Keen observers of London's lateral hiring market may have noticed something new about the way U.S. firms are hiring nowadays.

While hires in areas such as corporate and finance still dominate the headlines, practice areas that had in previous years received only casual attention in London, such as regulation and intellectual property, have been deemed important enough to require lateral hires by the likes of Kirkland & Ellis and Latham & Watkins.

Many U.S. firms also point out that there has been a notable increase in the size of their teams in areas such as employment, pensions and tax in London, which have grown either organically or through lateral hires.

But this U.S. growth in non-core areas has had a side effect, according to several partners. Not only have U.K. firms lost star performers to U.S. firms but, perhaps more insidiously, they stand to lose out on lucrative referral work that those same U.S. firms have historically, and often discreetly, outsourced to them.

Using people behind the scenes

Referrals from the London offices of U.S.-based firms have been happening quietly behind the scenes for years, with those U.K. firms enlisted to assist on deals rarely making even a nominal appearance on deal sheets.

On Pret a Manger's high-profile takeover of rival sandwich chain EAT, for example, Skadden Arps Slate Meagher & Flom and Travers Smith picked up headline roles on the deal, but Shoosmiths did the real estate work with little public recognition, according to one person close to the situation.

One partner at a U.S. firm in London says that while many firms are open with clients about what work was outsourced, some have been known to 'white label' outsourced work to pass it off as their own.

Another partner at a U.S. firm adds that many firms operating in London "present themselves as having a full-service offering, but they don't".

"They will use people behind the scenes," they say.

But partners at U.S. firms say they are looking less at outsourcing expertise, with some people saying that such referrals are becoming "less common now".

"You get to the point where you think that you are spending so much money outsourcing that expertise, you may as well just get someone in permanently"

"We saw that with the GDPR rules coming in, we couldn't really afford to not have a specialist," one partner says. "You get to the point where you think that you are spending so much money outsourcing that expertise, you may as well just get someone in permanently."

Among the U.S. firms that routinely refer work to U.K. peers are Cleary Gottlieb Steen & Hamilton, Skadden Arps Slate Meagher & Flom, Simpson Thacher & Bartlett, and Willkie Farr & Gallagher, to name but a few, according to partners in the market.

The same people add that U.K. firms that traditionally gathered up lucrative referral work include Simmons & Simmons, Bird & Bird, Travers Smith and Dentons – typically, full-service firms with plenty of partners ready to jump on a U.S. firm's mandate. Bird & Bird even opened an office in San Francisco last year, which the firm said provided it with "an ideal platform for working together with U.S. partner firms".

A delicate balancing act

Two partners at different U.S. firms say the referrals practice is viewed by their firms as just another exercise in sourcing local expertise when working in a foreign market, and that their firms use a similar approach in countries such as Italy and Germany.

However, the U.S. firms' non-core hires risk upsetting the status quo because U.K. firms are wary of helping potential competitors.

Operating with a broader range of practice areas may also mean U.S. firms start to find it harder to be as profitable in London. One partner at a U.S. firm explains: "The reality of these small specialist departments is that a partner in that firm costs the same amount but doesn't make the same amount in fees as a corporate or banking partner."

"The referrals network will continue for a while longer. But [strategy is] evolving, and U.S. firms are growing the breadth and scope of their practices in London"

Cleary London partner David Billington says: "Real estate is an area that sees a lot of referrals at the moment. That is partly because to be accretive on a standalone basis, a real estate practice needs to be scaled up, and some U.S. firms focused on M&A have chosen not to make significant investments in that area (so far).

"The referrals network will continue for a while longer, because there are certain specialist areas where having a deep bench of lawyers in a particular space doesn't fit with the overall strategic goals of the firm. But those goals are evolving, and U.S. firms are growing the breadth and scope of their practices in London."

A senior partner at a U.K. firm suggests that U.S. firm clients prefer that their lawyers outsource work because of the significantly lower charge-out rates at U.K. firms. However, the partner adds the U.K. firm would not want a situation in which it is taking on referral work and, in parallel, assisting the U.S. firm in becoming a bigger threat to its most profitable practices.

Referral work to taper off?

Partners at U.K. and U.S. firms disagree about where this will lead.

The U.K. firm's senior partner says that while American firms are on the lookout to hire specialist partners, they cannot always offer the same variety of expertise as U.K. firms, with homegrown lawyers often more prepared to refer work across departments.

For one U.S. partner, the increasingly full-service nature of American law firms in London will eventually lead to a tapering in referral work for U.K. firms. They add however that a referral model, in whatever form, may still have relevance for both newer London market entrants and firms that want to have a strategic presence in the city, however basic.

Both sides agree that whether or not such referral work survives is likely to depend on how U.K. and U.S. firms manage the increasingly precarious relationships, in which once-simple give-and-take arrangements have become narrower and more complex.