Here is the good news. There are 14 UK firms in the Global 100, but they account for 18 per cent of the total revenues. And when Dechert, Jones Day and Mayer Brown Rowe & Maw - all of which have pulled off substantial transatlantic mergers - are factored in, then the UK presence within the Global 100 is even greater.
Critical mass is vital if you want to appear on the global stage; UK firms have achieved that by being prolific exporters of legal services. According to research conducted by The Lawyer in association with The American Lawyer, Baker & McKenzie has the biggest proportion of lawyers outside its home jurisdiction at 83 per cent, but seven of the top 10 firms in the overseas lawyer table are UK-based. The only other US firms in that field are Coudert Brothers (64 per cent) and White & Case (59 per cent).
Here is even better news. UK firms are more adept at managing that global model than US firms. They can extract decent profits as they have a better mix of premium business. To take one example: White & Case is 35th in the profit table and Coudert 98th. Compare that with Freshfields Bruckhaus Deringer, the second most internationalised firm in the world, with 66 per cent of its lawyers abroad and lying 25th in the profit table.
The fact is, UK firms are very good at leveraging profit out of much lower revenue per lawyer (RPL). Only one, Slaughter and May, is in the top 50 by RPL, but eight make the top 50 by profit per equity partner (PEP).
But here is the bad news. While UK firms are thinking global, many US firms are acting local. Across the Continent, particularly in Paris and Frankfurt, US firms have launched serious challenges to UK practices in the touchstone areas of corporate, projects, private equity and acquisition finance. As our chart shows, a handful of US firms are resistant to investment overseas, but in the last five years Debevoise & Plimpton, Fried Frank Harris Shriver & Jacobson, Kirkland & Ellis, Latham & Watkins, Milbank Tweed Hadley & McCloy and Sidley Austin Brown & Wood have all embraced global expansion (see 'The Global Game' chart, opposite).
There is a good reason for the elite Wall Street firms - Cravath Swaine & Moore, Davis Polk & Wardwell and Simpson Thacher & Bartlett - to stay put. Namely, the bottom line. "Sticking flags in the ground - it's not a strategy, it's a crapshoot," says a prominent New York partner.
The fact is, it is easier to maintain profits if you stay in New York. The business eco-climate in Manhattan is such that major firms there can bill in a way unheard of elsewhere on the planet. Eight of the 10 most profitable firms in the world are in New York. They have also - and here is a key factor - kept their partnerships small. Cravath Swaine & Moore, Paul Weiss Rifkind Wharton & Garrison and Wachtell Lipton Rosen & Katz are essentially New York boutiques; Dickstein Shapiro Morin & Oshinsky is a niche litigation outfit; Kirkland & Ellis - which has done well to hit an average PEP of £1.16m out of a Chicago base (although its New York office is solid) - and Davis Polk & Wardwell have few global ambitions; Cadwalader Wickersham & Taft has established a successful, profitable bridgehead in London, with UK PEP of £1.3m, dwarfing the global £985,000. That leaves Milbank.
Similarly, maintaining profits when you are almost exclusively London-based is the easy thing. Slaughters is nineteenth globally by PEP, but only 16 per cent of its lawyers are based outside its home jurisdiction - a significantly lower percentage than any of its leading UK rivals and relatively low per se for a UK practice. But Slaughters is the perennial exception - it has muscle on both the top and bottom line. Macfarlanes - the only other major UK corporate-led firm which regards overseas expansion with antipathy - is simply not big enough to feature on the global stage. Herbert Smith, too, which has a similarly low 21 per cent of lawyers outside the UK, has avoided costly European growth.
Slaughters' and Herbert Smith's claims to global status stand and fall on their relationships with US and German firms - a position Allen & Overy (A&O), Clifford Chance, Freshfields and Linklaters would all find precarious.
The US strategy
But more and more US firms are turning their backs on isolationism and are aiming for global expansion without diluting profits. There are three key factors to make this a success: a basis of strong domestic profitability, a financial institutions practice and a partnership culture that is happy with the idea of lateral hiring.
Top of the pile is Sullivan & Cromwell, which has managed to have the best of all possible worlds, having charted a course between high profits and high-level global penetration of financial institutions. Nearly a fifth of its lawyers are outside its home jurisdiction (one of the largest of any elite New York firm), yet it still manages a profit of £1.16m - joint sixth in the world. The premier white shoe firm has grown its revenues by 59 per cent in just over five years. Its profit - always near the top - has still increased by 14 per cent over the same period.
