In early march the Gaylord National Hotel and Convention Center outside Washington, D.C., teemed with hundreds of attorneys from Hogan Lovells. The firm was holding its first global partnership conference, and one of the hotel’s ballrooms had been turned into a marketplace with stations representing each of the firm’s 40 offices. At each station, partners were on hand to provide information about the office. The stations also offered local treats to entice lawyers to linger. “The Paris station had champagne, the Northern California station had wine, and the Beijing station had baijiu ,” recounts J. Warren Gorrell, Jr., the firm’s co-chief executive (photo, left). “But it wasn’t all alcohol,” he adds quickly. (The Brussels station had chocolate.) The event, while certainly cliché, was nonetheless important for the 2,400-attorney firm, which was created in May 2010 by the combination of Washington, D.C.–based Hogan & Hartson and London-based Lovells.
As the firm celebrates its one-year anniversary, we wanted to check in on the newlyweds. How are things going? The definitive answer is years away. (Gorrell says they’ll know in three to five years whether the alliance has met their financial targets, which he declined to disclose.) Still, firm leaders point to signs that the inaugural year has been a success: strong client pitches (including one that landed a new multibillion-dollar client), adoption of a singular promotion process, and a relatively smooth march toward an integrated compensation system. “We’ve got a merger of equals,” says David Harris, the firm’s other co-chief executive (photo, right). “We have evaluated what each firm has done in the past and picked the best of both and what works well for a business of our size.”
The combined firm’s first year’s financial metrics don’t provide a perfect baseline (since the tie-up did not become effective until May 2010, data for the first four months of the year had to be merged), but they offer a preliminary assessment. Hogan Lovells’s 2010 gross revenue was $1.66 billion, a slight dip from the $1.68 billion grossed by the two firms before the merger. But at $1.12 million, profits per partners were up in 2010 from the prior year, during which Hogan reported PPP of $1.11 million and Lovells reported PPP of $1.04 million. (Partner head count dipped from 528 to 512 last year.) Hogan Lovells’s revenue per lawyer of $705,000 in 2010 was down 8.4 percent from the $770,000 Hogan reported for 2009, but represented a 33 percent increase from the $580,000 reported by Lovells. Gorrell and Harris, previously the heads at Hogan and Lovells, respectively, say they are pleased with the firm’s 2010 financial performance even though it was weighed down by weaker results in real estate and the European corporate practice.
On paper, at least, the alliance of Lovells and Hogan & Hartson looked promising from the start. In the last decade, Hogan had grown significantly from its Washington, D.C., base, but with only 23 percent of its 1,400 lawyers overseas, it was still primarily an American firm, with a reliance on litigation and regulatory practices. Lovells was more global–63 percent of its lawyers were based outside of the United Kingdom–and it generated a majority of its revenues from outside the U.K. Lovells had a sizable IP practice, yet it had been stymied in its growth in the United States, where it had 38 lawyers at offices in New York and Chicago.
Despite their wedding on May 1, 2010, in some ways the legacy firms still operate as two separate-but-equal entities. Technically, Hogan Lovells is not a merger, but a Swiss verein structure housing two separate limited liability companies: One is populated by the firm’s American partnership, and the other encompasses partners in non–U.S. offices. In addition to this arrangement, the two partnerships have not only separate profit pools but also different accounting calenders. The American side of the firm has a December-ending cash accounting method, while the international offices operate under an April-ending accrual method. Hogan Lovells leaders point to tax and liability benefits offered by the structure, which has been utilized by global accounting firms and a few law firms such as DLA Piper.
