The daily grind – toil and tension as Hogan Lovells gets past the honeymoon period

It’s been three years since the trailblazing transatlantic pairing of Hogan & Hartson and Lovells. Legal Business assesses if the much-touted marriage is living up to expectations

Rarely for a June evening in London, the sun was shining on the rooftop bar as the Legal Business journalist by chance ran into a senior partner at Hogan Lovells. ‘I have to ask, as we’re doing a piece on the firm, three years on, how do you think it’s going?’ The reply was to the point: ‘I saw the e-mail telling us not to talk to your journalists. Well, what do you want to know?’

The 15-minute conversation that followed served to act as a solid introduction to the issues now facing Hogan Lovells three years since the much-publicised marriage of Lovells and Washington DC-bred Hogan & Hartson went live.

The highly-ambitious deal was well received and, by all accounts, the tie-up was effectively sold by the two management teams as giving the pair a credible shot at achieving global leader status.

But with the honeymoon period inevitably ending, the 2,500-lawyer firm is now well into the daily grind of working through integration and cultural issues, many of them unavoidable in such a deal but nevertheless very significant. So significant that there is now consensus that the cultural gap between the two firms was far greater than initially depicted to the conservative and instinctively democratic Lovells partnership.

Such cultural issues have contributed to considerable unrest among legacy Lovells partners – in part due to concerns of being taken over but particularly focused on the implementation of Hogan’s merit-driven pay model firm-wide. Elsewhere, the firm has struggled for growth, essentially posting flat financials for three years, and it is conceded there has been at best modest progress on two key post-merger aims: upgrading the firm’s M&A team in London and its finance practice in New York.

Given the turbulent global economy it has been a solid three-year run, but it has nevertheless fallen some way short of the sky-high ambitions the audacious merger raised.

In consequence, morale has clearly faltered in London and tensions between the two sides are more evident than at any period since the merger.

One former partner expresses a common sentiment both in and outside the firm: ‘There is a big problem and I don’t think anyone should pretend it doesn’t exist, it does. Partners talk privately, they show it in their expressions and in their reactions to things that have happened. But, because of the way the firm is now managed, they just don’t openly express it in the way they used to in the partnership that was Lovells.’

One current partner observes: ‘Management is a pretty thankless job but you either listen or you don’t. Management don’t appear to care what the partnership says and does. It does things in its own way regardless of what the partnership think.’

Such sentiments extend beyond the narrow band of malcontents that naturally find a home in the chaotic democracy of all major law firms. Hogan Lovells certainly faces a challenge to rebuild trust internally and push the firm towards the unified leadership that was always the merger’s end game.

Asia and Middle East head Patrick Sherrington concedes it is taking time to make progress: ‘I always knew it would take quite a long while to bed things down so that we were truly in a position to prove to the world that it had worked and that we were a force for the future. It’s unfortunate when there are partners that are disaffected by some elements. I wish that weren’t so.’

 

‘The right thing to do’

The first thing to stress in any assessment of the early years of Hogan Lovells is that in the run-up to the merger, very few seriously disputed the need for a deal.

The 487-partner Hogan & Hartson was a top-tier Washington DC practice that had built a respectable position in the national US market and made some progress in forging an international network. Yet upgrading its practice in New York or becoming a serious international player looked unrealistic under its own steam.

Lovells, meanwhile, had problems of its own. Historically branded as the nice guy of the City’s major law firms it had built up a credible international network but it had clearly lost ground against the larger and more profitable Magic Circle.

The firm was also wrestling with a collegiate partnership that too often provided cover for a significant chunk of the firm to put in a mediocre performance. In the increasingly cut-throat City market, such complacency was unsustainable. Good partners were voting with their feet – especially the talented younger partners the firm hoped to cultivate as the next generation of heavyweights.

Under managing partner David Harris, there had been moves to restructure the firm’s partnership in late 2004, which exited 25 equity partners, and some modifications to its lockstep pay model to make it easier to address poor performance. But a drawn-out attempt at further reform of its partnership was finally blocked in early 2007 and for management it was frustrating trying to get the firm’s unruly partnership to agree on the drastic decisions that looked increasingly necessary.