Sullivan's strategy is rooted in New York legal advice, but nevertheless it has recognised that delivering a service in local law has to become part of its global offering. It has managed to recruit strong partners from top firms in Frankfurt and Paris and has become highly visible on European transactions, often as deal counsel. Sullivan has managed to use what is the US law firms' key strength - near umbilical ties to major global financial institutions, in this case Goldman Sachs. Not just Goldman, but key relationships as US counsel to many of the major European corporates such as Allianz, Interbrew, Nokia and Vodafone. According to The Lawyer Euro100, published earlier this year, Sullivan had the second-highest RPL in Europe at £523,000, compared with its global RPL of £649,000. The 24 per cent difference is instructive. Sullivan can still be pretty much top of the tree for premium work in Europe, but it is still not as remunerative as its New York business.
On a superficial level, Sullivan is seen as a competitor to the great UK names in Europe. The reality is that as it is not gearing up to rival Freshfields for the depth of European M&A, its advance should trouble its conservative New York rivals.
In truth, the elite Wall Street firms are more likely to react to competition from each other than from the UK practices. The question is why Simpson Thacher or Davis Polk are not following Sullivan on its global course. After all, they have a similar enough mix of business. Simpson Thacher is close to JPMorgan Chase, while Davis Polk has historical links with Morgan Stanley. What is more, Simpson has two of the most powerful private equity houses in the world in its pocket: KKR and Blackstone. Perhaps Simpson should start looking closely at the Sullivan model. Its hiring of Euan Gorrie from A&O and Stephen Short from Ashurst was good defensive play, but the partnership culture may be just too conservative to head off Sullivan's unstoppable advance in Europe.
Snapping at their heels
Cleary Gottlieb and Shearman & Sterling now have Latham & Watkins and Weil Gotshal & Manges on their tails, with Milbank also threatening to join the global grouping. Milbank's move from a more streamlined transatlantic model to investment in local legal capability is highly significant for such a conservative firm with an immense focus on partner profitability. But so many US firms before them have found that, once you accept the logic of global expansion, moving into having a local law capability is a small step.
The new entrants into the global market have largely been conditioned by their experience of growth within the US. Both Latham and Milbank are firms with strong financial institutional client bases, which has helped catapult them into new markets - although sometimes with mixed results.
Milbank's first office outside New York was in California. It opened in Los Angeles in May 1987, but the firm ran into problems in the early 1990s. Not only did it have a recession to contend with, but its stranglehold on Chase Manhattan work was loosened by Simpson Thacher following the merger with Chemical Bank. What is more, Milbank's targeting of the West Coast financial institutions was, insiders admit, flawed; it simply met with too much resistance from the cream of the West Coast, such as O'Melveny & Myers.
As a result, Milbank's global expansion has been relatively conservative up to now. Part of this is conditioned by its insistence on keeping the growth in the equity partnership to a minimum. Back in 1999-2000 there were 77 equity partners, and five years later the number has only just broken the 100 barrier (103). Although it was one of the first major New York firms to make serious hires when it took junior partners Kenneth MacRitchie and Nick Buckworth from Clifford Chance in 1994, it still has only 12 partners in London. Much of the UK projects team jumped to Shearman a couple of years later, but Milbank's US projects business is perennially perched at the top of the league tables. It has now made a notable foray into the UK through the hire of Tim Emmerson from Freshfields and Laurence Jacobs from A&O, and has made a splash in Germany through its recruitment of a trio of Freshfields private equity partners from Munich.
Milbank's European growth nowhere near matches the growth of the rest of the firm. Much of its rise in revenue has come from its home jurisdiction. Within five years turnover has leapt by 63 per cent and PEP has increased by 55 per cent - helped by a ferocious concentration on costs.
Latham is one of the few US firms which really knows how to crack a market using its core finance expertise. Having opened in New York on the back of high-yield work for Drexel, it managed to cultivate enough bankers after Drexel imploded. The same practice area has fuelled Latham's growth in London (although its RPL has been diluted by its French and German operations). The speed of Latham's rise can be seen by the simple statistic that in the last five years turnover has jumped by 104 per cent, PEP has risen by 38 per cent and its equity partner headcount by 38 per cent.
Weil is one of the few US firms to have expanded in Europe on the back of its corporate, rather than a debt, capability. The debt finance experiment in London lasted four years, amid serious internal rows about international investment. Its growth both in the US and Europe has been on the back of its core strengths of corporate and bankruptcy, and it has the figures to show for it. The Global 100 research reveals that in the last five years its revenue has rocketed by 98 per cent, with PEP up by 72 per cent on a partner headcount increase of 10 per cent.
