Waking the giant

Making Baker McKenzie stand out was once a simple business. The day in 1948 Russell Baker met John McKenzie by chance in a cab, he had already conceived the notion of an international law firm. Formed in 1949, its first international office was added six years later in Caracas, Venezuela. In the decades to follow, the Chicago-bred firm stood out as a genuinely global operator in a profession that remained largely a domestic concern.

True, having been stitched together from a series of financially separate offices, Bakers never worried the legal elite in New York and London, being dismissed by some as a mid-market franchise thanks to a multi-partnership model that was then unheard of. But Bakers could point to global coverage well beyond any peer, including market-leading practices in many jurisdictions where few rivals dared venture. Passing the $1bn mark in 2001, Bakers turned over more than $2bn just seven years later, making it one of the largest firms in the world.

Post-banking crisis, however, the market has been less kind, with Bakers seeing a number of peers use its verein structure to rapidly forge comparable or, in the case of Dentons, larger practices. Where once its coverage dwarfed rivals, now practices as varied as Hogan Lovells, DLA Piper, Norton Rose Fulbright and Dentons can boast similarly expansive empires, and in some cases greater credibility in core markets.

Meanwhile, more profitable US firms Latham & Watkins, Kirkland & Ellis, Gibson, Dunn & Crutcher and White & Case have asserted themselves further up the food chain for high-end legal services.

In the words of one former partner: ‘Bakers’ unique selling point is no longer unique: that’s the problem. Other firms are doing it and in some places better.’

Moreover, Bakers has for years been plagued by pedestrian organic growth and profitability which badly lags its Global 100 peers, while its struggles to integrate stretch back to the leadership of Christine Lagarde in the late 1990s.

So when former London head Paul Rawlinson became Bakers’ first British chair in October 2016, he not only inherited a 77-office colossus, but also the huge challenge of galvanizing a firm that appears near-impossible to direct at all. After all, Bakers veterans know all too well the firm’s reputation for bureaucracy and slow progress at securing premium work. The official line is that Rawlinson is aiming to re-establish the ambitions for the firm – a strategy wrapped up in a bold target to integrate Bakers by 2020.

Rawlinson sums up the pitch: ‘We want to be top of the pile of expansive global firms with multi-office, multi-practices, of which there will probably be ten or 12.’

That vision would require a wholesale reinvention of Bakers and how it is perceived by key clients. What are the chances for success?

The stepping stone

Bakers’ born and bred, Rawlinson joined the firm in 1986. He recalls: ‘It was my sixth interview and the one that just connected.’ He qualified in intellectual property (IP), which proved to be a great place to establish yourself in Bakers. While other firms intent on cross-border expansion were retrenching in IP, Bakers was scaling up and Rawlinson quickly got to work with astute operators such as Harry Small, Michael Hart and Robert Arnold.

A formative experience as a young associate was a secondment to Bakers’ thrusting Hong Kong office in the late 1980s at a time when the firm was doing pioneering work for Chinese clients.

Rawlinson further bolstered his reputation in the mid-1990s by upselling a relationship with Calvin Klein, which was at the time using Bakers to a limited extent. Rawlinson put together an unusual monthly retainer to cover a suite of services across its US and European offices, to counter grey goods and deal with licensing issues.

Recalls Rawlinson: ‘I thought: “This has nothing to do with being an IP lawyer in the UK; we need a solution globally.” I realised this firm has so much power when you bring together the right people in the right places and provide clients with some certainty in billing. I asked myself: “How can we replicate this?” So we started investing.’

‘We are naturally international. We live, breathe and feel globalism in everything we do.’
Alex Chadwick, Baker McKenzie

Making partner in 1996, Rawlinson came into contact with Bakers’ then chair, the charismatic French lawyer Lagarde, who was making the first serious efforts to integrate a practice then often dismissed as a franchise, or worse ‘McFirm’.

By 2004, Rawlinson was leading the global IP practice group, building a reputation for developing relationships with major clients, such as Unilever, L’Oréal and British American Tobacco.

Rawlinson further raised his profile in 2013 when he took over from long-time London managing partner Gary Senior, the clubbable but effective head of one of Bakers’ strongest offices.

Rawlinson has built a formidable reputation, with current and former partners speaking warmly of his work over more than a dozen interviews.

‘Paul is a very good guy – very charismatic, very clear leadership – he understands what the clients want and what the firm needs in order to achieve it,’ notes one former partner. ‘Paul is very ambitious.’

Another Bakers veteran recalls: ‘He had his eyes on the leadership for a number of years. London was a stepping stone for him.’

But a rare detractor notes: ‘Paul is very nice, but he is more style than substance. His three years as London managing partner were a lot of talk and some good things happened, but they were very superficial, not real shift.’

