Law firms with global reach seem to be more profitable than those that stay home – but are globalisation and profit actually related? Michael Goldhaber reports

Since the early days of the Global 100 survey, globalisation and profit have seemingly grown hand in hand. For the top 50 firms in 1999 – the first year that The American Lawyer published profits per equity partner (PEP) for what was then the Global 50 – the proportion of lawyers employed outside each firm's home country doubled, while PEP more than doubled.

But whether there is a causal relationship between global expansion and financial success is unclear, whether one charts the performance of individual firms in a single year or over time. Star performers may be found among the most stubborn homebodies, like Slaughter and May, and the most persistent imperialists, like Allen & Overy (A&O).

"There is a very distinct correlation between multijurisdictional work and profitability," says A&O senior partner David Morley (pictured). Slaughters practice partner Paul Olney counters that a strategy centred on one jurisdiction "can deliver equally effective international results," and, he need not add, superior financial results.

Last year was a time of subtle shifts in our global survey – a joint effort between The American Lawyer and Legal Week – which now ranks the world's top 100 law firms by revenue. The biggest year-on-year gainers were four Australian law firms that benefited from a strong currency; Norton Rose, which had the foresight to link up with an Australian firm; and the litigators at Quinn Emanuel Urquhart & Sullivan, who actually won new business.

Two vereins cracked the top 10 for the first time – one by virtue of a new law firm combination (Hogan Lovells), and the other by virtue of a methodological change on our part (DLA Piper). Nudged out of the top 10 were Sidley Austin, which was a fixture since its own transformative merger in 2001, and Jones Day, which was on the list from the start.

Over time, such slides can be dramatic, even for firms that maintain top-tier profits. Since 1999, Davis Polk & Wardwell and Shearman & Sterling have dropped from the top 10 to the bottom half of the top 50 when ranked by revenue. Cravath Swaine & Moore and Wachtell Lipton Rosen & Katz, which began in the middle of the list, fell out of the top 50 revenue rankings altogether.

As a group, the Global 50 has decisively expanded its overseas presence, according to our study of financial and headcount metrics of the 44 law firms from the 1999 Global 50 list that exist in their original form. In our first survey, about two thirds were reluctant travellers, with no more than 10% of lawyers practising outside the firm's home country. Today, only 28% are in that category.

On average, the overseas presence of firms in the original 1999 Global 50 went from 12% to 24% over the 12-year period, while increasing revenue per lawyer (RPL) by 77% and PEP by 114%. A typical example is Milbank Tweed Hadley & McCloy, which went from 11% to 21% global and hit the other averages nearly on the nose.

Few people think of Milbank as a global firm, despite its strong franchise in project finance. It is among a cluster of unexpected US colonisers that have slowly but surely crept into the range of confirmed internationalists like Jones Day. (Raise your hand if you knew that Dechert or Debevoise & Plimpton field close to a quarter of their team overseas.)

There are reasons for the spread of this imperial strategy. In their internal studies, Linklaters and A&O see a strong correlation between the number of offices that a matter involves and its profitability. A&O's Morley argues that larger, more complex deals command higher billing rates, and fewer firms can execute that kind of work. But even the most global firm can only reap this benefit if it is tightly knitted. After years of effort, Linklaters and A&O have pushed the proportion of firm matters that involve at least two offices near or beyond 70%. This may explain why A&O has increased RPL by 145% over 12 years, while pushing the proportion of overseas lawyers from 35% to 64%. (Each score is good enough for third place in our study of 12-year growth.)

At an earlier stage in the game, globalisation can be a way of moving up the food chain. Too small for the first Global 50 in 1998, Reed Smith has nearly doubled its RPL since then, while increasing the percentage of lawyers abroad from zero to 30%. "Global expansion allowed us to expand our relationships with our biggest clients," says managing partner Gregory Jordan (pictured), who cites as an example his firm's retention as counsel to The Bank of New York in the Lehman Brothers bankruptcy.

