"In battle if someone gets killed or wounded, you have to leave them behind. Lockstep in its purest form is similar – policed properly, it's the toughest remuneration system on earth" – Partner, Linklaters

If lockstep is the toughest management model, many would argue Linklaters is the toughest law firm in the City. Over the last decade the firm has monitored partner delivery and managed its lockstep to such an extreme level that it has almost become defined by its efforts to maintain financial performance at all costs. 

The firm may never have been as warmly collegiate as some rivals but two firmwide partnership restructurings under current managing partner Simon Davies and a previous effort by predecessor Tony Angel have set it apart from magic circle peers, themselves no strangers to tough decisions in response to the most challenging economic conditions for a generation.

But even accepting its image of hard-edged pragmatism, there is no doubt that Linklaters' most recent partnership shake-up, which led to the exit of 25 partners, has put the firm out on its own; no comparable law firm has attempted this level of upheaval in pursuit of global dominance.

Linklaters' drive and audacity has come at a cost. Indeed, after nearly claiming the scalp of Davies himself, who initially failed to secure reappointment in early 2012 despite being the only candidate, the restructurings have now attracted so much criticism that they are in danger of overshadowing everything else achieved by a firm, which by any yardstick remains one of the world's top corporate advisers.

But, complaints of poor communication aside, is Linklaters merely taking the only realistic approach to a bleak market? Or has it become so brutal that its brand is becoming tarnished? On a more basic level, even admirers of the firm ask if its institutional bonds can withstand such regular and far-reaching upheaval.

As one former partner argues: "The problem it's facing is that which any firm that has been very successful for a long time has. Revenues are flat or decreasing and it's harder to make money. You can't have such a high profit margin if you're trying to be everything to everyone so, by default, it has to keep shrinking." 

A numbers game 

First, a little perspective. A recent report by Reuters found that since the start of 2011, 29 banks have cut around 160,000 jobs globally, with Europe particularly badly hit. 

To use just one bank as an example, late last month Swiss bank UBS announced that up to 10,000 jobs could go as part of its latest redundancy round – equating to around 15% of its current business. Much-publicised research from the Centre for Economics and Business Research recently pointed out the impact of such trends, showing that finance jobs in London alone have now fallen from 354,134 in 2007 to 249,512 in the current year. 

What has happened at Linklaters and every other law firm since the start of the 2008 recession does not even begin to compare to the cuts in investment banking both in terms of percentages affected or generosity of severance packages. Restructured partners at leading law firms are generally given six months' notice plus a payout equivalent to between six and 12 months of earnings. For a senior magic circle partner, you are talking at least around £1.5m, and many should be able to find a job elsewhere, even if it will often mean a painful 'down-sizing' in the kind of firm that will employ them.

Of course, law firms remain a long way from mirroring the career path and structure of investment banking and those joining Linklaters in the 80s and 90s were never signing on for the kind of high risk careers and huge remuneration potential seen in finance.

And then Tony Angel happened. With a desire to turn Linklaters into the Goldman Sachs or McKinsey & Co of the legal world, the tax partner, who served as managing partner at Linklaters between 1998 and 2008, is widely credited with transforming Linklaters into a slickly managed operation to match the dramatic global expansion the firm achieved in the decade up to the end of his term. Under Angel's leadership the firm underwent a difficult series of mergers with three European alliance partners and significantly boosted profits. At the peak of the credit boom, the firm was arguably the most successful and influential major law firm in the world.

Of course, it wasn't quite as simple as the narrative that has since taken hold suggests. The firm Angel inherited had been shaped by a number of strong individuals, many of them with vastly contrasting styles. Among them were Charles Allen-Jones, the charismatic corporate partner who took over as senior partner of the then Linklaters & Paines in 1996, and Terence Kyle, who acted as chief executive of Linklaters' European alliance and had many chances in that role to deploy his trademark robust style.

Against such figures, it took some time for the understated Angel to make his mark, despite having built up his internal credibility after establishing himself  alongside Slaughter and May's Steve Edge as one of the City's elite tax practitioners.

But Angel was soon to prove that he had qualities that would stand him in good stead in management: in particular a rigorous eye for detail and a drive to usher in effective means of performance measurement.

In 2000-01, Linklaters' revenues stood at £505m against profits per equity partner (PEP) of £800,000.  At the end of the boom-time 2007-08 financial year, turnover stood at £1.29bn against PEP of £1.4m. It was a startling performance that married unsurpassed scale, full financial integration and profitability comparable with most of Wall Street's leading law firms. Angel's legacy at Linklaters may have left the firm unsettled – and some bristled at his process-driven approach – but no one questioned his results any more.

