SNR Denton – Strained Relations

It is no secret that legacy firm Denton Wilde Sapte (DWS) has had a rough ride. During the 2010/11 financial year, the firm’s UK LLP (including the Middle East and Europe) posted an 8% decrease in revenue to £154.4m, while profits per equity partner (PEP) fell to an unimpressive £233,000. This represented a 34% drop (the second in a five-year period) on the previous year and saw the bottom of the equity take home just £156,000.

The EMEA side to the business sits at number 89 in LB’s profitability table, having performed better than just six firms in the entire top 100. But with profit per lawyer (PPL) at an all time low of £29,000 and a margin of just 13%, this firm has almost been run into the ground.

By contrast, the firm’s US LLP, which came as part of the September 2010 merger with Sonnenschein Nath & Rosenthal, just reported a 4.4% uptick in revenue to $474.5m. PEP climbed 6.7% to $880,000.

 On paper, a recession should present no significant problems for the EMEA business at SNR Denton. With strong roots in finance, particularly restructuring and insolvency, thanks to a pedigree that traces back to Wilde Sapte, and a good litigation track record, this market should have gifted SNR Denton a safety net to fall back on while the transactional side of the business suffered.

Instead, the finance practice has seen a steady stream of partner departures, a lack of big ticket instructions, not to mention the retirement of restructuring and insolvency superstar Mark Andrews from the partnership and the imminent retirement of fellow partner and well-known practitioner Graham Paine.

‘The facts are that when Howard was elected the partners didn’t want a hands-on approach when it came to management.’ Martin Kitchen, SNR Denton

Yet, despite the problems the practice has endured, there are only platitudes instead of solutions. ‘We came off the back end of a tough year,’ says Ransley. ‘But there is an overall culture change across the firm, which is more entrepreneurial with an outlook to winning work from new and existing clients.’

Taking over the reigns from former chief executive Howard Morris, the Jones and Ransley duo have their work cut out. The pair has devised a new focus plan for the EMEA business, putting profitability and cost cutting at the top of the list. With new look management and a new look strategy, SNR Denton partners are enthusiastic that the firm is on a forward trajectory. But saying they will tackle profitability and actually achieving it are very different. And are the ghosts of the past still lurking in the firm’s corridors?

 

Profits and losses

Unsurprisingly profitability, the firm’s biggest sore point, is at the top of the list for the new management team. Partners ashamedly admit that its poor performance is embarrassing, with one partner exclaiming: ‘Our profits last year were horrid. And they came at such a bad time.’

‘We are very careful to avoid confusion here. The strategy change is for the EMEA business and not the global business,’ says Jones.The pair’s first move was to overhaul the partner pay structure within the UK LLP to bring it more in line with the US. Moving to a merit-based system in May last year, partner pay will now be directly linked to performance.

Equity partners will each be assessed on a yearly basis against a number of criteria, including financial performance, profitability and non-financial contribution to the firm. Partners will face UK LLP board members once a year to have their pay and performance reviewed.

The firm has allocated a bonus pool from which partners who have performed well will receive up to 5% of available profits. For underperforming partners, management will review historical results and take a view.

Changes to the pay structure in the firm’s EMEA business went down so well with management that the US also made changes in a bid to bring itself more in line with what was happening on the EMEA side by conducting pay reviews every year instead of every two years.

Feelings in the UK were that a merit-based pay structure would help to address some of the concerns by partners that the previous management was too soft on underperforming partners (particularly those within finance and litigation). Management says the changes were also part of the post-merger agreement.

UK senior partner Martin Kitchen says that in the years leading up to the merger with Sonnenschein, management’s hands were tied when it came to managing partners out. The firm’s deeds didn’t allow for the active management of low-performing partners as each would have required a vote by the partnership before being asked to leave if necessary. The sensitive culture at the firm meant that management wanted to preserve the dignity of the underachievers.

But that changed in 2009 when Morris and Kitchen were given a mandate by the partners to change the constitution and the ability to manage out equity partners more effectively. The move, however, wasn’t fully put to use. Equity partner numbers fell at DWS, according to LB100 data, from 90 to 89 between 2009 and 2010, while non-equity partner numbers went from 90 to 87 during that same period.

