American beauties

With soaring profits and driven forward by a litigious culture, US law firms generate giant revenues. So what can UK practices learn from their rivals across the pond? Grania Langdon-Down investigates

If the finances of US law firms are anything to go by, it seems we still have a few things to learn from our friends across the pond. The 100 largest US firms saw their gross revenues jump 10% last year to $46 billion (£25 billion), according to a recent survey by American Lawyer magazine (see [2005] Gazette, 30 June, 10). Revenue per lawyer grew faster than headcount for the second consecutive year, with, on average, 42 cents of every dollar taken in by the firms going to the partners.

So what is the secret of these firms’ success? There is no magic formula, according to Ed Wesemann, US partner of Edge International, specialist management consultants to law firms. ‘To be profitable, you work insanely hard, set high rates and raise them 10% a year, have three or four non-equity partners for each equity partner – and don’t throw too much money out of the window on expenses.’


The annual AmLaw 100 survey found profits per partner had risen 9% across the board to an average of $960,000. Wall Street giant Skadden Arps Slate Meagher & Flom held on to the top spot in the survey with an 8.3% rise in turnover, taking it to $1.44 billion. The two smallest firms in the top 100 by headcount – Wachtell Lipton & Katz and Cahill Gordon & Reindel – were also the most profitable, with profits per partner running at $3.5 million and $2.5 million respectively.


Watchells also headed a new table in the survey intended to measure practices’ efficiency in producing partner profit, needing just seven lawyers to generate $10 million in profit compared with the second-placed firm, Sullivan & Cromwell, which required 16.


Mr Wesemann says: ‘Watchells is unique in its staggering work ethic, extraordinary fees and absolutely the best company work. Their leverage is comparatively low, maybe 2.5 associates for each equity partner, but they earn their money as the brain surgeons of the legal industry, doing work other firms can’t do.’


Corporate lawyer Roger Meltzer, a member of Cahill’s executive board, is a spokesman for the firm. It has 247 lawyers and 64 equity partners, with offices in New York, Washington DC and a small office of three fee-earners in London. He says efficiency is a big part of the firm’s success: ‘Generally speaking, firms that don’t have a lot of branch offices tend to have more efficient cost structures, because there is little duplication of expenses.


‘Secondly, our practice is pretty evenly split between litigation and corporate work, with a heavy emphasis on capital markets and leverage finance. Litigation and corporate work tend to be counter-cyclical. Occasionally, they run in tandem. We are fortunate that our principal practice areas have such parity.’


Mr Meltzer adds: ‘Also, frankly, we stick to our knitting. We don’t try to be all things to all people all the time. Traditionally, we have not extended our practice areas through acquisition. While some see us as a dinosaur, we feel fortunate to have had the level of success we have enjoyed through applying this approach for many, many years.’


Mr Meltzer says Cahills does less marketing than other firms: ‘Our traditional approach has been to gain clients because they see our work on the other side of matters, and then seeking to engage us. We also try to develop existing practice areas by extension – such as intellectual property, private equity and fund work.’


‘Capital markets will become more and more accessible and commoditised. We always look for the most complex areas where we can add the most value and provide a depth to what we think is, and what we hope to maintain through recruiting as, a very talented lawyer group.’


David Miles is London managing partner and the senior English partner of US firm Latham & Watkins, which leapfrogged Jones Day into third place in the survey this year on turnover. He puts the performance differentials between UK and US law firms down to access to the ‘huge’ US market that brings with it access to US business – and especially banks – around the world.


‘The two big areas of the last few years – litigation and restructuring – are very significant for revenues and profit growth. Litigation post-Enron has been unbelievably significant over the last few years. The UK firms just don’t have access to that market in the same way.’


Solicitor Tim Foster, UK managing partner of US firm Reed Smith, which has 1,000 lawyers and revenues of more than $500 million, agrees: ‘Litigation is one of the key factors which powers the US firms. It is massive in the US, whereas in the UK it is becoming more difficult to make money in litigation after the Woolf reforms.


‘For US firms, the balance of work between litigation and corporate work helps provide consistent security for their financial performance, because it helps iron out the ups and downs in corporate activity.’


Ward Bower, principal at Philadelphia-based legal management consultancy Altman Weil, says: ‘It is a very healthy economy for US lawyers right now. The deal flow for those firms involved in corporate finance – particularly for New York-based firms – is very strong. At the same time, the huge litigation engine that fuels big US law firms is grinding out big cases which can become huge generators of fees – millions of dollars a month. Put the two together, and the end result is most of the major US law firms are operating on all eight cylinders.’


But can that kind of activity last? ‘It never does, but it is all relative – because what is likely to happen is that, rather than revenues decline, the pace of growth will simply slow.’


Mr Wesemann also points to the lack of litigation in the UK as a key difference. ‘For US firms, litigation is an annuity. It is not uncommon for an associate to work on a litigation matter on his or her first day with the firm and still be working on it when making partner eight years later.


‘With “loser pays” litigation in the UK, clients are much less willing to use litigation as a strategic weapon than they do in the US, where the average Fortune 1000 firm spends more than one-third of its outside counsel legal budget on litigation.’


Mr Wesemann also identifies international strength as another key difference: ‘The magic circle [City] firms are much more global than the major New York firms, which means that profits are being mixed with partners in a wide variety of economies.’


This perhaps explains why the biggest US law firm in size terms and second biggest by turnover – Baker & McKenzie – is 74th on the table of profits per partner. It has offices spread across the world, and what is profitable in Almaty is not in the same league as what is profitable in New York.


