EVENTS AND ROUNDTABLES > Roundtable > Global London Debate
In-house participants included
To mark our annual Global London report, Legal Business teamed up with Venturis Consulting to assess the dramatic progress made by US law firms in the City. Can anything slow the advance?
It has been the defining force in the City legal market this decade: the emergence of US law firms as credible and increasingly potent operators in the Square Mile. With these firms representing an increasingly existential challenge to City rivals, we assembled a group of senior practitioners to mark the publication of our 2015 Global London report.
The wide-ranging debate – covering strategy, dramatically shifting transatlantic markets and the fierce battle to attract the best lawyers – proved one of the most incisive discussions Legal Business has ever held.
Alex Novarese, Legal Business: Aside from the obvious point of a huge domestic economy, what is driving American firms in London?
Charlie Geffen, Gibson, Dunn & Crutcher: It is English law and the major financial centre that London is. The US and UK are the two systems that cover 90% of the transactions we all advise on. After that, strategies diverge. Many clients say to me they only go to a law firm for three reasons: the first is for advice, which they do not mind what they pay for; the second is to find out what the law is, which is not as complicated as we all make out; and the third is for execution, process and resource.
The second two parts are more commoditised. Even on the most complex M&A transactions, there is a very significant proportion of the second two types of work. It is possible that the people who focus on the first advice piece, which requires a low partner associate leverage model, are going to separate themselves from the larger firms, which will do more of the second two categories with a high leverage model, which is how they make their profits. The recent launches in Belfast, Manchester and Glasgow are an attempt to deal with this issue.
Nick Buckworth, Shearman & Sterling: The old US model was often referred to as a bunch of partners sharing a common cost base, and it is changing. Many of the firms that came across to the UK almost came by happenstance. They had a client or there was a privatisation with a US angle and suddenly there was an opportunity, but no one really thought about it. Now, as pressure starts to come on to the business, profitability is the currency. Firms are saying: ‘We can make money out of this if we position ourselves right.’
What I see happening is not so much that there is any major new wave of American interest. They are just becoming smarter, better, more strategic and are starting to drive their global businesses. That is what the Magic Circle did.
Simon Thompson, Venturis Consulting Group: US firms have now realised that the world is global and that they have to be able to operate effectively across markets.
Mark Stamp, Milbank, Tweed, Hadley & McCloy: US firms have competitive advantages over the traditional English model. There is a powerhouse in the US that is capable of being exploited globally. The margins of US firms are much higher than UK firms. They tend to be smaller and have less of a management infrastructure. The amount of time that is spent on management in large UK firms is a substantial cost given the number of hours spent on it by partners. It is a real competitive disadvantage that is not yet fully appreciated.
The second major advantage that US firms have over English firms is flexibility in remuneration. There is still a view that lockstep is a god, which all firms have to worship if they are to have a collegiate culture.
Alex Novarese: The Magic Circle no longer believe that, do they?
Mark Stamp: I no longer believe it. It was true. It was one of my canons of belief ten or 15 years ago. It is absolutely clear, and I know from my own firm, where you can have modified lockstep done in a fair, collegiate and transparent way, that works. It gives flexibility to the firm to pay the exceptional performers an exceptional amount of money. You have seen some absolutely fantastic stars in the UK firms, who you never thought would leave, have moved because they now see the opportunity elsewhere. It is not just about the money.
Nick Buckworth: It does not really explain the next wave of investment.
Mark Stamp: It is clear that, if you put resources into the UK market, you can get real and substantive returns.
Charlie Geffen: A senior partner of a top-ten New York firm in 2013 told me that, in 2012, the top ten New York firms shrank by 0.5% and the top ten non-New York firms grew by 2.5% in revenue.
If you are sitting in New York, the most profitable town in the world for legal services, the pressure to seek growth is not as great as it is if you are outside. All firms continually need to achieve profitable growth to strengthen their business – some of the non-New York firms have pursued that more aggressively than the New York firms.
In terms of the war for talent, the best partners move because they are finding themselves pitching for business with one hand tied behind their back. They are disadvantaged because they cannot do US capital markets and the US regulatory piece, and this is losing them business.
You add on to that the high leverage model; by their mid-to-late 40s partners are being sucked into management, which they mostly hate. They become partners later and the high-leverage model means that at 50–55 you are on the way out, when you are most able to give the advice piece.
