City firms under the cosh after salary splurges
When I cast my mind back through the mists of time to the heady days of 2023 – things are so busy at TBD HQ that last year already feels like an aeon ago – I vaguely recall that one of our industry’s top talking points was the NQ salary war, as all the big City firms competed for the cream of the UK’s talent crop.
This, in the face of growing economic headwinds as the effects of inflation, the first war of conquest in Europe since the fall of the Nazis, and the inevitable slow-down in M&A activity began to bite. Even at the time, there were mutterings that no good would come of it, this mad rush on the part of the City’s top dogs to outbid one another, and that at some point these particular pecuniary chickens would come home to roost with a vengeance.
Well, mind out for flying feathers and poultry guano, folks, because it seems that the naysayers may have had the right of it: on Monday, the Law Society Gazette published an article bearing the headline “Big firms under costs pressure as salaries rise faster than revenue”. Drawing on the accounts of international firms CMS and Trowers & Hamlins, journalist John Hydehighlights the fact that “soaring staff costs are outstripping increases in revenue and causing profits to nosedive” at these and, by a process of logical extrapolation, other big firms.
This is happening despite the fact that most firms posted pretty healthy revenue growth last year. So what gives? Hyde takes a look under the hood of the balance sheets of both firms to find that, although turnover last year was up by 6.7% and 8% at CMS and Trowers respectively, staff and related costs had shot up by 12.7% and 17% respectively, taking a big greedy mouthful out of the bottom line: there may be more money coming in, but it is being gobbled up by payroll costs.
The first thing to be said is that we have to keep a healthy sense of perspective and proportion here – as one wag puts it in the comments below the Gazette article: “Profit fell to just £38.3 million [for Trowers]? What a disaster.” Quite. But as tempted as some may be to reach for the world’s smallest violin, there are some major implications here that extend beyond the boardrooms of the UK’s biggest firms. That’s because when profits shrink, the two dreaded R words often swiftly follow: retrenchment and redundancies (though to all intents and purposes, these are, of course, the same thing).
Now, it is sometimes the case that when the industry’s leading firms sneeze, the rest of the sector catches cold. But I’m not convinced that this will necessarily be the case in this instance, because I believe that – to some degree, at least – we are seeing diseconomies of scale at work here, something that gives boutiques a real advantage: ironically, the same heft that allowed these huge firms to throw their economic weight around and pay such big (some might say bloated) salaries in the first place is now the very thing that is tripping them up.
When times get tough it pays to be agile, so as to be able to dart between the storm clouds; however, megafirms aren’t always known for being fleet of foot. By contrast, the very nature of smaller practices dictates that they are leaner, more streamlined organisations, and therefore much less likely to have too many mouths to feed.
The opportunities are clear, both for boutiques and for lawyers at the big City firms who are feeling the heat and are keen to move on to pastures new. Boutiques have the chance to pick up some hungry legal talent at lower-than-City salaries. And said legal talent might well appreciate a viable alternative to the pressure-cooker environment of their current digs in the City and the opportunity for more flexible working that the smaller, more agile firms often provide.
But meanwhile, the question remains as to what the top firms can do to redress the balance sheet, other than shedding staff. We all know that the legal sector is nothing if not supremely resilient, and I have no doubt that satisfactory answers will eventually be found – satisfactory to those sitting around the boardroom table, at least, though probably less so to the NQs and associates who, Jonah-like, end up being disgorged along the way to improved profitability.
It’s a bird…it’s a plane…it’s Kirkland!
As you all surely know by now, I love me some data. To me, happiness is a well-crafted spreadsheet (among many other things, of course; never let it be said that Si Marshall is anything other than a well-rounded individual). So it was with great interest that I read this Times article, which draws on research compiled by my erstwhile employer Legalese (publisher of the Legal 500) to delve into some of the financials of those firms to make the top 20 of the global earnings league table.
