Global 100: Clifford Chance – The shoulders of giants

The trailblazing global law firm has had more than its share of knocks since the banking crisis. Will a popular new leader and strategic shake-up help Clifford Chance regain the magic?

‘There seems to be a point at every lunch and every cocktail party where the conversation turns to Clifford Chance. It always happens with conspiratorial whispers and knowing laughter, lawyers in City firms recount the latest tittle-tattle about the second largest firm in the world…

‘Why are people so obsessed with Clifford Chance? Because it is big? Because the lawyers are aggressive? Because the firm challenges City convention? Or it is because they are pioneers? Whether competitors know it or not, Clifford Chance has become a marker by which they measure themselves.’

Legal Business, June 1993

‘One of the key things I wanted to make sure is we have complete alignment across the operational side of the business. There’s momentum in that. Clearly, it’s critical we look at how we are maximising the value we’re delivering.’

Matthew Layton, managing partner, Clifford Chance, April 2015

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For a firm apparently with much to be confident about these days, Clifford Chance (CC) strikes a strangely subdued note. True, the global legal pioneer has faced a few public reverses in recent years. After a dramatic period between the 1987 merger of Coward Chance and Clifford Turner through the 1990s under the much admired and defining leadership of Geoffrey Howe and Sir Max Williams when the firm effectively wrote the book on legal services globalisation, the 2000s largely proved a troubled decade.

At the start of the 2000s the firm’s renowned vision and entrepreneurial drive was heavily taxed by the painful integration of its 1999 takeover of New York’s Rogers & Wells, even if the simultaneous union with German firm Pünder, Volhard, Weber & Axster was more successful.

Having apparently put that period behind it by the mid-2000s deal boom, CC suffered more than any other leading firm in the post-Lehman environment as its finance-heavy practice was ravaged, giving the firm the oft-used tag of the sick man of the Magic Circle.

But in many regards, the 3,000-lawyer firm has cause for renewed confidence over the last 18 months. Not only did it post robust results in 2013/14, with revenues up 7% to £1.36bn and profits per equity partner (PEP) rebounding to £1.145m, in late 2013 the firm elected its highly regarded head of corporate Matthew Layton (pictured) as managing partner, with a mandate to reboot the firm as a leaner and more ambitious legal giant, recalling its heyday.

Layton has already made a mark, stripping down the firm’s sprawling governance and, more significantly, this spring winning backing for an overhaul of its lockstep remuneration to usher in a more flexible model – reforms many believe were badly needed.

All of which makes it surprising that Layton was so understated in several meetings this year with Legal Business in putting the case for revival at what was not that long ago the world’s most influential law firm. Face-to-face, Layton talks in terms of the modern managerial class, of KPIs, back-office innovation and continuous improvement processes. A representative refrain: ‘With our organisation, you can’t micromanage from the top down, the real power at this organisation you see is that the partners and associates are operationally empowered in what they want to achieve for the business. That will constitute our success.’

While these points are hard to query, it seems a long way from the vision that made CC the talk of 1990s’ cocktail parties. Nevertheless, the dynamic at CC under Layton’s leadership is more complex and shifting than the low-key rhetoric suggests. Certainly a more effective internal communicator, there is more to Layton than a technocratic manager, or even the good cop successor to previous managing partner David Childs, a tough-minded details man.

As one senior recruiter comments: ‘Layton has brought in much needed rigour. The firm is being shaken up. If I was a younger partner right now I would look at what Matthew Layton was doing and I would be very happy because I would have been sick of seeing older partners setting there at the top of the tree and not doing enough.’

The basic question is whether CC is currently engaged in incremental polishing of its business or a more full-blooded attempt to engage and galvanise a partnership that has been at times distracted and disengaged in recent years. The version of CC that ultimately emerges under Layton – a driving meritocracy or the sprawling bureaucracy its critics paint – may well decide whether the firm can regain its position as the outfit the global elite must grudgingly judge themselves against.

A good citizen

It was a smooth rise through the ranks for Matthew Layton after joining Clifford Turner in 1983 as an articled clerk. The Leeds University graduate joined an upwardly mobile firm during an upwardly mobile period for the City, three years before London’s Big Bang deregulation, and four years before Clifford Turner’s trail-blazing union with the finance-focused Coward Chance. He was soon to work in the UK’s emerging private equity industry, with Clifford Turner in on the ground floor.

But on his first day in the job he had a different kind of assignment, being asked to travel to Luxembourg to work with an asset recovery team on the Banco Ambrosiano liquidation. No ordinary mandate, it involved dealing with the collapse of Italy’s largest private banking group, which brought to light the lending activities of the Vatican’s central bank.

Layton recalls: ‘I was just taking my first steps and was thrown from my Law Society exams into this situation, this international scandal. I felt so out of my depth.’ Cutting his teeth as a corporate lawyer, Layton worked alongside a young James Baird and was also influenced by the likes of Graham Paul Smith, Paul Jacobs and David Jones-Parry.

Layton and Baird made a name for themselves with clients including Permira, CVC Capital Partners, Citigroup, Credit Suisse, and Apax Partners, working alongside an ambitious group of corporate lawyers, including Ian Sellars and Adam Signy and a next generation, including Jason Glover and David Walker.