But getting there wasn't pretty. On the back of rigid performance metrics dozens of partners were managed out under Angel in the early 2000s through his Clear Blue Water strategy, which was supposed to put Linklaters ahead of peers, in particular arch rival Freshfields Bruckhaus Deringer. Associates also left in droves. 

Rightly or wrongly Angel is credited with spreading this culture to other law firms. As one City finance partner comments: "Before Tony came along and did it in 2002, no-one had ever really sacked a partner before – now it's just normal."

If Angel started this approach, Davies – who succeeded Angel after four years as Asian managing partner based in Hong Kong – certainly kept up the proactive stance to management, with restructurings carried out in both 2009 and 2011 (see box on page 11 for full details). Since a high of 520 in 2007-08, partner numbers have fallen steadily by just over 12% to 456 at the end of the 2011-12 financial year. 

Davies was formally confirmed as Linklaters' new firm-wide managing partner in February 2007, with a remit to take over from Angel in January the following year. The appointment process saw Davies – who spent more than a decade in Asia with Linklaters – see off strong competition from then capital markets chief Nick Eastwell to secure board approval. Despite initially being regarded as an outside candidate against Eastwell and then banking head John Tucker, Davies had been groomed by Angel for success, with the appointment making him – at age 39 – the firm's youngest ever managing partner. 

With a focus on the bottom line like his predecessor, where Davies is seen to have differed is in his dealings with partners. Despite the axe-man tag given to Angel externally – a label he loathed – he had built up well established relationships within the firm over decades and always agonised over difficult decisions. This meant Angel went to pains to communicate and build support for such measures.

In comparison, Davies is viewed as a more single-minded operator and one who had less institutional capital to draw on given his youth and period in Asia.

Neither is Davies a clubbable figure, who naturally builds consensus for contentious decisions. This has often obscured other sides to his character, such as a genuine interest in diversity, an energetic and analytical mind and a frank charm he can deploy in one-on-one conversations.

"Simon isn't really ruthless. You have to be self-aware to be ruthless," argues one Linklaters veteran. "He's just very focused on getting from A to B and that can create a kind of tunnel vision. He won't always be aware of the bumps along the way in getting from A to B."

This dynamic has caused static in the communication between the firm's leadership and partnership and has at times over-shadowed the logic of strategic decisions. The most dramatic illustration of this saw Davies initially fail to secure the 75% majority required for reappointment when partners tactically abstained from voting in protest at the way the most recent restructuring was handled.

Not that the responsibility can be entirely laid on Davies, with senior partner Robert Elliott and the board also playing a role, with the criticism eventually contributing to eight of the firm's 14 board members being replaced in March this year.

According to partners within the firm, Elliott, who replaced David Cheyne as senior partner in May 2011, had made his desire to trim the equity clear during his campaign against litigation head John Turnbull and European managing partner Jean-Pierre Blumburg. 

Elliott was head of banking at the time of his selection, with his appointment adding further support to the argument that Linklaters' finance practice is taking an increasingly dominant role within the firm. 

In contrast to Cheyne, Elliott was widely viewed as having the desire and energy to drive through another restructuring. It is also widely accepted that Linklaters' lockstep had become top-heavy. And it became apparent that its corporate practice was being hit not only by a cyclical lack of deals but also increased pricing pressure and a greater willingness of key bluechip clients to hand out some work to cheaper providers.

Internal critics of Linklaters' M&A practice furthermore argue it has failed to cultivate enough commercially-minded operators and up-and-coming partners and looks over-reliant on a handful of names like Charlie Jacobs (an impression not helped in the City by the transfer of Matthew Middleditch to Hong Kong last year).

Signs of benchmark clients like BP and Vodafone shopping more widely have not helped the corporate practice's internal clout. In this regard, there are some criticism of Cheyne's term as senior partner. His predecessor, Anthony Cann, was low key in style but he remained an effective operator internally and a good foil for Angel. In comparison the high expectations attached to the mercurial Cheyne as Linklaters' top deal man are felt by some not to have lived up to the reality he delivered while Linklaters' corporate team did not seem positioned for the challenges of a globalising legal market.

In this context it was not a huge surprise that corporate was heavily affected in the latest restructuring, even if debate remains about whether the right individuals were targeted. In short, there was clearly a logic to the restructuring and the programme was driven by figures in Linklaters' management in addition to Davies.   

As one partner comments: "The truth is that David Cheyne did not have the energy to execute another partnership restructuring. He didn't want it to taint his legacy. It was pretty obvious that that is what Robert Elliott was coming in to do." 