The headline stat is the fact that, over the past year, US firms have managed to muscle all the UK players out of the top 10 spots, with only the Anglo-US outfit DLA Piper making it onto the list in tenth place. The only dyed-in-the-wool UK firms to make the top-20 list at all are Magic Circle firms Allen & Overy – which will soon also become a ‘transatlantic’ firm, of course – in 12th place, immediately followed by Clifford Chance in 13th position, trailed by Linklaters in 16th place and Freshfields in 17th position. Only one other City firm made the top-20 cut, namely Hogan Lovells, another Anglo-US practice.
Apart from the ranking list itself, what struck me most forcibly about the figures provided in the article is the sheer indomitability of the firm that sits at the top of the table, Chicago-based Kirkland & Ellis – no other firm, let alone its UK rivals, can hold a candle to it!
Just consider the huge chasm that exists between Kirkland’s turnover of $6.5bn, and that of the highest-performing City firm, A&O, which posted turnover of $2.57bn: Kirkland outperformed A&O by a factor of more than 2 to 1! This eye-watering lead over its UK-based rivals speaks to the truly global reach of the US behemoth, which also dominates its nearest US competitor, LA-based Latham & Watkins, whose turnover trails Kirkland’s by over $1bn at $5.32bn.
And then we have the minor matter of partnership earnings to consider: here too, Kirkland blows all its rivals clean out of the water, with its full-equity partners earning no less than $7.5m on average, over $2m more than nearest US rival Latham’s full-equity partners, who earn an average $5.15m. Compare that to the average salary earned by full-equity partners at Freshfields, who are the highest paid in the Magic Circle: a ‘mere’ $2.58m each, less than half of what their counterparts at Kirkland net.
In my head, I’m seeing a cartoon of a running track on which a conceited-looking hare bearing a Kirkland-branded jersey is lapping a bunch of tortoises, each bearing on its carapace the name of one of the UK firms to have made the top-20 list. The bunny is jeering at his competitors and kissing his biceps as he zooms past them for a third, fourth, fifth time. Only in this version of Aesop’s fable, Smugs Bunny doesn’t come a cropper, but instead effortlessly wins the race.
It may not be the choice for everyone, but my word it pays well for those who run that race for a while.
You are the weakest Linklaters
Speaking of lopsided US-UK rivalries, Linklaters has come in for a bit of a drubbing in the legal press of late due to its perceived lack of an effective US strategy. On Monday, Law.Com International posted a piece focusing on “Linklaters’ US Struggle”, while The Lawyer published an articlewhose headline certainly doesn’t pull any punches: “Linklaters should be embarrassed about its US performance”.
In her piece for The Lawyer, journalist Rachel Moloney highlights the fact that, despite managing to poach a New York-based team from Shearman – which will soon, of course, become the US arm of A&O Shearman – Linklaters still lagged far behind Magic Circle rival A&O in terms of US-generated revenue; A&O posted £287.5m of turnover from the other side of the Atlantic, whereas Linklaters managed only a relatively paltry £122.2m: over 50% less, in other words.
Moloney goes on to opine that “It’s about time for Linklaters to do something exciting in the Americas”, and that the firm’s recent US partner promotions and hires have only served to backfill several high-profile departures. She concludes that “In the US, Linklaters is going round in circles”.
While I don’t take issue with the findings in Moloney’s piece per se, I must confess that I’m a bit unsure as to why Linklaters has been singled out in the legal press, given that (unless I have missed something) Freshfields and Clifford Chance aren’t exactly motoring in New York yet either. I guess it’s inevitable that the pending emergence of the new megafirm that will be A&O Shearman is bound to have everyone looking at the remaining Magic Circle firms for a response.
But as I outlined in the preceding article, none of the City firms are exactly in contention when it comes to the US market’s heavyweight division. Which means that when it comes to beefing up its US strategy, Linklaters is by no means the only Magic Circle firm that could benefit from metaphorically necking a raw-egg smoothie before donning a tracksuit and going for a run that finishes at the top of the stairs leading to the Philadelphia Museum of Art.
