Lauded as one of the most promising mid-market players in the UK until recently, Addleshaw Goddard has run into the unfamiliar ground of poor growth and internal tensions. Georgina Stanley and Simon Petersen ask if the firm can regain that old polish

Many thought at the time that it couldn't be done. After all, successfully forging a national practice, which requires not only uniting fierce local rivals but also bridging the cultural gap between the City and regional markets, had eluded so many rivals. Yet eight years ago Addleshaw Goddard looked to have achieved the near-impossible – the creation of a leading UK law firm through not one but two mergers, with very little collateral damage.

Leveraging off Theodore Goddard's solid City reputation and Addleshaw Booth & Co's much vaunted national client base, the combined firm appeared to sail through the tricky integration process and grow rapidly. Revenues and profits per equity partner (PEP) increased year on year until 2007-08, when turnover hit £195.4m against PEP of £586,000. Though there were larger national rivals, many thought that, pound-for-pound, Addleshaws was the most effective player in its peer group, marrying a strong practice and a tightly cohesive partnership.

However, recent years have been less kind, with the firm being one of the most heavily buffeted law firms since the credit boom turned during 2007 – partly because Addleshaws had built a large property practice. Now, nearly a decade after the deal was agreed, Addleshaws appears 
to be facing its biggest challenge 
yet as a combined entity, with revenue falling back to 2006 levels and PEP dropping sharply to a seven-year low.

Financial issues aside, critics contend that a firm that seemed to have it all has lost a clear sense of direction and its ability to articulate where it wants to stand in the market. Moreover, there have also been indications of internal tensions amid the partnership. The leadership team of managing partner Paul Devitt and senior partner Monica Burch are now facing reports of a growing split between London and the firm's regional bases in Leeds and Manchester – an issue apparently fired by discontent over partner remuneration.

In this context there is much riding on Addleshaws' response to the challenges ahead, with the firm in May unveiling a myriad of announcements and strategic plans. These included the confirmation that it would be making up to 40 redundancies in its business services team, mainly in London, changing its pension scheme, setting up a new service company enabling it to benefit from a lower tax rate and overhauling its governance and management structure.

The firm also announced plans to launch its first international offices in Dubai and Singapore – a major initiative for a firm that made a strategic imperative of avoiding cross-border expansion. And all this on top of a controversial review of the firm's partner remuneration structure intended to make it more merit-based.

In addition to confirming the firm's third consecutive annual drop in revenues, Addleshaws also announced that profits had fallen by around 17%, with PEP dropping to just £328,000. Significantly, of 19 firms to have announced their 2010-11 results by press time, Addleshaws is the only one to post a drop in revenue and turnover, with its fee income now less than half that of Eversheds and around £50m lower than Pinsent Masons. Meanwhile, its PEP looks likely to be lower than all its nearest regional rivals except Wragge & Co and far below the top 50 average.

Burch (pictured) comments: "We have a number of measures we aspire to achieve. No-one likes having to make redundancies, but we need to take steps that are in the best interests of the firm and clients and that meant cutting costs and looking at what we need given the business we are, in respect of our business services.

"Current pricing pressures may well make it another difficult financial year and we need to recognise that with concentration on our costs. The business services consultation is part of that, but we also need to recognise and respond by changing the way we deliver our client work."

Ambition costs

While Addleshaws has, along with its peer group, obviously suffered from the prolonged downturn in commercial activity, a considerable part of the current financial pressure on the business is linked to its ambitious attempts to secure a flagship London office.

The firm signed up to the space on Moor Lane in early 2008, moving into its 200,000 sq ft office the following year. While the firm benefited from a rent-free period which only expired in August 2010, the timing of the deal meant the office was not cheap, costing the firm a reported £47 per square foot. And that is on top of the £20.9m the firm spent fitting out the office during the 2008-09 financial year.

With expenses like that, it is little wonder that the costs associated with the London office played a large part in the firm's increased borrowings, which stood at around £20m by the end of the 2009-10 financial year, with the firm also asking partners to contribute £15.6m in additional capital during the same year.

Burch adds: "London had the single biggest impact on the numbers as it was the first full year of being in Milton Gate, but you have to take a long-term view. London is going to be the main growth area for us – half our firm is here, we bring clients here and the brand image is important."

