Despite remaining singularly difficult for outsiders to crack, New York is facing unprecedented challenges to its position as the world's legal capital. Suzanna Ring and Alex Novarese ask if Wall Street's legal elite can adapt to the times

"Who we are hasn't changed at all in some ways over the years. At a partners' meeting recently someone showed me a letter written by Paul Cravath in 1920 and it was almost the same format that we use today," reflects Cravath Swaine & Moore incoming presiding partner Allen Parker. "Really, it was almost identical."

Welcome to Manhattan, the most singular, individualistic, contradictory and competitive legal market in the world. As the rest of the global legal profession changes to reflect the impact of the post-Lehman Brothers world and the rise of finance hubs and economies in the east, it seems that many lawyers in Manhattan's hermetically sealed environment carry on as if little has changed.

As much as it is often characterised as a global finance hub – in contrast to London, Hong Kong or Singapore – Manhattan remains a largely inwardly focused community. The famous New Yorker cover from the 1970s satirising the view of Manhattan-dwellers – from the vantage point of 9th Avenue, more than half the world is taken up by New York, leaving a small space for of America and a tiny slice on the horizon for the rest of the world – still seems apt.

While there is an awareness among many New York lawyers that this perspective no longer represents the world economy, in the offices of Manhattan, it doesn't feel like much has changed.

Indeed, the near-200-year-old Cravath's brand and reputation appears increasingly to be founded on a deliberate rebuff to what is going on in the rest of the legal industry, both in other US markets and abroad. 

Wall Street has other self-styled outliers. From a very different background to the storied Cravath, Wachtell Lipton Rosen & Katz, 'founded on a handshake" in 1965, has forged a similar path to become a highly profitable boutique that is a law unto itself.

Elsewhere, other elite Wall Street firms such as Simpson Thacher & Bartlett, Davis Polk & Wardwell and Sullivan & Cromwell have triangulated between the local market and globalisation, taking targeted steps into international expansion and foreign law.

Outside these prestigious traditionalists, a wider group of firms in New York – comprising mid-tier practices, out-of-towners and internationally focused firms – are facing an increasingly turbulent and challenging market. 

In this less hospitable world – still processing the shock collapse in May of Dewey & LeBoeuf – clients are more demanding, growth is flat and there are clear signs of the traditional law firm model coming under pressure as it struggles with over-capacity.

On a long-term reading of the US legal market, the trend is clear: New York law firms have seen their once huge lead over national and international rivals eroded, both in profitability and scale. 

However, they have maintained enough of a lead that the clubby, tight-knit Wall Street legal market remains uniquely difficult for outsiders to penetrate.

The questions this raises are obvious: can the conservative, domestically-focused model of New York firms survive in the face of two challenges – the creeping globalisation of legal services and the likelihood that lower-cost providers will attempt to seize sizeable elements of their business?

But for all the trademark swagger of the Wall Street attorney in their natural habitat, something has changed since Manhattan was last gripped by a downturn in the wake of 9/11. While there are no shortage of lawyers such as Parker who remain convinced of the viability of their approach, there are a growing number of senior figures who concede – if privately – that their firms will have to evolve in this changing market.

Ebb and flow 

Since the relatively easy growth of New York firms came to an end with the financial crisis – marked by the collapse of Lehman in September 2008 – fortunes have diverged substantially between many of the city's bellwether practices.

Looking at the results from 2011, the last full year for which financial results are available, the most successful firms have broadly been those that have pursued targeted international growth, tightly focused on existing clients and premium services. Cleary Gottlieb Steen & Hamilton and Davis Polk are by consensus two of the most confident performers in the post-Lehman era. 

Over the past five years, Cleary has seen revenues rise 37.8% to $1.12bn (£704m), with Davis Polk achieving 40% growth to generate income of $910m (£572m).

Cleary has benefited from maintaining a leanly staffed practice and having moved early into key European jurisdictions (the New York firm was a trailblazer, initially launching in Paris in 1949). 

The stance has given it a strong position for high-stakes work, often for foreign governments or focusing on premium securities and anti-trust work. The firm displayed its prowess earlier this year after securing a headline role advising the Greek Government on its high-stakes debt restructuring.

