What will the structure of the global legal marketplace look
like in, say, 2015? 

Before you exclaim either, "Who on earth knows?" or "What
a silly thing to speculate about!," permit me to draw your attention
to the duel, or at least face-off, in the November 2005 and February
2006 issues of The American Lawyer between the UK legal
consultants Partha Bose ("The
Tragic Circle") and Tony Williams ("The
Empire Strikes Back").  [I know Tony personally, but
not Partha.]

The debate in a nutshell can be framed as Partha’s belief that "Europe’s
lawyers and law firms are in the midst of a structural shift that
will make many of their products and services obsolete," primarily
because in any industry with structural overcapacity, those with
inefficient structures and outdated approaches will be eliminated—as
opposed to Tony’s belief that, partly because "U.K. firms are light-years
ahead of U.S. firms when it comes to institutionalizing their client
base," they will be more than amply able to compete and emerge
as winners, to wit, to be among "the top international law firms
for major cross-border and domestic M&A, capital markets, and
complex litigation worldwide."  Tony adds, with bravado,
"Let the battle commence."

Partha first.

Partha’s key argument is that the key European and Asian markets
"where
the British law firms have reigned are stagnating-and even contracting."  That
stagnation results from:

• US firms’ ability to cherry-pick the biggest and most lucrative
  European M&A work.
• The commoditization of new equity and debt issuance.
• The failure—which some would surely count a divine beneficence—of
  US-style litigation to catch on in Europe, thus depriving firms
  of an enormous cash cow enjoyed, as it were, by US practices.
• The virtual absence, Parmalat excepted, of headline-making European
  corporate meltdowns (again, a blessing when I’m wearing my economist’s
  hat, but a deprivation of fat Chapter 11, corporate-governance,
  and even white collar crime fees when I’m wearing my legal analyst’s
  hat).
• And clients’ alleged preference for "U.S.-style legal structures
  and documentation."

The only escape from this dismal prospect, Partha allows, is for
firms to remain, or morph into, one of five categories—which
on inspection are actually only three, as the population of
the other two turns out to be the null set.  

• "Simply the best:"  Sure, nice work if you can
  get it.  Think Slaughter & May, Cravath, Davis Polk.   But
  how, pray tell, if one is not already in this empyrean, does one
  ascend?
• "Focused firms," a/k/a boutiques.  For example,
  litigation only, or regional powerhouses, or deep industry specialists.  A
  perfectly defensible and even comfortable niche to defend, but
  not, shall we say, feasible for the AmLaw 25 or the UK 10.
• "Low cost providers."  See above.

  and our two null sets:

• "Distinctive firms:"  Of which he fails to cite
  a single living, breathing example, either US or UK-based.  Calling
  it "the holy grail of competitive success," it somewhat tautologically
  is described as "whatever they do, they do it in a fashion that
  very few can imitate."  What I’m about to say is a theory
  I’m toying with, and haven’t reached any intellectual equilibrium
  yet as to whether I endorse it or not, but try this hypothesis
  on for size:  The almost insurmountable difficulty of establishing
  a solid reputation as a truly "distinctive" law firm reflects the
  intrinsic inability of clients to accurately and consistently assess
  the quality of legal services.  In other words, a firm that
  wants to lay a (credible, ownable) claim to being "distinctive" can
  only do so by appearing that way to clients, and, since
  clients have the devil of a time evaluating the quality of their
  lawyers’ performances, the predicate can never be laid effectively
  or in a widespread fashion—widespread enough to become recognized
  as a true marketplace positioning, that is.  As I said for
  now, only a theory.   Your thoughts?  Managing partners?
    General Counsels?  Chief Marketing Officers?  Anyone
  else who’s thought about this?

  And lastly:

• "Rule breakers:"  Here he cites as examples eBay,
  Google, and FedEx, which created entire industries after their
  own business model.  In law firm land, the best he can do
  is Wachtell, for the poison pill.  I’d be more willing to
  buy it if (a)  the poison pill weren’t approaching 30 years
  old, and (b) some other truly memorable legal innovation could
  be pointed to in the interim.

