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Guest post: ‘Chasing short term profits is the enemy of long-term success’ – A conversation with Freshfields’ Ted Burke

I recently had the chance to sit down with Ted Burke, outgoing managing partner of Freshfields Bruckhaus Deringer. I’ve known Ted for years and with the recent announcement that he would be stepping down at Freshfields to join Arclight Capital Partners as COO and general counsel it was time to catch up.

When we sat down, I asked Ted to reflect on his years at Freshfields (head of the firm since 2005). He opened: ‘It’s the oldest great firm in the world.’ Founded in 1743 with the Bank of England as a client, which remains a client today. The firm has been successful over 270 years, Ted observed, but not at all times, and it has had to change repeatedly. ‘No business can last more than a generation without changing.’

Yet there’s a core set of values that have existed across Freshfields for generations. Ted described them as:

* to be the best—this requires rigour and commitment

* to always behave decently and honorably—with everyone

* the ability to recognise when fundamental change is taking place in the market

* to assess the firm with unblinking honesty, and to undertake change; and

* to know that as a partner you hold this firm in trust for future generations.

As an example of change, Ted went back to the firm’s origins in the 18th century. The prestige of its work for the Bank of England led it in turn to representing the aristocracy, who then held much of Britain’s wealth. But the mid-18th century saw the rise of the modern corporation and the concentration of wealth and power in those entities. Freshfields had to adapt to maintain success and it did, albeit slowly.

Freshfields had to adapt again in the 1960s and 1970s. The firm didn’t think that its corporate practice was on a par with some of its peers so the partners re-invented the firm by targeting new clients and de-emphasising its family practice. How did it achieve this? The answer: ‘Align your client strategy with your people strategy.’ Simple, profound, honored in the breach.

A more recent example of a ‘pivot’ came with the Big Bang in the 1980s and the deregulation of UK securities market: Freshfields realised it would have to go after new organisations as clients, including US investment banks. And yet more recently, in 2000, came the three-way merger between Freshfields/UK, Deringer Tessin (Germany) and Bruckhaus Westrick (Germany/Austria) – a move that was quite risky, Ted reminded me, for all three firms.

BM: How do you manage lawyers?

TB: ‘Well, we would probably not admit to managing lawyers at Freshfields. That wouldn’t be consistent with our culture. We would instead just talk about how we try to get the best out of each other.’

BM: Culture can be a tricky word; every firm likes to talk about it, but in my experience surprisingly few managing partners can define what it means for their firm. What do you mean?

TB: ‘Culture is the way things are done. It’s different than values, which are aspirational. Culture is the reality. If you sit in the reception area of any corporation for half an hour, you can work out the culture. The way people talk to each other, their energy level, how fast they walk, the way they welcome clients, job candidates, everyone. The language they use.

In our case, culture would include how we work together, our approach to client service and to community responsibility, the degree of our ambition, the way we talk to each other, the way we treat everyone in the firm and outside the firm, the way we elect partners, the way we recruit people, the way we value contribution. It’s everything, really, and goes beyond the conventional view of systems, which may reinforce culture but are not proxies for culture. Culture evolves over time, and it should evolve, but it can’t be microwaved. It’s more like a very slow crockpot dish.’

BM: So tell me how you make decisions.

TB: ‘Our decision-making processes must be in tune with our culture and must also reinforce it. We place a premium on partnership and consensus-building. We think that’s the best form of governance for lawyers. Lawyers are inclined to be highly autonomous and want to have a real say in their professional future. That’s best achieved in a real partnership and by that I mean a partnership in spirit not just in form.

‘With more than 400 partners in 20 countries, it’s a lot different animal than when everyone could gather in one conference room. Lawyers are highly autonomous and that’s why I believe the partnership structure is the best model for a professional service firm – speaking of the cultural dimension of partnership, not the technical legal form of the enterprise.’

BM: So how do you preserve partnership spirit at Freshfields?

TB: ‘First, we get together a lot. That can be expensive but it’s worth it. Partnerships require mutual trust and trust in turn requires familiarity. And eventually something more than professional respect emerges. Friendships around the world are formed and it can be incredibly rewarding.

Second, we spend a lot of time on consensus-building and put just about all material decisions in front of the partnership. Does that mean we’re slow to make decisions? Yes, but only to some extent. We pride ourselves on acting extremely quickly in our client service. That’s important. But there have been few internal decisions that have required very fast responses, though this is probably changing. In any event, when we need the partnership to respond very fast, they have done so. You just have to pick your spots and not ask them to do that on a regular basis.

‘Lastly, we do think that our lockstep remuneration system also contributes to our partnership ethos.’

BM: Is all of that work worth it?