Always a pragmatic and astute client man, Layton was noted for displaying little of the ego and diva behaviour typical in the City’s private equity market. Even in the bitchy buyout community, no-one had a bad word to say about him. Layton made partner in 1991, five years after qualifying.

Alongside Sellars, Baird, Signy and David Pearson, he was one of the figures that propelled CC’s private equity practice to become the undisputed leader in the City and European buyout market by the late 1990s. The team had functioned as a tight-knit and profitable unit, reflecting the fact that following the 1987 merger, CC had typically been led by finance partners, with banking partners increasingly overseeing its wider public M&A team.

With money pouring into the sector as interest rates fell dramatically from the levels seen in the 1980s, fuelling debt-driven takeovers, and US buyout houses increasingly venturing into Europe, private equity became a key strategic asset for a major law firm.

But the first indication that the team felt a disconnect with the CC empire came in 2004, when Weil, Gotshal & Manges came within a whisker of persuading Baird and Layton to join. So close did the US firm come before news emerged that it had already assigned secretaries to the pair.

By several accounts, the duo were disenchanted with problems then facing CC, where PEP had fallen dramatically to a low in 2003/04 of £562,000 amid integration problems with its US and German mergers, a troubled 2002 attempt to enter California’s legal market and a slump in transactional work. This was well below what was being generated by the City private equity team at the time as one of CC’s most profitable groups, while there were also concerns over a lack of a performance culture in CC’s partnership in what would prove a recurring theme. The older Baird in particular had become disengaged, though it was also he who first wobbled over the move.

Co-publishing features:
Cost reduction = quality reduction – Mark Husband, Cogence Search
Survival of the fittest – James Tsolakis, RBS

An intervention by management under then managing partner Peter Cornell, promising to address such issues, averted the departure while Layton, wearied by 20 years at the corporate coalface, agreed a longer-than-usual five-month sabbatical to recharge.

Layton recalls the decision to stay: ‘[There were] a lot of factors at play. What makes you happy? What makes you leap out of bed and be part of a firm? The team around you – that influenced me to stay. I looked at it as: when you get to the end of your career, what will you feel most proud of? I saw that as being here. I looked at the PE practice – we had [seen] the opportunities to grow that, the enthusiasm in the team and their desire for me to play a part in leading and going forward. There isn’t another firm that would have given me the same platform and opportunities.’

Good to his reputation as a CC loyalist, there were no more rumours of departure in the following years, which is saying something given the gossipy nature of private equity and the amount of effort that US firms were putting into hiring into the sector.

Baird went on to retire from law in 2011 after more than 25 years as a partner, while Layton was appointed as global corporate practice head in 2008 and was to work with finance head Mark Campbell to drive through cross-selling initiatives across the firm. ‘It was a quantum leap for us,’ recalls Layton. ‘We wanted to see what barriers or silos were getting in the way and how to overcome internal obstacles. I felt it was time for a change.’

Campbell and Layton would be key figures in the post-Lehman period as CC strove with some success to diversify its practice from financial institutions.

As such Layton was well positioned when Childs indicated he would step down at the end of his second term as managing partner in 2014, especially as Campbell, the strongest alternative candidate, ruled himself out.

Still, Layton’s elevation did not look certain. CC’s democratic traditions had produced surprise results before – the 2001 election of European managing partner Peter Cornell to head the firm edged out London head Peter Charlton, the supposed front-runner. And some felt Childs had been less clear than Cornell about his succession plan.

Four candidates emerged in the summer of 2013: Layton, Paris managing partner Yves Wehrli, corporate and finance tax partner David Harkness and real estate finance partner Andrew Carnegie.

Layton pledged to prune CC’s sprawling governance structure – a guaranteed crowd pleaser – and to review its lockstep pay model, which has been a bone of contention for 15 years. There was an emphasis pushing towards a more performance-driven culture and growth. There were no upsets this time: Layton emerged as the successor in November 2013, taking up the role in May 2014.

Childs reflects on the changing of the guard: ‘Honestly, we thought and talked about it. One can’t plan with absolute certainty in the way that a corporate can. But I’ve known Matthew a long time. I have a very high regard for him. Yes, of the candidates, I hoped he’d become managing partner after me.’

Jomati Consultants founder Tony Williams, himself a former CC managing partner, comments: ‘Matthew has been a good corporate citizen. It would have been an awful loss if he’d left. The fact he stayed showed the depth of his loyalty to the firm. He’s very well liked. He will take the firm to the next stage – he has a clarity of vision, is a good communicator and people trust him. David did an excellent job but was the right man for the right time in that he was a harder individual. Matthew is no pushover but there’s more of a velvet glove.’

While current partners are more circumspect – there is a certain weariness and distance between practitioners and central management in CC, even by the standards of major City firms – there is evident internal support for the new leader. Comments one partner: ‘Now people are thinking the market looks better, we need to be more expansionist and visionary, so Matthew is the face. We’ll see how he does.’