Giles Rubens, a UK director at transatlantic legal management consultancy Hildebrandt, says another factor helping the profitability of US law firms is that their lawyers tend to be brought in earlier by clients, and enjoy ‘general counsel-style’ relationships with them.


‘US law firms also tend to be run in a more business-minded way,’ he adds. ‘UK lawyers who have moved to US law firms say there is a much greater focus on the practice of delivering law and running a business, compared with UK law firms where there is, perhaps, a greater level of distraction on partnership and other matters.’


Mr Rubens says billing rates are also lower in US law firms, where there is ‘probably still a greater work ethic, except when comparing the very top end of the market, where there is a phenomenal work ethic in both US and UK firms’.


However, London-based Mr Miles dismisses the idea that US law firms work harder as a ‘myth’. There are just cultural differences in approach and in billing practice,’ he explains.


A booklet issued a few years back on the differences between US and UK lawyers told the story – surely apocryphal – of a US lawyer who went missing from his desk during a big deal for a couple of days. The lawyers on the other side received a message from him that he had suffered a heart attack – but was now back at his desk.


Mr Bower says lower overheads are another reason why US profits are so huge. He says: ‘The occupancy costs in New York are a fraction of what they are either in the City or the West End of London. There has also been a substitution of capital for labour in US firms, with a lower ratio of legal support staff to lawyers than ten years ago.’


Mr Miles agrees: ‘We run a very lean ship,’ he says, adding that Latham & Watkins has very few staff in non-revenue generating positions: ‘Our marketing and business development departments tend to be smaller than in UK firms.’


However, that may have to change as competition increases, says Ian Stephens, a principal with global brand consultancy Wolff Olins. ‘America is inherently a richer market. When we talk about companies going global, it primarily means American firms going international, so US law firms have an inherent advantage because those companies are their traditional clients and they will take their lawyers with them.


‘This has led to US law firms building substantial footholds in the UK. However, it is a testimony to UK and European firms that they have adapted so they can still compete, despite the US firms having those advantages.


‘They have invested in people, technologies, brands and their relationships with clients – and they have stopped the US firms taking more than they might have.


‘If you compare the situation with investment banks or management consultancies, there the European firms have long since lost the battle and disappeared.’


What UK firms have done well, he says, is to think carefully about the practice areas they want to be the best at, to maintain quality in the face of US competition. ‘But that occasionally leaves the door open for US firms to move in on other areas, particularly litigation and restructuring, which aren’t so high profile here,’ he warns. ‘However, the more competitive things become, the more the US firms will have to follow the UK firms and invest in marketing and branding, however much they dislike the idea.’


Mr Rubens maintains that UK law firms should be much more concerned than they are about the growing success of US law firms in London, which are winning both domestic and international work. ‘The US firms are being very successful, partly by exporting relationships from the US, and partly by their style and approach – which clients like. This is not just in the very high-value areas. The US firms are moving into private equity and real estate. I think a lot of UK firms are not focused enough on what is going on in the market- place. The loss of work happens at a relatively slow speed and, by the time this is recognised, it can be too late for them react.’


Speaking at the St Paul Travelers annual On Risk conference last month on the challenges facing large City firms, Herbert Smith senior partner David Gold identified one as the top New York practices – the so-called ‘white shoe’ firms – deciding to compete in London across all practice areas, rather than the more selective fields they currently target.


On the basis of his ‘regular meetings’ with such firms, Mr Gold said they currently had ‘no great wish’ to do so. ‘But to rule that out for the future would be foolish,’ he warned.


Mr Miles says Latham & Watkins has definitely benefited from its close alignment to the US investment banks, which have had a major impact on the European market. ‘But, in reverse, the UK firms don’t have the same sort of banking leverage in New York.’


Mr Bower agrees: ‘Some of the London firms are becoming permanent fixtures in New York. They are doing the work that they used to send out to US firms, but I am not sure that they are competing on the ground to take domestic work away from those firms.’


On the other hand, US firms are beginning to realise the benefits of their investment and long-term commitment to London, he says. ‘Five years ago, very few US law firms were profitable in their London offices – but a greater number of them are today.’


Reed Smith has had a London office since it merged with London and Coventry firm Warner Cranston in 2001. It has 70 lawyers in the capital and 20 in the midlands, while its UK revenues are now £25 million.


For Mr Foster, UK managing partner since the merger, part of the success of US law firms here is that lawyers in the UK have finally developed a ‘mature view’ of US firms: ‘People are realising that US firms are not dreadful sweatshops that pay lots of money. They are seeing that US firms, with the resources behind them and their international potential, provide good opportunities which mean they are attracting more and more good UK partners.’


Will the rivalry between UK and US firms continue – or is globalisation, as has occurred in the banking and accountancy sectors, inevitable? According to Mr Stephens, law firms are currently engaged in a ‘stand-off’ on either side of the Atlantic. He says: ‘US firms are saying they don’t want to dilute their culture, or indeed their profits, by merging with London firms, which they see as too huge and complex, while UK firms say they can’t find anyone of sufficient quality to merge with.



‘The stand-off will be broken by one of the premium firms making the leap, with the others following suit within six months. Alternatively, a second-tier firm – which doesn’t mean second rate – will form a global firm, creating a first-tier offering for global clients and, as it starts to win chunks of work, that will make the others sit up.’


Grania Langdon-Down is a freelance journalist