US firm's cost-cutting drive raises questions as talk of partner discontent surfaces. Friederike Heine reports

News that top 25 US firm Dewey & LeBoeuf has kicked off a wave of aggressive cost-cutting measures expected to result in 5% of its lawyers and 6% of staff leaving the firm around the world marks a stark contrast to the ambitious expansion plans executed by the firm in recent years.

The news, confirmed earlier this month (2 March) by chairman Steven Davis, ended weeks of speculation on websites such as Above The Law about the state of the firm, with Davis confirming that, in addition to the redundancies, a number of partners would be leaving after seeing their merit-based pay slashed. And, while Davis may not have admitted as much in the memo to the partnership, other partners have been explicitly asked to go.

In total more than 50 lawyers are expected to leave globally as a result of the cuts, in addition to partners. London alone has seen two partners and eight associates being asked to leave since the beginning of the year, with others expected to follow, including some of whom will be a loss to the office.

"The fact that there are at least 15 Dewey CVs currently circulating in the City speaks for itself," says one London recruiter. "We are anticipating a handful of senior departures in the coming weeks, with some coming as an unintended consequence of the cultural and financial unrest since the merger."

According to a spokesperson for Dewey, the cost-cutting measures, which also include a freeze on lateral recruitment in 2012 other than in exceptional circumstances, come as part of efforts to rebalance the firm's finances in the wake of more than 35 landmark lateral hires in 2011 alone – many of whom were brought in on large guarantees.

dewey-leboeuf-londonIn the US these hires include a team of lawyers led by securities partner Michael Fitzgerald from Milbank Tweed Hadley & McCloy, intellectual property litigators from now defunct firm Howrey, patent litigator Craig Allison from Dechert, and energy partners Karl Hopkins and Steven Otillar from Baker & McKenzie.

Meanwhile, in London 2011 saw the firm bring in a restructuring team from Orrick Herrington & Sutcliffe headed by Mark Fennessy, as well as private equity partners Mark Davis and Russell van Praagh from Taylor Wessing.

London managing partner Peter Sharp (pictured) says: "After our extensive growth exercise in 2011, we are focusing this year on integration and expense control. The firm has absorbed some significant costs, which is not unusual for a firm that has attracted such high-profile laterals over the past year."

He adds: "We are encouraged by strong progress so far in 2012 in London and the US, and the partnership is more productive than ever."

Even before the firm was created in 2007 through the merger of Dewey Ballantine and LeBoeuf Lamb Greene & MacRae, there was a significant disparity in earnings between those at the top and those at the bottom of the firms' equity, and this has not changed post-merger, resulting in what many see as a two-tier partnership.

While star performers have been well-rewarded (according to Legal Week affiliate The Am Law Daily, Dewey reserves around 15% of earnings to fund discretionary bonuses), swathes of partners making up the firm's junior and mid-tier ranks have seen compensation cut in recent years.

Indeed, according to Am Law, in 2011 the firm's 115 non-equity partners saw average compensation plunge by 23% to $499,000 (£319,000), while equity partners took home an average of $1.8m (£1.2m), with those at the top thought to make at least 10 times more than those at the bottom of the scale.

And on top of this, the firm has faced rumours that not all of its partners have been receiving their full profit entitlement. While a spokesperson confirmed that star performers had been receiving both their monthly drawings and their full profit share, the firm did not deny that at least some mid-tier partners failed to receive their full profit share in 2011, leading to further dissatisfaction at the firm.

"People have doubted several US firms' profits per equity partner (PEP) numbers for years, but my understanding is that Dewey's are even more meaningless than most because they are so inflated by the rainmakers' pay packets," says one recruiter.

Though Dewey posted an overall increase in revenues and PEP for 2011, there is no denying that its finances have suffered as a result both of its aggressive lateral recruitment and the costs of the merger itself, including a lengthy consultation with McKinsey & Company.

Legacy LeBoeuf partners began expressing their discontent when the firm deferred a promised merger bonus in early 2008 intended to even up the fact that Dewey Ballantine had a significant unfunded pension liability, with the firm subsequently cutting compensation in early 2009 for 66 of its then 350 partners, with this process continuing in 2010.

High levels of debt at both legacy firms also resulted in the firm taking the unusual step of refinancing through a $125m (£82m) bond offering in 2010. It has loan agreements with banks including Citi and, though the firm denies taking out any additional debt since the merger, the consensus remains that Citi leans on the firm's management decisions.

With firms such as DLA Piper and Hogan Lovells among those circling teams of disenchanted partners in both the US and the UK, there is no doubt that Dewey faces a swathe of partner exits, not all of which will be of the firm's choosing.

With US legal history littered with cautionary tales, Dewey now has to ensure it holds onto the right partners or risk losing what it has built up in the UK and elsewhere.