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Amy Miller legalweek

After a terrific run as a partner at DLA Piper, Pfizer’s Amy Schulman knows how the game is played and has set out to change all the rules. Amy Miller reports

Nothing was ordinary about the first civil trial stemming from Pfizer’s controversial epilepsy treatment, Neurontin.

Both sides loudly complained about witness intimidation. Colourful plaintiffs lawyer Mark Lanier opened to the jury one day, then settled the next after an anonymous donor deposited $50,000 (£31,000) into an account for the alleged victim’s daughter. And at the defence table, high-powered product liability specialists from three separate firms worked as though they were partners – and all on a flat fee basis. “It was,” says Pfizer general counsel Amy Schulman, “an extraordinary victory.”

It was also the first tangible dividend of a sweeping reform effort Schulman has put into place at Pfizer, a Fortune 50 company and one of the world’s leading consumers of legal services. Her goals are simple and familiar: lower fees, more collaboration and better value for both the customer and vendor. And with her characteristic drive and enthusiasm (plus a little help from the stumbling economy), she’s getting what she wants. Firms are so eager for a chunk of Pfizer’s huge legal budget that Schulman can make offers they can’t refuse.

Pfizer’s approach to alternative fees is remarkably comprehensive, say outside counsel and legal experts. The company’s law department has selected 19 law firms to be part of what it calls the Pfizer Legal Alliance. Each firm is paid one annual flat fee for all of the work that it does for the entire year – from phone calls to closing arguments, from product liability suits to government investigations.

“I really believe that if you are going to try to do something that is fundamentally not based on the billable hour, you can’t do it in baby steps,” Schulman says in her spacious office in Pfizer’s midtown Manhattan headquarters. “You can’t be half pregnant.” By the end of 2010, she wants three-quarters of her legal spending to be done within the network. If Schulman is successful, Pfizer will become one of the largest companies to have more than half of its legal work done under alternative fee arrangements.

The world’s leading drug manufacturer is hardly the first major client to pay its outside counsel off the clock. Big names like DuPont and Company, Cisco Systems and United Technologies have been doing it for years. The recession has spurred more businesses to do the same. This summer, BTI Consulting Group surveyed 370 lawyers at Fortune 1,000 companies who reported spending more than $13bn (£8.1bn) on alternative billing arrangements in 2009, up from $8.6bn (£5.4bn) in 2008.

Pfizer is going further, however. Nearly all the firms in its alliance have had some experience working for flat fees or other alternative billing arrangements. But none of the outside counsel interviewed for this article had ever worked under such a broad, all-encompassing agreement. “This is all brand-new,” says Harvey Kaplan, a partner at Shook Hardy & Bacon, a Pfizer alliance firm that has long done product liability work for the company. “[Schulman] has instituted something that nobody else has.”

Here’s how the programme works. Pfizer sets a different annual flat fee for each firm in its alliance. The fee, paid in monthly instalments, is based on the type and volume of work that the firm is expected to do during the year. “It’s not supposed to be a ‘gotcha’ or a strong-arm negotiation,” says William Ohlemeyer, a partner at Boies Schiller & Flexner, another Pfizer alliance firm. “It’s all designed to find a mutually agreeable way to promote strategic thinking and give the client predictability.”

Ohlemeyer teamed with Mark Cheffo (pictured) at Skadden Arps Slate Meagher & Flom and Charles Goodell at Goodell DeVries Leech & Dann to defend Pfizer in the Neurontin case.

Pfizer will also adjust a firm’s fee if it does more work than anticipated. Without being asked, the company has already gone to a few firms this year and paid them extra because they did more work than expected, Schulman says. Additionally, all of the firms must undergo a performance review at the end of the year to determine whether they get a bonus – and whether they’ll continue working for Pfizer.

The company estimates that the alliance will slash its domestic legal spending by 15%-20%. That’s a sizable sum, given that it spends more than $500m (£312m) a year on legal matters. But Schulman is quick to say that this is not the programme’s only aim. “If all I was interested in was saving money, I probably could have gone to any law firm in the country right now and said, ‘Give me a 10% or 15% discount,’” Schulman says. “And in this economic climate, they probably would have.”

But in addition to cutting costs, Schulman says that she wants to build better long-term relationships with her outside counsel. By liberating them from the billable hour, firms can focus on the real value of their work for the company. Ultimately, Schulman says, she wants her outside lawyers to be more than legal troubleshooters. They can become consiglieri, working as business partners with Pfizer – and each other. “I’m trying to project us into a world that doesn’t yet exist,” she says.

Schulman didn’t start her overhaul from scratch. In 2004 Pfizer’s then general counsel, Allen Waxman, began reducing the company’s outside counsel line-up in a convergence project called P3 – the Pfizer Partnering Program. By 2008, the company’s roster had shrunk by 80% to 39 firms.

Waxman left Pfizer in March 2008 for personal reasons, and three months later, Schulman came on board as general counsel. Successful and ambitious, she had been co-head of the mass tort and class action practice at DLA Piper, and was lead trial counsel for Pfizer in its Celebrex and Bextra litigation. A Harvard Business School case study reported that Schulman had a $60m (£37.5m) book of business. She was believed to have been DLA Piper’s highest-paid partner in 2006, earning $5.8m (£3.6m), according to a story published by The American Lawyer that year.

She’s been busy at Pfizer. For much of the year she’s been tied up with the company’s $68bn (£42.6bn) acquisition of rival drug-maker Wyeth. And in September she had to put the best light on a settlement with the US Department of Justice in which Pfizer agreed to pay a record $2.3bn (£1.4bn) penalty for illegally marketing its painkiller Bextra. (Current alliance members Cadwalader Wickersham & Taft, Clifford Chance and DLA Piper advised the company on the Wyeth deal, while another alliance firm, Ropes & Gray, was lead counsel on the Bextra agreement.)

