Halliwells held its first ever partners’ conference in Spring 2006 at the elegant Marriott hotel in downtown Prague. Halliwells’ charismatic managing partner Ian Austin glowed with optimism. The Manchester firm’s turnover had increased that year by 25% and Austin was fêted for his dynamic leadership.But Austin had bigger plans. He wanted to establish Halliwells as one of the country’s top law firms. He had gathered the hundred-strong partnership in the hotel ballroom to set out his vision. Using an overhead projector, he presented a series of graphs forecasting a golden future filled with ballooning revenues and soaring profits.
“It seemed like there was a never-ending horizon of opportunity,” recalls one of the attendees. Four years on, this grand vision lies in tatters. Halliwells’ profits have tumbled and its client base has dwindled. More than 60 partners have quit in the last two years. The story behind Halliwells’ downfall is one ofambition and greed, short-sighted management, and poor decisions. As a result, the firm was badly positioned to withstand the downturn. “Halliwells could become one of the big casualties of the recession,” says a former partner. “The whole sorry tale provides a textbook example of what happens when a business starts believing its own hype.”
Halliwells had always conducted itself with an arrogant swagger. The Manchester-based firm, aided by offices in London and Sheffield, expanded fast in the early 2000s. The firm’s remuneration system rewarded partners’ individual client relationships and its aggressive approach to business gained notoriety. “Halliwells was always a very money-minded place,” says an ex-lawyer. In 2004, Ian Austin, the 42-year-old head of litigation, was elected as Halliwells’ managing partner. The partnership had watched enviously as regional rivals like Hammonds and Eversheds had gained ground. Austin pledged to build Halliwells’ brand to help it compete.
The following year Austin secured the firm’s first-ever merger, with Liverpool’s Cuff Roberts. It bolstered the new office with a clutch of hires from DLA Piper. In 2006, Halliwells acquired 30-partner Manchester insurance specialists James Chapman. The tie-ups made Halliwells the region’s largest law firm, with almost 400 lawyers. Its turnover jumped 25% to more than £60 million.
Halliwells’ dramatic growth won Austin plaudits. He earned a reputation as a no-nonsense leader who was unafraid of taking big decisions. In 2006, Legal Business magazine named him Managing Partner of the Year.
To catch its rivals, Austin pushed partners to boost their turnover. He set a series of bold targets. ‘Mission 7007’ – turnover of £70 million by 2007 – was achieved ahead of schedule. The next goal was even more ambitious: revenues of £128 million by 2011.
Behind the grand pronouncements, Austin’s brash top-line-focused approach was creating tensions. His obsession with growth at breakneck speed saw the firm charge into decisions without enough attention to detail.
No one, for instance, contacted James Chapman’s clients ahead of the union to ask how they felt. This did not go down well at insurance giant Zurich International, which booted Halliwells off its panel two months after the merger. The blame and recriminations that followed saw many James Chapman partners quit. This led to the subsequent loss of Norwich Union, another prized client.
“Ian focused on the top line rather than the bottom line,” recalls a former partner. “It was all about maximising turnover. This inculcated a very bad culture in the firm that led to many subsequent problems.”Halliwells’ biggest problems centre around its efforts to relocate to a bigger and better Manchester office. The firm’s rapid expansion in its home city had left it with hundreds of staff working in five different rather nondescript offices. It was obvious that its sprawling operation would benefit from being in one premises.
A number of partners, led by Ian Austin, felt that the firm’s burgeoning regional reputation would be enhanced if it was based in an eye-catching landmark building.
At the rate the firm was growing it would need a substantial amount of space. 3 Hardman Square – an impressive eight-storey office building designed by Norman Foster, to be built in the new Spinningfields development in central Manchester – seemed exactly the kind of signature premises Austin had been looking for.
In May 2005 the firm’s 40 equity partners signed an agreement to become 3 Hardman Square’s anchor tenant. Austin cut a shrewd deal, guaranteeing Halliwells a share of the profits of a future sale of the property. Two years later, before Halliwells had even moved in, the building was indeed sold – and Halliwells’ equity partners scored a £21 million windfall.
