The gulf between success and failure among the firms occupying the second half of the LB100 is as pronounced as ever. From highly profitable boutiques to ravaged regionals desperate for a merger, we chart the haves and the have-nots
Collectively making up just a tenth of the LB100 firms’ total 2012/13 revenue for 2012/13 of £19.1bn, law firms ranked between 51 to 100 in the table can be polar opposites. The gap between high and low performing firms in these two quartiles is as startling, with profit per lawyer (PPL) varying from £177,000 at ascendant litigation specialist Stewarts Law to just £15,000 at the beleaguered Manches.
While average profit per equity partner (PEP) among the bottom 50 is down by 5% to £294,000 and average revenue per lawyer (RPL), is down 2% to £194,000, there is a slight uptick in average revenue, demonstrating the beginnings of some optimism in the market, as many managing partners interviewed from this half of the LB100 tentatively observed. The average revenue of a firm ranked in the lower half of the LB100 is £38m, 5% up on last year.
‘We’re definitely not complacent, you have to innovate and to make your offer distinctive in a crowded market,’ notes Paul Ayre, managing partner of Leeds practice Gordons. ‘There’s a lot of talk of more activity but the last six to nine months have seen trading conditions as tough as they’ve ever been. There’s uncertainty among law firms and some have been making some unsustainable propositions in terms of their fees, very short-term in outlook.’
Of the regional hubs, Manchester has been the main focal point for activity and drama, not least because of the demise of former key player Cobbetts in February 2013 and its subsequent acquisition by DWF for £3.8m from administrators KPMG.
Under the agreement, DWF – which through a flurry of five mergers in just 18 months has increased its 2012/13 revenues by 85% to £188.2m, the net result of which is a firm close to the top 20 in the LB100 – took on 419 staff, including partners, from the fallen firm in Leeds, Manchester, London and Birmingham. The deal did not however include Cobbetts’ debt recovery team, Incasso, while Walker Morris took on the firm’s 24-strong financial litigation team.
Cobbetts’ collapse, notwithstanding DWF’s rapid ascent, has not deterred other firms from expanding in Manchester. TLT will open its doors there this month, while Mills & Reeve’s tie-up with Manchester practice George Davies, which went live at the beginning of June, is expected to add around 10% to the East Anglian law firm’s top line.
Remain focused
Last year’s LB100 noted that it was the multi-purpose firms that suffered the biggest slides in revenue and profitability. This year the trend continues, with ‘focus’ the buzzword among many managing partners who have seen growth in their firms.
Firms with strong private client practices such as Stewarts Law and Forsters have posted substantial organic growth in revenues, mirroring the performance of larger firms such as Mishcon de Reya and Macfarlanes. West End boutique Forsters was one of the first firms to announce its results again this year, unsurprising considering a second year of double-digit revenue growth, up 16% to £32.5m. Turnover at the firm has increased 38% over five years – hardly symptomatic of a crippling global recession.
‘An underlying trend is recovery and growth in our core business; it’s about focus in the market,’ says Forsters managing partner Paul Roberts at the single-office firm, where real estate counts for 53% of its total fee income. ‘Some larger firms appear to have withdrawn from core property work or altered their offering. Our commitment to this sector remains, and our teams continue to be busy advising on both transactional and management work, as well as providing tax, trust, wealth and capital tax planning advice to property clients through our private client offering.’
For City boutique Stewarts Law, its status as now the largest litigation-driven practice in the UK has carried it through trying economic times, seeing turnover almost quadruple from £11.9m in 2007/08 to £45.2m at the end of the last financial year, a hefty 30% increase on 2011/12’s £34.9m (see ‘Case study: Stewarts Law’).
The firm’s success is not limited to revenue. Its profit margin is on a par with Magic Circle firms, recording 45%, the same as Freshfields Bruckhaus Deringer, giving it the second highest profit margin of the firms in the 51-60 bracket, with highly profitable pensions boutique Sacker & Partners posting the highest in the entire LB100 at 51%. Stewarts Law’s margin is slightly higher than technology and IP specialist Bristows, which has a margin of 42%. It is no surprise that Bristows, Sackers and Stewarts Law are all well-managed firms known for their tight sector and practice focus.
