In 2011 Stefano Simontacchi, then head of tax at the Italian legal giant Bonelli Erede Pappalardo, made a high-stakes presentation at the firm’s general partners’ meeting. The increasingly disastrous economic climate in Italy was forcing the firm to reappraise its strategy and Simontacchi, as part of a three-partner committee, had been approved by the firm’s board to find a solution.
‘We needed strategic thinking about whether we wanted to be a very small boutique or whether we wanted to remain at the size we were,’ recalls Simontacchi. ‘In which case, how could we survive when overall spending capacity of the market is decreasing?’
The structure that was proposed for Bonelli represented a radical shift for the firm and its equity partners, introducing a full lockstep for the top partners, shared client relationships and a limited bonus pool. This was a significant departure from the norm, especially in a legal market where a partner’s individual client relationships are sacrosanct, where earnings are largely linked to performance and a firm’s business often hinges on its founding partner. The challenge wouldn’t just be about changing Bonelli’s structure: it would be about changing the partners’ behaviour as well.
‘Clearly it isn’t an easy task because lawyers tend to base their behaviour on the experience they’ve had,’ says Simontacchi. ‘If you take a guy who is 55 or 60 and he’s been doing something successfully, it isn’t easy to convince him that the market has changed.’
But Bonelli’s partners were quick to recognise that the market had changed and they eventually voted unanimously in favour of the new proposals, which were officially adopted in May this year. In tandem with this came a significant change to the firm’s leadership structure: two managing partners would replace Alberto Saravalle, the firm’s outgoing head, who had managed the firm singlehandedly since September 2007. Employment head Marcello Giustiniani would be responsible for managing internal affairs, while Simontacchi would take the second managing partner position, which is a more outward-facing role focused on developing strategy.
Given that the firm’s three founding partners – Franco Bonelli, Sergio Erede and Aurelio Pappalardo – still practise at the firm, rivals are watching developments at Bonelli with keen interest.
Mind the step
By adopting the new business model, Bonelli has shifted from the modified lockstep that the firm introduced back in 2007 (itself a move away from the more meritocratic eat-what-you-kill system that is fairly universal among Italian commercial law firms), to a full lockstep for the top nine equity partners. These top partners have an untouchable level of points and their results as individuals aren’t liable to review unless in exceptional circumstances. The remaining equity partners are on a 90% lockstep, with an extra 10% discretionary bonus pool. Previously, the lockstep element of Bonelli’s remuneration had been set at 80% for all equity partners.
Equally important is the fact that all client relationships are to be shared between two partners now, rather than protectively guarded by just one. Cross-selling is essential: the firm now considers itself as an institution and client relationships need to reflect this, shared by the firm as a whole.
For firms using the Anglo-Saxon model, this might not sound particularly revolutionary, but within the Italian legal market, a full lockstep system has never been adopted by a domestic firm of Bonelli’s size. In most cases, such as with one of Bonelli’s closest rivals, Gianni, Origoni, Grippo, Cappelli & Partners, the lockstep is limited to 80% of remuneration.
In the current market conditions, Bonelli’s top nine rainmakers will in effect be taking a pay cut by adopting full lockstep. Indeed, the only prospect for extra remuneration is if all nine pull together in the right direction.
‘They have some extra points at stake but they only get it if they, as a group, achieve their targets,’ says Simontacchi, himself a part of this group of nine. ‘If one of them doesn’t behave as the firm wants them to, then all of them will lose their points.’
Succession planning
Bonelli’s strategic overhaul is more radical than most, but it has been a long time coming. Prior to the financial crisis, other firms had recognised the need to make a smooth transition from their founding partners to the next generation of partners, thereby encouraging greater institutionalisation. Many have realised there is a very real danger that when their senior partners retire, clients could also leave.
‘This is a generational issue,’ says Stefano Sutti, managing partner at Sutti. ‘For the first time in history, those that established the main firms are now in their seventies. When one feels the rainmaking lawyer is still working, but not so up-to-date, the client might look for alternatives, especially if other firms are more eager to serve them for a better price.’
In light of this, many firms set the wheels of reform in motion well before the market crashed.
‘Our succession planning was already in place more than ten years ago,’ says Francesco Gianni, founding partner of Gianni Origoni, which adopted its modified lockstep in 2006. ‘Among the various governance bodies, there is an executive committee with seven members and a remuneration committee with another seven members. I’m one of the senior partners and my powers are disciplined by our governance rules. I have a voice mostly when it comes to the strategic, long-term guidelines for the firm. The founders have to step back.’
