Allen & Overy and Shearman & Sterling have the same problem. For the past 20 years they've been losing ground to the competition. In 2000, Allen & Overy was ranked sixth by revenue globally and Shearman was ninth. By 2021, Allen & Overy had slipped to 11th and Sherman had fallen to 61st. More worryingly, as it's an indicator of a firm's ability to retain its commercially strongest partners, profits per equity partner (PEP) too has been trending downwards. In 2000 both firms ranked between 10th and 20th globally; in 2021, they ranked between 40th and 50th, see Fig. 1.

The Story Behind the PEP Decline

In 1999, Magic Circle firms Allen & Overy, Clifford Chance, Freshfields and Linklaters ranked between 13th and 17th globally by PEP. Today, they are clumped between 38th and 44th. What happened?

Beginning variously in the 1980s and 1990s, and with the stable, profitable, domestic market offering little room for growth, these elite firms embarked on global expansion. The vast majority of this growth was in continental Europe and, secondarily, Asia. As markets outside of the U.S. and U.K. are lower priced and less profitable, this put a downward drag on firm-average PEP. This, in itself, is not a problem. However, it becomes one if a firm's comp system doesn't adequately reflect the differing practice economics of partners in different markets. Failing to do so undercompensates partners in high-profit markets relative to the worth of their practices.