Partha sees two other threats to the competitive vigor of UK/European
firms.   The first is "merely" economic, the second reputational.

On economics, US firms simply pay partners and associates far more
richly than UK firms.  Add to that a critical factor that many
Americans overlook—but which the Brits certainly do not!—which
is that in the UK careers end at much earlier ages than here, depriving
partners of a decade or more of "climax phase" income, compared to
their US counterparts.

The reputational issue is at least as potent:  As Partha puts
it:

"European firms haven’t grasped one other reality. For
many U.S. lawyers, joining a European firm generally does not enhance
their street cred. In the United States, most of these firms have
little, if any, brand value; don’t get the most exciting (and complicated)
work; don’t attract the best talent; can’t place their lawyers into
high-profile roles at, say, the Securities and Exchange Commission
or the U.S. Department of Justice; and aren’t as profitable as many
top U.S. firms."

Despite my taking exception to much of what he’s written hitherto
in the piece, here he’s surely on to something.  This is an enormous
barrier to entry of the UK/European firms into the US.

Whether
his insight can bear the weight he proceeds to lay on to it I cannot
say, lacking the under-the-hood view to have an opinion on the matter,
but Partha proceeds to claim that UK/European firms manage essentially
oblivious to their own reputations and intangible assets, and that
they concentrate myopically on operating metrics such as capacity utilization.  

If
this further assertion is correct, we will indeed witness a race to
the bottom as firms promiscuously offer 20-30% discounts to qualify
for a beauty contest, toss on another 10% to win selection to the panel,
and a few more percent to get the bills finally paid—all the
while uncomprehending about what clients want and what value they actually
place on it. 

Bleak House, indeed.

Tony Williams takes what can only be described as a cheerier view.
  While conceding much of the factual prologue to Partha’s argument,
Tony draws strikingly different conclusions about the armaments UK
firms bring to the challenge of creating globally dominant firms.
   (Tony concedes, for example, that the US home market
is vastly larger than the UK market, and points out with nice empiricism
that AmLaw firm #200 [Lathrop & Gage] would place 44th on The Lawyer
UK 50; similarly, 50 AmLaw firms generated profits per partner of $1-million
or more, but only 12 UK firms.)

Of far greater strategic importance for the future trajectories
of US and UK firms, Tony points out, was a nearly across-the-board
"strategic error" committed by US firms (and specifically New York
firms) in the 1980’s:   The 1986 "Big Bang" in London abolished
restrictions and opened up the markets to international capital.  US
investment banks piled into London in a big way; US law firms did
not.

Meanwhile, UK firms were, perforce, looking abroad.  While
some expanded overzealously in hindsight, opening in marginal locations,
those lessons of enthusiasm or ignorance have been learned, and far
more gimlet-eyed metrics are now applied to foreign operations.  Tony
believes this has positioned them well for three reasons:

• UK firms have a strong presence where it matters—e.g.,
  Hong Kong, Paris, Frankfurt, and essentially every  important
  global financial center with the conspicuous exception of New York.
• A "new breed of law firm management" is bringing more businesslike,
  profit-minded approaches to the large firms’ operations.
• And the international expansion build-out has been "bought and
  paid for;" profits going forward will be income, not return of
  capital.

While Tony readily concedes UK firms have not penetrated New York
in a meaningful way—the elephant in the living room to many,
which he is happy to point to—he makes an intriguing, somewhat
converse, assertion:  That for all the ostensible success of
US firms opening in London, "probably 90%" are losing money, and
that the landscape as a whole reflects nothing remotely like
true financial success.

