Comment

Magic Circle v US firms: A moot point

By on
29

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.

Apply now for the final Legal Cheek Virtual Law Fair of 2022 on Tuesday 22 November

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).

RankingTop 5 UK firms by PEPTop 5 US firms by PEP
1Macfarlanes (£2.48 million)Kirkland & Ellis (£6.03 million)
2Freshfields (£2.07 million)Davis Polk & Wardwell (£5.91 million)
3Clifford Chance (£2.04 million)Sullivan & Cromwell (£5.27 million)
4Allen & Overy (£1.95 million)Latham & Watkins (£4.65 million)
5Linklaters (£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 partnersFirm
>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.

Apply now for the final Legal Cheek Virtual Law Fair of 2022 on Tuesday 22 November

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.

For all the latest commercial awareness info, news and careers advice:

Sign up to the Legal Cheek Newsletter

29 Comments

Anon

Unless the Magic Circle starts to cough up more cash, or the US firms slash salaries in the upcoming recession, then the US firms will continue to take the most high-end work and talent. The Magic Circle isn’t going away any time soon and will continue to at the top of the market, but they are losing market share and US firms will soon become the top places for transactional work in the City.

Another great article by City Insider!

Anon

I think the issue is more that MC are losing serious talent across the associate/senior associate level. Some of those people would have gone on to be partners and suited the job perfectly as they were house trained and knew how the firm worked and it’s clients well so there is a pipeline problem forming. This will lead to partner standards slipping which is something they will only feel in the next decade.

Anon

Does anyone at a MC firm have anecdotal evidence of this occuring in their team?

MC ass

Very mixed bag in my experience. We lose some really good associates to US firms, but also all of our shittest associates go to US firms too. There’s a huge gap between people who leave for proper shops like Latham and those that go to the joke places. Lots of excellent associates stick around.

Tutut

Dream on. Associates are hour fodder. The associates that jump to US firms all the more so.

Anon

Why is nobody discussing the stealth layoffs and hiring freezes from US firms currently occurring in transactional departments?

Anon

What are you on about recruiters are blowing up phones every day advertising jobs at milbank, Latham, Kirkland, stb just to name a few – across all levels and depts

STB 2PQE

US firms are not currently recruiting, especially in LevFin and M&A. The only teams hiring are Disputes and Restructuring.

Anon

Check LinkedIn moves in a few months. US firms always do big stealth layoffs when there’s a down turn in work (which is happening in some transactional depts due to market), and we’re heading for a big recession. Much more cut throat in the US firms and much greater chance of being made redundant (at all levels).

US doyen

I can confirm that stealth layoffs are happening across the board within elite US firms. Lev finance and PE are at risks.

Ex-MC US associate

You are in total denial.

One of your key points is that US firms have a lot of attrition at senior levels. You use the example of K&E even though they are an outlier as you automatically become partner at 6PQE. This is not how it works at other competitors like Latham & Watkins, STB and Skadden. If anything, it’s MC firms who are weak at this point. Why be a senior associate at an MC firm when you can double your pay (including bonuses) from around £180k to £350-400k at a Cravath US firm? And the MC experience a lot of very good junior partners leaving because they are still tied to a (modified) lockstep system whilst US firms can offer them much higher pay so long as they bring in the profits.

Your suggestion that the MC are going to properly break into the US is also laughable. The US firms have deeper pockets (hugely important for attracting key partners and associates), relationships built over decades and offices all over the US instead of just a handful. Firms like A&O are having to reduce UK salaries to fund their US expansion plans. It’s not going to work in the US and they’ll have weakened themselves further in the UK as partners and associates move for higher pay.

The Magic Circle have no right to be the top firms in London just as much as Liverpool/Man United don’t have the right to be the top football team in the UK. Believe it or not, a journalist’s categorisation of the top London firms from the 1990s can and will change. Wake up and smell the coffee.

Anon

I disagree with the conclusion, but agree with the point the current situation isn’t necessarily the MC firms’ fault.

The key advantage of US firms isn’t their partnership model or PE focus particularly, it’s that, as the name suggests, they generate most of their revenue in America. And for decades now the US economy has outperformed the UK economy.

The MC partners aren’t head in sand idiots who don’t get this, that’s why they keep trying to break America. The problem is, the Americans already stitched it up.

