Legal Business Blogs

Comment: Lockstep has to go for Magic Circle to enter new global elite

Conservatism and intransigence are qualities often bemoaned in the legal industry, in many cases beyond their manifestation. But there is one aspect in which the upper reaches of City law have shown a resistance to change verging on the surreal: the desperate embrace of a highly restrictive model of lockstep.

As we argue in our Future of Law special this month, the Magic Circle model is under intense pressure after seven years in which big changes in the industry and global economy have shifted against the group. Under the bonnet, these firms – which are well-run institutions that have been a British success story for very good reasons – have been through substantial restructuring in response. With a better global economy, strong international networks and transactional and contentious activity currently robust – a leaner and more productive big four are positioned for dramatic increases in profitability as their core markets pick up. And 2014/15 should be a very respectable year for the group.

It won’t be enough. Lockstep in its current form has got to go. It’s just not working. It’s not going to work without substantive reform. Frankly far more substantive than Clifford Chance has just voted through, Freshfields Bruckhaus Deringer and Allen & Overy have snuck in through the back door and Linklaters is now floating.

This model of compressed remuneration was forged in a different age, before the globalisation of legal services – it cannot cope with widely varying international conditions or pay top performers enough to retain them from US law firms.

The bleed of key talent from London’s big four and lack of progress in the US over the last six years is a gaping strategic problem that isn’t going away and a modest cyclical upturn won’t be enough to address it.

The existence of the Magic Circle as a meaningful term is being openly questioned now. But London’s big four shouldn’t kid themselves that this means they will automatically slide into a new global elite. On current trends their membership of such a club is no longer a certainty – the reason the Magic Circle is being queried isn’t because law has globalised, it’s because these law firms have lost status. And the biggest structural problem the four are wrestling with is their remuneration model. What looked justifiable in 2008 does not in 2015.

The bottom line is lockstep survived as it has because powerful blocks of older partners support it, not because it makes sense for the institutions. Management know this but can’t address it.

The choice is clear and it’s not eat-what-you-kill, which most of the best US law firms don’t use. You widen the band between entry and top of the ladder to at least four to one and use discretionary gates – probably two. This allows you to retain the many strengths of lockstep with much more flexibility. The only other play is to use an inner circle partnership with higher shares, though this would be even harder to push through.

These are fine institutions, with much to admire. But if they don’t materially flex their own models soon the market will break them. If that happens come 2040, London’s elite will have become just part of the crowd.

For Legal Business’ predictions on the Magic Circle’s future see: Coming Soon – assessing the big forces shaping the future of law