Crunched

Layton’s return to the fold a decade before appeared to have coincided with CC finally turning the corner after an unremittingly challenging four years marked by a string of reverses. The mid-2000s’ credit boom was firing the firm’s practice, the executive pairing of Cornell and Childs had ushered in a more disciplined period and Stuart Popham was a polished, uber-connected senior partner as befits a global giant. CC again looked potent.

Childs as chief operating officer reacted to the firm’s 2004 slump in profitability by shearing £40m out of its cost base, including phasing out 400 support staff globally. Costs per lawyer fell from £246,000 for 2003/04 to £211,000 by 2004/05, addressing profitability that was lagging its peer group.

The firm took other steps to get its house in order, shutting down its disastrous foray into California in 2004. Meanwhile, in late 2005 it voted in a more flexible model for lockstep pay, which would allow partners in less profitable markets to earn below its core lockstep, with a higher band intended for the US.

When in 2006 Childs took over as managing partner, CC seemed set. As one of its best public M&A lawyers, the plain-speaking Childs had been mentored into the role and matured into an effective chief executive, softening some of his edges. Respected for his rigour, discipline and ability to prioritise, while not a natural consensus-builder, Childs was a credible figure leading a reinvigorated firm.

Revenues rebounded to a high of £1.329bn in 2007/08 as PEP surged to £1.156m, twice what it had been just four years previously. Even the troubled US practice appeared to be turning the corner, as the younger generation compensated for the departure of Rogers & Wells’ rainmakers who had left over rows over ‘super-point’ pay deals.

But the roof was about to fall in. The credit crunch gripping the market during the summer of 2007 turned into a full-blown financial crisis by September 2008 with the collapse of Lehman Brothers.

CC was probably the worst affected of the leading firms in London and New York. Heavily reliant on financial institutions, private equity houses and with a larger property team than its City peers, CC was more exposed than its rivals to the banking crisis and global recession. By the same token, the firm had relatively few lead corporate roles with major UK plcs and its well-regarded restructuring team was this time slow to pick up major mandates when the market turned.

Aside from its historic focus on banks, critics contend that its partnership culture tended towards deal junkies moving from mandate to mandate rather than the long slog of strategically building lead advisory roles with corporates as its peers had.

The shape of CC’s business, with a 200-strong rank of salaried partners and higher equity partner/fee-earner leverage than Freshfields Bruckhaus Deringer, Linklaters or Allen & Overy (A&O), also made it more vulnerable to a downturn, as did its thinner profit margin.

Ominously, the firm in October 2008 announced it was making 20 litigators redundant, conceding it was failing to make headway in the crucially important US disputes market, and asked partners to inject more than £40m in fresh capital. By January 2009, it announced a London redundancy programme that would become the first stage of cuts of 350 staff globally. In February, the firm announced a review of the size and shape of its partnership and also opted to shut its Budapest office.

‘Sitting in your office thinking “this is completely outside my control and the firm might be finished by the end of this weekend” is a terrible feeling,’ recalls Childs. ‘The crisis exposed some issues the firm had – we always liked acting for financial institutions – they’re great clients with very large legal budgets. But we’d overdone it. Too much of our turnover was with financial institutions – not just banks, but insurance, private equity funds and so on.’

In contrast to quickly-executed partnership restructurings that year at A&O and Linklaters, CC went through an exercise in painful democracy. On 19 February, CC floated putting 10% of its equity ranks at risk. The firm put the move to a vote, risking a highly embarrassing rejection for its leadership at a crunch point.

Childs recalls: ‘I wanted the partnership to support me. I didn’t just want to do it in the centre. That would ruin our partnership culture for years. Most of our competitors did it from the centre, which means they did it quicker than us. I remember telling my wife: “I won’t get the vote. In a month’s time, I’ll probably be retired… and I’ll be at home all day.” But we got 88% support, which I think was really healthy. It was an awful thing to do but it meant the partnership had agreed it was the right thing to do. We made the decisions locally rather than [from] the centre and it enabled us to make better decisions.’

The vote provided a mandate for up to 15% of its partnership to be cut. It was a dramatic move – by the end of the 2009/10 financial year its partnership had fallen from 637, more than 100 larger than any Magic Circle peer, to 562, including that current partnership round. Its equity partnership fell from 419 the previous year to 372. Stripping out departures unrelated to the restructuring and retirements, approaching 100 partners departed.

Inevitably perhaps, some felt it was handled poorly. One former partner not affected by the restructuring comments: ‘They said: “We’re going to take 10% out of every department regardless of what it’s contributing or whether [it’s] profitable.” They weren’t looking at relative underperformances. Some people were asked to leave that were contributing more and were better partners than others who weren’t. It was ridiculous.’

Still, the consensus view was that it was a necessary exercise for a firm carrying too many partners and too many underperformers. CC regrouped relatively quickly, putting in considerable effort to widen out the practice in areas like pharmaceuticals, energy and infrastructure and telecoms, with Layton and Campbell taking the lead.

CC’s business went through a substantial reshaping between 2008 and 2014, with lawyer headcount falling by 637, 18% less than its boom time high, and cutting its partner/lawyer leverage. The clampdown on costs and headcount, led to a dramatic increase in fees generated per lawyer over this time, up 24% to £461,000 at the end of April 2014.

