Analysis: Pulling it together

DLA Piper has always been a firm in a hurry. In the mid-1980s Nigel Knowles, now co-chief executive of the firm, was busy earning his management stripes running Dibb Lupton Broomhead's office in Doncaster.

Since then, Knowles - who became managing partner of the firm in 1996 - has been gambling DLA Piper's future on an unrelenting diet of growth and international expansion. First, a merger with Alsop Wilkinson (the firm that put the 'A' in DLA) delivered greater critical mass in London. Then came expansion in Europe, first through an alliance with local practices and later by opening DLA's own offices.

Finally, a January 2005 merger with US practice Piper Rudnick Gray Cary created the platform for DLA to go global. It also gave Knowles a co-chief executive role in a $1.1bn (£683m) business, alongside Lee Miller and Francis Burch, who head the firm in the US.

Almost four years on, DLA has grown into a $2bn (£1.24bn) business. But it is still split in two, with two distinct sets of equity partners sharing from separate profit pots (albeit under a joint brand). While Miller and Burch head the US side - Burch is due to become chairman in January, leaving Miller as sole chief executive of the US operation - Knowles rules over the non-US (or 'international') part of the firm.

A firm that 10 years ago had just two overseas offices, DLA Piper International now includes offices in continental Europe, the Middle East and Asia, bringing in revenues of more than $1bn (£621m) and employing more than 2,000 lawyers. The growth rate has been remarkable. In the years after sealing the Piper deal, DLA Piper took a chunk of Coudert Brothers' Asia network as that firm imploded, E&Y Law's offices in Russia and Georgia and Squire Sanders & Dempsey's Madrid office. It also launched a practice in the Middle East.

But there are cracks in this global empire. Having delivered year-to-year growth in profits for DLA Piper International's small cadre of equity partners, profitability was largely flat in 2007. There has also been discord in Asia with the regional managing partner, Nick Seddon, leaving the firm in January following a disagreement with the former head of the Beijing office. Clearly, building an international firm is one thing. Making it work is quite another.

Piper International's recent history shows that its gambles have usually paid off. In 2001, the first year The American Lawyer compiled its Global 100 ranking of the world's highest-grossing law firms, DLA was number 59, with revenues of $264m (£164m). This year, DLA Piper International was number 16, with revenue of $1.074bn (£667m). (Legal Week and The American Lawyer treat DLA Piper US and DLA Piper International as separate firms in the Global 100 rankings, which are now compiled by both magazines).

As revenues have grown, so have profits. Between 2003 and 2007, the international operation's profits per equity partner (PEP) doubled, jumping from $688,500 (£428,000) to $1.32m (£820,000). Last year, however, it reported one of its smallest increases in PEP, as the average equity partner took home £728,000. This was an increase of just 1.8% from £715,000 the previous year. (DLA Piper International showed a larger increase in our Global 100 chart, but that was due to the US dollar's weakened position against sterling.)

For once, the firm's profits performance trailed that of most of its rivals. According to Legal Week's latest Top 50 survey, the group as a whole averaged growth in PEP of 7.3% in 2007-08. Growth of less than 2% when 14 of the UK's 25 largest firms reported double-digit profit growth is not what the market has come to expect from DLA Piper.

Knowles says there are two reasons that profit growth was "less than it might have been": growth in the equity partnership (to 187 from 171) and increased investment in the firm's international network. This growth came not through merging with local practices but predominantly through individual lateral hires who, Knowles says, "couldn't be earnings-enhancing in the first year".

The equity partnership may be growing, but DLA Piper International's equity remains one of the tightest-held among the world's leading firms. The equity partnership now stands at 187, while the ranks of salaried partners totals 389. This larger group on average take home just less than £200,000. Just 32% of the firm's partnership hold full equity (non-equity or fixed-share partners can earn a bonus from the firm's profits based on performance on top of their salary).

Making a comparison to a handful of (very broadly) similar law firms, that compares with 43% at Kirkland & Ellis, a firm noted for its small equity pool; 80% at Latham & Watkins, a firm that has seen considerable growth over the past decade; 64% at Clifford Chance, and 42% at UK rival Eversheds. At DLA Piper US, 45% of the firm's 614 partners have equity status.

