A MESSY WORLD is great news for those whose business it is to sort through a mess. One group in particular has had a fabulous time of late. “Business demand across every market has been strong,” beams Elliott Portnoy, chief executive of Dentons, the world’s fourth-biggest law firm by revenues. In 2021 Dentons, a product of a series of combinations, including one six years ago with Dacheng, a large Chinese practice, may bring in over $3bn in gross billings. In the past 12 months it has added 1,000 or so lawyers to its head count, which now numbers over 12,000, and opened offices around the world. It has to turn away business for lack of capacity.
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Dentons is not an isolated exhibit. Big law is on a tear. The 100 biggest global firms look on track handily to surpass their combined revenues of $128bn in 2020 (see chart). Kirkland & Ellis, an American giant which has topped the rankings in recent years, is expected to rake in annual billings of more than $5bn, more than twice as much as in 2015. Profits for each equity partner, an industry benchmark, have risen by more than 6% at over half of the 300 biggest global firms, estimates Peter Zeughauser, a consultant who advises many of them. At the fastest-growing 75 they have shot up by double digits. Equity partners at America’s top 100 firms could take home as much as $2.5m each on average. “Every law firm I know, every one, has had a record profit,” marvels David Wilkins of Harvard Law School, whose seminar on the legal business is popular with big-law chiefs. And this breakneck growth is coinciding with significant changes in the profession’s time-honoured ways.
The bonanza is the result of ballooning demand for legal services and falling costs. Thanks to pandemic-era restrictions, variable expenses such as travel and entertaining clients have plummeted. Despite their starchy reputations many firms have displayed managerial flexibility. The accoutrements of the legal professions—from leather-bound tomes and yellow pads to dark suits—were readily discarded in favour of Zoom, Google docs and sweatpants. Working from home became a convenient pretext to bill around the clock.
Even as overheads have declined, demand for lawyerly advice has swelled. Firms bracing for a repeat of the drought that followed the global financial crisis of 2007-09, when only bankruptcy practices did brisk business, have instead found themselves swamped. Mergers and acquisitions (M&A), the biggest money-spinners for lawyers, will exceed $5trn in value in 2021, obliterating the previous record of $4.2trn in 2015. Private-equity deals, from fundraising to divestments, are booming. So are stockmarket listings (including via complex special-purpose acquisition companies, or SPACs), as well as delistings (particularly of Chinese companies from American exchanges) and relistings (of those same companies in Hong Kong or Shanghai, at the tacit behest of the Communist Party).
At the same time the law firms’ non-transaction business, which has historically been more placid, is picking up. Governments around the world are preparing to regulate areas from data and diversity to climate. The European Union may soon pass two sweeping laws governing digital markets and services, which could ensnare rich clients such as Apple, Alphabet and Meta. American trustbusters are rediscovering their pep under President Joe Biden. His Chinese counterpart, Xi Jinping, is cracking down on the private sector across the board.
A global deal to make multinational companies pay more taxes and to divvy up the spoils more equitably between countries is expected to be approved in the next few months. Businesses are also under growing pressure from investors to conform to environmental, social and governance standards, which involve new legal instruments. On top of that, Dentons foresees a “very busy trial year” in 2022. Lawyers report that the prosecution of Elizabeth Holmes, accused of fraud at her blood-testing startup, Theranos, has prompted entrepreneurs and firms touting imperfect products to seek legal advice. Ms Holmes denies the charges. If she is convicted, law firms expect such consultations to intensify.
All these “are challenges for businesses and bright spots for lawyers”, says Jeroen Ouwehand, global senior partner of Clifford Chance, a big London firm. To make the most of the brightness, law firms are shaking up their management model. In many ways, they increasingly look an awful lot like their large corporate clients.
Culturally, the biggest shake-up is taking place in the area of compensation. Large firms have historically doled out pay to partners based on seniority. The approach has many virtues, not least promoting collegiality among many people who live to argue. But it requires the richest practices such as M&A to cross-subsidise less lucrative ones. And, as one partner at a global firm puts it, “It only works if all the partners work like maniacs, and everyone is making a ridiculous amount of money.”
Pay scales of justice
For the rainmakers, it increasingly does not work. Plenty of firms’ top performers are only too happy to jump ship if offered better terms. The partner says he receives a couple of emails from headhunters every week. Kirkland & Ellis and Latham & Watkins have climbed their way to the apex of the American market in part by poaching successful lawyers with the promise of paying them based on the profits they bring in. The performance-based approach, common in the corporate world (and known as “eat what you kill” in lawyerly circles), is spreading. In December Cravath, Swaine & Moore, a New York firm, and Linklaters, a London one, both stepped away from the seniority system.
