Freshfields remains the most potent of the City’s big four but modernising the 270-year-old institution has always been a delicate business. Legal Business meets the leadership team tasked with sealing its place in the global elite.
A City veteran, previously a partner at Freshfields Bruckhaus Deringer, sums up the task ahead for the firm’s incoming leadership. ‘The biggest challenge it faces is how it will retain its leading position in an increasingly competitive market. They are running a few initiatives to tackle this and have been reasonably creative. They are willing to challenge a few taboos but are taking their time. Time they don’t have.’
Freshfields has some form for taking a certain amount of time with high-stakes decisions, even as it emerges from a period in which the key strategic moves taken by earlier generations have run their course.
‘We have to close the profitability gap with the US/global elite firms. We’re on a very good track.’
Stephan Eilers, Freshfields
In the 1980s the firm famously tilted its practice to the foreign investment banks reshaping the Square Mile; in the 1990s it tacked hard towards globalisation, culminating in its 2000 mega-merger with Germany’s Bruckhaus Westrick Heller Löber; in the 2000s the firm went through a comprehensive restructuring that put its partnership in lean shape before the banking crisis. But the legal industry has moved beyond a world shaped by Big Bang and the Maastricht Treaty into a purer form of globalisation.
Freshfields remains for many the most potent of the four internationalist members of the Magic Circle, boasting probably the strongest pan-European M&A team and superb practices in disputes and antitrust. Unlike most leading City peers, even alumni remain impressed. ‘Undoubtedly a fantastic firm that does the best work with the best clients,’ says one former partner. ‘Incredibly high standard.’ Says another: ‘Of the Magic Circle, Freshfields is consistently better. In their core practice areas, they are peerless.’
Success brings its burdens. Shifts in the global economy and currency markets have made leading US competitors more threatening rivals since the banking crisis. Despite considerable success in building a contentious practice, the existential challenge of forging a corporate and banking practice in the US to befit its status remains. And the last five years has seen Freshfields struggle for growth, despite largely retaining its key partners, as even its largest corporate and banking clients press down on fees for much of their matters.
Steering the firm through this phase will be a new leadership team under incoming senior partner Edward Braham and co-managing partner Christopher Pugh. The pair are half of a quartet, alongside Germany-based co-managing partner Stephan Eilers and New York-based executive partner Michael Lacovara, stepping into the considerable shoes of figures who have gone before: among them Anthony Salz, Alan Peck and Ted Burke. The latter was the much admired managing partner who quit in 2013, part way through his term, leaving antitrust partner David Aitman to fill in. That, according to some, deprived Freshfields of the intellectual heft at executive level that had served it well.
Leading Freshfields requires considerable nuance, persuasive skills and deft grasp of human nature as more than 270 years after its formation the firm remains the least corporatised of its Magic Circle peers and the least reconciled to management.
Nevertheless, the last 18 months have seen some bold moves, notably the launch of a low-cost support and legal services centre in Manchester and the firm’s first serious attempt at forging a transactional practice in the US, the latter requiring some flexing of its cherished lockstep pay model. Both initiatives have sent reverberations around the firm.
Eilers makes it clear its Manchester programme and assault on the US will be top of the priority list for the next five years. ‘We have to make Manchester – this efficiency, this better way of working together – work. We have to get this implemented and complete the Manchester story. In terms of the US expansion, we have to close the profitability gap between Freshfields and the US/global elite firms. We are pretty confident that we are on a very good track to do that.’
Braham echoes the point, arguing the 2,300-lawyer firm is intent on becoming a more agile institution to meet a market in flux. ‘The world is changing very quickly and what clients want is changing. We need to be an organisation that can adapt incredibly quickly and deal with a more diverse set of client needs than I can ever recall.’
Bringing people along
After a contest in the summer of 2015, front-runners Braham and Pugh won Freshfields’ leadership election with Braham serving as senior partner, taking over from Will Lawes, while Pugh sits alongside Cologne-based Eilers as joint-managing partner, replacing Aitman. The roles of Braham and Pugh are largely focused on leadership, while Eilers and Lacovara are split broadly 50/50 between management and client work. The line-up spreads its leadership across the City, Germany and the US.
