City elite should quit while they're ahead
They’ve done it. The big gambles — defensive and offensive — that UK firms made a decade ago as the concept of a global legal market emerged have paid off handsomely.
That success is most unambiguously demonstrated by the big four, which as a group picked up pace during another 12 months of uniformly busy M&A and securities markets. The four alone clocked up £4.18bn in fees, equivalent to 40% of the entire UK top 50’s income in 2006-07. It was, in short, an amazing year for them — in global terms, a breakthrough year. Forget talk of a leading six or seven firms, just four are moving on to another level and Allen & Overy has done fantastically well to put itself convincingly back into that group after a turbulent 2005-06.
But the success goes wider, demonstrated across the top 20 or so UK firms that play on the international stage. Through 10 years of restructuring, partnership reviews, stretched leverage and overworked assistants, the UK’s top firms have finally achieved profits per equity partner (PEP) levels that put them roughly level with US rivals.
That is a remarkable achievement and one that has massive implications for the world’s second-largest legal market. For a start, the long-feared threat of predatory US firms has been largely neutralised. Where threat remains, it is now almost entirely due to the excellence of individual US firms combined with a coherent strategy for international expansion. Or put another way, the market has matured.
Which brings you back to that old, controversial, sometimes derided little acronym: PEP. UK firms have put themselves through the ringer to achieve the right numbers on that ratio — ‘right’ being what would let them compete internationally while defending their flanks from foreign rivals. Interestingly, having come full circle on their strategy, for the first time since the late 1990s, PEP has been reasserted as an accurate indicator of status. But such gyrations have pushed cultures and businesses near to breaking point, as the Freshfields/Bloxham dispute is only the latest in a very long list of reminders.
As more managing partners privately acknowledge, the time has come to stop engineering practices so heavily towards double-digit annual PEP growth. Clients have been remarkably tolerant so far of costs passed to them; the junior ranks less so, as their partnership prospects have diminished. It is time for City firms to reassess and revitalise their strategy.
Failure to update the vision thing now could be the one factor that derails the UK’s remarkable legal success story.
Can law firm leaders change their tune? Or will they risk destroying the cultures on which their firms are built? Join the debate with the Legal Week Top 50 Talkback special.
