Reader response to "It May Be More Than a Pond" has been
very gratifying, with some genuine insights into the perplexing,
and growing, difference in profitability between US- and
UK-based firms. Put together, we may be approaching
a viable theory of why this difference arose, why it persists,
and why it may indeed grow yet more pronounced.
First up is an American reader who theorizes that UK-based clients are
more demanding.
Hi Bruce,
Could not resist a reply on your query re UK law firm profits.
A possible explanation for the lower profits per partner
in the UK is that clients in the UK are more sophisticated,
demanding, less willing to pay high rates, and more insistent
on budgets. One way to test this hypothesis, though it might
not be easy, is to compare the legal spend (% of turnover)
of large UK companies to large US companies, normalized for
industry and regulatory variation. If UK companies spend
less proportionally on legal fees, there’s less money to
go round. For whatever it is worth, I have heard that clients
in Australia are, in fact, much more demanding.
Next is a UK-based correspondent who posits that a combination
of (a) higher educational attainment by US lawyers, together
with (b) the US firms’ broader domestic geographic footprint
and (c) their concomitant experience in managing far-flung,
multi-office operations all combine to yield a competitive
advantage.
Bruce,
A few thoughts in response to your piece on the differences
a pond makes.
I am not sure that the lock-step/eat what you kill distinction
explains it all. Apart from anything else, why has that distinction
itself arisen? However, I can’t see a simple reason for the
clear US/UK disparity. All I can offer are three additional
pieces of the jigsaw. These might not actually fit this particular
picture, but I think they are relevant. (I am only able to
speak of the English system, as that in Scotland is significantly
different, but the UK law firms that feature on the international
stage are almost exclusively English.)
1. Education and the profession
I think it makes a difference that American lawyers have
at least two degrees, and often significant real-world experience
as well prior to starting their legal careers. The typical
English trainee solicitor or pupil barrister starts their
career at the age of 22 or 23 with a single degree (not always
in law). The profession itself has a much more recent tradition
of being old-fashioned. As far as I can recall, advertising
by solicitors was only permitted within the last 25 years,
and was subject to restrictions even more recently than that.
As a result, the idea of "a lawyer" on either side
of the Atlantic has only recently started to converge. The
US system appears to produce lawyers that are more "professional" and
focused on competing in a marketplace, whereas the UK system
is still geared to producing talented amateurs. (This is
a bit glib, but I think there is a kernel of truth.)
2. Geography
US law firms are accustomed to competing on a variety of
different levels. The existence of at least three key "capital
cities" — Washington DC, New York and Los Angeles —
where the law firm market is appreciably different (at least
when viewed from this side of the water) means that there
can be different firms at the top of those markets which
can then go on to compete nationally and internationally
from a position of strength. I would guess that there is
even the scope for the best firms in Chicago, Boston and
so on to threaten the top firms. On this side of the Atlantic,
the dominance of the London market (an essay in itself) has
minimised competition from firms based in Manchester, Leeds
or Birmingham. That is now less the case, with the growth
of national firms such as Eversheds, Pinsent Masons, DLA
Piper Rudnick Gray Cary and Addleshaw Goddard.
However (and rather disloyally), I don’t think these firms
are a real threat to the established order, because they
will never be in the "Magic Circle", which appears
to be a self-perpetuating club without a clear justification
from the market as to its existence. For many unsophisticated
UK clients, buying legal services from the Magic Circle or
a small number of firms at the next level down is the "IBM
solution". The UK market is, therefore, largely stratified,
with little consistent, effective, competition between firms
at different levels. As a consequence, those at the higher
levels are probably more complacent than they ought to be.
(I have no direct evidence of this, apart from occasional
anecdotes.)
3. History
You mentioned the higher penetration of US firms into the
European marketplace. I think this is due in part to the
American refusal (typified most clearly by the history of
Baker & McKenzie) to be limited by jurisdictions. Whilst,
as far as I know, UK and US law firms are now roughly equal
in the regulatory impediments to foreign expansion, it is
more deeply engrained in the history of US law firms.
I wonder also whether the experience gained in US law firms
of managing a multi-city firm within the USA has been valuable
in expanding into Europe and other markets internationally.
The London-centricity of English law firms meant that they
had no such experience prior to their overseas ambitions.
