The world’s 100 largest law firms have faced another challenging year of depressed economic markets and little to no transactional work. So how have they fared? LB finds out
The combined revenues of the 100 biggest law firms in the world reached new heights this year. Setting a five-year Global 100 record, combined turnover came to over $81bn, greater than the Olympian levels the market reached in the boom year of 2007. In broad strokes it has been another year of single digit rises in revenues, profits and lawyer numbers. But with inflation running at around 3% in the UK and the US, performance in real terms has been more muted than those top-line figures suggest. The past financial year was essentially a flat market, a solid performance but nothing to set the world alight.
The biggest legal drama of the year came, not with financial results, but with the collapse of Dewey & LeBoeuf, which filed for bankruptcy in May and as a result does not appear in the tables for the first time since the survey began in 1999. The biggest law firm bankruptcy in history has undoubtedly given law firm leaders pause for thought (for more, see Dewey & LeBoeuf – lessons from a downfall).
Dewey aside, profits across the Global 100 rose by 6% to reach $31.14bn this year, the third year of successive growth in net profits. Total profits have now surpassed their 2007/08 peak of $29.95bn. Profit margins across the world’s top 100 law firms have also rebounded nicely and now stand at 38% on average, again comparable to 2007/08. Each lawyer on average pulls in $286,000 in profit, up from £278,000 last year.
Those healthy top lines have not lead to a corresponding increase in the number of lawyers employed by Global 100 firms. Burnt by the difficult redundancy rounds that occurred post-Lehman Brothers, firms in the top 100 continue to keep a tight grip on how many lawyers firms are employing. In total the Global 100 firms employ 108,827 lawyers worldwide, up by just 4% on the previous financial year.
Despite chatter in the market over the past year about stealth redundancies at partner level, equity partner levels have risen over the past five years, with around 22,000 across the globe. Given that equity partners are a firm’s chief profit drivers and rainmakers it should be of little surprise that their ranks have been maintained.
The number of non-equity partners and associates, who represent a significant cost to any firm, has also remained consistent, with 12,848 non-equity partners now employed by Global 100 firms, nearly identical to last year’s figure of 12,847. While there are now 73,963 associates across the top 100 firms, again similar to the 71,000 or so lawyers that made up the ranks last year.
But in relative terms associate ranks have been squeezed, meaning that equity partners are now less leveraged than they were three years ago with fewer associates for every partner.
To many, one of the defining traits of the past decade has been a push towards globalisation. Ten years ago just 17% of lawyers were based outside of the US or UK compared to 37% today. This year the Global 100 opened 60 new offices across the world, mainly in emerging economies. Asia in particular has seen a major growth with six firms choosing to open in Beijing and Shanghai, while the number of lawyers stationed in Asian offices has increased, with 11% or 10,847 lawyers now based in Asia, compared to just 9% or 9,592 lawyers in 2009.
Each year the largest firms in the Global 100 take a greater share of the market, and 2011 was no exception. This year the top ten firms alone will generate nearly $20bn of fees or one quarter of the Global 100’s total billings. Smaller firms are now losing out on market share, with the bottom 50’s total revenue now accounting for just 30% of total billings.
Firms that have invested in global networks are reaping the benefits of the global legal market now more than ever. Take Skadden, Arps, Slate, Meagher & Flom, the world’s third largest law firm in revenue terms, which saw fee income rise by over $1bn in the past decade to reach $2.17bn this year.
‘We had a very good year because of the strength of our global platform and the diversification of our practices,’ says executive partner Eric Friedman. The Global Elite continues to dominate the scene but the signs are that the corporate powerhouses are struggling without a diverse mix of practice strengths (for more, see The Global Elite – Hollow victory).
While the overall picture is of a steady market, managing partners report that the first half of the 2012 year was stronger than the latter half of 2011.
By December 2011 the crisis in the eurozone, particularly Greece, put the kibosh on demand for legal services, with companies delaying deals. ‘Our corporate practice was affected by the volatility in Europe,’ adds Friedman. The volatility of the past 12 months was also seen at K&L Gates, as managing partner Peter Kalis puts it: ‘We kept waiting for things to bounce back but they never really did. Nothing fell precipitously in any particular practice area though.’
