City Insider takes issue with a recent market report comparing the elite quintet to ‘a room full of millionaires that refuse to believe that their business model is in trouble’
This week Legal Cheek reported on a new piece of “thought leadership” by Ince-owned corporate advisers Arden. Its analysis of the Magic Circle and what the future might hold for the elite quintet, was eye-catching to say the least.
The report likens the Magic Circle to “a room full of millionaires that refuse to believe that their business model is in trouble.” Although the analysis suggests that the fate of the UK’s elite corporate law firms is far from certain, it does affirm that “they probably don’t have the right answer” to the challenges that lie ahead.
So, what exactly are these challenges? And have they been overstated in this research?
The report starts off by comparing the demise of UK investment banks in the face of US competition to the Magic Circle’s situation today.
Banking’s ‘Big Bang’ was caused by a major regulatory shift in 1986 that brought the traditional banking system and the securities industry closer together, enabling large US banks to capitalise on the momentum they had been building up in the previous decade.
Since then, the report states that “US banks’ commanding position in their home market has given them the financial firepower to hire the best dealmakers and the resources to invest in Europe”, completing the hegemony of American banking that exists today.
The message appears to be that a similar fate awaits the Magic Circle, but just without the suddenness of the ‘Big Bang’. A lack of transatlantic strength and less attractive pay packets could see the Magic Circle’s stature relegated below their US rivals.
This problem facing the Magic Circle is apparently worsened by the steady development of the Big Four. The researchers allege that whilst US competitors are eating into their high-end work, the Big Four are taking some of their market share for mid-tier mandates, squeezing the UK elite from both sides.
Arden are not alone in arguing this. Just yesterday Christopher Saul, former senior partner at Slaughter and May who now runs Christopher Saul Associates (a consultancy business), drew the same comparison to banking in 80’s and highlighted the same arguments that the Arden researchers have done here.
This analogy to US banking is, to my mind, overly simplistic. Whilst the researchers have picked up on some interesting trends, the report just scratches the surface, providing an incomplete analysis of the facts and the current position of the Magic Circle.
First, let’s take a look at the much-lauded size of the heirs-apparent to the City legal market’s throne. The researchers contend that “size matters”, citing a range of metrics including UK revenue growth, UK corporate revenue growth, and profit per equity partner (PEP).
|Ranking||Top 5 UK firms by PEP||Top 5 US firms by PEP|
|1||Macfarlanes (£2.48 million)||Kirkland & Ellis (£6.03 million)|
|2||Freshfields (£2.07 million)||Davis Polk & Wardwell (£5.91 million)|
|3||Clifford Chance (£2.04 million)||Sullivan & Cromwell (£5.27 million)||4||Allen & Overy (£1.95 million)||Latham & Watkins (£4.65 million)|
|5||Linklaters (£1.87 million)||Debevoise & Plimpton (£4.14 million)|
The strongest statistic to back up Arden’s claims is the changing of the guard in the top 50 firms by UK corporate revenue growth. US firms have turned the tables on their UK counterparts here. In 2020, UK firms outnumbered US firms by 27 to 23. Now, the reverse is true (27 US to 23 UK). Furthermore, Latham & Watkins topped the charts on corporate practice revenue for the first time.
Whilst certainly significant, this does not necessarily mean that the Magic Circle have been knocked out of the City elite for good. Factors such as a particularly bumper year for private equity (PE) deals should be kept in mind, especially given that many of these US firms’ USP is being a ‘one-stop shop’ for PE.
The stats do not point to a slow down in work for firms being shunted down the list — financial results for 21/22 were very strong. Rather, the unusual post-pandemic economic environment perfectly suited US firms’ strengths. Now the economic winds are blowing in a different direction, it remains to be seen if US firms can maintain their position as the emphasis shifts to disputes, and restructuring and insolvency work.