But firm leaders bristle at the argument that using a Swiss verein structure suggests that the new firm is little more than an alliance. Firm leaders point to other processes to show how intermingled the two firms have become. In the ten cities where both firms had offices, attorneys and staff have been combined. (In the days immediately following the merger, more than 700 people moved offices.) Hogan Lovells has also put in place integrated industry-sector teams. And the combined firm has jettisoned Lovells’s mandatory retirement for partners at age 65, but adopted its 30-day vacation guarantee. The new firm is also in the process of unifying its accounting systems, which has been surprisingly difficult. “We both use the same accounting software, but we didn’t use the same versions,” Gorrell says. “We thought that was going to be straightforward, but for much of the first year, we had difficulty reducing pro forma financial information, and we had to track things on two systems,” he adds.
There have been other challenges, too. Lovells partners, accustomed to a modified lockstep compensation system, will have to adjust to Hogan’s more flexible compensation system in the near future. “What we did was to agree in the context of the combination we would move over two or three years into . . . the Hogan system,” says John Young, cochair of the firm’s 12-member board and a legacy Lovells partner. The Hogan system was chosen because it offers the combined firm a greater ability both to retain top contributors and to attract laterals. At legacy Hogan the ratio between the highest-paid partner and the lowest-paid partner was 15:1, while legacy Lovells’s ten-year modified lockstep system resulted in a far more equitable (if not as flexible) ratio of 2:1. The march to a Hogan-style compensation system also provided Lovells partners with bonuses. Eighty-five percent of the firm’s 2010 profits of $574 million will be allocated to equity partners on a point system. The remaining 15 percent, which represents the bonus pool, is allocated on merit, region, and other factors. Claudette Christian, a legacy Hogan partner who cochairs the board with Young, says that the firm has adopted a set of measurements for determining compensation that includes typical financial metrics, such as client collections and billable hours, as well as factors that are not purely financial, such as developing clients, cross-selling clients, organization credit, and pro bono work.
The partnership promotion process has also been retooled. Before the merger, Hogan partner promotions were overseen directly by the firm’s executive committee. But now the process has an additional layer and includes more formalized reports. Currently, a committee of the firm’s board is tasked with handling promotions. This group reviews candidates in consultation with the 17-member international management committee, which is headed by Gorrell and Harris and is responsible for the day-to-day running of the firm. Partners are sent reports on the candidates being recommended, which is the way Lovells did it. (At legacy Hogan, PowerPoint presentations on the candidates were put together for the partnership.)
The merger has paid off in other ways. In a March interview, Gorrell and Harris repeatedly pointed to clients’ encouraging feedback. “There have been a lot of positive things, especially the way clients have reacted, that prove the risk of what we did,” Gorrell says. Ford Motor Company is one client that has responded well to the combined firms. Hogan Lovells advised the Dearborn, Michigan–based automotive giant on its $1.8 billion divestiture of Volvo Car Corporation, a Sweden-based company, to China-based Zhejiang Geely Holding (Group) Co., Ltd. ["Dealmakers of the Year," April]. “For a company like Ford, which does business all over the world,” says David Leitch, Ford’s general counsel and a former Hogan partner, “it is nice to have a firm like Hogan Lovells that has the expertise in a variety of different jurisdictions.”
Both firms advised Ford before the merger (Lovells did pension and commercial work for Ford in Europe, while Hogan handled U.S.–based litigation, regulatory, and commercial matters), but Gorrell contends that the merger has allowed it to capture more work from the auto manufacturer. “Having the combined resources of Hogan Lovells, the strong IP capacity we needed in China, and the mergers and acquisitions expertise enabled us to do a better job than either of us could have done [separately],” Gorrell says. (Other clients the legacy firms have in common are JP Morgan Chase Bank, N.A., Merrill Lynch and Co. Inc., Barclays plc, and Iberdrola S.A., a Spanish energy company.)
The merger has also resulted in new business, firm leaders say. A privately held multibillion-dollar company with insurance agencies and a portfolio of global investments, which Gorrell declined to name, has retained Hogan Lovells as its principal outside counsel (replacing many of the 329 firms the company previously used). Gorrell adds that the work for this corporate giant during the past year, which included real estate, corporate, mergers and acquisitions, and regulatory and finance matters, has involved more than 100 lawyers in ten of the firm’s offices. “We were told that the reason we were selected was because we had better high-end global capabilities than [other firms that were considered], and they liked the people they met,” Gorrell says.