Ed Parker, Mayer Brown: A key driver for certain US firms has been the growth of the idea of the global client and industry team. Two years ago we had a retreat and we had just hired some people from a now defunct law firm. Rather cruelly, they put a chap from this firm up on the podium and asked him what it was like in terms of co-operating with your partners. He said that it was rather like prison eating. In prison, you hunker around the bowl.
Various consultants then came on and presented a graph that showed the firms that had successful global client and industry teams, how they were growing and their profitability. London is an important jurisdiction and so is New York. Inevitably that is going to drive investment.
Alex Novarese: Presumably, a big part of what has happened with American firms was trial and error. They started figuring out business lines that had been particularly effective, notably around client portability. Private equity, funds, global investigations… That is a big shift from the original model. How far does that process go?
Perry Yam, Reed Smith: We get a call from a headhunter everyday looking to recruit for firms that are not even established here yet, so I think it will continue. Whether it will be successful remains to be seen. If we had a headhunter around the table, I am sure they would say they have a mandate from half a dozen law firms looking to establish in funds, including private equity teams, in the same way as many of my previous partners have now set up a diaspora of private equity practices in the City. It makes it a more competitive environment, because inevitably private equity firms tend to instruct lawyers individually instead of law firms, which is why the law firms tend to recruit individuals, because the clients will tend to follow them. At Berwins in 1990, Apax instructed Jonathan Blake on a buyout for £500,000, which was a big deal in those days. How many people service and go after Apax now? Maybe ten or 15 different law firms.
Alex Novarese: What is it like growing a practice at Reed Smith, which was not historically known for private equity?
Perry Yam: It is interesting, because I would not categorise our firm as a US law firm. It is an international law firm. Why did I leave SJ Berwin? I was trying to sell services to private equity firms that I had acted for. They said: ‘Actually we are selling to a US buyer; it is being governed by New York law or Delaware law.’ I say: ‘That is okay; we have a “best friends” policy with so and so.’ They would reply that they would rather have one law firm and so were going to Baker & McKenzie or whatever.
I then left. I would like to say I had forethought, but it was coincidence and it had been because I had come second in a managing partner election. I thought to be a successful law firm in London in private equity you needed to be global. To be global you needed a US capability. It was quite clear that we were not going to merge with a US firm any time soon.
David Temporal, Venturis: Conversations with US firms, both before and since the financial crisis, highlight a shift in mood towards international growth. They recognise that the domestic market is not growing as it used to and are looking internationally for profitable growth opportunities.
US firms have realised that they can no longer operate in practice areas that are not core and have sharpened the focus accordingly.
US firms do enjoy huge structural advantages in key practice areas and industry sectors: private equity is one such example, essentially a US product and an industry that has global traction. US corporations and institutions are tremendously loyal to their US legal advisers, often instructing them in other jurisdictions.
There is a tremendous momentum for US law firms to continue to build out into the London market. They have woken up to strategy and are beginning to leverage core assets more powerfully.
Alex NovareseWhat I do not understand about leading London law firms is not that they want to keep lockstep, but why keep this particular compressed, inflexible version of lockstep?
Charlie Geffen: I don’t agree with the argument that lockstep is essential to drive collegiality. A lockstep firm at its most extreme is a brutal system. What matters more is what you measure, not your architecture. If you have a lockstep firm where the only information that is circulated around the firm was personal partner billing, it would be a ghastly place to work. But at a firm with a more flexible architecture where the key focus is on the global and not local or practice, profit and loss accounts and partners are thoughtfully assessed on their overall contribution, then that can drive a very collaborative culture.
If the only way people at the top can make more money is by growing the whole cake, you will have a very different culture to one where those at the top of the equity can still be given a $1m bonus, because of the message that would send through the system.
Mark Stamp: Remember UK firms generally have been very good at adapting to the market. Lockstep was fit for purpose in the 1970s and 1980s. It started creaking in the 1990s and its rationale has been significantly undermined in this century. I have no doubt that we will see firms change their remuneration structure in response to the demands of the market.
Lockstep is terribly inflexible – the only option with a partner in later years who is not performing strongly is to ask them to leave rather than to adjust the amount that they earn, so it is wasteful of talent. However, to change it you need a partnership vote – it is not a quick fix and requires cultural change. A partnership vote is 75%: turkeys and Christmas.
