A decade of flying the Global 100 has left some legal players frazzled while others have become increasingly energised. Here we chart ten years’ performance by the world’s largest law firms
‘We want to be the number one global law firm and, without a strong US component, we won’t achieve that,’ – this comment, made by Linklaters managing partner Simon Davies in 2008, reflects a perennial issue since Legal Business first began producing its own list of the top 50 global firms by revenue in 2004. The tussle between the UK Magic Circle and the Wall Street elite has dominated agendas since that period.
In 2003, the number one firm in the world was Clifford Chance (CC), with revenues of $1.467bn. Move forward ten years and the top firm is now DLA Piper, posting turnover that is a billion dollars higher than CC in 2003. Three other firms now in revenue terms eclipse the UK Magic Circle, all with US origins: Baker & McKenzie, Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom.
However, the biggest single development in the cross-border market is arguably the ascendency of the global behemoths DLA and Baker. In our 2004 report, DLA and Piper Rudnick were yet to merge, and were ranked 38 and 33 in the Global 50 respectively, while Baker & McKenzie came third in the table. Beyond obvious changes – Dewey & LeBoeuf debuted at number 18 in the world in 2008 on the back of the October 2007 merger of its legacy firms, Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, before exiting the table in dramatic fashion last year – little has changed at the top, beyond some subtle variations. Global vereins and UK-driven international giants dominate in pure revenue terms. And if you want to make some serious money, Wall Street remains the place to be.
The tables on these pages track average performance across the Global 50 (and, over the last five years, the entire Global 100 (G100)) across three key metrics – revenue, revenue per lawyer (RPL) and profit per equity partner (PEP). It is a long-haul snapshot that reveals which groups of firms have suffered the effects of global expansion, and which have remained fresh after travelling their chosen routes.
GLOBAL 100 HISTORIC AVERAGES: PROFIT PER EQUITY PARTNER ($K)
The aerial view
Total revenues for the Global 50 have swelled significantly over ten years: in 2003 the combined turnover of the top 50 firms was $30.1bn; by 2013 this has doubled to $59.9bn. As for the G100, between 2008 and 2013 total revenues swelled from $76.2bn to $84.9bn – an increase of a far more modest 11%. This beats average GDP growth worldwide by some margin, which fell to -2% in 2009 and is currently less than 2%, but nonetheless reflects the inescapable fact that law firm growth has been far harder to come by post-Lehman. Unless you are Quinn Emanuel Urquhart & Sullivan.
As for RPL, the average income per fee-earner across the top 50 firms in 2003 was $590,000. Today, it is up by 47% to $868,000. RPL growth across the entire G100 for the last five years is again a wider reflection of the global macroeconomic picture: up 5% from $783,000 to $819,000.
However, one constant of the past decade is that the leading global firms have remained intensely focused on increasing their per-partner profitability. Average PEP among the top 50 was $1,059,000 in 2003, rising to $1,781,000 – up 68%. Across the G100 itself over the last five years, PEP has increased by just 3%, from $1,483,000 to $1,524,000.
The results are stark – the top 50 global law firms as a group have materially pulled away from the next 50 firms since the banking crisis gripped the world economy in 2008 on all major measures.
Splitting the G100 into quartiles, the most pronounced changes in growth have taken place among the upper two bands of 25 firms. The first five years of the past decade were plain sailing: each of the four quartiles following closely comparable upward trajectories as the boom years in the lead up to the credit crunch in 2007 provided benign conditions. Then the problems began. In terms of revenue growth, the first quartile of firms judged by revenue have shown the most erratic growth, with a huge plunge in average income growth between the 2008 and 2009 financial years (reported in the 2009 and 2010 G100 surveys). Given that many of the firms in the top quartile are what Legal Business loosely defines as ‘global elite’, a club of 15 of the most potent international advisers, this was inevitably going to be the first group of firms to feel the pinch as M&A work dried up and investment banks retrenched. It is interesting to note the trickle effect on firms lower down the G100 table: the second, third and fourth quartiles in revenue terms all experienced essentially flat revenues between 2008 and 2009, while the upper quartile shot up again in the same year. It was the national US and second-tier non-US international firms that occupy the slots between 51-75 in the table that started to feel the effects of the global financial crisis more keenly as business confidence waned, lending dried up and new infrastructure and real estate development ceased.
