HWL Ebsworth has earned a reputation as one of Australia’s most acquisitive firms – but as managing partner Juan Martinez explains to Renu Prasad, profitability and sound management are where the firm is really making its mark.
HWL Ebsworth has earned a reputation as one of Australia’s most acquisitive firms – but as managing partner Juan Martinez explains to Renu Prasad, profitability and sound management are where the firm is really making its mark.Double digit revenue growth. Double digit profitability growth. 50% profit margin. It’s fair to say that HWL Ebsworth has had a reasonably good year. “For our size, I think we blow [the competition] out of the water,” says Juan Martinez. Most firms do not disclose their profitability, so we may never know whether he is correct. However, these figures certainly stand HWL in good stead against the more profitable top tier firms such as Clayton Utz, which is reportedly operating with a margin in high 40s. “When you are charging top tier rates, I’d imagine it’s easier to be profitable,” says Martinez. “But we’re often charging a half or two thirds of what they charge. When we talk to people from Freehills or Mallesons, they can’t believe it. We have a vision to be highly profitable, but not at the expense of the client. It’s profitable because we run a good business.”
HWL Ebsworth is one of those firms that seems to polarise market opinion. The firm’s rapid expansion late last decade with high profile targets such as Ebsworth & Ebsworth and Abbott Tout left it open to criticism that it was pursuing a “growth at all costs” strategy; an amalgamation of partnerships without a soul.
Martinez is familiar with this line of criticism and counters it with evidence of the firm’s cohesion and direction: “Over the last six or seven years, we added over 100 partners. That’s a stunning statistic in anyone’s language,” he says. “And of those partners, I’d say over 90% would still be with the firm today. Our staff attrition rate is significantly below market rate - we’re about 10% below average for legal practices. Having a high level of partners staying with the firm is consistent with a good strong culture - people want to stick around.”
More recently, HWL has been somewhat quieter on the acquisition front, although it did manage to pick up six ex-DLA Phillips Fox partners in Canberra ahead of the DLA Piper integration in May. “We’ve had Canberra as a possible strategic market for some years but we kept our powder dry until we had a strong opportunity to go in with a strong team,” explains Martinez. “And that’s what I mean – there’s this perception that we’ve got this aggressive mentality of growth at whatever cost and instead Canberra shows the true position is that we’re actually very patient. We do things when it’s right. You seize on opportunities as they arise and you do it on the basis of the quality of the opportunity - not because we have a set plan for a certain amount of growth. We do these things as merit dictates.”
Partnership structure
Some of the partnerships acquired by HWL were of the old lockstep variety and in a distressed state. “They were based on the traditional legal partnership models,” says Martinez. “Lockstep, and if you got to a certain position in the firm and became a partner usually you would stay there regardless of merit.”
This is anathema to the way HWL Ebsworth functions, employing a flat merit-based structure which Martinez says can only increase in prevalence as the market becomes more competitive. “I think a number of successful firms are on record as having moved towards that performance-based model rather than the traditional lockstep,” he says. “I think some firms are comfortable and familiar with lockstep and to that extent it may well survive for a while longer, but if you ask me whether it will survive ultimately - I’d be very surprised if it does. There is more complexity and competition in the market and I think it’s inevitable that you have to become more competitive and have a sharper performance focus.”
HWL has both fixed draw and equity partners, although it is unusual for partners to remain at the fixed draw level for more than a couple of years. “We believe that there is a proper role to be played by fixed draw partners,” says Martinez. “It doesn’t have to be a place where aspiring financial partners sit and become disgruntled. That’s what it is in many firms, but it doesn’t have to be like that. It is a legitimate position to learn what it means to be a financial capital partner and to work on the skills you need in that leadership role. I would have thought for an appropriate candidate one or two years is really the timeframe you’d be looking at ideally - but of course there are exceptions.” These include retiring financial partners and partners who are remaining fixed draw by mutual agreement. “What we don’t do is pretend that you’re there temporarily and then keep you forever by some kind of hoodwinking exercise,” says Martinez.
Capital contributions and partnership exit
Incoming HWL Ebsworth financial partners pay a capital contribution which is paid out when the partner leaves the firm. A limited recourse loan facility is provided by the firm. “The idea is that you want partners to have some skin in the game, but you don’t want it to become an obstacle to entry,” explains Martinez.
At the other end of the scale, the firm has a non-solicitation clause for departing partners which prohibits the solicitation of work from the firm’s clients during a set period. However, the firm does not believe in “no-compete” clauses. “My philosophical view is that clients will do what they think is best,” says Martinez. “It’s insulting for lawyers to think that they can contractually bind an exiting partner or control the thoughts of a client as to who they wish to engage. Clients are sophisticated buyers of services - they can make up their own mind. The strongest clause we have is a non-solicitation clause and that’s basically to stop ex-partners from annoying or badgering clients. But if a client wants to engage an ex-partner, we don’t prohibit them from doing so as long [the partner] did not solicit it.”
It is arguable that the client cannot make an informed choice about their advisor if they can’t be contacted, a point which Martinez rejects. “All you’d have to do is advertise the fact that you’ve now started at a different partnership and anyone who likes you would be entitled to use you,” he says. “For exampIe, I wouldn’t need to solicit my clients if I moved - they’ve known me for 30 years.”
The firm’s traditional strengths in transport, maritime and insurance have been complemented by a growing expertise in the financial services space, where several top tier hires have occurred. “We’re in a position to reward these people - we’re a good firm, a good business; we have high profitability but at same time our rates are very reasonable,” says Martinez. So what’s the secret to enjoying a high profit margin? “Join HWL Ebsworth!” replied Martinez.