I recently looked back more than 20 years and read about newly qualified lawyer salaries in London topping £50k (about £89k in today’s prices). High pay was justified by long hours. Life put on hold until the future by trainees with stories of drug taking, alcohol misuse and 1 in 5 reporting being bullied. One might be forgiven for thinking that nothing has changed. There was even a mention of foreign law firms attracting talent previously exclusively hired by London’s magic circle firms.
But roll on 22 years and there are some important changes. Start with the numbers. NQ salaries at Akin Gump have topped £164,000 in 2022, with a whole host of US headquartered firms offering in excess of £150,000. London headquartered firms are also offering salaries far above those at the turn of the century but they are slipping behind US firms. Freshfields and Clifford Chance are reported as offering NQs £125,000 but Linklaters and Allen & Overy are ‘only’ at £107,500.
Silver circle firms are offering NQs salaries ranging up towards £100,000. So we are now in a position where NQ salaries at magic circle firms are closer to the next level down than they are to the most elite US law firms. And it seems that the gap is getting bigger every year. Why might that be and what does it mean for the future of legal services?
Exchange rates are not helpful for UK HQ’d firms. The pound has fallen from $2 in 2007 to about $1.30 now. It has fallen by 50% since it floated in 1971. The shift of sterling to emergent market status echoes the relative strength of the overall economy. GDP per head is 25% lower in the UK than the US. The sheer scale of the US domestic market brings advantages to US firms, but perhaps most important is that US financial services businesses, and particularly investment banks, have already won the global competition in that market and they are very loyal to their US legal advisers, all around the world.
Perhaps we are moving towards a position where the only truly global elite law firms are the US ones. So it is no surprise that London law firms’ NQ salaries are barely clinging on to the coat tails of US firms. It seems to be replicated with partner salaries too. What might London law firms do to compete?
Many are proud of having seen off the threat from silver circle firms that spent the last 20 years trying to break into the magic circle. None did. But perhaps the magic circle was looking over the wrong shoulder? The US firms have grown significantly in London. To win in the competitive market London firms need to use the advantages they have to overcome the US firms’ advantages noted above. Those advantages that underpinned the growth of London HQd firms since 1980 were environmental rather than specific to the firms: English law and courts, time zone, language and the advantages of London as a truly global city have all been important. But US firms have taken advantage of them too. What is left?
Expertise, deep relationships with clients, more experience of transactional work might all seem plausible differentiators. But one advantage that gets missed is the regulatory environment in England & Wales. City law firms are able to do a number of things that cannot be done in the US. In particular it is possible to create an alternative business structure for a London law firm – that is a law firm with non-lawyer ownership. How is that relevant to the issue of NQ salaries?
NQs are promised the opportunity to make partnership. That, alongside the high salary, is used to justify billing targets that are eye watering. The recent coverage of the Hogan Lovells memo and the 2,400 hours ‘target’ and the alleged quote that “Many of our partners regularly surpass this range, however, and most partners in leadership roles exceed it by necessity. Ideally, a significant proportion of the expected annual hours commitment will be on client chargeable work because that remains the best way to build our brand and drive profitability.” Apart from the risks to ethics from the financialisaton of law firms (see here or elsewhere on LawyerWatch by Professor Moorhead) it is a questionable strategy for a sustainable workforce. Back in the 1960s solicitors became partners on qualification, but since then the partnership horizon has become more distant, with an increasing failure rate.
It is reported today that EY’s proposals to split off its audit business will see 15% of equity sold and 15% reserved for non-partner staff. If law firms were to take a similar approach they could offer equity to all NQs. These would give non partners a stake in future growth, align incentives now (as opposed to promising everything to those that bill the most) and allow London HQ firms to offer an alternative model to the US firms unmatchable starting salaries.
When senior partners talk about leaving the firm in good shape for future generations what do they mean? It is hard to square that with a full distribution partnership when growth is lower than in the previous century. Offering equity to NQs would be a commitment to the long term and a differentiator.
It would also allow firms to give senior executives ownership status and parity with lawyers. They may say that they create mirror structures already but so long as lawyers are the only ones entitled to make those decisions, law firms will never attract the very best talent. They could gain an advantage over US firms by attracting the very best finance, IT, customer service and other executives with equity.
What might a magic circle law firm do with the capital it could raise from a conversion to an ABS with some sale to private equity or an IPO? Law firms are not short of cash and could raise more through debt without problem. The issue is strategy. The partnership model has not given law firms the culture to build long term capital value of the business. Many senior lawyers tell me that they don’t need more money. But why not? Revenue growth in the magic circle is not matching rising salary costs and in the long-term margins are being eroded. Narrowing the ownership base is not sustainable.
Even big law firms struggle to gain 1% of the global legal market. There are so many law firms that are broadly similar. Difference is rare. Alternative providers have grown but not taken significant market share (as I have blogged about before here and here, referencing the excellent paper by Susskind and Eisenberg).
Additional capital, allied to a renewed culture and strategy focused on long term growth, could support a renewed period of growth for London HQd firms. They could acquire alternative providers to become more cost orientated, seek large scale growth in the US with mergers or lateral hires, funded by equity rather than guaranteed drawings that kick the can down the road.
Magic circle law firms are successful businesses, usually led by impressive lawyers. But they are facing a squeeze from all sides. GCs and CFOs seeking better value; alternative providers are offering it and moving up the value chain; silver circle firms are creating pressure from below; US firms becoming uncatchable and costs are rising faster than revenues. I am sure that they can continue to extract huge profits in the short term. But the pattern of NQ salaries tells us that the race is lost and London HQd firms need to shift their strategy and embrace ABS if they want to compete at the very top.
US law firms outside the elite few are facing similar pressures. They do not have the ABS/equity option. But there are ways around this and private equity is moving into the US legal market, with some US States now allowing ABS. If London’s elite firms do not take advantage of ABS then even that advantage will disappear. It is time for action.
