New research from Legal Week highlights the mountain that U.K. firms need to climb in order to compete for talent in a global marketplace, with partner profits at the top 10 U.S. firms growing by roughly 50 percent more than their equivalent U.K. rivals over the last five years.
Data from Legal Week’s UK Top 50 and The American Lawyer’s Global 100 rankings shows that the 10 largest U.K. firms by revenue have increased profit per equity partner (PPP) by an average of 15.7 percent during the last five years, compared with 24.7 percent across the 10 largest U.S. firms.
The disparity is even starker when considering a larger group of firms from each market, with the U.S. top 20 increasing PPP by more than twice as much as their 20 U.K. counterparts in the same period.
Across this group of 20 U.S. firms, PPP increased by an average of 25.2 percent between 2011-12 and 2016-17, compared with less than 12 percent at the equivalent largest U.K. firms.
(The research disregards trans-Atlantic players DLA Piper, Norton Rose Fulbright and Hogan Lovells, which are classed as U.K. firms by Legal Week and U.S. firms by The American Lawyer.)
Nine top 20 U.S. firms have seen PPP climb by more than 30 percent over the past five years: Paul, Weiss, Rifkind, Wharton & Garrison; White & Case; Latham & Watkins; Kirkland & Ellis; Sidley Austin; Gibson, Dunn & Crutcher; Simpson Thacher & Bartlett; Ropes & Gray; and Skadden, Arps, Slate, Meagher & Flom.
In contrast, just three of the U.K. top 20 have achieved five-year PPP growth of at least 30 percent: Allen & Overy; Pinsent Masons; and Slaughter and May (with the added proviso that Slaughter does not disclose PPP and therefore its performance is estimated).
Given that the already higher base figures at the biggest U.S. firms mean even a relatively small percentage increase pushes PPP further out of the reach of U.K. firms, the difference in growth rate is doubly important.
For example, A&O’s 37 percent five-year increase boosted PPP by £400,000 ($523,000) from £1.1 million to £1.5 million, but Latham & Watkins’ 34.8 percent hike took PPP from $2.27 million in 2011 to $3.06 million last year—a difference of $790,000 (£600,000).
“My expectation is that the U.S. firms’ growth is linked to the very strong performance of the U.S. economy and the strong performance of U.S.-headquartered corporates and financial institutions, enabling U.S. firms to follow them as they expand and invest globally. Where are the U.K. equivalents of Google, Apple and Facebook?”
While many have long argued that PPP is not the best measure of law firm profitability or success, it remains the most widely used metric within the market.
Many leading U.K. firms, including most of the Magic Circle, have overhauled their lockstep systems in recent years to create more flexibility at the top end in order to better recruit and retain star performers in the face of U.S. advances.
However, as highlighted by these figures, the higher underlying growth in profitability at U.S. firms means the U.K. elite will have to step up this fight in order to remain competitive.
Brettle added: “If commentators are correct that 48 percent of global legal spend is in the U.S. and 12 percent is in the U.K., then it stands to reason that if you do not have a strong U.S. practice, you will find it more difficult. The findings put U.K. firms at a further disadvantage when it comes to hiring and retaining talent, given this is before converting these figures to dollars and making the difference look even more stark. A lot of this is about talent—investing and keeping people because you can afford to do so.”
Within the U.K. top 10, average growth was brought down by Herbert Smith Freehills and Ashurst, both of which have completed Australian mergers during the last five years and both of which have lower PPP now than their legacy U.K. side did five years ago.
In contrast, Morgan, Lewis & Bockius is the only top 10 U.S. firm to report lower PPP for the 2016 calendar year than in 2011—a decrease that has come alongside a significant hike in equity partner numbers following the firm’s acquisition of sizeable teams from now-defunct firms Dewey & LeBoeuf and Bingham McCutchen.