Mon, 2 Oct 2006 12:12:56 EDT
How a Global 100 Firm Became a Profit Powerhouse
Ben Hallman
The American Lawyer
10-02-2006
In addition to purchasing an equity stake in their firm, most new partners at the English law firm Slaughter and May buy a napkin ring, too.
After Slaughter partners finish their lunch in the firm's partners-only dining room, they roll up their napkin and slide it into the ring, for use the next day. (Particularly messy partners can claim a fresh napkin.) In the late 1980s the number of partners at the firm had swelled to the point that it was necessary to install a special napkin cabinet with numbered pigeonholes, one for each partner. This addition allows lawyers to forgo the napkin rings altogether if they choose. Still, most prefer to use their rings.
Slaughter partners recycle their napkins because that's what partners at the 117-year-old corporate powerhouse have done since before the queen was in diapers. (Note to the lawyer who once neglected to wear a necktie to lunch: Your colleagues have not forgotten.) The system combines practical economy with a certain sense of decorum (no paper napkins, please). Pigeonhole No. 46 is held by Tim Clark, the firm's 55-year-old senior partner. Tall, with thin hair and tired eyes, Clark describes the napkin ritual to an American visitor with a tone that says he is aware that his guest probably finds the whole routine a little bonkers, and that maybe he thinks so, too.
But beneath Clark's easy manner and self-deprecating sense of humor -- qualities that helped him get elected to the post in 2001, his colleagues say -- is a devotion to tradition that helps explain why this Magic Circle firm has remained independent and relatively small (522 lawyers), even as its competitors have ballooned in size. Clark would never say so, but this son of a Slaughter and May partner gives the impression that he would sooner swallow his napkin ring than see Slaughter embrace some of the management practices that are now standard at most big firms.
Organizationally speaking, Slaughter and May is a dinosaur. The compensation structure is lockstep, with just two tiers: The higher-earning partners' compensation is twice that of the lower-earning. Out of 126 partners, 73 are in the top earning tier, which a partner reaches after 10 years. By comparison, the 58 U.S. firms that responded to a question about pay distribution in the 2005 Am Law 100 survey reported an average spread of nearly 10:1, highest- to lowest-paid partner. Unlike almost every one of its competitors, Slaughter is not looking to expand; and in recent years it has consolidated, closing small offices in New York and Tokyo and shuttering its French law practice in Paris. Today, the firm has only one foreign office of note, in Hong Kong. No one recalls a Slaughter partner ever leaving to join another London firm, and Slaughter has never hired a lateral partner.
But had the Tyrannosaurus rex pulled in the kind of profits that Slaughter does, it might have lasted a few more million years. According to the Am Law Global 100 survey, Slaughter is one of the 10 most profitable firms in the world, trailing only the highest-earning Wall Street players, and topping all of its U.K. competitors. Profits per partner clocked in at more than $2 million in 2005, nearly twice the firm's 1998 numbers as published in what was then the Global 50 survey. And anti-expansionist should not be mistaken for antiglobal. To continue to do what it does best -- churn out high-end corporate deals with a metronomic regularity -- Slaughter has formed a network of like-minded independent firms: Hengeler Mueller in Germany, Bredin Prat in France, Bonelli Erede Pappalardo in Italy, and Uria Menendez in Spain. This group of "best friends" routinely works on some of Europe's biggest deals.
A central reason for the firm's continued success is an obsessive focus on lucrative, high-end mergers and acquisitions work for the United Kingdom's top corporations. It is exclusively an English law firm, and most of its biggest clients are British. The firm boasts as clients 32 members of the FTSE "Footsie" 100, top blue-chip companies that trade on the London Stock Exchange. Those institutional clients include British Airways and Unilever, as well as Diageo, the world's largest producer of alcoholic drinks. In the past few years, for example, Slaughter helped Diageo sell the Pillsbury and Burger King brands, and buy Bushmills Irish Whiskey, which was divested in the course of Pernod Ricard acquiring Allied Domecq, another large beverage maker. Slaughter is routinely one of the top two or three deal-making firms in the U.K. In particular, 2000 was a banner year, with the firm brokering £215 billion in transactions, or more than 40 percent of the overall market, according to league tables published by Mergermarket Ltd. After that, Slaughter's volume of deals dropped sharply, following the trend of the U.K. market as a whole, and slipped a few places in the league tables. The value of its transactions was down to £33 billion in 2004. But as M&A has picked up again, so has Slaughter's standing: In the first half of 2006, Slaughter brokered £49 billion in deals, second only to Freshfields Bruckhaus Deringer. Clark notes that the firm's percentage of deals greater than 1 billion euros was 29 percent in 2000 and 26 percent in 2005 -- suggesting that while the overall value of Slaughter's deals has dropped, its market share of the biggest deals has remained about the same.