Lovells had assigned a small group including senior litigator Sherrington and Harris to take a closer look at the US market, including potential suitors. By early 2008, Hogan & Hartson was the prime candidate. The talks had to be put on hold through 2008 as Harris faced a closely-fought election challenge from continental European managing partner Harald Seisler to win a second term. Picking up momentum in the spring of 2009, a small management team on both sides decided to back the deal by the summer before putting the tie-up to the wider partnerships in October 2009, ahead of a formal vote in December.

For Lovells, a union provided the chance at a big bang reinvention that could give access to a very sizeable US practice, putting it in some regards ahead of Magic Circle rivals, allow it to forge a distinctive global top ten practice and move towards the more driven culture that the firm needed.

Though the merger was to be structured with two separate profit centres, it was an ambitious undertaking and by all accounts Harris and then senior partner John Young did a sterling job at marshalling support from the wider management team. Perhaps too good a job, as the efforts to sell the tie-up meant making light of the sizeable cultural gap between the two firms. It also led to the oddity of some figures who had opposed previous reform of its lockstep now backing a deal that would involve major reform of Lovells’ notoriously flat pay structure (see box, ‘Money talks’, below).

One senior Lovells partner at the time, recalls the period: ‘Credit has to be given to management for having created a unified voice despite it coming from a number of people who had so strongly objected to change before this. [But] it was the right thing for the firm to do. I still think that.’

If some Lovells partners felt railroaded, there was even more unease on the Hogan side in Europe, where there was substantial overlap and would inevitably be considerable upheaval. Several partners attest they were informed very late in the day about the merger, which only accentuated resentment.

But whether pushed through aggressively or not, there was genuine enthusiasm for the merger on both sides. Even peers – typically slow to give credit to rivals – generally conceded the deal had much to commend it.

There was just the small matter of making it work.

 

 

‘The pain-staking way to do it’

The merger-of-equals model was always going to be culturally and logistically challenging to pull off, forging as it did joint chief executives in Hogan & Hartson’s highly influential leader Warren Gorrell and Harris, as well as joint senior partners and practice heads.

The firm formally integrated on 1 May 2010 but had already gone through a detailed process to begin implementation – which involved picking elements from both legacy firms to adopt. In essence, the plan was to adopt Lovells’ more structured governance model, while adopting a version of Hogan & Hartson’s partnership pay model, which allowed for a far greater spread between top and bottom earners. The reforms to pay were ushered through in stages over a two-year period (see box, ‘Money talks’, below).

With two partnerships working under a verein umbrella structure, Hogan’s international network transferred to Lovells, while the UK firm’s small US practice integrated with the Hogan side.

One point to note is that the firm receives widespread praise for the skill with which it marshalled its integration effort.

Harris recalls the process: ‘We went through our policies and procedures and selected the best of both firms. That covered everything from the way we hold quarterly partners’ meetings to financial reporting. We looked at our procedures for new partner appointments, equity elevations, lateral recruitment, training and we put together an infrastructure that reflected the merger-of-equals balance. That’s a painstaking way to do it but it created the right structure for the combined firm, now and for the future.’

There were many departures from the new firm’s European practice, with legacy Hogan offices in Warsaw and Geneva rapidly breaking off in 2010 respectively to K&L Gates and Akin Gump Strauss Hauer & Feld. Largely, these were factored in, particularly in Poland where both firms had sizeable offices and would have been badly overweight. But arguably the level of Hogan departures in Europe went further than expected.

One departure that probably did make an impact was that of high-billing corporate tax specialist IIya Rybalkin, who quit Hogan’s Moscow arm for Akin Gump in May 2010.

Overall, the firm has been relaxed about such issues. Asked if any departures concerned the firm, Harris responds: ‘None immediately spring to mind. Some departures we didn’t expect.  Some partners had joined Hogan & Hartson in London to be a big fish in a small pond and suddenly found themselves in a much larger office; that’s a totally different proposition. Some bought into it. Others didn’t. Globally, when you look at the size of the firm and the numbers of departures, it was immaterial.’