While the move to a new pay structure was appreciated by current partners, who feel that underperforming partners should have been managed out during the financial crisis, others weren’t so happy about the change. ‘There was a real threat to partners leaving because they changed over to the merit-based system. This is because now they can judge how much you’ll get when you leave,’ says a former partner.

While the firm’s broken performance within the UK LLP has left a stain on its history, some partners argue that financial performance has always been an issue for DWS, particularly after the combination of Denton Hall and Wilde Sapte in 2000. ‘I don’t think the merger ever really worked,’ comments a former partner. ‘It never really seemed to pull together. I just don’t think the partners meshed well.’ Another partner at the firm is to the point: ‘Financial performance has been poor for a long time and for people like me that is frustrating.’

 

Revenue at DWS, for example, failed to ever surpass the £200m mark. The closest it came was in 2003/04 when fee income hit £177m. In recent years profitability has really held the firm back. SNR Denton’s UK LLP has become one of the few firms to see PEP fall by almost 40% twice in a five-year period. The first drop came in 2008/09. Overly exposed to the financial sector, the firm’s PEP plummeted by 38% to £287,000 from £470,000 that year. The firm’s profit margin sank to 19% and the firm’s PPL went from £57,000 during 2007/08 to £35,000.

While DWS’ pains hit partners hard, it was not alone in suffering: a collection of rival firms saw PEP fall by roughly the same amount that year.

Both Berwin Leighton Paisner (BLP) and Ashurst suffered a 35% drop in PEP, while Addleshaw Goddard saw that figure drop by 32% and Nabarro, which is vulnerable to the real estate market, saw PEP drop by 38%.

While its peers were busy improving financial results after a blip (BLP’s PEP climbed 50% during 2010/11 and Ashurst’s rose 3%), gloom spread through the corridors of SNR Denton’s Fleet Place office as it saw EMEA PEP fall again, down 34% from £353,000 to £233,000.

DWS’ five-year (from 2006 to 2011) PEP compound annual growth rate (CAGR) is -9%, while the firm’s revenue CAGR for the same period is 1%. However, during that five-year period, the firm’s equity partner numbers barely shifted.

‘Now is the time for us to regroup and re-energise. The potential we have in this firm is enormous.’ Paul Holland, SNR Denton

According to LB data, in 2006/07, there were 88 equity partners at DWS. In 2010/11, the firm had 85. In those between years, the firm’s PPL figure started a declining path. In 2006/07 it was £50,000 (with a profit margin of 22%), while in 2010/11 PPL for EMEA was £29,000 (with a 13% profit margin).

The firm’s exposure to the finance and corporate markets helped to create some pain, while the lack of big ticket restructuring and litigation mandates have also been big contributors. But part of the fall off can also be attributed to previous poor decisions.

 

The ghost of Denton Wilde Sapte

There is no doubt that some of DWS’ past will haunt Jones and Ransley. For example, the firm has a massive property overhang. It still owns office space left over from the legacy Denton Hall and Wilde Sapte days, costing it more than £3m a year in extra costs.

Denton Hall’s legacy includes two offices on Chancery Lane. Lewis Silkin sub-lets space at 5 Chancery Lane, while up until recently 124 Chancery Lane held DWS’ support staff (who have now moved to One Fleet Place). The former Wilde Sapte property, Strand Bridge House, is sub-let.

‘We’ve got too much property, but there is not much that we can do about it,’ comments Jones. ‘The surplus leases are running out soon, when they do, it’ll have a significantly positive impact on our profits.’ Managing the UK LLP’s cost base was again one of the first hurdles management has tried to tackle.

Jones says that last year, he and Ransley managed £8m worth of costs out of the firm’s UK LLP. The pair cut expenditure on IT, reducing what it spends on premises and slimming headcount. The firm’s LLP accounts show that fee-earner headcount during 2010/11 fell by 34, while administrative and support staff numbers went from 614 to 577, saving the firm £4.36m in salary costs.

 

While coming to grips with managing the balance sheets, the biggest change Jones and Ransley want to make is to the way partners themselves approach their business.