However, Manches bucks the trend of successful private client-focused firms, becoming one of the biggest losers of 2012/13. The firm has seen revenue slide 13% to £26.3m, shifting the City firm down 11 places to its lowest rank ever in the LB100 table at 93. PPL has hit its lowest level at £15,000, tumbling 67% from £44,900 in the first LB100 in 1993. PEP is now just £134,000, compared to £235,000 a year ago when the firm was already generally regarded to be struggling.
Melvin Pedro, London managing partner at the firm, which suffered the loss of its most high-profile family partner Helen Ward to Stewarts Law last autumn, is unequivocal on the cause of its current malaise. ‘Last year’s results are a reflection of losing a team from within the family department, a flat market for mid-size transactions, and the impact of the recession, most notably on our property team, where many projects for clients have either been put on hold or postponed indefinitely.’ However, a clearly unsettled partnership will need to pull together quickly as the situation cannot afford to worsen.
Case study: TLT
Few law firms can report an increase in revenue year-on-year (bar one) since 2000 but Legal Business National/Regional Firm of the Year TLT has enjoyed another enviable year. Turnover increased 11% to £49.6m at the end of 2012/13 from £44.5m in 2011/12. This means that since the firm was formed through the merger of Bristol firms Trumps and Lawrence Tucketts, turnover has grown by more than 300%.
‘One year doesn’t make a story,’ explains managing partner David Pester. ‘You have to take into consideration everything that was done in the years before. We spent a lot investing in the previous year, especially litigation, and a lot of work came off last year which we’d been building up to for some time, so what we’re seeing is revenue return from a lot of hard work as well as the merger with Anderson Fyfe and launch in Belfast,’ says Pester.
For a firm which has historically favoured investment over profitability, it seems that prudence has finally paid off. Profitability has improved significantly, despite an increase in both partner numbers and overall headcount. Partners took home 7% more with average profit per equity partner (PEP) at £274,000 at the end of 2012/13, up from £255,000 the year before. Profit per lawyer (PPL) is also up 20% to £30,000, and profit margin too is up two percentage points at 15% compared to 13% at the end of 2012, despite an increase in headcount of 12%.
Revenue was spread fairly evenly across three main practice areas with disputes accounting for 29% of turnover, corporate for 25% and finance for 23%.
The tie-up with Scottish litigation boutique Anderson Fyfe last summer has gifted the firm offices in Glasgow and Edinburgh, along with eight partners and 45 employees, and around £3m in revenue when it went live in July 2012.
‘It was a case of two plus two equals five,’ says Pester. ‘They had some clients we wanted and vice versa.’
The firm also moved into the Irish market in May 2012, appointing former Wilson Nesbitt Solicitors litigation partner Katharine Kimber to head the now four-partner Belfast operation.
‘Belfast and Glasgow have been a success. In Belfast we were expecting to take 15 people but we now have 30. In Glasgow we have taken an extra floor in the building,’ says Pester.
The firm has put in the legwork to ensure the likelihood of continuing this steady upward trend for another year, securing places on a number of high-profile legal panels in 2013, including that of the Department of Energy and Climate Change and the Government Procurement Service, and advising on major or complex projects. It was also appointed sole property legal adviser to the BBC for its general estate work.
TLT has also continued to invest, with plans to move into Manchester in September, led by key hires in the form of former DLA Piper commercial partner Stuart Campbell and former Pinsent Masons disputes lawyer Emma Flower.
‘Over the next few months, we’ll develop Manchester and add some new practice areas while reinforcing existing ones in other offices, especially London and Bristol, and we will continue to build scale,’ says Pester.
‘We want to be a top 50 law firm. We have the trappings, but we’re not quite there yet.’
Buffeted about
Aside from the plight of Scottish firms Maclay Murray & Spens and Dundas & Wilson (see ‘Scotland the grave’), the other worst-performing firms in the 51-100 bracket are Lawrence Graham, Morgan Cole, Clarke Willmott and Bevan Brittan, which have all seen revenue drop and taken double-digit hits on profit.
