The LB100 survey is now in its 20th year – what does the data reveal about how the market has changed?
When LB first published the gross fees of the UK’s biggest firms in 1992, it was met with consternation and horror by some partners. ‘It is one thing for the Americans and accountants to get into this sort of thing, but not lawyers,’ one managing partner told us at the time. ‘I don’t think you will get any of the City firms to talk about this sort of thing.’
Another managing partner declared: ‘Anyone who gives you this information will be booted out of the partnership.’
Reporters rang hundreds of partners to get the key data in 1992, cajoling firms to reluctantly confirm their numbers. How things have changed. These days, firms like Clifford Chance have conference calls to journalists to go through the nitty gritty of their annual results. Every year for the past 20 years the legal market has become more financially transparent, with firms now giving out more information than they could have dreamt of back in the early 1990s.
As a result we now have more data on the performance of the legal sector than ever before and analysing the underlying numbers provides a revealing snapshot of which firms have stood out, as well as some of the core changes to the market.
But before we delve into the numbers it’s worth dwelling on the impact of this financial transparency. Should the numbers ever have been published? Many partners still bemoan the annual round of hand wringing that accompanies the announcement of turnover and PEP figures. But the release of these numbers has had a positive impact on the business of law in many ways.
For starters, it has marked the maturing of the legal sector into a proper business. In the late 1980s and early 1990s, the modern structure of law firms was still in its infancy. Only ten firms in 1992 employed more than 100 lawyers, and many firms were still run along distinctly old school, even amateurish, lines.
‘Twenty years ago we probably made money despite ourselves,’ says Jonathan Adlington, senior partner of Trowers & Hamlins. ‘We had absolutely no idea. I can remember we didn’t used to bill very often and we used to make our profits on the last day of the financial year.’
This view is echoed by Peter Jackson, managing partner of Hill Dickinson: ‘We had a much more laissez-faire attitude to financial affairs and HR issues. Twenty years ago we were partnerships that ran along very nicely with minimal attention, now we are businesses.’
Secondly, would the fluidity of the law firm merger and lateral hiring market have been able to flower to the extent it did in the 1990s if partners could not easily (and independently) see how well the competition was doing? Probably not.
‘I think were it not for the scrutiny being applied by yourselves, would there be the same level of takeover activity by firms who you describe as being in a stronger position than others?’ asks Brodies managing partner Bill Drummond. ‘I suspect there probably wouldn’t be because I think the main legal press are pretty carefully read across the profession and people want to be put in a position of strength because of the transparency that is being applied.’
Lastly, and perhaps most importantly, it means partners are able to track firms and see which strategies have paid off and which have not. One partner told us in 1992: ‘I am not in a position to comment on anyone’s financial performance – especially on our own.’ Such a response is rare these days and that surely is a positive thing considering many recent law firm failures were caused by partners being kept in the dark about their firm’s financials. Partners and pundits can now benchmark the success of their firm’s strategy against their competitors and hold management to account for their failures.
In the following pages, we crunch the numbers to pull out some of the key changes to the business of law over the past two decades. Over the long term it’s a surprisingly rosy picture. The data reveals that the legal sector has become bigger and richer than ever before, outperforming the wider economy. More consolidation than expected has taken place and there is a surprising consistency in many of the core financial metrics such as leverage and profitability.
The macro perspective
If we look at overall trends, the legal market on the whole has grown eightfold from £2.7bn in 1992/93 to top £17.67bn this year (for more analysis of the past 12 months, see ‘Future proof’). By any measure it is an impressive performance and compared to the wider economy it’s even more remarkable, as the British economy has grown just 2.5 times over the same period (see chart, ‘LB100 total revenue and profits: the past 20 years’, page 38). It marks the legal sector as perhaps one of the biggest unsung successes of UK trade of recent years.
If we look at this period over four five-year chunks from 1992, then we can see that growth has been at a fairly steady rate. Yes, there were blip years where an element of boom and bust crept in to the figures but the hard times of, say, the 2009 financial year are smoothed out over the longer term. From 1992 to 1997 and then again from 2002 to 2007 and 2007 to present, the average LB100 firm grew its turnover by around 7-8% a year on a compound basis.
