A View from Germany

German lawyers generally see things differently from their colleagues in London. While London managing partners bemoan the low leverage and mediocre profitability of German firms, German lawyers look with some incredulity at the modesty of the fees per fee-earner which are produced even by magic circle firms – and in a market such as London where billing rates are much higher and where – because of the overvalued pound – any comparison flatters the City firms.

UK firms emphasise that leverage makes up for this – it is the benchmark of the highly-profitable firm. This approach is supported by the fact that claims that lower leverage in Germany is a necessary demand of the civil law system, have not really held water.

After all, there are plenty of examples of high partner-associate ratios in other continental jurisdictions and in any case, German firms such as Deringer Tessin have long since been an exception to the 1:1 trend.

Nevertheless, it seems undeniable that, as a rule, German law firm culture in the upper end of the market does resist higher gearing. The difficulty instead is how to leverage knowledge of statute – and nowadays also transaction management – down through the firm in order to gain as much of the premium-billing market as possible.

This has been recognised by some managers of UK law firms, who realise that the growing emphasis on profits-per-partner at German law firms demands not just delegating work to associates but guaranteeing continued access to high-end high-billing work.

And premiums need partners – a fact which is driven by both demand and supply. Clients in the German civil law environment need individual expertise before manpower, and some of the lawyers able to give this expertise are going to those firms where they will be full members of a partnership over whose direction they have some influence.

Here lies the problem for UK firms. Events of the past year have led some lawyers to question which foreign firms, from the UK or US, look more likely to improve their position in the premium market in Germany. It seems most UK firms have to seek a merger with a larger German firm in order to provide the full service across a single European market that the clients demand. Accordingly, the leverage of that German firm plays an important role in attaining the sort of profitability which would allow a full merger in the short or medium-term to make sense.

US firms in Germany, on the other hand, are not so restricted by their domestic client base and have enjoyed the luxury of being able to go after the premium work only. They can pick and choose lawyers and teams, and do not have to worry about the integration aspects of an unwarranted full-scale merger with a large firm. As long as the lawyers are bringing in the high-end work and high-end fees, the leverage – and culture – can remain unchanged.

A number of leading German names in the market are thus migrating to those firms where the culture of the German offices is familiar, and where profitability does not suffer. In other words US firms have exploited the German legal market culture to their own purely profit-oriented end.

In contrast, UK firms are having to rub against the grain of that culture to attain their medium-term goals in the market. If more leading US firms decide to come to Germany, UK lawyers might feel the air getting worryingly thin at the top end of the market.