Global 100 – Slice by slice

The Global legal market is stratifying at a pace never seen before. From the rocketing profits on Wall Street to the rapidly expanding global giants, which model paid off in this year’s Global 100?

Whether your strategy is to devour the world whole, or take it piece by piece, financial centre by financial centre, global competition has never been fiercer. Bounding straight into the top ten of the Global 100 this year is the newly merged Hogan Lovells, while a dose of revenues from down under has seen Norton Rose rocket into the top 40.

But while the likes of Hogan Lovells’ co-chief executive David Harris and Norton Rose’s chief executive Peter Martyr busy themselves in carving up the globe wholesale, the more conservative, US elements of the Global 100 are back in the business of making money. A lot more money.

Leading contentious firms such as Kirkland & Ellis, Quinn Emanuel Urquhart & Sullivan and Paul, Weiss, Rifkind, Wharton & Garrison not surprisingly had stellar years in 2010, as counter-cyclical practices continued to drive business in the US. But then so did some of the more international denizens of Wall Street. Cleary Gottlieb Steen & Hamilton’s long-term commitment to an international presence continues to pay off in spades – the New York firm saw revenues up 9% to just over $1bn while profits per equity partner (PEP) also increased by 11% to a little over $2.5m.

Overall the picture is of a market back in the black. Total revenue for this year’s Global 100 stands at $76.35bn compared with $74.61bn last year. Profits are back on the rise after last year’s slight dip. Net income for the top 100 now stands at $29.16bn compared to $27.26bn in 2009/10. Profits are still some way off their 2007/08 peak of $29.95bn but the resilience that the market has shown throughout the economic downturn has been remarkable.

Despite the improving financial outlook, firms have continued to keep a tight grip on headcount. The total number of lawyers in the top 100 is now 105,002 compared with 106,352 last year and down from the peak of 108,935 in 2008/09. The number of equity partners sharing from the profits pot decreased marginally from 21,244 to 21,052 while the number of non-equity partners increased marginally last year to 12,847 from 12,803.

It’s a small jump but it seems unlikely that this is going to lead to a period of sustained reduction of the non-equity ranks. Non-equity partners are a significant cost burden and by their very nature are not the rainmakers that firms need to generate business but they still have many advantages in terms of giving firms flexibility in less profitable practice areas and jurisdictions. As firms’ principal business generators, equity partner numbers have not surprisingly remained steady throughout the economic downturn. They’ve now hovered around the 21,000 mark for the past three years.

It is firms’ associate bases therefore that have taken the hit. ‘The downturn hasn’t necessarily led to more partner-led matters but it has led to less demand for associates,’ maintains Rick Burdick, head of Akin Gump Strauss Hauer & Feld’s international corporate transactions practice. ‘More routine tasks can be done by lower cost providers,’ he adds. Most in the market would agree. But just how you capture more of the higher cost matters is where the differences start to emerge.

Back in business

For all the focus on the emerging markets, nowhere still comes close to matching the depth of the US market. The traumas of Lehman Brothers and the global financial crisis that followed have not had the profound impact on Wall Street’s finest that might have been expected. New York’s ability to corner the most complex, business-critical matters, fuelled by America’s predilection for high-stakes litigation, has kept the US elite performing in a manner that would make businesses in almost any other sector more than a little envious.

Not all firms have rebounded this year – of the New York firms Cadwalader, Wickersham & Taft, Shearman & Sterling and Weil, Gotshal & Manges all saw their revenues shrink – and for them there’s more than a little food for thought from the confident statements of their rivals. ‘Last year was a record breaker in every respect,’ trumpets Brad Karp, chairman of Paul Weiss. ‘We handled more multi-billion dollar litigation matters, bet-the-company regulatory matters and multi-billion dollar deals than at any point in the firm’s history,’ he adds.

Paul Weiss’s contentious pedigree means that it’s no surprise that the firm reported such strong numbers. Among its highlight matters it acted for Citi in its dispute with Guy Hands’ Terra Firma over the acquisition of EMI. Of greater note is the firm’s relatively aggressive lateral hiring of a seven-partner corporate finance team from the New York office of O’Melveny & Myers in May this year. ‘Never before have we taken a group the size of the O’Melveny team,’ Karp reveals. ‘We’re trying to be strategic and opportunistic to secure our future path and to ensure that our practice strengths are stocked with stars.’ As well as the O’Melveny team, Paul Weiss added an office in Toronto in April 2011 with the addition of two partners from Shearman & Sterling. But Karp cautions that the additions in North America aren’t going to be followed by the firm moving away from its policy of advising only on US law. ‘We think about our strategy every day. We’re mindful of other firms’ global strategies. But right now, our approach is paying enormous dividends for us in this environment and we have no plans to change it,’ he says.

