms, the spread is typically higher. At Skadden, the ratio is 4:1, placing last year's range at an estimated $1.05 to $4.2 million. U.S. firms with no lockstep will pay stars more than $5 million. Thus, Linklaters pays top-of-the-market for young partners, but struggles to attract older lawyers from U.S. lockstep firms, or stars from eat-what-you-kill firms. In addition, some New York firms promise generous (some would say reckless) pension benefits; Cravath, Swaine Moore's has been reported to be in excess of a half-million dollars per year. Linklaters bids farewell to its retirees with one lump-sum payment, currently in the range of $1.2 million.
Linklaters' U.S. head, R. Paul Wickes, is undeterred. "There are a number of partners at U.S. firms whose compensation is such that we don't make sense for them," he says. "That number is small and shrinking. But our approach is not to wait for a 55-year-old big hitter, or to wait for a merger. We're hiring a bunch of young talented people whom we can plug into our firm network." Whether this approach can build a domestic corporate practice is questionable. But to American lawyers with a global mind-set, that network is enticing.
The New York office has tripled in three years to 130 lawyers, with a mix of litigation and finance lawyers from firms like White & Case, Shearman & Sterling, and Latham & Watkins. Still expanding, with six lateral partners hired in the past year, the branch falls short of firmwide profitability, while paying partners a full share of equity. It's an office mature enough that Linklaters was able to keep some of the U.S. work for three of this year's megamergers: advising Royal Bank of Scotland Group plc on its bid for ABN Amro Holding N.V., Rio Tinto Group on its bid for Alcan Inc. and UBS AG on the financing for Enel S.p.A.'s deal with Endesa, S.A. But RBS still needed to assign much of its U.S. work to Shearman. And, as in Germany, native corporate clients remain a long-term dream.
Angel's critics say that the Alliance and the mergers it prefaced were a big waste of effort. "The profit story is driven by the core London practice," says a former partner, "which would have been there anyway." It was certainly a messy way to get there, and the problem of Germany has not been solved, but Angel argues that this critique misunderstands the nature of the beast. In today's Linklaters -- with two-thirds of billings involving more than one country -- even the mighty London office depends for its might on the global network of 30 branches in 23 nations.
One notable critic complains that Linklaters stifles creativity by relying on its database of precedents and armies of junior lawyers. "It's the difference between prêt-à-porter and tailor-made craftsmanship," says Hans Rolf Koerfer, now head of global M&A at Shearman, who left Oppenhoff & Radler in 2000 on the eve of its merger with Linklaters, which he negotiated. "I love my profession, and I need intellectual stimulation. If it is just to make money, I could run a variety of other businesses and make more money." Koerfer adds that morale at Linklaters is "miserable."
To Koerfer's comment on the firm's quality, Angel retorts that clients are not complaining, and that the ratio of associates to all partners is a moderate 3.3:1. To the claim of low morale he responds: "What would most affect morale at Linklaters would be if we were not on top." In the forthcoming survey of associate satisfaction by Legal Week, Linklaters ranks second among international firms.If today's Linklaters partners are disgruntled, they are not voting with their feet. One needs to go back three years to find a clutch of prominent lawyers who left by choice. Since May 2004 Linklaters has stolen 13 partners from other Magic Circle firms, while losing only one in return. Like America during the Civil War, the Linklaters partnership grew during its years of fratricide, thanks to 46 lateral hires and 114 promotions over four years.
By far the most common complaint among Linklaters refugees is that they lost all autonomy in practice development. David Aknin is a private equity star in Paris who left in 2003 for Weil, Gotshal & Manges. "What is really important," he says, "is that you feel a bond with your partners, and not like an employee of a corporation. Tony Angel is a great manager, and Linklaters is a true success, but it is not to the taste of everyone." Says another refugee at a major U.S. firm: "By the numbers, I made a bad decision. But I did the right thing. I enjoy my work. I can pursue whatever client I want, and no one will stop me. I admire Tony and his model works. But he made the place into a big machine."
If making tough choices among clients restored Linklaters to the top, Angel offers no apologies. He seems glad to see the backside of lawyers who give priority to their own fancies; call them entrepreneurial or call them insubordinate. "Strategy is not saying yes to everything," he says. "Strategy means saying no. If we're going to be a global law firm, there are some things that we must stop doing."
At the end of Angel's tenure, Linklaters is awash in acclaim. It topped Thomson Financial's M&A league tables in both Europe and Asia for 2006, and topped Thomson's European equity capital market tables for the first half of 2007. For the past two years, it has been rated by lawyers as Britain's best-managed law firm in a Legal Week survey.
Nor has the firm neglected its civic responsibilities under Angel, who found time to serve as treasurer of the Cystic Fibrosis Foundation during his years at the helm. The London office derives all of its energy from renewable sources, and the firm is shooting for carbon neutrality. Linklaters was honored this year by the Financial Times and Legal Business for lawyering a cross-border, cross-practice initiative to finance the immunization of half a billion children, on behalf of The Global Alliance for Vaccines and Immunization. On Jan. 1, Angel will leave to his successor a well-balanced firm, if perhaps a weary one. "Tony's vision and strategy and tenacity about strategy has been the thing that has kept us on the right road," says Turnbull. "He had the right big idea in the late nineties. He took a lot of criticism, but he's seen it through to success."
The man selected by Linklaters' supervisory board to replace Angel stands for a continuation of his policies. Angel groomed Simon Davies as a leader at a young age by appointing him Asia managing partner. During four years in that role, Davies boosted training, slashed attrition, bagged a passel of laterals, and, in 2005, pulled off a merger with Mitsuhiro Yasuda and Akihiro Wani in Japan. Davies raised Asia's share of firm revenue to 10 percent and, in a region where many would be happy just to break even, elevated each office's profitability above Linklaters' lofty average. A 40-year-old newlywed, Davies has boyish, even-set features. His agenda, he says, is to complete what Angel has begun. That may mean that finance continues to edge up in its share of revenues. But it also means that the firm needs to add German, American and Asian corporate clients to its base, as it has already added India's Reliance Industries Limited and Russia's OAO Gazprom to Britain's BP Group and Vodafone Group plc.
So how will the new Linklaters differ from the old? Davies chooses his words carefully, to cushion any implicit criticism. "More emphasis," he says, "needs to go into firm culture." Davies favors more consistent firmwide support of child care -- "Maternity is a global phenomenon," he notes. He also supports flexible work arrangements, and greater diversity in hiring and promotion. Davies' argument for improved diversity and quality of life are both moral and pragmatic. "We need to strengthen the culture," he says, "so we're not just relying on economic bonds when we hit a downturn."
Can Linklaters sustain the financial strength that it has achieved through management? Both Angel and Davies believe that the long run favors the Magic Circle, because the process of globalization will only deepen. If they're right, the law firm managers of the future may wish to enroll in Harvard Business School. And they may just find themselves learning from a case study of Linklaters under Angel.