Braham is Freshfields man and boy, joining the firm as a trainee in 1985 and making partner a decade later. He brings management experience having served as corporate head from 2009 to 2014 while Pugh was in charge of the firm’s dispute resolution team over the same period, overseeing substantial expansion in Freshfields’ contentious practice.
Tax partner Eilers steps up to the joint managing partner role from his current position as the firm’s executive partner. Eilers led the firm’s tax practice between 2000 and 2005 and reprised that role from 2008 to 2010. US partner Lacovara currently co-heads the firm’s general industries sector group having joined in 2012. Previously, he was a partner at Sullivan & Cromwell, before moving to investment bank Sandler O’Neill + Partners where he became chief operating officer. Before Freshfields, he was director at Analysis Group for eight years and president at Cortview Capital Holdings from 2010 to 2012.
‘We bring people along with us so it’s much more collaborative and cohesive. I worry about those organisations that have strong management teams who chop off parts of their businesses.’
Christopher Pugh, Freshfields
Braham and Pugh were initially set to go head-to-head for senior partner but ultimately united for a joint run. The firm saw several competing tickets formed at the firm’s partner conference in Paris in May, where teams pitched to the partnership and were required to receive a minimum 5% of partners’ votes to become an official nominee. Against Braham and Pugh was an Anglo-German duo, corporate co-head Simon Marchant, who ran against Braham for the senior partner seat, and Germany and Austria regional managing partner Klaus-Stefan Hohenstatt, who bid for the managing partner position.
Braham certainly seems to fit the classic mould of the senior partner, cited by colleagues as engaged with the wider strategic picture. It goes almost without saying that the M&A/capital markets lawyer has the reputation you expect from Fleet Street as a polished client whisperer and all-round ambassador for the brand.
Braham’s rise at the firm has been smooth, having negotiated a long period in leadership while making few enemies. An understated approach has its appeal at Freshfields, a firm in which seeking office is still frowned upon; Braham’s predecessor Lawes was viewed by some as a reluctant senior partner who needed encouragement to take on the role in the absence of credible and willing contenders.
Freshfields regional managing partner for MENA Pervez Akhtar says: ‘Ed is an effective operator and good at making strategic decisions. When it comes to making big decisions, I would want Ed behind the wheel.’ Adds one former partner: ‘Ed will be a good ambassador for the firm. Although he is not as charismatic as Will Lawes, he is a good client man.’
Pugh was a popular and engaged leader of the disputes practice during a period in which Freshfields’ wider contentious practice expanded profitably across commercial litigation, global investigations and arbitration. At the start of his term running disputes the firm had 58 dispute resolution partners, a figure that has expanded to 100.
In discussion the pair go out of their way to sound joined up, while Pugh – naturally more inclined to plain-speaking – is assiduous in deferring to Braham.
Lacovara brings operations experience, while Eilers has financial experience and has already previously sat in the executive role with former leaders Burke, Lawes and Aitman.
Nevertheless, some peers think the leadership team lacks the weight it once had. One former partner comments: ‘Ted Burke had a standout presence. He was present in every decision and was extremely entrepreneurial. Everything was always thought of in advance. The firm truly lost something when he stepped down.’
Another ex-partner takes the point further: ‘The incoming leaders are still very conservative – more so than some of the others that ran in the election, but their eye will be on the ball. [Braham and Pugh] are both very aware of how far the Magic Circle has fallen behind the US firms/global elite. They have fallen to the bottom of that pack and they will be wanting to fix that.’
The firm has taken a hit in some metrics compared to peers. Profits per equity partner were down 8% to under £1.37m, while revenues were more or less static for the financial year 2014/15. Freshfields’ revenue has grown only 9% over the past five years, a performance that has seen Allen & Overy (A&O) and arch rival Linklaters now generate more revenue, albeit with more lawyers and offices.