Law also resembles other sectors in the way firms configure their operations. Clifford Chance runs a research-and-development office, which studies matters like how best to administer far-flung global cases (with an experienced case manager rather than a lawyer) to the feasibility of shifting financial transactions onto blockchains (the jury is out). What used to be a senior partner’s well-timed whisper to the client company’s board is coalescing into formal practices in new non-transaction areas. That sort of work doesn’t provide the same billing rates as complicated deals, but it is consistent and growing, says Alastair Morrison, head of strategy at Pinsent Masons, a big London firm. Ashurst, an Anglo-Australian firm, has created an in-house consultancy with 60 people (including ten partners) doing anti-fraud, compliance and “remediation” (crisis management in plain English) work that used to be the preserve of accountants and consultants. In 2021 Dentons teamed up with the Albright Stonebridge Group, an advisory firm founded by Madeleine Albright, an American former secretary of state, to launch a consulting outfit. Dentons also employs 15-20 people just to seek out and manage such combinations, as well as those with other law firms.
Most such deals are international—the third way in which law firms look ever more like other global businesses. Lawyers used to follow their multinational clients to new jurisdictions. Now many are expanding pre-emptively, opening offices in erstwhile legal backwaters, both to serve customers and cut costs. Clifford Chance has moved some operations from expensive legal hubs such as London and New York to cheaper places like Delhi and, more recently, Newcastle. Ashurst now has as many lawyers in Australia as in Britain. It does some simpler work from Brisbane and Glasgow rather than Sydney or London. Baker McKenzie, a Chicago firm that was early to the trend, now operates in 46 countries. Dentons boasts over 200 offices in 82 countries; it praises the virtues of places once sniffed at by big-shot lawyers, such as Milwaukee.
At the heart of operations like Baker McKenzie’s or Dentons’ is a structure known as a Swiss verein (voluntary society). Branches in different countries operate under a similar name but enjoy substantial autonomy in how they are run. Firms structured this way look like an assortment of fast-food franchises rather than a unitary organisation with a strong culture; critics sometimes still deride Baker McKenzie as Baker McDonald’s. But like the fast-food chain, vereins are at once more global and more local than more centralised rivals.
Dentons has pushed the verein approach particularly hard in recent years. Its name was deliberately chosen as the most memorable and easiest to pronounce from among 67 permutations of the names of former partners. In the past 12 months it has forged ties with firms in North America, Latin America and Africa, and is about to close a deal with a Vietnamese one. It has also opened new offices in Bolivia, Grenada and Uruguay. “The more global the firm, the higher the demand,” says Mr Portnoy. He refers to Dentons as “polycentric”: with no dominant culture, no standard pay scale, no instructions on whom to hire and, most of all, no “colonisation”. It even dispenses with a headquarters. Every time you Zoom with Mr Portnoy or Joe Andrew, Dentons’ global chairmen, they appear to be in a different place.
Firm footing
Being on the ground has proved especially useful for Dentons and others during the pandemic, when travel restrictions limited where and how easily partners could move around. It has been especially handy for firms to have a large presence in America and China, with their vast domestic markets and relatively rapid economic rebound from covid-19. The biggest American firms, like Kirkland & Ellis or Latham & Watkins, have consolidated their position. Big Chinese ones like Yingke or King & Wood Mallesons (as well as Dentons, whose most numerous practice is in China) remain scarce in a field dominated by America, which accounts for four in five of the top 100 firms. But they have rocketed up the revenue rankings.
The growth of vereins is making the legal profession resemble other businesses in another way. Big law is becoming not just bigger but also more concentrated. In 2020 the three biggest earners accounted for nearly 10% of the gross billings at the top 100 global firms, up from 8% five years earlier. A handful of superstar firms like Kirkland & Ellis or Dentons may increasingly dominate the league tables. They are better able to serve clients wherever and in whatever capacity they need serving, to deal with an inevitable uptick in overheads as the world puts the pandemic behind it, and to poach talent from weaker rivals. If corporate history is a guide, the high-flying legal eagles are unlikely to have their wings clipped soon. ■
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This article appeared in the Business section of the print edition under the headline “Soliciting success”