A sample of non-finance-related clients includes Shell, Amazon, General Electric – on which it recently secured a coveted spot on its global corporate M&A panel – Siemens, Volkswagen, Deutsche Telekom and Petrobras.

Having secured a position on Shell’s 11-strong global panel two years ago, major mandates include advising on the A$2.9bn agreement to sell its Australia downstream businesses to Vitol and the sale of a number of businesses in Italy to affiliates of Kuwait Petroleum International in 2014. And in a move to position itself as a player in the burgeoning shale gas field, it acted for Chevron on its $10bn exploration project with the Ukrainian government in late 2013.

In pharmaceuticals it counts Pfizer and Bayer as major clients; while in telecoms it advised Deutsche Telekom on its £12.5bn sale of EE to BT in late 2014; and FairSearch, along with consortium members Allegro, Nokia and Oracle, on the ongoing antitrust investigation into Google’s alleged abusive practices in search advertising.

In the UK at least, the firm has some way to go to match its peers in terms of lead relationships outside banking. Research from Adviser Rankings shows CC having 11 lead client relationships in the FTSE 100, against 21 at A&O, 24 at Freshfields, 30 at Linklaters and 33 at the top-ranked Slaughter and May. However, the firmwide client plc base is regarded as stronger internationally.

Senior partner Malcolm Sweeting is bullish on the firm’s global network: ‘We’re the firm with the strongest international capability in New York. We are well ahead in terms of providing a high-quality legal service, although US firms are expanding rapidly. I don’t think there are any weaknesses to our international network.’

CC by 2010 moved back into expansion mode and in early 2011 secured a merger with two M&A boutique law firms, Sydney-based Chang, Pistilli & Simmons and Perth-based Cochrane Lishman Carson Luscombe. It created an Africa practice in 2012 with an office in Casablanca, and became the first UK firm to receive permission from South Korea’s Ministry of Justice to open an office in the country the same year.

This push reflected its most conspicuous success, in Asia, where by the 2013/14 financial year the firm was generating £195m of revenue – 14% of total revenue and comfortably more than the £152m it generated in the US. The firm’s global corporate practice also had a very respectable run of instructions after securing a string of cross-border deals.

The firm also in 2014 secured a much-touted joint venture in Saudi Arabia, with a team of 30 lawyers, further bolstering the firm’s strong credentials in the Middle East.

Less happily, the firm continued to lose a number of notable practitioners in the City, particularly from its private equity practice, which was facing increasingly intense competition from US advisers and a shift towards US financing for European buyouts.

Corporate heavyweight Adam Signy quit in 2009 for Simpson Thacher & Bartlett, followed in 2010 by highly rated funds head Jason Glover, who had been the driving force in breaking SJ Berwin’s stranglehold on the market. The funds practice was badly hit again in 2011 when a four-partner team left for Weil Gotshal. In addition, the last two years have seen Latham & Watkins recruit four notable buyout lawyers, global practice head David Walker in 2013, followed by up-and-coming partners Tom Evans and Kem Ihenacho, weakening CC’s hold on core Latham client The Carlyle Group. Latham followed up this year with the recruitment of Oliver Felsenstein, one of CC’s leading Germany deal lawyers who had been promoted to co-head the private equity team alongside Jonny Myers after Walker’s departure.

Layton argues that the firm can weather such departures: ‘Our PE practice, people will say we’ve lost a lot but it continues to grow year-on-year.’

Asked if any departures surprised him, Layton responds: ‘I’ve never thought about that. I’d have to have a think. I’m always disappointed when someone leaves. I don’t want to see great partners leave. There isn’t anyone who I could say: “I’m shocked” over others.’

While CC was far from alone among leading City law firms in losing prominent partners to US firms, the level of losses weakened its once unchallenged position in buyout work and stoked calls to shake up the firm’s pay system to retain high performers. Last month, the firm also saw the departure of corporate partners Ivan Presant and Joe Cosentino to Greenberg Traurig, part of the five-partner haul from the imploding Dewey & LeBoeuf that CC argued had been a major boost for its US practice. Its US practice – which shrunk from a high of 23% of revenues to 11% in 2013/14 – remains the largest of its London peers, but a long way from truly challenging leading US firms.

Aside from its own challenges, CC along with all its City peers has had to contend with a six-year period in which growth has been considerably more difficult to achieve while the Magic Circle faces a more potent threat from US advisers in Europe. All in all, there is plenty to keep even the most energetic managing partner busy.

Grasping the nettle

Assuming the managing partner role in May 2014, Layton quickly made good on his pledge to trim the firm’s unwieldy governance structure. The firm phased out the regional and practice head elections in favour of an appointment by the managing partner, ending an oddity of the firm’s governance.

Also ushered in was the creation of three global business units (GBUs) to cover financial markets; M&A and corporate transactions; and risk management and disputes; and the reduction of its executive group from 16 to 12.

