Reversal of fortunes – A decade-spanning view of the Global 100

Back in 2007 UK-based firms were living large on a boom in the City and sterling. A global financial crisis and currency turmoil then changed the narrative fundamentally

In the summer of 2007, the proverbial had not quite hit the fan yet. The global economy was still riding high on the back of the boom years of 2005 and 2006, and it was not until July 2007 that Bear Stearns reported that two of its hedge funds had imploded. Lehman Brothers was still very much in business. The first iPhones went on sale at the end of June. And, in stark contrast to today, City-backed law firms were dominating the Global 50.

With sterling at its highest level for 15 years (one pound would get you two dollars in 2007) the Magic Circle cast a long shadow in our Global 50. While the centre of gravity of the Global 50 was unquestionably in New York, the UK-based international firms were riding high as London boomed as a financial centre. Linklaters’ then managing partner Tony Angel told Legal Business: ‘We have reached the point where we can say without hesitation that the strategy of globalisation has paid off.’

Clifford Chance led the way and – along with Linklaters – became the first-ever $2bn-plus law firm. The fact that both now have lower revenues a decade later demonstrates the stark impact the banking crisis and turmoil on foreign exchange markets has had since then.

The four City-bred international leaders have since managed considerable revenue growth in their home currency over the last ten years, albeit at far slower than the rates sustained during the 1990s and most of the 2000s. Allen & Overy has seen revenue increase 71% from £887m to £1.519bn in its home currency during that period. In dollar terms, that growth is just 23%. While currency fluctuations often even out because international firms bill in multiple currencies, those that account in sterling (and euros and Australian dollars) have suffered. And this issue goes well beyond accounting, reflecting the global market for legal talent in which such law firms are competing with dollar-driven rivals.

This is why, for three years running, firms that have posted subdued financials have often provided artificial ‘currency adjusted’ revenue figures to mitigate the damage.

In 2007, firms billing in sterling were happy to take advantage of a weak dollar to mark their prominence on the global stage. One Magic Circle partner commented then: ‘The pound is what it is. You can’t just discount it because it is strong. It still goes into our pockets. The fact is that it is now much more expensive for US firms to operate in London than it used to be.’ Prophetic words… unhappily so for the City elite.

The 2006 financial year was a licence to print dollars, pounds and euros. It would have taken some effort for members of the Global 50 to post poor performance. Every single firm posted year-on-year revenue growth (Jones Day had the slowest rate of growth at 3%) and only two posted a fall in profit per equity partner (PEP) – O’Melveny & Myers and Cadwalader, Wickersham & Taft – and both were to fall out of the top 50 and further down the Global 100 over the ensuing decade.

The Global 50 in 2007 comprised many of the same firms as in 2017 – 34 of the 50 then remain there now. There are some exceptions: Hogan & Hartson and Lovells were both in the list ahead of their merger a few years later; Fulbright & Jaworski was a top-50 firm in its own right without the combination with Norton Rose; Bingham McCutchen went on to implode a couple of years ago; King & Wood Mallesons, Covington & Burling, Baker Botts, Proskauer Rose, Goodwin Procter, Cooley, Squire Patton Boggs, CMS, K&L Gates, Quinn Emanuel Urquhart & Sullivan and Dentons were yet to make their way into the top 50; while O’Melveny & Myers, Slaughter and May, Eversheds, Foley & Lardner, Pillsbury Winthrop Shaw Pittman, Debevoise & Plimpton, Cadwalader, Cravath, Swaine & Moore and Hunton & Williams were to slip further down the table.

But top-line growth in 2007 tells only half the story. On the key productivity measure of revenue per lawyer (RPL), US advisers have continued to set a pace beyond their UK counterparts. The levels of RPL a decade ago at Skadden, Arps, Slate, Meagher & Flom ($967,000); Latham & Watkins ($817,000); Kirkland & Ellis ($917,000); Sullivan & Cromwell ($1,455,000); Weil, Gotshal & Manges ($904,000); and Gibson, Dunn & Crutcher ($1,016,000) outstrip the four UK elite firms. And with all these US firms now comfortably posting RPL in excess of $1m in 2017, that dominance over the UK firms continues, though even elite US law firms have not generally achieved material increases in fees-per-lawyer.

