The Magic Circle is doomed. Here’s why.

The UK’s Magic Circle – a variable, but severally-numbered group of firms which represent a charmed band favoured by the government, banks and major companies in the UK – will not, I think, survive in the longer term.

The UK’s premier players are in a strategic dead-end, unable to achieve what they need to without sacrificing everything that they are, and facing impossible competition which will ultimately choke the life out of them.

I’d except one firm from this analysis: Slaughter and May. The Lawyer unceremoniously ejected Slaughters from its definition of the Magic Circle for perfectly logical reasons, but instinctively, emotionally, I think the legal market continues to regard this bluest of blue chip firms as part of the charmed five, and I think it’s the one which will endure.

So it is to the other four that this piece is primarily addressed and to their need to attain credibility in New York, the world’s largest, richest and most prestigious legal market.

I’m not going to give you a data-led analysis here. For an eye-popping article looking at the issue from that point of view, check the excellent piece by Bruce MacEwen in 2014, which starkly illustrates some of the trends I’m talking about.

Gaining credibility in New York is a very tricky thing to do. Organic growth via lateral hiring has seen Freshfields recently adding a restructuring team from Kaye Scholer, and Allen & Overy bringing a finance and securities team in from Paul Hastings, for instance.

Clifford Chance is the only firm to try to short-circuit the grind, merging with private equity firm Rogers & Wells in 1999, a merger Legal Business described as “the troubled US acquisition that halted Clifford Chance’s once unstoppable momentum”. CC’s New York office today is less than half the size it was immediately after the R&W takeover.

The perceived failure of that merger stands as a warning to any US firm foolish enough to consider submitting to a takeover by the former Colonial masters, so organic growth is the only viable option for the MC.

However, this strategy is costly, beyond the titanic recruitment fees hanging off each hire. Because indigenous New York firms are significantly more profitable than the Magic Circle, the MC has had to award ‘super-points’ to many New York partners, a policy which has been extended to London in some cases, with inevitable systemic consequences I fear.

While UK firms in New York have to break their own rules in order to hire good people, US firms in London, in contrast, can comfortably cherry-pick from the Magic Circle without breaking stride, financially.

But a deep-dive into the London vs NYC comparison demonstrates how the Magic Circle is, in fact, going backwards in comparison with New York rivals.

To illustrate, in the 2006 UK edition of The Legal 500, there was not a single US firm in the first six tiers of the ‘London: Mergers & Acquisitions’ table, the directory’s Blue Riband benchmark of elite status.

By 2016, however, Skadden Arps had climbed to the first tier of the ‘Upper Mid-Market and Premium Deals (£250m+)’ table, and tier three featured Cleary Gottlieb and Shearman & Sterling, along with the US/UK merged firms Norton Rose Fulbright and Hogan Lovells.

Cross the Atlantic, and in the US directory’s equivalent table, ‘Mergers & Acquisitions $1bn+’, the first UK firms to feature – Allen & Overy and Clifford Chance – are found languishing in the 7th tier.

Corporate isn’t everything, of course. In the US rankings, Clifford Chance manages top tier status in Asset Finance and Leasing, REITs and Tax: Financial Products, but this is classic ‘mid-tier’ performance. Freshfields scores top in International Arbitration, but that’s the only Gold Star it gets.

The combination of being squeezed in your own backyard and slogging expensively to try to gain purchase in New York creates a terrible asymmetry, and forces the Magic Circle into that thing all military strategists warn against: fighting a war on two fronts.

The obvious solution would be merger, and many Magic Circle partners have fantasised over the years about creating a Transatlantic titan – Davis Polk and Freshfields was often touted, for instance.

But there are only two ways to do Transatlantic merger. Either you find a firm of equivalent gravitas – as Hogan Lovells and Norton Rose Fulbright seem to have done, broadly – or you subsume one into the other and let the legacy identity fade into history – Rowe & Maw, Richards Butler, Rogers & Wells and so on.

True merger is impossible for the Magic Circle. All the New York firms of the requisite quality and pedigree have nothing to gain by a ‘merger of equals’, and even if any of the MC firms would agree to be acquired – a scenario which I have difficulty imagining – we’d have Rogers & Wells: 2, in London, as the more powerful partner’s identity took over and key teams headed for the door.

So organic it is. And this is where resources come into play, and where the US firms have an insurmountable advantage over their UK rivals, thanks, in large part to the US preoccupation with litigation, a problem which is magnified thanks, of all things, to the English Bar.

While successive UK governments have kicked the backside out of litigation in the UK, the US tort ‘industry’ continues to grow, pushing in excess of $300bn through the US legal system every single year, much of it going directly into the coffers of US law firms. To put that into context, that is larger than either the US agriculture or mining industries.

So while litigation – not including incredibly-lucrative patent litigation, as well as some other contentious disciplines such as labour law – accounts for roughly 30% of major US firm income, the figure is barely half that for their top UK competitors. As Cicero said – albeit translating terribly into English – “the sinews of war is infinite money”.

Litigation, as the US has rightly recognised, is the gift that just keeps on giving.

And then we have the English Bar. While the rest of the Anglo-Saxon world happily adopted the principles of a ‘fused’ profession, where the same lawyers both prepare the cases and take matters to court, the English (and Welsh) trundle on with an antediluvian system which seems to suit primarily those people who benefit most from it: barristers.

Yes, you can go on as much as you like about how special the English court system is, how respected around the world it is, and so on, but the net effect of taking many of the most talented legal brains out of the intake valves of law firms and sticking them as guns-for-hire in antiquated premises clustered where the centre of the English legal universe used to be has been to deprive the UK’s law firms of the cream of the legal talent pool, not to mention revenue.