Conclusion
For the most part, the UK and US firms in the Global 100 operate in separate spheres. Only a small number of them come into direct competition with each other for mandates, unless it is for project finance. The battle for global ascendancy will, on a practical level, be fought in Europe, and in the next decade in China. There is no reason to think that the UK firms will not do well, given their robust attitude to investment. The very fact that an increasing number of US firms are covertly learning from the UK model may be a threat, but many of the richest US partnerships will only dip their toes in the water, because their attitude to lateral hires will only count against them. The UK firms, on the other hand, are used to the lateral rough and tumble, just as they are more used to a managerial culture.
UK firms should not be filled with gloom. Of course US firms dominate the Global 100; the economy is vast. That UK firms can rival many elite US firms in global reach and mandates should be a cause for celebration. UK firms have actually made the best of a model that many US firms have not been able to sustain. Chins up.
THE GLOBAL GAME
The demystification of the world's top 100 boils down to profit and lawyer numbers at home and abroad. Revenue gets you so far, but what counts is the bottom line. The Global 100 stars break down into four categories, all of which illustrate the changing face of the global legal market. Each group is a reflection of the differing strategies these giants of law are pursuing, but when it comes to profit, only one group really cuts it. The further left you travel along the chart the higher profits go. The irony is that the prevailing trend over the last five years has been for firms to move to the right.
The New York 'elite' group is home to the mega profit earners, with Wachtell Lipton Rosen & Katz heading the list. The perennial PEP list leader outguns the firm at the other end of the scale, Coudert Brothers, by a factor of six. The latter sits comfortably in the 'global' group, where margins are low and lawyer count and jurisdictional coverage is high. The merger of DLA and Piper Rudnick will do little to move either firm leftwards, where the strategic emphasis shifts to encompass both international expansion and higher profits. Milbank Tweed Hadley & McCloy and Sullivan & Cromwell straddle both the global and 'transatlantic' groups, having done well to maintain the focus on profits while expanding globally. Five years ago Milbank would have been found closer to the elite group. Similarly, Skadden and Kirkland & Ellis straddle 'transatlantic' and the blue bloods of 'elite'. As for the UK heavyweights, their higher PEP base has helped their visibility in the US. The chart is an endorsement of their model.
THE COST OF GOING GLOBAL FOR THE UK ELITE
In September this year, for the first time, The Lawyer UK 100 Annual Report mapped the progress of the UK's major firms on revenues, profits and headcount over the last five years and plotted partners' return on investment. What was clear was how their international investment has affected the magic circle firms.
Clifford Chance: mergers in the US, Germany, Italy. Grew revenue by 62 per cent and partner numbers by 74 per cent. PEP was down 18 per cent from 1999-2000 level.
Freshfields Bruckhaus Deringer: merger in Germany. Grew revenue by 107 per cent and partner count by 88 per cent. PEP was the same as in 1999-2000.
Allen & Overy: merger in Benelux. Grew revenue by 102 per cent and partner numbers by 76 per cent. PEP was down 18 per cent from 1999-2000.
Linklaters: mergers in Germany, Belgium, Sweden. Grew revenue by 82 per cent and partner numbers by 100 per cent. PEP was down 5 per cent from 1999-2000.
US OLD STAGERS
The only two US firms that havetraditionally staked all on a globalmodel are Shearman & Sterling andCleary Gottlieb Steen & Hamilton.Crucially, both have been activeinternationally for decades: bothestablished strong roots in Paris in thepost-war period and both opened inGermany in the early 1990s. But whileCleary's growth has lagged because ofits reluctance to take in lateral hires,Shearman has continued to build - andits recent difficulties in New York havenot deterred the firm from its strategy.In the last five years turnover has risenby 70 per cent. While other New Yorkfirms take it as their creed that allinternational expansion must mean adent in profits, Shearman's experienceshows that an international networkhas not been terrifically dilutive; PEPhas grown by 30 per cent in five yearsand partner headcount by a similar29.5 per cent.
Shearman's attack on Germanyshould be seen by other US firms as atextbook case. It entered Germanythrough investment bank contacts,exploiting its links with GoldmanSachs for privatisation work, but thenentered the corporate market. It nowhas strong boardroom relationshipswith a slew of German industrials andis the most serious challenger to thelegacy Hengeler and Bruckhaushegemony.
Cleary has been more conservative inits growth - its percentage increase inrevenue over the last five years, at 57per cent, is rather lower than those ofmany of its US counterparts, althoughwith PEP up by 39 per cent in the sameperiod the partnership is probably notcomplaining. Recent hires in Germanyfrom Linklaters suggest that expansionis once more on the agenda. But Clearyhas a way to go before it can rivalShearman on either its German or UKofferings, and it is in danger of beingeclipsed on the Continent by its moreambitious US rivals.
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