Lawrence Graham, which has four of its five offices overseas and counts 40% of its business as international work, saw PPL fall 22% to £36,000, down on 2011/12’s £46,000, which itself was a 36% drop on the year before. PEP has also fallen 14% from £304,000 to £260,000 and more than halved (-54%) from the 2010 high of £568,000.
It has been a rollercoaster few years for the firm, which in June last year mutually shelved merger plans to create a £150m practice with City rival Field Fisher Waterhouse. Each firm cited different reasons for the split, including Lawrence Graham’s comparatively low PEP. However, Hugh Maule, managing partner at the firm, has again cited high property prices in the City for decreasing profit margins.
‘Our London property costs again weighed heavily on profits, but this issue has now been addressed. All of our surplus office space has been sub-let (to Bond Dickinson and an international property developer). We therefore expect profitability to increase significantly this current financial year,’ he says.
For South West players Clarke Willmott and Bevan Brittan, a need to find the focus that has been such a winning formula for some of the more successful firms in this year’s 51-100 bracket has been a stated aim, but it hasn’t yet paid off.
For Bristol-based Bevan Brittan, its strategic reshuffle to concentrate exclusively on public services clients (see feature, ‘Bevan Brittan – Don’t Look Back’, LB224, May 2012) was perhaps poorly timed as significant cuts to spending in the sector, which managing partner Duncan Weir attributed to poor results last year, continue to plague the firm.
While the firm’s revenue is down just 3% to £32.8m, it has dropped 21% in the five-year period since a 2008 high of £41.7m. PPL has tumbled 27% to £24,000 from £33,000 the year before, significantly below the average PPL of £44,000 in the 51-100 bracket. While PEP is nowhere near as low as the firm’s nadir of £55,000 a few years ago (indeed PEP is one of the fastest growing in the LB100 over five years), the profit margin of 13% is back to worryingly low levels.
‘We expect to see at least a couple more challenging years in the current economic conditions,’ concedes Weir. ‘The performance of our litigation and property teams in particular is testament to a sound core business, but there is no doubt that lack of infrastructure and services projects impacts both on our public sector clients and many of our private sector clients who wish to win mandates to service the public sector.’
Meanwhile, managing partner at Morgan Cole, Elizabeth Carr, says falling income had been expected as a result of costs involved in refocusing the firm over the course of the last financial year, which saw revenue dip 8% to £33.7m, with PPL taking a large 38% hit down to £26,000 and PEP down too by 31% to £170,000 – the lowest since 2005.
Growth of £1.7m in its public sector practice and appointments on the Government Procurement Service and NHS Litigation Authority panels are, however, highlights for the firm, with Carr optimistic for the year ahead: ‘We are confident that focused sector marketing and an open approach to merger and acquisition opportunities will result in new clients and increased revenue in 2013-14 and beyond.’
However, there have been some strong performances among regional firms in fairly depressed economic circumstances. Firms to have shown signs of solid growth include Freeth Cartwright and Ward Hadaway, which have both seen around 10% boosts to revenue, up to £40.6m and £33m respectively.
For Newcastle-based Ward Hadaway, described as the ‘one bright spot’ in a fairly dark outlook among northern firms in the LB100 two years ago, a strong litigation practice counting for 51% of revenue has carried the firm through hard times as it has seen steady turnover increases year-on-year since 2008, growing 16% in that period. However, PPL stands at just £17,000, the third-lowest in the entire 100.
Freeth Cartwright has been on the acquisition trail in recent times, averaging one merger a year according to managing partner Richard Beverley, and is reaping the rewards of an increased national presence with ten offices across the country. The firm continued that expansion with the acquisition of Henmans in Oxford at the beginning of February this year. However, Henmans’ £8.9m turnover is not accounted for in this year’s results, so the firm will see an even bigger hike in revenue at the end of 2013/14, edging it closer to the £50m mark.