The combined effect of being comprehensively and continually out-pointed on money by US firms, and the subtraction of talent and revenue from the UK’s law firms due to the continued existence of the Bar is, I believe, a toxic cocktail for UK law.

Firms like Lovells, Rowe & Maw and Richards Butler saw the writing on the wall, and jumped early. Norton Rose and Eversheds are trying a slightly different tack and trying to retain the cultural whip-hand, a strategy which may or may not be sustainable in the long term.

For the Magic Circle, though, the stakes are much higher and the deck is stacked against them.

To win this one will take something breathtaking, a genuine reinvention of the way these firms operate. At the moment, I see little evidence of such radical vision at work.

US firms and building London

US firms and building London

If you’re a US firm, what is the balance between home-grown and US-derived work in your London (or for that matter any other foreign) office?

One of my clients asked  what the balance was at other US firms, having read in this week’s edition of The Lawyer that Kirkland & Ellis, for example, derives 70% of its London revenue from the US.

That set me thinking about what the ideal balance might be, and how that might affect partner behaviours within the office and lateral recruitment.

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Shopping center

Dewey and the Beast

Another great blog from one of my favourites, The Belly of the Beast, on the current ‘struggle’ at Dewey & LeBoeuf which has claimed 80 partners since the start of 2012 and has the London partners in talks to put the office here into administration (see The Lawyer).

In the Beast’s view, “partnerships aren’t really partnerships anymore”. He cites the 20-1 spread in partner earnings as a key corrosive effect in the firm’s current dire condition.

“Those at the top of most big law firms function with far greater independence than corporate CEOs who must answer to a board of directors and shareholders,” he says. “In many big firms, a growing internal wealth gap reinforces the hubris of senior leaders who answer to no one — except each other. With Dewey’s disintegration, we’re seeing where that can lead.”

Worth a read.

Do clients know or care about law firm strategy

Do clients know or care about law firm strategy?

Do clients know or care about law firm strategy?

I’m sure the knee-jerk response of most lawyers would be ‘no’, but the recent experience of a friend of mine got me thinking.

I had referred a very good friend of mine to an excellent lawyer I know for some significant advice. I am very careful about who I refer business to, as I’m very conscious that it reflects on me, not least as a self-styled law firm ‘expert’.

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Goldrush

Lateral partner hiring: the new Gold Rush

This week started with a mega-feature in The Lawyer on one of my favourite topics, partner lateral hiring, in this case talking about how US firms’ stronger financials will mean they can pick off the UK high-flyers with ease (http://www.thelawyer.com/us-firms’-stellar-city-financials-put-uk-high-fliers-in-hiring-line/1007673.article)

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Author, Author

My first publication as Motive Legal is now out, courtesy of the lovely people at Ark Publishing. Entitled ‘Lateral Partner Hiring and Integration for Law Firms’, it’s my attempt to make sense of all the observations I made during my time as a recruiter.

As well as plenty of observations on the business and politics of lateral partner hiring, it includes a nice set of case studies looking at specific aspects of the lateral hiring process from some excellent law firms including Latham & Watkins, Berwin Leighton Paisner, Olswang, K&L Gates, Bird & Bird, Field Fisher Waterhouse and Speechly Bircham.

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American stars

American stars?

With the recent news that Howrey – a firm which last year turned over $480m with average profits per partner of $845,000 (source: AmLaw100 2010) – had voted for dissolution, another of BigLaw’s very recognisable names bit the dust. Chairman Robert Ruyak put the blame variously on conflict-problems Howrey’s European offices ran into; contingency fees and the problems of long case-cycles; and, slightly perplexingly, litigation-support vendors.

Noted legal commentators are not convinced. One of my favourite blogs – The Belly of the Beast – is coruscating on the topic (here http://thebellyofthebeast.wordpress.com/)

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Lateral Hire Attrition rate

Lateral Hire Attrition rate: 30% in three years, 44% after five

Partner lateral hiring in London is a very tricky business, at least if the attrition rates are to be believed. I undertook some research into 1,944 partner moves in London in the last five years, using data from the superb digest publication LegalMoves as well as the redoubtable weekly publications The Lawyer and Legal Week, and the results showed that fully 30% of partners hired in 2007 are now not at the firms they joined.  Go back to Q4 2005, and the figure rises to 44%. US firms do worse than UK firms, especially in their key hiring areas – Finance and Corporate.

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US eyes UK investment model with interest…

From October 6 this year UK firms can accept outside investment, something the US is clearly eyeing with interest. Here’s a nice little interview from The American Lawyer with Mitt Regan, Co-Director of the Center for the Study of the Legal Profession at Georgetown University Law Center, which raises among other things the interesting ethical questions of having outside investors, who have not been “socialised in professional values” . You can find it here: www.law.com

Should we feel squeamish about Squammonds?

Should we feel squeamish about Squammonds?

The forthcoming merger of Squire Sanders & Dempsey, Ohio’s most prominent international law firm, and Hammonds, the UK national firm which shares with Mark Twain the distinction of having been declared prematurely dead on at least one occasion, has not had an overwhelming effect on commentators and the legal press.

The Lawyer (6 September 2010) reckons the tie-up looks “distinctly like a shotgun marriage”, wondering whether a battered and bruised Hammonds – having dropped from 15th to 24th largest UK firm over the last decade – has the stomach for the kind of radical re-engineering it says multinational clients are demanding of the national/international mid-market firms.

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