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The paths to partner riches for British and American firms have been very different. One telling indicator: leverage. British firms traditionally have used more lawyers per equity partner to squeeze out big profits. As American firms compete more aggressively against the British in Europe, are they under pressure to emulate the United Kingdom’s higher-leverage model? Yes — but the amount of pressure will depend a lot on the nature and volume of European work that the Americans seek. The British firms still lag behind the top American firms in profitability. On our Global 100 ranking by profits per partner, only five British firms are among the top 30, and none ranks higher than eleventh. Average profits per partner among British Global 100 firms is $760,000; the average for American firms is $895,000. But the British firms have made strides in the past few years. To compete with the American firms, they’ve made profitability a top priority. And they’ve succeeded, to a degree. Their financial formula hasn’t meant working harder than Americans. Expectations for billable hours have recently gone up at British firms, but their partners generally don’t bill as much as those at American firms. Instead, to get closer on the profits charts, the British firms have fielded armies of associates — who are paid about $80,000 to start, much less than their American counterparts — to work on more standard fare at relatively low rates but high margins while partners wait for the next premium deal. In this year’s Global 100, the 18 U.K.-based firms have 6.4 lawyers for every equity partner, on average, compared with 3.3 lawyers for every equity partner at American firms. (In our leverage count, we include trainees at British firms. After school, British recruits enter a firm and spend two years as trainees before they become qualified lawyers. As trainees, they are paid significantly less than in their third year — when they become qualified lawyers — but firms charge for their services, so we count them.) Leverage among the British firms varies by practice type. Firms with practices that lend themselves to standardization or require lots of documentation typically have more leverage. For instance, Slaughter and May, which has a high-end M&A practice, uses less leverage than Allen & Overy, which has big banking and finance groups. Similarly, Herbert Smith, with its large litigation docket, has higher leverage than Freshfields Bruckhaus Deringer, a firm more oriented toward high-end transactions. When top American firms have trolled for more work in Europe, they’ve tended to reel in only the high-end deals. And for firms interested in handling only the U.S. end of a deal, the typical American leverage has worked just fine. But once American firms try to grab a larger share of the big deals — and not just service U.S.-based clients that happen to be involved in a big transaction — they will have to get much bigger, says David Temporal of London-based Temporal Consulting. And because there is less premium work on the Continent than in the United States, that will require “adjusting the resource pyramid” — making sure the new bodies are properly profitable, a practice in which the British firms are well-trained. Some firms are moving faster than others. Shearman & Sterling, which has a top-notch capital markets practice in London, has one of the largest footholds there of any U.S. firm, with about 130 lawyers, including 22 partners. Unlike some New York firms that pay their associates New York rates in London, Shearman pays a “mid-Atlantic” salary for associates, which falls between the London and New York rates. That’s made it affordable to grow. During the past five years, the ranks of Shearman’s London associates — who are recruited as trainees — grew twice as quickly as the firm’s partner roster in London. “Our goal is to become a London firm, not just a London office,” says partner Christopher Bright. Still, some American firms with a mix of high- and low-value work in Europe aren’t ready to push their leverage to British levels. Some see it as a philosophical difference over how to run their business. In a bit of snobbery toward the British, they scoff at “volume” or “commodity” work. Furthermore, they believe that in down times, high leverage becomes a drag — underworked associates dilute high profit margins. Some Americans also believe that increasingly sophisticated clients will want to see partners, not associates, handling their complex matters. “Overseas, there’s going to be a convergence of the two systems,” says Valerie Ford Jacob, co-managing partner of Fried, Frank, Harris, Shriver & Jacobson. “You can have high leverage when your clients don’t expect much partner time. … As that legal market changes … clients will expect more partner time.” British firms may adjust their leverage ratio depending on the economic climate (leverage works best in good times), but few expect it to decrease significantly. There doesn’t seem to be much concern about the sustainability of leverage at current levels. Though British associates made noise about being compensated less than their counterparts in New York a few years ago, it hasn’t resulted in any major market changes. And while the top firms in the United Kingdom have a sotto voce “up-or-out” policy for their midlevel associates, the young recruits keep coming. That’s partly because the firms act as career placement centers for associates who don’t make partner, a situation that is also common at American firms. “[The British firms] still attract bright young people who say, ‘Even if I don’t stay at Freshfields, I’ll put it on my C.V.,’ ” says consultant Alan Hodgart. High leverage at U.K.-based firms came into vogue in the late 1980s and early 1990s. At the time, British firms began to see a tremendous amount of competition for a limited amount of premium work — the kind that demands lots of partner hours and top-shelf rates. To get their share of major transactions, say consultants, a handful of British firms set out to get big. Their philosophy: To serve their clients and gain market share, size mattered. That meant hiring specialists in areas like tax, employment, and real estate. It also meant aggressively adding to the associate ranks, which could provide better margins on standardized work than partners. As British firms aggressively moved onto the European continent in the mid- to late 1990s — by mergers or by acquisitions of small offices — they have continued to use size to their advantage. “They started to manage themselves in a highly effective way,” says Temporal. The competition that shocked British firms into a high-management gear has no parallel in the U.S. Competition has long been a characteristic of the American legal market, but there’s always been more premium work to go around in the U.S. than in Europe. Deals are bigger and more in number. U.S. law firms have also benefited from countercyclical work in bankruptcy and litigation, which doesn’t produce as much revenue for firms in Europe. The result: More firms in the U.S. can be highly profitable without adding as much to the associate ranks. But there’s plenty of evidence that American firms are aggressively adjusting their own lawyer numbers with an eye on the bottom line. Growth in the equity partner ranks among The Am Law 100 slowed from 6 percent in 2001 to 3 percent last year. In 1992, the average Am Law 100 firm had leverage of two lawyers for every equity partner. Last year that ratio was 3:1. The effort to increase leverage will continue, says Hodgart. The reason? It’s what British firms have already been feeling for years: price pressure. So-called bet-the-company work that the Wachtell Liptons of the world do probably won’t be subject to such pressure, but services in finance and capital markets perceived to be less valuable may be. “In the next five to six years, I think we’re going to see clients getting tougher on pricing,” says Hodgart. Maybe it’s time to crank that lever some more.

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