30 November 2004
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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.
ComparethatwithFreshfields 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, above).
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 its not a strategy, its 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, for example, are essentially New York boutiques.
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.
Herbert Smith, too, which has a similarly low 21 per cent of lawyers outside the UK, has avoided costly European growth.
Slaughters and Herbert Smiths 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 US firms are turning their backs on isolationism and aiming for global expansion without diluting profits. There are three key factors to make this a success: strong domestic profitability, a financial institu-tions practice and a partnership culture that is happy with the idea of lateral hiring.
Top of the pile is Sullivan & Cromwell, which has attained 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.
Sullivans strategy is rooted in New York legal advice, but it has recognised that delivering a service in local law has to become part of its global offering. It has recruited 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 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 Euro 100 2004, 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.
Snapping at their heels
Cleary Gottlieb Steen & Hamilton and Shearman & Sterling now have Latham & Watkins and Weil Gotshal & Manges on their tails, with Milbank also threatening. Milbanks move from a more streamlined transatlantic model to investment in local legal capability is significant for such a conservative firm with a focus on partner profitability. But so many US firms have previously found that, once you accept the logic of global expansion, moving into having
a local law capability is a small step.
Milbanks European growth nowhere near matches the growth of the rest of the firm. Much of its revenue rise has come from home. Within five years turnover has leapt 63 per cent and PEP by 55 per cent helped by a ferocious concentration on costs.
Latham is one of the few US firms that 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 Lathams growth in London (although its RPL has been diluted by its French and German operations). The speed of Lathams 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 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.
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.