If size was the only factor clients valued in their advisers, Baker & McKenzie would easily be the best law firm in the world.
But unfortunately for Bakers, size is not all-important, and it is not the best firm in the world, by any stretch of the imagination.
If only life were simpler for Bakers’ executive committee. The firm has some strong bases among its network of 61 offices, but the committee knows that it is not regarded as an all round top-tier competitor, despite its titanic proportions.
The situation has also become more serious with the rapid rise of the Big Five accountancy firms’ legal arms, which have followed Bakers into some of the less mainstream jurisdictions around the world.
Meanwhile, top-tier firms such as Clifford Chance and Shearman & Sterling, have been consolidating their position as the first port of call for the world’s major corporates when they need legal advice on complex international transactions.
This has put Bakers in a tight spot – perhaps the tightest yet for a firm whose decision in 1955 to go international in such a big way set it so apart from its rivals. It is in danger of having all the problems associated with its size – it has more than 3,000 lawyers with 61 offices in 35 jurisdictions – and few of the benefits.
Chairman Christine Lagarde admits that the firm has big challenges ahead. She acknowledges that partner profits must rise, and the firm must work harder to gain top clients. However she refuses to admit that the firm’s quality is patchy. “This alleged quality gap between the offices is a myth,” she says bravely. But the ‘myth’ lives on, because even Bakers’ partners will privately acknowledge that it is true. As the managing partner of one Bakers office happily says: “I would agree that there are different standards within Baker & McKenzie.”
But he does go on to assert that Clifford Chance is suffering from similar problems as it continues with its programme of rapid international growth.
Lagarde is keen to point out that unlike Clifford Chance, Freshfields Bruckhaus Deringer and the like, Bakers had its growth spurt decades ago, allowing it to iron out many of the problems associated with being so big.
But she cannot escape from the fact that her firm is far less profitable. For example, Clifford Chance’s average profits per partner for 2000 were more than £650,000. Last year, the average partner profits at Bakers’ London office stood at about £355,000 – and it is one of the firm’s most profitable centres.
Such disparity is not easily explained by a firm that was meant to dominate the global provision of legal services to the world’s most international companies. “We have to raise the bar, and we have to raise the game to improve in all respects,” Lagarde says.
These pressures have been taking their toll on Bakers’ 570-plus global partnership.
In the last few months 15 partners have left Bakers’ Amsterdam, San Francisco and Palo Alto offices.
This spate of departures is being put down by Bakers’ management sources to a restructuring programme being undertaken by the firm designed to drive up profits by focusing on core practice areas.
But departed partners that Legal Week has spoken to say many of the moves now and over the last
few years have had a lot to do with the unique frustrations of working with Bakers.
In many ways Bakers is a victim of its own success. If it had not expanded so rapidly throughout the 1970s, ’80s and early ’90s it would not have such a sprawling network of offices, of which only a handful are regarded as approaching top-tier outfits. That handful would include London, Frankfurt, Hong Kong and Chicago, although more critical City observers might err on the side of caution and say that it is really only the Hong Kong and London offices that consistently hold their own against the big boys.
At the other end of the scale, insiders and former partners say there are at least 30 offices that are not regarded as major income generators, or ‘money centres’ as Bakers’ offices are referred to internally. These – as well as the more profitable offices – are a legacy of the firm’s frenetic expansion.
For example, in 1964, the firm celebrated the opening of its Sydney office, then its 17th office, at a time when most firms regarded opening an office in Paris as risky. By the late 1970s the firm was pushing boundaries for an Anglo-Saxon firm by opening in Bogota.
By the 1980s the idea that the firm was a US firm, let alone an Anglo-Saxon one, was forgotten.
Now, after allowing itself to stretch out in all directions for decades without attempting to impose a uniform culture, the firm is flexing its corporate muscles.
It has embarked on a quality drive that includes the promotion of Bakers as a single brand by the removal of local office names, better integrated practice groups and improved inter-office communications. The key to any fundamental change within the firm, however, must lie with a reform of its remuneration system, which is known as “The Formula”.
Partner remuneration differs across the Bakers network. The London office, for example, has adopted a modified lockstep system to reflect the environment in which it is operating.
The Formula provides the glue that locks the offices into a single network. Devised many years ago, many believe it has outlived its usefulness. The reason many local partners and firms were attracted to Baker & McKenzie in the first place was the prospect of gaining referrals from its international network.
In return for this, the offices’ global partners are required to pay about 25% of their fees into the Bakers’ pot in Chicago. This money is then redistributed back to Bakers’ global partners on a merit basis.
A significant slice of this money is calculated using a controversial client credit system where partners are rewarded for introducing clients to the firm.
In the most extreme example, global partners are understood to have kept as much as 15% of all fees collected worldwide on a client they have introduced.
There are even stories of Bakers partners making so much on client credit they hardly needed to come into the office.
The system is understood to cause tension between partners and offices. Its detractors maintain it encourages partners to focus all their attention on getting new clients through the door, rather than developing existing ones, or focusing on the need to do quality work.
One former partner, who worked in a US office, said that although Bakers boasts clients such as Cisco Systems and Boeing, it usually does medium to low premium work for them.
One East Coast office is said recently to have pulled in $36m (£25m) in fees, the majority of which was paid out in chunks of less than $50,000 (£34,965) from a wide array of clients.
