The Business of Law Firms - The American Threat Facing UK Firms​

By Jake Rickman​

What do you need to know this week?

This marks our tenth article in TCLA’s series on the Business of Law Firms.

For the last nine articles, we have looked at the various financial metrics law firms use to disclose their financial performance. For all but one of these articles, we have stuck closely to the financial accounts of a single law firm. However, beginning with the ninth article, we took a more comparative approach by analysing the function of profit per equity partner and the difficulties in using it to compare performance across the five Magic Circle firms.

Beginning this week, we will depart from a close reading of a firm’s financial metrics but continue with a comparative spirit to critically examine an evolving theme that increasingly defines the UK legal market, especially in London. Specifically, we will look at the threat facing many of the top UK law firms — including the Magic and Silver circles — as they strive to maintain their competitive edge in a market increasingly dominated by US firms. To gain an informed opinion of this issue requires us to make use of the financial analysis tools we have studied so far.

The Problem

The Lawyer published its annual review of the top 50 corporate law firms in the UK in terms of revenue. The data suggests that the top UK firms’ struggle to defend against the encroachment of certain elite US firms continues to intensify.

Here are a few of the most important data points:
  • US firms account for 27 of the top 50 firms compared to 23 in 2020
  • Average revenue per partner at US firms is £3.63m versus £2.67m at UK firms
  • Latham & Watkins is now at the top of the list, supplanting Linklaters, which held the position the year before
The Implication

Before we consider the impact of this, it is worth clarifying that these figures do not refer to each firm’s revenue in its entirety; only revenue derived from its UK corporate work. But for global law firms, corporate work is immensely profitable. By way of illustration, at Clifford Chance, corporate and sponsors work accounted for two-thirds of the firm’s entire revenue in 2021. Though other Magic Circle firms do not break down their revenue into segments, it is likely corporate work contributes to a similar portion of their revenue.

The fact that the US is increasingly dominating the UK corporate market suggests that not only are the UK firms less competitive on UK matters, but they are also facing headwinds internationally in the North American, European, and Asia-Pacific markets. The reason for this is a chicken/egg scenario that begins with the fact that, as a matter of birthright, US firms have traditionally had first dibs to US clients because of organic business development. Given the US economy has been and remains the single largest domestic market in the world, the law firms that advised the largest US clients grew deep pockets that they used to expand into other jurisdictions beginning in the 1960s, approximately a decade before the elite UK firms did the same.

Compounding this advantage, over the past three decades, financial sponsors have increasingly come to dominate the M&A space. As of 2021, private equity firms comprise 30% of buyers in the global M&A market. Here again, the US has had a head start given that most of the world’s largest PE funds hail from the US and have tended to opt for instructing US firms. This preference continues to be born out in the data today: the US firms still originate the bulk of the financial sponsor-led transactions in the UK and internationally.

This is of course a simplification, glossing over the fact that the UK firms have benefited from geographic proximity to the European market and the fact that much of international trade and finance relies upon English law. But what is undeniable is that both elite US full-service firms such as Latham & Watkins or Baker McKenzie as well as corporate boutiques like Davis Polk, Ropes & Gray or Kirkland & Ellis have invested heavily in their UK and European presence, and it seems to be working.

How is this topic relevant to law firms?

One of the best ways you can demonstrate how familiar you are with a firm is to understand its strengths and weaknesses, both internal and external (see the SWOT analysis).

If you are interviewing at a UK firm with a sizeable corporate practice, the fact is that many of the US firms pose a sizeable external threat to their ability to organically grow their corporate and M&A practices. To counter this, each firm needs to leverage its strengths and realign its strategy to minimise the potential consequences. What this looks like in practice depends of course on the firm in question, so you should ensure you understand the nuances of the firm you are interviewing with. You can then apply this sort of critical analysis to demonstrate your understanding of the firm’s business and financials.