Beyond internal politics

Whether looking at Linklaters' restructurings or shifts in the firm's international network, internal debate at Linklaters has been dominated by strategic issues in recent years. At a time when obvious rivals such as Allen & Overy (A&O) have come up with clearly-defined growth plans and have embarked upon an ambitious series of international launches, Linklaters' cross-border agenda is less clear. The issue is compounded by upwardly mobile firms such as DLA Piper – where Angel is now charged with trying to replicate his former success – and Norton Rose carrying out a series of international mergers (most recently signing up US practice Fulbright & Jaworski), while leaving discussions about financial integration for later. 

Long-held ambitions to expand everywhere from Germany to New York have resulted in little tangible improvement, with Linklaters arguably falling behind A&O and Freshfields in the US. 

Earlier this year, however, came signs of change in the firm's international outlook when part of Linklaters' five-year strategy running to 2017 came to fruition. In April this year, at the same partner meeting where Davies secured his re-appointment, partners approved the firm's exclusive alliance with Australian leader Allens Arthur Robinson – now Allens. 

The deal, which came into effect from 1 May, comprises an alliance covering referrals, shared resources and training as well as two joint ventures – one in Asia covering energy, resources and infrastructure work and the other in Indonesia, building on Allens' existing relationship with Widyawan & Partners. 

Linklaters earlier this year ended its long-standing joint venture with Singapore's top law firm Allen & Gledhill after declining the firm's interest in a merger, but the deal had never been regarded a huge success.

According to Stuart Salt, Linklaters Asia managing partner, in its first six months the Australian union has generated around 144 referrals between the firms, with Allens gaining around 100 of these and Linklaters the balance. The deal, which has gifted Linklaters offices in Vietnam, Indonesia and Mongolia while strengthening Allens' small bases in China, Singapore and Hong Kong, is expected to lead to further investment in Singapore and Indonesia. 

Salt says of the deal: "We actually like each other, which is a great starting point, particularly if you're winning deals and there's flow through both ways. It's been a real eye opener in terms of being able to talk intelligently to clients about the Australian and Asia-Pacific market, and to come to meetings with experts in these fields."

And while Asia is the focus for the time being, the ambitions do not stop there. As Legal Week revealed earlier this year Linklaters is also in talks with South Africa's Webber Wentzel about striking up a similar alliance. A strategic deal in the region would give Linklaters a chance to build on its historically strong position in southern Africa and raise its profile in an increasingly targeted market.

While it is too early to judge either deal, reverting to an alliance rather than launching its own offices sets the firm apart from rivals such as A&O and Clifford Chance (CC), which are following a more expansive global strategy. 

Davies comments: "The way we see the world is that there are some core markets where we want our own offices and others which are very important but not core – like Australia – where having an alliance with the best firm is the right approach."

Critics claim it is indicative of the firm's increasing conservatism. In the short term, however, while the risks to Allens, which includes Linklaters branding on its site, are apparent, from Linklaters' perspective it seems a sensible and largely risk-free arrangement. 

Should it ultimately decide that it does need hundreds of lawyers across Australia, it should have done much of the groundwork to make extending the deal relatively straightforward. 

But given the high expectations that will always attach themselves to Linklaters, the question remains of whether such deals constitute enough progress for the firm in key emerging economies. One reason why there has been discontent regarding its painful restructuring in the UK is that it has not always been that apparent that corresponding progress was being achieved in markets like Asia to justify the pain.

New world; new clients

In addition to international ambitions, Linklaters' 2017 strategy also encompasses the firm's revised client perspective. Since Davies took over, Linklaters has steadily been shifting the focus of its client base away from traditional corporate clients towards growing FTSE 250 companies and, more interestingly, alternative credit providers willing to provide financing where regulated banks are retrenching. It is a step which puts hedge funds and private equity houses to the fore alongside traditional banking clients such as JP Morgan, Lloyds Banking Group and Royal Bank of Scotland. It would also give Linklaters the opportunity to build on its finance practice, which has grown over the last 20 years to rival traditional finance leaders like A&O and CC.

Banking head Gideon Moore (pictured) comments: "We've always worked closely with other parts of the firm, whether it is regarding the regulatory aspects of banking, the litigation aspects of insolvency processes or working with our partners in the corporate team. Within corporate, there's obviously not a huge amount of traditional M&A activity recently, but there's a lot of PE activity and restructuring work, which produces the need for banking to continue to work closely with the corporate department."

From the private equity perspective the renewed focus on the sector appears to be working. Private equity is an arena in which Linklaters initially struggled to make inroads compared with rivals but its practice has certainly developed in recent years.