Focusing on the huge US market, the key story over the last ten years has been the continued rise of challenger brands bred outside of Manhattan, with this breed being among the standout long-term performers. Boston’s Ropes & Gray has seen revenues grow 141% from $616.2m in our 2007 report to $1.49bn this year, with RPL climbing 49% from $857,000 to $1,280,000. Los Angeles-born Gibson Dunn, meanwhile, virtually doubled its turnover over the same period from $809m to $1,606m and increased RPL 28% to $1,296,000 from $1,016,000.

And the two firms that now lead the Global 100 in revenue terms – Kirkland and Latham – have unsurprisingly been among the most striking successes of the decade financially: Latham has seen revenues grow 74% from $1.62bn to $2.82bn, while RPL was up 47% from $817,000 to $1.2m. It is an impressive performance from a finance-heavy institution that saw its business battered in the 2008/09 banking crisis. The Chicago-bred Kirkland, meanwhile, has ridden the boom in markets in its core disputes and private equity teams to more than double income over the period. Kirkland’s revenue is up 132% from $1.15bn to $2.65bn, while RPL jumped a remarkable 61% from $917,000 to $1.47m.

The common factor with the four firms is disputes – where they lead the pack in their home market – and private equity. Each has successfully ridden the sustained wall of investment that has seen US buyout giants and funds expand globally, and increasingly diversify into product lines once dominated by banks. The four have also exported that expertise overseas, particularly in London.

However, established Manhattan players have hardly struggled, more than holding their position as go-to advisers on high-stakes matters even as clients have pushed down their rates for business-as-usual work. Davis Polk & Wardwell (75%); Simpson Thacher & Bartlett (62%); Milbank, Tweed, Hadley & McCloy (58%); Cleary Gottlieb Steen & Hamilton (56%); Sullivan & Cromwell (45%); and Cravath, Swaine & Moore (34%) have all increased revenues by more than a third since 2007. But the standout New York institution is Paul, Weiss, Rifkind, Wharton & Garrison, which built its business around its twin engines – corporate and its top-tier disputes/regulatory investigations practice – to more than double revenues from $594m to $1.22bn. RPL is more moderate but still robust, up from $1m to $1.27m.

Notable by its absence from this line-up is Shearman & Sterling, which is one of the slowest-growing firms from 2007’s Global 50. Ranked in position 21 with revenues of $842m, over the last ten years the firm has slipped to 40th position, managing to grow turnover by just 8% to $912m. White & Case has also been a mixed performer, increasing its revenues by 38% over the period.

Special mention must also be made of the top-performing firm of the decade, one that was not in the Global 50 in 2007, when its revenues were just $298m. Ten years and the best part of a billion dollars later, Quinn Emanuel’s 304% increase in turnover to $1.2bn, while also becoming the second-most profitable firm in the world, is proof that one of the best ways for a law firm to make money over the last ten years has been to sue major banks. Defending them has unsurprisingly also been rewarding, but metaphorically carrying their bags just does not bring in the money like it used to.

The emergence of the individualistic disputes specialist Quinn Emanuel as such a strong force in the US market also reflects the long-term shift of gravity towards contentious work at the expense of transactional disciplines, which are increasingly prone to commoditisation and cost pressure. And, as with Kirkland, the evolution in the US towards an ever-more aggressive market for star partners is pushing the packages for marquee partners remorselessly towards the $10m mark and separating the top 25 law firms from their less profitable counterparts. Such figures would have been unthinkable ten years ago. The reverberations from those shifts come from the US but are being felt on a global basis. LB

mark.mcateer@legalease.co.uk

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