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.