Rawlinson had the chance to further raise his standing in October 2014, when the firm’s annual global partnership meeting was held in London. Recalls one partner there: ‘Paul gave the opening speech and it was a great performance. That appealed to the international partnership and he became the favourite to win the next time around.’

The financial performance in London for 2014/15 helped. While on a global level the firm that year put in a poor performance, with revenue down 4% to $2.43bn, the City office saw revenue rise 9% to £145m – the biggest jump in five years.

When Eduardo Leite announced he would step down as chair in October 2016, Rawlinson’s name was among the four candidates to replace the Uruguayan. Other contenders were Senior, former Paris managing partner Eric Lasry and Latin America chair Claudia Prado.

In June 2016 it was announced that Bakers had elected its first British chair after a two-way contest against Prado. Rawlinson was close to management but not on the firm’s executive committee, giving him a pitch as a fresh face at a time when many felt a more client-centric approach was needed.

While Leite’s leadership was seen as solid, his tenure was defined by expanding Bakers’ practice in emerging economies. In contrast, his predecessor, US-based John Conroy, had focused more on building on Lagarde’s efforts to haul Bakers upmarket and specifically improve its underweight US practice.

‘Bakers’ unique selling point is no longer unique: that’s the problem. Other firms are doing it and in some places better.’

Conroy also instituted a ‘quality audit team’ that assessed individual offices and made recommendations. ‘That was a very powerful programme,’ notes one Bakers veteran.

‘Eduardo was a good chair, but he didn’t have much impact on London,’ recalls one ex-partner. ‘He did a lot of projects in Latin America and China. There was not enough focus on the money centres. Bakers was a bit static in the US but did not slip backwards. It is not where it should be in Frankfurt. London was steady but had no real development.’

In an accelerating global legal market, the original global pioneer was no longer moving fast enough.

Good news somewhere

The institution Rawlinson began leading on 23 October 2016 had considerable assets. For global reach, Bakers has a unique mix of coverage and maturity, with over 4,500 lawyers across 47 countries. The practice that had been dominated by US clients in the 1980s had grown into a genuinely multi-polar practice long before Dentons tried to introduce ‘polycentricity’ to the profession’s lexicon.

London managing partner Alex Chadwick notes: ‘We are naturally international. We live, breathe and feel globalism in everything that we do.’ In 2016/17, Asia-Pacific accounted for 26% of the firm’s revenue, EMEA and the Americas for 37% each. The firm’s huge coverage in Latin America and Asia-Pacific still marks it out.

Corporate partner Timothy Gee talks of the advantages of not relying on a single economy: ‘Whatever happens in any part of the world, there is always a part of Baker McKenzie that is helped by good news somewhere.’

While Bakers is not a corporate-driven institution, the range of its commercial practice has made it a strong contender to handle cross-border mandates for global clients, particularly in technology, IP and tax-related matters (tax is commonly cited as the firm’s strongest card).

Bakers counts Unilever, Google and Emerson Electric among its top clients, with each generating over $15m annually for the firm.

The firm has made substantial investments in recent years to bolster its platform, including launching service centres in Manila and Belfast, and in 2014 deploying SAP’s cutting-edge financial management system.

By consensus, morale remains strong across the firm, which has been deft at combining local diversity with its global reach. As such, Bakers has a strong record on retaining partners across most of its major offices. ‘It’s a nice partnership, because most of the people have grown up in a very diverse atmosphere,’ says one former partner. ‘You have to be very respectful if you want to get things done across jurisdictions. You make friends all over the world; you have to do things by consensus and culture.’

‘Bad feeling’

For all Bakers’ strengths, only the most on-message deny the issues that have dogged its ambitions. Probably the most pressing is lack of credibility in the key money hubs of London, New York and China. The firm’s New York arm – at just 120 lawyers – remains tiny for an institution of this size.

The firm has, likewise, struggled to move its practices up the value chain, particularly in deal work. Even in a market where it is regarded as a pioneer, like Latin America, Bakers is yet to challenge top players in high-end corporate or disputes work in the large economies of Brazil, Mexico, Argentina and Chile. With the firm’s practices stronger in secondary markets like Colombia, Peru and Venezuela, Bakers now faces greater competition in the region from DLA Piper and CMS Cameron McKenna Nabarro Olswang.

The firm’s efforts to bring in big-name partners to build its corporate and litigation practices in mature markets have been hampered by profit per equity partner (PEP) that lags far behind global peers. PEP for 2016/17 at $1.3m compares to a $1.6m average for the Global 100 and even further behind the $1.8m average for the Global 25. Revenue per lawyer at $572,000 (based on its 2015/16 financials) also lags well behind the Global 100 average of $790,000, while remaining above Norton Rose Fulbright ($481,000) and Dentons ($296,000). With revenues up 2% in 2016/17 to $2.67bn, Bakers’ top line has grown only 15% over the last five years.

