A five-year view of the LB100 underlines the profound impact globalisation has had on the UK’s top firms but also the soaring success of the best mid-pack players. Legal Business analyses the winners and losers since Lehman unleashed a storm
The five years that have passed since 2008, when the previous year’s credit crunch morphed into full economic meltdown, have been, in relative terms, the bleakest period economically in the UK since the Second World War. Yet despite this, with the exception of 2009/10, when total revenues tumbled 14%, collectively the UK legal profession has grown remarkably during that period. In our 2008 report, total turnover of the top 100 firms was £13.96bn. This year, those top 100 firms have amassed revenues of £19.1bn, an increase of 37%.
The same is true for headcount: with the exception of a 3% fall in total lawyer numbers in 2009/10, UK law firms have continued to bolster their fee-earner levels. However, the five-year view reflects the year-on-year picture for the LB100 (see part I, ‘LB100 – The top 25: The age of turbulence’): top-line growth in revenue and headcount flatters the LB100 firms as a group and these figures are heavily distorted by the wave of consolidation that has affected every corner of the UK legal services market. From the union that formed Hogan Lovells in 2010 and the publication of global financials for multi-profit centre firms like DLA Piper, CMS and Norton Rose Fulbright; the significant mergers of key insurance firms Barlow Lyde & Gilbert/Clyde & Co and Davies Arnold Cooper/Beachcroft; to the emergence of super acquisitive firms such as DWF – mergers have had the most significant impact on the figures of the LB100. Yet a glance at the performance of firms, grouped together in quartiles, throws up some interesting and subtle variations – particularly when you take the impact of mergers out of the equation and look at revenue per lawyer (RPL) and profit per lawyer (PPL).
Number crunching
The chart for overall revenue performance shows clearly the extent to which the collective might of the top 25 firms dominates the profession, with the five-year line of the entire LB100 closely mirroring that of the top 25 firms. But that sharp increase in revenues from 2009/10 to present among the upper quartile of firms has not been matched by the lower half of the LB100: firms ranked 26-50 and 51-100 over the last five years have followed nearly identical paths: as a group they have flatlined. The top 25 firms include DLA Piper, Norton Rose, Hogan Lovells, CMS, Dentons and Clyde & Co – all of which have made their own contributions to the significant leap in revenues in that group.
In terms of relative performance, the RPL chart makes interesting viewing – particularly the strong showing from firms ranked in the second quartile, which have narrowed the gap in RPL between themselves and the elite 25, while widening the gap from those firms in the lower half of the table. In 2010/11, the top 25 firms had an average RPL of £354,000, some £124,000 higher than firms in the 26-50 bracket, which posted RPL of £230,000. This year that gap has narrowed by £19,000 per lawyer – the upper quartile has remained static while the second tier has edged up to £249,000.
Revenue 2008-13
Total Lawyers 2008-13
Revenue per lawyer 2008-13
The gulf in RPL between the bottom half of the LB100 and the 26-50 group was a barely perceptible £38,000 in 2010/11. By 2012/13, the gap had widened significantly to £55,000, with RPL among the bottom half standing at £194,000.
One reason why the second quartile has performed well on a per lawyer basis is that it has been relatively unaffected by merger activity. While some firms present in this bracket in 2008 have moved up the table thanks to consolidation – Beachcroft and Barlow Lyde & Gilbert – weaker firms have also vacated this quartile, and slid down the rankings – notably Dundas & Wilson and LG. Meanwhile, two firms ranked in the 26-50 bracket in 2008 have disappeared after becoming the biggest law firm collapses of the era: Halliwells and Cobbetts. The net result is that firms in the second quartile are considerably stronger as a group now.
But while the second quartile has been performing well as regards top-line growth, the upper echelons of the LB100 have been careful to ensure that profitability remains at consistently high levels. This can be seen from the sharp growth in PPL by the firms ranked 1-25 between 2008/09 and last year. While PPL has fallen back slightly this year, no doubt caused by the significant swelling of total lawyer numbers among the rapidly consolidating firms in the group, between 2008/09 and 2012/13 the PPL of the top 25 firms grew from £102,000 to £115,000 – an increase of 13%. The firms lower down the rankings have been unable to match that level of performance in what is arguably the cleanest single barometer of law firm financial health.
Profit per Equity Partner 2008-13
Profit per Lawyer 2008-13
Leverage 2008-13
One reason behind these strong levels of profitability is leverage. The most telling statistic is that while the bottom half of the LB100 and firms in the second quartile actually slightly increased their leverage ratios in recent years, the top 25 firms have collectively lowered leverage, with the clear intention of maximising associate utilisation rates and improving overall profitability. Leverage among these firms on an all-partner basis was 3.6:1 in 2008/09, now it is down to 2.8:1. Equity partner leverage is down from 6.3:1 to 5.5:1 currently.
Unsurprisingly, profit per equity partner (PEP) levels have been assiduously maintained. Beyond the sharp fall following the global economic collapse in 2008/09, all LB100 firms have kept PEP levels on a reasonably even keel, showing just a slight increase of £38,000 on average since then. It underlines how unreliable PEP can be as a metric: whatever the circumstances, PEP can usually be massaged to a certain extent to provide a consistent message of financial well-being.
