Blue Sky review focuses on crunch international decisions and performance but partners call for faster resolution

Herbert Smith has put a potential merger with alliance firms Gleiss Lutz and Stibbe at the heart of its ongoing Project Blue Sky strategy review, it has emerged.

The top 10 City firm is considering whether it should push for a merger with its longstanding alliance partners, with a Swiss verein structure allowing all three firms to maintain separate profit pools one option under consideration.

The proposal, which was last considered in 2007, is part of a wider strategy review focused on the firm's international expansion plans dubbed Project Blue Sky, which was launched earlier this year and is being led by CIS managing partner Allen Hanen.

As part of the review, Herbert Smith is also looking to resolve whether it should have a presence in New York, where it has faced calls to open an office from its litigation partners, and South America, where a Brazil arm has been under consideration for more than a year.

The firm's position in Asia-Pacific is also under review – in addition to a planned launch in South Korea in 2012, some partners have called for clarity on its Australian ambitions. It held talks with Blake Dawson earlier this year, with the Australian firm subsequently agreeing a tie-up with Ashurst.

One Herbert Smith partner said: "The whole point of the [Gleiss and Stibbe] alliance is that we wanted to create a structure that would enable us to provide a seamless service for our clients so that we would be in a position to merge if we felt that made sense. We are now looking at the market to see if it is saying to us there are benefits to being merged and looking at a number of options including things like Swiss verein structures."

In addition to looking at international expansion, the firm is also moving to focus on partner performance as part of the review, with management warning partners earlier this year that some need to improve.

Partners have had an annual working hours target of 2,400 for the last few years, with a billable hours target last year of between 1,250 and 1,500, according to a partner within the firm. It is understood that a substantial number of partners are falling far short on both targets, with managing partner David Willis (pictured) stating in an email in May this year that performance needed to improve.

The corporate practice in particular has faced criticism, despite landing a number of high-profile instructions. With fee income of £192.8m in 2010-11 compared with total firmwide revenues of £465.1m, corporate brought in more than any other practice last year, closely followed by litigation.

However, while the litigation practice saw revenues increase by 11% on 2009-10, corporate income fell by 3.5%. The drop contributed to a budget shortfall of around £20m last year – more than £5m of which was due to a write-off for a key client, believed to be EDF Energy.

Partners within the practice suggest the problems stem from poor cross-selling within the group and a need to target more mid-market work from key clients. The group's performance means it is thought that between 10 and 12 partners across the corporate and finance practices could be asked to leave over the coming months.

In addition to any partners being asked to leave, Herbert Smith has seen a string of departures in recent months. These include four US securities partners and three Paris litigation partners, with five of the partners set to join Allen & Overy.

Ex-partners suggest the firm's management needs to speed up important strategic decisions or face the firm being left behind its closest City rivals. This criticism is supported by admissions from partners within the firm that a global partners meeting in September to discuss Project Blue Sky failed to provide any strong conclusions or indications of when decisions would be made.

One ex-partner said: "They are looking at what they should do with the alliance because there's a sense of frustration in the firm. The problem is that Gleiss and Stibbe don't want to merge."

Separately, real estate head Ian Cox is set to report back to management next month on the outcome of a back-office review of the firm's systems and productivity 
by PricewaterhouseCoopers. Changes are expected across a number of areas including client management, work allocation and billing in the New Year.

Despite the criticism the firm still has many loyal partners. One commented: "When you ask partners what they want out of their firm they will say interesting work, stimulated people, a nice working environment and a good living. A lot of the firms that have been much more brutal can't say that they have all of these things, but Herbert Smith can."

Other news comes after the firm held a global partners meeting at the end of September this year to discuss the project, with feedback sessions held for partners to give their views on the firm's strategy.

General feedback from partners since the meeting has been that while they feel positively about the firm's attempts to address its strategy, more was expected from the meeting.

"There hasn't been any further indications or firm conclusions given since the meeting", said one Herbert Smith partner.

Herbert Smith, Gleiss and Stibbe all declined to comment.