When Schulman made the switch from counsel to client, she brought with her a desire to fix some of what she found frustrating as a lawyer. In her experience, the biggest barrier to better adviser-client relationships has been the billable hour. “The more you argue over billing, the more you miss the point of the real conversation about value,” Schulman says. “If I can liberate us from the apparatus of billing and have the actual conversation about what matters, then that’s a tremendous gift to the lawyer-client relationship.”

The alliance that Schulman envisioned had to be small if Pfizer’s outside counsel were going to function more like trusted advisers. She picked Justin McCarthy, associate general counsel for global research and development, to head the selection process. He had an essential credential: he didn’t hire outside counsel often, so he didn’t have a strong allegiance to any firm. “She refers to me as the Switzerland of the process,” McCarthy says.

The project started in the autumn of 2008, when Pfizer invited firms to apply for its new network. With one or two exceptions, all had previously worked for the company. A total of 31 firms answered a questionnaire with three simple queries: What are your capabilities? What is your philosophy about partnering with a small number of firms? And what are your ideas about how to deliver savings? “It wasn’t designed to torture firms,” Schulman says.

Then Pfizer chose 19 firms to interview. Each candidate’s expertise was discussed in detail, but McCarthy and others involved in the process also wanted to see how much chemistry a firm’s partners had with each other. Did they work well together, finish each other’s sentences, call each other out for not answering questions? “It really told us a lot about the firms,” McCarthy says.

The hopefuls that stood out, he adds, emphasised relationships and collaboration as much as their legal skills. Ropes & Gray sent a team of 10 lawyers who not only talked about their past experience handling government investigations for Pfizer (the US attorney’s office in Boston has long been an active investigator of big pharma), but also about how their firm rewards its lawyers for collaboration as well as the number of hours billed. “It’s just part of the culture,” says partner William Knowlton. “We don’t want to say we take it for granted – it’s just what we’re used to. And Pfizer really did notice it.”

Schulman says she has had some tough conversations with firms that didn’t make the cut. Only 13 of the 18 law firms initially chosen for the alliance were part of Pfizer’s previous P3 programme. Some of the P3 firms not chosen, such as Davis Polk & Wardwell and Baker Botts, still work for the company. And the alliance door remains open to them, Schulman says.

After the alliance firms were chosen, they met with in-house lawyers to talk about compensation. The process of setting each firm’s flat fee was both art and science. First, Pfizer decided on the types of work each firm would handle and then estimated how much it would cost the firm to do that work based on past cases. “It’s a more time-consuming process than the traditional process,” says associate general counsel Bradley Lerman, head of litigation. “It requires trust on both sides and open communication. It cannot succeed if it’s one-sided.”

Lerman concedes that the fees Pfizer pays are not totally divested from the billable hour yet. The fees still have to be competitive with market rates, which are based on what firms charge by the hour. But Pfizer is working to create a system of metrics that will completely replace the billable hour over time, and focus instead on measuring performance and outcomes. “It will happen,” Lerman believes.

And firms in the alliance have not completely abandoned the billable hour, either. Outside counsel say they still keep track of their hours so their firms have some internal way to measure profitability. That can create a slight conflict, says Jeffrey Healy, a partner with Tucker Ellis & West in Cleveland. Tucker Ellis still tabulates lawyers’ hours, he says, but it does not reward or penalise lawyers for hitting, or not hitting, a certain number. “We do truly look at what our lawyers have accomplished,” says Healy, chair of the firm’s trial department.

Lawyers in the alliance say they are pleased so far with the process and with what they’re earning – although they will not say exactly how much Pfizer pays them. They will say that they are making about what they would if they were paid by the hour. “The end result for us was certainly something we thought we could live with,” says William Hoffman, a partner at Kaye Scholer, which has represented Pfizer for about 40 years. “And as time has gone on, [it] has seemed just about right.”

They are not only pleased with their fees. They like not having to quibble about hourly billing issues. They can spend extra time on scientific research or a motion for summary judgment, or put a partner on a specific task instead of an associate without having to explain why. With the price set, the firms can allocate resources as they choose – which, for some, is itself a refreshing change.

Plus, alliance lawyers say they are being more proactive. They can go to Pfizer’s in-house lawyers with ideas about how to deal with upcoming legal matters, without fear of looking like they’re just fishing for more work. Quentin Urquhart, a partner with Irwin Fritchie Urquhart & Moore in New Orleans, says he has approached the company’s staff lawyers about preparing a brief on drug litigation trends to watch. “I wouldn’t have even thought about doing that in the past,” he says. “I would be more reactionary.”

But outside counsel say that one thing they find especially unusual is the key role they are playing in deciding how the alliance operates. The project is still very much a work-in-progress. Outside lawyers sit with in-house lawyers on committees that are creating systems to govern how the alliance functions. For example, it has a governing roundtable that’s designing a 360-degree review, to be conducted annually.
Sheila Birnbaum, a partner at Skadden who has been handling product liability and insurance cases for Pfizer for years, sits on the roundtable. She says she has never been so involved in deciding how a client should evaluate her performance. “I think we’ve made enormous progress,” Birnbaum says. “Much of this year has been spent trying to come up with a framework that is really going to work next year.”

The alliance’s first performance review was slated for December. This process grades outside counsel, in-house counsel and the alliance as a whole on a scale of one to five. Depending on their size, firms get to select five to 15 people to participate in the review. Their assessments will determine whether firms deserve a bonus and how much work they should get in the future.

