Germany

Freshfields Bruckhaus Deringer is reducing its partner count by 20%, Clifford Chance (CC) and Linklaters are capping partner pay at a lower level, and Allen & Overy (A&O) has toyed with a similar move – these are tricky times to be a magic circle partner in Germany.

With partnerships in the country under intense scrutiny in recent years, and no signs of this abating, Legal Week asked partners at a range of firms in Germany why there is so much pressure on performance.

A commitment to lockstep remuneration unites the magic circle, and it is this that is causing many of the problems, according to some in the market.

“The fundamental problem in Germany is that it’s less profitable. You can’t charge the same rates as you can in other jurisdictions, so as a result it’s difficult to have people on the same lockstep,” explains one German partner.

It is a dilemma the firms have been trying to work through for some time, without completely ripping up their remuneration systems.

Freshfields Bruckhaus Deringer

A quick glance at comparative headcount in Germany shows why Freshfields has had to take more active steps than its rivals to address the problem.

The firm currently has just over 100 partners working across five offices in Germany, making it by far the largest of the magic circle in the country, thanks to its mergers with Deringer Tessin Herrmann & Sedemund and Bruckhaus Westrick Heller Loeber in 2000.

Freshfields has been cutting back aggressively in recent years, closing its Cologne office last year, reducing partner numbers by 20% since late 2015, and moving partners to a lower lockstep ladder.

The latest plans to scale back partner count by a further 20% – in part through retirements – mean the firm clearly feels it has not yet gone far enough. Its projected 2020 partner size of around 80 partners stands roughly 40% lower than figures published by Legal Week in December 2015.

However, Freshfields has hit back at speculation that more offices will close, despite former partners suggesting that both Hamburg and Berlin could potentially be at risk.

Freshfields Germany, Austria and central and eastern Europe managing partner Helmut Bergmann is emphatic on the subject: “We have no plans whatsoever to close down any of our offices in the region.” He went on to describe Hamburg as “extremely successful” and said that “you will see partner promotions in this office in the years to come”.

It is easy to see why there has been speculation though. The firm has not promoted a new partner in Hamburg since 2014, and has seen a number of exits both there and in Berlin. Exits from Hamburg last year included a four-lawyer team led by regulatory partner Michael Schafer, which spun off to form boutique firm Chatham Partners, with a five-strong team of associates leaving to set up Neuwerk. Elsewhere in Germany, a team of four lawyers left to found boutique firm Blomstein in Berlin, where they were subsequently joined by public procurement partner Hans-Joachim Priess.

Other exits last year included corporate partner Oliver Von Rosenberg, who left to join Cologne firm GORG, while in Duesseldorf, corporate partner Christoph Nawroth and competition partner Michael Esser left for Herbert Smith Freehills and Latham & Watkins respectively.

Some of the exits reflect an active push to get lawyers to focus on more profitable work, moving away from representing the mid-cap ‘Mittelstand’ companies that make up much of Germany’s economy.

One ex-partner says: “Freshfields wants to focus on mega-deals and massive investigations like Volkswagen or DFB [German Football Association], where they can use gigantic teams working around the world.”

Bergmann agrees, saying that the firm has looked to concentrate on “the very difficult stuff, the complex mandates, for large clients where we can really add value”. As a result, he admits that there are “niche practices that we used to have which didn’t match the overall strategy of the firm, so partners decided this isn’t the right home for them”.

Clifford Chance

Freshfields hasn’t been alone in trimming its numbers on the ground in Germany. CC has pushed forward with a similarly aggressive reduction in partner count in recent years. Since December 2014, when it undertook a regional review of its German practice, its partner numbers have dropped by around 20% from 83 to 65 partners.

And, like Freshfields, its efforts to deal with the profitability issue are still ongoing. It is understood to have cut back profit share for almost all Germany plateau partners by 30% from this month, as a result of a global performance review that started around October last year. It is not yet clear if these partners are moving to a lower lockstep ladder or if their pay has been cut back to a 70-point gateway.

The firm’s standard lockstep runs from 40 to a plateau of 100, with the option to extend this to ‘super-point’ levels of 115 or 130 for star performers.

CC also has a lower lockstep ladder capped at 70 points in place in some jurisdictions, such as eastern European offices including Warsaw, Prague and Budapest.

According to some, the changes have created tension in Germany. One ex-CC partner comments: “One partner complained to me that he was in the wrong ‘bucket’. He felt he should be in a bucket where you can move up to 75, 80 and all the way to 100. He is in a capped bucket. For normal partners, they all stop at 70 now. The firm will only consider moving outstanding performers up to 100.”

Another former partner adds: “I’ve heard that this has been elected for by departments in Germany and a few other places. There’s been a lot of departmental horse-trading. They saw the writing on the wall. Their thinking was: ‘We’re all toast unless we come up with a plan. Let’s all do this and speak to management.’”

Two partners retired at the end of the 2016-17 financial year. In addition, three partners left the equity and became counsel.

Linklaters

With 70 partners in Germany, Linklaters is the second largest of the magic circle firms in Germany, a legacy of its 2001 merger with local firm Oppenhoff & Radler. However, partners inside the firm argue that it is in good shape, having already undergone a restructuring in 2007 that saw the firm pull out of Cologne and downsize in Berlin, as well several firmwide partnership restructurings.

One Linklaters partner says the German partnership is “very stable” and that “there are few underperforming partners due to our previous partnership restructuring”.

Helping the firm avoid more partner cuts, though, will be changes it made to its lockstep last year. In Germany it now takes partners at least 13 years to reach the top of a lockstep capped at 45 points, compared to a 12-year lockstep in London capped at 50 points.

Partners in Germany also have two gates in the lockstep to get through – one at six years and another at 10 years.

One Linklaters partners says: “We have stuck to lockstep, but adjusted it with gates on certain points to enable high performing partners to have the same packet they would have if they went to Latham, Kirkland or Milbank.”

Another adds: “People are confident that with the lockstep revision we will be able to substantially increase our profitability.”

Allen & Overy

Looking like a bit of an outlier, A&O will not be following its rivals and capping pay for partners in Germany at a reduced level. While the firm, which is the smallest of the magic circle in Germany with just 51 partners and 220 lawyers overall, actively considered doing this, it has now decided against it.

The firm launched a consultation about introducing an informal 40-point top of the lockstep that would stop most German partners from progressing to the standard 50-point top of the equity, but did not pursue the plan.

Behind the scenes, however, former partners suggest the firm has been more actively managing individual partner performance. One comments: “They haven’t sent partners away, but they have equity managed about half of the partnership.”

Another adds: “Money-wise, it is very hard to sell big-ticket lateral hires to partners in Germany at the moment if they are facing equity measures themselves.”

An A&O partner acknowledges the measures, adding: “Germany has been a net contributor, and that is something we wish to retain. The question on the table for all of the magic circle is: what does the German legal market offer as a legal spend and how should this be allocated?”

The firm said in a statement: “In Germany we regularly monitor the performance in the lockstep system but there are no changes to the ladder at this time.”

As all of the magic circle try to reshape their operations in Germany in a bid to transform them into a lean and profitable part of their global network, it is clear that the real battle is not in Germany, but with the US firms globally.

But with boosting profitability in Germany forming an important part of UK firms’ fight to attract and retain top performers in London, the US and Asia, there may be fallout in Germany and other parts of Europe still to come.

As one Linklaters partner concludes: “Freshfields is often the frontrunner on these questions. I wouldn’t rule it out that somebody could be thinking about cuts in the near future at Linklaters, but for now there is nothing in the pipeline.”

Clifford Chance and Linklaters declined to comment.