<< Law Firms as Businesses - What Type of Companies Are They? |
Home |
Partners not Shareholders - Law Firms are Different >>
Go Global or Stay Local - The Jury Is Still Out
Introduction
Other
professional service industries such as accounting and advertising have
consolidated to produce big global generalists. For example, these include the
"Big Four" accountancy firms: Deloitte, Ernst & Young, KPMG and PwC and
advertising agencies such at JWT, Omnicom and Publicis.
Whilst
there are some law firms with a truly global footprint, there are relatively
few internationalists compared to other industries.
Why
hasn't a cross-border merger wave swept the legal sector?
- Marriages
have been stymied by the different nature of business in its two biggest
markets: London and New York. See below for details.
- London
law firms want to be more global, New York firms want to be more profitable.
- So
far, the Londoners have been pursuing the New Yorkers, but the east coasters
seem happy to remain independent and have been resisting their merger advances.
In
Europe, many German firms also advocate a global strategy. French firms,
however, have largely remained independent.
However,
if you are looking for a law firm with a global outlook, London is the best
place to find one. The chart overleaf should provide a few ideas.
The Big Smoke and The Big Apple
Both
cities have a small group of premium firms which are marked out by their blue
chip client lists.
- In London
this is the "Magic Circle": Allen & Overy, Clifford Chance, Freshfields,
Linklaters and Slaughter and May.
- In
New York they are known as the "Charmed Circle": Cleary, Cravath, Davis,
Simpson, Skadden, Sullivan and Wachtell (abbreviated names).
- New
York firms are by far the most profitable. Only one UK firm, Slaughter and May,
makes it into a list of Top 10 firms by PEP which is dominated by the
relatively specialist New York firms.
- There
is little direct competition between these two circles.
For
UK law firms wanting a slice of American pie, remuneration seems to be the core
problem.
- Any
UK firm starting or merging with a US practice will have to handle the thorny
issue of different remuneration structures on either side of the Atlantic.
- UK
model: "lock-step" profits are shared between partners on the basis of their
seniority. This aims to encourage teamwork and minimises internal fighting.
- US
model: "eat-what-you-kill" profits are shared between partners according to how
much business they bring in. This encourages a more aggressive approach to
wining business.
Conclusion
While
there may still be global tie-ups in the future, a small number of legal giants
are unlikely to ever dominate the industry. This is because:
- There
remain large differences between different countries' legal systems (eg civil
vs common law).
- "There
are real diseconomies of scale in this business. We are not making widgets." - Robert Joffe, Cravath Swaine & Moore.
- Mergers
are tricky. Keeping all the partners happy is often impossible, especially if
you throw in different pay structures for them to argue about.
However,
some firms will still pursue global strategies.
- The
road for such a global footprint lies through Europe and China.
- If
global giants do emerge, they will probably be from London. Indeed, some of the
Magic Circle may fit the bill already.
Consolidation Trends of Legal Services
Consolidation
is driven by the desire of some corporate customers, who require a host of
legal services, to have one firm handling all of their needs, a
"one-stop-shop".
Firms
typically add specialist lawyers and practice groups to do this. However, they
can achieve this more rapidly and on a grander scale by merging with other
firms.
Non-global
players traditionally share an international mandate with a local player, or
refer the client to a firm which they recommended. An example of this is the
Slaughter and May (UK) / Cravath (US) "best friends" relationship.
One
of the hottest current debates regards whether firms will consolidate globally
to offer cross-border one-stop-shopping or whether firms will be chosen on
their ability to provide the best service in a particular jurisdiction similar
to a specialist boutique.
Partners not Shareholders - Law Firms are Different
Margin
not Profit
- Unlike
limited companies which aim to maximize total profits for their shareholders,
almost all law firms operate as partnerships or LLPs.
- With
no shareholders to worry about, the profits are distributed across the
partners. Therefore they are
incentivised to maximize profits per equity partner (PEP).
- This
makes them potentially more concerned about maximizing profit margins (by
keeping headcount down, for example) rather than increasing revenues by adding
fee earning partners.
- The
same is not true about companies since the shareholders care only about margin
in as much as it affects profit.
- Most
companies would happily exchange a small decrease in profit margin for an
increase in profit. Quite the opposite can be true of partnership law firms.
Partners
not Board Members
- Law
firms usually take decisions by reaching a consensus amongst the partners. If
they don't, partners can defect to rival firms or set up their own, leaving the
firm to disintegrate.
- Therefore,
legal practices tend to behave more cautiously than their clients.
Comments
No comments posted yet
Add your comments on this page using the form below.
Home 
Blog Posts