Early financial performance in 2010 and 2011 was seen as unspectacular but more than respectable given the challenges of integration and a gloomy corporate market – with the firm posting largely flat revenues but seeing moderate increases in revenue per lawyer.

If the performance in the first two years was respectable, it didn’t quite match the high expectations. Though Hogan Lovells was embarking on a sizeable and sustained programme of expansion – within three years the firm would have recruited 80 partners – it was notable that it largely failed to bring in the expected transactional names in corporate in London or finance in New York, where the firm wanted to build a stronger underwriter practice.

Part of the reason for this is the state of the market and the firm’s commendable desire to recruit the right partners rather than commit to splashy lateral hires.

What was more disappointing was the announcement earlier this year of financial results for 2012, which showed continued lack of growth. Revenues edged down by 2% from $1.665bn to $1.633bn. At the same time, profits per equity partner (PEP) were down 6% to $1.097m, and revenue per lawyer dropped 3%.

While it was inevitable that revenues would be impacted by integration, conflicts and merger-related departures in the first two years, to see the firm still struggling for growth by year three – while profitability continues to lag its peer group – has been disappointing.

The firm responds that the results were partly impacted by the relative weakness of sterling and the euro over the year – with underlying revenues being essentially flat. Short-term performance was partly impacted by the firm’s decision to close its Abu Dhabi practice to focus its Middle East operation on Dubai, which incurred a substantial cost.

Harris admits, however, that he is disappointed. ‘We’re ambitious and we want to see the firm continue to grow and develop, building on our strong global platform. We are confident that the work we’re winning and the clients we are gaining position us well to grow revenue in a market that is still pretty flat.

‘I would certainly like to see us grow our revenue. When you’re trying to win work in a static market, there’s a huge amount of competition and you’re effectively trying to eat someone else’s lunch.’

 

‘The US guys are just different’

In some regards, the tensions Hogan Lovells is currently wrestling with appear to be a consequence of its previous success in building support for the merger.

While legacy Lovells was notoriously hard to manage, Harris had slowly established a stronger hand on the firm’s operational governance, taking on wider control of the majority of appointments below him and ushering in faster decision-making.

The ground was well prepared for the merger. As part of this, much had been made of the similarities between the firms, which did have broadly comparable financials and places in their respective markets.

But even strong internal supporters of the deal now concede that there was a considerable cultural gap between the two firms, which could be seen in differing remuneration policy but was also more wide reaching. Hogan under Gorrell was a leanly-managed operation that avoided navel-gazing – a firm packed with ‘highly-incentivised dogs – all you need to do is let them off the leash’, as one Lovells man puts it. It was a much more individualistic culture – in keeping with many peers operating in the US upper mid-tier.

This was very different to Lovells, with a more laid-back style, flat pay structure and committee-heavy governance. As such the deal has proved a shock to many partners in London.

Asks one former partner: ‘The question is did [Lovells’ management] try to brush it under the carpet? Did they pretend to the rank and file that there wasn’t anything to address? And, if so, have they lost the trust and support of the partnership?’

By the same token, it seems apparent and widely accepted that the more driven side of the US legacy business is slowly achieving ascendency – at least in comparison to London, which, of course, was the base of Lovells but is only 24% of the combined practice.

It should also be stressed that much of these tensions have a peculiarly London character, with the firm’s large and profitable German practice, for example, highlighted as being more in tune with the new mood sweeping through the combined firm.

Indeed, the German practice had often been irritated with what it viewed as a complacent mind-set in parts of Lovells’ City partnership, which partly triggered Seisler’s leadership challenge to Harris in 2008.

While Gorrell and Harris understandably seek to make light of the cultural gap, some internal partners who are upbeat on the union now argue that it would have been better to have had a fuller and franker discussion ahead of the merger. Says one partner: ‘The US guys are just different. They just are and we should have been more upfront about that.’

 

‘A hugely challenging exercise’

Much of the criticism regarding the firm’s post-merger performance is focused on its position in the City, where it is conceded that the firm remains underweight in the key area of corporate.