Perhaps only at CC could such a shake-up be classed as slimming down, especially since the firm was adding a new governance tier. The newly-created GBUs are oriented around clients and are aligned with CC’s six core practice areas ‘to maximise collaboration and integration of expertise from across the firm’. The GBUs attract little comment internally. The firm retains a vote for the managing partner role, senior partner role, and members of its partnership council, its main oversight body and still puts more matters to a full partner vote than most peers.

Nevertheless, the attempt to strip back management has been well received. One former CC veteran claims that at its worst in the early 2000s the firm had accumulated more than 30 partners in non-fee-earning management roles. The firm was frequently criticised for either allowing unproductive partners to escape into senior management or, conversely, losing strong performers to leadership roles.

Layton comments on the changes: ‘I don’t think it’s fair to say [management] was overburdened but it’s good to shake things up. Part of it was a consequence of the markets we’re operating in. There was huge activity around product lines… but they weren’t the same market drivers. We needed to ensure the firm was aligned to the clients and market.’

Childs is more direct in supporting his successor’s stance: ‘I said to the partnership during my last couple of years that we had too many people in management and too much democracy. I used to say to the partners: “If you’re not careful, we’ll soon be electing members of the reception areas.”’

Head of corporate Guy Norman, who also heads one of the GBUs (for M&A and corporate) alongside Rob Lee and Jeremy Sandelson, comments: ‘Matthew’s constitutional change – the GBUs… has made a difference. We’ve always had cross-selling but there’s a huge emphasis on this now. What’s changed most is our clients don’t look at things from a CC practice area perspective – they have a great bucket of issues meaning we have to be joined up entirely on what clients are looking for.’

A former partner observes: ‘It’s got a lot better now, I understand. Matthew has grasped that nettle. There were people with double and treble reporting lines, the head of corporate of an office reporting back to the London corporate head and then the management committee in Asia, Europe, wherever.’

Layton is also intent on further polishing of CC’s operational performance and building on its continuous improvement programme, expanding a specialist team charged with helping lawyers improve work processes from six full-time staff to 12.

Central to overseeing the operational side of CC is strategy consultant, Caroline Firstbrook, who Layton hired as chief operations officer from Accenture, where she led a 1,000-strong strategy practice. He further created the new role of global head of innovation and business change, a spot given to Amsterdam managing partner Bas Boris Visser, who is tasked with ensuring the best ideas from legal and operations are able to percolate.

The move echoes the model of A&O, whose partner Jonathan Brayne heads its innovation panel, though, to Childs’ frequent exasperation, A&O has so far arguably been far more successful at promoting its innovation agenda than its old finance rival, despite CC’s once celebrated reputation for pushing through industry firsts. Nevertheless, CC was a pioneer of offshoring with the 2007 launch of its India service centre. The New Delhi-based venture was complemented with a global shared services centre, which now employs 20% of all business support staff, and supports the entire CC network.

Visser says he is intent on bolstering CC’s record in the area, including assessing the potential for new technology to transform CC’s business. Since meeting in New York in February, Visser has been working with IBM Watson to scope what technology the firm can use for the purpose of e-discovery and investigations work. And to nurture a strong innovation culture Visser is set to establish an innovation committee for which individuals on all levels of the firm, legal or operations, can apply. At the time of going to press, Visser was running a pilot in Amsterdam and expects to roll out committees in other jurisdictions before year end.

He says: ‘The challenge will be looking at how we have an innovation culture in each office. It’s easy just to say we need to create the energy in those offices. It’s crucial that innovation is part of the overall firm strategy.’

Discussing his priorities, Layton is looking for material growth in the US and Asia, citing an aspiration to push regional revenues to around 20% and 25% respectively in the medium term (US revenues were 11% of turnover and Asia reached 14% in the 2013/14 year).

More concrete points in the plan to help ensure the strategy translates into revenue growth and higher profitability are the introduction of fresh KPIs for partners and associates, and aligning client satisfaction to a greater degree with bonuses.

The message hasn’t resonated with everyone. One high-performing partner, who generally applauds his former firm says: ‘If I was still at CC now, I would think it’s a lot of hot air. I would say: “What’s the magic here? You haven’t told us anything!”’

While Layton’s external strategic statements tend towards the gnomic, many have taken the emphasis on improving collaboration and KPI for client satisfaction as code for pushing for a more commercially minded and meritocratic culture. While it has been carefully phrased, it is clear that Layton is seeking notable improvements in CC’s profitability. Such an approach is also expected to inform a more proactive stance on performance management.

At CC, that’s a tall order.

Fair for all

In late April, CC’s partnership voted through proposed changes to its remuneration, addressing an issue that has been highly charged for 15 years. Its 2005 shake-up had ushered in a regime in which CC maintained a core lockstep running between 40 and 100 points on a nine-year progression, which remained overwhelmingly the dominant means of compensating its roughly 400 equity partners.

That model introduced a lower ladder in some less profitable jurisdictions running from 30 to 70 points and a higher range primarily for partners in the US, meaning they could be paid up to 150 points, though this was rarely used. The 2005 regime was designed to be used on an office basis, not as a vehicle to reward individual performance, and the onus was on offices to deploy the varying tiers. In reality it was of little use.