David Frank, 52, Slaughter's practice partner -- responsible for supporting "practice streams," or practice groups -- says it is a mistake to think of Slaughter as simply a deals boutique. The firm also handles clients' tax, pension and finance work. It boasts a small (11 partners, 40 associates) "dispute resolution" (litigation) practice, and an even smaller environmental practice. But these functions, say several partners at other London firms, serve as support and dressing for M&A work.
This past summer, the firm advised Abbey National plc, a large British bank, on the $7 billion sale of its life insurance business; it counseled the government of Botswana in renewing a diamond mine license at Jwaneng, the largest diamond mine in the world, for 25 years; and on the sporting side, firm rainmaker Nigel Boardman advised the Arsenal Football Club on the new long-term contract signed by Thierry Henry, one of the top soccer players in the world.
Of the changes Clark has ushered through in his five years as the firm leader, achieving consensus on a new design for a business card was one of the toughest, he says. The new, officially sanctioned versions (there are two) replaced a design-it-yourself methodology that persisted long after the rest of the business world realized the value of showing a unified face to the world. Slaughter partners simply wanted to be able to design the card however the heck they wanted.
Susie Middlemiss, who heads the intellectual property stream, remembers that on her first day in 1996, she asked a longtime secretary about the standard format for letters and documents. There was none, she was told. "This sums up the total independent mind-set above all else," she says, adding that she feels the free-spiritedness clears the way to focus on more important details. "It's the content that matters. We start with a blank sheet of paper on everything."
The firm's culture is best characterized by what the firm's lawyers are free from, rather than what is imposed by rule or leadership. Consultants are eyed with suspicion; uniformity, with disdain. Slaughter is also remarkably flat in terms of personalities. Aside from Boardman, a corporate finance partner (with a side specialty in sports law), who is generally acknowledged as the partner with the highest-earning practice, there are no superstars. Even Clark is careful to cultivate a "just one of the gang" persona.
Unwritten rules, however, can be just as powerful as written ones. Slaughter has no hourly targets, for example, but there is tremendous peer pressure to work hard for the good of the firm, say Slaughter partners and associates interviewed for this story. "The overriding thing about the firm was that you felt you owed the firm more than the firm owed you," says Francis Neate, who spent 34 years at Slaughter and May and is now of counsel at Kirkland & Ellis (following a decade at Schroders plc., an asset management company) and president of the International Bar Association. "It had a living strength. You felt guilty if you didn't pull your weight." The unspoken pressure often leads to early burnout. "You do the same work at 55 as at 33," Clark says, and while "some partners are doing that with vigor and enthusiasm," the overwhelming majority of partners retire by age 60.
Another unwritten rule: no lateral partner hires. As of Aug. 1, the firm had 396 associates and 182 trainees, who serve a two-year stint before bumping up to associate. Of the approximately 90 trainees added this year, about 85 percent to 95 percent will continue on to the associate phase. About 10 percent of trainees eventually go on to make partner. Firm leaders say the risks of bringing in someone at the partner level who is unfamiliar with Slaughter's culture outweigh the potential rewards. Under the current system the firm is doing well, they say, so why shake things up? Partha Bose, a law firm consultant at Partha Bose & Co., and former chief marketing officer at Allen & Overy, says lockstep only works as long as everyone knows everyone else -- the addition of a stranger to the mix could upset the balance, he says.
Of other London firms, Linklaters best demonstrates the path Slaughter has not taken. For more than 100 years, Slaughter vied with Linklaters for the top spot in the London market. Linklaters managing partner Tony Angel says the two firms were bound together by geography, the nature of their work (corporate work for Britain's biggest companies), and even blood. Often, the sons of Linklaters' partners would go to work for Slaughter and May, and vice versa. By the 1980s, however, client demand led Linklaters to establish small domestic law operations in key foreign jurisdictions. (Slaughter established just one, a French law practice in Paris.) Then, in the 1990s, the advance of technology broke down barriers of time and space, and deregulation reduced tariff barriers, led to the abolition of exchange controls, and drove growth in international trade. The small foreign-law practices needed to grow fast to meet the demands of financial superconglomerates. "You have to be clear about what you are trying to do, and pursue that with a certain degree of single-mindedness," Angel says. This meant re-evaluating whether Linklaters wanted to remain an England-focused firm, or become something different. In 1996 Linklaters announced that it would cease to be an "English" firm, and would expand rapidly across the globe. Today, Linklaters has 2,000 lawyers in 23 countries, 39 percent of whom are based in the U.K.