By consensus, Lovells’ corporate brand took a major knock with the 2006 departure of a private equity team to Weil, Gotshal & Manges. Recent years have seen the departure of respected operators like John Davidson (to key client SABMiller) and Hugh Nineham (to McDermott Will & Emery).

Affable co-head of corporate Andrew Skipper divides opinion somewhat, but is viewed as a talented deal lawyer who is adept at handling senior clients, if less at home running a team. Andrew Pearson is cited as another good all-rounder, if not an aggressive business-winner. However, the departure last year of equity capital market specialist Richard Brown for Latham & Watkins deprived the firm of one of its most cited practitioners.

This has left the firm light of partners in their prime to lead the charge in the Square Mile, with the exception of the well-regarded corporate infrastructure specialist Steven Bryan.

Chairman Nicholas Cheffings comments: ‘In a perfect world, we would have brought in additional highflyers and rainmakers. That’s a hugely challenging exercise to do when you’re operating in a tough economic environment. In boom times, people at top quality firms are happier to take the risk of a move not working out for them. That’s been the impediment. What’s hugely encouraging is that there are people talking to us who wouldn’t have talked to Lovells or to Hogan & Hartson.’

A glance at figures from mergermarket underlines the extent to which a gap still remains between the firm and its Magic Circle rivals in corporate.

On a three-year view to May 2013, Hogan Lovells acted on 390 deals globally valued at $231.7bn, compared to 688 deals worth $462.7bn at Allen & Overy (A&O), historically the least M&A-centric of London’s big four. Over the same period, Freshfields Bruckhaus Deringer acted on 707 deals with a value of $747.8bn.

Profitability continues to lag the Magic Circle in sterling terms, with PEP this year coming in at just over £700,000. In contrast, the Magic Circle as a group all generate PEP above £1m (though the gap is much narrower on a revenue per lawyer basis).

There is also little comfort in rankings from The Legal 500. In 2010, Hogan Lovells achieved 295 global recommendations, including 60 top-tier recommendations, more than half of which were in the EMEA region. By 2012 this had fallen to 276, with 57 top-tier rankings. In comparison, A&O has moved from 264 rankings in 2010 to 295 in 2012, with 127 top-tier rankings.

With the firm having so far little success in attracting a handful of big names for its City M&A practice, some argue it would do better to focus its efforts outside big ticket takeovers, focusing instead on its contentious and banking practices or in doubling down with a more explicit industry approach.

 

‘A fantastic platform’

If transactional work is yet to provide the break-through the firm hopes for there have been plenty of successes, notably in litigation, intellectual property (IP) and competition – traditional areas of strength for both firms in which they have continued to do well.

Likewise, Hogan Lovells’ City finance team is regarded to have maintained solid form, despite the firm typically getting too little credit for its banking practice.

Major contentious work the firm has undertaken includes advising BTA Bank on the largest fraud claim to come before the UK courts and advising BlackBerry maker Research in Motion on US antitrust clearance on the acquisition of 6,000 patents from Nortel. The firm has also been involved in a complex cross-border defence strategy on breast implant litigation spanning 4,000 claims.

And even if Hogan Lovells needs to develop its transactional practice, headline work does illustrate a handful of mandates that point to the firm making good on its impressive global platform.

This year has seen the firm secure a headline role advising Apple on its record-breaking $17bn bond, fielding a team under US-based corporate co-head Stuart Stein. Also welcome will be a growing relationship with Google.

The firm also this year acted for Dell on its $24bn take-private and is handling European competition and employment issues on Liberty Global’s £15bn acquisition of Virgin Media. In the UK the firm in 2011 acted for Northumbrian Water on its £4.7bn takeover by UK Water.

There has also been a solid range of
energy and project work for clients such as JKC Australia LNG, Citi Infrastructure Investors, ExxonMobil and Brookfield Infrastructure Partners.

Panel appointments are arguably also beginning to show some of the fruits of the tie-up, notably for the firm’s banking team. Wins over the last three years include major panel appointments for China Development Bank, Macquarie Group, Sberbank, Société Générale and Standard Chartered. The firm also won a major pitch for Citi.

