The Ecosystem of the UK 100 in 2005

The Lawyer is out with their annual "UK 100" (for 2005), and it shows that while the Magic Circle is pulling away ("going galactic," as they gaily put it), the interesting action is in what they newly dub the "Silver Circle," or the just-trailing firms.  First, this being a blog about economics, to the numbers:

"Average PEP for the big four of Allen & Overy (A&O), Clifford Chance, Freshfields and Linklaters was up a healthy 13.5 per cent from £630,000 to £713,000. Average magic circle revenue per lawyer was up 1.4 per cent from £353,000 to £358,000."

The divergence between revenue increases and profit increases is explained (but you knew this) by cost decreases, as well as by a near lockdown on equity partner headcount growth. (To translate £ into $, multiply by 1.8:  So the average PEP of £713,000 equates to US$1,283,000.)

And recapping the performance of the entire group (where "RPL" stands for revenue per lawyer and "CPL" stands for costs per lawyer):

• Average PEP for magic circle was up 13.1 per cent to £713,000 from £630,000 in 2004
• Average PEP for top 50 was up 10.6 per cent to £431,000 from £390,000 in 2004
• Average PEP for top 100 was up 10.5 per cent to £343,000 from £311,000 in 2004
• Average RPL for magic circle was up only 1.3 per cent to £358,000 compared to £353,000 in 2004
• Average RPL for top 50 was up 2 per cent to £270,000 compared to £263,000 in 2004
• Average RPL for top 100 was up 0.4 per cent to £233,000 compared to £232,000 in 2004
• Average CPL for magic circle was down 1.7 per cent to £230,600 compared to £234,600 in 2004
• Average CPL for top 50 was down 1.2 per cent to 184,300 compared to £186,500 in 2004
• Average CPL for top 100 was up 0.3 per cent to £168,100 compared to £167,600 in 2004

The full table of PEP results is here, and the full table of revenue-by-lawyer (one of my favorites, because it never tracks the PEP table very well) is here.

If this were a study in biodiversity instead of in law firms, one would say the Magic Circle had all adopted the same evolutionary survival strategy:  Go global, and get bigger than everybody else in the room.  The Silver Circle, by contrast, has no monolithic approach.  What has happened?

"Ten years ago the dominant firms outside the magic circle (which then firmly included Slaughter and May, of which more later) were the chasing pack of Ashurst, Herbert Smith, Lovells, Norton Rose and Simmons & Simmons. Of that five, only Herbert Smith still appears in the top 10 in the PEP table."

In other words, the "chasing pack"'s erstwhile strategy of following the Magic Circle into international-land has come a cropper, and the variety of "Plan B's" being launched is fascinating to behold. It's being driven primarily by "focus and sheer ambition." Emblematic of the niche's being pursued:

• Ashurst has now embraced "small is beautiful," following two failed attempts at US mergers.
• Macfarlanes, "Law Firm of the Year" in 2000 for its rigorous management, has "not faltered" and its PEP remains in the UK's top 5.
• SJ Berwin is on a cost-containment tear, with its CPL down 17% this past year alone.
• Herbert Smith caters to global, multinational clients not through its own offices abroad but through a thick network of alliances and affiliations.
• Berwin Leighton Paisner has the strongest managerial culture of all, with "an entrepreneurial, unbureaucratic" culture, and the greatest proportion of lateral partners of any Silver Circle firm; accordingly, it has also enjoyed the fastest recent growth, and now the danger may be more one of expectations (how high is up?).

For us on this side of the pond, the lessons are clear:  You can be part of law-firm-land's equivalent of the New York-based "bulge bracket" of investment banks (roughly, that would probably include Cleary-Gottlieb, Cravath, Davis-Polk, Milbank, Shearman & Sterling, Simpson-Thacher, and Sullivan & Cromwell), or you can be a newly bulked-up global player (Jones-Day, Latham & Watkins, Orrick, many emulators) or you can find your own niche. 

The problem is that membership in the bulge bracket is, except over glacial time-frames from the perspective of any individual's career, closed, and that the ranks of the global powerhouses also has some intrinsic economic ceiling on it—which we will only discover when some unlucky firm (and it wasn't Coudert, by the way) powers up right out of the atmosphere and dies of oxygen starvation.  In other words, those strategies are, respectively, unavailable and all-but-unobtainable.

Which leaves finding your niche:  A tall order.  Volunteers are now being recruited nationwide.