For years, DLA Piper International has been known for its small equity partnership. While DLA Piper International's revenues have quadrupled since 2001, the equity partnership has grown by just 87. Knowles predicts that the proportion of equity partners will increase as lateral partners who currently have non-equity status increase their contribution to the business. "We have hired a lot of people who are very good, and I expect them to mature and grow and enter the equity," he says.

Yet there is an urgency to the situation: profit growth has been a hallmark of DLA Piper International, even in the current economic downturn. The firm was not built for a second year of flat profits.

The firm also does not always appear built to bear the strain of assimilating a constant stream of laterals. In China, one of the markets that any aspiring global firm has to get right, the firm's Beijing office has been the scene of considerable turmoil. In December 2005 DLA launched an office in the Chinese capital with Coudert's former China head, Jingzhou Tao, and three other partners. Raids on Coudert also brought DLA a new Tokyo office and doubled the size of its Singapore outpost - all in the autumn and winter of 2005.

It was a classic DLA move - opportunistic, quickly executed, and with seemingly more thought for getting the deal done than whether the lawyers were the right fit.

It didn't take long, however, for part of the deal to unravel. Tao, a respected corporate and arbitration specialist characterised as difficult to work with by several former co-workers, objected to London's interference in the local affairs of the Beijing office. "DLA's tactic is to promise the moon before you join; then, after, they say everything has to follow Nigel Knowles's wishes," says one former China partner.

After a series of disagreements with Asia managing partner Seddon, Tao was sacked as head of the Beijing office in March 2007 and replaced by Mark Williams, an American corporate partner. Williams has since been replaced by Hong Kong-based partner Wei Liu.

However, Tao's popularity with some in the China practice led about 45 lawyers and staffers in the Beijing office to sign two petitions, sent to DLA Piper management, to complain about his treatment.

Although DLA Piper attempted to placate the situation by offering Tao several other positions, including head of arbitration in China, he resigned from the firm in September 2007 and joined Jones Day a few months later. Of his reasons for leaving DLA, Tao says simply: "DLA was not a good fit for me. The former local management had no clue about managing a China practice."

Such was the fallout from the Tao affair that Seddon was replaced as Asia regional managing partner by Europe, Middle East, and Africa head of corporate Alastair Da Costa in January. (Seddon joined the now-defunct Heller Ehrman in the summer as its Asia managing partner). Of the four partners that were in the Beijing office at the launch, three have left: Tao; Janet Tang, who moved to Akin Gump Strauss Hauer & Feld; and Matthew McConkey, who left for Mayer Brown JSM. Most recently, in September, Henry Wang, a July 2006 hire from Shanghai General Motors who split his time between DLA's Shanghai and Beijing offices, joined Dechert as its Beijing head.

Ten months into his job, Da Costa is relatively open about the turmoil the firm has faced in Beijing. "The office needed settling down," he says.

"It was a difficult period. We had our own tensions and issues, but it has settled down. When you grow so quickly and bring in so many people from different firms, it takes a long time to bed down." Knowles downplays Tao's exit, saying that "one departure doesn't call into question the decision [to open in Beijing]. We agreed a new head was needed".

Da Costa works to improve integration between the firm's 270 lawyers in Asia and the rest of the DLA Piper network, most of the firm's partnership has been focused on an even more significant integration process. In June, shortly before the global partnership conference took place aboard a cruise ship in the Mediterranean Sea, the firm's partners voted on a series of proposals intended to improve integration between DLA Piper US and the international side of the business.

The proposals - which were approved by the two partnerships - were drawn up by a seven-member integration committee established in the spring of 2007. The group was chaired by A.B. 'Buzzy' Krongard, one of the firm's non-executive directors; the remaining committee members were partners from either side of the firm.

The proposals included greater alignment between the firm's seven global practice groups; establishment of a Swiss verein (a model also used by Baker & McKenzie and accountancy firm Deloitte Touche Tohmatsu) to assist investment in the global network; greater integration between the sets of management; and an enlarged global bonus pool.

The pool is used to reward the referral of work between two parts of the firm, pay for such joint investments as new offices, and cover such joint costs as the global partner conference and George Mitchell's salary as chairman. (Mitchell, a former US senator, will become chairman emeritus in January, when Burch becomes chairman.) The size of the pot was increased from $30m (£18.6m) to $50m (£31m), with the majority of the increase intended to reward referrals. Bonuses for referral work will be decided by the firm's global management board on the recommendations of Knowles and Miller.