Austin had agreed with the equity partners who signed the property deal to split the majority of any profits between them. £5 million was pumped back into the firm; the rest – £16 million – was divvied up, with partners receiving between £250,000 and £1 million each.
In December 2007, Halliwells occupied the whole of 3 Hardman Square. The move was celebrated with much fanfare. Many at the firm hoped it would help propel Halliwells into the big league. It would, in fact, herald the beginning of a disastrous period that would plunge the firm into crisis.
One of the key planks of Halliwells’ positioning was that it was prudently managed. It was a source of huge pride that the firm had only ever accrued minor debts. But at a spring 2008 partners meeting, Austin dropped a bombshell. The partnership was asked to approve a resolution in relation to an £18 million loan facility from RBS. The loan was needed to cover the cost of fitting out 3 Hardman Square.
Austin maintains that the equity partners had known when the Spinningfields deal was struck that it would involve borrowing upwards of £12 million for fit-out costs. But in the context of the worsening business environment, the move worried newer and non-equity partners. “There was no debate or discussion on the subject,” says a former partner. “It was a fait acompli.
To further antagonise the partnership, rumours were circling about a multimillion-pound property windfall that had been quietly divvied up by some of the equity partners. Fixedshare partners, and equity partners that joined after the Spinningfields deal was signed, had not only received none of the profits, but had been kept in the dark about the windfall. Now, though, word was getting out.
“Those of us who were getting figures could see the debt was creeping up. At the same time, news leaked out about the property windfall,” says a former partner. “There was a surprising correlation between the amount that was allegedly paid out and the amount of debt the firm had incurred.”
At a meeting, a number of partners challenged Ian Austin and demanded full disclosure. “He didn’t take very kindly to being put on the spot and talked around the subject,” says a former salaried partner. “He said the equity partners had taken a position but it was highly confidential and he couldn’t possibly disclose the details.”
But Austin’s reluctance to divulge facts only fuelled the sense of mistrust that many felt about his style of management. “It became a hugely divisive issue because it created a sense of haves and have-nots,” says a former partner. “There was a lot of anger and recrimination.”
Then, as one former partner puts it, “everything started unravelling.” As 2008 progressed, the British economy slid into a full-blown recession. The day-to-day commercial and real estate work that sustained Halliwells’ business was declining dramatically. The slump chopped almost one-third off the firm’s profit margin.
Halliwells launched its first round of redundancies in spring 2008. In the summer it made further cuts. A third round of layoffs followed in the autumn.
To make matters worse, a stream of high-profile partners quit the firm – including former London corporate head Julian Lewis, real estate heavyweight Simon Hardwick and commercial disputes expert Marko Kraljevic – taking with them multimillion-pound books of business and teams of associates.
Halliwells was stuck paying millions in rent on its eight-storey Manchester office, despite the fact it was only partially full.
The firm’s London office, meanwhile, was performing well below expectations. Halliwells had invested heavily in a string of expensive lateral hires that had failed to live up to expectations.
Three different partners held the role of London head in less than a year. Halliwells was floundering.
By winter 2008, Austin had no choice but to issue the partnership with a cash call. The firm doubled the price that partners had to pay to buy into the equity – from £20,000 per point to £40,000 per point – forcing partners new and old to dig deep into their pockets. (The firm’s equity spread ranged from three to 11 points.)
Had Austin been able to recoup most of the cash from the previous year’s property windfall, it might have been different. However, the deal did not include a ‘lock-in,’ so the partners who received the money were free to resign at any time afterwards without paying a penny back.
A number of senior partners, some of whom had received £1 million, quit the firm shortly after the March 2007 payout. (14 of the 40 equity partners that received the payout remain at the firm today.)
The cash call helped stabilise Halliwells’ finances. But the move deepened the sense of injustice that many felt. “The previous generation had wrecked everything by taking millions out of the business,” says a former partner. “They then expected the next generation, who had not benefited, to just roll up their sleeves and pay up.”
At the same time, a sharp decline in profits added to many younger partners’ feelings of resentment. The firm had doubled the buy-in price of an equity point just when the value of a point had dropped off a cliff.
New equity partners bought in for considerably more, only to receive substantially less.