Indeed:  Tony asserts that US firms’
forays into London have, over the past ten years, cost them "in excess
of $1-billion"!   How could this massive amount have
gone missing, as it were?  Primarily through firms’ failing
to recognize the "all-in" costs of being in London, by, e.g., neglecting
to properly allocate firm-wide overhead expenses such as training
and IT, taking rent-free periods up-front rather than amortizing
them over the lease’s life, and, perhaps most important, failing
to acknowledge the opportunity costs of moving productive US partners
to London where they have to start over scrambling for work.

Assuming Tony’s even half right, why and how could the US firms’
have lost their collective heads?  He nominates four candidates,
and I concur:

• A shocking proportion of US firms have no idea what they’re trying
  to accomplish in London and why they’re there in the first place.
• The easy, and false, assumption is that US-based clients will
  naturally shower the US firm’s London office with work—ignoring
  the long-standing relationships that client already has with eminently
  competent UK firms.
• The difficulty, and protracted nature, of getting value from
  a lateral hire in London, where clients are institutionalized property
  of a firm, not a lone ranger.
• And the predictable failure to truly connect the London outpost
  into the firm’s network:  A silo in a distant land separated
  by too many timezones, where they drive on the wrong side of the
  road, don’t use US$’s, and speak in dialect.

Finally, two fundamental structural aspects of the New York/London
marketplaces are acting to inhibit an aggressive invasion by the
Americans.  One is quite new and, while potent at the moment,
does not constitute a long-term barrier to entry.  The other
is deeply problematic.

The first is the increasing attractiveness of the London capital
markets vis-a-vis New York.  London’s market share of international
equity offerings is increasing, and New York’s declining, because
of the increased regulatory burdens in the US (read:  Sarbanes-Oxley)
and the all-too-real risk of litigation.  This development gives
an advantage to the Magic Circle and other London incumbents, to
the short-run exclusion of their US competition.  Of course,
like all such developments, it can be overcome by tenacity and flexibility;
but there’s no question that in London for now at least, it’s score
one for the home team.

The second issue begs of an easy solution.  Simply put, the
world-class New York firms have it too good.  New York is too
rich, their practices too successful, the profits too astronomical.   Tony
may exaggerate when he says that at the top end of the New York market,
firms "can sit back and wait for clients in crisis to come to them,"
but he’s not far wrong.

Or, consider this jaw-dropping anecdote: 

"I remember being told in 1998, by a very senior partner
in a major New York firm, “Everything that is innovative in legal
services originates in New York. To operate outside New York is dilutive
of quality and profitability. We will not do it.” Apart from saying, “Have
a nice day,” I had no immediate response."

And what, you are asking yourself, is wrong with this picture?

Complacency!

Perhaps worse than complacency is the undeniable whiff of arrogance,
with its traveling partner Lost Opportunities.  Particularly
when combined with the equation of "outside New York" with "dilutive
of profitability," we are staring at a profound barrier to serious,
sustained, and substantial investment abroad.

So back to 2015.  Where will we be? 

Tony—and I agree with him foursquare on this—assays
a landscape that looks like this:

• Clifford Chance, having reformed its US and international operations,
  will focus intently on growing profitability and—with or
  without another US merger—will stand out as one of the handful
  of truly top-tier international firms.
• Slaughter and May, Wachtell, Cravath, and perhaps a few others,
  will continue to generate astonishing financial performance as
  boutiques.
• Allen & Overy, Freshfields, and Linklaters lack critical US depth,
  and a game-changing merger with a top-tier New York firm looks
  increasingly unlikely.  They have one of the tougher
  strategic hands to play.
• The very success of the creme of New York firms on their home
  turf will seriously inhibit their overseas expansion and, if the
  US continues to be compromised in its historic comparative global
  advantage in capital formation, they could be looking at some surprisingly
  unhappy choices.
• The AmLaw 25 will be transformed, with a handful of truly dominant
  1,000-lawyer-plus firms emerging with profits per partner comfortably
  north of $1-million/year, and a powerful geographic footprint based
  on the three legs of New York, California, and Washington, DC.

As Tony says, let the games begin.   This ride could get
even more exciting.