What a Difference a Pond Makes (Revisited)

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.

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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.

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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.

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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,

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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..."

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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.

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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.

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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

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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.

Posted by Bruce at April 14, 2005 8:14 AM
Posted to Compensation | Cultural Considerations | Finance | Globalization | Leadership | Partnership Structures | Strategy

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