The danger is that international expansion can add to a firm's overhead, while exposing it to low-revenue jurisdictions. Mayer Brown ranks first in globalisation growth over the past 12 years, while placing in the bottom five in improvement of both RPL and PEP.

Not every firm sings the global gospel, and some of them are doing just fine, thank you. In ranking the first Global 50 by their rate of globalisation over a dozen years, the bottom two performers are Slaughters and Paul Weiss Rifkind Wharton & Garrison. Yet Slaughters ranks first in RPL growth over the 12-year period, with an improvement of 175%, and Paul Weiss ranks second in PEP growth, with a gain of 272%. Both have the advantage of a unique market niche. Slaughters is the only large elite UK firm to adopt a near exclusive focus on UK law. Paul Weiss has completely turned over its top 10 client list and reinvented itself as Wall Street's litigator, which in 2010 was a good place to be.

But other homebodies fare less well in this study. Cravath and Wachtell appear near the bottom of the globalisation list and score at the very bottom of the list on RPL growth over time, with increases of 28% and 30%, respectively. To be fair, Cravath and Wachtell started from great heights, are still doing well in absolute terms and are penalised by a study that uses as its endpoint a slow year for deals. But they have clearly seen the rest of the pack draw closer financially. An argument could be made that, having put all their eggs in the New York basket, Wachtell and Cravath suffered from the city's relative decline as a financial centre (while Slaughters benefited from London's relative gain).

The ultimate argument for globalisation is that both New York and London are declining as capital centres, and fast. As Freshfields Bruckhaus Deringer chief executive Ted Burke (pictured) puts it: "If this turns out to be the Chinese century or the BRIC century, then the natural advantage of being a London or New York firm is not going to be as obvious." Mayer Brown may have had increased profits of 'only' 62% over 12 years, but it can also boast 172 lawyers (on a full-time equivalent basis) in Hong Kong. And if deals stop running through New York and London, those lawyers may come in handy.

There is already evidence of a surge in emerging market legal work. By value, the lion's share of Linklaters' merger activity over the past 18 months was 'South-South', meaning that both deal partners hailed from emerging economies. Clifford Chance (CC) increased Asian and Middle Eastern revenues by more than 16% in 2010, accounting for essentially all of the firm's growth. "We see quite a lot of the South-South trade," says managing partner David Childs, "and I think the shifts in economic power will be permanent."

CC has prepared for the brave new multi-polar world by opening offices over the past two years in the four hot spots of Turkey, Australia, Morocco and the Gulf. Even bolder, A&O has opened 11 overseas offices in three years.

Slaughters and Paul Weiss are not rushing to plant flags overseas. But their leaders confess to keeping a watchful eye on macro-economic developments. Of course, if their strategy falters in the next dozen years, they remain highly eligible bachelors.

The world-straddling DLA Piper, which places third in this year's Global 100, traces its American-side origins to a Baltimore and Chicago firm with exactly zero lawyers overseas. As everyone knows, homebodies make the easiest matches.

• Click here for the full table of this year's Global 100 results.

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The profit picture

For the world's highest-grossing firms, global reach doesn't always equal higher profits.

Most revenue – gross revenue rebounded slightly in 2010, with Global 100 firms reporting an overall 3% increase from 2009.

Most profits per equity partner (PEP) – PEP among Global 100 firms averaged nearly $1.5m (£971,000), and 70 firms topped the $1m (£647,000) mark.

Most lawyers – average headcount at Global 100 firms was just over 1,000 lawyers. Nine firms employed more than 2,000. Two boasted more than 3,000.

Revenue per lawyer (RPL) – RPL among the top Global 100 firms averaged nearly $810,000 (£524,000), and 16 firm reported RPL of more than $1m.

This article first appeared in The American Lawyer, a US affiliate title of Legal Week.

• For more, see Global 100: US leaders set the pace as City firms face fierce competition