In 1986 Goldman Sachs became the first US bank to appear in the top 10 UK M&A league tables. Fourteen years later Citi bought Schroders’ investment banking business and the US banks now dominate the scene. At some point during that period the top undergraduates started to apply for jobs at Goldman Sachs instead of Warburg, then the leading Merchant Bank in London.

US law firms have been a material feature in the top 10 UK league tables for some time now and although there has been no Citi/Schroders moment there is no doubt that today’s undergraduates are flocking to US firms.

For all the strengths and training the English firms offer we are sensing a growing appreciation among undergraduates of the opportunity, excitement and challenge that US firms can deliver. In particular, the US model of fewer associates per partner creates a more entrepreneurial environment with more access to partners and clients. And US firms are now permanently and securely established in London.

Eagle vs lion

The magic circle’s problems

The macro trends are clear but we are also seeing an interesting narrative playing out in the minds of some successful partners at Magic Circle firms. A typical example will be aged just over 45. He or she is yet to reach the top of the lockstep but is doing well and is highly regarded by management. They are not particularly driven by money – but it does rankle that the previous generation will have enjoyed several years at the top of the equity by that age.

They are a bit anxious about the growing competition the US firms are presenting in London. They worry about a lack of deep US capital markets capability. And realise that they will never be able to support clients when the US Department of Justice comes knocking. For the moment, these issues are manageable.

Perhaps of more concern is that English law firms’ access to US clients is diminishing. Inbound deals from the US, including public M&A which was once the preserve of the top English firms, are now more often than not handled by US firms in London. That represents a big chunk of high margin business that has been lost by the UK firms.

Closer to home, they are under increasing pressure to bring work in and pass it to younger partners – let alone associates. The much higher associate leverage at English firms requires more systems and bureaucracy. There are lots of non fee-earning partner roles.

Then, driven by the requirements of the lockstep model, their friends, no more than five years above them, are beginning to be tapped on the shoulder and shuffled out the door.

Over the road at the US firms the technical tool box is complete – US capital markets is a given and experience of the DoJ is a differentiator that gives access to the most senior levels at clients. US clients who prefer working with US firms are more accessible. There is no expectation of retirement until the mid sixties and a real appreciation of the value of experience. The US firms are more lightly managed with far fewer partners in non-fee earning roles. Finally – and it is finally – they are likely to pay more.

Even if this partner chooses to stay (“five or six more years will do me fine”) the younger lawyers in their group have a different calculation to make. They have a whole career ahead of them. How does one build a team when the best younger lawyers are drifting away? One Magic Circle firm reportedly has only five lawyers left at two years PQE out of the 100+ who joined as trainees.

Finally there is currency. The recent profit growth of UK firms was significantly driven by the drop in sterling, and against the US dollar all the UK firms are likely to show a fall in both revenue and profit. Even if that matters less for London based partners, the 60 per cent plus of partners at Magic Circle firms who work outside the UK have suffered a 15 per cent drop in pay since June 2016. In US firms partners and lawyers are paid based on dollars so their higher pay relative to the English firms is not increasing costs. In the competition for talent a weak sterling really matters.

The pressure is on

There is no question that the Magic Circle firms remain strong and powerful institutions. But the pressure is on and the changes they are making to their profit sharing systems to tackle the US threat will bring huge cultural challenges.

They are discovering the lessons other firms in London learned as they faced pressure from the Magic Circle themselves. The time and distraction of a new compensation system is significant and invariably leads to resentment and disaffection among many important partners. It takes a long time to learn that a well managed merit based system is nothing like the same as an “eat what you kill” system. It is not the system that is disruptive, it is the change.

As a result people become defensive and confidence falls. Anxiety about who may be thinking of leaving will grow. Frustration with bureaucracy increases as more time is spent looking inward.

Ironically it may be the very changes that are being made to ward off the US firms that are likely to accelerate the shift of talent.

Charlie Geffen chairs the corporate practice at Gibson Dunn & Crutcher in London and was previously senior partner at Ashurst.