Route to the top
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18 October 2013
Is size everything or is success simply a matter of focus? Leo Schulz reports on the strategy of the leading firms. The leading firms in this year's Top 100 are much the same as those which appeared in our first survey 10 years ago. Clifford Chance, which had at that time only just merged, was and remains the largest firm. Linklaters & Paines and Slaughter and May were second and fourth in terms of fee earners, while Freshfields was fifth.
What has changed is the extent to which these firms have increased their dominance. In 1987 they were the leading players in a field of 10 or 12 top City firms. But increasingly the 'Big Five' - Clifford Chance, Linklaters, Freshfields, Allen & Overy and Slaughters - have formed a distinct 'super-group', leaving the rest to redefine themselves as a new second tier.
"The leading five firms have opened a real gap - not just a gap of perception - between themselves and other firms," says Terence Kyle, managing partner at Linklaters.
This leads to the question, how have they done it? But what may be more important is the response of other firms, not only those in the second tier, such as Nabarro Nathanson, but middle-ranking firms such as Addleshaw Booth & Co or Wragge & Co, which may see opportunities for themselves in a shake-up at the top.
The Big Five firms attribute their success to having pursued strategies which are not merely different but directly opposite and mutually exclusive.
Size matters, of course. A place in the first rank implies the ability to follow multinational clients across jurisdictions to business centres in continental Europe, the US and the Far East. It also means bringing together working groups across a variety of specialisms.
But size is not everything. National firm Eversheds, with its 1,142 fee earners putting it second in the league table, is not considered a Big Five firm, while Slaughters, with around half that number, most certainly is. Slaughters admits it is not among the "very large" firms, but insists that it is big enough to field large teams, citing its work on UK electricity privatisation as an example.
What Slaughters has that Eversheds does not is what Kyle describes as "a concentration of involvement in premium areas of work".
According to Kyle, an often disregarded key to gaining access to premium work is tax expertise. Slaughters, Linklaters and Freshfields can all claim skill in tax structuring. Because of its importance to clients and many transactions, it provides a link to other, often more lucrative and exciting, work such as mergers and acquisitions, corporate finance and capital markets.
All this is common ground. Where views differ radically is on the issue which some firms insist is the key to success - and which others say is a distraction - internationalisation. Linklaters and Freshfields assert that internationalisation has been what "opening the gap" has been all about. Slaughters insists that its success has come from focusing on English law.
Georgina Stewart, a spokeswoman at Freshfields, agrees on the importance of globalisation in drawing the Big Five ahead of the pack. "It stems from the decision that Clifford Chance, Freshfields and other firms took some years ago to expand out of the UK. In our case it has been organic growth, so it has been slow."
According to Kyle, the importance of internationalisation is that it follows the trend of big business to globalise, while creating the chance of "hooking overseas clients at source".
"Professional services can only follow their clients," says Kyle. "And what the clients want is service in many different jurisdictions."
It is also a means of keeping ahead of the new, ambitious firms jostling their way up and into the top 20. "There is always competition coming up, and the UK is a small, static market," says Kyle. "There is nowhere to expand but overseas."
However, Giles Henderson, managing partner at Slaughters, disagrees. "We are believers that what we have to offer is expertise in UK law - supplying advice on UK law all around the world," he says, pointing out that UK law is used second only to US law in international financial transactions.
He concedes that no two firms are alike but says there are a number of reasons for not setting up offices overseas. "One is that clients will know or will want to know the leading lawyer in that jurisdiction. Another is that it is difficult to recruit lawyers trained in a different system. Consistent quality of service is fundamental to success and we take very great care in selecting our partners, all of whom will be UK lawyers by definition and most of whom we will have trained ourselves."
According to Alan Hodgart, a management consultant at legal practice specialist Hodgart Temporal, the problem for second-tier firms trying to make up the ground between them and the Big Five is a lack of focus. "They try to sell themselves as full-service firms and the market doesn't believe them," he says. "The Big Five don't sell themselves as experts in all areas. They concentrate on two primary areas which then suck in other services."
David Bramson, managing partner at Nabarro Nathanson, a leading second-tier firm, agrees on the need for clear direction. "You can't be a mid-to-large firm without knowing where you're going," he says. "But there is a place for us. I don't think accountants and US firms would be coming in unless there was business here."
Bramson believes smaller firms can compete on the quality of their lawyers. He says: "There are four or five firms which are drawing away, and that's fine for them. But they produce lawyers who are clones. What firms like ourselves can do is give people the opportunity to get close to the client, to react quickly, to be involved rather than just one member of a large team."
One strategy which Hodgart Temporal appears to admire is that adopted by Wragges. There are two aspects to it. On the one hand, the firm aims at all-round dominance on its home turf of Birmingham. On the other hand, it aims to compete nationally in a small number of industry areas, each of which arises either from the concentration of that particular industry in the Midlands. The convenience of Birmingham's geographical location in the centre of the country also leads to a lot of property work.
"We can't compete with Clifford Chance or Slaughter and May," admits Wragges managing partner Quentin Poole. "Our place is to act for listed companies in the Midlands area. Within that, we have the opportunity to be leaders in four or five specialisations on a national basis."
And according to Poole, an important aspect of the strategy is organising the firm on cross-disciplinary lines by industry group. "The issue is understanding the industry," he says.
Merging is one route that many firms have seen and still see as a means to move forward. Dibb Lupton Alsop and Cameron McKenna, both of which have vaulted into the top 100, are just two examples. "Everything has to be on the agenda," says Bramson. "But it is a mistake to do it just to get bigger."
One recent merger which appears to be working is that between Addleshaw Sons & Latham, a Manchester-based firm, and Booth & Co, based in Leeds, to form Addleshaw Booth, ranked 14 in the survey, one place behind Nabarros.
According to managing partner Mark Jones, the merger allows the new firm to pitch for business that would have been beyond the grasp of either of the pre-merger firms. "It gives us a combination of experience and a depth of resource that neither firm would have had on their own."
Jones sees the new firm's natural franchise as being the FTSE 250, rather than the upper half of the FTSE 100 "We have got a good number of very capable lawyers - better than their counterparts elsewhere - and we have to demonstrate that to our clients," he says.
The dilemma, of course, is that although second-tier firms do not have the "concentrated involvement in premium areas", with cost bases of around £100,000 per fee earner before salaries, neither do they have the luxury of competing on price.