Finance partner Stuart Brinkworth, who joined the firm in 2010 from SJ Berwin, is bullish on the firm’s prospects. ‘Looking at my practice area, it’s a fantastic platform. I’ve never been more successful as a partner than I have been here. It’s a combined global offering with the perceived strength of the firm. It’s been hugely beneficial to my practice.’

Major corporate appointments include Merck for North America and Germany, GE in Europe and an appointment to Vodafone’s main panel. There will have been some disappointment that the firm didn’t achieve a larger role in Shell’s recently overhauled panel, though it retains work for litigation and arbitration.

Aside from panel appointments the firm maintains lucrative relationships with companies including Alfa, ALSTOM, Barclays, Citigroup, Ford, Honeywell, HTC, News Corporation, Prudential, SABMiller and United Health.

The firm argues with some justification that persuading major blue-chip clients to move is a huge, time-consuming job and there is an inevitable time-lag before those efforts will pay off. The pitch is that current indications are that the work is beginning to feed through.

 

‘The same job done twice’

If the firm faces a challenge to manage tensions between its two legacy sides, a decision is currently looming that will bring the issue to a head.

Harris has previously indicated that he intends to stand down at the end of his second term in June 2014, raising the prospect of the firm making good on its plan to move to a single chief executive.

The issue has become charged, as many in London view the likelihood of the firm being headed by Gorrell as evidence of the effective takeover of Lovells.

The firm has begun moving towards a unified governance structure, with David Hudd taking over at the start of the year as sole head of finance as Washington DC-based Ben Hammond stepped down as co-head. The government regulatory practice and IP, media and telecoms teams are currently headed by one partner globally, respectively Agnes Dover in Washington DC and Andreas von Falck in Dusseldorf. The larger teams in corporate and litigation are set to remain led by co-heads (Andrew Skipper and Stuart Stein for corporate and Michael Davison in London and the Baltimore-based Stephen Immelt for litigation until 2015. The firm maintains co-CFOs, reflecting its dual partnership structure).

The firm had already in February 2012 confirmed London real estate litigator Nicholas Cheffings as its sole chair for a three-year term, replacing co-chairs Claudette Christian and the retiring John Young.

But management in general remains a sore point. An overhaul of the international management committee (IMC) announced in March 2013 is critically highlighted by some as retrenching the usual suspects rather than bringing in a fresh generation. At the same time the firm replaced Andrew Gamble with antitrust specialist Susan Bright as London managing partner, while Crispin Rapinet stood down as Asia and Middle East head in favour of then litigation co-head Patrick Sherrington.

Several lawyers argued this was a missed opportunity to promote fresh thinking and help to rebuild bridges between the partnership and the IMC, Hogan Lovells’ main executive body, though Harris responds that continuity was required at this stage.

Such debate reflects the extent to which management decisions have become politicised. In this context the firm will have to decide whether to press ahead with a single chief executive against the opposition of some partners.

As Legal Business went to press, Harris confirmed that he would consult with the firm’s oversight board in the next month on whether he would step down from his role next year and what happens in terms of senior management.

Based on over a dozen interviews conducted for this article, it was apparent that pressing for Gorrell as a single head would be a difficult sell at this time given the mood in London, though it would be more popular elsewhere.

Cheffings comments: ‘What we’re looking to do is move to a place at this stage of the development of the firm that the majority is comfortable with. At this point, it’s not a question of which legacy firm is dominant. It’s a question of what Hogan Lovells is. That’s down to the people, and those who you choose to take us forward.

‘There are inevitably going to be people who have strong views about the direction we should go and making one decision is not going to tick everybody’s box but ultimately we do what’s right for the firm.’

Yet one of the ironies of the firm’s situation is that, while there is considerable cynicism around what is seen as a bloated management structure and the IMC in particular, Gorrell and Harris themselves are generally well regarded and seen to have built an effective working relationship, even by those with criticisms about the firm.

By the same token, the consensus is that the firm should ultimately move towards a single chief executive.

While they have very different personal styles and are, to a considerable extent, products of very different institutions – there is considerable ground to unite them. Harris generally proved adept at pushing through changes in one of the hardest practices to manage in the City, typically in a lower key manner than other law firm leaders that have pushed for change.