What was not on the agenda, however, was full financial integration - DLA Piper US and DLA Piper International would not be merged to share profits. And that represented a major change in direction.

Even before the DLA-Piper merger took effect in January 2005, various figures in the firms' management loudly announced a clear intention to fully integrate. In 2004, shortly before the deal took effect, Miller told Legal Business: "I think financial integration is cardinal... We have a common global vision, and it's going to be the juice in the deal."

Andrew Darwin, now DLA's managing director in Europe, the Middle East and Africa, told Legal Business: "I am a big believer in profit integration. It has worked well in the DLA network, and I want to work towards it over a sensible time frame."

Yet today, the message from management isn't so clear. Miller claims that the phrase 'financial integration' is open to interpretation. "We are on more of an accountancy-firm model," he says.
"I haven't moved my position. Having one pot is one way of looking at integration; we have hit on another structure that works."

Burch says that full financial integration moved off the committee's agenda early on: "We decided fairly quickly that there was little advantage in moving to one operating entity."

Knowles says that "pushing for one bottom-line firm for the sake of it wasn't worth the risks".

Darwin admits that things have changed. "If you asked me on 1 January, 2005, is financial integration important in the next three years, I would have said, yes," he says. "Now it is a different answer, but I am satisfied that we can achieve our business objectives without it."

Those business objectives focus on making DLA Piper the world's number one business law firm, as defined by the firm. That does not mean a business devoted to high-end corporate and finance work from the world's leading capital markets, like the magic circle. Instead the vision is of a firm with almost unrivalled global reach (the current count is 65 offices in 25 countries), which is full-service in each office, and able to act for the world's largest companies wherever they are.

However, most firms have opted to undertake global expansion with much closer financial alignment than DLA. Most have seen sharing profits as a fundamental part of operating as an international firm. In the years after its merger with New York's Rogers & Wells, for instance, Clifford Chance (CC) thought it was so important to harmonise its US remuneration system that it tried to integrate the US firm's top earners into its lockstep before most of these super-billers walked out.

However, CC's leadership still see the single global profit share as crucial to its business. "We think it is fundamental," says David Childs, CC's managing partner. "It helps with partner mobility and it ensures that the firm's clients get the best service from an office."

Allen & Overy senior partner David Morley is equally enthusiastic about full integration. "As a partner, it's an emotional investment that you make in ensuring that other parts of the business grow and succeed," he says. "There are always tax and regulatory issues to handle, but we have structures in place to deal with them."

DLA has a record of not conforming to accepted market practice, but this might be its toughest task yet. Work is flowing around the firm's network, but it is hardly the torrent that you might expect from a global firm. According to Miller, in 2007 a workload worth around £60m in fees moved between the two halves of the business, compared with £30m in 2006 and £12m in 2005.

This, he says, covers only major case work, but the message from senior management, regional managing partners, and department heads is that this flow of work is going to increase.

On both sides of the Atlantic, partners talk enthusiastically about the opportunities they say they are just beginning to embrace. "On 1 January, 2005, the US [partners] couldn't say to their clients, you can now use us in Europe as well," says Darwin. "You have to show them a track record."

Now the firm can point to the $6.7bn (£4.2bn) takeover of Applera Corporation's Applied Biosystems Group by Invitrogren, an old client of Gray Cary Ware & Freidenrich - the West Coast practice that merged with Piper Rudnick in 2005 shortly before the DLA deal. Or to advising Asian airline Cathay Pacific on multiple antitrust investigations into air cargo pricing practices and on two class actions filed in the US.

"The amount of work being shared and generated between offices is outstanding," argues Knowles. "During the current downturn, our geographic and practice diversity means we are still operating very healthily."

Indeed, Knowles doesn't seem to know any mindset other than relentless optimism. Faced with a downturn as serious as any as he's seen, and with a business that generates almost one-fifth of its revenues from the troubled real estate area, he shifts his focus to the potential of the Middle East or new opportunities in Asia. Despite some rancor in Asia, flat profitability, and juggling integration with the US business, his bet that DLA Piper International had to go global to thrive still looks like it might pay off - that is, if the firm can consistently deliver on it.

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