Stars and hypes

It has become traditional at this time of year when details of the financial performance of US firms emerge (including in the pages of Legal Week) for many a hyperbolic claim to be made concerning the international prowess of America’s legal elite.

Nowhere does this tend to be more pronounced than in Europe, where it is often argued that US firms are set for, or have even achieved, their major breakthrough. Evidence to back this up include high levels of profitability of the London operations of many US firms and their high overall levels of profitability.

It would plainly be ridiculous to deny that, as a breed, American firms are making genuine progress in Europe. But step back a moment and neutral observers must ask not what is the secret of their success, but why it has taken so long to travel such a modest distance.

Start with the supposed reasons for their superiority. It is certainly true that many US firms have very high London billings and profitability, but this is often at firms that are operating highly selective branch practices.

Judged by the same misleading yardstick, you would find plenty of similar, hyper-profitable foreign law branches at leading London firms, even in less lucrative Western European and Asian markets.

As to the overall profitability of US firms, anyone with even a passing knowledge of the financial workings of American firms knows that they have been inflating the bottom line for years by cutting back on the number of equity promotions. This, of course, echoes what has happened in the UK but there has been far less comment on the matter in the US - a market where the dramatic expansion of Kirkland & Ellis’ salaried partner ranks has gone virtually unnoticed.

You could also argue that the efficiency or client focus of the US law firm model is just a fancy way of saying that they are institutionally very stingy. The upside is a highly disciplined use of capital; the downside is avoiding strategically-sound expansion, which frankly is still the norm among top 50 US law firms.

In addition, the supposed profits gap is also something of a myth. With the entire magic circle on course to crack the £1m average partner profits barrier this year (and Slaughters and Links set to do considerably better than that), the headline numbers are getting to the same ballpark as it is. And that is even before you consider that large London firms could substantially beef up their bottom line with relative ease if they chose to be as narrowly focused as New York rivals (a strategy that Freshfields is, to a certain extent, already putting in place).

Ironically, US firms’ real in-built competitive advantage is the one least remarked upon: a domestic market that is worth twice as much as the rest of the world’s legal market combined. That, especially combined with the hedge of a hyper-litigious culture, should provide the knock-out blow to London rivals. Yet the inherent conservatism and caution of the US profession has largely cancelled out this advantage.

The momentum that was clearly with US law firms on the international stage in 2003 and 2004 has now passed - and it will take more than a handful of mega club bids to get it back.

alex.novarese@legalweek.com