King & Wood Mallesons (KWM) has had a turbulent few years. Since the merger with SJ Berwin in 2013 created a global firm made up of three separate partnerships, bosses have struggled to keep a hold on ‘big-hitter’ partners in the UK, keep finances in check and integrate 2,800 lawyers including 600 partners worldwide.
Now, finally, things appear to be stabilising. The flood of post-merger exits has slowed, and despite a flat year in terms of global revenue in 2015, a number of the jurisdictions – Europe and the Middle East excepted – saw healthy growth, particularly across Asia.
Turnover was $1.02bn (£717m) last year on a currency-adjusted basis, down around 1 per cent on the previous year. On a like-for-like basis, China saw the biggest growth of over 20 per cent to $354m, while Hong Kong was up 11 per cent to $75m, Australia saw 5 per cent growth to $313m and the UK, Europe and the Middle East was flat at $277m.
In just the last year, the firm has brought on board a number of major clients both in the UK and elsewhere, including the AA, JP Morgan and China Life, and has succeeded in taking longstanding legacy SJ Berwin clients such as Expedia and British Land, and building the relationship out across Asia Pacific.
But with the need to push harder for UK revenue growth, plus some major names to replace, particularly in the private equity and disputes spaces, low morale as a result of late distributions payments to partners, and the unavoidable cost pressures of UK lawyers servicing Chinese clients, cementing and finalising full integration over the next couple of years will prove key to KWM’s future in a competitive global market.
“Trying to shunt 600 partners towards market opportunities takes an enormous amount of energy,” says global managing partner Stuart Fuller, adding he knows the only way to steer the ship through the coming years will be if management can make a “compelling” case to the partners that change and expanding into new markets will lead to growth and success.
For Europe and Middle East senior partner Stephen Kon, the biggest challenge will be trying to get the partnership to “embrace” the changes that come with a Sino-Anglo merger, and get partners to implement those changes on a personal basis.
“The problem is that everyone wants to change the world but nobody wants to change themselves,” he says, paraphrasing Tolstoy.
Kon is optimistic. “The majority of partners here have embraced the combination and on a day-to-day basis it’s business as usual. The partners that don’t like it have left,” he says.
“The thing about doing a merger like ours is people love it when you announce it, and love it when it’s completed, but the middle period is challenging, and that’s where we are at the moment.”
Chalk and cheese
The pair make an unlikely double act. “They’re like chalk and cheese,” comments one senior KWM source. Fuller, who runs the firm from Hong Kong, joined legacy Australian firm Mallesons in 2007 before becoming Australia chief executive partner after the Chinese merger in 2012.
Kon meanwhile is an SJ Berwin lifer, having joined 33 years ago as one of just 17 partners. He has seen the firm through various periods of growth and decline and says the current tumult is nothing new.
“That dynamic is inherent in any business that is doing innovative and different things,” he says, adding instability following a merger is “inevitable”.
Where Fuller is the typical new model of global boss – overwhelmingly energetic and on-message – Kon is more old fashioned in a droll, pragmatic way.
“The firm hadn’t had leadership like Stephen before,” says one source. “The senior partner role was defined completely differently before him. Jonathan Blake was senior partner in the boom times and after that he was focused on trying to do a few US deals that all fell over.
“Stephen’s job was to pull the partnership together and focus on big strategic moves, which he has done. He’s a lifer at the firm so he cares.”
Another source added Kon was “not everyone’s cup of tea” but said this didn’t affect how the SJ Berwin arm of the partnership viewed him as a boss. “He’s number one in his field and that doesn’t happen by chance. He has incredible knowledge and focus.”
From a regulatory perspective the Swiss verein structure means Fuller “can’t tell the Europe or Middle East business what to do”, according to one insider, who adds that because Kon runs the EUME board he largely sets the agenda.
“As time goes on will Stuart get more influence over big decisions in EUME? Probably,” the source continues.
Future direction
Fuller and Kon are now embarking on delivering the new “2020 strategy” to the partners. Kon has gone “on the road” with Fuller to explain the “five-year direction of the firm”, he says.
The upfront and personal approach has been seen by some as a bid to tackle criticism among the partnership that there is a lack of leadership in the UK and Europe offices following the shock departure of managing partner William Boss in February shortly after the exit of COO Rachel Reid to Taylor Wessing.