Alex Novarese: Many of the people around this table have experienced several pay systems. What works in your experience?
Jan Matejcek, White & Case: The people who come to us from lockstep firms generally say their number one reason for leaving is what they perceive as unfairness. They have a lot of people in management and they believe that there are too many people in management who are not necessarily working that hard, and they also have a hard time getting co-operation from partners who are not really motivated. Of course, they can earn more money in a firm when they change laterally, but frustration is the negative element of the lockstep.
I agree with you 100% that it is not a collegiate system. Ultimately, you need to balance performance and compensation. The biggest problem at [Magic Circle firms] is that you have these amazing clients, which are institutionalised. How do you decide whose client it is? Just because you allocate this client to one partner, they essentially get a free ride for life.
Alex Novarese: How do you achieve a balance between getting collaboration but also personal incentive to grow the business?
Nick Buckworth: The more you can de-link culture and compensation, the better, because you can set expectations and behaviour, and you can set a performance culture. If you are profitable enough, money ceases to be an issue. Okay, you want that bonus, but if you are comfortable with what you are being paid, you can create a culture in which people are there for each other. Behaviour is something that the leadership of that firm has to set and deliver.
Helen Bradley, Baker & McKenzie: We have a modified lockstep at Bakers, but part of the problem with the partnership model is that you have to get the turkeys to vote for Christmas. When we have done this at Bakers the partnership has usually been pretty enlightened, but it is never easy. Our key challenge has been what to measure. One of the things we’ve focused on a lot is collaborative behaviours and how to drive those. That is fundamental to moving the business forward, but it takes a bit of faith because often the collaboration that we want does not generate income today. We hope it will generate income tomorrow, but you have to work hard to get your partners to buy into that strategy and focus on the right clients.
Ed Parker: A strict lockstep seems to force people out at 55. In my law firm, the oldest partner joined the firm in 1956. UK firms have been dominated by thinking ‘we will have deadwood with people at this age’, instead of thinking ‘we have really great lawyers’.
Nick Buckworth: If you are looking at the Magic Circle firms, are there any that are really lockstep anymore? You look at Clifford Chance, for example: this is a firm that has started the journey. It has genuine aspirations to be a global firm, which means, ultimately, they have to get the US right. It is already breaking down.
Simon Thompson: You are absolutely right, historically in lockstep firms the partners were there for life. Now all of a sudden, five or ten years into the lockstep, the managing partner turns up and tells partners ‘you aren’t performing so we’d like you leave’. The managing associates are thinking, ‘I have to go through all of this to become a partner and then the firm can just tell me to go away anyway in five years’ time?!’
Mark McAteer, Legal Business: How much is remuneration a factor of the success of US firms in the City of late and how much is it the shift in the dynamic of power?
Charlie Geffen: It is the ability to do US capital markets work, which the English firms find difficult. US regulatory work is increasingly important as well.
If you look at the legal directories now in the private equity world, fund formation shifted first because so many of the investors are American. Something like 26 of the 28 ranked lawyers in London who do fund formation now work for American firms.
Finance has grown because the English firms have not been able to crack high yield. Something like 65-70% of the ranked finance lawyers in London now work for US firms. It was inevitable that the deal lawyers would follow; I guess 65-70% of private equity deal partners are now working for US firms in London. Corporate has not moved to the same degree, but M&A lawyers are less jurisdictionally specific. You do not need to be English to give good M&A advice.
Nick Buckworth: It is entrenching because US technology is being exported so even if it says ‘English law’ at the bottom of it, increasingly it is US technology driving the financing structure.
Charlie Geffen: I agree. The US firms are now dominating the financing market at the higher end for the alternative asset managers. The US regulatory system is ten or 20 years ahead of the English system. The increasingly American general counsel of the big banks here will say: ‘The US lawyers understand how regulators think better than English lawyers.’ They would, because they have been doing it for ten or 15 years longer.
Jan Matejcek: It is the perfect storm. We have a big banking practice and it has been quite a dramatic development. The percentage of financing coming through the banking side of the business has dropped significantly, whereas capital markets has increased a lot. Then you have this whole alternative capital provider space, which is essentially US-driven business.