Freeth Cartwright’s impressive performance reflects a steadfast belief in scale among many firms in the LB100, which has resulted in inflated results in the 51-100 bracket among recently merged firms. The most significant example of this is Bond Dickinson, the 700-lawyer tie-up in May this year between South West stalwart Bond Pearce and North East firm Dickinson Dees. Both firms are listed in the table, having each completed full financial years separately with Bond Pearce posting revenues of £50.3m and Dickinson Dees £48m respectively at the end of 2012/13. Next year is likely to see the new Bond Dickinson take its place in the top 40 with revenues of around £100m. PEP was up 19% to £270,000 at Bond Pearce, while Dickinson Dees saw PEP fall 19% to £240,000 – the relative increase and decrease in PEP demonstrates how well aligned the two firms were financially ahead of the union.
Scotland the grave
It’s been a mixed picture again this year for the beleaguered Scottish legal market, which has suffered the diminishing status of Edinburgh as a financial centre since 2008, while the move by some firms towards London in a bid to win more transactional work has been little more than a failed experiment.
Though not the worst performers in the 51-100 bracket, Dundas & Wilson and Maclay Murray & Spens have seen dismal financials again this year, with both posting the second and third biggest reduction in revenue since 2008 after Clarke Willmott, down 35% and 33% respectively.
Dundas has posted some of its worst results in its 21 years in the LB100 table. While revenue is down 11% to £48.7m from £54.5m at the end of 2011/12, which itself was down 12% on £62m the year before, profit per lawyer (PPL) has dropped 20% to £39,000. This has of course affected profit per equity partner (PEP), which is at its lowest since 1999 when equity partners took home on average £159,000.
Maclays has fared even worse year-on-year, with revenues of £40.9m, down 13% from £46.9m at the end of 2011/12, dropping the firm to its lowest position in the LB100 since 2000, while PEP is at its lowest since the turn of the millennium, down 22% from last year to £211,000. In June this year, the firm took action, kicking off a redundancy consultation with a view to making 30 legal and support staff redundant.
Of the four largest Scottish independents (now three after McGrigors was acquired by Pinsent Masons last year), Shepherd and Wedderburn is perceived to have suffered the least. This has proved the case again in 2012/13 with Shepherd posting a less dramatic 3% fall in turnover from £37m to £35.9m, while profits fell 2% to £10.3m. PEP stands at £251,000, down 4% on the previous year. This is against a 7% decrease in total lawyer headcount, while partner numbers have increased by two – up 3% on last year.
‘It’s fair to say the impact of the recession on the big Scottish banks hit some of the bigger Scottish firms harder in the market than others,’ says chief executive Stephen Gibb. ‘We didn’t have that level of exposure to those banks. A proportion of dealmakers who used to be based in the Scottish market have moved south but deals are still being done and we are fortunate enough to still be a part of those deals.’
However, the news is far from bleak everywhere in Scotland. Brodies has inched its way up to its highest position ever since making the LB100 in 2003, with revenue and PEP also up to their highest ever levels. Revenue is up 7% to £46m on last year’s £42.8m, which itself was up 16% on the year before. PEP now sits at £432,000, well above the average for firms in the lower half of the LB100. Brodies is now the second-largest independent Scottish firm by revenue, after Dundas & Wilson.
Meanwhile, the eye-catching union between Burness in Edinburgh and Glasgow and Aberdeen’s Paull & Williamsons at the beginning of December 2012, has seen the combined Burness Paull jump up the table, recording turnover of £38.7m, up 59% on legacy firm Burness’ £24.3m revenue at the end of 2011/12. The firm says that its revenue for the last year shows organic growth in turnover of 3.2%.
With net profit up 55% to £15.8m, equating to a profit margin of 41%, Burness Paull remains one of Scotland’s most profitable law firms, although, PPL is down 43% to £43,000 due to a 170% increase in headcount following the merger.
‘It’s been a dramatic year in Scotland,’ Burness Paull chairman Philip Rodney tells Legal Business. ‘We’ve seen a real changing of the guard at the top of the Scottish market. Two distinct models have evolved: firms that are servicing the London market such as Dundas & Wilson and Maclays, and firms such as Brodies and Burness Paull that have concentrated on Scotland. Over the last year, the latter strategy seems to have worked better.’
Merger mania
The Midlands is fast becoming dominated by merged firms. Birmingham-based Shakespeares’ merger with Leicester’s Harvey Ingram in August last year positions the firm well within the top 100 as it takes 64th place, up from 85th the previous year. The firm, which grew revenues 53% to £45.4m, is not looking to stop there, with commercial director Hamish Munro saying the firm is currently in talks with an intention to merge in September with planning boutique Marrons.