The exception was between 1997 and 2002 when turnover increased by an astonishing 18% a year for five years. Much of this is down to a rash of Magic Circle mergers, all in 2000, including Freshfields’ merger with Bruckhaus Westrick Heller Löber; Allen & Overy (A&O)’s tie-up with Loeff Claeys Verbeke; and Clifford Chance’s deal with Rogers & Wells in the US.
As well as growth rates, leverage has also remained consistent across the years, with around three fee-earners employed for every one partner. In 1992 there was one partner for every 2.8 lawyers, and today that figure is nearly identical with one partner for every 2.7 lawyers.
The revenue that each LB100 lawyer brings in is far higher than in 1992. This year on average each LB100 lawyer pulled in £317,000 of fees, compared to £166,000 in 1992. That law firms can squeeze more revenue out of each lawyer is a sign that increased financial transparency has not fed through to clients demanding significantly lower fees. Clients may want more value from their firms but not necessarily lower chargeout rates. ‘Clients want more for less and they want to be able to define the service they want,’ argues David Kerr, chief executive of Bird & Bird. ‘It comes down to value rather than the pressure on hourly rates.’
But while revenue per lawyer (RPL) may have increased dramatically, profitability is another core metric that has stayed fairly consistent over the years. Profit per lawyer (PPL) stands at an average of £97,000 this year, compared to £47,000 back in 1992. That translates into a consistent profit margin across the two decades: 20 years ago the average profit margin stood at 33% and this year it stands at 30%.
So while revenues may have gone up, profit has not dramatically increased. That’s because it has become more expensive than ever to employ an LB100 lawyer. In 1992 an LB100 lawyer cost around £75,000 to keep on the books, but this year cost per lawyer topped £220,000. Much of that extra expense is down to inflated salaries: in the early 1990s a newly qualified solicitor at a quality London outfit could expect to earn around £15,000 a year; today that figure would be over £40,000 for an LB100 firm and over £60,000 at a Magic Circle firm. True, bigger firms should be able to achieve greater efficiencies and economies of scale, but once you add in foreign offices, international travel, IT infrastructure and more corporate functions, including dedicated management and business development, then gradually costs understandably begin to creep up.
Profit with a pinch of salt
We don’t like PEP. If we could, we’d get rid of it all together. It’s a crude instrument for comparing the profitability of firms, that takes no account of a firm’s leverage or how tightly the equity is held. For instance, take two very different firms – Parabis and Slaughter and May, which both have a PEP of just over £1.8m. At Parabis just 11% of its partners are in the equity, whereas nearly all of Slaughter and May’s partners are in the equity, giving Parabis a massively inflated PEP.
It is also open to flagrant manipulation. We calculate PEP ourselves (by dividing net income by the total number of equity partners) rather than relying on firms to give us their headline PEP figure, but rumours persist that firms fiddle their PEP, for instance by reclassifying a few partners as non-equity partners to bump up the numbers.
Add to that the growth of Swiss Vereins and other law firm structures that don’t share profits and PEP becomes more meaningless. This year we have included the global figures (and global PEP numbers) of firms like CMS, Norton Rose and Taylor Wessing. But given that at firms like Norton Rose, there are big differences in the profitability in many of the countries in which it operates and that partners don’t share profits, coming up with a global PEP is an artificial process that has little bearing on reality.
A far better metric to compare profitability is profit per lawyer (PPL), which makes allowances for leverage, how tightly the equity is held and the overall size of the firm. Take the example of Parabis and Slaughter and May again: each Parabis lawyer brings in £42,000 of profit and each Slaughters lawyer brings in over £300,000 of profit, a much clearer reflection of both firms’ relative profitability.
We held serious discussions with law firm management about whether we should scrap the PEP metric altogether from our report this year. But it was felt that PEP is still the headline figure that partners look at when considering moving firms and gives a rough idea of whether a firm has the financial muscle to compete for the most talented partners. So we have kept PEP in our tables as a reference tool, but will not be comparing PEP between firms in our editorial. Take PEP with a pinch of salt and instead use PPL as a key benchmarking tool.
