An Insight into Legal Market Profitability Report Extract,Cap Gemini Ernst & Young Strategic Research Group CGE&Y 2002 October 2002,Key Research Findings,UK legal firms are switching their concentration from growth to profitability. This mean there is a need to focus on cost structure and pyramid.,Cultural barriers are the biggest obstacle to implementing such changes.,Market share comparison of the UK and US legal market,Source: “UK Market Sub-Group Economics and Deals Profile”, Hildebrandt International, 2002; “The Legal Business 100”, Legal Business, 2002. Source: “AM Law 100”, The American Lawyer, July 2002. a. “United StatesLegal Services”, Datamonitor, 2002. b. Freshfields Bruckhaus Deringer. c. UK Legal Services Market, Euromonitor 2001,OVERVIEW OF THE UK AND US LEGAL SERVICES MARKETS,Largest Five Firms Market Share of the AM Law 100, 2001,Skadden, Arps, Slate, Meagher, Flom,Baker & McKenzie,Jones, Day, Reavis & Pogue,Latham & Watkins,Sidley Austin Brown & Wood,Rest,AM Law 100 Market Value = $35.1bn US Legal Services Market Value = $162bnb,During 2001, the gross fees of the AM Law 100 grew 10% compared to 2.5% growth in the legal services market,Excluding the largest five, US law firms are typically larger in revenues and more profitable than UK firms,Gross Fees (bn) and PEP (000) for Law Firms in the UK and USab, 2001,Average Profitability per Equity Partner, PEP, 000,Cumulative Gross Fees, bn,Source: “The Legal Business 100”, Legal Business, 2002; “AM Law 100”, The American Lawyer, July 2002; US Census Bureau; UK National Statistics. a. Exchange Rate taken 31/12/00 when $1= 0.6699. B. US profitability (PEP) is from 2000; 2001 PEP is due to be published Q4 2002; so far only gross fees have been published.,The US market can support a greater number of larger firmsfirms can manage their profitability by pulling appropriate performance levers.,OVERVIEW OF THE UK AND US LEGAL SERVICES MARKETS,US legal services firms outside the top 100 account for two-thirds of the overall legal services market value,UK and US average spend per head of the population on legal services is 140 and 250 respectively,However, there is weak correlation between the size of a US firm and its profitability,Source: “AM Law 100”, The American Lawyer, July 2001. Note: Data is from 2000; 2001 global results are due to be published Q4 2002. To date, the full UK results and US revenues only for 2001 have been published. a. By revenues.,Profits per Equity Partner ($000) vs. Gross Fees ($m) for Largest 50 US Law Firmsa, 2000,OVERVIEW OF THE UK AND US LEGAL SERVICES MARKETS,Average Profits per Equity Partner (PEP) ($000),Gross Fees ($m),Growth in size is not necessarily accompanied by growth in profitability.,UK origin firms,US origin firms,UK: LLPs introduced,Firms are experimenting with emerging partnership models driven by legislation changes and recent events,General Partnerships,Profit shared between partners All employees engage in a single commercial discipline e.g. law All partners liable for damages sought against the firm,Multi-disciplinary Partnerships,Key Difference: Firms offer a diversified service, e.g. accountancy and law,Limited Liability Partnerships,Key Difference: Only the firms assets are liable, not a partners personal assets for damages sought against the firm,Aug,Nov,Mar,Nov,2000,2001,2002,American Bar and UK Law Society favour MDPs,UK Law Society to speed up MDPs,UK office of fair trading gives green light to MDPs,Enron collapse,Dutch rule against MDPs,Collapse of Andersen throws future of MDPs into doubt,Withers London (City) becomes an LLP,Legislation:,Events:,Law Firms:,Accountants can employ up to 50% non-accountants,Source: Reuters Business Briefings; www.internationallawoffice.com, 26/6/02; “New York Gives Green Light to MDPs”, International Law Office, 15/8/01.,We believe it likely that current concerns for partner liability will encourage UK law firms to convert to LLPs.,Some Definitions,1,000 UK LLPs registered,Recent Legislation Changes, Events and Adoptions of New Partnership Model,Aug,MDPs are not yet permitted in UK. Firms can form “linked partnerships” with firms in other industries though these are uncommon,LLPs can be either single or multi-disciplinary,OVERVIEW OF THE UK AND US LEGAL SERVICES MARKETS,Many states, e.g. California, have allowed LLPs since the mid-90s,Tite & Lewis (tied firm of E&Y) associated firm, Asson McKnee becomes the first tied law firm to open an office in New York,New York: MDPs introduced,Board,Organisational Structure,UK firms are adopting corporate board structures and appointing non-lawyers to senior management positions,Increasing Adoption of Corporate-Style Structures,“ . . . we are moving to a management structure which is more like a company.”a - Joint MD, UK Law Firm “. . . this is the first ever CEO appointment ever made by the firm. . .Linklaters is committed to structuring Blue Flag our online legal service as a business ra