When asked why, if legacy DWS has such a strong reputation in restructuring, finance and litigation, has the firm suffered so heavily from a lack of mandates and huge instructions, Jones lets out a frustrated laugh and says the firm is currently, as part of its new strategy, promoting a cultural expectation for associates and partners to work harder.

‘We want to develop more of an ownership culture among partners. There is the need to increase work and produce more billable hours, but it’s about more than that. It’s also about doing whatever it takes to deliver excellence in client service – always going the extra mile,’ says Jones.

Jones says this approach is not just for the partners but for every member of the firm, from the post room to the single senior equity partner. Ransley has also launched, with the help of TMT chief Scott Singer, London corporate partner Richard Macklin and global corporate co-leader Jeremy Cohen, a training programme for partners to help restore confidence. The programme covers tips on how to win work from existing clients while going into the market and winning mandates from new clients.

They are, essentially, trying to shed the firm of its complacent nature and culture, which is believed to be one of the contributing factors to the decline in business since the Denton Hall/Wilde Sapte merger.

But culture change is a difficult, long and arduous process with no immediate effects. Despite this, expectations are that with some of the firm’s cost-cutting measures and new inspiration from the merger with Sonnenschein, that things will improve.

‘My first impression was that we all seemed to get on really well. There is a nice atmosphere about the place and we have some great lawyers.’ Jeremy Cohen, SNR Denton

 

Lethal cocktail

There is an air of excitement among DWS partners, more than one year after the Sonnenschein merger went live. While most UK partners see the merger as a saving grace, the changeover in management has been the biggest driver behind this surge in enthusiasm. But it has come at a cost.

‘There is a real confidence in the leaders of this firm at all levels,’ comments energy partner Christopher McGee-Osborne. ‘There is a clear vision now.’

Some argue that the clear vision was something the firm’s previous management seriously lacked. While no partner currently at the firm would admit that there were any faults in the way things were run (former partners aren’t as forgiving) following the Denton Hall/Wilde Sapte merger, there is a sense of relief that new management has taken over.

‘One of the main issues was that management at the time was trying to merge with other firms when they should have been trying to fix our problems,’ says one former partner.

Another says: ‘Effectively the style of management was to stare away from the iceberg when it was on the horizon. Management was a disaster because the firm had benign leaders.’

‘The strategic review was heavily focused on tackling the issues around profitability driven by a strong sense that there was a need for change,’ says Jones.

Jones replaced Morris as chief executive in March 2011, much to the surprise of the market and even partners at the firm as he was fairly unknown and always seen as a quiet leader. Ransley was appointed UK managing partner at the end of December 2010. At the time he was managing the firm’s Milton Keynes operation and now oversees its London and Milton Keynes businesses. Both were appointed by the board and each brings something different to the table.

‘Matthew has come in and already made a huge contribution,’ comments McGee-Osborne, while Singer says: ‘With Matthew and Brandon, we have much more firepower.’

 

But these changes meant that Morris faced a harsher fate, which came about at a cocktail party, according to numerous sources. At the combined firm’s first ever partner meeting at the Grande Lakes Ritz-Carlton in Orlando, Florida, a group of DWS partners approached then global co-chief executive Elliott Portnoy and US management to express concerns over Morris’ leadership. According to one member familiar with the scene: ‘A cocktail party for the global advisory committee essentially turned into a lynch mob.’

Partners complained that the firm’s management, led by Morris, was too complacent in actively managing the business through the downturn. It is understood that among the top complaints was an unwillingness by senior management to weed out underperforming partners who were sapping the equity and the lengthy trips taken by management during economic hard times, which were also draining resources.

‘We worked hard for the firm,’ defends UK senior partner Martin Kitchen, who was chairman at the time. ‘Howard took difficult decisions to run the business through the recession.

‘The facts are that when Howard was elected the partners didn’t want a hands-on approach when it came to management. They wanted a laissez-faire and more consensual approach. Whether that’s what the firm needed in the long run, I don’t know.’

‘We’ve got a compelling story to tell after year one. Among other things, we find ourselves with net gain, including 100 new lateral partners this year.’ Elliott Portnoy, SNR Denton

‘As set out in the information memorandum that was sent to all partners, it was always planned that I would only be co-chief executive for an interim period. It also made clear that the firm would be organising itself into a single management structure,’ defends Morris.