Familiar stories
A look through the original LB100 charts sees many familiar names pop up, particularly in the top ten (see box, ‘The original list: how the top-20 looked in 1992’, above), with Clifford Chance, Linklaters & Paines, Freshfields, Slaughter and May and Lovell White Durrant emerging as the biggest billing firms in 1992. Even just a few years before the first LB100, it would have been difficult to distinguish between firms on size alone. In the mid-1980s for instance, firms such as Stephenson Harwood and Richards Butler, as well as Norton Rose, Simmons & Simmons and Lovell White Durrant, were similar in terms of turnover and total lawyers to what would later be called the Magic Circle. But by the early 1990s, the leading pack of firms that have remained a fixture at the top table was already in place.
But that top level consistency belies a remarkable amount of change further down the charts. Of the 100 firms that appeared in the first full list in 1993, just 51 have survived with their names and businesses intact. Of the 49 firms that have departed the LB100 since, 34 have been completely transformed by merging with other LB100 firms, such as Pinsents and its merger with Masons in 2004. A further seven have been transformed by merging with an American firm, mainly in the past decade, including Rowe & Maw and its merger with Mayer Brown in 2002, and Richards Butler’s union with Reed Smith in 2007.
Consolidation has not been confined to small firms outside the top 50 either, with many mid-market firms also taking the merger plunge to create bigger UK giants. Eight firms that featured in the original top 20 have disappeared or been transformed through mergers, with several of them in their third or fourth incarnation. For instance, Denton Hall Burgin & Warren became simply Denton Hall and merged with Wilde Sapte before eventually tying up with US outfit Sonnenschein Nath & Rosenthal last year to become SNR Denton. Cameron Markby Hewitt and McKenna & Co combined to become Cameron McKenna, later cementing a deal to establish the European CMS network. Meanwhile Dibb Lupton Broomhead morphed from Yorkshire heavyweight to global behemoth DLA Piper through wave after wave of regional, international and US mergers.
That so many firms have left the LB100 because of mergers shows that significant consolidation has happened across the sector: 40 mergers equate to two major deals a year over the past 20 years. Over the long term, consolidation has slowly but surely been bubbling along under the surface.
Given Dewey & LeBoeuf’s collapse this year you’d also be forgiven for thinking that law firm bankruptcies were commonplace. But the partnership model has proved remarkably resilient, with just three of the original LB100 firms collapsing entirely – Turner Kenneth Brown (1995), Frere Cholmeley Bischoff (1998) and DJ Freeman (2003) – four if you count Halliwells, which didn’t make the LB100 until 1996 and bit the dust in 2010. All four closed their doors after mismanagement and the departure of key partners. A further five do not make the LB100 because revenues are below the minimum cut off of £22m this year.
Mergers, bankruptcies and drop-outs aside, the firms that have survived intact, such as Linklaters, Herbert Smith and Clifford Chance, (we’ll call them the survivors) have enjoyed impressive revenue and profit increases, perhaps not surprising given that the survivors should be the fittest in the pack. On average, the survivors grew revenues by 9% and profits by 7% a year on a compound basis for the past 20 years.
On the whole, it’s the elite firms and those in the top-ten that seem to have cleaned up. After embarking on global domination these firms are now disproportionately bigger and control a greater share of the market. Back in 1992 the Magic Circle (although the term ‘Magic Circle’ was not coined until the mid-1990s) brought in around one third of the legal sector’s £1.44bn worth of fees. This year, it was still pulling in around 30% of the sector’s much inflated £17.67bn worth of fees.
The trend for the big firms to take home a big slice of the pie is not just limited to the Magic Circle – the top ten pulled in 40% of fees in 1993 but this year they bought in 55% of fees (see box, ‘The division of wealth: 1993 and 2012’). There is now a growing gulf between eight mega firms – DLA Piper, Clifford Chance, Linklaters, A&O, Freshfields Bruckhaus Deringer, Hogan Lovells, Norton Rose and CMS – that have over 2,000 lawyers globally and each pull in at least half a billion pounds, and the chasing pack that is losing market share to these global giants. This concentration of market share in just a few firms is yet further evidence that consolidation has dictated the distribution of wealth over the past 20 years.