Partners typically spent three years as salaried partner before moving to equity. CC retains a large rank of salaried partners – Childs’ failure to win support to move to an all-equity structure was one of his biggest regrets.

If the 2005 regime looked to be a messy compromise, it at least ushered in a more coherent structure than the previous situation in which the firm had a series of ad hoc deals above lockstep after its takeover of Rogers & Wells, which was at the extreme end of the eat-what-you-kill partnership. In one case, it had handed antitrust partner Kevin Arquit, its biggest US rainmaker who was said to have controlled around $40m in annual business, 326 points, more than three times what top London partners earned. There were similar arrangements in Italy after its takeover of Grimaldi and for its West Coast launch. Such deals – widely resented in London – were partially phased out during the early 2000s as ‘super pointers’ departed and the firm moved to standardise its pay system.

But the system has been under some pressure, not least because CC was generally less adept at managing out underperforming partners than peers, aside from the expectation partners would retire at 55.

This year’s shake-up is billed as allowing the firm to have a more flexible system and as a catalyst to review the equity allocations of a number of partners. While CC has shrouded the shake-up in secrecy, one partner describes the move as allowing plateau partners to be moved from 100 points to either 115 or 130 points, while others have been moved down as far as 70.

Described as a fairly comprehensive review, it is intended to look at performance across all geographies and took effect in May. One partner comments: ‘They haven’t torn up the lockstep, put it that way. The stretching of the ladder is expected to be used in the US. It’s unlikely you’ll see senior London partners being brought down from the plateau.’

Management has so far refused to comment on the criteria for adjusting equity points. Indeed, the firm has displayed a surprising determination to maintain secrecy over its remuneration given that lockstep is by definition a relatively flat and straightforward model.

It appears that as much as it is a means of stretching the pay scale, the current shake-up is as significant for giving management powers to review where partners sit.

As a relatively short lockstep, partners typically reach plateau in their early 40s. This, married with what many claim is a more indulgent culture than seen at Linklaters, Freshfields and A&O, means CC’s partnership tends to be top-heavy and that there is a narrow gap between PEP of £1.145m in 2013/14 and a top of its core equity at around £1.3m.

Figures released as Legal Business went to press showed a more subdued year for CC in 2014/15, with revenues down 1% and PEP edging down 2% (a softening euro has dragged on the sterling results of major London firms, with CC estimating that by stripping out exchange rates, underlying revenues grew by 3% annually). This will place the firm slightly behind its closest London peers in growth terms, after last year leading the pack.

It is notable that while its fee-earner base has been substantially cut from its boom peak and salaried partner ranks trimmed, the size of CC’s equity partnership is little changed on 2008, despite the 2009/10 restructuring.

The revitalised pay model appears set to boost the ability to pay top performers, underwrite a stronger performance culture and boost profits per point by stripping back the number of points in circulation. As such, the profit per point of roughly £13,000 in 2013/14 looks set to be increased by reducing equity stakes for weaker performers and those in less profitable foreign offices.

Nowhere is this more apparent than in Germany, where the firm in December launched a review of its practice by local managing partner Peter Dieners. The firm has since seen the departure of ten partners from its 83-partner German practice amid reports of considerable local discontent, a surprise perhaps given that the Pünder takeover has historically been regarded as successful. By several accounts, a number of German partners have also seen their points cut to between 70 and 80.

One local partner comments: ‘The practice focused on German corporate clients, domestic and international investment banks operating out of Germany, and it has done a good job. But the London office has a different view. They want to service international investment banks based in London and they need support for that from different offices in the region. That works well in Paris, Amsterdam, Brussels and Spain. But it simply doesn’t work in Germany because it was too big and too proud.’

Another local partner says: ‘Things improved on day-to-day work but not on the general standing of clients we want to advise. That has never been solved or overcome. I had no interest in voting on the pay proposals, and you should expect to see more German departures when it’s rolled out.’

Guy Norman argues that the practice needed the current shake-up: ‘It has a good brand, but it’s not in the top slice currently. There are firms ahead of us and we want to catch up with them. You’ve seen a significant restructuring to rebalance the partnership and provide oxygen and space for some of the really strong and impressive ambitious partners lower down the seniority ladder.’

As Norman’s comments suggest, a wider refreshing of CC’s 569-strong partnership allows the firm to address what some claim is a failure to cultivate young partners at the expense of a protected older guard.

CC’s promotion round has over the last six years varied between a high of 27 and a low of 20 partners and averaging 23 annually between 2010 and 2015, against an all-time high of 72 partners in 2000. Even more striking has been the paucity of UK promotions – the firm has on average over this period promoted just over five partners annually in the City. The lack of UK promotions partly reflects a reduction in CC’s UK business, which had shrunk from £548m in 2007/08 to £469m by 2013/14.

While it is hard to argue with the aim of bringing in a tougher performance approach with the least actively managed partnership in London’s big four, there will be considerable resistance in London to widespread awards above its current 100-point scale for a series of super-point laterals.

A number of current partners appear unclear as to how the new model will work. One partner says altering the system for the sake of big-name hires shouldn’t be at the expense of the firm’s ethos: ‘It would be a shame to move away from the model you have at the moment, where all partners are sort of equal, to making noise around: “do we need to hire specific people with specific packages?”’