Cleary may not be able to match Paul Weiss’s lateral raid on O’Melveny but with the launch of a Hong Kong-law practice led by former Norton Rose partner Freeman Chan, and the upcoming launch of an office in São Paulo, the firm has reaffirmed its global credentials. ‘We’ve surpassed 2007 in terms of activity,’ says Steven Wilner, a New York-based Cleary corporate partner. ‘I think you’ve seen our strength in acting on complicated matters while the economy has been going through the downturn. It was the same story across all the top firms in the market.’

One firm that would certainly like to see itself bracketed in that group of top firms is Shearman & Sterling. The problem is that Shearman’s financials have slipped significantly against the rest of the market and revenues and PEP continued to fall last year – both by 8%. ‘The results of the firm over the last two years broadly reflect the wider economic pressures but also our willingness to invest,’ Shearman senior partner Rohan Weerasinghe insists. He points to new hires in Brussels (the firm hired a team from Howrey led by Trevor Soames) and Asia, as signs of the firm’s investment but which haven’t become accretive yet.

However, if you compare it with Cleary – a New York firm with a similar international outlook and a traditional strength in capital markets – then the picture is startling. In 2001 Shearman’s PEP was around $100,000 more than Cleary. This year the latter’s profits outstrip Shearman’s by $1m.

To many, one of the defining traits of the downturn has been a flight to quality – the best work going to a familiar band of practices in New York and London. Looking at those firms that have made the greatest gains or at least maintained their relative market position then that looks broadly true. Client expectations might have gone up in terms of improving efficiencies but when a business-crucial deal needs to be done or piece of litigation won, they are still prepared to pay top dollar.

‘Low-cost providers may not have proven to be the best place to be over the last few years and people in the market may not have expected that,’ Cleary’s Wilner says. ‘I do think they’ll rebound because companies will want to staff up with lots of in-house lawyers.’

Akin Gump Strauss Hauer & Feld hasn’t made the same investment overseas as Cleary but its focus for the past year has been on its international footprint. ‘After an experience like the global economic crisis you come out of it very cautiously but we’ve recognised that there are a lot of opportunities to expand overseas,’ says Akin Gump’s Burdick. Through the course of last year and the first half of 2011, the firm hired seven lateral partners in its international offices and another two in the US that are focused on emerging markets. It also added a Geneva office in the course of 2010 with a team from the legacy Hogan & Hartson. Not exactly growth on the scale of a K&L Gates or DLA Piper but significant for a firm of 170 equity partners.

London stalling

In London the picture is much less bullish than across the pond. Of the Magic Circle, Freshfields Bruckhaus Deringer and Linklaters are both largely flat, although Freshfields saw a 7% drop in profits. Clifford Chance’s profits rose again but ever since it saw PEP drop to £733,000 in 2009, it has been playing catch-up with its closest rivals. In financial terms, it’s still chasing their tails. (With the sterling still in the doldrums – this year we used an average exchange rate of £1 = $1.56128 compared with $1.56593 last year – UK firms’ figures haven’t been boosted against the dollar.)

The current performance of the Magic Circle has echoes from the last period of economic turmoil. In the admittedly much more muted economic downturn that followed the bursting of the dotcom bubble in 2000, the Magic Circle firms reached their profits nadir in 2003 and 2004. Freshfields’ PEP, for instance, hit a low of £675,000 in 2004, while Clifford Chance dropped to £562,000 that year.

Today the UK’s leading practices are clearly better, meaning more aggressively managed, so that profits are unlikely to drop off in the same way as they did in the early 2000s. But it is another period of relative stagnation for the Magic Circle as they struggle to grow revenues and have done most of their cost-cutting to maintain profits. While the feedback from management is that there will be some growth to report next year, another macro-economic shock or two in the eurozone might cause expectations to be revised downwards.

‘We have become hardened to this long downturn and we feel on balance we’ve done pretty well,’ maintains Freshfields’ managing partner Ted Burke. It’s proving tougher than ever just to stand still.

‘When you are a global operation it is in your nature to continue to grow but you have to ask whether it is the right growth.’
Andrew Moyle, Latham

Outside of the Magic Circle and the main story is the spectacular growth of Berwin Leighton Paisner. The firm is back in the top 100 this year (it last made the cut in 2008) having increased revenues by 15% to $345m and PEP by just under 50% to $1.04m (in sterling terms the top line increased to £221m with PEP at £667,000). The firm’s buoyant top line means that it has passed Clyde & Co, Bird & Bird and Pinsent Masons in revenue terms.