But London is not the only reason for Addleshaws' woes. While there is no doubt that the office is expensive, more generally, the negative impact of its investment has been greatly increased because of the firm's struggle to grow its business in recent years.

On one level, this struggle for growth is surprising. Addleshaws has, by any yardstick, an excellent roster of FTSE clients, a legacy in part from its City merger but also the product of the legacy national firm's huge reach with plc clients. It counts 3i, Aviva, Barclays, British Airways, Capita, Diageo, GlaxoSmithKline, HSBC, Kingfisher, Rolls-Royce, Sainsbury's, Wolseley and Standard Life as well as Lloyds Banking Group among its roster. Recent client wins include reappointments to Clydesdale Bank's panel, a new appointment to the commercial lending panel for Nationwide, a larger role for Sainsbury's and a new panel appointment to Volkswagen UK.

However, the firm's subdued relative performance over the last three years seems to revive the historic criticism of Addleshaw Booth & Co: that the firm struggled to convert a strong partnership and client portfolio into profitability.

Inevitably, in part this reflects the wider difficulties in the economy, as well as issues in core areas for Addleshaws specifically, such as real estate and the northwest, where activity levels are still low. It also demonstrates the problems faced by mid-tier firms under pressure from larger law firms, drafted in on the more profitable mandates.

There is no doubt that many areas of mid-market practice have been heavily affected by pressure on fees. And it would be wrong to assume that these pressures are easier when dealing with FTSE 100 clients. In many areas of commercial advice such as employment, property and intellectual property, such work is now managed through robust panels, and such sophisticated buyers have been increasingly willing to use their buying power to push down hard on rates. In the case of Addleshaws, partners concede the firm has been forced to cut its billing rates – costing it more than £10m last year, according to 
one estimate.

Real estate head Adrian Collins says: "The quality of new clients last year, together with increased deal volumes, was encouraging, but the pricing of these deals was much lower than previous years, which reflects the current pricing challenges facing the whole real estate market."

Finance and projects division head Richard Papworth adds: "Last year was much better work-wise, with strong contributions across the financial services sector and the main UK banks in particular. Activity levels were up and we built market share in a crowded and difficult market – but despite some record fee levels, the division overall was down slightly. Our clients are finding it difficult out there, too, and that impacts on fees."

In short, critics contend that Addleshaws hasn't built on its historically strong corporate and banking practices to sustain enough lucrative upper mid-market work, instead pushing into too many volume-heavy commercial areas.

The international question

The issue of the firm's international ambition also looms large. To date, Addleshaws has remained committed to its strategy of being a UK law firm without any kind of international network, instead preferring to rely on a group of non-exclusive referral relationships, which include the like of Garrigues in Spain, Noerr in Germany and Willkie Farr & Gallagher in the US.

It is a tactic that has worked for a handful of prestigious City law firms but, as one rival comments: "Being Slaughter and May is only ever really going to work for Slaughters."

Part of the tension inherent in Addleshaws' international strategy is due to the strength of its client base. With a roster of globally active clients, Addleshaws' lack of an international presence means it automatically misses out on a lot of premium work. This dynamic – and the resulting response by rivals aiming to become international commercial advisers to large plcs – is illustrated in the development over the last five years of DLA Piper, Eversheds and Pinsent Masons – while Hammonds has, of course, merged with a larger US practice.

And while the firm states it wants international work to account for around 25% of its total revenues by 2014, it is hard to see how it will achieve this. The Dubai and Singapore launches planned for later this year will focus purely on arbitration and are therefore not likely to create significant fee income in themselves. Besides which, even if the firm wanted to expand beyond arbitration to more full-service offerings, its current low level of profitability puts significant investment out of reach.

The plain fact is that international expansion takes a lot of time and huge resources and, with current revenues of £162m and no foreign progress, Addleshaws looks poorly equipped to make rapid progress on its own. There is a case to be made that the firm should have taken steps towards international growth five years ago – once it had delivered on its successful integration of Theodore Goddard. Instead, it is a late entrant to a notoriously long-term game.

As one Manchester partner comments: "Without an international network, you're buggered. You've either got to be a niche player like Walker Morris, or you've got to be global. The worst thing to be right now is a national firm, as it's not a growth marketplace and, more and more, deals are international. And for Addleshaws, Singapore and Dubai are too little, too late."

A tough act to follow?