The forceful Gorrell is seen as ruthless by some partners in London but most who have dealt with him generally admire his even-handedness, ambition and can-do spirit.

‘Warren is a class act,’ comments one former partner. ‘He’s got vision, he communicates it well, and he’s massively ambitious and aggressive in a good way. If he’s allowed to push that vision, it could potentially be fantastic.’

For all the wariness over a US takeover, there is little enthusiasm for the dual governance model to be maintained in the long term.

‘You just have the same job done twice, doubling up on aeroplane costs, flying back and forward,’ says another ex-partner. ‘Lovells itself was so big on management positions and committees – all that stuff clogging the firm up and stifling any sort of growth. It was classic of the way businesses used to run in the 1970s. If anybody could find a management post, they would jump on it and cling to it forever. All that bureaucratic overlay of management saps your ability to do anything.’

Sherrington is more philosophical in his approach to the structure, as he believes partnerships are very different animals to most corporations.

‘They’re partnerships of people who think with their peers and have strong views. You need to ensure everybody feels comfortable with the leadership team. I’m absolutely convinced it was the right thing to do.’

 

 

‘Not the end, the beginning’

Hogan Lovells is determined to carry on with the plan that brought it together. It will see through geographical expansion via Asia (which currently accounts for 7% of revenue) as well as Latin America that includes a newly-launched office in Rio de Janeiro.

For all the claims that everything has largely gone to plan the firm currently stands somewhat worn down and bloodied. If some difficult decisions were deferred when the deal was agreed, they can be deferred no longer.

Perhaps one solution comes from conceding that the legacy Hogan’s culture will – and probably should – have a more dominant role in the combined firm. After all, Lovells spent a decade trying to become a more focused and driven outfit – why else do the deal? The idea of Gorrell alone leading the firm seems perfectly credible.

Law firms need a certain amount of momentum if they have a chance of sustaining their position at the upper reaches of the global legal market, let alone moving up a division as Hogan Lovells wants to and on paper looks capable of doing. Whether it is through faster decision-making, aggressive expansion, or a unified leadership model, Hogan Lovells will have to find the means to gain that momentum.

That progress could come from finding more clarity on the exact position and distinctiveness Hogan Lovells holds in the market. Some of the more thoughtful and nuanced of its critics highlight a certain vagueness around Hogan Lovells’ pitch beyond being a global leader. There is a case for being a cross-border giant less explicitly built around M&A but if so, the firm should say so.

But what remains striking – and what the firm must build upon – is how much support there still is for the union. If this marriage is past its honeymoon period, the partners still believe they are better off together.

Rediscovering that commitment will partly come through rebuilding trust and communication between management and the partners. There have certainly been some melodramatic claims from partners at the coalface and some knee-jerk reactions to change in London, but on some points management appears to have withdrawn rather than engaged. Senior management did lose some trust by down-playing the gap between the two firms – it would arguably be more constructive to hold a collective hand up for that and move on.

An accommodation would certainly be timely if the firm is not to squander the opportunity presented by a ground-breaking merger that had considerable impact on the global legal market. The prize is still there and Hogan Lovells looks potentially well positioned, if it can galvanize around its merger. In many regards the firm looks better placed than Ashurst or Herbert Smith Freehills, rivals that legacy Lovells would rarely compare favourably to.

An ex-partner says: ‘It was a very brave decision and allowed the firm to do something that no one else had previously done. Looking back three or four years, one wouldn’t necessarily have expected Lovells to be the most obvious candidate to do something like this. One has to give a lot of credit to David Harris and Warren Gorrell for having the guts to do it.’

Cheffings perhaps hits the best note: ‘It’s probably going to be five years-plus in reality before we know just how successful we’ve been. From my perspective, it’s going well and I’m pleased with how things are looking now and for the future.

‘When we came together, we always saw it as not the end but the beginning. Hogan Lovells was establishing a platform upon which we would build. It made a huge amount of sense and still does.’ LB

sarah.downey@legalease.co.uk

alex.novarese@legalease.co.uk