Consistently underperforming its magic circle rivals on profitability and with the US question still looming large, Pui-Guan Man looks at the challenges Clifford Chance's incoming managing partner faces

It would be hard to imagine the incoming global managing partner of Clifford Chance (CC) facing a more different landscape than his predecessor did eight years ago. 

Matthew Layton (pictured above), who takes up the reins at the Canary Wharf behemoth in May, will lead a firm that has several challenges to overcome if it is to usher in a period of growth and change. But the scene the firm's current corporate chief surveys is nothing like that which confronted the outgoing doyen of CC, David Childs, a year after his election in 2006. 

The pivotal challenge for CC now seems to be maintaining its position as a leading firm in the transatlantic race. Although the firm has indicated that the year ahead will show improved profit and revenue results, the question remains as to whether profitability will grow enough to catch up with its magic circle rivals and fend off the threat of the City's increasingly bullish US contingent – and if it can do so without losing a culture widely regarded as less cut-throat than at some of its competitors.

It's a different challenge, but one potentially just as daunting as that faced by Childs just a few years ago.

The illusory boom of the early 2000s came to a juddering end not long after Childs took on one of the toughest jobs in the City. Soon, he was in charge of arguably the UK's pre-eminent banking firm just as the sector was plunged into the biggest crisis for a century. "One couldn't have chosen a better period to run a law firm," says Childs in a pained reference to his two-term reign.

Taking charge just before the crisis hit, Childs was soon forced into a 'defensive management' role, meaning he had to adopt a particularly numbers-led approach. The most crucial, not to mention most controversial, of these numbers was headcount. Kicking off a restructuring in 2009, Childs cut the partnership by 15% while axing a total of 350 staff.

Understandably, the focus on the bottom line had its critics. One former partner describes Childs as "more or less a glorified accountant", arguing that he should have better engaged with practice heads on lateral hiring and other expansion strategies instead of playing grim reaper.

"His legacy might be that he survived CC during that time," jokes another former partner. "But whether he was the right person to take it to the next level is debatable. The problem was he often made his mind up too quickly and was then too stubborn to change his mind on anything."

But Childs has taken the criticisms in his stride. "I was very focused on making sure we had the right cost base, along with the backdrop of increasing partner numbers," he says. "I expect more of the same with Matthew."

matthew-layton-2-webStrategic vision

While some CC partners say Layton is lucky to take over the firm in what look like more benign times, he will still have to get to grips with a series of big strategic problems – not least the thorny issue of how to avoid losing even more ground to magic circle rivals on partner profits without damaging the CC culture.

With four months left before the transition of power, Layton is still drawing up his strategic masterplan, but certain priorities are already clear. Among them will be the job of slimming down the firm's senior management while trying to work out what to do in the US – an area that Childs admits has been a disappointment.

"The US is doing well but it's much smaller than it ought to be," says Childs candidly. "The brand isn't as well known in the States and we are not making the same impressions on the US legal market as we are elsewhere in the global network."

Despite these not insubstantial challenges, Layton is unlikely to inspire the same level of controversy as his predecessor. One partner observes: "Matthew is lucky to get the big job just as the market is improving – he will have a very different start to David. It will be much easier for him to implement change and direction."

Another of the firm's partners describes Layton as "the more human form of [Childs]", while a third praises his strength as a "consensus builder" despite not being "the best public speaker".

"He's not the type to say it is his way or the highway," adds the partner. "If there is a problem he will phone around and meet with people, which is what the firm needs in a leader."

Childs was credited with centralising the firm's disparate business functions under the umbrella of one senior person, chief operating officer Amanda Burton, significantly improving the firm's efficiency. 

During his time as managing partner he also oversaw the firm's rapid Asia expansion and office openings in Turkey, Qatar and Morocco, as well as a merger in Australia.

Losing its edge?

But that perception of CC as a first-mover in key markets has dissipated over the years, with it increasingly following its magic circle peers, rather than showing them the way.

As a source close to the firm explains: "I think the firm has lost the dynamism of the visionary, entrepreneurial spirit it had some years ago. I think it has become a little bit tired. 

"It's had the same lawyers at the top for a long time, which could be a factor. It is full of nice people and it isn't as ruthless as it used to be. The firm has got a bit complacent, but it seems happy with how things are."

At the end of 2012-13 CC's revenue dropped by 2.5% to £1.27bn, making it the only magic circle firm to post declining figures. This left Freshfields Bruckhaus Deringer challenging CC's long-held status as the UK's largest law firm by turnover with revenue of 1.2bn, up by 7.2% from 2011-12.