Even allowing for currency movements, many would contend that Freshfields and its City peers have not kept pace with US rivals since the banking crisis.
But Braham – while cautious in his messages on many fronts – is emphatic in rejecting suggestions that Freshfields has lost any ground. ‘We more or less invented the market of global investigations. We have the leading antitrust practice. We are number one in cross-border M&A for at least the last six years. We have strong capital market practices in Europe and Asia and now have a team in the States.’
There is also a considerable degree of continuity. While Burke had pressed for Freshfields to step up its US commitments before his departure, he and Lawes were the first to put the Manchester initiative on Freshfields’ agenda.
The election speeches picked up these issues centring on several broad areas: geography, innovation and execution, which meant tackling two thorny issues: how the prospective leaders thought Freshfields would crack the US and what that aspiration meant for its cherished lockstep remuneration model.
Pugh tells Legal Business: ‘Some law firms are much more directional with core management teams and the partnership expects them to make the tough decisions and drive them through. That leads to a different culture. We bring people along with us so it’s much more collaborative and cohesive. I worry about those organisations that have strong management teams who chop off parts of their businesses – particularly if they do it every five years.’
Little steps and big ambitions – Ed and Chris on the Freshfields way
On Freshfields’ culture:
‘You see people join us and there is something about the firm that they fall in love with. There is a genius about the firm – an ability to be creative and fulfil your potential one way or another. There is something in the history, the culture, the people, the quality. Yet we don’t take ourselves too seriously. There is consensus about wanting to achieve something special.’ Christopher Pugh
On leadership:
‘We’re both optimists. If I can’t work out what I’m doing next I’d rather stand back and ask: “What is the objective?” People say that’s strategic. Chris is very good at that too, but he nicely says that I am slightly better at it. Chris is much better at putting in place systems to achieve results.’ Ed Braham
On globalisation:
‘Thirty-eight percent of what we do is in places where we don’t have offices – that is not an accident. We work extensively to build this.’ Braham
On strategy:
‘We have always managed to evolve in little steps when we have needed to in order to grow our strategy. We have never had to make those big changes that are very difficult. [The strategy] will continue to evolve but I don’t see any major changes that will be difficult to handle.’ Braham
Freshfields post-banking crisis:
‘We have tried to bring dispute resolution and corporate together and wrapped them around the clients. Ten years ago we wouldn’t have seen anything like this. We have never worked like this before and that is a huge long-term achievement and resonates with what came out of the [banking] crisis.’ Braham
On decision-making:
‘We are high consensus and people say [that means] you can’t make decisions quickly. I would say it’s the opposite.’ Braham
On switching tickets:
‘I put myself forward for the senior partner role but I always thought I was much more suited to the managing partner role.’ Pugh
On Freshfields’ US practice:
‘We have critical mass in the US today. We do want more scale but are we able to do today everything that our clients want us to? Yes.’ Braham
The sandpit
While the US has long been on Freshfields’ agenda, this year’s decision to launch a large support service team in Manchester – called the Global Centre – is a more recent, some say divisive, topic on Fleet Street.
The move commits Freshfields to the nearshoring model apparently on a larger scale and with a faster rollout than attempted by less traditionalist firms (some guesswork is required here as the firm is somewhat vague on the details). With more than 700 support staff currently based in central London, it will likely mean substantial numbers of jobs moving to the north-west and redundancies.
Current head of the firm’s general industries group and former disputes head, Paul Lomas, was initially tasked with assessing the venture, while Deloitte was appointed to advise. Some partners say Lomas’ views on the project were ‘too aggressive’, amid initial proposals to house as many as 800 staff in the north, leading to a less radical outline.
The firm in May 2015 hired Anup Kollanethu as centre director after it signed a lease for temporary office space in Manchester’s Arndale House. Kollanethu joined Freshfields after 12 years at Aviva Investors, where he was managing director of global shared services and transformation for the last three years, and chief operating officer for Asia-Pacific and its director of global operations transformation from 2008 until 2011.