Which firms have performed the best?
Of our 51 original survivor firms, Slaughter and May, Freshfields, Linklaters, Wragge & Co and Irwin Mitchell emerge as the top performers over 20 years. Each of these five firms at least doubled the profitability of its lawyers over two decades (see ‘LB100 20 year tracker’), racking up increases in PPL of over 200%.
While three of the top five performers are predictably elite firms, it’s testament to the changes in the legal market that a regional heavyweight – Wragge & Co – which came in at number 49 in 1993, has made impressive inroads, coming in at number 26 this year. The best-performing firms are a diverse mix, emphasising that no single strategy has emerged as a clear winner. Freshfields and Linklaters may be the epitome of the modern global law firm but being a conservative, quality Birmingham outfit can bring relative success, as can being an innovative volume specialist, soon to be alternative business structure (ABS), like Irwin Mitchell.
Different strategies have bred different kinds of successes. Later in this section of our report, Claire Coe Smith looks at the evolution of three very different firms through the personal views of three management figures that have seen what the last 20 years have thrown at those firms (see Retrospective ). She casts an eye over City blueblood Macfarlanes, the ambitious regional firm Osborne Clarke and global behemoth A&O. In many ways the different strategies these three firms have adopted symbolise the success and the evolution of the legal market over the past two decades.
The most interesting contrast comes in comparing the PPL figures of globe-trotting A&O and stay-at-home Macfarlanes (see ‘Profit per lawyer, the last 20 years’). Despite the wildly different strategies, there’s very little difference between the amount of profit that the average lawyer at both firms generates. While A&O may have pulled away from Macfarlanes in the last two years to open up a gap of around £20,000 in PPL, vindicating its expansion strategy, Macfarlanes was more profitable than A&O for nine years between 2002 and 2010. Expectations are that the gap will widen in profitability as the market becomes more international, but Macfarlanes has more than held its own to date.
The worst-performing survivor firms in profit terms are Pannone, DWF, Bond Pearce and Weightmans, which all saw PPL decline over the past 20 years. Just one London-headquartered firm features among the stragglers five, West End firm Manches, which saw PPL decline by 44% over this period. It is worth noting that Pannone, DWF and Weightmans have significant low-margin insurance litigation practices, which explains their meagre PPL performance.
‘Net profit is important because it gives you cash to reinvest in the business. However, 14% of £102m is a good amount of money and as long as turnover is up, profit is moving in the right direction,’ says DWF managing partner Andrew Leaitherland of his rapidly growing firm’s low profitability. ‘We are focusing heavily on increasing RPL and that improved last year and this year.’
Despite a number of non-City firms featuring among the worst performers, the rise of the regional firm over the past 20 years has been one of the biggest changes to the market. It’s a trend that Mark Jeffries, senior partner at Mills & Reeve, believes has had a huge impact on the legal sector. ‘I think the greatest change over the past 20 years would be the increasing capability and specialisms of the traditional regional firms as they have become national firms,’ he says. ‘That development has had enormous implications for what type of work is done inside and outside London.’
Further evidence for this is found in the original LB100: back in 1992, all of the firms in the top 20 were headquartered in London. Now London firms still prevail but they have been joined by regional firms, which have become national then global, like Eversheds, DLA Piper and Squire Sanders (which gobbled up Hammonds).
Firms such as Wragges, Mills & Reeve and Burges Salmon have all taken advantage in recent years of the growing tendency of clients to look beyond London for first-class, cost-effective advice.
The next 20 years
The last 20 years have seen firms get bigger, richer and look outside of the UK for expansion. We’ve also seen mergers aplenty and regional firms power into the big league with their ambitious national and global expansion. But what about the next few years? Who will make it into the table in ten or 20 years time?