Rise and fall
Individually, there have been a number of standout firms that have grown their revenues significantly over the past five years without having to resort to large-scale mergers. The most notable example is insurance specialist Kennedys, which despite facing considerable market pressure from large rivals that have joined forces to create mega-firms (see box, ‘Insurance and shipping: securing growth’), has grown its revenues by 127% through smaller acquisitions (such as its recent deal with aviation boutique Gates and Partners), the odd new office opening and pure organic growth, up from £51.5m in 2007/08 to £117m today. This includes a 31% leap in revenue for two years in a row between 2008 and 2010 – although conversely some of this growth was due to around £9m in revenue through the acquisition of Davies Lavery Solicitors during that time. According to chief executive Guy Stobart, the precedent is there to continue adding small bolt-ons to the firm.
‘There are a number of firms who do little bits of our business which is at the margins of their strategies but the core part of our strategy,’ he says. ‘We say to the lawyers in those firms: “Why do you wish to be a peripheral part of a firm? Come and join Kennedys where this work is the core of the firm.”’
Fastest-growing firms in organic revenues over five years
Fastest-shrinking firms in revenue terms over five years
Bird & Bird is in many respects the unsung hero of the top-tier of firms, consistently posting strong increases in income, amounting to a 73% growth in turnover over five years from £143.7m to £249m. Again, this growth has been achieved without resorting to a transformative merger – although there have been plenty of acquisitions along the way, including Lane & Partners in London in 2008 and more recently Danish IP/IT boutique Bender von Haller Dragsted in May this year.
‘We’re continuing to grow,’ says chief executive David Kerr. ‘We’re continuing with a different strategy – to be strong in core industry sectors and to focus on our core of technology and knowledge economy clients. We’ve been growing consistently for ten years, having the same core strategy throughout that period.’
It is unsurprising to see Mishcon de Reya near the top of the charts for revenue and PEP growth over the last five years. In many ways the Legal Business 2012 Law Firm of the Year has been a poster child for success within the legal industry in the UK post-Lehman. It has adopted an incredibly successful strategy of fashioning itself as a private client sector firm – not simply having a great private client practice but positioning itself as a firm that advises privately wealthy individuals, families and companies on all their legal needs, be it a high-profile divorce or a management buyout. Servicing a client base that is cash rich and not at the mercy of the banks has been a winning formula: revenues at the firm have increased by 88% since 2008 and PEP has swelled by 18%, from £714,000 to £840,000.
According to managing partner Kevin Gold, the time has come to take stock but not to relax – that would start the decline of the firm.
‘Our growth plan is moderate; we want to grow to a £100m business in three years. It’s moderate in the sense that our growth up until this point has been extraordinary. We want to slow that down to allow us to breathe and integrate as we bring laterals in. Another key aspect of our three-year plan is our ambition to be regarded as one of the leading litigation firms in London and the leading private firm in London.’
It is no coincidence that three other firms with the fastest organic growth in the last five years have a heavy private client bias – Farrer & Co, Forsters and Withers. They would never admit to it, but privately some management figures at City firms that put their unfashionable private client practices out to pasture in the 1990s must be kicking themselves.
One firm that has bucked that trend is Manches. As documented earlier (see ‘Scattered in the wind’) the firm’s difficulties in the last financial year have been acute. In fact, its problems go back much further: the firm has seen revenue decline 24% since 2008, while PEP has fallen 41%, from £229,000 to £134,000.
PEP: 20 fastest-growing firms 2008-13
PEP: 20 fastest-falling firms 2008-13
Similarly, South West firms Bevan Brittan and Clarke Willmott (although Bevan Brittan’s PEP growth is one of the fastest over five years) have had extremely tough recessions, both still suffering as a result of overexpansion into non-profitable practice areas at the wrong time. While management at both firms told Legal Business last year that all the necessary steps were being taken to shore up finances, it is clear that neither firm is out of intensive care yet.
More worrying from a LB100 perspective is the long-term revenue drop of some of the biggest names in the UK legal market – Simmons & Simmons (see ‘Case study: Simmons & Simmons’), SJ Berwin and Addleshaw Goddard, all of which have seen double-digit falls in revenue over the last five years. While SJ Berwin has recognised that it cannot compete in the global market independently and has agreed a potentially game-changing merger with King & Wood Mallesons, the feeling is that Simmons and Addleshaws have both been squeezed hard by the fall-off in corporate and property transactional work and will hope that the attendant problems blow over. Either that or something more radical might be required.
‘We would have liked to have done better but if you look at where we’re investing, we’ve had a significant number of lateral hires (29) and three new offices. We’re getting ourselves in shape to take advantage of the improving economy,’ says Simmons’ senior partner Colin Passmore, speaking on the past year’s performance. ‘The London market is at capacity – it will pick up if the economy truly is picking up. There are lots of firms competing for the same business, a number of firms getting themselves into difficulties. It’s indicative of the pressures we’re all under.’ LB
mark.mcateer@legalease.co.uk