Sometimes a shock looks certain to leave life forever changed only for things to carry on much as normal. Sometimes, the jolt marks a genuine crack in the foundations underpinning industries, business and society. We now know that for the profession and the City, the banking crisis proved very much in the latter camp. In law, the most visible result of this was the end of the startling 25-year success story of the Magic Circle, closing the period in which the group had blazed a trail across the global market and become utterly dominant in their core European and Asian heartlands.
After the banking crisis, growth slowed, ground was ceded to US rivals, and even some mid-tier rivals, and the group lost much of the strategic daring that defined their remarkable ascent. They remained successful institutions but the swagger was gone, the myth of invincibility lost.
So the question for many senior lawyers is whether the coronavirus pandemic represents a similar transformation in the commercial law game and, if so, how it will impact the City’s legal elite.
Beyond stating the bleedin’ obvious that it is hard to see such a profound shock not leaving lasting marks, let us not dwell on how long its effects will be felt and move on to the second question. What can already be gleaned from the initial economic impact of coronavirus and subsequent national lockdowns is that London’s top law firms have stood up remarkably well. Even against the yardstick of top-50 UK law firms, which have been among the least-impacted sectors in the UK economy, Magic Circle firms have been hardy performers; so far elite firms are faring better than the chasing pack and most mid-tiers rivals. This comes despite the plunge in mainstream transactional work that the Magic Circle has traditionally relied upon.
Such resilience is apparently driven by the group’s client base. The Magic Circle remains the go-to counsel for major plcs and banks, the kind of clients that generate huge, ongoing pipelines and need large amounts of disaster response advice. Such clients also have the resources to keep paying even as smaller clients see cashflow come under intense strain.
Conversely, the Magic Circle has been aided by the punishment taken in the banking crisis, which hit their core clients and product lines harder than the wider market. In response they emerged with leaner and less-leveraged practices. Left to their own devices they would have edged back to their old ways, but their increasingly-thankless battle to keep profitability within shouting distance of US rivals saw such changes stick.
The low-leverage model also works well to absorb economic shocks as it depresses fixed costs and allows flexible partner profits to take the strain.
There was room for improvement in their post-Lehman reboots. The group remains far too fond of putting expensive partners in pseudo-management roles – even if the worse offender, Clifford Chance, has curbed its old excesses. And improvements in operational management were not matched in strategic decision-making. But they learned a lot of lessons that have not been forgotten.
The Magic Circle also benefited from this crisis by having built better-hedged practices that draw more profitable work from counter-cyclical practices like litigation, arbitration and high-end regulatory work.
And if the banking crisis did sustained damage to the Magic Circle, there are other reasons to believe the current crisis gives them a remarkable chance to rediscover their form.
For one, US firms tend to do worse in major downturns than UK counterparts, given their hire ‘n’ fire cultures, the volatility of the US partner transfer market and a relative lack of cultural glue. London firms can keep trudging through a bad decade without collapsing, a bad 18 months can put down a US equivalent.
Purely from enlightened self-interest, this is the perfect moment for the City elite to make maximum capital of avoiding job cuts – they could never compete on salaries with US rivals, they have a chance to win on staff engagement and start wooing back some of the junior talent they have been losing.
The likelihood that business travel will never come back in the same form is also a particular boon for the Magic Circle, which, thanks to the size of their networks, were especially prone to having expensive partners stuck on planes. Releasing huge amounts of productive partner time will have considerable benefits in improved client engagement and better associate development and a chance to further push down leverage.
The pandemic and resulting shock, in another contrast to the banking crisis, also looks likely to drive consolidation in the legal sector and benefit larger players over mid-pack rivals. For one, wide-scale remote working and increased calls for commoditised legal services will drive pressure to invest in technology and the productisation of law.
That won’t be an easy process. The dirty secret New Law evangelists won’t admit is that it has proven far harder to profitably automate and re-engineer routine legal services than claimed. But efforts, and results, will surely ramp up now to build on this modest early development. And while I am wary of forecasting consolidation in the legal sector given the 20-year record of such predictions being proven utterly baseless, its time must surely come eventually.
Such forces should play perfectly to the Magic Circle, given their brand strength, scale, balance sheets, client bases and considerable inroads with New Law operations.
The Magic Circle will also disproportionately benefit when the global M&A market finishes its short-term freeze and emerges into what promises to be a mammoth run of strategic corporate re-organisations, divestments, restructuring and fire sales. Also useful will be the relative strength of their Asia-Pac networks in a period in which the region looks sure to outperform Western economies.
None of which ensures the group will rise to the moment. Allen & Overy is still bedding down a new leadership team and digesting the ramifications of its abandoned US merger bid last year. Freshfields Bruckhaus Deringer has been performing robustly of late but faces a high-stakes management contest this year amid doubts that the camp around touted candidate Helmutt Bergmann will be sufficiently reformist to position the firm for the future. CC has looked stronger under the leadership of Matthew Layton and Linklaters more comfortable in its skin in recent years but it remains debatable whether the group is ready to take the kind of bold steps that will be required to position these firms globally.
In particular, City leaders have so far been unwilling to make the sacrifices required to forge credible practices in the crucial US market. But in a convulsing profession, this could be the moment for the City elite to make up for lost time stateside.
Alternatively, they could just bet on US rivals like Latham & Watkins and Kirkland & Ellis losing their way post-pandemic but that’s not a bet I’d recommend.
On any objective measure over the last decade, the Magic Circle was in serious danger of being relegated to second-tier status globally, the current crisis is probably the best chance they will ever get to return to world-beating form.