The reviewers will look at a variety of factors, such as how matters are staffed, and how well a firm understands Pfizer’s short- and long-term business goals. But one of the most important criteria will be each firm’s willingness and ability to collaborate. “If we don’t play nice, it’s not going to look good on our record,” Birnbaum says.

Lawyers say the flat fee arrangements are making it easier to work together. There’s less incentive to hoard work or to be territorial about assignments. “We sometimes talk to each other more often than we talk to the partners in our own firm,” says James Hooper, a partner at Wheeler Trigg O’Donnell, a 54-lawyer litigation boutique in Denver that has been working for Pfizer since the 1990s.

Collaboration was key during the first trial over the alleged side effects of Neurontin, Pfizer’s defence counsel say. The family of Susan Bulger filed suit against the company after the 39-year-old Massachusetts woman hanged herself in 2004 after taking the anti-epilepsy drug. It was the first of some 1,200 Neurontin-related suits against Pfizer to go to trial. In July the plaintiffs voluntarily dropped the case after the first witness was called. According to the family’s lawyers, they no longer wanted to pursue the matter after the anonymous donation to Bulger’s daughter’s trust fund.

Any of Pfizer’s defence lawyers were experienced and skilled enough to try the case individually, says litigation chief Lerman. But instead, they worked as a team. One lawyer did the opening argument while another planned to do the closing argument. Duties often overlapped. They worked together to find and depose witnesses. They shared research and information openly. “Basically, we did it as if we were one law firm,” says Goodell, a name partner at Baltimore-based Goodell DeVries, which has been working for Pfizer since 1985. “Everyone very successfully left their egos at the door.”

There was no official lead counsel in the trial, but Skadden’s Cheffo took charge of delegating work based on skills and abilities. He and his co-counsel point out that they didn’t abandon their competitive natures completely. Yet no one jockeyed for work, because there was no financial incentive to do so. “It was clear to us that this wasn’t the only litigation we were going to be involved in, and we all took a long-term view,” Cheffo says. “We knew we would all be judged about whether we would rise above what might be traditional law firm rivalries. Plus, there was a fair amount of work at hand.”

There are plenty of challenges ahead, some foreseen, others that will come as a surprise. “There’s going to be a lot of flak, and something is going to blow up, of course – that’s life,” says Rees Morrison, an independent consultant to corporate legal departments. One potential problem: it may be difficult to get candid feedback from firms waiting on cheques from the company. “They’ve got so much now invested in pleasing Pfizer,” Morrison notes. He suggests that bringing in a third party to gather comments might be a good idea.

Schulman says one immediate challenge will be integrating Wyeth’s outside counsel into the alliance. Some of that work will likely be handled by existing alliance firms that have already worked for Wyeth, such as DLA Piper, Ropes & Gray and Williams & Connolly. It is also possible that some firms not already in the alliance may be integrated later. Either way, Schulman hopes firms in the network will be handling all of Wyeth’s legal work by next year.

And the alliance is expanding around the world. Pfizer’s legal woes are global, just like the company’s market reach, so Schulman wants at least one or two firms based abroad to be part of the alliance. Clifford Chance was added in October, bringing the total number to 19.

Schulman says mistakes and missteps will likely happen along the way, but that’s OK – it’s a learning process. “I’m famously patient,” she says. “Despite my intensity.”

A version of this article first appeared in the December edition of The American Lawyer, Legal Week’s US sister title.

———————————————————————————————————————————————–

We happy few -  Pfizer’s 19 alliance advisers

• Boies Schiller & Flexner
• Bradley Arant Boult Cummings*
• Cadwalader Wickersham & Taft
• Clark Thomas Winters
• Clifford Chance
• DLA Piper
• Goodell DeVries Leech & Dann
• Irwin Fritchie Urquhart & Moore*
• Jackson Lewis
• Kaye Scholer
• Ropes & Gray
• Shook Hardy & Bacon
• Sidley Austin
• Skadden Arps Slate Meagher & Flom
• Tucker Ellis & West
• Watkins & Eager*
• Wheeler Trigg O’Donnell
• White & Case
• Williams & Connolly

*These three firms have formed a partnership in which they bill Pfizer as a single firm.

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Georgina Stanley legalweek

The merger of Lovells and Hogan has won plaudits and raised expectations. Georgina Stanley assesses the challenges the new firm faces in living up to its huge promise

If the outlook of any major strategic move can be gauged from the general reaction of rivals, the prospects for the impending union between Lovells and Hogan & Hartson could not look brighter.

For while the cynical City legal community typically pours buckets of derision and faint praise over major moves by rivals, the upcoming merger has won a remarkable degree of support from observers.

The attraction of the merger is obvious – in only three months the rebranded Hogan Lovells will become a top 10 global law firm with combined revenues of $1.8bn (£1.1bn), around 3,000 lawyers and 566 equity partners – not a bad result for two firms that have struggled to fulfil their ambitions in an increasingly globalised market for high-end legal services.

As Lovells managing partner David Harris comments: “No firm will have the same range of capability that we will. Having the scale and quality of practice and the breadth of coverage in key areas will give us a competitive advantage and a unique proposition.”

For Lovells, used to the knives being out over the last decade, the positive notices have made a welcome if unexpected change. But though both firms – neither of which could generally have been regarded as pace-setters in their respective markets – deserve credit for achieving the kind of transatlantic union that seemed nearly impossible, neither can rest on their laurels.

With a deadline of 1 May to merge practice groups, industry sectors, management teams and brands, the two firms have their work cut out if they are to be operating as a single firm in little more than three months. Given the mixed record the legal industry has had at turning promising international tie-ups into successful realities, the pair are all too aware of the challenge they face if they are to make the most ambitious merger the global legal market has seen for at least five years deliver.