Davis Polk has followed a less consistent path in recent years. Historically one of Wall Street's premier names, the firm was regarded as having lost its edge while many firms ploughed ahead during the boom. Counter-intuitively, under managing partner Thomas Reid (pictured), the firm is widely seen to have galvanised itself. He says: "The past few years have been interesting. There has been zero-to-negative development in many of our markets. But we have also seen the emergence of new markets. We have had to concentrate on growing share and anticipating new areas of demand."

Other firms to manage robust performances in recent years include Sullivan, whose practice has been buoyed in part by its reputation as the US's top bank regulatory practice. 

The firm has seen revenues rise by 23% since 2006, while managing to push its profits per equity partner (PEP) up by 14% over the period to $3.2m (£2m).

Other strong performers unsurprisingly include Paul Weiss Rifkind Wharton & Garrison, one of New York's top litigation shops. Latham & Watkins and Kirkland & Ellis, meanwhile, have continued to build on their reputation as two of the most successful out-of-town entrants, backed by firm-wide revenues that have risen by 32% and 53% respectively.

While the hoped-for counter-cyclical upturn in restructuring and litigation failed to materialise to the extent that many US firms were predicting during the downturn, Paul Weiss's strong showing proved an exception, with the firm acting for some of the world's largest banks as they have faced a host of claims following the financial crisis.

"We may be the only firm in the world to have tried a multi-billion-dollar lawsuit on behalf of a financial institution over the past decade – and we've tried four on behalf of Citigroup (Parmalat, Terra Firma, ADIA, WorldCom) and secured complete defence victories in all," says Paul Weiss chairman Brad Karp.  

"Thanks to these highly visible successes, we have attracted an enormous share of the tidal wave of financial crisis-related litigations brought against financial institutions."

The recession has led the firm to act for some of the biggest institutions in the world for the first time, including Bank of America and Bank of New York.

At the other end of the spectrum, top firms that have performed less well during the recession come from two separate camps. Cravath and Wachtell saw revenues grow by 3.3% and 16.5% respectively on one hand; on the other, heavily globalised New York firms such as White & Case and Shearman & Sterling have found the markets challenging, with the former seeing income up 12% since 2006, while Shearman has seen revenue fall by 11%.

For Shearman, its performance since the global downturn is a repeat of its difficult period in the early 2000s, with the firm, once seen as a model of successful New York international expansion, struggling to keep pace with Wall Street rivals – a factor many put down to a relatively underweight litigation practice.

The global question

If the relative post-Lehman performance of New York's top firms gives an ambiguous signal as to the development of the legal industry, there is no doubt that the question of international expansion continues to exercise minds in Manhattan, with many firms drawing contradictory conclusions.

This illustrates a slow but unmistakable segmentation in New York in which different strategic positions have hardened. While there was already a clear group of New York law firms that had bet on globalisation – in very different contexts Cleary and White & Case had been pioneers decades ago – the past five years have seen Davis Polk, Sullivan and Simpson Thacher slowly but steadily internationalise their business in key finance hubs.

The period has seen all three firms launch local law practices in Hong Kong, with Davis Polk also opening in Brazil and launching a UK law practice in London, Simpson Thacher starting a UK corporate and funds practice in London, and Sullivan bolstering its City practice with a number of strategic hires including former Freshfields Bruckhaus Deringer finance partner Presley Warner.

It will be seen as significant that the trio has outperformed more locally focused rivals such as Cravath and Wachtell.

"I'd divide US law firms into three: the boutiques, specialised by practice or geography; the mega global firms, doing everything for everyone; and the firms in between, like us, Cleary and Simpson Thacher," says Sullivan chairman Joseph Shenker (pictured, right).

Shenker echoes this point, saying: "We had been looking at UK law for a long time. Clients were asking for advice in that space, but the hard part was finding the right people, and we waited until we did."

Also bolstering the case for an increasingly global outlook is the solid recent showing of firms such as Skadden Arps Slate Meagher & Flom, Cleary and Latham (the latter firm was bred in Los Angeles, but has established such deep roots in New York that it rarely suffers the dismissive attitude usually accorded to out-of-towners).

With Latham's 31 offices, Skadden's 23 and Cleary's 16, the firms have developed a truly global footprint. All three have shown the benefit of their broad international coverage with increased turnovers across the board for the past three years.

All three also sit in the top 20 global firms by revenue, with turnover of more than $1bn (£629m) each but, more importantly, they have all largely seen this figure continue to grow throughout the financial crisis.