Advising clients such as Montagu, HgCapital and Apax on work covering M&A, financing and restructuring, the firm ranked second for European buyout activity by value and volume in Mergermarket rankings for Q1-Q3 of this calendar year. Meanwhile, well-regarded practice group co-head Richard Youle ranks as one of the firm's 10 busiest partners overall over the last five years according to Mergermarket data.

And while mainstream M&A markets continue to struggle, the firm has advised on the largest deal of 2012 – the long-running merger talks between commodities giant Glencore and Xstrata, on which key dealmaker Charlie Jacobs has the lead role for Glencore. 

Davies comments: "It's been an interesting year, which I see as starting in April when we had our partners meeting and agreed our 2017 strategy – to fulfill our vision of being the leading global law firm.  We need to be leading in terms of the quality of our people and the relationships we build with clients. As part of this we've identified gaps to fill with internal partner elections and lateral hires."

Significant hires include Herbert Smith regulatory partner Martyn Hopper, who will help boost an area where Linklaters has traditionally lagged rivals – and antitrust partner Simon Pritchard from A&O. 

Other positive initiatives include a women's leadership programme, which aims to identify and develop talented female associates to help them achieve partnership and ultimately management positions. Meanwhile, in recognition of growing client demands for lower cost services, its Colchester back office site is being used as a paralegal-led legal services centre. 

'Where you want to be'

Even the most damning of Linklaters' critics cannot deny that it still has a fantastic client base and a group of highly talented partners and none of its recent reverses have come near putting its position as one of the world's top law firms under serious threat.

But its willingness to take difficult decisions has not yet given the firm what it so clearly desires – significantly better profits than its peer firms or strategic superiority in terms of its global platform. Crucially it has not delivered a strong base in New York in order to provide a London/Hong Kong/New York axis of power. For that, the firm needs to significantly up profitability to the point where it could either hire big name US partners in its own right or merge with a leading New York firm. Yet the current mood in Manhattan shows no signs of top firms being willing to consider transatlantic mergers. Assuming such a deal is not on the horizon, Linklaters is left with three choices: slog on for decades in the US, consider tying up with another kind of US law firm or substantially break with lockstep to free its hand.

On the latter point, the attachment of a firm as unsentimental as Linklaters to lockstep – at least in its current form – seems increasingly out of date and to fly in the face of market realities. 

It is widely accepted that functional lockstep requires a 1%-3% annual 'pruning' of the partnership to work for a large firm. But if the price of lockstep is constant restructurings that go far beyond that, it becomes questionable the extent that the firm is really operating the model at all.

While many agree lockstep no longer works the firm's determination to maintain it leaves it with the options of accepting that profits may dip until markets pick up again; or keep going down its current route, which requires constant pressure on partner performance. 

Thus far given the resentment and unease built up within the firm, the benefits of Linklaters' approach hardly seem unquestionable. It seems telling that the magic circle firm that has made the most progress over the last five years is the expansive A&O – the only firm to see a significant increase in partner numbers and equity partner numbers. Over a longer period its PEP is up 68% since 2004-05 against an 18% rise in partner count, while Linklaters PEP is up 47% against a 9% decline. 

As one former partner warns: "There is certain logic in what they're doing. You can criticise them for shrinking but there's no other way to boost profits but to narrow their focus. They're a little short-termish in strategy as it's hard to keep going down this route and still motivate partners. My advice would be get people together over some wine and really think about where the market is going and where you want to be. A&O has clearly done that and it's now a threat. Do they know where they want to be in five or 10 years' time or what their competitors are doing?"

Perhaps the wider issue facing Linklaters is less about what difficult decisions the firm is taking than why. There are some credible critics of the firm that argue that Linklaters needs to develop a clearer vision of where it wants to sit in the market as it moves increasingly further from the London-centric, corporate-driven partnership that built its brand.

Or to take a more charitable view, the firm's leadership should work harder to communicate and bring more of its partnership with it. For all the focus on the dissent at Linklaters, there are sizeable numbers of younger partners who are in tune with the current meritocratic mood.

There is also a consensus view internally that the post-restructuring Linklaters is in a more proactive, energetic mood, an opinion held even by some influential partners who were bitterly critical of the programme at the time. But the firm will surely do better still if it can bring together different wings of its practice. The alternative to such an accord looks to be a factional divide that could hamper the firm's development through what will be a crucial decade ahead on the global stage.

Jomati consultant Tony Williams argues: "The level of ruthlessness in the profession was necessary and long overdue. In the corporate world people earning £1m a year have far less job security. There needs to be a reality check. This has been coming to every firm for 15 years.