Harris says the firm has a window of maybe a year to make this deal deliver if Hogan Lovells has a hope of living up to the transformational hype. The question many rivals will be asking themselves now is to what extent the firms can seize this opportunity.

Long road to a fast deal

While to outside observers the deal appears to have been conducted at lightning speed, it was more than two-and-a-half years ago that Lovells began on the journey that led to this moment. Given that Lovells at the time was struggling to keep pace with some of its City rivals that were riding the transactional boom, the initial omens could have been better.

Litigation partner Patrick Sherrington, who in recent years had primarily managed Lovells’ relationships in the US, was tasked with working alongside Harris and other members of the US strategy committee to take a closer look at the US market.

Initially, this was as much about gauging the trends and attitudes in the US, though the case for a transatlantic merger was obviously one of the issues being considered. As early as 2008 the discussions were increasingly focused on Hogan & Hartson, the top 25 US practice based in Washington DC. Sherrington knew Hogan through Hogan chairman Warren Gorrell who sat on the same industry body, the Pacific Rim Advisory Council, and the firms’ finances, market positions and cultures looked comparable.

Though the discussions remained low key, Lovells’ team were devoting more time and serious thought to the debate.

The deal could even have been scuppered by a closely-fought managing partner election in 2008, which saw Harris put the US issue on hold while he campaigned for re-election. (Harris, in November 2008, secured victory in a vote against continental European managing partner Harald Seisler).

Once the financial years of both firms were out of the way, the discussions, led by Harris and Sherrington from Lovells and Gorrell and tax partner Prentiss Feagles from Hogan, began to build momentum in the spring of 2009.

In the early summer, Harris decided to formally bring in senior partner John Young as the voice of the firm’s supervisory partnership council and the partnership as a whole.

Harris comments: “Over the last 18 months or so we have been considering more closely the changes taking place in the market, many of which have been accelerated by the downturn. The importance of scale globally is becoming increasingly evident, as is the need for full service capability in the US, and you can’t build and achieve critical mass by other means.”

Given that Young had been previously somewhat sceptical about US mergers, winning him over was no foregone conclusion, but it was determined that the chances of convincing Lovells’ partnership would be harder if they delayed consulting beyond the executive team.

By June a decision had been taken in principle that it was worth committing enough resources to put the firm in the position to give detailed proposals to the partnership in November.

Lovells also engaged US consultant Zeughauser Group to give a second opinion. Zeughauser’s involvement was on three levels: reviewing the US market, considering the US firms that would be compatible with Lovells and assessing the compatibility of Hogan specifically. (Neither Lovells nor Hogan used their respective external advisers – Zeughauser and Deloitte for tax issues for Lovells and PricewaterhouseCoopers and Jomati for Hogan – for initiating talks or finalising negotiations).

As it happened, Legal Week broke news of the talks on 8 October, three weeks before the executives of both firms decided to recommend the deal in principle. With an initial positive reaction to the deal, both firms gave the talks a warm response at partner conferences in November.

Despite the challenge of putting together such a large deal and the fact that it would require major reform of Lovells’ lockstep partnership model, the deal was widely expected to be voted through by the time it was put to a formal vote in December (Hogan needed a two-thirds vote in support, Lovells third-quarters).

The reasoning behind the merger is echoed from partners at both firms: both realised that with the legal market changing and clients seeking more global coverage, building the kind of international presence they sought in London and New York respectively would be impossible without a merger.

Though the two firms have shied away from the DLA Piper comparison, it is privately acknowledged that the 2004 union that created DLA had helped boost the firm’s brand and market position. For Lovells the timing also looked right as a revival in its financial performance relative to peers and its counter-cyclical strengths left it better placed than many rivals to secure such a deal in a tough commercial market.

Gorrell (pictured) outlines the thinking during the talks: “We were not pursuing a merger as part of our strategy. We are very happy with our position in the US but at the same time our mission is to be a leading international firm. As we sought to build more high-end capabilities globally, we realised it would be hard to achieve our goal gradually.

“None of the UK-based firms have anything like the brand recognition of Hogan in the US, so it’s easy to see that this gives Lovells something that none of the other UK-based firms have. Lovells is very similar to Hogan; they have a diverse practice, are at the high-end, are known for being user friendly and have a strong commitment to pro bono. Put it all together and it’s a very powerful offering no other firm will have. That’s why we’re all so excited.”

It helped that, by all accounts, the case was made well to both firms’ partnerships. While some, like Harris and Sherrington, were instinctively well disposed to a US deal, Lovells had plenty of partners who needed to be won over by the concept of a US union. Hogan, likewise, was previously regarded as an unlikely candidate for a mega-merger, with the firm having eschewed such moves in favour of lateral hires and manageable takeovers.

Speak to most partners within the firms and their belief in the deal is clear to the point of cultish. One Hogan partner described the union as “phenomenal” no fewer than three times in one sentence.

As Young comments: “There’s a huge amount of goodwill within the firm from the partners. What appealed about Hogan included the collegiate mentality and that we genuinely get on with each other.”

Even those who may have traditionally shied away from such a move seem to have been converted by the strength of the combination.

Andrew Skipper, Lovells’ corporate head, concedes that instinctively he was not pro-merger, however, he now says: “I’m surprised I’m as enthusiastic as I am. The things most European firms worry about, like culture and remuneration, are things that are very dear to me, but I’m a complete convert.”

From the perspective of the Lovells partnership, it helped that the merger with Hogan provided the opportunity to deal with longstanding dissatisfaction over partner remuneration. The firm has fought a number of battles to change its lockstep and allow management greater powers to adjust partner pay based on performance. Despite the changes already made, feeling was mounting within the firm that it had not gone far enough and that there needed to be more effective ways to reward and attract top-quartile performers.