Corporate partner Gareth Stephenson was tasked with leading a pilot project that ran in London for 18 months from the beginning of 2014, and was then transferred to Manchester to oversee the operation.
At present, around 70 staff members mainly covering document reviews are on the ground in the new 40,000 sq ft hub. But in early 2017, staff will move to permanently occupy One New Bailey, located by Spinningfields in Salford, double the size of its current space. In five years’ time, the firm expects the new site to be fully occupied.
Staff headcount at the current site is expected to grow to 300 by mid-2016, according to one partner in management. Looking further ahead, Pugh says expectations that there will be around 500 staff in Manchester by 2020, while staffing in London falls from around 1,500 currently to 1,000-1,100, are realistic.
The office will accommodate legal services staff, as well as human resources, IT, marketing, design and business development, office management, document specialists and change management, and also some paralegals. While the redundancy consultations with City support staff ended in the autumn, Freshfields refuses to confirm how many in support roles were made redundant.
Manchester will cover back-office operations internationally, with Freshfields’ main IT function in Germany closing down this year. Around 30 IT staff members were affected, and the news came while the firm announced plans to merge its Cologne and Düsseldorf offices in Germany, in a substantial shake-up of its local practice.
‘If you have a client who needs 13 non-disclosure agreements worldwide, this is something we can do from Manchester rather than across three or four different offices,’ says Eilers. ‘Our centralised pitching unit no longer needs to be in London or Frankfurt. This is the new approach to how we will allocate our resources and people.’
The plan is to roll out two more outposts in Asia and the US to provide 24/7 legal support for all its global offices. The Global Centre will also be a site for exploring the latest technology options; Freshfields recently assigned several groups to assess the use of IBM Watson and advanced automation for its business. If Manchester looks to be a reworking of earlier initiatives in Belfast by A&O and Herbert Smith, Freshfields emphasises the ambition to treat the new arm as integral to its service, rather than focusing narrowly on back-office support.
‘Manchester may be a sensible and necessary move to position the firm in the next 20-30 years but to say it’s something that has been welcomed is nonsense.’
‘Manchester is a sandpit for innovative ideas where we can try out different processes,’ says Pugh. ‘We have to deal with language and time zone issues so it becomes an international centre, but if we have this and other centres in five years’ time, it will have transformed the way we engage with clients.’
While management argues the firm is behind the move, inevitably, the process has been unsettling for some.
One associate at the firm says: ‘Non-fee-earners are very uncomfortable with the move. It has been done in a very cloak-and-dagger way. You ring up somebody in word processing or IT and they are just gone without any leaving announcement. There was no true consultation about Manchester. Management made the decision and then there was a redundancy process.’
One former partner comments: ‘People are sceptical about the move. If you have word processing work that needs doing late at night, you would rather give it to the person who has been doing it for you for years, who knows your handwriting and knows how you work, rather than e-mailing it off to some business address.
‘It may be a sensible and necessary move to position the firm in the next 20-30 years but to say it’s something that has been welcomed is nonsense.’
Others have raised eyebrows that Freshfields, which has generally been seen as less operationally slick than its City peers, would put so much store in northshoring and process improvement. According to one account, a far more modest move, or ‘mock test’, to centralise word processing in a unit dubbed the London Business Centre led to a fall in standards as teams used to handling specialist documents struggled to work across practices.
Communication around the initiative has at times been patchy and gnomic, a situation aggravated by the short-lived appointment of a new head of comms from a major banking group.
Pugh responds: ‘It has been unsettling for partners and fee-earners, but most people understand why we are doing this and are behind us. It goes back to consensus. Partners say their associates are doing things that don’t extend their client and legal abilities or enhance their career – document review is the classic example that can be done by others under supervision.
‘It’s not a ruthless move, but a thoughtful and considered one. It will be critical to maintain our culture. Anup was brought in to help and we have a partner [Stephenson] in Manchester embedding this culture. Manchester has to be integrated internationally, it is going to be hard work but we have to make sure we get it right.’
