Since we broke the news last week that Freehills considered splitting its ER group from the rest of the firm, our friends at the AFR followed up the story and some juicy new details emerged. The cast of characters agitating for the ER demerger were revealed; the project was run by chief executive Gavin Bell, managing partner of Sydney Mark Rigotti and former BHP Billiton general counsel Mike Ferraro. According to AFR:
The plan was to re-badge 16 ER partners under a new firm banner… these partners would be guaranteed 85% of their current salary for two years, with any shortfall to be picked up by the broader partnership, In return, the ER partners were to put up $1million in personal security to secure bank facilities.
But apparently the banks didn’t feel comfortable lending money to the project, casting considerable doubt over the asset base of the ER partners:
The project fell out of favour when the firm was unable to get a bank on board.
When asked for comment, Freehills were slightly more generous with their friends at the AFR than in their response to us, with CEP Bell stating:
There was some consideration given to moving to an affiliate model, similar to that of our tax practice Greenwood & Freehills… We undertook extensive due diligence including careful testing of the affiliate model with internal and outside consultant advice… Following this process it was decided that the existing model is working well for Freehills, its clients and the ER team.
We thought this story warranted a bit more analysis so we took a look at the firm’s figures for FY 2009/2010 and generally set about doing our own “extensive due diligence”. We wanted to estimate how the severance of the ER team would have impacted on profit and to establish whether consultancy fees were justifiable when zero has been achieved. You’ll recall the following estimated stats from last year:
- Estimated Profit Margin: 40%
- Estimated Profit: $190.8million
- Profit Per Non-Partner Fee-Earner: $220,000
- Profit Per Equity Partner: $930,000
- Revenue: $477million
- Revenue Per Partner: $2.32million
- Revenue Per Equity Partner: $2.32million
Based on these stats, the 16 ER partners should bring in revenue of $37,120,000, netting each of them the abovementioned profit of $930,000 (using the benchmark profit margin of 40%). But if the demerger deal would guarantee them only 85% of their previous profit-take, what must their actual current per partner revenue be? Well, one commenter noted in response to our first post that the ER group “struggles to meet the revenue targets required by the firm”, so let’s take a conservative figure and assume that they were 15% under-budget. In FY 2009/2010, this would mean that the 16 ER partners netted $31,552,000 in revenue, which, assuming a 40% margin, would yield a PEP of about $788,800, or $141,200 less than the benchmark PEP.
$141,200 is a nothing to sneeze at – certainly not for the impecunious punks in the FS office – but how would it have affected the profit margin of the partners who would have continued to be part of Freehills partnership post-demerger?
Well, based on the bullet-point stats quoted above, the Freehills partnership has a total of 205 partners. Post ER Group split, this would have been 189, meaning:
- $141,200 x 16 = $2,259,200
- $2,259,200 / 189 = $11,953
Yep, a paltry $11,953 smackaroos each. Certainly not the sort of bunce that we think would warrant:
- extensive due diligence;
- careful testing of the affiliate model;
- internal advice; and
- outside consultant advice.
Which gets us to the point we first raised a few weeks ago that Freehills appear to have a renewed hunger for profit. For junior lawyers and non-partners generally, this should come as bad news indeed. Still, there are some who see it differently – one commenter added:
I think that the high billing partners are very frustrated by those not pulling their weight, but I also think there is less tolerance for bad behaviour too … some of those partners (and everyone who works there knows who they are) are starting to be held accountable for the turnover in their teams which can only be a good thing.
Hmmm … a good thing for partners, but likely a bad thing for juniors who may count the cost in salary-review season.
Send the Firm Spy your news and views!
Loading...
Many leaps of logic over the chasm of irrelevance in this post.
oh right, Skiman you’re that kid from primary school who knew the answer to the rubix cube… but didnt tell anyone fhe answer
actually, Skiman is the child genius who visited elite north-shore primary schools in the eighties and charged 2,391 kids $5 each for the rubix cube answer. But he later matured into a Freehills M&A partner and now considers himself “exactly even” after supporting underperforming ER partners for the last 12 months. Closer analysis reveals he is actually short $2. Loser
The article assumes achieving revenue targets to be the same as being ‘profitable’.
Further, it assumes the employment group were 15% under budget in FY 2009/2010. Is there any evidence of this?
Wow, a pretty innocuous comment on my behalf seems to have encouraged some (what are intended to be, I am sure) fairly personal attacks.
Without resorting to pseudo-psychology to respond, all I was getting at is that this entire post and the numbers that come from it are a brilliant example of garbage in, garbage out statistics, and demonstrate a really sh!tty understanding of the way that firms work. Firmspy has about a 70% hit rate, and this post is well and truly in the 30% of misses.
To believe that the figures are in any way correct, you have to (i) believe that employment partners take home the same pay on average as partners of other groups in the firm; (ii) completely ignore the words “two years”; and (iii) believe that the 85% figure is something other than Firm Spy making it up (an aside: if 85% was a defensible figure, why won’t banks underwrite it?). You also have to completely ignore the impacts of other factors such as legacy client issues, discounted rates and pro-bono work, the effects of which vary from group to group. Finally, you have to completely forget that Firm Spy posted the other day about the new profitability expectations of the firm. There you go – there’s how the cube works.
By the way, Ferris, just because you live in Sydney doesn’t mean everyone else does. But I’m sorry I upset you so much. Next time I write a throwaway comment, I’ll make sure I provide enough detail to protect myself against the unfounded attacks of bitter idiots.
Firmspy – poor effort.
Looks like somebody got punched in the feelings.
Skiman, thanks for the comments. We agree that the post relies on a lot of speculation, but we stand by its basic premise (that the mooted ER split turned on a profitability difference that wasn’t going to break the bank). Also, while you might disagree with the numbers and quibble about some obvious oversimplifications on our source’s part, we published because we still thought it useful to try to break through the opacity of partnership revenue decisions at the top end of town, and shed some light on what motivated the proposal.
Also, can we ask commenters to keep things civil in the comments? We can take comfort in being able to speak frankly and anonymously on here, but there’s no need to be shits.
Incidentlally, the 85% figure came from noting that under the proposal ER partners were being guaranteed 85% of their current salary, suggesting that that was required to bring remuneration back in line with earnings. We have no better data, but if you do, feel free to enlighten the world…
@ The Spy: “Also, can we ask commenters to keep things civil in the comments? We can take comfort in being able to speak frankly and anonymously on here, but there’s no need to be shits.” Couldn’t agree more.
I’m not sure I agree that the split wouldn’t break the bank (in light of a move to a $3m per partner revenue model, E&R would simply never be able to perform and would significantly dilute earnings) but good explanation of the post generally. Cheers
Sounds like the making of a 2 tier partnership is well and truly underway?
With the unit review process underway and the final unit value heading over $13k, it’s time to share the toys in the sand box or find that your corner of the play ground is a lonely place?
Like other firms, Freehills was trying to reduce the size of its partnership and increase its profit per partner to increase its attractiveness for a “merger” with an offshore firm.