However, according to two senior legal recruiters, there will be London departures due to older partners having points cut to be handed to star performers. And some shift in this direction seems inevitable both to build out its US practice and retain City stars from US firms, especially as A&O and Freshfields have in the last year pushed through a number of above-plateau hires and Linklaters is currently floating similar reforms.

As one veteran recruiter says: ‘The aim should be to get top earners to about £2.5m, through a mix of pushing up profits per point and lengthening the ladder. At that point you can fend off most of the US firms. There are a lot of partners moving now out of the Magic Circle to US firms and they are making 50% more. That’s hard to argue with.’

Sweeting comments: ‘Profitability is important. Our partners want to do the most challenging, interesting work. Profitability shouldn’t be an ambition in itself. But it is critical to all leading firms that it remains attractive to partners and future generations. As a leading firm, we should remain highly profitable. It’s strong and going in the right direction.’

One CC partner comments: ‘We have to consider is the system fair for all the partners through their level of experience, from junior to those on the plateau? Also, how do we look at and address the situation in markets where there’s a business need to bring people in? The time is right to have a look at the ladder. If we’re going to do something radical now is the time.’

How the pay shake-up plays out is perhaps the biggest operational issue facing CC over the next few years. By consensus – partnership culture has been both a strength and a weakness of the firm. While still a collegiate and co-operative partnership, compared to say Linklaters or A&O, the firm’s more critically-minded insiders concede that consistency of quality throughout the partnership and entrepreneurialism have slipped since the 1990s.

Jomati’s Williams comments: ‘It’s a strong, understated culture. They don’t wear their culture on their sleeve in the way other firms do but there’s a strong commitment and sense of pride. Traditionally it has been a can-do attitude. Inevitably that took a knocking. But those elements are still there.’

If the overhaul can make a material improvement in this regard, and give the firm a better platform to reward outstanding achievement, Layton will have made a lasting impact on CC.

Paying attention

For all the challenges it has faced in recent years, CC retains many considerable assets. Pound for pound, CC has one of the strongest global networks in the industry, with the firm boasting a muscular presence in the Middle East and Africa region and comprehensively strong European practice.

By consensus, the firm’s Asia-Pacific practice has only strengthened, particularly in Hong Kong, even as many London peers have lost key talent in the region. (It may be further strengthened. As Legal Business went to press China’s legal community were much engaged with claims that CC was attempting to secure a tie-up with a significant local practice, following Dentons’ tie-up with Dacheng this year.)

There is, however, room for improvement in some areas of US law financing work, where A&O has arguably made inroads this year and Freshfields has just made an audacious recruit in the shape of Kirkland & Ellis’ high-yield star Ward McKimm.

Nevertheless, few contest CC remains – along with A&O – the finance brand to beat in Europe with a fantastic grip on the market. Aside from its aforementioned need to evolve its practice towards a more transatlantic model of financing, the only serious challenge CC faces is ensuring it is developing enough quality younger finance and securities partners.

The firm has also established itself alongside Freshfields and Herbert Smith Freehills as one of the leading cross-border disputes teams in Europe, and has also built up a strong profile in the key regulatory disciplines. By the same token, considerable ground has been made to flesh out the firm’s industry coverage in recent years, while the firm has made considerable progress in cross-border M&A.

Competition, where the firm lost Oliver Bretz this year to set up his own boutique, and arbitration are both regarded as areas with room for improvement.

In private equity, the firm clearly has nothing like the clear blue water it once enjoyed between itself and rivals in the mid-2000s, particularly with US institutions that have increasingly migrated to their ‘house’ firms in Europe, but, as Bridgepoint general counsel (GC) and chief legal and compliance officer Charles Barter notes, the firm retains a strong bench and a sizeable roster of clients. David Pearson remains the key name for CC in the City, while of the up-and-comers Amy Mahon is frequently cited internally and by peers.

Norman comments: ‘I don’t accept the proposition that we’ve lost so much ground in PE… I don’t accept that we’ve fallen off and can’t get back. What’s happened is a huge and undeniable Americanisation of the market. American firms have come in and joined the party, no question. Many have one or two massive trophy clients. Our practice… we continue to win accolades and awards.’

Feedback from clients contacted for this article was strong. One Asia-Pacific GC at a major banking client, comments: ‘CC has a very strong understanding of who we are as a client. That’s impressive – you phone them up and they’re very well connected internally, have a very good historic understanding. You could talk to one of the key partners there and they’ll know things about our business that I won’t know. They really pay attention in understanding the issues we face and who we are and support us.’

The GC is also impressed with the firm’s global network, while conceding the firm has work to do in the US to compete with local firms, he comments: ‘The network is really good. It’s one of those firms you can use all over the world, particularly Europe and Asia without batting an eyelid. But its expansion in Australia has really helped us so you get that full service.’

If you would expect a strong review for CC from a core banking client, one GC at a major energy company is also impressed, and applauds Layton’s stance of drawing on client feedback.

