Not every firm can be Cravath, Swaine & Moore. If you want to sell yourself as an elite, niche player then you actually need to be the best—or at least carry the perception that no one else can do what you do.
Top firms like Wachtell Lipton Rosen & Katz, Paul Weiss Rifkind Wharton & Garrison, and Kirkland & Ellis can justify high fees and pay their partners more than competitors, thus keeping their club exclusive. Many claim to be competing with them but a quick look at the world’s largest firms ranked by their average profit per equity partner (PEP) shows who the real leaders are.
For everyone else, a unique selling point is essential. Whether it’s global coverage, expertise in a specific sector, strength in a practice area, good value, or work-life balance, firms must differentiate themselves. Sure, premium quality and high PEP are important, but those not competing at the very top end need a more sophisticated strategy than just claiming to be ‘the best’.
This distinction becomes problematic when a firm’s strategy leaves it trailing in PEP. For example, if a firm’s geographical presence is holding back profits, should it adapt to stay competitive, or double down on offering something different?
What, for example, should Herbert Smith Freehills do about its sizeable but sluggish Asia presence assuming its merger with America’s Kramer Levin Naftalis & Frankel goes through in the coming weeks? The opportunities in the Asia Pacific region are huge—most of the world’s population is based there—but the revenue on offer for law firms in the region is small in comparison to the West. Growth in the U.S. will surely be its goal, which may impact the firm’s unique market positioning.
White & Case, a significant global player operating in about 30 countries, recently ended its association with an Indonesian firm. Linklaters appears to be exiting Poland as well. This reflects a broader trend: A&O Shearman and Hogan Lovells, both with more than 20 offices worldwide, last year closed locations to bolster profitability.
Even Germany, Europe’s biggest economy, is losing its appeal. Last week U.K.-based Pinsent Masons said it would cut 14 equity partners in the country.
One law firm leader recently told me law firm economics don’t work well there, as fees are often about two-thirds of what they are in the U.K., while costs are three-quarters as high. It is profitable, but not profitable enough if you want to get into the top tier.
For that you need a strong presence in America. Freshfields, which has fully embraced this logic, is not slowing down and has agreed to double its office space in Washington D.C.
So it’s not hard to imagine a future where the most profitable firms no longer maintain extensive global networks.
This isn’t inherently bad—profits matter—but it can leave firms caught in the middle. Clients don’t need another decent, fairly-profitable, full-service firm scattered across the U.S. and Europe. That market is oversaturated...