"My only issue [with Linklaters] is how they develop their international platform. They need to clearly articulate their proposition which is between the more expansive, in location terms, approach of Allen & Overy and Clifford Chance and the more restrained approach of Freshfields."

And, of course, Linklaters is capable of a lot more than no-man's land.

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Restructuring Linklaters – more is more

As the most heavily managed magic circle firm, Linklaters has a long history of restructurings and strategic overhauls of its practice. The firm first clearly moved in this direction after managing partner Tony Angel put forward a strategic review dubbed Clear Blue Water, which was aimed at refocusing the firm to make Linklaters a global leader ahead of its peer group. In 2002-03 this resulted in several dozen partners being asked to leave while a number of associates were managed out as Angel ushered in detailed performance metrics.

Though Angel's approach to robust performance management was unsettling, it was largely accepted as necessary. Linklaters in the early 2000s had avoided managing its partnership in a comparable manner to some peers and anyway the firm was struggling to maintain its focus after three major mergers, the legacy of its somewhat troubled European network. But as Angel handed over to Simon Davies in early 2008, it became evident that an even more proactive approach would be deployed by Linklaters' youthful new managing partner.

In late 2007, the firm overhauled its German practice – the result of its merger with Oppenhoff & Raedler in 2001 – closing its 120-lawyer Cologne office and launching in Duesseldorf. The following year saw the closure of four offices in Central and Eastern Europe (CEE) – Bucharest, Bratislava, Budapest and Prague. 

All of which meant the firm was well-practised by the time Davies kicked off the unfortunately named Linklaters' New World in early 2009, when around 40 partners left the firm, while more than 200 UK associates and back office support staff were made redundant.

New World was not without critics – in part for deep cuts into its fee-earner ranks that saw around 15% of its UK associate base made redundant – but it came amid a period in which many top law firms were restructuring in response to the global recession. 

With Linklaters offering relatively generous severance terms, for many the 2009 shake-up was viewed as a necessary evil as London's elite got in shape for a much changed world. Much of the controversy instead focused on confused communication of the cuts.

In comparison, news of another major restructuring at the end of 2011 sent far bigger reverberations through the firm, constituting the third substantive restructuring of Linklaters' partnership in a decade. If you include the restructuring of Germany and the CEE network, the firm had at the time been through four overhauls in five years under Davies' leadership.

Management drew extensive criticism within the firm for the lack of communication about the cuts, only confirming final numbers in April this year when they apologised to partners about the way the cull was handled.

In the unsettled atmosphere after the restructuring was first announced internally there were widespread incorrect reports of the scale of the programme, with some predicting the cull could claim 70 partners and come in two stages. At the firm's annual conference in Montreux, Switzerland, Linklaters confirmed 41 partners were affected overall. Of these, 25 were asked to leave altogether, with the remaining 16 either stripped of their equity status or asked to take a reduced profit share.

Explaining the difference between the 2011 cull and its predecessors, one former partner says: "The culture hasn't become more ruthless: it just is ruthless. Perhaps Simon and Robert [Elliott] are more trigger-happy but the main difference is the bottom 20% of people had already gone in the last reviews so this seemed more brutal as many of the people affected were good."

Indeed, part of the shock regarding the restructuring is that a series of well-regarded partners, many of them handling transactional work for major Linklaters clients, were affected in the shake-up. It did not escape notice that many of the high profile names came from Linklaters' corporate practice, on which the firm built its brand but which had been hard hit by a lack of deal activity and much increased pricing pressure from bluechip clients.

With the firm now seemingly restructuring its partnership on a regular basis, those outside the firm were as surprised as those inside. Six months later though, while rivals are still scathing and some ex-partners remain bitter, those inside the firm are more circumspect.

It should be stressed that there is considerable support for management's stance from sizeable factions of partners who argue the firm had to get in strategic shape and that too many underperformers had been tolerated in high places in the firm's lockstep. 

One Linklaters partner comments: "No one likes to see people being fired and there was definitely a lot of unhappiness but time heals most ills and six months have passed. Quite frankly, if you're a partner in the magic circle asked to leave and you can't get an offer elsewhere you deserved to be kicked out."

Another adds: "What you have to consider is that there were a large number of partners getting increasingly angry at the cushy attitudes of some of the partners, especially in London. We work incredibly hard, and it's not very motivating to see others do a fraction of that work and get paid the same amount of money. If the lockstep is supposed to continue working – and in many cases it no longer works – then those kinds of decisions have to be made."

Summing up the impact, Davies strikes a philosophical note: "Every firm does these things in accordance with their own culture: It was felt we needed to be more open, that means we were subjected to more scrutiny."

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