Given the firm's difficulties, it is now facing a challenging environment for any law firm management, but particularly so for a relatively new leadership team. Former corporate head Devitt only replaced longstanding managing partner Mark Jones in May 2009, with Burch taking over from senior partner Paul Lee in March 2010.

The old duo seems a tough act to follow. In many ways having been a textbook managing partner/senior partner pairing, Jones brought a pragmatic details-focused rigour to his role while the smooth, well-connected Lee was a firm ambassador par excellence. Given that Jones was at the firm's helm for 17 and Lee for 19 largely smooth years, it would be easy to lay the blame on the new management team.

However, in retrospect some of the problems facing the firm can be traced back to the boom years. Signing up to the new London premises was clearly a decision by the former management and it is London which also appears to have saddled Burch and Devitt with the reported partnership tensions. As some back management's plans to move to a more merit-based remuneration structure while others, reportedly those in Leeds and Manchester, are against it, citing the high current costs of City investment. By the same token, it was the previous management team that refused to go international.

With the new board set to issue revised remuneration proposals in the coming weeks after partners complained they had not had enough time to consider them to vote in May as originally planned, the firm is hoping to introduce its new partner pay system in time for the new financial year.

However, Addleshaws may have a fight on its hands, with some partners in the North unwilling to see their pay reduced in order to free up more money for a London office they see as a drain on capital.

As one ex-partner comments: "It's a constant battle between the young guns in the City who are setting up their own practices in difficult times, who are hungrier for work and are perhaps not being paid well enough for their efforts, versus the more senior partners in the North who have established practices, sit on top of the lockstep and don't have to work as hard.

"Under Jones and Lee, if you disagreed with them they would ram it through anyway. Paul Devitt is much more into doing things as a proper committee."

Certainly, under the old leadership duo decisions appeared to be taken without such visible divides. Hence legacy Addleshaws managed to cut 11 equity partners the year before securing the Theodore Goddard tie-up to boost its merger prospects. Indeed, rivals were openly admiring of the firm's decisiveness over the issue, with many seeing the move as a signal of ambitious intent and clarity. The firm, again, in January 2009 moved to cut 19 partners – more than 10% of its partnership – as a result of the recession, though it obviously had far more company the second time around.

Management insists that current plans to amend partner pay are not about de-equitising or getting rid of partners, but about increasing flexibility. The tension, though, means that while Addleshaws has yet to see a significant number of partner departures – with the exception of an 11-lawyer team led by litigator Simon Twigden (who stood unsuccessfully against Burch to head the firm) – this may not stay the case for long as partners in London are receiving not much better than half the going rate at competing firms.

Management stresses that by cutting costs through the business services redundancies and using cheaper options such as the Manchester-based transaction services team, which effectively sees the firm farm less complex volume work to cheaper paralegals, it can come back stronger. Indeed, the firm has high hopes for the transaction services team, which is now a 40-strong division following a pilot at the end of last year.

Though the firm will not talk about revenue targets, its 2014 strategy sees Addleshaws aiming to become one of the top three FTSE 100 advisers according to legal directory Chambers and Partners, with each of its key clients hoped to be using the firm across at least six practice areas. It has also placed people at the heart of its strategy, with Burch leading a drive to see the firm's partnership comprise 25% women by 2014, with the firm also hoping to achieve a 95% acceptance rate for offers of employment.

Devitt (pictured) comments: "We need to improve profits per partner and we're going to do that through growth – we see good opportunities with significant clients – and also through greater efficiency and cost reduction; things like our transaction services team in Manchester. We've also changed our management structure and we continue to look at how we reward ourselves as partners to become more meritocratic. I'm optimistic about the future. Investment in relationships is a part of our core strategy, alongside our sector focus and renewed local office push."

While Devitt may be optimistic, from a neutral reading, making good on the firm's strategy will require achieving a very demanding combination of substantial international growth, development in the City and targeted moves to embrace commoditisation of areas of legal practice. By any reading, it is a very hard line to walk, let alone for a firm with limited financial room to move.

As the head of one top 50 firm comments: "In terms of their market position they have almost tried to become a national Slaughter and May. That might have been fine and a good idea when times were good, but when times get hard everyone is looking for new markets and new areas of cashflow, while they are stuck in the UK.

"The market is improving, but they are missing out on all the work coming out of emerging markets."

