Part I: The Strange Tale of How Elite US Firms Surpassed Their UK Counterparts
The first in a three-part series looking at competition between elite US and UK firms. Part I presents evidence that the US elite has vanquished their UK counterparts
August 02, 2017 at 10:13 AM
1 minute read
By Nicholas Bruch and Hugh A. Simons |
Updated on August 02, 2017
Thank you for sharing!
Your article was successfully shared with the contacts you provided.
Part I: The evidence that the US elite have eclipsed the UK’s magic and silver circle firms
Editor’s Note: this is the first in a three-part series looking at competition between elite US and UK firms. Part I presents evidence that the US elite has vanquished their UK counterparts; Part II examines how this victory came about; and Part III draws out lessons for firms of all types.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.
Part I: The evidence that the US elite have eclipsed the UK���s magic and silver circle firmsEditor���s Note: this is the first in a three-part series looking at competition between elite US and UK firms. Part I presents evidence that the US elite has vanquished their UK counterparts; Part II��examines how this victory came about; and Part III��draws out lessons for firms of all types.
The top end of the legal world has long been dominated by a small group of elite US firms and their UK counterparts���the magic and silver circles. But no more. The US elite have left their UK brethren behind. The proof? Lateral partner movement between the two shows that US firms have a clearly established an upper hand. The higher profitability of the elite US firms, combined with their wider compensation bands, has rendered the UK elite unable to compete on remuneration for the most commercially-successful partners.
Talent flow among the global elite
To appreciate the US elite���s victory, it helps to start with a view of competition. Well-matched competitors score against each other in a steady back-and-forth. Thus, for competitor law firms, one would expect to see healthily reciprocal flow in lateral partners���for each partner won, there would be another lost. However, for the elite US and UK firms (as identified in Figure 1) the data show the a lopsided exchange: of the 35 partners who moved laterally between elite US and UK firms in the past five years, 29 were to the US elite from the UK elite; only 6 were in the opposite direction, (see Figure 2).
The asymmetry is even more stark in each group���s home market: 14 partners moved to the US elite from the UK elite in London; only 2 moved from the US elite to the UK elite in the US. Lateral movement was especially robust last year���2016 accounts for almost half of the 5-year total, indicating the lopsided flow is unabated. Just three law firms���Kirkland & Ellis, Gibson Dunn, and Davis Polk���account for the bulk of the US elite���s hiring. Each of these firms has gained more partners than they have lost to their elite UK counterparts. In contrast, net losses pervade the UK firms.
Profit and compensation differentials
As one would expect, this one-sided flow in partner talent aligns with the difference in profitability between the US elite and their UK counterparts. What one might not expect is just how wide the profit gap has become. With the exception of Slaughter and May, the low profitability end of the US elite is operating at profit per equity partner (PPP) levels some 30 to 60 percent above their UK counterparts, see Figure 3. Note that this gap is not an artifact of current exchange rates as the analysis uses long-term equilibrium exchange rates (i.e. purchasing power parity) both for converting the UK firm���s non-sterling revenues into sterling, and again for converting bottom-line sterling-denominated profits into dollars.
Differences in firm average profitability tend to understate the differences in compensation for more commercially-successful partners. For these partners, firm compensation ratios���the difference between the highest and lowest paid partner cohorts���play an important role. US firms are increasingly moving to systems wherein individual partner compensation more closely reflects a partner���s contribution to firm profit. UK firms, by contrast, are still operating on variations of lockstep systems wherein a partner���s compensation is less tied to their individual contribution to firm profit and is more driven by firm average profitability and partner seniority.
This difference in compensation philosophy has led to US and UK firms having very different ratios between the compensation of highest and lowest earning partners. Last December, for example, Kirkland & Ellis moved from an 8:1 to a 9:1 ratio between the compensation of their top and bottom bands. Lockstep firms traditionally operate at about a 2.5:1 ratio.
So how big is the compensation difference at the top end? For a 9:1 firm, a reasonable rule of thumb is that the lowest compensated partners earn about one third of firm average while the top tier earn about 3 times firm average. Similarly, for a 2.5:1 lockstep firm, a reasonable estimate of the range is from 0.60 to 1.5 times firm average. Applying these ratios to an elite US firm with average compensation of $3.5m, and a Magic Circle firm with average compensation of $2.0m, reveals that compensation at the top end of the US firm is about 3.5 times that at the UK firm, see Figure 4.
Of course, many UK firms have departed from a strict one-firm lockstep model and, in particular, have gone off lockstep at the high end. How far off have they gone? In the public Companies House filings of the magic and silver circle firms, the highest ratio of top compensation to average compensation identified is 2.3 times. This implies a ratio of lowest to highest compensation of 5:1. This closes the gap to a 9:1 US firm from 3.5 times to 2.3 times. Thus, even with departures from lockstep, the US elite can offer the top end of partners a compensation premium that would not go unnoticed by would-be movers.
*������������������ *������������������ *������������������ *Part II of this three-part series looks at the origins of this performance gap, its momentum through the great recession, and how it is unlikely to be closed.
Nicholas Bruch is a Senior Analyst at ALM Legal Intelligence. His experience includes advising law firms and law departments in developing and developed markets on issues related to strategy, business development, market intelligence, and operations. He can be reached by Email, Twitter, or LinkedIn.
Hugh A. Simons is an ALM Intelligence Fellow. He is a former senior partner and executive committee member at The Boston Consulting Group and the former chief operating officer at Ropes & Gray. He is currently conducting research for a book on the fundamentals of elite law firm strategy.He can be reached by Email
With this subscription you will receive unlimited access to high quality, online, on-demand premium content from well-respected faculty in the legal industry. This is perfect for attorneys licensed in multiple jurisdictions or for attorneys that have fulfilled their CLE requirement but need to access resourceful information for their practice areas. View Now
Our Team Account subscription service is for legal teams of four or more attorneys. Each attorney is granted unlimited access to high quality, on-demand premium content from well-respected faculty in the legal industry along with administrative access to easily manage CLE for the entire team. View Now
Gain access to some of the most knowledgeable and experienced attorneys with our 2 bundle options! Our Compliance bundles are curated by CLE Counselors and include current legal topics and challenges within the industry. Our second option allows you to build your bundle and strategically select the content that pertains to your needs. Both options are priced the same. View Now
Law.com Compass includes access to our exclusive industry reports, combining the unmatched expertise of our analyst team with ALM’s deep bench of proprietary information to provide insights that can’t be found anywhere else.
Law.com Compass delivers you the full scope of information, from the rankings of the Am Law 200 and NLJ 500 to intricate details and comparisons of firms’ financials, staffing, clients, news and events.