A similar debate was under way at Slaughter and May in the early 1990s, but with a very different result. Most Slaughter partners didn't want to expand. They feared losing those qualities that partners most enjoyed -- a sense of common purpose and camaraderie, their freedom from oppressive bureaucracy ... the napkin thing. But they also realized the marketing and operational value that so-called global firms bring to their clients, and felt pressure to compete.
At a meeting held at Slaughter and May in the early 1990s, Neate says he volunteered to meet with other independent firms in Europe to gauge their future intentions and to see whether they might be interested in joining forces without actually merging. Any networking strategy would hinge on other firms deciding to remain independent, too. "I'd say, 'We don't we want to merge with you, and you don't want to merge with us,'" he remembers. "There was no formal acknowledgment that we would refer work to each other."
One of those firms Neate talked to was Uria Menendez, a 300-lawyer firm based in Madrid. For 20 years it had had a loose affiliation with a handful of European firms. But in 1992, Linklaters acquired the other firms in the network. Uria Menendez had few choices: merge, stay independent or find a third option, says managing partner Jose Maria Segovia. "We found ourselves in the ideological position of wanting to be an independent firm," but also wanting to remain an international player in the M&A market, he says. When Slaughter and May, with whom the firm had a relationship dating back 20 years, came calling, it offered the chance to fulfill both wishes.
Hengeler Mueller, Bredin Prat, and Bonelli tell similar stories. All were under pressure to globalize, but didn't want to do so by merging with a large, international firm. "There is an advantage to being rooted in our own country," says Umberto Nicodano, Bonelli's managing partner. "We know the courts, we know the system. Rarely, if ever, are the global firms able to establish these relationships." Practically speaking, Slaughter's Frank says, staying small keeps overhead low, keeps the firm cohesive, and makes it easier to pursue common goals than if lawyers were spread around the world. Furthermore, the fact that other firms don't feel that Slaughter is encroaching on their space makes the British firm attractive to work with, Frank says.
In the mid-1990s, several years after their first discussions, the group realized that to compete with the global firms, they needed to do a better job of articulating their vision. So the firms drew up a list of basic criteria to define the relationship: Members are independent law firms based primarily in one country. Relationships are nonexclusive; legally, nothing binds the firms together. Their clients would find the network's multinational service as good or better as that from a single firm with offices in different countries. Over time, the ties among the firms grew stronger. Working groups in each practice area were arranged. Committees were formed to address the health of the relationship and to improve the image of the network. Regular meetings were scheduled with the general counsel of clients. Secondments were ramped up.
"It feels like too much sometimes," says Jean-Francois Prat, managing partner at Bredin Prat. "All of our partners are traveling each month." But the extra effort to maintain the relationship is worthwhile, he says: "The relationships are ten times more important than they were 10 years ago." If the five firms combined into one, they would boast a lawyer army 1,400-strong. Clark says he now spends at least half his time managing the relationships, but stresses that Slaughter is not "in charge" of the friendships. "There is no sense of Slaughter and May as the sun with other firms revolving around," he says. Still, as the biggest firm in the network, Slaughter's role is as de facto leader, arranging regular practice group meetings in various disciplines, hosting workshops in London and in Europe, and offering aid to any independent in the group, or otherwise, that asks for it.
The payoff comes when two or more firms close a big deal. In March, for instance, Bredin Prat partner Sebastien Prat led a team of lawyers from all five firms of the European group in advising the French investment company Eurazeo on its $2.1 billion acquisition of Volkswagen's rental car unit, Europcar, following an auction process. In May, Slaughter, Hengeler, and Bredin Prat, working with Dutch firm Nautadutilh, facilitated the £240 million sale of five European "Star Parks" to Compagnie des Alpes, a European leisure and ski resort operator. As with all best-friends transactions, the supporting firms sent bills to the lead firms -- in the Eurazeo deal, Bredin Prat -- which in turn submitted a unified bill to the clients, Star Parks Group and investment fund Palamon Capital Partners. The split of the fees is agreed upon by the firms involved, based primarily on "value added" to the transaction, Clark says. Very rarely, one firm might ask another to reduce a bill, but this is handled amicably, leaders of the firms say. Best friends don't squabble over fees.