As Harris comments: “I have been a proponent of change in terms of our remuneration structure for some time. I always felt we needed a bonus element to provide a more balanced remuneration system.”

Young adds: “We’ve had gradual changes to the lockstep over the last five years and there would have been further changes. Changing the remuneration structure was expected by the partnership.”

Practice makes pretty near perfect

Judging the union in terms of practice and geography, the benefits are also clear from both sides, with Hogan Lovells managing to balance complimentary practices with minimal overlap in the global network.

The firms only overlap in 11 cities worldwide. Lovells gains that all-important US coverage through a network of national offices as well as a base in Geneva, Berlin, Abu Dhabi and Caracas – providing a crucial gateway to Latin America, an area partners at both firms earmark for growth. Hogan, meanwhile, gains a 750-lawyer London base that can go head-to-head with all but the magic circle firms in their marquee practices areas.

The combined firm will also be one of the strongest players across Europe, with Lovells bringing its well-regarded and energetic continental network to the deal as well as a major presence in Asia.

The deal is particularly attractive from a litigation perspective, creating as it does a genuinely world-class practice. Both firms have strong disputes practices, generating nearly a third of their respective revenues. Combined, the litigation practice will have some 250 partners and 940 fee earners, bringing together clients such as Barclays, Lloyds and British American Tobacco on Lovells’ side with the likes of IBM, Bristol-Myers Squibb and United Healthcare from Hogan.

Indeed, Sherrington and his Hogan counterpart Steve Immelt are practically falling over themselves with excitement at the combination. As Sherrington says: “We are merging two leading litigation firms on either side of the Atlantic, marking it out as a unique firm because of a breadth of practice that’s pretty well unmatched.”

Intellectual property (IP) is another strength for the firms, which will count nearly 400 fee earners in the combined group.

Significantly for Lovells, the merger also gives the firm access to Hogan’s highly-regarded government regulation practice and a whole host of Washington links expected to prove increasingly important given the huge policy commitments of the Obama administration and the current push to overhaul market regulation in the wake of the financial crisis.

Hogan will also benefit from Lovells’ finance practice, which has often not received enough credit in the City as an effective upper mid-market player. The US firm currently houses finance within its corporate group. However, it will be an independent practice at the merged firm, with some 130 partners covering banking, project finance, public finance and business restructuring and insolvency.

But it is not all perfect on the practice front. Many observers question what the deal will deliver in terms of corporate, even if Lovells’ M&A practice has regained some pace after a poor period from 2003 to 2006.

Despite the protests of partners within the US firm in particular, neither Lovells nor Hogan is renowned for M&A in London and New York, though Hogan has a stronger corporate footprint on a national US level.

Stuart Stein, corporate partner and head of Hogan’s financial services and corporate governance groups, comments: “Our respective strengths will create a powerful combination. We will have a global law firm of the highest quality lawyers that will include a leading US corporate practice.”

The bottom line, which some Lovells partners privately concede, is that the firm is still punching a little under its weight on corporate given its scale, global reach and history. It also seem apparent that corporate lawyers at both firms, while generally supportive of the deals, see less immediate benefit to their practice than some other teams.

Skipper adds: “It gives us the starting point from which to attract a stronger client base – it’s a platform for us to become a leading global corporate firm. It won’t happen overnight, but it gives us the right start.”

Another obvious medium-term area to build upon is the firm’s presence in New York, where the combined firm will have around 200 lawyers. In addition, the firm will want to use its sizeable investing power to back more expansion into Asia and launches in Latin America.

Are two heads better than one?

If practice, culture and geography look to be clearly in the union’s favour, it is less certain how well the dual management structure, which will see two chief executives and chairs, will work in practice.

A notoriously difficult structure to make work, the challenge will be to push through the quick decisions needed to gain the most from the merger in its early stages. The balance the firm must strike is genuinely integrated leadership. That will be no mean feat, as most firms that have tried it have ended up either continuing as two separate firms under the same brand or, at the other extreme, slowing decision-making to a crawl under an unwieldy one-firm structure that attempts to grind out consensus without the institutional culture to deliver it.

There is also the issue that the two firms have, over the last decade, been shaped by very different experiences. Lovells has had to compete head-on with larger and more profitable rivals in one of the world’s two primary global legal markets. In contrast, Hogan has been a top-tier player in a large and very significant US market, but one that has not been exposed to the level of entrants or competition as seen in London or New York.

As such, Lovells has suffered more than its fair share of pain and criticism, including its turbulent partnership restructuring of 2005. This experience has created a brutally realistic self-image at the firm, suggesting the firm will be ready and willing to seize the opportunity to make this union affect real change. It may be challenging for Hogan to get into that mindset.

There will also be a great deal of attention on how Harris and Gorrell will work together. Gorrell, a highly-respected corporate real estate lawyer who still handles some client work, has been the dominant force within his firm for years. In contrast, Lovells’ leadership has been identified with a more consensual, team-based style. If this core relationship works, the odds of success will improve substantially.

Harris (pictured) is confident the deal will work, arguing that Hogan has in recent years increasingly taken the view that it needs to become more competitive if it is to position itself in the global market. Harris also expects that the co-chief executives will avoid splitting their brief on geographic lines to reinforce the one-firm ethos.

So far the two firms’ model for the merger is widely seen as striking a workable balance between genuine integration (aligning remuneration and unifying the two primary LLPs in the US and UK/international) while avoiding the energy-sapping problems of going for full financial integration on day one.

But there is no doubt that making the deal work – becoming a true top 10 global practice in quality as well as size – will require seizing this opportunity to its full.