Despite their best intentions, however, the continued existence of high-profile founding partners does mean that even under the new system, some partners are more equal than others. In reality, the new remuneration policies all come with caveats that protect the founding partners. Bonelli’s founding partners remain outside of the lockstep and are due a portion of the firm’s profits regardless of their numbers. Similarly, at Gianni Origoni, founders Francesco Gianni and GianBattista Origoni also enjoy greater benefits than their fellow equity partners. The mandatory retirement age at their firm is 65, whereas for the founding partners it is 70. If they do decide they want to continue practising, only then will they fall outside of the remuneration package that they are enjoying at the moment.
In theory, this protection gives them greater flexibility to spend more time drumming up business, whereas the day-to-day relationships and fee-earning with existing clients can go to younger partners.
‘If I consider my hours a year, about 75% of what I do is billable and 25% is management and originating new business,’ says Francesco Gianni. ‘My role is to introduce younger partners to the clients.’
No ego
It is too early to say what the fallout will be from Bonelli’s new business model, if there is any at all, but many Italian lawyers believe that shifting to a pure lockstep won’t be easy if profits are depressed.
‘It is a difficult and long process and they are really at the beginning of it,’ says the managing partner at one rival firm. ‘They still have the name partners, but we will see how good they are at completing this transition. For the time being they are competing really well.’
Partners at other firms don’t believe that a lockstep system is necessary to foster closer integration. ‘Our flow of knowledge and expertise are to the sole benefit of clients’ needs: though our firm has a meritocratic system, we have a strong incentive to shift competences across the firm,’ says Ascanio Cibrario, a corporate partner at 19-partner Pedersoli e Associati. ‘If we win an instruction for a debt restructuring, I would bring in one of my banking partners. We all very much appreciate each other and have strong respect for each other’s competences.’
One Italian lawyer with a good idea of the difficulties that lie ahead for Bonelli is Paolo Montironi, senior partner at NCTM, a leading Italian firm that commenced its own structural changes in 2009. The firm, which was created following the three-way merger of Negri-Clementi/Montironi & Soci/Toffoletto & Associati in 2000, has gone to great lengths to try to institutionalise its client relationships: it introduced mandatory cross-selling and put all associates in a common department pool rather than being allocated to individual partners, in order to promote more efficient use of resources and improve associate training. The firm also introduced mandatory specialisation for partners, where they couldn’t focus on more than two discrete practice areas. The new strategy came with a cost and some partners did leave in the wake of the changes, including litigation partner Paolo Pototschnig, who took a four-strong team of lawyers to Legance. ‘It is difficult to achieve, although our reforms had the full support of the ample majority of partners,’ says Montironi. ‘You must be firm in ruling how any partner can behave and firm in ensuring that everyone respects the rules. That can create clashes, but that depends on how determined you are in your bid to institutionalise. We succeeded in that, but we did lose some partners as a result.’
Market forces
In Montironi’s view, the need to institutionalise and change the firm’s internal culture was as much down to external market forces as it was with any pressing generational concerns.
‘We started from the assumption that the golden age will not come back, therefore we are very focused on our profitability,’ says Montironi. ‘Our emphasis isn’t on growing the firm, but finding a sustainable model of profitability. When you are growing, everything is easy. When you reach a certain size, you can get into trouble, because people want to grow their careers and increase their salaries.’
Most firms concede that growth isn’t really an option. ‘Not many firms are growing,’ says Andrea Arosio, managing partner of Linklaters in Italy. ‘If they grow it is by recruiting a team. Nobody can afford to grow without people bringing in new work.’
In one of the most high-profile moves of this type, in November 2011, Roberto Cappelli, a corporate partner and co-founder of Grimaldi, left his firm with ten associates to join what was then Gianni, Origoni, Grippo & Partners, where he automatically became a name partner. Grimaldi elected to dissolve a month later and other firms benefited from the fallout, including DLA Piper, which, in May 2012, recruited one of the firm’s three founders, Francesco Novelli, and a team of 20 energy lawyers. For law firms looking to grow quickly, it is often difficult to marry up the need to bring in high-profile rainmakers to boost revenues with the equally important, yet sometimes conflicting, need to institutionalise client relationships and encourage greater partner stability.
‘I’m a little bit scared of lateral hires; I always see them as a risk,’ says Luca Masotti, a partner of the boutique firm Masotti & Berger. ‘If I go with a woman who has cheated with her husband, I cannot be angry if she cheats with me three years later. I can’t afford someone coming in and learning something, and then taking our clients somewhere else. We prefer organic growth.’