Back in 2006, Halliwells’ robust performance generated annual profits-per-point of about £40,000. This resulted in competitive PEP of between £200,000 and £500,000. But by 2009, the firm’s crisis-ridden business meant partners’ profits-per-point were in “single figures”, according to former partners. PEP at the bottom of the equity was less than £100,000.
The disparity with its rivals turned Halliwells into a rich picking ground for headhunters.
Some partners found they could double their annual earnings by moving firms. Halliwells’ client-hoarding culture made it especially vulnerable. “A lot of good people walked out the door and took their clients with them,” says a former partner.
The departures included insurance litigation powerhouse Chris Philips, insolvency expert John Lord and corporate leader Frank Shepherd. In all, more than 60 partners have left the firm in the last two years.
By summer 2009, the flood of departures had left Halliwells at risk of breaching its covenants with the bank. The firm teetered on the brink of collapse.
Ian Austin acknowledges that Halliwells overreached itself. “Yes, we did take too much space in Spinningfields,” he concedes. But, he argues, the plans the firm made, while ambitious in retrospect, seemed reasonable in the context of the economic boom.
“We looked to occupy Spinningfields based on annual growth of 8%,” he says. “At the time the business was growing at a rate of 15-20%. We thought we were being prudent.” The root cause of Halliwells’ problems, Austin argues, is the recession. “What makes our lives difficult at the moment is the state of the corporate, commercial and property markets. We’ve lost £15 million of combined fee income in those areas.”
Austin makes it clear the firm’s whole equity partnership shares responsibility for the Spinningfields deal, the loan that was needed to fund it, and the decision to pocket most of the proceeds. “I didn’t make any of these decisions alone,” he points out. “There were frank discussions amongst the equity partnership about these decisions, and there was consensus.”
The decision by the equity partners to keep most of the profit from the sale of Spinningfields, says Austin, was made for tax reasons. Had the money been put into the firm, he points out, it would still have been disbursed to the equity partners at the end of the year – making it subject to both corporate and then income taxes.
Of course, Halliwells could have tried to keep the money in the firm, to fund the fit-out of 3 Hardman Square without debt. But that thought seems not to have occurred to Austin.
“I suppose you could have done that,” he says. “But you must understand, the debt we expected to accrue seemed very manageable given our rate of growth.”
Perhaps Austin’s most baffling decision was to not ‘lock-in’ recipients of the property windfall. But agreements that force departing partners to repay capital are actually hard to enforce, he says. “The decision was made in the context of the firm’s history, which was one of a very stable partnership.” And measures to require departing equity partners to repay their windfall “would have just got us mired in litigation,” he says.
“I would have done some things differently,” Austin admits. “We would have retained more [windfall] capital in the business. But that’s with the benefit of hindsight. It’s very nice to judge some of those decisions now when we’ve had the worst recession in living memory.”
There’s no doubt that Halliwells has been unlucky. But other Northern firms with similarly large corporate and property practices have got through the recession without Halliwells’ troubles.
Former Halliwells partners say that, even at the height of the boom, Austin’s growth plans seemed unrealistic.
Back at that weekend retreat in Prague in 2006, when Halliwells’ former managing partner laid out his visions for the firm in a series of extravagant projections, many partners left the meeting completely unconvinced. “I just remember sitting there and shaking my head in disbelief at the naiveté of it all,” recalls a former partner. “We came out of the meeting feeling we’d just played a game of bullshit bingo.”
Adds another former partner: “I know a number of us felt a sense of disquiet at the expectation that the rate of growth we’d achieved over a year or two would just continue on forever.”
Whatever Austin’s personal culpability, one thing is clear: when the firm faced collapse, it turned to new blood to pull itself back from the brink. Enter Jonathan Brown.
Brown joined Halliwells’ Liverpool office from DLA Piper in September 2005. In January 2008 he became Liverpool’s managing partner.
Liverpool held up reasonably well during the crisis, a fact many partners put down to Brown’s level-headed leadership. Furthermore, Brown had joined too late to be involved in the property deal and subsequent windfall, and this increased his standing amongst the wider partnership.