Then the sponsors – which I think is a really interesting development. It has also popped up in New York where essentially the borrowers can say: ‘Firm X is too difficult; we want to work with Firm Y as your counsel.’ Having a banking relationship is actually like a handicap.
Alex Novarese: The rise of the sponsor or fund-driven law firm is one area where London firms have struggled to cope. It seems that they are culturally not geared up to build those relationships.
Charlie Geffen: One of the explanations is the number of alternative asset managers in the US. They now invest not only in private equity but credit funds and real estate as well. Increasingly, private equity is not necessarily the biggest pot of money; the credit fund bit is.
David Temporal: We are often consulted by US firms who have yet to develop a compelling strategic rationale about building up in London. We often hear: ‘We just want to be in London.’ I say: ‘London needs another mid-sized law firm like a hole in the head. You need to have a clear and compelling strategy.’ Often these firms do not hire us but hire a headhunter, hire a bunch of lawyers, but unsurprisingly fail to build anything distinctive and enduring. Some of these firms could do better; others should not be here in the first place.
Nick Buckworth: We could probably all fund you to take that message to the US.
David Temporal: What I detected in conversations with US law firms who have been successful in London is that they do have a better sense of strategy, building on domestic strengths that have traction in the international markets: practice areas such as private equity, litigation and high-yield debt, or sector strengths such as energy, technology and pharma. We see now that firms are coming in with a much more strategic play.
Nick Buckworth: We have not yet touched on the US firms’ appetite for investment. How long are they willing to back these operations? I certainly look at our firm and the ability of it to look at the performance of its offices as a whole has become so much more sophisticated. As the squeeze of profitability and individual partner performance becomes greater, they ask: ‘Why are we spending money over there?’ This is just the beginning of a shake out, if you project this forward.
Helen Bradley: There are incredible amounts of money being spent on partners. But I’m sceptical that all those moves are sustainable. Sometimes firms make these hires hoping that two plus two is going to equal ten. We look at a lot of these candidates and we’re often interested, but you also have to ask the question: ‘How long can the rest of the office support them? How long are the rest of the partners, who are not taking home £4m, prepared to support them?’ We don’t want to be part of the trend we’ve historically seen in the market, where someone comes in on big money for a couple of years and then flips to another firm.
Alex Novarese: Is there enough focus now on trainees and associates? Has that become the Achilles’ heel of some London firms? The partnership numbers being made up are pitiful.
Jan Matejcek: There are very different strategies for some firms. In a big, international market like London, a financial centre, you can have a viable boutique corporation.
Where it becomes complicated is where you do something beyond that. This is a challenge that everybody is going to face. Just looking at it in London or New York – a lot of the business into these firms comes from the network. In our case, probably 40% of the business in London comes from the network, not from the US. We want to be a big English firm. We want to be one of the top English firms.
Mark Stamp: You are never going to get the best associates if they cannot see a career path. You will get the people who want to take the largest cheque, who ultimately are not integrated in the firm in the way you would ideally like. As we know, having good associates is key to a premier law practice.
Jan Matejcek: I agree. Being a growing firm is a huge advantage, just by virtue of growing. Growing is a decision that has its own knock-on problems. When you grow, you have to take on the mid-market and other business. The next thing you know, you have all of these support people who you do not necessarily want as a big part of your practice. Managing that growth and that talent, having the best people, showing them a path forward yet keeping to the high end of the business, is a constant challenge that we all have to deal with.
Ed Parker: Jan caught it there when he said we have to have a growing business. You cannot establish a business by handing over to an associate and saying: ‘Create the business and grow it.’ Making up those associates means the people who you brought in to start those practices have to have made a success of it.
Alex Novarese: I hear a lot of London firms say it is a flat market, and I look at the numbers coming out of some of the foreign firms in London and think: ‘It is not flat. You are just losing business to American firms or, in some cases, in-house legal teams.’ Growth matters, but I want to get some thoughts from the table. How easy is it for Baker & McKenzie to have some momentum of growth?
Helen Bradley: Bakers has a great brand, which we have enhanced significantly over the past few years. We have really started to focus on certain core money centres and making sure we get that right. Our challenge is: do we want to be giving general commercial advice and executing on large M&A? Our strategy is a full-service strategy to act across the board for as many FTSE 100 clients as we can. That does mean that you are not just doing the sexy M&A deals.