K&L Gates saw revenues rise by 1% to $1.06bn this year, but saw its profit per lawyer (PPL) plummet by 15% to $134,000, one of the lowest PPL in the Global 100. The firm opened in Brussels, São Paulo, Charleston, Doha and Milan in the past year and Kalis has his eye on the Australian market. ‘It should be the heart’s desire of any global firm to be in Australia. It’s a great repository of English-speaking lawyers,’ says Kalis.
Swiss Vereins
There are now more firms structured through a Swiss Verein in our list than ever before, with a total of seven in the top 100. This includes Norton Rose, Hogan Lovells, Squire Sanders, SNR Denton, Baker & McKenzie, DLA Piper and CMS.
Norton Rose, SNR Denton and Squire Sanders all posted their first post-merger financial results this year after completing mergers in 2010.
The seven Swiss Vereins in our table continued to perform in line with the market, increasing revenues by 7% on average once merged firms are taken out of the picture. But profitability in Swiss Verein firms is lower on average than across the Global 100, with a 30% profit margin on average compared to 38% across the tables.
Meanwhile, SNR Denton saw revenue reach $712.2m, while Squire Sanders posted 2011 revenues of $740m. Both firms are new entrants to the Global 100 as merged firms. Squire, Sanders & Dempsey ranked 64th last year but this year came in at 41, while Sonnenschein Nath & Rosenthal ranked at 71 last year but as SNR Denton came in at 44.
Baker & McKenzie, the largest law firm in the world, had a robust year after growing global revenues by 8% to $2.27bn in its most recent financial year (June 2010 to June 2011).
Bakers global chair Eduardo Leite attributes much of this growth to the firm’s international spread. ‘In some emerging economies we grew by double digits,’ says Leite, who has visited an astonishing 50 of the firm’s 69 offices in the past 18 months. ‘There is a lot more emerging market to emerging market work. It may give the impression that the whole world is moving to the emerging world but that’s simplistic. You need to be mindful of staying strong in Europe and the US,’ he adds.
This year is also the first time LB has included the CMS network as one entity instead of splitting out the UK business of CMS Cameron McKenna. The firm operates under a structure similar to a Swiss Verein, an European Economic Interest Grouping (EEIG), with each of the nine European firms contributing a percentage of annual revenues to a central profit pool. By including the revenue from the CMS network of $1.05bn, the firm leapfrogged 73 places in the tables and is similar in revenue terms to K&L Gates and Reed Smith, with 2,434 lawyers across Europe.
Non-US firms
US firms continue to dominate the tables, making up 78 of the Global 100. American firms have performed particularly well, on average increasing profits by 4% and turnover by 5% this year. For in-depth analysis of the US market see ‘The state of the union’ on page 48. But outside of the US results have been mixed.
In Europe, Spain-headquartered Garrigues posted static revenues of $468.4m this year but saw PPL rise by 13% to $63,000. ‘Last year was a good year in terms of profitability and we saw a normal increase in revenues,’ says managing partner Fernando Vives Ruiz. ‘This year has been difficult in the Iberian economies. We’ve had 5 years of crisis, activity levels are clearly lower than 3-4 years ago. We are maintaining our market share” he adds.
UK firms posted a mixed bag of results. Freshfields Bruckhaus Deringer saw turnover flatline at £1.14bn this year. But UK firms have been buoyed by a stronger pound against the dollar. In dollar terms Freshfields increased turnover by 2% to $1.82bn.
Magic Circle firms on the whole did relatively well, increasing revenues by 2.6% on average in sterling terms. Allen & Overy was one of the top performers, increasing turnover by 5% in sterling terms in large part down to the firm’s Asia offices. While Linklaters saw turnover inch up by just 0.6% to reach £1.21bn after a difficult year that included a number of partners being asked to leave the firm. The smaller UK firms such as Bird & Bird and Berwin Leighton Paisner also performed strongly, increasing turnover by 10% and 9% respectively in sterling terms.