“Stephen and I did seven cities in seven days,” Fuller says, adding he also covered five Australian cities in five days on the same mission. The new strategy, which launched on 1 January, can be boiled down to a few broad aims, according to Fuller: “full financial and functional integration”, “greater communication from management and between lawyers” and “creating a global elite firm that respects the differences of the partnerships and maximises their similarities”.
More tangibly, the strategy means implementing a “globally consistent” business development, IT, partner assessment and remuneration structure; focusing globally on capital markets, infrastructure and energy; “growing and localising” its one-year-old Singapore office; and refocusing on capital markets, infrastructure and energy. Meanwhile in the UK, KWM is restructuring its 17 practice areas into three core groups: corporate, funds and finance; dispute resolution and regulation; and real estate.
The aim for Kon will be to prove to the UK partners that investment in the region is still on the agenda. This is particularly important as the firm has delayed in replacing Boss, who officially steps down in May, as UK and Europe head until the end of the year.
“You have to look at the European practice from two perspectives,” Kon says.
He says the first of these is “the input from the combined firm thanks to the exposure to the Chinese market”. Kon cites examples such as advising China Life on its acquisition of 99 Bishopsgate in October and advising the Shanghai Stock Exchange on its JV with Deutsche Börse
The second perspective is “the established client relationships from the legacy firm”, such as advising on the Ladbrokes Coral merger process before the Competition and Markets Authority, and advising on the £3.5bn Broadgate development for British Land.
But focusing less on the latter in order to facilitate the former is frustrating some of the UK partnership, sources have said. One source said the “huge cost reductions” expected from Chinese clients to UK lawyers putting a dent in figures is one reason behind the recent spate of exits. Another added that mandates from Chinese clients “are not the Holy Grail everyone thought” due to “very tight budgets” and insistence by Fuller the firm implements a global pricing strategy.
Restructuring the practice groups following a long period of consultation is one way Kon and Fuller are seeking to rejuvenate the London office. As well as aligning the office with its Australia and China practice area structures, the three core groups will enable “greater collaboration” and a “more seamless” way of institutionalising clients across the jurisdictions, Kon insists.
The launch of the Cambridge office also signals some investment, particularly in the real estate space, although Kon and Fuller agree plans for the hub are likely to develop depending on its success over the next 12 months.
“If Cambridge works well we would use it as a platform to support the global firm,” says Fuller, adding he is not consulting on expanding it into a legal services centre but “wouldn’t rule it out”.
Challenges ahead
However the problem of leadership in the UK still exits, with some partners complaining of a “shift in power” to Asia following the merger. One source said the delay to appointing Boss’s replacement is likely thanks to “no-one putting their name forward for the job”.
“Boss was a good bloke but he quickly realised leading KWM in the UK and Europe meant more than cost-cutting,” says a source. “He had to strategically replace lost revenue from big exits in key areas.”
Delays to contributions have also plagued morale in the legacy SJ Berwin partnership, with sources saying the firm has still not paid out full distributions due in August 2015, having previously paid just half the money owed in that quarter. Another said they had only been paid 25 per cent of their distributions for the last financial year.
Kon is now understood to be leading a review into partner capital contributions – which have been historically low at KWM – that could see partners pay more in return for more units in the LLP. Whatever the result of the consultation, partners are keen to see a resolution that will prove management values retaining junior talent at the firm.
Sources have also speculated another way to prove this could be to put revisiting the firm’s dual partnership structure back on the agenda. KWM is understood to have consulted on bringing the large salaried partner contingent into the equity for tax purposes just over a year ago, but decided to stick with the status quo.
“There are no immediate plans to change it but it’s something we talk about quite a lot and we certainly haven’t excluded it from happening at some point,” says Kon.
Despite no systematic changes to the equity structure since the merger, sources close to the firm have said the legacy SJ Berwin partnership has become “more transparently performance based” in recent years. If the trend continues, this could secure growth over the next three or four years, some believe.
The firm trimmed its equity partnership by around 10 per cent in the middle of last year in a move that “actively pruned some of the underperformers”, according to one insider.
“The key now is to make sure people get paid and direct resources to the real generators and performers,” the source adds.
KWM has a unique opportunity to become a truly global Asiastic-facing East and West firm driven by its transactional work. “It’s a complex journey but its aspiration transcends Herbert Smith Freehills’ and is more focused than Dentons’,” comments one former partner.
“There’s no point doing a merger unless you accept that the firm will look fundamentally different five or 10 years down the line,” concludes Kon. “There’s enormous variety and differences across our firm but the partnership needs to embrace it.”