Yes, MC partners have at times been guilty arrogance, but that’s hardly in short supply in US firms’ partnerships either. Rather the MC have been done over by macroeconomic changes far outside their control.

“Money is green. Money says In God We Trust. Money has the picture of a dead American on it because money comes from America”

Anon

Not exactly correct.

2022 London only office revenue figures (as reported in the times):

Latham: £270 million

Kirkland: £258 million

Linklaters: £254 million

CC: £200 million

A&O: £195 million

Anon

But those are recent figures. It’s because of their underlying US strength that US firms had the cash to set up in London in the 2000s and start offering market beating salaries, which they have built on to be where they are today (and they still generate a far higher proportion of their profits in America, it’s just their profits are much higher than the MC)

MC firms were trying to do the same in New York at the same time, but they simply weren’t generating enough home market revenue to go in and pay significantly over Cravath scale, so they were squeezed out by the established players.

?

Link?

Good line

Where is that quote at the end from

Kirkland NQ

The numbers don’t lie. If you don’t have a Lambo on the drive you’re a nobody these days.

Anon

25 stealth layoffs (corporate associates) in Kirkland’s Texas office last week

Anon

And …? K&E’s Austin / Houston offices are far more in the kind of satellite offices than the London office at this stage.

George Bush

Yeehaw. Irrelevant.

Loko banana

Stealth layoffs will likely occur within a band 1 sponsor finance firms shortly – no one is near 80% utilisation which is, frankly, worrying.

Anonymous - NOT a Lawyer

Surely another reason for the disparity in solicitor pay and partner PEP at the MC and US firms is the perks? From my understanding (which, admittedly, is limited), MC firms tend to have far more perks to offer than US firms. I know of several MC firms that have swimming pools, sauna’s and spa’s, 24/7 doctor’s and dentists, concierge, sleeping pods etc all in the office. Whereas, I believe US firms tend to do the minimum with having a doctor around and perhaps concierge and that’s it (of course, both types of firm also do parties and getaways). When combined with the fact that US firm lawyers tend to bill more hours, then of course the MC firms will lag behind. They must have much larger overheads with funding all of these perks, which is coming out of the solicitor/partners pay at the end of the day, with less revenue per lawyer to start with. And especially when you multiply the excess overheads by however many offices they have, pretty soon you end up with a gulf of difference in operating costs between US and MC firms.

Anon

This has to be the stupidest comment on here. At my MC firm we get a measly £10 for dinner credit if working late – at American firms it’s triple that. They get business class 5 star trips to New York for their associates conferences while at most we get an away day in slough if we’re lucky. Their health and dental coverage is much better, some of them even give 10k as a bonus just to travel somewhere for a week. Oh and they get paid double the salary on top. Shall I continue?

MC Donald

Which MC are you at? We get £20 for dinner at my MC shop. You are being fleeced!

James

Hahahaha how much did Clifford Chance pay you to write this one

Bananaman

MC firms are like Mercedes/BMW (solid, no frills), while elite US firms are like Aston Martin and Rolls Royce (prestigious and premium). Both are excellent products, but with notable differences. As a senior at an elite US firm, I can confidently say that MC firms’ prestige is fading rapidly. Clients care about the quality of our service, and MC firms’ quality is slipping after losing a large number of excellent associates to US firms for the money (primary reason) and the entrepreneurial culture.

My firm is a band 2 practice but everyone is either trained at MC firms or from US/Australia with fantastic CVs. We regularly win work that is traditionally handled by MC firms. Our associates are hungry and ambitious – beyond mere hard work – and that is what makes US firms successful.

Anon.

Spot on. I’d add that MC partners and associates are in denial. The self-assured hubris amongst MC partners will eventually result in the demise of what used to be the gold standard of our legal industry. Many MC associates have failed to exercise independent judgment of the situation or lacked the courage the jump the boat. Then again, US firms do have high recruitment standards and not every MC alumnus can get in (and doubtless it depends on the practice area too).

cringe overload

My mans just compared his firm to a Rolls Royce 😂😂😂 cringe alert??

“”Oo we won some work from the MC” well done lad do ya want a medal 🏅 👏

Fresher alert 🚨 🚨 🚨

Future MC trainee detected – someone has gotten chippy.

Join the conversation

Related Stories