In fact, as firms struggle to maintain profitability, the reality is that most have taken the opposite route to growth. The lower ranks of fee-earners have borne the brunt of these cuts, with most firms adopting what one managing partner calls ‘an up or out process for our associates, so that they remain lean and hungry’.
International pressure
While foreign law firms practising in Italy don’t face the same generational challenges as their domestic counterparts, they still face a depressed market. ‘With some clients we’re seeing our rates go down by 20 to 30%,’ says Federico Sutti, managing partner for DLA Piper in Italy. ‘The larger the client, the more their purchasing power. Most general counsel have been asked to reduce their legal expenditure but keep the volume of work the same.’
‘The amount of work hasn’t decreased,’ agrees Tommaso Salonico, Freshfields Bruckhaus Deringer’s Italy managing partner, ‘but the pressure on fees, even if we’re trying to share the risk with the client, has an impact on the level of profitability.’
One thing that can’t be agreed upon, however, is the correct approach that international firms should take to tackle the market.
‘One thing that has emerged in my view, is that the one-stop-shop idea can’t be successful,’ says Andrea Arosio, managing partner of Linklaters Italy. ‘These last two or three years have clearly shown it. We’ve been lucky because we opened in Italy in 2007 so we could see the crisis coming and could shape ourselves accordingly.’ Linklaters’ more streamlined approach includes teams for M&A, banking and capital markets, and litigation. Clifford Chance, however, is unapologetically full service.
‘Unlike others, we continue to be a full-service firm in Italy, having capabilities to serve our clients in the full range of products and legal expertise that are of interest to them,’ says Giuseppe De Palma, Clifford Chance’s Italian banking and project finance head. ‘We strongly believe in the international model, coupled with a strong domestic focus. We opened in 1993 in Italy as a domestic firm associated with Clifford Chance and so have a strong domestic legacy, coupled with our global reach and business model.’
From the perspective of many domestic lawyers, the firm that has probably best adapted to the Italian market is Cleary Gottlieb Steen & Hamilton. The fact that the firm has a bigger focus on more specialised regulatory issues has helped keep it relatively immune from any fee pressure.
‘More and more international groups have scandals so they run internal investigations with the assistance of a law firm,’ says Cleary’s Milan-based corporate finance partner, Roberto Bonsignore. ‘We run those in the US and now it is picking up in Italy too. There is no room for negotiation there, they will take whatever is your hourly rate. The SEC is involved, the government regulator is involved, it goes to the heart of corporate governance and the survival of the company as a whole, so you don’t try to save a few pennies.’
A new era
Few deny that the golden age of growth is over. M&A work, the bread and olive oil for the major Italian independents, has fallen off a cliff. According to mergermarket, after Italian M&A reached a peak of 453 deals in 2008, volumes plunged by 42% to just 261 completed deals in 2009. There has been a gradual pick up since then, but the 322 M&A deals completed in 2012 still represent a 28% drop from the 2008 high. 2013 shows no sign of improvement; in fact, completed deals in the first half of the year are down 7.6% on 2012.
Coupled with this is the lack of liquidity in the market, which has seen average lockup periods rise from 90 days to about 150. In turn, clients have reduced their legal budgets and are assessing how they can better manage their law firm relationships. Panels and beauty parades are increasingly commonplace among domestic clients who in the past might have stuck with one relationship partner, a fact not lost on firms like Bonelli. This has resulted in reduced fees, particularly for commoditised matters, where smaller firms can reasonably compete.
Conversely, smaller law firms are also leveraging off the fact that they can supposedly offer a more personalised and efficient service to the client, now that their larger counterparts are taking the institutional route.
‘In this law firm, the lawyers cover a lot of areas of activity: they are generalists,’ says Alfredo Craca, a founding partner of the three-partner boutique Craca Pisapia Tatozzi. ‘The clients want to create a relationship with the lawyer and want to be sure that that lawyer is involved in the matter, that the deal isn’t handed to the youngest lawyer in the law firm after the kick-off meeting with the senior partner.’
This tricky combination of external market pressure and internal evolution is very much behind Bonelli’s decision to restructure itself over the next few years. It is also the reason why it will be such a challenge to succeed. Nevertheless, Simontacchi is convinced that his equity partners are foresighted enough to bear the short-term losses needed to see the project through.
‘Younger guys would prefer to lose some money today, but be at a firm that is still successful in 30 years,’ says Simontacchi. ‘If this formula works, the firm will increase in revenue, so the partner points will increase in revenue. If you apply the model to previous years, the best performers wouldn’t get such big bonuses, but then all of us will earn better. We’re betting on the force of the group.’ LB
anthony.notaras@legalease.co.uk