The news last month that Freshfields Bruckhaus Deringer was to push through the highest real-terms pay rises by a major City firm for a decade is a significant moment for the London legal market.
The decision to hike its associate pay scale, raising its benchmark rate for newly-qualified solicitors from £85,000 to £100,000 is a bold and expensive step for the City giant. Back-of-the-envelope calculations suggest such a move, which will put Freshfields well ahead of its Magic Circle peers, comes at an annual cost in the region of £10m.
This takes us right back to the market-churning pay rises of 1999/2000 and 2007/08, a period of utter domination in Europe for the Magic Circle when their decisions clearly defined the market. After the banking crisis, the circa-£66,000 starting rate at elite London firms was reset downwards to £60,000 in 2009 (led again by Freshfields). For the next decade, real-term pay rises have been modest… until now.
Not only will this put intense pressure on Freshfields’ rivals to respond, but it nails the City giant’s colours to a clear strategic mast, strongly suggesting a turn in the direction of the US legal model, with lower leverage and a smaller and more focused pool of associates. Lawyers in support departments will be feeling unease, unless we see more watering down of the associate lockstep model (which would be fine).
Certainly, the economics of this decision must force Freshfields to further sharpen its practice, a debate that has been internally gathering much force. Given the supposed fundamentals of Freshfields’ global elite aspirations, that logic is inarguable. The camp at Fleet Street arguing for Freshfields to stop trying to split the difference between two contradictory strategies will feel they have won a notable tactical victory.
The legal industry has for years been caught between the contrasting forces of changing GC buying behaviour and the arms race in profitability among law’s Global 100.
In truth, the wider London elite cannot continue to allow such a huge disparity in the pay scales they are offering against major US rivals; when firms like White & Case and Kirkland & Ellis are offering compelling platforms for junior lawyers and often better promotion prospects, it has been plain for some time that the game was up.
Such moves also increase the pressure for City leaders to expand their LPO-style delivery arms to handle the increasing areas of work their associates are priced out of, and refer more work to mid-tier law firms. That is how the market should logically evolve anyway.
The legal industry has for years been caught between the contrasting forces of changing GC buying behaviour and greater willingness to insource on one hand and, on the other, the arms race in profitability among law’s Global 100, a pack now utterly dominated by US law firms driven by different forces to European rivals.
In more subdued markets, those pressures could be finessed but that time is ending and City firms have to make changes to their business models with it. If Freshfields’ move on salaries helps the highest levels of City law to face some of the evolutionary realities they have ducked for the last five years, they will have done their peers a favour. Not that they’ll get any thanks.