Alex Novarese: Is that a good way to go? I have seen a lot of firms get dragged into low-margin stuff by pursuing that strategy.
Helen Bradley: In times of M&A booms, our numbers will not be at the level of our peers, but then we are never dragged down to their level either. There are pros and cons. Certainly our strategy is to go for much more high-end value transactions.
The war for talent
Alex Novarese In terms of the junior associates that apply to your firms, how do you feel about the talent? Do you have visibility with law students?
Helen Bradley: In terms of the number of people applying and the quality, it increases every year. The problem is how we retain that fantastic talent because we cannot make them all partners and yet they would have made partners just a few years ago.
Charlie Geffen: Why does it matter that you cannot make everyone partners?
Helen Bradley: What options have we got to retain them?
Charlie Geffen: From the business’ point of view, the best symptom you can have is that you are growing at the rate you want to grow, you are making great people partners and you have a big choice. It is not fun telling people that they cannot be partners, but take the business’s point of view.
Helen Bradley: It is really important to bring people through the ranks and Bakers has been incredibly good at that. It’s a problem the Magic Circle has faced for a while. We’ve certainly benefited from hiring senior associates from the Magic Circle in targeted areas over the last few years.
Charlie Geffen: Look at Slaughter and May, and the most successful Anglo-Saxon law firms in the world, they make up a tiny number of people as partners and they still attract the best talent.
Ed Parker: Making up lots of partners is a relatively recent phenomenon. You did not have this until the sudden explosive growth in the early 1970s through the 1980s. One older partner that I spoke to had an actuary do an analysis and found that, at the speed that London firms had been growing at that point, everybody in western Europe would have been working for those firms by this stage in 2015. Without that growing profession and with a relatively young partnership base in London, a consequence of leverage is that you cannot make these people partners.
Alex Novarese: Mark, you work for a lean firm with pretty low leverage. How important is growth?
Mark Stamp: Very important, but we are very keen as a firm to have measured growth. It is about leveraging your strengths. Our strengths in Milbank are our specialities in various industry areas and various practices, and using those to gain high-value, complicated work. We are not on any panels in corporate, given the size of team needed to support such a relationship.
However, if there is, say, a big aircraft deal, we will get a look-in on the corporate side because of our transportation expertise. That allows you a very great strategic advantage, because it means you do not end up doing the more commoditised work at lower margins. How sustainable that strategy is in the medium term I do not know, because we need to build up corporate beyond that. You then start facing all of the other issues associated with that but, at the moment, that strategy is really working for us.
Perry Yam: I have seen such a fundamental shift in the quality and the mindset of the people coming through. I am 47; I was at law school in 1990. I remember quite clearly that, when I was at Berwin, I was one of 13 trainees – all I wanted to do was be a partner of a law firm. That was the be-all and end-all. I would never go home before the partner said I could. If I was called in on an all-nighter I was as excited as I could possibly be. We do not see that today.
Simon Thompson: You are in a management position, in control of your business, so you are probably right, but you can make the decisions about how your firm recruits people.
Nick Buckworth: One of the major causes of attrition in most law firms is the cynicism of the partners. I do not remember my partners being cynical. There was always inspiration; there were always people you could turn to who were interested and wanted to motivate you to be successful. Now there is a level of cynicism among partners and maybe a lack of ownership.
Perry Yam: The reason I chose SJ Berwin was I did the interview and they asked me to step outside afterwards. They made a decision, and gave me the job there and then. There were 30 partners in the law firm; it was 15 years old. It was exciting.
This point is key. Today, there are so many law firms where very few partners are home-grown talent who can say: ‘This is my firm.’ You are just guns for hire in some sense and there is some cynicism because of that.
Mark Stamp: I do not think that it is cynicism; it is disinterest. The reason I make a distinction is that, today, partners in larger firms think: ‘That is not my responsibility. That is HR’s responsibility.’ I grew up with a mentor. I suspect that most of us did have mentors – somebody you looked up to, who brought you along and was responsible for your personal development, who looked after you. That does not exist in the same way. It is all to do with the size.
Alex Novarese: Is that something of an opportunity for smaller firms?
