When A&O emerged in Australia in early 2010, most senior law firm figures and CEPs publicly offered words of encouragement (a notable exception being Clayton Utz), in essence stating that they “looked forward to the competition”.
Privately, those same people were at pains to communicate to young partners within their own firms considering the A&O triple jump that A&O probably wouldn’t make it past three years. We’ve heard the figure of three years repeatedly – offshore A&O partners were apparently prepared to put up enough capital for a foray down under, but within a strict, pre-defined time limit, and subject to certain performance benchmarks. We also understand that the partners initially constituting A&O in Australia have their incomes guaranteed for a time period (we think it is a couple of years), and the same CEPs and senior law figures admonishing would-be defectors that “A&O will be gone in three years” no doubt also raised the idea that distributions would plummet after that guarantee period.
But this domestic law firm hyperbole all looks a bit silly now with the news that A&O has signed up to a 12-year lease in Sydney. The AFR reported last week:
Allen & Overy will establish its Australian headquarters in the new office tower being finished above Westfield Sydney. The firm will initially take four floors – 4500 square metres in all – at a cost in rent and outgoings of more than $4.5million a year.
As an aside, you’ll recall we got fired up in November 2010 when a commenter named “Facts and Figures” made the following observation in respect of out post profiling Minter Ellison 2010 profit:
I’m all for disclosure of firm profit margins etc. similar to the disclosure of eg the London firms. The absence of any disclosure inevitably results in speculation. And frankly that is all that the AFR is really engaging in. From my knowledge of revenue for the firm I work for the AFR is habitually significantly off the mark both under and over in different years (I can’t speak about profit because costs / profits are not disclosed internally – only revenue).
How the AFR “estimates” profit margins is anyone’s guess – note the absence of any sensible explanation.
To that end I enjoyed your comment that: “the AFR largely got the facts and figures right on this one”… Let’s just enjoy the AFR article for what it is – pure speculation that the firms must wear given their attitude.
Looking forward to how you both predict the demise of Clayton Utz (a seeming favourite past-time) and criticise partners for taking home too much profit at the expense of the indentured labour – but objectivity is not why we visit the site…
We wrote the following response:
Oh, sorry Mac Daddy, didn’t realise you hard the cold, hard “facts and figures” in your moisturised hand. But, do you?
The revenue statistics picked up by the AFR are first published by BRW. The disclaimers used by BRW as to accuracy are also replicated on this site. From memory, the only firm not to openly divulge revenue stats in 2009/2010 was AAR, in our view probably because of the berating they get on this site.
So in the first place, no, the revenue stats from which the AFR bases their profit estimates are not “pure speculation” as you submit. In the case of Mallesons, profit figures are 100% accurate – the firm is transparent about profit margins. Using that margin, applied to the revenue, one can easily calculate the profit pool for the financial year. It is just a matter of the points allocation between partners that determines what each person takes home. THAT is a matter of speculation, but one where reasonably informed guesses can be made.
Where does this leave the other firms that do not disclose profit margins?
Well, based on the profit disclosure of Mallesons alone, we think informed guesses can be made about the other major firms. Research into reasonably ascertainable costs metrics like tenancy fees, wages, bonuses, discretionary spend etc can help inform a view as to whether the outgoings of the firm are likely to be higher or lower than Mallesons (likely higher, given that Mallesons are notorious tightwads with their staff). It is not an exact science, but it is nowhere near the “pure speculation” that you posit.
And why would you seek to rubbish the transparency this site seeks to provide? Is it because you are a Clayton Utz partner? Based on some of your earlier comments on this site, we think so.
Firm Spy
And while we’ve again got the attention of the Clayton Utz partnership with a post profiling the successes of their arch-nemesis A&O, we couldn’t help but highlight that one of the metrics referenced in our response above – tenancy fees – has been revealed (well, at least clarified) by the AFR in the A&O article quoted above. The AFR also noted that:
Allen & Overy would have received a substantial lease incentive, but the figure is closer to 20 per cent of the total rent, not the 30 per cent incentives offered at the height of the financial crisis.
So, assuming four floors of prime inner-city commercial real estate is leased at similar rates, informed guesses can be made about partnership draws – and this is what the AFR does in its estimates. If partners weren’t so secretive about the size of their manhood income, this exercise wouldn’t be needed. But for now, it’s the best we’ve got. And we think it’s pretty accurate.
Back on the 12-year lease, A&O Managing Partner Grant Fuzi had the following comments to make about the new headquarters:
The rapid expansion of our operations has exceeded all expectations … Our new offices will offer a dynamic and modern experience to our clients and staff.
A&O will take levels 22 to 25 in the new building and will move into the premises, located at 85 Castlereagh Street, in December 2011.
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Haha … love the image! The ‘big boys’ are in town and here to stay.
For all we know (and none of us has seen the lease document), the term may be for 4 years with two options to extend each for another 4 years (or any other permutation). So yes, loosely speaking, a 12 year lease. But i dont think anyone can draw an inference from a reported “12 year lease” that A&O are here for the long term.
As another possibility, the lease could have a termination for convenience clause – who knows cos we ain’t seen the lease.
then again i didnt read the AFR article and it is also fun to speculate, especially when it involves a bit of fun at a big firm’s expense.
@davo – its known around town (if you know the right people) that it is a 12 year lease. A&O wanted that space badly which reflects in the lower incentive.
Pretty exxy 4 year commitment when you consider its going to cost them at least $2,100 psm to fit out the premises alone and how this is then depreciated over the life of the lease (original term not options) – after 4 years it has not reached the end of its useful life. Major accounting headache…
Never seen a lease with a termination for convenience clause (and Westfield are not known for being easy to negotiate with) – if you want out early, you surrender the lease and normally pay big money for the privilege.