For one, expect the LB100 to include more hybrid law firms and ABS. Over the past year alone we’ve seen Australian-listed Slater & Gordon enter the fray after buying a controlling stake in Russell Jones & Walker, while Duke Street also purchased a stake in Parabis, which enters our tables for the first time this year.
‘Clients want more for less and they want to be able to define the service they want. It comes down to value.’– David Kerr, Bird & Bird
In many ways, these changes and external investment in law firms are just the next steps on the long road of law becoming like any other industry or business.
Eversheds is one firm that has been at the epicentre of a phenomenal amount of change over the last 20 years and current chief executive Bryan Hughes sees the next few years as being even more dramatic.
‘The biggest change for me has been the amount of change,’ he says. ‘We’ve seen a credit crunch, global recession, double dip, globalisation, increased use of technology. I think law, being a pretty conservative sector, has taken its time to adapt and adjust but I think firms are adapting now. Over the next five years or so we’re going to see even more intense change as you see ABS and new entrants and competitors coming into the market, with the rising use of technology and the continuing trend of globalisation.’
Back in 1992 it was ‘Americans and accountants’ that caused consternation but now it will be ABS that ruffle a few feathers. But if that means the legal profession is set to continue on its strong path, then it’s no bad thing. LB
becky.pritchard@legalease.co.uk
claire.coe@clairelegal.com
20 years of the LB100
1992 Legal Business publishes the gross fees of 35 leading firms with revenues over £20m. The six constituent firms in the Eversheds family announce a merger into one law firm – but without full financial integration. The Eversheds name is adopted in 1995.
1993 Arthur Andersen hires Colin Garrett to form Garrett & Co, its first tentative step towards becoming a global multidisciplinary partnership. Clifford Chance (CC) severs ties with German associate Gleiss Lutz Hootz Hirsch, while Frere Cholmeley merges with Bischoff & Co. LB publishes the gross fees of the top 100 firms in the UK.
1994 The full extent of Turner Kenneth Brown’s demise becomes clear: partner drawings plummet to £65,000 while debt spirals to £5m. Titmuss, Sainer & Webb announces its alliance with US firm Dechert Price & Rhoads – the precursor to the transatlantic merger wave that takes hold several years later.
1995 Lovell White Durrant’s Lesley MacDonagh becomes the first female managing partner of a top ten City firm. Nabarro Nathanson finally takes over the fatally wounded Turner Kenneth Brown.
1996 The regional firm rules – Dibb Lupton Broomhead merges with Alsop Wilkinson. This merger is the genesis of DLA Piper and creates a new giant for the regions. It follows a restructuring at Dibb Lupton the previous year, one of the first partnership overhauls to be made public.
1997 The Big Four accountancy firms begin to make their presence felt. Coopers & Lybrand announces its legal practice, Tite & Lewis, formed by two Stephenson Harwood partners. When Coopers and Price Waterhouse merge in 1998, it briefly unites Tite & Lewis with Arnheim & Co, Price Waterhouse’s legal arm. PricewaterhouseCoopers’ vows to become ‘one of the top five legal firms in the world within the next five years’. By 2000, Tite & Lewis had jumped ship to Ernst & Young.
1998 The Norton Rose M5 Group disbands. The group, founded in 1977, comprised Addleshaw Booth & Co, Bond Pearce, Burges Salmon and Mills & Reeve, and was joined by Norton Rose in 1990. The firms’ shared resources used the M5 Group name in beauty parades. Linklaters announces a formal alliance with four European firms: De Bandt, van Hecke, Lagae & Loesch; De Brauw Blackstone Westbroek; Lagerlöf & Leman; and Oppenhoff & Rädler.
1999 The transatlantic wave begins – CC merges with Rogers & Wells in the US, ushering in an era of transatlantic deals. Over the next few years Dechert merges with Titmuss Sainer; Mayer Brown & Platt with Rowe & Maw; and Jones Day with Gouldens. CC also seals a merger with German giant Pünder, Volhard, Weber & Axster in a transformative year, while Denton Hall ties up with Wilde Sapte.
