New York's White Shoe, the Magic Circle, and Historical Path-Dependency

Chambers has a nice seasonal report it mails to subscribers, but it doesn't provide it online. This is a pity (and, I predict, a practice with a finite half-life), but one of the articles in the issue I recently received (August 2007 for those of you following along at home) is too rich to escape comment: Success or Failure? UK law firms in New York.

The subhead is "After struggling in New York for years the magic circle has at last gained some traction. But have London firms downgraded their brand in the US in order to upgrade their profits?"

Well, this is a typically British journalist cheeky lead-in, but the article has some genuine substance:

• A former senior Linklaters partner comments: "The British firms arrived in New York thinking their names would carry a lot of weight, but people had no idea who they were and didn't really care; the firms took too much for granted."
• Paul Wickes, a 59-year-old bankruptcy litigation partner who left Shearman & Sterling along with three other partners in 2003 to join Linklaters/New York found an office "bereft of direction, low on morale, hemorrhaging partners, and losing money." He quickly realized the composition of the office was not, shall we say, aligned with the local marketplace: "I remember saying to people in London after we joined that a third of the New York practice should be litigation and their eyes would get wide! But to make an international firm a success its offices have to reflect a mix of the firm's overall strategy and the local market realities."
• Litigation now makes up 31% of Linklaters' US business, and 34% of Clifford Chance's.
• The type of litigation the Magic Circle seem to excel at is US-centric but where the party involved is based overseas and there are concomitant regulatory proceedings in various jurisdictions.  This is becoming more common, according to Rob Khuzami, general counsel for the Americas at Deutsche Bank:  "I was skeptical about the need for multi-jurisdictional litigation capability:  I couldn't think of many matters when you'd need it.  but in the last year or so that's changed."  Today there may be cooperative regulatory investigations by the SEC in the US, the Financial Services Authority in the UK, and BaFin in Germany.

But the real question is not what has happened, but what will happen, and here the piece has some observations that portend trouble for US firms' push abroad.

The fundamental dynamic has been that London-based firms, faced with a relatively small domestic market, and with a bred-in-the-bone orientation towards both continental Europe and the US, got a long head start in international expansion.  Meanwhile, New York-based firms, sitting on top of what for a long time was the most lucrative market in the world, not only saw no urgency to establish costly beach-heads abroad—they reasoned (inarguably, if short-sightedly) that international expansion would dilute profitability during the invest and build-out phases.

Tony Williams sums it up like this: 

When the US investment banks—Goldman Sachs, Morgan Stanley, and the rest—expanded into Europe and Asia in the late 1980s most white shoe firms decided "to leave them to their own devices:  It could prove a key strategic error.  The American firms, given how profitable they were, didn't invest in London or Hong Kong at that time.  This was wrong and complacent.  If they had, the UK firms' international ambitions would have been stillborn.  But because of that oversight British firms are on the radar in relation to New York deals because bankers move around.  The decision makers in Manhattan will have spent time in London or Hong Kong and used the British firms."

The final crack in the wall of Fortress New York may be the finally-competitive levels of PPP the Magic Circle are generating.  Consider these numbers (the most recent available as of publication of this column):

• Linklaters,:  £1.62-million, or $3.25-million
• Allen & Overy: £1.54-million, or $3.1-million
• Clifford Chance:  £1.15-million, or $2.3-million
• Freshfields: £1.44-million, or $2.9-million

The moral is simple:  The parity of PPP "has given many good lawyers the confidence to move laterally," as Ward Bower of Altman-Weil puts it.

And it's not just about lateral partners:  Consider the market for new associates.  What percentage of Harvard Law School graduates are now non-US natives?  [Tick tock tick tock....]  23%.

"Among the best students who are interested in Linklaters, an enormous proportion have something international about their background," says Paul Wickes.  "We see  a lot of students that have grown up somewhere other than the US and have language skills.

"The student who interviews with us one day and with a Wall Street firm the next faces a relatively conventional decision on one hand, and something more unusual in deciding to come to us. The thing that will tip people in our favor tends to be the opportunities we offer as part of a genuinely international firm."

Assume for purposes of argument that 80—90% of classic New York white shoe firms' lawyers are in Manhattan; that proportion is reversed, at the very least, for Magic Circle firms.  Be careful what proportion of top-notch students you may be ruling out.

And we'll give Wickes the last say:

"What top New York-based firms need to be worried about is what we're doing in the world at large," he retorts [at those sniping at the Magic Circle's slow start in  New York].  "If anybody thinks that the battleground for legal services today can be described in terms of individual geographical markets, they've missed what's happened in the last five to ten years."

Do I believe New York firms are behind the eight-ball in their international growth?  (1)  Yes. (2)  At the moment.  Marketplaces have a way of surprising people with their dynamism, especially the incumbents who, if you believe this article, are the Magic Circle.

But beware linear extrapolations.  The historic path-dependency of the New York firms may explain their positions today, but alter that historic reality—as we are witnessing with our own eyes—and be prepared for the landscape to take on different contours, potentially with great rapidity.