Legal services: US firms lay down the law in the UK

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In most walks of life, take home pay of some £2mn would be hailed as an unequivocal success. Not so amid the UK’s “magic circle” law firms. Clifford Chance, Allen & Overy and Linklaters and Freshfields have reported stalling or declining profits per partner. Gazing into a crystal ball offers little in the way of relief. 

The problem, for the UK’s elite law firms, is that they have been forced to jack up salaries and offer perks to stop ambitious US competitors from poaching their staff. That has loaded up their cost base, just as they headed into a dealmaking slump. 

To be fair, elite law firms do not just work on M&A transactions. Indeed, they try to be a one-stop shop for their clients’ legal needs. But advising on successful transactions is more profitable than most lines of work. The $90mn that Wachtell, Lipton, Rosen and Katz charged Twitter, which is now being contested by Elon Musk, is a case in point. 

The cyclical dearth of transactions helps explain the squeeze on pre-tax profits, which fell marginally at Linklaters, A&O and Clifford Chance. But the bigger issue, for the UK’s magic circle, is that US behemoths such as Kirkland & Ellis or Skadden Arps are stealing their lunch.

Top US firms are structurally more profitable. They make pots of money on their home turf — the world’s largest capital market and a litigious one to boot. On top of that, they get to tag along when their key corporate or private equity clients snap up European companies. In a UK ranking of revenue per lawyer, US firms occupy the first five spots according to Law.com’s recent international ranking. 

That means they can afford to pay people more. At top US firms, partners often take home more than twice what magic circle partners make. Starting salaries, too, used to be much higher — although the UK has recently had to catch up. That is going to stoke the fire of cost inflation at UK law firms — keeping profits under pressure even when boom times return.