Partners got what they asked for. In February 2011, Morris relinquished his role as co-chief executive to become the firm’s integration partner, seeing him leave London altogether and move to New York City for two years. His new role will see him travel around the firm’s US and international offices.

‘What was going on was the need to bring forward management changes. The [Sonnenschein and DWS] combination plans laid out the adoption of a new management structure within a three-year period. Those plans were delivered earlier than anticipated,’ says Jones.

‘I am also very proud of the hard work that the management team, the office and department heads devoted during my time as chief executive and co-chief executive and continue to devote to the firm. There is no truth in the suggestion that anyone neglected to respond to the challenges posed by volatile economic conditions,’ says Morris.

The decision saw Portnoy, who shared the chief executive role with Morris, take on the post alone. Washington DC partner Joe Andrew was appointed as global chairman.

The move also kickstarted the complete global overhaul of the combined firm’s structure.

Each region has gone through change. The US, EMEA and Asia-Pacific offices now have their own senior partner, managing partner and chief executive.

In December 2011, the merged firm created two new positions in its US business. New York partner Peter Wolfson was appointed as the firm’s chief executive for the region, while Washington DC partner Mike McNamara was appointed as US managing partner and Michael Barr (New York) has been appointed as senior partner.

‘We’ve really worked to align the business operations, compensation systems and governance globally, so that the US region matches the approach we’ve followed in the EMEA region,’ says Portnoy.

 

In the Middle East, Neil Cuthbert, who was managing partner of the region between 2005 and 2011, was appointed as Middle East senior partner, while Dubai partner Michael Kerr has been appointed as UAE managing partner and Doha-based partner Leigh Hall has stepped into the Middle East regional managing partner role.

‘I really think we’re under better management now,’ comments Paul Holland, who was recently appointed head of banking and finance in London.

 

Departure lounge

SNR Denton’s London office has been notoriously difficult to recruit from, according to a managing partner at another City firm. ‘The CVs are on the market, I just can’t seem to get to the next stage with any of them,’ he complains.

Last year, 15 partners resigned from SNR Denton’s London office. Of those leaving, four were board members (one retired), six were finance partners and most were senior, including finance partner Michael Black, real estate finance partner Ian Roberts, advocacy chief Rory McAlpine and litigation co-chief Paul Morris.

Also in 2011, it appears the firm’s EMEA board quietly tightened its exit terms, holding senior equity partners to a 12-month notice period and junior equity partners to a six-month notice period in a bid to deter people from leaving.

It is understood from market sources that partners like Black, Roberts, Paul Hayward-Surry and Andrew Hill were all held to 12-month notice periods, without the option of taking gardening leave. Black joined Norton Rose at the start of the year, while Roberts moved to Pinsent Masons, both left slightly before the 12 months were up.

Management defends the move and Jones says: ‘We felt it was appropriate for a number of reasons, but mostly to ensure the stability of client relationships and service delivery. The constitution position on notice is as it has been for a long time. It hasn’t changed.’ He also says the firm assesses gardening leave on an individual basis.

‘I think they wished to be difficult to deter people from going. They don’t want to tell you [what date] you’re going, but they also won’t give you gardening leave. You’re in a difficult period as the work trails off because clients don’t see much point in giving you new instructions,’ says a former partner.

‘We are very careful to avoid confusion here. The strategy change is for the EMEA business and not the global business.’ Matthew Jones, SNR Denton

But just because stringent measures have been placed on departing partners doesn’t erase the fact that they’ve left, taking with them clients, associates and revenue.

The firm’s finance practice has been particularly badly hit. The year has seen the exits of Black, energy trading partner Brett Hillis, real estate finance partner James Linforth, Roberts and project finance partner Howard Barrie. Real estate finance partners Hill and Hayward-Surry are expected to leave for Stephenson Harwood (to join Linforth) but a date has yet to be confirmed.

‘There were a number of departures last year and we wish them well,’ comments Holland. ‘Finance has always been a major pillar of the firm. The practice is always under review. We’re looking under the bonnet and doing a full analysis.’