The third pillar
If wrestling with the realities of disaggregation and northshoring is new territory for Freshfields, 3,000 miles away the firm last year dramatically returned to more familiar ground, with a series of senior recruits aimed at kick-starting its US transactional business.
Braham was already overseeing building up the corporate group in New York, and the hiring spree began by adding former Wachtell, Lipton, Rosen & Katz partner Mitchell Presser, and James Douglas, a former partner at Skadden, Arps, Slate, Meagher & Flom, as division heads for its M&A and leveraged finance practices.
After this came a series of other hires, including the arrival of Fried, Frank, Harris, Shriver & Jacobson securities trio Valerie Ford Jacob, Michael Levitt and Paul Tropp; Howard Klein, an employment partner from Kirkland & Ellis; Shearman & Sterling’s M&A veteran Peter Lyons; and Simpson Thacher & Bartlett corporate disputes specialist Linda Martin in June 2015, who was the firm’s eighth hire in the US over the last 18 months.
It was an audacious move that has been received as a credible next step by peers, even if it requires recruiting several veterans towards the end of their careers as full-time lawyers.
Freshfields is now approaching 200 lawyers in the US and is intent on material growth. The level of that growth does receive some varying messages from within the firm. Lacovara says that aiming to double the headcount and generating 15-20% of the firm’s revenue in the US over a three-to-four-year period is a ‘reasonable and achievable target’, but adds: ‘To some extent it depends on the pace with which we can attract talent, the demand size of the market and what some of our competitors do.’
Eilers adds: ‘The merger with Bruckhaus established a two-pillar type firm and now the firm’s task is to make the US the third pillar alongside the UK and continental Europe.’
The strategy is to build a top M&A capability on a par with its European practice; build its US finance offering; and expand its litigation and white-collar capability in Washington DC. So far, the US arm of Freshfields has seen considerable progress in its global investigations, disputes, antitrust and M&A practices, while its LatAm arbitration practice is also very well regarded.
Though management is careful with its wording, Freshfields apparently has conservative views on further Asia expansion, preferring instead to focus investment on the vast US market (Burke was particularly sceptical of foreign law firms throwing money at the much-hyped but highly protectionist Chinese legal market).
Regional head Robert Ashworth says Asia is ‘a huge priority for the firm’ and cites plans to build its litigation and arbitration offering but its local network at just over 200 lawyers is much smaller than its City peers.
‘You either evolve your firm to wrap around your remuneration system, or you evolve your remuneration to wrap around your firm – we are definitely the former.’
Edward Braham, Freshfields
Of the US, Lacovara says: ‘We have built a white-collar, litigation and antitrust practice and have been able to attract M&A practitioners, a capital markets team, and pensions and employment benefits lawyers – which are needed as part of the M&A practice in the US – while more hires are expected before the end of the year.’
Nevertheless, Braham is more nuanced on what Freshfields needs to build in the US to compete at the highest level, rejecting claims that a 500-600 lawyer practice is required to position the firm, stating it is already at ‘critical mass’. A West Coast launch – which Freshfields previously flirted with when a high-billing team came on the market in 2012 amid the collapse of Dewey & LeBoeuf – is not singled out as a priority, despite the boom of California’s technology sector.
There will be many who would question whether an elite City player can position itself for the long-term without a much larger presence in the world’s largest legal market, especially a firm fielding more than 750 lawyers in London and over 1,000 in the rest of Europe.
While hiring US talent has delivered for Freshfields in building a well-regarded contentious practice, sticking to its lockstep pay model had obviously limited its ability to recruit marquee Manhattan partners.
Freshfields made provisions to allow it to pay a small band of recruits over the top of its lockstep, open only to lateral partner hires, to back strategic recruitment in US law.
One Magic Circle peer, impressed with last year’s batch of recruits, terms the hiring spree a ‘£60m investment’ for the firm. The big question, of course, is whether the recruits can deliver the flow of transactional work to justify the commitment.
