Thursday, December 14, 2006

What Are the Rewards for Going Global?

The Financial Times published an article on the risk of going global for law firms. Whether or not to go global is a hot topic, but lawyers and firms would be advised to avoid the herd instinct. The number of times I've heard from lawyers, "We must merge/open an office there/etc, because Smith and Brown are doing it," is huge.

It all started with the Clifford Chance merger in the late 1980s and so it goes. The problem is that law is not the type of product that typically fits with globalization. Law is prototypically local. (There is too little international law to create an effective counterfactual here.) The major advantage of the Anglo-American law firm axis is that American and English law are extremely malleable and can be formed to fit almost any situation; something which civil code countries' legal systems find difficult to accommodate. I have an article in the forthcoming symposium issue of the Indiana Journal of Global Legal Studies on this topic (draft available here).

Despite this big UK and some US law firms are developing a global reach. (NB. global doesn't really mean global: it means opening offices in the bits of the world that are perceived profitable, ie, China, Europe, Japan, not Africa and not much of South America, and India won't let them in, but see today Linklaters has agreed a tie-up with a Bombay firm.) These big law firms are earning big revenues, but they are incurring big management and resource costs that are eating into those other metrics that quantify the success of lawyers and their firms. It is worth remembering that just because a law firm has offices everywhere does not mean that clients want to use all those offices. Clients are picky: "I'll use your London and Frankfurt offices, but I don't want Paris. I'll use a different firm there." Big doesn't signify uniform quality across the entire domain.

Of the top five law firms by revenue, 3 are English: Clifford Chance, Linklaters, and Freshfields, and all are close to £1 billion, with 2000 to 2500 lawyers, and offices in 19, 23, and 18 countries respectively. Cross-border mergers and capital markets work has been tremendously rewarding for them and spells a success story for the export of English law.

There are, as I've forewarned, significant costs incurred by these ventures. In addition to revenues, profits per equity partner and revenue per lawyer are healthy measures of productivity and performance. And according to Bruce MacEwen, "it's a lot harder to game total revenue and number of lawyers than it is to game profitability. This strikes me as a pretty hard number, all things considered." Clifford Chance has a PEP of £651k and an RPL of £369k; Linklaters and Freshfields fare slightly better at PEPs of £843k/£700k and RPLs of £400k/£369k.

Let's put this into context with Skadden Arps which is number 3 in the top five. Its revenue is comparable to the others, so no difference here, but it's only in 12 countries. But then look at the PEP and RPL which come in at £947k and £505k. Very different. If money were the only determinant, then it's obvious which firm one would rather be in.

The Lawyer and The American Lawyer tables (1-25; 26-50; 51-75) on the top 100 law firms show a preponderance of US firms achieving higher rates of profitability than UK firms. Some of these are rank outliers. Wachtell Lipton with a PEP of £2m and an RPL of £1195k; and Cravath with a PEP of £1.2m and RPL of £638k. Indeed, on a ranking of PEP there is only a single UK law firm in the top 10, namely, Slaughter and May at £1.05m PEP and £504k RPL.

Wachtell, Cravath, and Slaughter are relatively small compared to the behemoths yet they are considerably more profitable and perhaps, slightly more controversially, held in greater esteem by the legal profession. For as much as law firms are business enterprises, lawyers have been slow to slough off their ideals of professionalism. Being ethical remains integral to what a lawyer does, or ought to.

What then are the advantages of globalization to law firms? Bigger revenues but at the expense of lower PEPs and RPLs; a considerably large layer of management with all the difficulties of quality assurance and risk management; and some perplexity over what partnership means in the 21st century, if anything. Sure Goldman Sachs calls its directors partners, but no one is fooled by that. Moreover, the US courts agree with the EEOC that partners may actually be employees, as Sidley & Austin is learning to its cost.

It's not easy for law firms trying to hold together so many divergent strands--business, globalization, profits, partners, equity, de-equitization, ethics, conflicts of interest. Every managing and senior partner, whether in the UK or the US, should read Milton Regan's cautionary tale of John Gellene's travails at Milbank Tweed when he failed to make appropriate disclosures in the Bucyrus-Erie bankruptcy. (See Eat What You Kill: The Fall of a Wall Street Lawyer; and a quirky review in the Harvard Law Review.) It is the legal profession's equivalent of Lampedusa's The Leopard, which describes the trials of the Sicilian aristocracy as they attempt to adapt to the coming 20th century. It contains the line: "Unless we ourselves take a hand now, they'll foist a republic on us. If we want things to stay as they are, things will have to change."

While in the US Tocqueville characterized lawyers as the American aristocracy, the legal profession has within itself the propensity to adapt and change without necessarily diminishing itself. If it wishes to become merely a corporate enterprise then it must be prepared to abandon many of its cherished privileges, eg, lawyer-client confidentiality, and accept the totality of external regulation, even to law firms being owned by non-lawyers. Something already on the horizon in the UK. (See UK government Legal Services Bill.)

In a recent paper I have attempted to theorize about the tension between professionalism and enterprise. They can accommodate each other; where they won't is at the global level. The venture is too big and cumbersome. There is nothing intrinsically wrong with this, but moral claims to privilege and protection are necessarily weakened by this move. In many ways the likes of Wachtell, Cravath, Slaughter know exactly what they are doing, and are being very well-rewarded for it too.

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