TB: ‘We think so. By preserving partnership, you get the hearts of your partners not just their wallets. I have heard some law firm leaders say that the corporatisation of law firms is inevitable so don’t bother avoiding it. I disagree with that. I want our partners to regard our firm as more than a good professional platform and a good paycheck. I want their long-term commitment. I want them to be willing to invest in something that may not pay dividends until after their retirement. I want them to embrace the concept of holding the firm in trust. You might be able to get that in a corporation but I think it’s most easily achieved in a partnership.

‘We might be the largest business in the City of London [over 2,000 employees] to go through the financial meltdown without laying off more than a single digit number of people and we’re proud of that. Could we have improved profitability by doing so? To be sure. Would it be the right thing to do? Releasing loyal people into a horrible job market? No. Would the partners think better of themselves and of the firm to let people go? No. Would it make a material difference to their take-home pay? Not really. So that was our approach and none of our partners disagreed. They were looking beyond the economics.

‘The key is to get hearts on board, not just minds; this is the only route to sustainable success.

‘I heard someone from another firm say recently, perhaps with some hyperbole, that his partners only care about their pay this year and next and will leave if it’s not enough. That’s incredibly depressing! I would be the first to say that financial success is very important; you neglect that at your peril. But too much of a focus on short-term profitability is the enemy of sustainable success and strategy. I hope that will never be the case at Freshfields.’

BM: But you mention that the need to respond quickly is probably growing. What is changing?

TB: ‘Well, you have described it yourself. The clients have more choices.’

BM: So how has Law Land evolved since 2008?

TB: ‘I think of it in terms of the concept from evolutionary biology of “punctuated equilibria”; the idea that there are long periods of stasis punctuated by brief crisis periods of intense speciation. This is what we’re going through, prompted of course by the financial crisis and, perhaps more importantly, by technological advances.

‘Law firms didn’t change immediately after the crisis. In the first couple of years, many firms were swamped with crisis work or were hunkered down dealing with serious over-capacity. But starting a couple of years ago many firms began to emerge from their caves, blinking into the light and thinking hard about their strategies and business models. We’re seeing some of these firms start to go in different directions and take pretty bold steps.

‘Of course, there isn’t a single right strategy or model for any firm and we clearly see multiple strategies and models succeeding in the legal sector. But I do think that some firms are facing a strategic trap. Many seem to want to shrink and that seems the right answer if you want to preserve or enhance profitability and if you believe that the demand for high-end legal services has shrunk. But shrinking in size may also mean that you can’t adequately meet your clients’ global needs. That creates a strategic dilemma.’

BM: One impetus for periods of intense speciation, if I recall Stephen Jay Gould accurately, is the abrupt entry into the ecosystem of foreign invaders – like the Asian carp in the Great Lakes. You surely know about how firms like Kirkland & Ellis are coming into the New York and offering top-of-market compensation to marquee partners, which is antithetical to lockstep. How does this play out?

TB: ‘We have this model of a hierarchy of needs for every law firm partner, and no, it’s not Maslow’s. The elements are:

Platform: What’s the brand name, how good are the associates, what’s your position in the practice group;

Culture: Is it a fit?

Financial issues: The obvious. Not just current pay, but capital contributions, pensions, etc.

Security: Lawyers want to work; they don’t want to retire at 45. Security to lawyers means a steady stream of work., and that’s really important to them. And:

Friendships. These can keep people at, or keep them out of, firms.

‘So new firms can change the market, without question, but it won’t just be about pay packages. It will have to be about meeting all the needs of potential partners.’

BM: So how do you think, strategically, about the future of a complex law firm today?

TB: ‘All firms have had to redefine their market. It used to be all about their traditional local competitors who more or less operated with the same business model; now it’s much more difficult for firms such as ours to concisely describe the competition because we’re competing with different firms in different countries and practices. That, in turn, means strategy has become more complex.

‘But there will be loads of other changes. The employment model will change – it will get more complex. Business services will get increasingly professionalised. And firms will be required to make significantly greater capital expenditures as technology becomes more and more important.

‘I look five to seven years out; that seems to me to be about the right time frame. What sort of firm do you want to be in 2020?’

BM: What’s the future? What next for Freshfields, after you’ve moved on?

TB: ‘Freshfields has a tremendous amount going for it. A really cohesive partnership with a strong, friendly, positive culture. A great reputation for quality. A diverse mix of practices and a great, global footprint. A commitment to intergenerational equity. Stewardship. Leaving the place better than you found it. And a very large profit pool, which together with the culture, enables the firm to make significant long-term investments. I think that the firm will continue to adapt to changing client demands and I think that they will focus in particular on growth in the US and in Asia. And they will succeed!’

270 years. And counting.

Bruce MacEwen is president of Adam Smith Esq the legal research and consulting company