David Morley has a tricky path to navigate. Despite a 20% rise in average partner profits at Allen & Overy (A&O), which took average drawings this year to £788,000, A&O finds itself trailing behind its magic circle rivals after five years of indifferent performance and lacklustre growth. Arguably of more concern are indications that A&O’s corporate practice is struggling to keep up with firms with greater cross-border muscle at a time when big-ticket M&A is back in Europe. After all, profit and turnover can improve dramatically within a short time but it takes years to upgrade a major transactional practice.
While it is easy to overstate the impact of a handful of senior departures for a firm with more than 400 partners, few would claim that A&O’s top-tier banking practice has really hit its stride in recent years.
Add in much-publicised problems with associate morale and staff turnover and A&O faces testing times if it is to keep pace with its rivals while putting in place the investment needed for long-term success.
As managing partner, Morley unsurprisingly takes a more positive view of the firm’s position, but concedes that competition is tough.
He says: "This was a good performance but we can always improve. Is it the end of the matter? Obviously not. There is continuing pressure out there. The US and magic circle have done well and the bar has been raised."
Morley also points out, with justification, that as the only limited liability partnership in the magic circle, it is not always clear that comparing its finances with those of its rivals is akin to comparing ‘apples with apples’.
"We are the only magic circle firm to publish our numbers," he says. "Nothing is hidden. That is not true of any other major competitors, who are free to publish their numbers on whatever basis — there are no end of ways to present numbers.
"I do not see this transparency as a dis-advantage, but it would be good if, when comparing us, people took account of the fact that they are not necessarily comparing like with like."
Building corporate
Concerns over A&O’s M&A performance are less easy to dismiss, a fact Morley concedes. The firm has received a number of high-profile corporate mandates, including acting for Alliance Unichem on its £7bn merger with Boots and the £800m Glazer takeover of Manchester United. But it has yet to break into the top tier of M&A work that has boosted its rivals’ bottom lines.
In comparison to arch finance rival Clifford Chance (CC), A&O has also been less successful at using its international network to upgrade its European M&A standing.
There is little mystery as to why. As a late convert to international expansion — the firm was dubbed Allen & Over-Cautious before an aggressive late-1990s push under the helm of charismatic senior partner Bill Tudor John obliterated the tag — the firm remains considerably smaller than its rivals overseas.
Its offices in Germany and France, the stage for so much big-ticket M&A work in the past year, are significantly smaller than those of its rivals, even if this conservatism has given it profitable foreign outposts. In contrast, many believe the firm is over-represented in the Benelux market.
Morley is clear that growing the firm’s corporate practice and international network are key strategic aims.
"Probably the biggest single issue is making sure we have a broader corporate client base. We do have a very good practice, but we have not won as many of the high-value deals as we would like. We need more of the top bluechip clients and we also need a stronger private equity franchise, which is a key focus."
The latter point will chime with many. Indeed, A&O’s critics argue that the failure to capitalise on its respected private equity practice built in the 1990s by corporate heavyweights like Alan Paul was the legal equivalent of missing an open goal.
An aggressive hiring programme in the buy-out sector together with a clear statement of intent to the market would surely have served better than what has so far proved to be a broad, but arguably sometimes unfocused, assault on Europe’s boardrooms.
Here, much store has been set in the recruitment this year of respected Lovells partner Derek Baird to help to reinvigorate its offering. Yet the practice will clearly need more investment if real ground is to be made up in what has become a fiercely competitive area.
Internationally, there are similar plans. "We began by building the network later than some of our major competitors, but it is coming good," argues Morley. "There is room for expansion — New York, Germany, France and China. Other markets we are looking at include India and developing areas around the world."
The US question
If international growth is generally an issue, the US question in particular looms over the firm. As revealed in last week’s edition of Legal Week, Morley concedes that A&O is now open to the idea of a US merger, a position that is the result of prolonged discussions between Morley, senior partner Guy Beringer and other senior partners that began last year.
Morley comments: "If there was the right partner out there we might be prepared to do a merger, but there does not seem to be, so we have a choice over whether to do nothing and wait, or to grow — and we are choosing to grow."
Other insiders put the interest in a US merger in considerably stronger terms, but even Morley’s admission marks a shift in policy after several years during which the emphasis was firmly on building its practice organically. Such a policy was certainly not cheap, with one former partner claiming that two years ago the US practice was costing A&O as much as £16m annually after partner drawings were taken into account, though this shortfall is believed to have fallen last year to around £7m.
Yet A&O’s earlier boldness Stateside — backed by notable hires like the recruitment of Cravath Swaine & Moore corporate veteran Dan Cunningham and its success in marketing itself to the US’s top law schools — was even cited as A&O’s unique selling point five years ago compared to UK rivals obsessed with US mergers.