There also remains a sizeable integration project to get through. With only three months to go the firm is still to confirm its full management line-up. At press time it was still finalising details of the implementation committee that will oversee areas such as client development and integration of practices, people and offices.

As Harris says: “We recognise that the implementation will be challenging. There’s a huge amount of work in the planning stage to ensure that we market the proposition of the combined firm clearly to clients and we co-ordinate our approach effectively, not to mention the raft of organisational and operational issues in bringing the firms together.”

The two firms have achieved an impressive feat in securing an eye-catching deal at such speed. The bad news is that this is only the beginning if the firm has a hope of emulating the few transformational deals the legal market has seen. Both sides must be ready to give ground and face awkward truths about their weaknesses, a process that will sorely test the current reserves of goodwill.

Gorrell and Harris – and their respective partnerships – claim they are up for this challenge. This will certainly be put to the test.

***

Sidebar – the combined firm and integration plans

Management

Co-chief executives David Harris and Warren Gorrell (respectively currently managing partner of Lovells and chairman of Hogan & Hartson), are expected to serve four-year terms from 1 May. Lovells senior partner John Young will work with Hogan corporate and project finance partner Claudette Christian as co-chairs of the combined firm.

The governance of the combined firm echoes Lovells’ current model of a defined executive team and a supervisory board providing oversight and representing the views of the partnerships.

The new executive body will be called the international management committee, with Harris and Gorrell at the helm. It is expected to consist of practice group heads and regional managing partners and will be primarily responsible for setting strategy, operational oversight and putting recommendations to the supervisory body.

The board will consist of 12 members under the leadership of Young and Christian. Though modelled on Lovells’ partnership council, the board will also have a supervisory role over management and affairs of the firm in addition to partner matters. The new oversight body will make recommendations to the partnership on matters such as internal promotions and hires. However, all of its recommendations will be based on recommendations from the management committee.

Integration

The firms are currently finalising the membership of a new implementation committee to handle projects that need to take place in order to get the two firms operating as one by 1 May.

It includes distinct working groups such as a premises committee already in the process of looking at those cities (some 11 worldwide) where both firms have premises, to decide which offices will be used. Along with decisions on the leadership of practice areas and individual offices, these decisions are expected to be made by 1 May.

Structure

The merged firm will operate through two primary distinct limited liability partnerships (LLPs), one in the US and one for all international offices, most likely with a Swiss verein acting as an umbrella body for firmwide governance and cost-sharing.

Remuneration

The model means both firms will maintain two partnership entities and there will be no direct profit-sharing. However, remuneration will be aligned, with Lovells’ modified lockstep moving towards Hogan’s ‘contribution-based model’ for partner pay, with little regard for years of service. This means that 85% of profits will be allocated on a points-based system covering both financial and non-financial contribution. While this part of partners’ remuneration will be reviewed every two years, partners will also be eligible for an annual bonus.

Fifteen percent of profits will go into a bonus pool intended to recognise short-term contribution over a 12-month period. The range of points within the core ladder will be expanded from Lovells’ current 2:1 model. Despite differences between Hogan’s merit-focused model and Lovells’ system, the firms stress that around 80% of Hogan’s partners are within the parameters of the UK firm’s lockstep, though the US firm has a significant number of ‘outliers’ paid significantly more than plateau Lovells partners, who earned £736,000 in 2008-09. Changes for Lovells partners will be phased in over four years, with the lockstep to remain in place for two years until the new points are decided. The bonus could be allocated from the end of 2010-11.

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Sidebar – market response to Hogan Lovells

“I am very surprised that it has taken five years for two firms to do the same thing that we did. It confirms our strategy but leaves them five years behind.”
Nigel Knowles, joint chief executive, DLA Piper

“It is a very good deal and one that makes sense for both firms. I don’t think that it is a game-changing or transformational move, but it will no doubt make many other firms ask themselves serious questions about their strategies.”
Paul Maher, London chairman, Greenberg Traurig Maher

“It’s an exciting and bold move for both firms. They will have to expand their business. I suspect convincing institutional clients who are sophisticated users of their legal services on a global basis to use a corresponding office as the new place to go will be the challenge.”
Dennis Brock, litigation partner, Clifford Chance

“The merger will not change the day-to-day dealings we have with Lovells. What I do think is key to the success of this is going to be Hogan making sense of Lovells’ UK client base who have operations in the US and Lovells working with Hogan clients in the UK. If that goes together seamlessly then it will be a roaring success.”
Andrew Garard, group legal director, ITV

“They have done well to get through so many legal and partnership complexities and push through their deal quickly.”
Simon Bromwich, managing partner, Ashurst

“Culturally, Lovells has been looking to something significant in the US for a while, so mentally, they are ready for the change. It is a great combination of two firms that share the same values.”
Marc Bartel, law firm practice managing partner, Heidrick & Struggles

“This is potentially a transformational deal – it is not just about a UK/US tie-up but could create a very serious global law firm. It has certainly got people thinking and forced them to advance their plans.”
Tony Williams, co-founder of consultancy Jomati

For more analysis, see Editor’s comment: Fortune favours the brave

Alex Novarese legalweek

Hogan Lovells must keep the ambition burning

Assessing the prospects for this year’s impending launch of Hogan Lovells remains, despite the extensive coverage it has already received, no easy task. Twenty years since leading US and UK firms began thinking seriously about international expansion there remain few precedents for a merger of equals in the upper reaches of the global legal market. Transatlantic unions have proved even more elusive; some would argue that the governance structure of DLA Piper and the disparity in size between Clifford Chance and Rogers & Wells means there has never been a true merger in this class.