‘The key reason for the rise is that we continued to invest through the recession and that has given us forward momentum so that all areas have grown significantly,’ comments managing partner Neville Eisenberg. The firm’s international revenues have grown by 30% so that the firm’s overseas offices in Moscow, Paris, Singapore and Brussels now contribute around 10% to the top line – still relatively small but then the UK firm is new to international expansion.

Norton Rose is a little more experienced at the global game. The UK firm has surpassed even Berwin Leighton Paisner’s revenue growth but its jump of 32 places up the top 100 is thanks to an increase of $274m to its top line, in part from its Australia merger. ‘For the firm, growth has been good but growth has been more difficult,’ admits Peter Martyr. ‘The last quarter was not as good as the previous three.’

Thanks to deals with Deacons down under and more recently with Deneys Reitz in South Africa and Canada’s Ogilvy Renault, Norton Rose is in a period of complete transformation. ‘Our bigger offices did well but some of our smaller investments hurt a bit and this is partly due to the fact that they don’t have the same weight and size,’ Martyr adds.

The Ins and Outs

There are six firms leaving the Global 100. Howrey checked out for good after filing for bankruptcy earlier this year. While Dorsey & Whitney, Crowell & Moring and Finnegan, Henderson, Farabow, Garrett & Dunner all saw turnover nudge below the cut off of $337m. But that’s good news for the five new firms who entered the Global 100 this year: Berwin Leighton Paisner; Patton Boggs; CMS Cameron McKenna; Baker & Hostetler and Allens Arthur Robinson. There are now 82 US firms in the top 100 – the highest level since the survey began in 1999.

Cutting back

The question that firms now face on either side of the Atlantic is can they grow their top lines sufficiently to keep up with rising costs? Last year the top 100 reduced overheads by just under $4bn so that, although revenues dropped $5bn, profits only dropped by just under $600m. This year costs have crept up marginally but the increase in revenues of just under $2bn means that the bottom line is back up.

However, there’s a limit to how much firms can take out of their cost bases and although most will insist that they will continue to keep a tight rein on costs some increases are inevitable. ‘There’s only so much you can do on cost cutting but at a certain point you need to get back to investment in training and IT,’ Eduardo Leite, chairman of Baker & McKenzie, comments. Plus with salaries starting to creep back up and competition for talent becoming more intense, most notably in New York and Asia, some managing partners recognise that costs will inevitably rise. ‘Our cost base is certainly not growing at the same rate as it once did, but wage and other inflation in some markets means that it’s increasingly difficult to reduce aggregate cost,’ Simon Davies, managing partner of Linklaters, admits.

Which means that any improvement in profitability needs to be driven by revenue growth and this is where the Magic Circle starts to diverge. Freshfields and Linklaters have largely set themselves against more international expansion over the past two years while Allen & Overy and CC have continued to pursue a policy of opening in new markets. In the first six months of 2011 CC has added offices in Doha, Istanbul, Perth and Sydney. A&O has added an association in Jakarta to the offices it opened last year in Doha, Perth and Sydney.

For Freshfields and Linklaters therefore the answer is to push themselves further upmarket or to change course slightly and begin a new period of office openings. The announcement that Robert Elliott, senior partner-elect of Linklaters, is to review the firm’s lockstep and whether the firm needs to expand its non-equity partner numbers, suggests that it may soon have more flexibility to open or expand in less profitable markets. With the improved profitability of some of the leading US practices, Linklaters’ managing partner is clear on one of the firm’s priorities. ‘Obviously US firms that are not on lockstep have a bit more flexibility when it comes to what they offer lateral partners so you have to ensure that your profitability is competitive,’ says Davies.

Balancing growth with maintaining profits and quality is a challenge that all the leading firms face. ‘When you are a global operation it is in your nature to continue to grow but you have to ask whether it is the right growth,’ says Latham & Watkins London partner Andrew Moyle. ‘You need to focus on high-end work and the danger is to grow for growth’s sake, so you need to be very careful.’

Profits for the top 100 may be back on the rise but few of the largest firms are predicting runaway growth in the short term. ‘The profession has shown itself to be extremely resilient, and I expect we’ll continue to see incremental growth,’ comments Eric Friedman, executive partner of Skadden, Arps, Slate, Meagher & Flom. ‘However, law firms must be willing to constantly re-evaluate their value proposition and evolve to capture shifting practice and geographic opportunities.’ How firms carve out those opportunities around the world is still a work in progress. LB

Legal Business would like to thank Barclays Wealth for its sponsorship of the Global 100.