Against this is the fact that the English national law firms
mentioned above have hardly been more successful. (I am watching
DLA Piper carefully, because I think their approach is very
different from some of the others.)
I hope this is useful.
Cheers,
A third (American) reader chalks it up to the "millions
for defense, not a penny for tribute" mentality—or,
more precisely, to the regulatory/enforcement state of affairs
in the US, which gives corporate America no non-fatal alternative
but to comply with Sarbanes-Oxley, bow humbly at the feet
of Eliot Spitzer, and investigate the daylights out of "even
the appearance of…"
Interesting blog.
For what its worth – I think it comes down to 3 things:
- Sarbanes-Oxley
- The SEC
- And Eliot Spitzer.
The impact of corporate scandals on the corporate psyche
has these corporations shelling out unconscionable amounts
of money to the big-dog firms…more so now than ever
before. These companies are under so much pressure, and the
stakes are so high, it just seems worth it to over-pay and
err on the side of caution.
Think about it. I bet in the month of April alone (mind
you it’s only the 11th) AIG, Berkshire Hathaway and
Morgan Stanley have already collectively run up millions
(if not tens of millions) in fees and costs surrounding their
troubles. Outside Counsel (dealer-makers, litigators, investigators)
fees, hundreds of contract attorneys reviewing enormous data
sets – its just mushrooming out of control. David Boise
is on the front page of the WSJ today lobbying Spitzer to
buy some time because they don’t even know what information
they are sitting on! For all they know – AIG’s
IT infrastructure is one big crime scene – and there
is only one way to find out – bring in the army of
lawyers!
Anyway – that’s has to be a least a little bit
of it – especially if you amortize this hypothesis
across all of America – those in hot water and those
looking to proactively stay out.
Finally, we have the most, shall I say, unusual and intriguing,
view heretofore. Having, as a lowly associate, experienced
the 5:30 Friday afternoon phone call that destroys your weekend
plans, I can certainly empathize with the following—with
the large and conspicuously stated caveat
that in over 20 years of observing the legal scene in New
York, I am still enough the optimist to cling to the belief
that "waste, fraud and billing abuse" are diabolical, and
rare, departures from the profession’s precepts. But
as a theory with raw explanatory power, I must give this
credit.
Dear Sir:
I do not know UK firms, but I worked in a New York law
firm for two years.
Virtually all billings were by the hour. A junior associate
in NYC is
expected to bill 60-70 hours a week. (That’s BILLABLE time).
The amount of
waste, fraud and billing abuse (not mention misery of people
who are paid
obscene amounts of money to "review files" in return
for sacrificing
anything resembling a meaningful life) is, well, Dickensian.
And I worked for a mid-size (40-lawyer) firm, which was
considered a
paradise compared to large Manhattan firms because we did
not have to work
holidays.
Perhaps UK firms are more honest, and their billing methods
more diverse,
and the hours they work more human and humane. Perhaps people
earn a little
less in exchange for billing less and not having to work
most weekends.
Please factor that into your calculus of the revenue disparities
between US
and UK firms, which I assume are related to billing practices
at some level.
Please also note that the figures do not include anything
relevant to client
satisfaction. Are clients happier paying more, or less, for
what I assume is
comparable work?
You may use my name.
Best wishes,
Wendy R. Leibowitz
Legal Technology Columnist
1140 23rd St. NW
Washington, DC 20037
http://www.wendytech.com
So have I changed my views on this initially-perplexing
question? Yes, I believe so. The elements of
an explanatory theory surely include:
- the different incentive structures between eat-what-you-kill
and lockstep - as a corollary to that, the non-negotiable imperative
for US law firms to have high, and ever-increasing, profits
per partner if they wish to survive in the shark-infested
waters of rampant lateral partner mobility (a market which
is, to be charitable, less well-developed and liquid in
the UK) - US firms’ greater historical and managerial advantage
in taking far-flung, multi-jurisdictional, multi-office
structures as the natural way of the world - the empirical reality that US lawyers are willing, however
so much they might protest against it, to work ungodly
hours - and lastly the reality that corporate America has no
choice whatsoever but to pay whatever it takes when the
regulatory and investigative arms of various federal and
state authorities deign to make inquiry.
If these elements are correct, then the "chasm" originally
cited by Legal Week is here to stay. Indeed,
those tectonic plates are moving away from each other.