Arden’s use of PEP as a benchmark for heralding a new era of US dominance is, in my view, one of its weakest arguments. It doesn’t address different partnership structures, with US firms operating a two-tier system of salaried and equity partners, whilst the Magic Circle (to greater and lesser extents) have far more equity partners.
|% of equity partners||Firm|
|>90%||Slaughter and May,Freshfields Bruckhaus Deringer, Linklaters, RPC|
|70%-90%||Allen & Overy, Burges Salmon, Clifford Chance, Herbert Smith Freehills and Taylor Wessing|
Rather than a sign of US dominance, I would argue this instead showcases one of the US firms’ greatest weaknesses. Whilst they are dangling a lot of money under the noses of ambitious graduates, they are experiencing real retention problems at more senior levels in large part due to how tightly guarded their equity partnership is.
The cohorts of new partners from 2008, 2009, 2012 and 2013 at Kirkland & Ellis, for example, have all left, according to The Lawyer (£). This leaves a gulf of 20 lawyers with around a decade and a half’s experience that needs to be filled by lateral hires; a real problem if the firm cannot get enough replacements or improve partner retention rates.
And this likely stems to a certain extent from US firms’ culture of ‘working as an individual’. As I have explained before, the ‘eat-what-you-kill’ model — whereby partner compensation is based on the revenue they generate for the firm — is pervasive in elite US outfits. You need only look as far as the recent decision by Boies Schiller to offer its UK associates a choice between a fixed salary and meeting your 2,000 billable hour target, or get paid in line with the number hours worked for proof.
This is an inherently riskier model that can yield improved productivity and therefore larger profit margins. But, equally, a more individualistic, money-centric culture can collapse in the face of adversity and in-fighting (the demise of Dewey & LeBoeuf is a good reminder of this). The report pays no attention to this cultural divide that exists between elite UK and US firms. Yes, big money may be more attractive to graduates, but if these firms struggle to retain their senior lawyers, it will cost them more in the long run.
There are then two ‘what if’ arguments that Arden’s researchers says will damage the Magic Circle. By contrast, and with respect to those behind the research, I believe that the evidence points to the opposite conclusions.
The first is that the Magic Circle doesn’t have a “credible US presence”. It is not yet clear whether the Magic Circle can make serious in-roads into the US market. But, as I have pointed out before, the elite quintet are clearly up for pushing the strategy to its maximum, breaking their lockstep systems in order to play the Americans at their own game. Allen & Overy is most clearly demonstrating this shift — it generated over half of its global revenue growth from its activities in the US which is now home to more litigation partners than in the UK.
It’s hard to predict what the future holds (Britain’s economic turbulence certainly hasn’t helped). However, I am inclined to lean more on the side of Nick Crasner, strategic advisor to the boards of US law firms, who last year made the “bold claim” that “the UK Magic Circle is on the brink of a golden age of expansion into the USA. Between 2022 and 2027 they will, finally, break into the US market”.
I feel more decisive on the second “what if” argument. That is the contention that the Big Four are seriously threatening the Magic Circle’s market share on mid-tier work. PwC’s UK head of legal Teresa Owusu-Adjei, who is not herself a lawyer, has admitted to not viewing traditional law firms as her primary target but rather hopes to open up new legal revenue stream with a more tech-driven and integrated approach.
Again, look at what Nick Roome, UK head of KPMG Law has to say: “If clients just want a stand-alone piece of legal work, they can certainly come to us for it, but the chances are that they already have established relationships for it. So where is the reason for them to work with us?”. Roome’s answer is that the likes of KPMG offer an integrated approach with the aim of becoming “the most technology-enabled legal services practice on the planet”.
It would be amiss to not mention that the Magic Circle and many others are also investing large amounts into their legal tech offerings. Clifford Chance has its Applied Solutions business, A&O has Fuse, Linklaters has CreateIQ and there’s also the Freshfields Lab (amongst other things). Far from having it all their own way, the Big Four are trying to open up a new, more tech-focused legal revenue stream and have the uphill battle of taking on the existing players who are also racing to do the same thing.
All in all, the weathervane on the future of the City is not indicating the Magic Circle will need a requiem any time soon. Yes, their unique features may be less clear to aspiring solicitors than they were in the past. But to compare the demise of British banking in the face of a new US hegemony to the Magic Circle’s circumstances ignores the US elite firms’ flaws, how to properly evaluate “size”, and UK elite firms’ US strategies.
The future remains far from certain, but the Magic Circle are not on the verge of being dealt a deathblow by their US rivals.
City Insider has keen interest in all things City law.