A&O has made its bold move to rejoin the elite. Over to you, remaining Magic Circle firms.
The other side of the law
Justice: sometimes, it’s the way the courtroom crumbles
Another week, another depressing news story – this one courtesy of The Times– on the state of the country’s justice system. The article reports on the remarks made by Dame Sue Carr, the English and Welsh judiciary’s first-ever Lady Chief justice, during her first appearance before Parliament’s justice committee last week.
Dame Carr informed the assembled MPs of the “endemic, ingrained problem” of the poor conditions to be found in the country’s courts, which are quite literally crumbling, a parlous state of affairs which is resulting in “100 unplanned courtroom closures every week” and “200 near-closures” every month. The Lady Chief Justice added: “It doesn’t make you feel great if you are doing a difficult case and you’ve a bucket next to you because the roof is leaking”. I’m sure the committee’s MPs could sympathise, given that Westminster Hall is almost literally falling down around their ears.
How demoralising this must be for those toiling in our hallowed halls of justice, who are already beset with manifold other problems, many of which can be traced back to massive and chronic underfunding. It’s little wonder, then, that the Law Society Gazette reported last Friday that four in ten civil legal aid providers are actively planning to quit the sector in the next five years, especially in light of the fact that more than 50% of firms that provide civil legal aid either make a loss or break even.
Anyone for a general election?
In other news
Is AI coming for your mental health?
The mental health crisis across the country is something we are all too familiar with. As recently highlighted by HR Grapevine, firms are becoming increasingly proactive, with 89% of HR leaders claiming they have plans to use AI to help streamline mental health support and management within their businesses. A reportpublished by Workplace Wellbeing Trends and referenced in the HR Grapevine piece has shown that among those surveyed, 72% have noticed an increase in mental-health-related employee absences in their organisations, highlighting that the need to alleviate these issues has never been more pressing.
AI is a fantastic means of coming up with rehashed ideas, solutions to problems and facilitating creative diversity. However, mental health is very human and requires empathy by nature, and this therefore begs the question – to what extent can intelligence that is artificial by nature, help with working through real-life issues and supporting well-being?
Time goes by so slowly
Some celebrities put in the graft to earn their ‘diva’ titles. Often it takes a lot of hard work, and, er, a demanding nature – as illustrated in this article by The Guardian, deploring the Queen of Pop’s “tardiness”. Madonna was so late to start one of her live shows in New York in December that her failure to appear punctually has cost her a lawsuit.
This isn’t Madonna’s first rodeo, or should I say, offence: she has built quite the reputation for her notoriously late start times. There comes a point where you have to ask yourself how much longer can pop stars get away with this behaviour simply under the guise of being a ‘diva’? Or does it actually help reinforce their brand and become part of what fans expect and like?
The priciest pint of all time?
The Law Society Gazette this week reported that SRA has issued its largest-ever fine for a solicitor convicted for drink-driving. The levy of £13,836, issued to Lincolnshire-based solicitor Richard Lunn, is thirty-one times higher than the court-issued penalty: a costly offence indeed, in terms of both money and serious reputational damage.
What a performance…
Just how important is having strong presenting skills for those looking to win new business? My answer: very. Presenting ideas to an audience is something that can be nerve-wracking at any age, and in any setting; but the ability to speak publicly is an invaluable skill.
I recently sought out the best of the best to brush up on my own presentation skills, and I couldn’t recommend Chris Scoble’s services more highly. Chris and his wonderful colleague Simone Douani have put together a one-day training programme titled “Where Business meets Performing”, focusing on helping people deliver confident and impactful presentations and drawing on Chris and Simone’s combined wealth of experience across the performing and banking sectors.
You can attend the session at The Union Club in Soho on Thursday 15 February. It will be a fantastic opportunity to not only boost your own presenting skills, but also build up your network. Please see this linkfor more information.