"There has been a globalisation of the financial markets and if Europe sneezes, we cough. With the trend to globalisation accelerating, clients will increasingly look to global firms with expertise in the financial, business and regulatory capitals to help them around the world," says Latham New York managing partner James Brandt. 

"There are lots of different models, but I think ours will be successful in the long term. Those who have been great and successful are likely to remain that way, but there are some things we do that they can't."

Meanwhile, Skadden scored a role in one of the world's largest international disputes this year, acting for Roman Abramovich on his $6bn (£3.8bn) dispute with Boris Berezovsky in London, reflecting what is regarded as a formidable UK law practice. But the argument has hardly all gone the way of those favouring aggressive expansion. For one, views are sharply divided over the strategies of leading US law firms putting in heavy expansion in Asia.

A slowdown in corporate work in the region – particularly in the key Hong Kong equity capital markets this year – has led many to question if law firms can make the kind of margins their US partnerships will expect. 

This is particularly pressing in Asia, where its traditionally lower charge-out rates are already proving a challenge for the notorious unwillingness of New York firms to contemplate profit dilution. 

And much attention has focused on the fortunes of Kirkland, which hit the headlines last year for investing a reputed $50m (£31.4m) to put together an eight-partner team hire in Hong Kong.

There is a school of thought that the relative out-performance of the US economy compared to Europe, combined with a relative slowing of growth in Asia, will see some New York firms revert to their traditional US focus.

The aforementioned struggle for growth at firms defined as mid-tier globalised New York players such as White & Case and Shearman will provide further fuel to the sizeable band of local lawyers who question the need to go global.

"White & Case and Shearman have both made big investments in the past 15 years that have just been the wrong decisions. Wrong time in the wrong places," comments one New York partner in management.

Shearman senior partner Creighton Condon (pictured) concedes it has been a difficult period, but says the global network has definitely benefited his firm: "The general issue at the moment is that, with the effects of the global slowdown, some firms are not growing by latching onto growth in the market, but rather by competing against each other for existing business. Everyone has the goal of increasing market share, but the challenge now is to bring in new business while strengthening the relationships you have."

White & Case saw revenues increase last year from $1.27bn (£798m) to $1.3bn (£817m). However, the firm has been going through a turbulent time internally with a crackdown in partner performance earlier this year in light of a drop in average billable hours across the firm, understood to have resulted in some partners being asked to leave. 

White & Case chairman Hugh Verrier comments: "I see us as a global firm competing with other international firms. Less than one third of our lawyers are in the US. I don't really see us as a US firm. In a recession, financial results are particularly important. What I'm focused on is realising the dividends of the past years of international investment."

A big country

But if the global view offers some evidence for those opposing globalisation, New York is also unquestionably facing a challenge from the emergence of a national legal market as opposed to the regional US economies of yesteryear.

This trend has been apparent for 20 years, but has been given fresh impetus by the relative downturn in capital markets work and the rise of aggressive regulatory enforcement, typified by the efforts of President Barack Obama to rein in investment banks. There is evidence of a power shift away from New York – as a global hub and for lawyers – towards Washington DC as advisers struggle to deal with set-piece reform like the Dodd-Frank Wall Street Reform & Consumer Protection Act.

The sustained demand for energy and commodities has also seen some firms focus on markets such as Houston, once the preserve of Texan law firms. Indeed, the combined impact has seen more New York firms focus further afield within the US's vast national economy. Simpson Thacher chairman Pete Ruegger comments: "Our growth in the US has primarily been outside of New York over the past few years. In 2011, we opened our Houston office in response to client demands and their interest in the oil and gas, and energy spaces. 

"We've had a long-time presence in California and the increasing activity in the tech space has resulted in a great deal of work being generated, not only out of our Palo Alto office, but also in Asia."

In the context of the national US market, there is also attention focused on the emergence of firms like Hogan Lovells, DLA Piper and the announcement this month that Norton Rose and Fulbright & Jaworski are to merge. 

All three unions have not only created global law firms, but significantly they have been forged by major US practices with their centre of gravity outside New York.

While such firms have a long way to go before they become a force in New York, in theory the emergence of such law firms will prove an additional challenge to New York advisers, or at least those outside the elite band. 

Skadden executive partner Eric Friedman (pictured) reiterates the value of an offering outside New York, saying: "When you look at the US, it isn't just New York, it's a national market with clients and opportunities across the country."