Integration is also frequently cited as a problem. In the US the firm was operating different profit centres across its offices until five years ago, when it moved to bring the US into a single profit pool. Even then its small but highly profitable Dallas office negotiated a special deal before accepting to join, while Washington DC initially remained out of the grouping. The office subsequently negotiated its own deal to join, amid reluctance from the rest of the firm to refer work to this hold-out. ‘That led to a lot of bad feeling,’ says one ex-partner. ‘Other offices would not send work there because there was no return on profits. It was detrimental to the firm and clients.’

‘Eduardo Leite was good, but he didn’t have much impact on London. There was not enough focus on the money centres.’

While Bakers has for years been moving towards a regional governance structure in the US, Europe and Asia, comparable efforts to introduce a single compensation structure in Europe have yet to unify the business, with one partner citing disagreements between the UK, French and German practices.

Another frequent complaint is an excess of management. Many agree there is a multiplication of managing roles at the firm, with many teams having a local, regional and global head. One former partner recalls: ‘There was a class of people who did a lot of management and not much client work. It was a real point of contention. Many felt it was diluting profitability substantially.’

Fiona Carlin, managing partner of the European and competition law practice in Brussels and chair of the global and antitrust law practice, concedes the point: ‘We are tackling it: we are embarking on numerous international projects to streamline management. We are becoming leaner, but it is a process.’

The plan

If there is little doubt regarding Bakers’ foibles, Rawlinson wins plaudits for articulating a clear response, describing his strategy as focused on three key pillars: integration, innovation and profitability.

‘Paul right from the start created a strategy that he could put on one page, with very simple building blocks and a key focus on looking at things more from the clients’ perspective,’ says Samantha Mobley, London’s head of EU, competition and trade.

The firm has formalised six industry sectors around which its approach to clients would be organised: healthcare; energy, mining and infrastructure; financial institutions; TMT; consumer goods and retail; and industrials, manufacturing and transportation.

While the firm is late to emphasise industry sectors, it maintains it will use the model to drive far more revenues out of the roughly 200 companies in its core client programme, covering those generating more than $2m a year in fees.

‘The idea is to enable our partners, organised around industry sectors, to go to clients and have a much deeper conversation that makes us the natural choice for different areas of work,’ says Rawlinson.

A core aim will be to drive double-digit percentage revenue increases from these clients with a loose target of having half a dozen such clients in the $15m-$20m+ range across each of its core industry sectors.

The Legal 500 data shows a range of major listed FTSE and Fortune 500 clients instructing Bakers in at least three different areas (see below). However, there is room for improvement, with data from Legal Business sister brand, The Client Intelligence Report, showing Bakers ranked 19th out of the 20 largest global firms thanks to below average scores on 11 of the 13 core criteria (see box below). The report, which draws on more than 9,000 in-house counsel respondents, found adoption of innovative working methods and billing flexibility as the only criteria where Bakers beat the peer average.

Officially, there is no target for PEP, but Rawlinson is explicit that profitability needs to improve materially at a firm-wide level and in what Bakers can offer in core markets. Unofficially, the talk is of getting PEP to $2m in the near future.

Says Rawlinson: ‘On a ten-year graph, our revenues grew 50% and our profitability only 20%. That is an issue. In today’s market, we need to be more profitable.’

Paul Rawlinson: ‘This is not a new market strategy – this is a global clients’ strategy. You have to have strong money-centre practices.’

Despite claims that its aspirations can only be met by further toughening up on performance and axing partners, Rawlinson argues that Bakers can achieve its goals without contracting its partnership.

‘There is a lot we can do before we get to partner headcount. We need to improve productivity, improve performance across the piece. I have no intention of shrinking practices and offices. We are still less than 1% of the revenue of law firms globally – consolidation in this market is potentially massive.’

Nevertheless several partners interviewed for this piece cited a tougher line on performance and recent moves to trim equity ranks, particularly in its US practice.

Rawlinson concedes none of this will have much credibility if the firm cannot achieve one of its core strategic goals: making dramatic progress in New York, London and China.

It is aiming to recruit between ten and 20 transactional partners in London, and more than double the size of the New York office to 250 lawyers. The two offices, along with Shanghai, Beijing and Hong Kong, will receive a disproportionate amount of investment over the next three years to beef up their transactional teams.