‘Lockstep does limit the pool of talent we can access. There are people that are fantastic lawyers who we cannot talk to because either current compensation and expectations are not just deal breakers but culture breakers for us,’ says Lacovara. ‘Selling the brand in Manhattan becomes incrementally easier with each new hire. And given the list of work we have done in the past 12-18 months, it doesn’t feel like we’re an outpost or like a Magic Circle firm that’s testing to see whether it works.’
The formula for the US recruits is understood to have effectively given a 20% uplift on equity allocations to some of the new recruits, though this model has only been used on a handful of occasions.
Even coming at a time when A&O and Clifford Chance have both ushered in more flexibility to their partners’ pay model and being only used sparingly, the policy remains controversial.
Close to home, Freshfields this summer hired US high-yield specialist Ward McKimm in London, as co-head of its European leveraged finance group, on a deal that reputedly doubled the top of Freshfields’ lockstep, equivalent to $6m a year.
The arrival of McKimm – regarded alongside Latham & Watkins’ Richard Trobman and Nick Shaw at Simpson Thacher & Bartlett as one of the best high-yield lawyers in the City – marks by far the most prominent bond specialist yet recruited by a City law firm.
The move is also a powerful statement of intent for Freshfields as a firm and a key hire for its highly-rated private equity practice given the vogue for bond financing in leveraged deals in Europe.
However, it has not been welcomed by all. One Freshfields partner comments: ‘There was a lot of blood split over the lockstep-break. It’s a very isolated incidence. They haven’t uniformly gone well. They have made the higher band above lockstep only available to lateral hires, so you could be ten times better than the person they hire but you have to accept the different system.’
Braham stresses the use of such above-lockstep deals will remain exceptional – stating flat out that Freshfields will not have 10% of its partnership over its core lockstep in five years, even allowing for its US ambitions. He concludes: ‘You either evolve your firm to wrap around your remuneration system, or you evolve your remuneration to wrap around your firm – we are definitely the former.’
Braham accepts this stance requires Freshfields to drive material further improvements in its partner profits to close the gap between the City firm and leading New York peers.
The issue continues to divide opinion internally – while there remains huge instinctive support for its lockstep model, a considerable number of partners argue that more flexibility will be required given the firm’s global spread and US aspirations. Others argue in favour of flexibility in both directions, contending the current model is hampering its European practice by forcing local offices to attempt to match London profitability that is simply out of line with local conditions. Aggravated by the weaknesses of the euro, such pressures have impacted even on Freshfields’ top-tier German practice, which remains a tightly run business and the top legal practice in Europe’s largest economy.
One partner calls the above-lockstep pay a ‘band-aid over the issue’ until the management face the problem of lockstep head-on.
In 2014, one practice head suggested the idea of introducing three separate profit pools for the UK/Europe, Asia and the US to allow local discretion but the idea was rejected with claims that it went against the firm’s culture. ‘The current manifesto doesn’t even envisage a discussion about lockstep, let alone a change,’ another partner adds. ‘This topic will stay under review, and won’t change in the short term, and when it does, it will be very painful.’
‘Selling the brand in Manhattan becomes incrementally easier with each new hire. It doesn’t feel like we’re an outpost.’
Michael Lacovara, Freshfields
For Freshfields’ partnership, lockstep, not only as a general approach but this specific model of lockstep, remains something close to sacred. The critics believe half measures are risking Freshfields’ hard-won status as the ‘last champions’ of the Magic Circle, ultimately weakening its aim to establish itself as a true global leader.
Pugh contends that, after years of careful investment, Freshfields now has in place the foundations on which to achieve that goal.
‘During the election process, we affirmed the core principles of lockstep would remain. This is likely to be the key element that will set us apart from the top firms in the future. Our competitors have not aligned their remuneration and their international aspirations.
‘Manchester is at the heart of our strategy. The goal of being the leading firm is in our sights but what will get us there is partly the US, partly the international approach, and mostly our collaborative approach to client service, which is why lockstep is important. This will mark us out in five years’ time.’
One way or another, it seems likely that Pugh will be proved right about that. LB
jaishree.kalia@legalease.co.uk, alex.novarese@legalease.co.uk