2000 The year of the Anglo-European merger – Allen & Overy merges with Loeff Claeys Verbeke and Freshfields merges with Bruckhaus Westrick Heller Löber. Eversheds achieves management and financial integration across all UK offices. Lovells merges with Boesebeck Droste. Magic Circle partners at the top of equity start to break the £1m drawings barrier for the first time.
2001 Kemp & Co becomes the UK’s first law firm LLP. Over the next decade all of the UK’s top-50 firms convert to LLP status, bar Slaughter and May. Berwin Leighton merges with Paisner & Co. KPMG’s legal arm, KLegal, begins talks with Scotland’s McGrigor Donald.
2002 After the collapse of Enron the accountants beat a hasty retreat and Andersen Legal implodes. CC sets up its first ever offices on the West Coast of the US, by hiring Brobeck, Phleger & Harrison partner Tower Snow and ten other partners. CC closes its San Francisco and Los Angeles offices two years later.
2003 Linklaters managing partner Tony Angel implements a root and branch review of the firm’s performance by de-equitising the first partners in the firm’s history. The restructuring would later be followed by other Magic Circle rivals. Theodore Goddard and Addleshaw Booth & Co seal a game-changing merger between a quality City outfit and a strong regional firm. DJ Freeman dissolves after one group of partners left for Olswang and others formed Kendall Freeman. Top UK firms start to make more of their new partner promotions overseas.
2004 The rise of the guaranteed deal – Berwin Leighton Paisner hires CC property partner Robert MacGregor to become head of real estate on a three-year, £1.4m-a-year guarantee. The move marks the start of guaranteed pay deals in the frothy pre-Lehman market.
2005 DLA merges with US firms Piper Rudnick and Gray Cary Ware & Freidenrich to form a mid-market transatlantic giant. Hammonds partners face a lock-in as the firm’s financial woes worsen. Coudert Brothers global network implodes and the firm disappears without a trace. The entire UK partnership leaves for Orrick, Herrington & Sutcliffe.
2006 Richards Butler agrees to merge with US giant Reed Smith. Hammonds’ fortunes take a turn for the better when it is cleared of negligence in the long-running Football League TV rights case, paying just £4 in damages.
2007 The Legal Services Act receives royal assent, paving the way for a radical overhaul of the profession. Tyco whittles down its 250-strong law firm roster in EMEA to just one – Eversheds. Manchester’s Halliwells nears the top 25 law firms in the UK with a 37% leap in turnover. CC breaks the $2bn barrier for revenues, while most of the Magic Circle break £1m PEP for the first time.
2008 Another year, another set of impressive financial results with double digit revenue rises at nearly all of the top 50 UK firms. But firms begin to batten down the hatches, with Bevan Brittan, Hammonds and Eversheds among the first to announce redundancy consultations.
2009 Mass redundancies begin with a number of firms coming under fire for redundancy rounds before a whole host of rivals follow suit. British law firms head to Asia with Australia as a springboard in to the region. Norton Rose becomes the first UK firm to agree to a merger with an Australian firm, with a tie up with Deacons, but is quickly followed Down Under by Allen & Overy, CC and most recently Herbert Smith and Freehills in 2012.
2010 Halliwells collapses after mounting debts and a scandal over its Manchester Spinningfields property deal. Lovells merges with Hogan & Hartson, creating what is considered to be the first transatlantic merger of equals.
2011 The year of the rogue partner – allegations of fraud are made against individual partners in at least five major firms, the most notable being Hogan Lovells’ Christopher Grierson, who is sentenced to three years in prison in 2012 for stealing £1.27m. The insurance sector learns that four of its main legal advisers have become two: Barlow Lyde & Gilbert and Clyde & Co announce a £309m tie-up; while Beachcroft and Davies Arnold Cooper merge to become a £175m firm.
2012 Alternative business structures come into effect under the Legal Services Act, with Co-operative Legal Services one of the first out of the block. Australia’s Mallesons Stephen Jaques completes a tie-up with China’s King & Wood, underlining a shift in power to Asia for global legal services.