This current shift leaves A&O to focus on bolstering its contentious US practice — a strategy that has worked with considerable success for Lovells — rather than sitting on its hands waiting for a merger.
Morley comments: "There is an appetite in the partnership for focused growth in New York, for example, in structured finance and litigation. Litigation is about 11% at the moment and if you are growing in New York you are bound to grow that percentage — in New York, most major firms have 40% litigation."
Yet it is managing internal politics in A&O’s City heartlands that will probably provide Morley’s defining challenge.
High associate attrition has dogged A&O in its core finance practice. Though the firm was late to see the problem, genuine action has now been taken, with the firm last year signing off substantial pay rises and this year agreeing a comprehensive package of reforms to bolster flexible working options. In addition, A&O has moved to improve its career progression, with the introduction of new senior associate and counsel roles and an annual associates’ conference.
The shake-up of the firm’s bonus pool, which will from next year see half its bonuses awarded on an individual basis — which should see well over £10m dished out on discretionary terms — will be regarded as a substantive move to head off associate frustration in high-billing practice areas.
"Attrition rates are stable and even down slightly," says Morley. "It is hard to say if this is because of new measures, although we are trying hard to address these issues."
Partnership problems?
Less clear are solutions to tensions at partner level, with the firm seeing a string of high-profile finance departures over the last 18 months, among them leveraged finance partners Tony Keal, Stephen Gillespie, Jonathan Nabarro and Clive Wells and structured finance partners Julian Tucker and Angus Duncan.
Morley is quick to deny claims that the losses represent broader discord within the partnership, citing individual circumstances. "The partner losses are not indicative of an endemic fundamental issue. In modern, competitive times, it is healthy for the market for there to be a degree of partner turnover," he says.
Endemic or not, A&O partners cite tensions within the firm. Certainly, this has been seen in an occasionally fractious relationship between corporate and finance.
Another contentious issue is the firm’s lockstep which, with a 15-year ladder, is long by the standards of major London firms, even before accounting for a typical two-year wait on salaried status.
This has been cited as a factor in the departure of a number of partners to US firms. After all, lawyers in their prime for rival firms looking for young, business-winning partners, will often be barely halfway up A&O’s lockstep.
Recent moves to shift a handful of partners around the lockstep have also proved controversial. These led to a number of partners in A&O’s highly-rated projects team being moved down the equity ladder, a response to the weakness of the US dollar, in which much of the team’s billing is conducted. Meanwhile, leveraged finance partners Tim Polglase and Robin Harvey have seen increases in their equity points.
Such tactics expose management to accusations the lockstep is being meddled with on an ad hoc basis, a fact that was underlined when Legal Week revealed that not all of the projects partners were affected by the equity cut, but Morley insists that the firm has always operated a "managed lockstep".
"It is no great secret that to preserve the principle of lockstep you need flexibility. We do not have a modified lockstep, but it has to be flexible.
"If pure lockstep means ‘rigid and inflexible’, we have not had that for many years. Given the scale of our operations and complexity, that would be impossible. There are special arrangements with partners or groups of partners, although the vast majority are on the normal lockstep."
Some partners believe the lockstep needs major reform to speed up the partnership track or reward high performers more. Certainly, a model that puts a heavy focus on time served — which, unusually for a top London firm, means top-billing partners at the coalface often make less money than management — has generated its fair share of criticism.
However, Morley says that the system will remain in place for the time being, although the firm is currently considering minor adjustments to ensure it complies with incoming age discrimination laws.
"There is no formal plan to change the lockstep," says Morley. "We keep it continually under review. It is a board responsibility as to whether the time is right [for a change] but it is not at the moment."
The next 12 months will be testing for A&O. The firm is gearing up for a move to Spitalfields this autumn, which will also incur multi-million pound developments costs. Likewise, with substantial investment on its wishlist, A&O has precious little room to manuvoure if it is to maintain profitability. There is also management to be considered, with both Morley and Beringer’s terms due to end in the next 18 months.
While some of the dire predictions about the firm’s fate look a touch premature — compared with the problems assailing CC just two years ago, A&O’s woes are modest — some serious prioritising will be needed.
Since the Tudor John years, A&O has too often succumbed to mixed messages and a failure to put a bloated strategic agenda into action.
It is a mark of Morley’s enduring high regard within the firm that he is still touted as the man most likely to give A&O a clearer direction after what has been a difficult period. With Morley also viewed as the lead contender to take on the senior partner mantle when it becomes vacant (he, of course, refuses to comment), it is not a task he is expected to shirk from.