This trickle effect is more clearly pronounced on examining the engine room metric of law firm financials: RPL. The upper quartile of firms experienced a sharp dip in RPL between 2007 and 2009, while the second and fourth quartiles did not experience a significant drop in RPL until the 2010 financial year. There are two separate reasons for this. The second quartile, which contains Wall Street elite firms Simpson Thacher & Bartlett, Paul, Weiss, Rifkind, Wharton & Garrison and Davis Polk & Wardwell, as well as Slaughter and May, has generally been more resistant than any other quartile. At the bottom end, the third and fourth quartiles are the most changeable of all the groups with firms continually falling out of the top 100, often being replaced by firms in the ascendency.
The PEP line graph is predictably more erratic than those for revenue. None of the quartiles have seen significant growth in PEP since 2007. The strongest performer in recent years has been the fourth quartile, with PEP increasing from an average of $940,000 in 2008 to $1,064m in 2013 – an increase of 13%.
Solid states
As mentioned above, the second quartile has been the strongest overall performer across all three metrics – largely because of a strong contingent of high-performing US law firms. Contrast two statements this year from second quartile firms from either side of the Atlantic, Herbert Smith Freehills (HSF) and Paul Weiss, and the difference in outlook is clear.
‘It’s about repositioning the firm for the long term,’ says Jonathan Scott, senior partner at HSF. ‘If I stand back, ten years ago we missed the boat in Europe and we did the next best thing with the alliance which wasn’t good enough. It is very important to position the firm to take advantage of the opportunities that will arise in the Asia-Pacific market.’
Compare this with Brad Karp, chair of Paul Weiss: ‘It was another record-breaking year in 2012 – record-breaking revenues and profits across the firm in all areas. The first half of 2013 has been even stronger, with growth fuelled primarily by both our litigation and transactional practices.’
In many ways Paul Weiss, generally regarded as one of the top litigation teams in the US, is the poster child for the resilience of Wall Street’s elite. Revenue at the firm has more than doubled from $409.5m in 2003 to $877m and even in the last five difficult years its progress has been impressive, with turnover increasing by 35% during this period.
The collective might of the US advisers is made even clearer in the graphs when you compare the performance of the Magic Circle with a cadre of elite Wall Street firms: Cleary Gottlieb Steen & Hamilton; Cravath, Swaine & Moore; Davis Polk; Latham; Paul Weiss; Simpson Thacher; Skadden; Sullivan & Cromwell; Wachtell, Lipton, Rosen & Katz; and Weil, Gotshal & Manges. While the Magic Circle experienced significant falls in revenue between 2008 and 2010, their US counterparts only experienced very moderate dips as a group over the same period.
Looking at RPL and PEP, the gulf between the two groups of firms is remarkable. Disparity in average RPL between Wall Street and the City is at its highest level this year – well over half a million dollars and the gap has progressively widened in the past decade, despite temporarily closing during 2006 and 2007. In 2004, average RPL among the Magic Circle was $507,000 while in the US it was $723,000 – a difference of $216,000.
In PEP terms, how the gap has widened has been remarkable. Between 2005 and 2008, average PEP – fuelled in part by favourable currency conditions that saw more than $2 to £1 – rose stratospherically among the UK elite, from a little over $1m to near parity with Wall Street at $2.7m. Since that brief hiatus, normal service has resumed and the New York leaders have maintained partner profits at consistently higher levels, peaking at close to $3m today. After a sharp dip, the Magic Circle has rallied somewhat but in 2013 the average gap in PEP between a broadly comparable US practice and its opposite number in the UK is touching $1m.