Another thorny issue relates to costs. Local costs are borne by the partners of each office.
But the firm’s global partners also have to contribute to the firm’s overall running costs. The firm is attempting to take advantage of its hefty turnover to invest in new technology. This autumn a state-of-the- art practice management system is due to go online.
One London partner enthuses that the system will give it the most integrated IT systems of any of the major international law firms.
It is an enormous project that will provide Bakers’ management with a vital tool in its drive to integrate the firm.
But projects like this cost money. One partner grumbled that his global expenses rose from £8,000 a year to £54,000 in five years.
Lagarde acknowledges that costs for the global partners are rising.
For the partners in the most profitable offices this should not be a problem, especially as they are the ones who are likely to benefit most from the investment.
But rising costs will not be welcomed by partners working in less profitable jurisdictions.
In Amsterdam, for example, the partners are understood to have attempted to spread these global costs throughout the firm – which meant asking its associates to contribute at the expense of their Christmas bonus. The plan is understood to have been shelved in order to head off an associate revolt. Rising costs may also partly explain the departure of some partners with local practices from Bakers’ Amsterdam offices. And Amsterdam has a relatively buoyant economy.
Some partners in far-flung corners of the world might be starting to wonder whether the costs of being in the Bakers’ network are starting to outweigh the advantages.
At the heart of the challenge facing Bakers is a cultural problem. The reason senior partners in multinational magic circle UK firms are so wedded to the lockstep system of remuneration is that they believe it is the only way these firms can maintain their quality as they expand.
Bakers has an individualistic tradition. One former New York partner recounts how he saw the opportunity to punt some work on to another partner in one of the firm’s other North American offices. The partner had a colleague in mind whom he believed was better suited to do the work for what was an important client.
But he claims the office blocked the move because it could upset the formula.
The partner maintains that he was subsequently frozen out by his colleagues, as he was not regarded as “an insider”.
New York is not a jewel in Bakers’ crown. Nor is the US practice as a whole a star performer when it comes to corporate work. Bakers only figures in one of the American Lawyer top 10 tables for all types of corporate and finance work – and that is project finance, where it comes ninth.
Although Bakers is first and foremost an international firm, to significantly improve its profits it does need to make inroads into the domestic US market.
That is not to say that it is all bad news. The London office, under the leadership of Russell Lewin, is increasingly gaining compliments from City lawyers and there has never been any doubt that the Hong Kong office, under the management of Richard Weisman, is anything less than a top practice.
Weisman, who is also a member of Bakers’ executive committee, does not see his Hong Kong office as particularly unique in the network.
He is adamant that the firm’s offices are pulling together, at least in Asia. “There is no split of objectives in Asia,” he says and insists the ructions in San Francisco and Amsterdam are not spreading to his region. He says that the Asian offices are well managed, collaborate well and are focused.
Bakers does have its success stories. But supporters and critics wonder how it will fend off the two major threats it is facing – from accountants and top tier international firms.
Does the firm want to be like its London office with its respected City practice, or is it a workmanlike firm with a burgeoning network of small- to medium-sized offices dotted from Taipei to Bogota offering mid to low premium advice?
If Bakers opts to compete as a mass of small practices it risks being put under increasing amounts of pressure from the legal arms of the Big Five accountancy firms that specialise in bulk cross-border transactional and tax work.
But how can Bakers raise its game to compete with Wall Street and the City for high-level corporate work, without a wholesale restructuring of its international network of offices? One ex-partner believes the firm must go for the latter option. “The Bakers concept was brilliant,” he says. “It allowed rapid growth while holding a disparate culture together.”
But he adds that clients want proven teamwork and uniform quality across the board, not just a spread of offices.
Although Bakers’ executive committee is serious about improving quality across the firm, it is unlikely to sanction office closures.
After all, its international reach is one of the firm’s unique selling points. Neither Lagarde nor Weisman see office closures as an option, although some partners would consider it.
“Maybe we should close all the offices that are not in financial centres,” ventures the managing partner of one office. But he adds this would turn Bakers into a different firm.
It is obvious that he does not believe this would happen. But there is no doubt that the firm needs to focus its resources on growing in the world’s financial centres.
Lagarde and Weisman are also wedded to the controversial client credit system, although they agree it needs reforming so that it rewards client management, as well as client wins.
It has been working to improve its client relationship management for several years. But it has to tread carefully. As one ex-partner put it: “If they scrap the client credit system Bakers will fly apart like the Soviet Union did.”
The ultimate solution to the firm’s conundrum could be a merger with an accountancy firm. The firm already works closely with Deloitte & Touche, which recently announced that it was looking for a law firm ally. And Largarde has not ruled out a merger with an accountancy firm.
So which way will Bakers go – or can it operate on both levels offering top level and bulk advice? After all, this is a problem that the accountancy firms’ legal arms are also grappling with.
“If I knew what to do with the firm I would be chairman of the executive committee,” confides one senior partner. Many of Bakers’ detractors view it as a slumbering giant. It has its fair share of problems – but it also has some unique advantages.
After all, it has become only the second firm to boast a turnover of $1bn (£700m) after Skadden Arps Slate Meagher & Flom. If its management team gets it right, they could take the firm a long way.
Baker & Mckenzie facts
Founded: Chicago 1949
First foreign office: Caracas, Venezuela 1955
Chairman: Christine Lagarde, (French-qualified and based in Chicago)