What is clear is that the tie-up between Lovells and Hogan & Hartson has huge potential and the management teams of both firms deserve much credit for putting together a workable deal at such speed. As can be seen from this week’s analysis, with so much goodwill on both sides and a compelling practice story, expectations are sky high.

That is the good news, but it brings with it the heavy burden of meeting expectations. Unlocking the potential of the union will require both firms to build decisively on their initial success in securing the union. That will take determination, good humour and bags of pragmatism. It will also require a lot of progress in the first year of the merger. As managing partners have found through painful experience, if you don’t get the merger to largely happen in spirit in the first 12 months, it’s very hard to make it happen at all.

The danger is that it will be very easy to fall into muddling along as two firms under one brand. After all, such a move would be no disaster and would most likely provide some modest but considerable benefits. But such an approach won’t take the firm where it says it wants to be: a top 10 global practice in quality as well as size. That means not being content with being a large fish in sizeable regional pools, but being mentally prepared to compete with the world’s best law firms, at least in the combined firm’s core areas.

Another challenge Hogan Lovells will face is making its dual management structure, the inevitable result of such a sizeable merger, provide the leadership it needs. Such structures can certainly work but, by definition being light on governance clarity, they do require large reserves of goodwill and engagement on both sides to be truly effective. Thankfully the two firms don’t appear to be in short supply on this front. As such, they have a respectable chance of making this a genuinely transformative deal. A lot of people have asked if the merger is a ‘game-changer’ for the legal market, the kind of development that affects attitudes among peer group firms. The simple answer is: not yet, but it certainly could be.

Click here for an in-depth analysis of the Hogan Lovells merger.

For more, see Lovells and Hogan name first combined 12-member board

Jeremy Hodges legalweek

Lovells and Hogan & Hartson have named their first combined governance body ahead of their 1 May merger, confirming details of the firm’s board.

The 12-member Hogan Lovells board will play a supervisory role, overseeing partner issues and management affairs.

The board will not have executive responsibility for strategy, management or operating decisions but will instead take recommendations from the combined international management committee (IMC) to the partnership, as well as providing input to management.

Its specific responsibilities include determining partner compensation matters, managing the firm’s lateral partner hiring and internal partner promotions and dealing with the elevation of non-equity partners to the equity.

Chaired by firmwide co-chairs John Young (pictured) and Claudette Christian, in consultation with joint chief executives David Harris and Warren Gorrell, the board will meet monthly from 1 May.

The board has eight regional representatives, split evenly between Lovells and Hogan. Young told Legal Week: “The chief executives and the IMC will present recommendations for which the board has supervisory responsibility or final approval authority.”

The board regional representatives are: Jose Maria Balana (Lovells, Madrid); Nicholas Cheffings (Lovells, London); David Dunn (Hogan, New York); Marc Gottridge (Lovells, New York); Gernod Meinel (Hogan, Berlin); Andreas Meyer (Lovells, Hamburg); Michael Silver (Hogan, Baltimore); and Jun Wei (Hogan, Beijing).

Lovells on the Legal Week Wiki

Jeremy Hodges legalweek

Hugh Nineham, McDermott Will & Emery’s London head, has been given a new role leading the US firm’s European practice as part of a firmwide strategic review.

The position will involve Nineham taking a seat on McDermott’s firmwide executive committee, which oversees global strategy.

The appointment is the first time the firm has had a region-wide head for Europe.

The new role is one of a number of changes to come into effect this month as a result of a strategy review carried out last year, with McDermott hoping it will bring greater integration and profitability as well as further growth in the region.

New firmwide co-chairs, litigators Jeffrey Stone and Peter Sacripanti, have been reviewing McDermott’s strategy since being appointed to their new positions last April. The pair officially took over on 1 January when predecessor Harvey Freishtat stepped down.

Other changes see the firm reorganised around four main business units – controversies; regulatory and governmental affairs; tax; and transactions.

Each unit is headed by a management representative who will sit on the executive committee.

Nineham told Legal Week: “It is a new move for the firm to have someone sitting on the executive committee who has specific European responsibilities. The move will help us to focus on the region in terms of firmwide integration, profitability and growth.”

The four business unit heads are: Washington DC-based litigator Peg Warner, who runs controversies, Ray Jacobsen, who takes charge of regulatory and governmental affairs and is also based in Washington, Chicago partner Mike Fayhee, who heads up tax and corporate partner Mike Anthony, who leads the transactions unit.

Earlier this month McDermott announced it was moving away from associate lockstep and introducing a merit-based pay system for its US associates. By next year, associates and senior associates will be placed in one of three pay levels based on the skills they have achieved and business experience.

The London office is expected to adopt this model in the long term, but there are no immediate plans to change its pay model.

McDermott Will & Emery on the Legal Week Wiki

Jeremy Hodges legalweek

Dorsey & Whitney has boosted its London corporate capabilities with the hire of former DLA Piper partner Kate Francis.

Francis, who resigned from DLA last August, becomes the tenth corporate partner in Dorsey’s London office. She joined the partnership at DLA in 2005 and her practice focuses on capital markets and M&A.

Her appointment follows that of fellow corporate specialist Matthew Doughty, who joined the US outfit from Addleshaws midway through 2009.

Paul Klaas, Dorsey’s partner in charge of international, commented: “Kate adds experience and depth to our corporate group in London and is a fine addition to the firm.”

London corporate head Mark Taylor added: “Kate and Matt are important hires for us and add considerable strength to our capital markets practice as well as deepening our contacts with the mid-market banks and corporates on whom we are primarily focused. We anticipate further hires in the short to medium term.”

The hire of Francis follows the recent departure of London-based corporate finance partner Richard Baumann to New York firm Morrison Cohen.

