Eric Chin of Beaton Capital recently wrote a nice analytic piece about the Charmed Circle law firms – the top NYC law firms. The Charmed Circle of BigLaw firms in the USA (April 9, 2013) presents an excellent financial analysis of these top firms. He invited commentary on his post. 

Today Bruce MacEwen, aka Adam Smith, Esq., published his views as a guest writer. Adam Smith Esq on BigLaw’s Charmed Circle (April 18, 2013) sets forth Bruce’s views that circle members shift over time and, separately, the challenge of Magic Circle firms entering the NY market.

My comments, Charmed Circle and the luxury goods market (April 12, 2013) ask just how ensconced their position really is, though I cannot reach a firm conclusion. Here is are my comments in full:

What’s happened in the luxury goods market…

Luxury stores and brands such as Tiffany and Hermes are subject to economic ups and downs but I have seen no evidence of fundamental changes in the buying behavior of their customers. Contrast the luxury goods market with retailers of consumer electronics in the USA, where the rise of Amazon and other online stores led to Circuit City (a major Big Box store) and other chains to go out of business and to Best Buy (the one surviving Big Box electronics store) having to re-tool its selling approach.

So the question I have is whether the Charmed Circle is more like the luxury sector, subject only to economic ups and downs, but facing no fundamental change in buying behavior, or more like electronics, where buyer behavior has permanently changed.

The way to gauge that would be understanding how much pricing pressure they face. And the way to answer that would be to know what their realization rate is, which we do not.

What this means for law firms…

We do know that that the many firms tracked by Citi Private Banking have seen realization rates drop by about 10 percentage points, from the 1990s average of about 93 or 94% to an average today of about 84%. If members of the Charmed Circle have experienced that drop as well, I think that would speak volumes about the sustainability of their growth and margins.

Even if they do face such pressure, however, I suspect their competitive position is safe for the foreseeable future. Two or three dozen law firms likely think they are in the top 10 firms that do not have to worry about their future, that the market for their “unique and branded expertise” is safe.

The fact is, however, that here is just not that much high-stakes, price insensitive work, where clients will pay premiums and buy the brand to sustain a large number of firms. But I think that sliver is large enough to sustain the Charmed Circle firms.

For me, the more interesting question in the US market is what happens to the firms that cannot lay claim as clearly to being the go-to experts for certain high-stakes work.

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My coda here is that I fear, as price and value pressure continue, that many firms face a squeeze. The brand of Charmed Circle firms will carry them quite a ways. But what of the AmLaw 20 to 100. Some have good differentiation but many do not. Time may be running out for some.