Beyond the US and Europe, Canadian and Australian firms have had a strong year. Canada’s McCarthy Tétrault increased turnover by 12% to $466m and now has a profit margin of 53% and a healthy PEP of $961,000. Chief executive Marc-André Blanchard puts this down to the strength of the Canadian economy and increased inbound work, particularly from Chinese clients. ‘The Canadian economy has performed relatively well compared to the rest of the G8,’ says Blanchard. ‘So far we have been able to achieve growth by concentrating on our own market and by focusing globally in specific areas where the Canadian businesses are world champions like financial services, infrastructure, renewables, oil and gas and mining.’
The past few years have seen a number of UK and Canadian firms tie the knot. Norton Rose merged with Ogilvy Renault in 2010 and Calgary firm Macleod Dixon in 2011, while Clyde & Co merged with Nicholl Paskell-Mede in 2011. However, Blanchard does not believe the market will necessarily see more transatlantic mergers. ‘It’s way too early to say if it’s a developing trend,’ says Blanchard. ‘The Canadian market is largely dominated by four national firms which is not unlike the former Australian legal market. But I would be surprised if the Canadian market evolves as the Australian market has for two reasons. The proximity of the US market to the Canadian legal industry contrasts markedly with the closeness of the Australian legal industry to South-East Asia. That means American-centric firms are not likely to do in Canada what Magic Circle firms have done in Australia.’
Down under, the Australian market has been relatively buoyant with the five Australian firms – Minter Ellison, Freehills, Mallesons Stephen Jaques, Allens Arthur Robinson and Clayton Utz – reporting impressive turnover rises of 3% in Australian dollar terms on average.
US firms: The top performers
Quinn Emanuel Urquhart & Sullivan and Boston-based Ropes & Gray posted particularly strong results this year.
Quinn Emanuel increased its total billings by 31% to $723.4m this year, jumping 16 places up the tables. The litigation firm now has the highest profit margin of any Global 100 firm at 64% and an eye-watering PEP of $4.3m. This year the firm opened in Moscow, Washington DC and Hamburg, and bulked up in London with the hire of Allen & Overy partners Stephen Jagusch and Anthony Sinclair to launch its City arbitration practice in May. ‘We are careful about who joins our firm: we look for high quality people,’ managing partner John Quinn told LB in May. The firm also has its sights set on further international expansion. ‘South-East Asia is also very important to us, we have no-one on the ground there now but we want one of the top people,’ says Quinn.
Ropes & Gray increased revenues by 10% this year to $903.1m. Managing partner John Montgomery puts this down to an increase in demand for IP litigation, government enforcement work and an impressive run of fundraisings in Asia. ‘The market is still very difficult but all across our client base there is a need for sophisticated legal services,’ says Montgomery. The firm increased its overall headcount by 5% this year, and added eight new partners to its partnership. ‘Our partnership growth is opportunistic, we don’t have targets. If our partners are successful, dynamic and attractive then some additional growth is likely,’ adds Montgomery.
Looking ahead
While the feedback from management is that there will be some growth next year, another shock or two in the eurozone could easily derail that. ‘I don’t see anything to suggest we are going to see a big change on the transaction side. It will be another bumpy six months,’ says Barry Wolf, executive partner of Weil, Gotshal & Manges which achieved a 4% rise in turnover and net income this year to $1.23bn and $454m respectively. ‘Just look at the number of financial institutions and how that’s changed – Bear Stearns and Lehman are gone, Merrill Lynch is no longer independent – that automatically leads to less work.’
John Soroko, chairman of Duane Morris, also predicts a difficult next 12 months: ‘It’s going to be another very tough year in the US market. We’ve now had several years of operating into a headwind and we’ve become accustomed to it.’
Profits may be back on the rise, but don’t expect great things for next year. LB
becky.pritchard@legalease.co.uk
Legal Business would like to thank AlixPartners for its sponsorship of the Global 100.