Editors' Blog

Tough markets to stress-test global law’s two power blocks

Posted 25/03/2008 by Richard Lloyd

When a downturn hits the world economy, elite US law firms are better hedged than their UK counterparts. So runs the conventional wisdom, with some reason. In the past, New York¹s rainmakers have not felt the effects in their pockets as sharply as the London locals. But today, with financial markets in crisis and recession looming stateside, how will the American firms, with their diversity of practice areas, stack up against the Brits and their superior geographic reach?#

Traditionally, US firms have benefited from the sheer size of their domestic market, the American penchant for pursuing litigation at all costs and large bankruptcy proceedings that provided a seemingly endless gravy-train for law firms. UK firms, in contrast, do not see the same upside from countercyclical litigation work. There is simply not the same litigation climate and litigators make up a far smaller proportion of most UK firms. At New York¹s Cravath Swaine & Moore, around 50% of the firm¹s lawyers are in litigation, while at Herbert Smith, London¹s premier brand in commercial litigation, around 35% of attorneys are litigators.

Following the collapse of the dot-com boom between 2001 and 2003, the magic circle was way off the pace compared with the US leaders. In 2002, for instance, Linklaters' profits per equity partner (PEP) were just over $1.1m (£553,000), compared with Skadden's $1.6m (£805,000) and $1.775m (£893,000) at Davis Polk & Wardwell, according to The American Lawyer Global 100 charts for that year.

Linklaters and its magic circle peers have since eradicated the profitability gap, thanks in part to a corporate finance boom, thriving international networks and a weakening dollar. In 2007 they outstripped the likes of Skadden and Davis Polk in PEP.

So predicting the likely winners in today's downturn is not so easy. Indeed, the answer depends on who you talk to. Freshfields chief executive Ted Burke grants the Americans an advantage in litigation and bankruptcy but says: “In favor of the UK firms is that we have much more diversified revenue sources.”

In other words, English firms generally have broader and deeper international networks so are more exposed to the still-booming markets in the Middle East, Russia and Asia. Freshfields now has more than two-thirds (around 68%) of its attorneys outside its home market, compared with Skadden's 16%. “It¹s not enough to replace a bull market in London, but we're talking degrees of mitigation,” Burke adds.

US lawyers are similarly unsure of who has the edge. The important thing is to look at it on a firm-by-firm basis, insists James Roome, the London head of Bingham McCutchen. “It's a lot to do with the quality of a firm's franchise,” he says. “I have a feeling that those with a broader, deeper franchise, whether in the US or UK, will be just fine.”

“I would rather be a lawyer in a US firm in a downturn,” says David Lakhdir, a London partner at Paul Weiss Rifkind Wharton & Garrison, a firm considered one of the New York’s top litigation shops. “But US firms' profits per partner could be hit harder, particularly if you factor in how profitable we've been per partner and the decline in the dollar.”

America's litigation and bankruptcy markets may give the US firms a boost, but it is perhaps a testament to the UK firms’ progress in developing their international networks and their focus on bottom-line growth that the argument is less clear-cut than it's ever been. It's time to start reassessing those easy assumptions.

A version of this article appears on the website of The American Lawyer, a US sister title of Legal Week.