And of course, there have been one-off engagements. Cole Finegan, managing partner of the firm’s Denver office, was attending a Denver chamber of commerce meeting when a local businessman expressed frustration with a construction project in Mongolia that he was working on. “No one in the Colorado office would have been able to help him,” says Finegan, who put the businessman in touch with lawyers in London who were able to retain him as a client.
But there are downsides to a global footprint. In the months before and after the merger was completed, more than 109 lawyers, many citing client conflicts, left for new firms. These departures encompassed whole offices in some cases. The 38 lawyers in Hogan’s Warsaw office left in March 2010 for K&L Gates, months before the merger became effective. (Lovells’s 60-person Warsaw office remained in the fold.) Gorrell says, “Both firms had a presence in Warsaw. Hogan had a 35-person office, and Lovells had a 50-plus office. We really didn’t need 100 lawyers in Warsaw.”
But there are cities where the combined firm ended up with zero lawyers as a result of the merger. Hogan’s seven-lawyer Geneva office joined Akin Gump Strauss Hauer & Feld in May as the merger became effective. Lovells’s 18-attorney Chicago office, which has a reinsurance practice, was shut down, and many of those attorneys joined Foley & Lardner. The combined firm also lost key intellectual property lawyers who had practiced for Lovells in New York and Hogan in Los Angeles. And in Hogan’s Berlin office, 18 partners and 22 associates and counsel left to start their own firm, Raue, in the months before the merger became effective. The legacy firms’ combined head count was 2,569 in 2009, but in 2010 Hogan Lovells reported 2,363 lawyers, which represents a drop of 8 percent. The combined firms’ partner head count also declined by 16, to 512 for 2010. Bigger isn’t always better, says one former partner who left because of client conflicts: “Bigger can also lead to a lot more stresses on client relationships.”
These departures may have resolved many actual and potential conflicts among Hogan Lovells’s 20,000-strong client roster, but not all. The media and pharmaceutical sectors provided both Lovells and Hogan with key client relationships that may nevertheless have to be cut off because of conflicts. For example, Hogan has represented a variety of Rupert Murdoch–related companies, including British Sky Broadcasting Group plc, while Lovells has represented rival British media company ITV. Firm leaders say that both media companies remain clients, and they don’t expect that to change in the near term.
Going forward, firm leaders want to add lawyers in New York, Frankfurt, and London, especially in the corporate practice. They also want to grow the firm’s intellectual property practice. Along those lines in February the firm added five IP partners from Howrey. All of this is likely to bring more conflict situations. When asked how the firm is approaching potential client conflicts, Harris responded, “Carefully and sensitively.”
In the months before the tie-up, and during the firm’s first year, impartiality, even to the point of inefficiency, has emerged as a touchstone. This is obvious in the very bureaucracy of the firm. Simply put, Hogan Lovells has two of everything: two governing bodies (a board and international management committee); two operational centers (Washington, D.C., and London); two board chairs (Christian and Young); two chief executives (Harris and Gorrell); two litigation practice heads; two corporate practice heads; and two finance practice heads. (The firm’s two other practices, intellectual property and government regulatory, have single heads.) “The cohead mechanism is a way to make sure the two firms are coming together in a measured way,” Young says. “It is a phenomenon that is temporary, but for the time being it is working well.”
At its first-year anniversary, there is much about Hogan Lovells that seems temporary. But for the firm’s leadership, the first year has been less about formulating long-lasting policies and procedures, and more about something they view as far more valuable: benchmarks. “During our first year, we were looking at progress against a virtual representation of what the firm would have looked liked,” Young says. “From now on, we have a track record. We have something to compare ourselves with.”
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Photo by Susana Raab