Part of the EMEA strategy review is to return the firm’s finance practice to a more prominent position within SNR Denton. Holland says he isn’t concerned about the impact on large banking client relationships that the departures may have because they’re so institutional (the relationship with The Royal Bank of Scotland (RBS) dates back to Wilde Sapte). But the truth of the matter is that partners like McAlpine and Black, who traditionally managed the RBS relationship are now gone.

‘There are very few bank panels that we are not on,’ says Holland. Indeed, the firm has relationships with all the major clearing banks and large foreign banks, including BNP Paribas, Investec and Goldman Sachs. The firm also sits on the Lloyds, Barclays and HSBC panels.

 

The 40-partner practice in EMEA contributes roughly £35m, or 22%, to the firm’s overall EMEA revenue. ‘We’ve slightly contracted in finance,’ admits Holland. ‘We’ve lost our focus a bit and so now is the time for us to regroup and re-energise. The potential we have in this firm is enormous.’

The biggest cash cow for the finance practice in the years leading up to the global financial crisis was the firm’s restructuring practice. Andrews, who was seen as the City’s leading specialist, led the group at the firm for more than two decades. But his 2011 retirement is thought to have had a major impact on the firm’s business.

While a number of mid-market instructions helped to keep restructuring partners busy, the firm failed to land roles on some of the biggest mandates, losing out to firms like Linklaters and Freshfields Bruckhaus Deringer.

Alongside finance, Ransley and Jones have earmarked the firm’s energy, infrastructure and project finance, and dispute resolution practices for growth. But the disputes group suffered from the exit of McAlpine to Skadden, Arps, Slate, Meagher & Flom and Morris to Norton Rose also in 2011.

Much like its restructuring practice, the firm’s litigation business never really took off during the recession. Some attribute this to a hesitance by t mghe banks to litigate during the difficult periods.

‘There is a real confidence in the leaders of this firm at all levels. There is a clear vision now.’ Christopher McGee-Osborne, SNR Denton

The firm did have a few wins. In early 2011, current litigation chief Richard Caird took on the British Bankers’ Association for the Financial Services Authority in a judicial review launched by the banking advocacy group over payment protection insurance. Caird was successful and the High Court case was dismissed.

The firm is also acting for A&E Television networks in a UK trade mark dispute. While many have left, a few have joined. Part of the new strategy is to once again place the firm on the recruitment map.

The biggest hire for SNR Denton’s London office came in the shape of ex-Linklaters partner Edward Hickman, who joined the firm in early 2012. The firm also took energy partner Mark Cheney out of Linklaters in August 2011, and Humphrey Douglas from legacy firm Barlow Lyde & Gilbert to boost its energy offering in the City.

‘We’ve got a compelling story to tell after year one,’ explains Portnoy. ‘Among other things, we find ourselves with net gain, including 100 new lateral partners this year. We’ve also opened new offices in Hong Kong and Beijing.’

 

Integration across the nations

‘This is a turnaround story,’ says the EMEA chief executive with confidence. He is expecting profits to increase significantly for the 2011/12 financial year. When asked by how much, Jones responds: ‘Why don’t I give it to you using adjectives rather than numbers. We are not just expecting a mild recovery, but we are expecting significant double-digit growth in profits.’

When we meet, the firm still has three months of trading time before the end of the financial year and geo-political situations still look as if they could get out of hand (the Arab Spring continues to rage, the eurozone continues to teeter on the brink and the UK economy continues to lag).

 

But one thing is for sure. The combined SNR Denton is feeling much better.

‘Culturally the fit has been great. My first impression was that we all seemed to get on really well. There is a nice atmosphere about the place and we have some great lawyers,’ says Jeremy Cohen, who co-leads the firm’s global corporate practice.

As the partners prepare for another trip to Orlando in May to celebrate their success – and indeed the firm has had a number of successes – the road ahead is not smooth.

It probably helps that the two sides of the business are connected through a Swiss verein legal structure (and don’t share profits), so if one side’s profits plummet, the other side doesn’t feel it.

But for now at least, everyone is happy to be together.