A management re-shuffle in July 2009 saw Brown promoted to Halliwells’ six-person executive committee. By this stage it was clear that many people had lost confidence in Ian Austin.
“It was felt in the best interests of the firm if someone else took over,” says a former partner, and in September, Jonathan Brown became the firm’s new managing partner. The move had received unanimous support from the partnership. The management rejig saw Austin given the newly created title of executive chairman.
Halliwells’ PR suffered disastrously in the final months of the Austin regime. A lawyer from rival Eversheds was overheard discussing Halliwells’ plight on the train home one night, and received a threatening letter. Such defensive behaviour only compounded the popular impression that Halliwells was in deep trouble.
Brown is keen to avoid similar mistakes when he sits down with Chambers Magazine on a sunny April afternoon. “The truth is the truth, isn’t it?” he says with a smile. “I’ve tried to be open, because otherwise it just causes trouble you don’t need.”
Brown’s first task on becoming managing partner was to restructure the debt.
Halliwells was required to have at least 37 equity partners according to the terms of its debt facility with RBS, but was set to drop below that figure when a number of partners, who had handed in their resignations, served their notice periods.
The new deal requires Halliwells to maintain a certain amount of capital in the business, regardless of the number of equity partners.
To help maintain the required capital level, Brown revised the firm’s partnership agreement.
Now, departing equity partners won’t be able to recoup the money they invested in the firm until 2013. The aim: hold Halliwells together while the economy picks up.
The restructuring still leaves Halliwells with a fearsome level of debt for a firm its size. As of April this year, the firm had £14.4 million in banking debt and £6.7 million in leasing debt.
Brown estimates that by April 2012 Halliwells’ banking debt will have shrunk to £11.8 million. And Brown is taking steps to improve Halliwells’ management. In the past, Halliwells’ practice groups have suffered from a lack of cohesion and have been bedevilled by clumsy lateral hiring. Now, says Brown, the firm’s focus will be its traditional strength of litigation, both insurance and commercial.
To confront Halliwells’ silo culture, Brown has appointed deputy group heads in all the major departments. He has also appointed the firm’s first Manchester office head to free up central management to operate firm wide, and make the business less Manchester-centric.
His top priority now is hiring to replace the lost talent – and revenue. “Our biggest problem is that partners have left and we haven’t replenished them at the other end,” he says.
The central obstacle is the firm’s poor PEP. “Halliwells used to be one of the best-paying firms in the North, but now it’s one of the worst,” says a recruiter. “Many rivals can offer people considerably more. They’re struggling to attract talent.”
Brown points to the recent hire of litigator Sydney Fulda, from Manchester’s Berg Legal, as a positive development. This spring also saw the promotion of ten new partners.
But the new hires are all fixed-share members. Former partners claim the firm’s high buy-in price coupled with meagre returns could leave it struggling to recruit new equity partners for years to come. Brown contests this and says that deals are in the pipeline to promote four equity partners internally.
Will Brown’s efforts prove successful? For the time being at least, the new boss has the support of his troops. “He commands the loyalty of a lot of people,” says a source.
Halliwells’ woes have not escaped the notice of its clients. “[The departures] have led to delays in response time,” says the finance director of a large Manchester-based company. “When you pay for service you expect it to be top notch, but they’ve let themselves down once or twice.”
Jonathan Brown has inherited a very tough job. He may have the backing of his partnership, but he has failed to plug the slow trickle of departures. Some, such as the large Sheffield-based insurance and healthcare teams at the start of the year, are existing resignations working their way through the system. But others, such as real estate chief Mike Edge who quit in the Spring, suggest Halliwells’ new managing partner has his work cut out.
Brown can only hope that his efforts to tie capital into the business until 2013 hold Halliwells together until the economy picks up. This year, the firm forecasts a 15% drop in turnover to £70.7 million.
Halliwells’ future hangs in the balance. But the firm should – just about – be able to wriggle out of its current predicament. The firm that emerges will be a diminished, more modest, operation. The remaining partners recognise this. The firm recently sublet 25,000 square feet of Spinningfields. The days of grand pronouncements, lavish lateral hires and wilful expansion are over.