‘We enjoy working with CC as it is a very client-focused firm and is open to both receiving and providing feedback. It makes a real effort to understand our business and does so as an investment rather than a “charge as we learn” approach. I like its focus on continuous improvement that includes reviews after each deal/matter to gather and disseminate learnings. Its global footprint and mindset fits strongly with our own footprint and approach.’

On areas for improvement, the GC says the firm could do more on diversity and adds: ‘I believe it can do better on understanding the changing pressures on a client like us, eg low oil price driving a clear focus on cost reductions, as it tends to have a mindset that a premier law firm needs to be in premier locations and premium facilities, support etc. Then again, not many law firms have woken up to this reality.’

However, Legal Business’s 2014 In-House Lawyer survey, based on findings from 436 GCs, found some room for improvement, with CC ranking fifth for ‘Strategic high-quality advice’ behind Linklaters, Slaughters, Freshfields and Baker & McKenzie and ninth when ranked across all categories.

In practice, the glaring weakness remains the US, where the firm has stabilised but it is not clear that CC is anywhere near getting the momentum required for a decisive breakthrough even as Freshfields and A&O have made some inroads in recent years.

With 270 lawyers spread across New York (200), Washington DC (55), and São Paulo (15), Americas managing partner Evan Cohen cites the reinsurance, pharmaceuticals, retail, and aerospace sector groups as targets for potential growth.

The commitment

Discerning what CC stands for now is not easy. An apparent attempt to control its message in a series of interviews during the research of this article was in some regards so heavy-handed that it squeezed out much convincing enthusiasm or sense of purpose for the firm which once aspired to be the world’s top commercial law firm.

So pronounced is this tendency – and the cautiousness of Layton’s external statements – that it is easier to gauge the firm’s strengths and enduring achievements from peers, clients and even former partners, who often maintain a considerable regard for the firm that remains the defining player in legal service globalisation.

Ironically, in comparison to the popular Layton, the robust Childs was in many respects better at articulating a clear message for what he wanted CC to achieve and evolve. It seems a notable difference between the leadership of Childs and Layton is less a focus on details, which both possess, or even communication skills, but that Layton excels at making partners feel better about themselves and is more consultative with his key leadership team. Observes Norman: ‘The new management team and structure in place now has pushed a blast of fresh air into the firm after a relatively long period… Matthew is different to David.’

One former partner comments: ‘The people in leadership they have now are good. Malcolm and Matthew are the sort of people they want. Malcolm definitely understands the old CC and the way it should be – they lost a certain element of that when David was there. I just think David didn’t really understand the strengths of Clifford Chance.’

What remains uncertain is if CC under Layton will now have the drive and clarity to address issues that have been avoided for so long. The firm is still strongly shaped by figures that led it in the 1990s, the potent culture that engendered and the legacy of its tripartite deal.

The sheer scale of the firm’s wasted opportunity in the US is often forgotten in the familiarity of its defeat. Rogers & Wells was at the time of its deal a respected upper mid-tier player in New York that could have provided a perfectly respectable basis for the firm to grow in the world’s biggest legal market. CC is still prone to dwelling on its poor choice rather than focusing on its poor integration or lessons it could have drawn. CC should have a $500m-plus US practice now – the failure to capitalise on that merger has cost it incredibly dear.

As Childs reflects: ‘You can debate for hours [if CC should have merged with Rogers & Wells] and some of my partners used to. The reality is you can only merge when someone wants to merge with you. And many US firms are reticent to carry out mergers. If there had been others… the fact is they wanted to merge with us. There’s no point day-dreaming. Pünder and Rogers & Wells were the right things to do. I don’t think we had any alternative.’

Leaving aside the natural cautiousness of a new leader – much of CC’s legacy from its celebrated 1987-2000 period remains intact. The firm has the unsurpassed global network and plenty of respected operators in leadership roles such as Lee, Norman and Sandelson to help execute Layton’s agenda.

Though the firm in 2014/15 posted slightly less robust results than its key City peers, the sick man of the Magic Circle critique is now behind it – CC has done enough to emerge as a more productive and balanced global leader and made some ground up against its UK peer group in recent years. But is the Magic Circle still such a healthy place to be?

Competition has increased as scores of rivals have borrowed from CC’s playbook over the years and in some cases executed it with more clarity. CC finds itself in a much more crowded global field than it faced as it helped reshape the market. Currently, the firm has yet to fully display the ambition, drive and willingness to address its baggage that would be required to put it back into a class of its own.

A true US revival and a renewal of its partnership culture with an emphasis on performance stand between CC and what is surely its goal: a shot at being the world’s top law firm. And it will take more than managerial competence to get the firm back to its old ways – in Cornell, Childs and Layton the firm has had a series of effective performers leading it for years. It is hard to escape the feeling that CC needs to find a compelling vision and to aim higher once more.

Layton finally gives voice to that old CC rhetoric: ‘There is a very strong bond, a common culture, a dynamism, a pride in terms of service we deliver and that commitment to do what we’ve done. That commitment is shared across the partnership. My key ambition is to empower not just the partners but everybody.’

He should want to let that message ring a little louder. LB

sarah.downey@legalease.co.uk, alex.novarese@legalease.co.uk

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