Mark Stamp: That is why I love being back in a smaller firm. I feel empowered and that it has brought out the best in me again, because it is what I grew up with.
Simon Thompson: That is not a direct function of size. It is much more to do with firm leadership and strategy. Not all large firms are the same – some have developed much more innovative and open cultures.
Alex Novarese: What do people think the response of the Magic Circle firms will be? They need to tackle issues in remuneration and structure.
Charlie Geffen: Given that they have largely not got the US, what can they do?
Alex Novarese: There are some challenges where they are simply swimming against the tide, but there are lots of things that they could do that they are not doing.
Nick Buckworth: The key challenge is to penetrate the US market. Until this happens, they will continue to be at a significant disadvantage. They need a kit of half a dozen measures to respond operationally [to the challenge of US law firms]. They need to tackle issues in remuneration and structure. New York law and New York practice are going to drive not only financing but increasingly regulation, probably therefore disputes.
Mark Stamp: In the short term, it is going to be defensive. It is going to be changing the lockstep systems. I know you say it is half-hearted at the moment, but it takes time for this train to get out of the station. They are going to try to retain their existing talent; that is the first thing. You are in a tug of war for talent.
Alex Novarese: Clifford Chance has been waiting 15 years for the train to get out of the station.
Mark Stamp: Fair enough, but this is what I think they need to do. The only other thing that they can do, which is going to be almost impossible, is to significantly shrink in size.
In the absence of an alternative credible US strategy, the only option is to merge with a US firm. A merger with a premium US firm is only achievable if the UK firm is of a comparable size, since the US firm is likely to be the top dog and it will not even consider a merger unless its target is capable of being controlled.
David Temporal: The US is a critically important issue. Growing profitability to compete with the top US firms is vital, and to do so will inevitably require a presence in the deep and lucrative US market, and shrinking back to the most profitable areas.
Building powerful global M&A and litigation practices is critical to profitability and global leadership. The high exposure of some of the Magic Circle firms to the banking sector is an issue requiring strategies to drive down delivery cost. This can drive the whole mindset of the firm the wrong way.
At the moment the top UK firms are so strong culturally that they would want to be the acquirer of a US firm. Whether they can achieve that with the quality of US firm that they want to attract is another matter.
Mark Stamp: That is the point. The premium UK firms could acquire a US firm, but they will not do it unless it is an absolutely top-tier name. So they will have to make themselves attractive as a target. Profitability is no longer the key issue. It’s size.
Alex Novarese: Are we not getting to a point where London and New York are moving into synchronisation, and they will be a dual hub? The pay bands will pretty much match, as will the levels you charge. Magic Circle firms need to stop trying to be a London hub to a global network. They need to become American-Anglo firms; that is the hub – NYLon. Everything else is secondary.
Jan Matejcek: We are seeing Freshfields doing some smart things. We compete against them for US work and they are doing it well. They are spending real money and getting real people in. It is difficult for the Magic Circle because they are so big, and the infrastructure and cost of the overheads is so high.
Alex Novarese: Final thoughts: what is the outlook for this very broad breed of firms? How confident are people feeling?
Charlie Geffen: We are close to reaching a tipping point, leading to the increasing dominance of the US firms. There is that great Churchill quote that ‘the Americans always do the right thing, after they have tried everything else first’. The dynamics of the US capital markets, US regulation, the lower leverage model, for those who follow it, and the later retirement age at US firms are powerful forces. I would not dream of predicting how long it would take, but I do believe it is unstoppable. It is difficult for the English firms to create a credible narrative that they will be stronger tomorrow than yesterday. LB
- Mark McAteer Managing editor, Legal Business
- Alex Novarese Editor-in-chief, Legal Business
- David Temporal Partner, Venturis Consulting Group
- Simon Thompson Partner, Venturis Consulting Group
- Helen Bradley Head of corporate finance group, Baker & McKenzie
- Nick Buckworth Managing partner London and Europe, Shearman & Sterling
- Charlie Geffen Chair of London corporate, Gibson, Dunn & Crutcher
- Jan Matejcek EMEA head of M&A corporate, White & Case
- Ed Parker Global co-head of derivatives and structured products, Mayer Brown
- Mark Stamp Partner, Milbank, Tweed, Hadley & McCloy
- Perry Yam Head of private equity for Europe and Middle East, Reed Smith