It is often said that American law firms are winning the war for London while British firms are failing in the United States. As with most narratives of this kind, there is some truth and quite a bit of fiction to this story.
It is true that a handful of U.S. firms have done well in London. American firms at the higher end of the market, for example, appear to have gained an upper hand against their U.K. counterparts in terms of profitability and their capacity to attract and retain top talent (see ALM Intelligence’s three part series on this topic). It is also true that U.K. firms have generally, though not uniformly, struggled to penetrate the U.S. market.
That said, generalizing these stories and applying them to the entire market is wrongheaded. This two part series, using data on law firm performance, paints a more nuanced picture of success and failure on both sides of the Atlantic. It also reveals some important truths about the globalization of the legal market and how firms should think about expansion.
The US Invasion
The expansion of U.S. firms into London has been one of the most visible trends in the legal market over the past decade and a half. Since 2000, 47 American firms have entered the London market. In that period, the number of London-based lawyers among Am Law firms increased by 227 percent, from just over 2,000 lawyers at the turn of the century to nearly 7,000 today (see Figure 1).
The expansion of American firms into the London market has not only been limited to office openings and lawyer growth. Am Law firms have also successfully penetrated many key practice areas. The most notable success of U.S. firms, and perhaps the most important, is in the market for high value mergers and acquisitions work.
Advising on high-value mergers and acquisitions in London was once owned by the Magic Circle and other elite U.K. firms. According to data from Mergermarket, a handful of elite U.S. firms have put an end to their dominance. Last year, White & Case and Cravath, Swaine & Moore were ranked 2nd and 3rd, respectively, in terms of the combined value of European deals they advised on. Moreover, seven of the top ten ranked firms in this area were U.S. based. Figures from the first half of this year show similar trends, with U.S. firms holding eight of the top ten rankings.
Nuance to the Numbers
There is a tendency to conflate these two trends – to link the success of Cravath and White & Case in the mergers and acquisitions space with the broader trend of American firms’ expansion into London. This tendency, fueled by the stunning growth of U.S. firms in London and the near constant news of lateral partner moves from British to American firms, has caused many to conclude that Am Law firms have been broadly successful in the U.K.’s capital. An analysis of the data, however, suggests that conclusion is unfounded. Success appears to be limited to a small number of firms.
Of the 5,000 lawyers added by Am Law firms in London between 2000 and 2017, over half were from ten major mergers. The Norton Rose Fulbright merger, alone, added 700 London based lawyers to the Am Law ranks. What’s more, another 28 percent of the growth originated from 10 highly successful firms (see Figure 2), adding over 1,300 lawyers in London since 2000. The next 10 firms, account for an additional 12 percent of the growth.
The remainder of the growth of U.S. firms in London – accounting for 6 percent of the total – originated from 47 U.S. firms. Those 47 law firms added only 570 London based lawyers over the past 17 years, a rate of less than one additional lawyer per year for each firm.
The truth is that a significant number of U.S. firms have failed in London. Consider the following:
- Twenty-four percent of the offices opened by Am Law firms between 2000 and 2017 have since closed – a shocking figure given the costs associated with opening foreign offices (see Figure 3).
- Twenty-seven percent of the Am Law offices opened since 2000 remain very small, housing less than 10 lawyers.
- Only 9 percent of the Am Law firms that have entered the London market since 2000 have grown to over 100 lawyers and only one of those has done so without a major merger
The U.S. firms that have done well in London fit a specific profile. They are highly profitable, have been active in London for decades, and focus on high value transactions work. There are exceptions, of course. Baker McKenzie is among the top ten fastest growing firms in London. It has added nearly 100 lawyers there since 2000, and is the 5th largest U.S. firm in the market. Baker, however, is not highly profitable. In that sense, it breaks the mold of other U.S. firms that have done well in London. Baker does, on the other hand, fit the remaining criteria. The firm has been active in the London market for decades, and it focuses on transactions work, though not the highest value areas.
Lessons on International Expansion
The successes and failures of U.S. firms in London reveal two important truths about global expansion. The most important is that opening offices abroad is difficult and often ends in failure. Law firm leaders should keep this in mind when considering the idea of opening a new office. The reasons in favor of expanding into new territories are often attractive. The idea of new revenue and new clients is obviously alluring. It is easy to forget that the market the firm is considering has existing competitors and the clients the firm intends to attract have existing providers. Rents must be covered, international (business class) flights must be paid for and new management staff, often, needs to be added. All of this typically gets lost, or minimized, in the discussion – helping explain why nearly one-third of office openings fail.
The second lesson is that the firms who succeed abroad often benefit from institutional advantages. Highly profitable U.S.-based transactions firms, for example, have done well in London for three reasons. First, their above average profitably allows them to attract and retain top tier talent – an important advantage when competing in high value markets. Second, elite U.S. firms have used their strength in the U.S. market to provide a service U.K. firms have difficulty matching – a link between the world’s two most important financial centers. Last, the most successful U.S. firms in London have been there for decades. They have invested time and significant capital to learn how to compete and win in the London market.
This analysis suggests that aspiring firms looking at London, or other international markets, should approach the question of expansion skeptically. They should ask themselves what competitive advantage they have that others do not. They should also consider if they are capable of putting in years of work to develop a sustainable market position. Above all, firms looking to expand should closely examine the true track record of their peers to determine why they would fair differently.
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.