Once again, we are in merger-talk season. There was a flurry of ­activity last year that culminated in the various Sonnenschein, Norton Rose, and Squire Sanders transoceanic combinations. They were notable because they all opted to organize as Swiss vereins rather than single profit sharing partnerships, and all were motivated, at least in part, by a desire to get bigger so they could compete for work and talent that was waiting for those who, well, got bigger.
The wooing continues. Consultants log George Clooney–esque flyer miles trying to complete promising law firm mergers. And partners seek to convince themselves either that they’re not being acquired or that an acquisition is necessary to have a chance at becoming one of the Select 17 (or whatever) who will stand astride the known world, someday real soon.
To paraphrase John Lennon’s lyric, while all these plans are being made, life is happening. Imagine, if you will, that The Global 100 represents the market for high-end legal services. (Of course, it represents only a portion of that market, as many firms who work in that space are not big enough to make the list.) Over the past decade, the G100 enjoyed a spectacular 105 percent growth, to $74.2 billion, roughly $30 billion ahead of a growth rate pegged to inflation. And head count zoomed up 33 percent, to 100,218.
But along the way a market share anomaly developed. As expected, in gross revenue, the 25 biggest firms increased their share of the G100 market, from 40 percent to 42 percent. And their profitability nearly doubled, from profits per partner of $772,440 to $1.3 million. By contrast, the 25 firms with the highest profits per partners lost market share—down by 2 percent. But their profits per partner jumped more than 50 percent, to an average of $2.3 million.
A closer look at the numbers shows that a small group of firms managed to get very big and very rich. There were seven who were among both the 25 largest and the 25 most profitable. In alphabetical order they are: Allen & Overy; Freshfields; Kirkland & Ellis; Latham & Watkins; Linklaters; Skadden; and Weil, Gotshal. The four U.S.–headquartered firms also appeared on the top revenue-per-lawyer charts. As it happens, none are a product of mergers.
What’s going on here? It appears that the long-brooded-about segmentation of the market was, at least as of 2010, firmly in place. The G100 market turns out be a series of markets, where price and price sensitivity vary dramatically. And the result was that over the past decade, while most firms were getting bigger and richer, the gap between the rich and the superrich grew. Billie Holiday had it right: Them that’s got shall get.
This isn’t a failure of vision, skill, or effort. It seems mostly to be a matter of the mix of work any firm has. According to the financial results we log and what we know about the market, we think that the G100 services divide into five rough groups:
• Mission-critical work;
• If-you-want-us, you’ll-pay-our-fee work;
• Important operations work;
• Routine operations work;
• And, commodity work that hardworking firms of all sizes can perform.
All five categories are under fee pressure. Despite that, the first two pay better than the others, and, alas, there isn’t enough of the better-paying work to go around. And, as you go down the categories, the fee pressures tend to increase. By our estimates, the last three categories constitute about two-thirds of the market, roughly $49 billion. We posit that everyone on The Global 100 gets at least a taste of the top-end work, but that a disproportionate share goes to the most profitable firms.
Will mergers change that? Not yet. As best we can tell, the recent G100 mergers may help the new entities attract a bit more of the mission-critical work because of their new outposts or their new recruiting war chests. But they’re not fundamentally changing the practice mix; they’re about building strength, not catapulting up the ranks.
Strength, of course, is good, locally, nationally, and globally. Baker & McKenzie and Jones Day discovered this decades ago. DLA Piper, Reed Smith, and K&L Gates would all be mired in their second- and tertiary-city pasts but for their willingness to get bigger and bolder. Their moves bring their own challenges, some still to be resolved. They may buy a piece of the future. They don’t buy a place in the first tier.