With such an outlook, it is thankful that senior partners at the firm maintain that there is a renewed sense of purpose after a difficult period. Litigation head Richard Leedham says: "Sometimes things just need to change. There's a real sense of optimism here about the year ahead. We've had a difficult year for one reason or another, and now we're ready to move forward."

Collins takes a similar line: "Of course I still have confidence in senior management. The results have come out, there have been some very positive results and it's pretty likely that we are going to be at the lower end of the range, which is disappointing, but I am very happy with our strategy. By responding to pricing pressures and continuing to invest in the firm we're heading in the right direction."

And to be fair, Addleshaws concedes that it faces a make-or-break year and that it must do better, in particular, at freeing up partners to bring in premium work. In essence, the firm argues that it has a comprehensive response to a difficult situation and that this long-term approach is already beginning to pay off in the current financial year. Addleshaws also points to recent recruits like DLA Piper corporate veteran Neal Shepherd, Taylor Wessing commercial partner Andrew Smith and nuclear specialist Roger Clayson as evidence that the firm is still a place for ambitious partners.

Perhaps one solution for Addleshaws is to once again articulate a clear picture of the firm's position in the market. One element of the firm's previous success was that Addleshaws consistently aimed to position itself upmarket of its national rivals – one of the reasons that its tie-up with a City practice worked was that the legacy national firm had more in common culturally with a London practice than some regional rivals. If that is still the firm's aim, it could be clearer about it. There is a danger that its current gameplan could be interpreted as a lowest common denominator – an attempt to split the difference between various strategic options rather than selecting a path.

Perhaps the elephant in the room is whether the firm should pursue a credible international tie-up, which would kickstart its international ambitions and usher in additional investing power. Despite its short-term financial pressure, the firm remains a very attractive practice for an international partner.

But one way or another, the firm has two pressing matters to attend to: Addleshaws must start growing its business once again and unite its partnership around common goals. Without such an outcome soon, its strategic options will not only quickly reduce, they will be imposed on a firm that, until recently, looked to be one of the brightest success stories in the top 50.

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Northeastern promise – a brief recent history of Addleshaw Goddard

Addleshaw Goddard in its current form emerged out of the fast-evolving legal services market of the 1990s. This period was defined by consolidation, turbulence and growth in the legal industry, both across key regional markets and the City.

In particular, this era saw the emergence of a group of genuinely national law firms such as Eversheds, Dibb Lupton Broomhead and Pinsent Curtis. Lagging behind this group in scale, Addleshaws took its first step towards building a genuinely national profile with the 1997 union between Manchester legal royalty Addleshaw Latham & Sons and big six Leeds firm Booth & Co.

In contrast to the bloody factionalism that scarred many of the regional mergers at national rivals, most notably the troubled 1995 marriage between Simpson Curtis and Pinsent & Co, the deal was widely regarded as a success. The efficiently-run and thrusting Booth & Co injected a fresh discipline and drive into Addleshaws. The latter firm had built a commanding position as an adviser to large corporates active in the northwest but had become somewhat complacent thanks to the clear domination it enjoyed in the Manchester legal market before the entry of national rivals.

The combined firm initially badged itself more as a northern giant rather than explicitly focusing on London or the national market. However, the firm was soon investing in the competitive City market after launching a greenfield London office in 1998.

The firm's good fortune was partly shaped by a well-regarded and complementary management pairing of urbane senior partner Paul Lee (pictured) and robustly pragmatic Mark Jones, respectively from the Manchester and Leeds sides of the business.

Aside from developing a reputation as a cohesively organised partnership, the firm also made early efforts to strike a progressive stance. Addleshaws became one of the first law firms to introduce a partner alternative role in 2004 and also made commitments to diversity initiatives and corporate social responsibility ahead of many peers.

But despite performing credibly since its regional merger, there was no doubt that Addleshaws faced considerable challenges in competing both with established City players and larger national firms. However, it soon became apparent that the firm did not intend to muddle along. Addleshaws' ambitious and decisive spirit was on display again in 2002 when it announced it was cutting 11 equity partners. The move was widely interpreted as a bid to raise profitability, in part to help the firm secure a credible City merger.

Opportunity soon presented itself in the shape of Theodore Goddard – a well regarded City firm that had previously entertained merger talks with a string of firms, among them Eversheds, Salans, Richards Butler and Denton Hall.