The reason for the resilience of US firms – beyond the fact that they have the world’s largest economy in their back yard – is largely down to the fact that the UK firms have travelled as wide as Berlin and Beijing but have largely failed to crack the US market effectively. This has been aggravated by a generally stronger post-Lehman run in the US economy in comparison to Europe.
Asia is attractive but it is not yet the market that really counts. In 2003 Legal Business wrote: ‘The English might not have cracked New York but on the international stage they represent serious competition for the Americans.’ This still holds true today. But the international stage has yet to deliver the same level of return as New York, even today. While Freshfields Bruckhaus Deringer and CC may argue that they have built credible disputes practices stateside, they are still a long way from making a dent in the coffers of US rivals.
‘The UK firms have not managed to crack the US legal market, which is the biggest market for legal services in the world,’ says Andrew Moyle, London partner at Latham and a member of the firm’s executive committee. ‘It’s been a sluggish market across Europe, which places enormous pressure on firms that don’t have diversified practices and a global integrated platform.’
The other area, touched upon in the overview to this report (indeed the year-on-year trends of the G100 reflect the past decade as a whole – see ‘In the club’, page 42), is the prominence of litigation among US law firms. While no-one can doubt the strength of Freshfields’ and CC’s international disputes practices, it is litigation in the US that has been driving much of the growth.
‘Our current business cycle is somewhat unusual in that both our litigation and transactional practices have been running on all cylinders at the same time,’ says Karp. ‘Generally, as a result of market conditions, one practice area outpaces the other. But for the past few years, both of our primary practice areas have been on a record-breaking pace.’
Chris Saul, senior partner at Slaughter and May, says that litigation is undoubtedly a factor, even deal machines such as Cravath and Wachtell have strong litigation practices. ‘Litigation is hardwired into the States in a way that it is not elsewhere in the world. For whatever reason (and the absence of a “loser pays” approach must be a factor) litigation is much more of a component in business life in the States. Thus, and in addition to traditional disputes, there is significant litigation associated with M&A, there are class actions and there are significant regulatory disputes,’ he says.
Staying at home
A review of the data shows that the domestic US economy has been a boon to elite US firms and while Latham and Skadden have undoubtedly enjoyed considerable success on the global stage – particularly in London – it is the immovable might of New York that plays the most significant role. However, UK-based international firms may, with a tinge of hope, ask how long this will last.
‘I suspect that purely domestic firms will have to change their strategies by growing internationally or shrink over the next ten years,’ says Ted Burke, chief executive of Freshfields. ‘You can already see that some have decided to shrink.’
Moyle agrees: ‘We will see greater stratification in the market – there will always be a handful of elite firms that never have to step out of Wall Street that will continue to operate the way that they are given the size of the market and the heritage position they occupy.’
Indeed, long-term trends suggest that the extreme version of the Manhattan-focused model is coming under pressure, with firms like Cravath and Wachtell falling down the US and global rankings and facing a stronger challenge from more broadly-based, larger and internationally-minded US rivals. Firms with this internationalist outlook can now be said to cover a very broad base of practices including Sullivan & Cromwell, Latham, Kirkland & Ellis and Quinn Emanuel.
However, the US has buoyed the Wall Street elite so far and John Quinn of Los Angeles-bred Quinn Emanuel recognises how important his home market has been, even as his litigation-only über boutique embarks on aggressive expansion into Asia.
‘It’s hard to argue with success,’ he says. ‘On a profits per partner basis, I’m guessing eight of the top ten firms in the world will be traditional. On the other hand, very few have shown a real global strategy but their success makes you wonder, is a global strategy really necessary? The market in the US is so big it dwarfs the rest of the world. Why have the Magic Circle firms promoted offices around the world? It’s because the US market is small in comparison to the US and London is saturated. These firms had to expand in this way. And this is not true of Sullivan, Cravath, Simpson Thacher and Davis Polk. New York is the financial capital of the largest market in the world and the US market as a whole has become more New York centric in the last 20 years. You can criticise that they don’t have a global strategy but do they really need one?’ LB
mark.mcateer@legalease.co.uk