Tim Proctor, Diageo's general counsel, says, "We generally expect firms to have seamless connections," and says he is less concerned with what goes on beyond the scenes than with the end product. From his perspective, he says, since building the network, Slaughter has served the interests of his company as well as it ever has. (Clark notes that, as a "sophisticated corporate client," Diageo tends to choose their own counsel, but that Slaughter worked with a number of best-friend firms to put together the Seagram drinks business transaction in 2000-01.) For that seamlessness, some of the credit is due Alison Hahn and Sally Cash at Slaughter and May, who run the firm's international connections team. The women, both nonpracticing lawyers, help build "a virtual law firm for every deal," Hahn says, using a database with a wealth of information about lawyers and deals all over the world. The process is "very ad hoc," she says: "Hengeler will phone us and say we need the lawyer in Mongolia or in Togo. We're also happy to be phoned up by firms we don't work with very often. That improves our knowledge of those firms." Hahn adds a qualification: "While we are a great resource, we are not a clearinghouse. In most cases, heavyweight corporations already have a good idea of who they want to use in a particular jurisdiction."
Clark says the system is not set up to identify a precise number, but he estimates 60 percent to 70 percent of Slaughter work involves an international component, and that a great majority of those deals involve an overseas law firm.
In the United States, Slaughter regularly partners with Wall Street titans Davis Polk & Wardwell; Cravath, Swaine & Moore; Wachtell, Lipton, Rosen & Katz; and Simpson Thacher & Bartlett, as well as with regional powers like Alston & Bird, whose 700 lawyers are based mostly in Atlanta. "It is to the benefit of our clients to call upon that network, to know that you can refer your client to the same level of legal service that our clients have been accustomed to," says Mark Greene, a corporate finance partner at Cravath, who has worked with Slaughter on U.S. deals involving Slaughter client Unilever, and on U.K. deals involving Cravath client Shell Oil Co. Slaughter has undertaken team-building across the Atlantic, too: In June, Greene attended the quarterly meeting of M&A partners from Slaughter's best-friends network, held in Paris. "We get to know each other personally, so when we get before a client, it looks like we work for the same firm," he says. Slaughter also sends secondments to the U.S. firms. The American firms, however, are just pals, not best friends. The U.S. legal market is too varied and broad for Slaughter to risk alienating U.S. firms by shacking up with just one U.S. firm.
If there's a flaw in Slaughter's model, it's one that seems particularly troubling for a firm that so values its independence: The fate of the other firms in its network is out of Slaughter's control. If the other independents cave, so would Slaughter's global ambitions. (The firm closed its overseas offices in recent years as part of its best-friends strategy; its 40 lawyers in Paris, the largest foreign office, were absorbed by Bredin Prat.)
This is the chink in Slaughter's armor, says David Temporal, a law firm consultant in London. Slaughter's continued success relies on the other firms also remaining successful. "Can Slaughter maintain its top spot in the U.K. without an integrated global network?" he asks. The firm admits to the vulnerability, but Clark says the complete destruction of the network is unlikely. Cravath's Greene, who says his firm shares a similar business philosophy as Slaughter -- high-value, high-profit corporate work in one of the world's largest financial centers -- says the model is "sustainable," due to an "echelon of sophisticated consumers who would rather have the best individuals than the perceived convenience of a one-stop shop."
Tony Williams, another London-based consultant, also brings up the vulnerability issue. "Their business is sustainable as long as their best friends don't try and do something different," he says. But then he pauses. "So-called problems at Slaughter and May are problems that managing partners at other firms would die for," he adds.
Like the leaders of other firms, the triumvirate that heads Slaughter -- Clark, Frank and Melvyn Hughes, the firm's executive partner (essentially, the chief financial officer) -- meet with clients, look at spreadsheets, and handle all the daily irritants of managing a multimillion-dollar business with hundreds of employees. But they aren't preoccupied with hourly goals, nor do they worry about synergizing the operations of, say, a New York and Budapest office. This leaves time for other pursuits, such as literally contemplating the bedrock of the firm.
Hughes, 55, whose divergent interests seem better suited to an Oxford don than a corporate lawyer, oversaw the construction of the firm's Bunhill Row headquarters, completed in 2002. Giving a tour of the building to a visitor, he relates the history of the stone slabs that line the lobby. They are a geologist's dream -- a rare combination of 300-million-year-old igneous, sedimentary and metamorphic rock from the Lake District in England. He stops and points out a staircase of which he is particularly proud. Looking down, the visitor sees the same white streak shooting through each of the slabs, meaning that great pains were taken to keep this particular section of the rock together, after it was broken apart.
Other firms are riding an elevator to the future built by consultants and powered by the egos of their leaders. Slaughter and May partners are taking stairs of their own design.