In one positive sign, recent LLP filings for the year to June 2016 showed robust growth in London, with revenues for its 400-lawyer UK practice up over 20% to hit £176m, while profits spiked 48% to £70m. The firm’s LLP for the London practice in 2015/16 showed the top earner receiving £1.2m.

Rawlinson notes: ‘We may look at one or two additional markets, but this is not a new market strategy – this is a global clients’ strategy underpinned by what we have got. If you want to be the number one cross-border firm, you have to have strong money-centre practices.’

Says chief strategy officer Julia Hayhoe: ‘Eduardo and his predecessors built the platform upon which Paul is now consolidating. We have already entered many of the new markets: Myanmar, South Africa, Turkey, Saudi Arabia.’

Nor is Rawlinson shying away from the two perennial issues: management and integration. He talks of beefing up Bakers’ professional services roles to reduce partner time in management. ‘I want my managing partners to spend time on clients and people, not the mechanics of the running of the office. That’s the chief operating officer’s role.’

While many expect a more ruthless line, Rawlinson says Bakers will remain a consensus-driven firm: ‘I don’t think we will ever have a top-down management structure.’

‘We are streamlining management. We are becoming leaner.’
Fiona Carlin, Baker McKenzie

More surprisingly, he talks of wanting full integration, with the firm having a global governance system and remuneration model by 2020. Exactly what is meant by this is a little vague given the challenges of unifying such a broad practice, though he claims the firm is ‘80% of the way there already’.

Bakers’ pay model is characterised by several partners as having been moved from a loose merit-driven structure in many markets to one in which 60% of equity partners’ pay is effectively in lockstep, while the remaining 40% is handed out on a largely discretionary basis. It appears that this approach is the model for its global equity structure, with considerable variations made for local markets.

Rawlinson comments: ‘We have a global compensation system and incentives at a regional and local level. My objective is to incentivise partners to meet clients’ needs regardless of practice area and geography. We are a long way along that road.’

The sleeping giant

The lingering question is whether the model pursued by Bakers and a number of peers can become more potent, rather than remaining as a huge cross-border ‘supermarket’, focused on business-as-usual services.

‘We have a different model,’ insists Bakers IP and IT/communications partner Ben Allgrove. ‘We not only help clients with big transactions: it is also the day-to-day knowledge of their business which is of value to them.’

Rawlinson echoes the point: ‘The market is moving towards our model. Companies want a law firm that they can trust in multiple areas.’

However, multi-profit centre firms have generally been outperformed financially by conventional law firms in the last five years, while a broadly comparable firm like White & Case has gained momentum by refocusing towards core markets and product lines.

Verein firms are far more complex to manage, while Bakers has rarely used the model for its obvious advantage: to rapidly achieve high-impact mergers. But then Bakers is attempting to leave the legacy of the verein patchwork behind.

For nearly two decades, Bakers has promised more than it has delivered, leaving its brand mired in the mid-market.

In London and China, markets in which the firm has for years failed to capitalise on credible heritage and platform, the chances for progress are good if the firm is prepared to commit substantial investment. In London, the firm has hired 15 partners over the last two years, including Barclays’ global head of financial crime Jonathan Peddie and the bank’s global head of competition Nicola Northway. However, only five of the group were partners at rivals. New York will be a far longer project, requiring global momentum and major improvements in profitability to make progress.

The irony is that few doubt the quality of the cross-border service Bakers is capable of providing, with one former partner noting: ‘Bakers is a sleeping giant. If you can unlock its potential, that firm would be amazing. You can get the potential of the network and the quality of the people there. It could be doing incredibly well.’

But for nearly two decades, Bakers has promised more than it has delivered, leaving its brand mired in the mid-market. If Rawlinson can break that legacy he will have done the firm a huge service, but it will take more than a credible strategy to rouse this beast. LB
marco.cillario@legalease.co.uk

Baker McKenzie financial results: the last ten years

 

Client feedback – Bakers vs the Global top 20

2015/16 Global 100	Average client score out of 10
Ropes & Gray	8.06
Sidley Austin	7.93
Hogan Lovells	7.88
Morgan Lewis & Bockius	7.87
Gibson Dunn & Crutcher	7.87
Skadden, Arps, Slate, Meagher & Flom	7.85
Kirkland & Ellis	7.84
Jones Day	7.82
Clifford Chance	7.77
Latham & Watkins	7.75
Linklaters	7.74
Greenberg Traurig	7.72
Sullivan & Cromwell	7.71
White & Case	7.70
Norton Rose Fulbright	7.68
Dentons	7.67
DLA Piper	7.62
Allen & Overy	7.62
Baker McKenzie	7.51
Freshfields Bruckhaus Deringer	7.47

Source: The Client Intelligence Report