DLA Piper recently saw the departure of banking and finance partner Matthew Morgan, who joined Pinsent Masons to lead the national firm’s banking team in Manchester.

DLA Piper on the Legal Week Wiki

Emma Sadowski legalweek

Clifford Chance (CC) has bolstered its litigation and dispute resolution offering in Washington DC with the hire of William Wallace from Milbank Tweed Hadley & McCloy.

Wallace joins CC after nine years as a partner with Milbank and will head up the magic circle firm’s US corporate and financial services litigation group.

Prior to joining Milbank, Wallace also led the litigation practice at Morgan Lewis & Bockius and worked in the US Department of Justice in Boston.

His practice focuses on insolvency, fraud and commercial disputes, while he also specialises in trade secret-related litigation.

Commenting on his arrival, US litigation chief Juan Morillo said: “His experience and success make him ideally suited to lead the firm’s US corporate and financial services litigation group, which is focused on high stakes commercial disputes expected to go to trial. At the same time, he has a number of attractive corporate relationships that provide us with new opportunities, both in litigation and other practice areas.”

The hire of Wallace comes a year after CC brought in former Federal Trade Commission general counsel William Blumenthal as chairman of the firm’s US antitrust group.

CC has seen a number of partner departures from its US offices in recent months, including the departure of former global litigation chief Mark Kirsch.

Kirsch left the firm in May last year and joined US rival Gibson Dunn & Crutcher a month later along with fellow litigation partner Joel Cohen.

Clifford Chance on the Legal Week Wiki

Sofia Lind legalweek

Bingham McCutchen is set to launch a London antitrust practice with the hire of a McDermott Will & Emery partner in the City.

Davina Garrod, who heads up McDermott’s London hedge fund practice, will join Bingham in the next two months as the first European-based partner in the firm’s antitrust and trade regulation practice group.

Garrod, who joined McDermott in 2002 from Olswang, focuses on US and EU merger control law, while she also advises on competition-related litigation and regulatory government investigations.

Bingham said that the hire is part of a strategic focus to broaden its US and Asia-based antitrust capabilities into Europe.

London managing partner James Roome (pictured) said: “It is a very interesting hire for us as antitrust is an area that we have not really taken advantage of before in London, and it will tie in with our significant practice in the US. Also, Davina’s strength in the hedge funds area will tie in particularly well with our London office focus on financial institutions.”

The arrival of Garrod, which brings Bingham’s London partner headcount to 15, is the firm’s second partner hire from McDermott’s City arm in the last year after London tax partner Stuart Sinclair moved in the same direction last June.

Bingham also added a City partner from Sidley Austin in December, when Sarah Smith joined as a partner in the finance practice.

McDermott also made several additions in London last year, most recently the hire of Denton Wilde Sapte energy partner David Birchall in October.

More US news, comment and analysis

Jeremy Hodges legalweek

Mishcon de Reya has launched in New York with the hire of a team of lawyers from US firm Sheppard Mullin Richter & Hampton.

The surprise move will see a 15-strong team of lawyers and support staff set up shop in the highly competitive New York litigation market, headed up by white collar litigator Jim McGuire.

The move will give Mishcons its first office outside the UK in a bid to take advantage of a recent upturn in global fraud and regulatory work for the firm.

The new office will officially launch tomorrow (19 January) with McGuire as managing partner alongside litigation partners Mark Berube and Tim McCarthy.

Mishcons managing partner Kevin Gold (pictured) said: “We are delighted to have Jim, Mark and Tim leading our New York office. Opening our first international office in one of the major financial centres of the world is an exciting opportunity for both our business and our clients. It is also timely. There has been a rise in the level of regulation globally. A presence in two of the world’s leading financial centres is exactly what clients of the expanded firm need.”

McGuire – a former partner at White & Case – was the founding partner of Sheppard Mullin’s New York office and sat on the firm’s executive committee.

More US news, comment and analysis

Richard Lloyd legalweek

K&L Gates has posted its financial results for 2009, passing the $1bn revenue mark for the first time, reports The Am Law Daily.

The US firm saw gross revenue increase by 8% to $1.034bn (£635m), while profits per equity partner (PEP) increased to $861,000 (£529,000), up 1% from $855,000 (£525,000) last year.

Revenue growth was driven largely by the firm’s March 2009 merger with Chicago-based Bell Boyd & Lloyd, which added 250 lawyers and an office in San Diego. The firm also continued its overseas expansion with new offices in Frankfurt, Singapore and Dubai.

Headcount increased from 1,552 lawyers to just over 1,700, including 605 non-equity partners – the firm added 495 non-equity partners in 2008. With the growth in the total number of lawyers, revenue per lawyer dipped slightly to $610,000 (£375,000), down from $620,000 (£381,000) in 2008.

K&L Gates chairman Peter Kalis (pictured) commented: “Of the top 50 firms in the world, I think relatively few will have shown growth in revenues and profits in 2008 and 2009 like we have.” Kalis said he is very optimistic about 2010, given a strong fourth quarter last year, adding: “There are signs that our client community is faring better than a year ago.”

Despite the growth, K&L Gates was not immune to the effects of the downturn. The firm laid off 36 associates in March of last year and deferred 80 first-year associates until the start of 2010. Kalis stressed that he sees no similar cuts for 2010. “With the cost-cutting we did, we feel pretty well-positioned and do not see any further dramatic measures as necessary,” he said.

K&L Gates is one of the first Am Law 100 firms to report its financials for 2009. Last year 13 firms reported gross revenue of more than $1bn.

The Am Law Daily is the website of The American Lawyer, Legal Week’s US sister title.

K&L Gates on the Legal Week Wiki