In the South, Ashfords’ tie-up with Rochman Landau in March 2012 is a factor in a 23% increase on revenue to £29.5m at the end of 2012/13 compared to £24m the previous year.
It is not just the regional firms that have benefitted from consolidation either. Following the tie-up between legacy firms Howard Kennedy and Finers Stephens Innocent at the turn of the year, HowardKennedyFsi has leapt up the table, releasing combined figures of £40.6m, up 46% on the £27.8m posted by Howard Kennedy alone last year.
However, while net income is also up by 158% on Howard Kennedy’s in 2011/12, PEP is half the £259,000 posted by the firm last year at £129,000. This is because the combined firm has increased its partner ranks to 70 equity partners, five times the 14 equity partners at legacy Howard Kennedy.
Wedlake Bell’s merger with City firm Cumberland Ellis in April 2012 sees the combined practice post a remarkable 131% rise in PEP at the end of the last financial year to £319,000 from £138,000 at the end of 2011/12. Despite the number of equity partners increasing by 30% from 16 to 21, the proportion of partners in the equity has remained relatively stable at around the 40% mark.
Thomas Eggar’s merger with City boutique Pritchard Englefield, also in May 2013, is likely to fulfil the South East firm’s ambitions of bulking up in the capital and expanding internationally. According to managing partner Victoria Brackett, the current financial year for the firm is all about focus (that word again) and defining the firm’s market position.
‘The mid-market is the most undefined area,’ says Brackett, ‘and that’s where we sit. We’re not big enough to have huge volume, but we’re not a boutique. Finding out where you sit in that has been the most difficult thing.’ LB
francesca.fanshawe@legalease.co.uk
Case study: Stewarts Law
Stewarts Law continues its irresistible rise since storming into the LB100 in 2011, achieving a 30% increase in turnover to £45.2m in 2012/13, following the previous year’s 22% growth to £34.9m. The key to the success is the firm’s focus on litigation, mirroring that of global litigation specialist Quinn Emanuel Urquhart & Sullivan, which has also achieved remarkable double-digit growth since the financial crisis.
Stewarts Law’s profit per equity partner (PEP) is £1.14m, bringing profits to a level commensurate with the Magic Circle. ‘We are delighted to be one of the few real success stories in what are still difficult market conditions,’ says managing partner John Cahill. The top of equity at the firm is £1.4m while the bottom is £462,000. Of the 18 equity partners, eight are at the top of equity.
Stewarts Law has been involved in some high-profile cases, including acting for bankers against Commerzbank over a bonus dispute. In this case heard in May this year, Stewarts Law secured a victory over both Commerzbank and Linklaters as the firm won €50m for the bankers it represented. Clive Zietman, who led on the Commerzbank case, also acted against The Royal Bank of Scotland (RBS) in March. In this case, Zietman is representing claimants over an alleged misrepresentation of the financial health of RBS when it made a rights issue.
While the firm’s focus on disputes work has seen revenues grow 126% since 2010, the firm is far from a commercial litigation one-trick pony, with strong aviation and travel, employment and family practices as well. Its employment practice acts for clients such as First Utility and London Capital Group.
The firm has expanded its offering with 15 new lawyers in the last financial year, the most high profile being the arrival of Helen Ward in September 2012, a star divorce lawyer who made her name at Manches. Another key hire was Mo Bhaskaran, who joined as a partner and head of commercial litigation at the firm’s Leeds office from Pinsent Masons. The firm also brought in Philippa Charles from Mayer Brown to head up the firm’s international arbitration practice.
This summer, Stewarts Law entered into a strategic alliance with US plaintiff practice Lieff Cabraser Heimann & Bernstein, which resulted in it scaling back its US operations by closing its Delaware office and slimming down the firm’s New York operations. The firm only moved overseas for the first time in May last year, opening offices in New York and Delaware after hiring former Grant & Eisenhofer securities litigation duo David Straite and Ralph Sianni. However, according to Cahill, the firm now favours an overseas model of collaboration over competition.