Kevin Wheeler, principal, Wheeler Associates
The magic circle’s spell remains unbroken
21 September 2009
25 February 2014
3 July 2013
14 June 2013
27 November 2013
22 April 2013
In June 2008, I wrote a piece for this column entitled ‘Eversheds: green-eyed or just naive?’.
The subject was Eversheds’ recently published report ‘The Law Firm of the 21st Century’ which attempted to forecast what the legal landscape might look like in ten years time. In my opinion the research results had been ‘spun’ to create the impression that over the coming years, clients would be deserting magic circle firms in their droves for firms such as Eversheds, all because the latter provide “better value for money and better client service”.
I argued that while Eversheds and other national firms had indeed taken much legal work from London lawyers over the preceding 20 years, there was a limit to how far this migration would go. Yes, a FTSE 100 company or a major financial institution may use an Eversheds or similar firm for property, employment or IP advice, but when it comes to a ‘bet-the-company’ issue, these clients will turn to the magic circle even though it will cost them more. And why do they do this? Because the magic circle employs the best legal minds, has lawyers experienced in the largest and most complicated transactions, and has the most extensive global resources at its disposal.
I thought it would be instructive to look at the impact the recession has had on the predictions made in the Eversheds report. You might have predicted that the pressure to reduce legal fees would have been so great that the resultant flood of work migrating from the magic circle to Eversheds and similar ‘better value’ firms would have shown up in their respective performances over this period. In fact, if you look at the results published in The Lawyer UK 200 Annual Report 2009, the opposite has been true: the performance of the magic circle firms (with the exception of Clifford Chance) has held up remarkably well, while Eversheds et al have had a torrid time.
Eversheds has seen fee income fall 6 per cent during 2008-09, while profit per equity partner (PEP) was down 27 per cent and the firm has just announced consultations on its fourth round of redundancies since the recession began. While the magic circle has not been immune from restructuring, it is still producing PEP of more than £1m (with the exception of Clifford Chance) and turnover has held up well.
The key to the magic circle firms’ success is the quality of their client bases. If you are acting in a lead advisory capacity for predominantly blue-chip corporates, major financial institutions and government, you will have been insulated from some of the worst ravages of the recession. These big organisations will always need help and they will always be prepared to pay for it. This is illustrated by HM Treasury turning to Slaughter and May for help on the banking crisis, Linklaters’ involvement on the administration of Lehman Brothers and the news of Clifford Chance’s appointment to advise Kraft on its takeover of Cadbury. Having a strong international dimension to your business also helps.
By contrast, the national firms are wholly or predominantly reliant on the UK domestic market, on the mid-market and smaller companies that have been hardest hit by the recession.
This ‘flight to quality’ that we are seeing in the legal market is replicated in most other professional services markets, with a handful of global players dominating each of them. The UK’s four biggest law firms will undoubtedly strengthen their positions during this recession.
However, their emergence among a global elite will only be truly achieved when they crack the US market, which can only happen through merging with leading US law firms.