Even more striking was a 9.1% fall in average profits per equity partner (PEP) at CC to £1m. In contrast, Freshfields posted a 7.6% increase in PEP to £1.4m and Linklaters managed a 6% increase to hit £1.3m. 

"The firm has been very focused on internal management but there is only so much we can do in terms of maintaining our own cost efficiency," offers one partner by way of explanation. "For example, while our building doesn't cost much per square foot it still creates significant overheads. What the firm needs to do is increase its focus on retaining and strengthening client relationships to improve the top line."

cliffordchanceCulture club

For CC, the answer may lie in a more active management of performance. But how to do so without bringing in a more cut-throat culture? As a partner at a rival firm observes, the firm "is about culture almost in exclusion of profit" – the antithesis of its magic circle peers. While CC may not have the most collegiate of cultures after the downturn, the partnership certainly has a reputation for being less brutal than others that have had more bruising restructurings and consistently manage out under-performers.

One partner says: "Everybody knows that we need to improve our profits. It is an interesting moment because you can see that Linklaters wants to become like one of the Wall Street firms and is getting quite ruthless about performance. But we do need to be careful about the culture here. 

"We've had people who've joined from Linklaters and US firms who have been taken aback at how collegiate we are by comparison. The worry for us, though, is that the firm's brand is important and profit is a part of that – both in how you are seen by clients and in terms of attracting the best talent."

The firm's eight-year equity lockstep, when stacked up with the longer ladders of its magic circle peers – Allen & Overy's managed lockstep spans 15 years, for instance – has consistently provided management with the challenge of keeping lawyers incentivised and persuading them to go the extra mile.

Another problem is how the top end of the career ladder is being managed, as the firm struggles to keep its grip on its star performers.

The need to address this problem was brought into stark relief when CC's private equity head David Walker defected to Latham & Watkins last April. As an isolated incident, such losses can be absorbed; the worry is if Walker is a sign of things to come.

One partner comments: "Firms in the US are retaining elder statespeople in their 70s. At CC there is support for making bespoke arrangements, but there is the bigger question of whether the lockstep accommodates the notion.

"As [Childs] has always said, 'change the lockstep at your peril'. I can't imagine, for example, that we will introduce a system in which partners have to regularly justify entitlement to rewards after a certain point in their career, like they do at some US firms. It would create a culture that we wouldn't agree with. So I think Matthew will be considering how to best approach the situation."

In 2005 the partnership restructured its retirement provisions for partners, voting out an expensive annuity system that had rewarded those on the equity plateau. In common with several other firms that made similar moves around this time, this had the effect of removing a safety net for partners rising through the ranks, but did provide a welcome boost to profitability in the long term. However, the cut-off point agreed upon means the firm is still liable for the retirement provisions of a number of partners still at the firm who just caught the tail end of the more generous system.

"We need to ensure we have the right numbers of individuals across all areas of a practice – including the right level of grey hair and gravitas," adds another partner. "But at the same time we can't have people sitting on the plateau forever and blocking talent that is rising up the ranks. We need to figure out how to retain the lawyers who can add real value to the business."

One of Layton's other plans is to cut down CC's 16-strong management committee, a move that is anticipated to significantly improve the firm's revenue position.

A former partner says: "A lot of partners are hiding in their management roles at the moment. If you take their management duties out of their responsibilities it would hugely increase the amount of chargeable hours and client-facing activity that the firm currently has. It would transform the business."

The US issue may be more difficult to address. The firm has offices in New York and Washington after merging with Rogers & Wells in 2000. Although Childs pointed to the US revenues accounting for 11% of the firmwide total in its most recent financial results, there is a long way to go before making significant headway in the region. 

"There are a lot of people in the firm who feel bitter and frustrated by the slowness with which the US merger has bedded down," comments a partner, echoing the feeling of many at CC.

Preparing the ground

Despite these problems, improving market conditions gives Layton a good springboard with which to start his stewardship of the firm. CC may yet claw back its position as a firm that can keep pace with its more ruthless rivals, but not without making a few changes first. 

After all, as one partner observes, a number of rainmakers have left the firm in recent years "in search of more money". So it is vital for Layton to work out how to retain its top performers – and ensure it doesn't fall further behind its rivals – without further shifting the divide between brutality and profitability. 

As Layton sits in his office contemplating his plan of action, it's likely to be this very balancing act that dominates his thoughts.