A number of partner departures effectively softened up Theodore Goddard's appetite for independence and eased the path to the deal, which was sealed in 2003. It was a very rare example of a merger between two top 50 law firms and arguably the most significant union between a City and national player.

As important, Addleshaws made a good job of integrating the deal. The firm announced it would hold off international expansion to focus on integration (the firm's small Brussels arm was closed in 2004), improving profitability and attacking the City market.

Rejecting the vogue for foreign expansion, its pragmatic stance appeared to work as it turned an £11m overdraft in 2003 into a £7.5m surplus by 2005 – an impressive feat given the costs of integration. This also improved the firm's financial position to back further expansion, and Addleshaws sustained robust growth – growing revenues from £125.2m in 2003-04 to a peak of £195.4m just four years later. Over the same period, profits per equity partner increased sharply to £586,000 – an important achievement for a firm that had historically been criticised for not converting a strong client base and partnership into profitability.

However, there were to be challenges ahead. The firm had built up a large real estate team which was heavily hit after the credit crunch. The firm saw a sharp fall in revenues and profitability after 2008, even in comparison to its peers. The firm announced the redundancy of 16 support staff that year and in January 2009 announced plans to cut 19 partners – equating to more than 10% of the firm's partnership.

The firm has also seen the handover of its long-running management team. After 17 years in the role, Jones stepped down as managing partner on 1 May 2009, while Lee, who became managing partner at Addleshaw Sons & Latham in 1991 and then senior partner of Addleshaw Booth six years later, stood down from his role in spring 2010. Today, with Paul Devitt and Monica Burch taking on the managing and senior partner roles respectively, the firm faces an outlook once again as uncertain as its legacy practices faced in the economic gloom of the mid-1990s.

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No win, no fee – problems with success fees

Addleshaw Goddard has attributed a £6m shortfall in its 2010-11 financial turnover to significant litigation cases conducted under conditional fee agreements (CFAs).

The admission comes three years after Addleshaws unveiled an initiative dubbed Contro£, which was intended to offer clients a comprehensive package of funding options for litigation, including CFAs, after-the-event insurance (ATE) and third-party funding. The initiative was led by the firm's then contentious group head, Simon Twigden, disputes partner John Gatenby and contentious business director Chris Howe. This saw the firm press unusually heavily into no win, no fee litigation funding – usually deployed in volume litigation, not complex disputes.

One of these CFAs is being used for Russian businessman Boris Berezovsky's £2bn claim against Chelsea Football Club owner Roman Abramovich (pictured) related to investments in Russian oil company Sibneft and aluminium giant Rusal. If successful, Addleshaws' success fee is expected to run into millions of pounds.

Litigation head Richard Leedham comments: "The CFAs show how we've invested in our clients, partly because of the economy. We're backing them in a way that wouldn't have happened some years ago. We are reacting positively to a major concerns of our clients when it comes to litigating: cost."

He added: "We currently have two major cases on a CFA, and our ability to innovate and run those cases on that basis was key to getting and retaining the work. These cases are so big that it has had an impact on our bottom line, but the upside of that will, we hope, be in our future results."

The firm currently has about a dozen cases operating under CFAs, of which the Berezovsky case is the largest. However, apparent difficulties with success fees underline the problem in attracting work under such arrangements and for law firms to manage their cashflow. Experience in the US has shown that contingent fee deals can prove very hard for law firms to handle. Notably, Howrey, the US law firm that announced its break-up earlier this year, cited problems with contingency fees as one of the issues that led to its collapse.

The litigation head at a rival City firm comments: "When Addleshaws first came out with the CFAs it had a lot of people worried that they would get all the work due to competitive pricing. However, it hasn't worked out that way. Large clients still want to go with the firms they already know and trust – they don't want to take a gamble on who represents them."

However, it remains unclear the extent to which Addleshaws has been affected by CFAs, with one former partner arguing that such problems have been overstated. Either way, a major contingency payout for the firm couldn't come at a better time.

Leedham maintains the firm is well positioned for contentious work: "In litigation our performance and reputation is measurably stronger than ever before, and I feel very confident about the year ahead. Taking into account the effect of the CFAs, we matched the income from 2009-10, which was 25% up on the year before – that's a fantastic result."

For more, see False impositions – can Addleshaws live up to its own reputation?

• Click here for a comparison of Addleshaws' financials to the UK top 50 average