Mid-pack advisers faced contrasting fortunes over the year, with many generalists seeing margins under continued pressure, while a sizeable band of confident City and insurance players rode the winds
With a combined total of 9,859 lawyers, 1,416 equity partners, £2.46bn in revenue and profits of £578.7m, the firms ranked 26-50 in the LB100 lag significantly behind the top 25 as a group.
Revenue at the average firm in the upper quartile of firms is up 9%, inflated by the wave of mergers that has boosted the income at firms such as Dentons and Herbert Smith Freehills, while firms ranked 26-50 managed average revenue growth of 7%.
However, compare the performance of this group of firms to the Magic Circle and the numbers are more favourable. While the elite averaged revenue of £1.06bn, this is only up 1% on average compared to last year.
And while the average Magic Circle firm saw profit per lawyer (PPL) stay flat at £191,000, firms ranked 26-50 fared relatively better with average PPL up 5% to £59,000.
At Wragge & Co, which had a steady year with turnover up 2% to £120.5m and PPL up 7% to £80,000, managing partner Ian Metcalfe sums up the current mood among many firms: ‘We went into the financial year thinking that a flat performance would be pretty good. The sense I get from talking to my peer group managing partners is that this was indeed the case. The legal market remains extremely challenging and it was a hard, gritty year. Against this backdrop, we were quietly satisfied to have achieved growth in both turnover and profitability.’
But while the year-on-year performance of the second quartile of firms may be collectively stronger than some of the elite firms in many respects, individually some of the 26-50 firms have had tough years as mediocre financial performance and failed merger talks have taken their toll. For some, simply not boosting revenues by virtue of a merger has seen them eclipsed by rapidly expanding rivals.
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Holman Fenwick Willan (HFW) has been nudged out of the top 25 altogether, despite enjoying an impressive 14% leap in turnover this year to £141m, while net profit jumped by 17% to £38m. Nonetheless, there is a sizeable £25.5m revenue gap between HFW and 25th-placed Addleshaw Goddard.
The biggest slide in this bracket of firms comes from Stephenson Harwood, which falls five places despite posting modest revenue growth of 2% to £112.3m for the 2012/13 year; enhancing its international offering by agreeing a formal association with Singapore’s Virtus Law; and launching a representative office in Beijing in May. However, the firm’s profitability makes less impressive reading – profits have fallen in successive years, with PEP down 10% to £453,000 and profit per lawyer down 15% to £72,000. This compares to 2007/08, when PEP was £620,000 and PPL £90,000.
Case study: Macfarlanes
With almost daily reports of law firm redundancies and poor financial performance in the UK legal market, economic depression has had little effect on the performance of City firm Macfarlanes, which has every reason to feel optimistic and little reason to change with the times.
The firm recorded a 12% rise in revenues in 2012/13 from £102.2m to £114.2m, along with a healthy net profit increase of 16% from £42.44m to £49.25m, equating to profit per equity partner of £985,000 – a rise of 9% on last year – while profit per lawyer stands at £158,000 (a rise of 7%).
As a proudly conservative beast with a resolutely organic approach to growth, Macfarlanes’ success story is one that has grown steadily over the last 20 years, despite suffering a 16% revenue drop between 2008 and 2010 as private equity transactions dried up completely. Relatively tiny in stature to major City peers, with 312 lawyers, the firm is one of the smallest of the top 35 UK firms with a spread of 50 equity partners and 21 non-equity partners. So why has the London firm yet to disappoint?
‘I struggle to think of another firm out there with quite the mix of our practice, which may be part of the answer,’ says managing partner Julian Howard.
‘I attribute it to a number of things,’ adds senior partner Charles Martin. ‘People working very hard, having the right sort of mix of clients for the market out there and our strong private client business have put us in good stead. You need clients but you need active clients that need your help. Frankly, it’s come together with planning and a bit of luck.’
This diverse mix of corporate and private client capability is reflected in the firm’s first-tier ranking in investment funds and private client by The Legal 500. Martin also notes the lean structure of the firm has aided its consistent standing in the market as well as ‘talking to our clients to make sure they get what they want in the form and at the price that they want it – what they expect is value for money’.
The firm, however, is not resting on its laurels just yet as Martin explains: ‘I don’t think we’re ever comfortable or remotely complacent. There’s always room to improve. The hard lessons from the downturn are about the need to adapt. I don’t think we expect to be comfortable. We recognise that in this market a willingness and ability to respond rapidly to changing client needs is absolutely critical.’
Given the relatively poor performance of myriad firms pursuing international or merger strategies, expect to see more of the same from Macfarlanes next year.
Field Fisher Waterhouse (FFW) remains locked in 38th place – an anomaly as the 358-lawyer firm endured a difficult year of unsuccessful merger discussions with both LG and Osborne Clarke (OC), which may have played a part in causing the 3% drop in revenue to £95m, alongside a PEP decrease of 8% from £434,000 to £398,000. Managing partner Michael Chissick told Legal Business in July that a merger is no longer on the cards.
‘We’re not in the market,’ he says. ‘We did discuss it last year and we concluded we don’t have a perfect merger partner. We’re focused on this business now and thinking about who we were going to merge with is why the figures are down now. You’ll see results improving year-on-year now. It needs some fine tuning but that doesn’t mean all the ingredients are not in place.’
In contrast to other segments of the LB100, the overall performance of firms ranked 26-50 in the table has not been affected by the wave of consolidation that has swept through the UK legal market. In fact, Withers, Nabarro, FFW and OC were all linked to mergers that failed to materialise in the last financial year (in FFW and OC’s case, with each other). One of the few firms to pull off a noteworthy tie-up recently was Mills & Reeve, which acquired Manchester stalwart George Davies on 1 June.
Merger activity elsewhere has squeezed the rankings of this peer group which, like Stephenson Harwood, have slid down the table despite posting revenue increases.
Diversity: Still too few women at the top
Nabarro, Olswang and Parabis Law all moved down three places. Again, Nabarro’s drop does not appear to be a direct reflection on performance, as it produced solid PEP growth of 29% from £332,000 to £427,000.
Senior partner Graham Stedman says: ‘We restructured the partnership last year, which, combined with an increase in turnover and a reduction in costs, has helped us increase PEP by 30%. Plus, we have no debt and we have a strong cash position.
‘We can’t do anything about the economy or the legal market but the one thing we do have under our control is how we manage the firm. We’re conservatively run, but we’re also ambitious.’
By contrast, there are firms that have fared better in the rankings with flattering top line revenue increases. Take OC, which has had a fruitful year of international expansion with new offices in Germany, Belgium, Italy, Spain and most recently France, while revenue has increased 15% to £112.8m – the third-largest revenue hike in the peer group. However, the revenue growth masks a couple of slow periods for the firm’s transactional business. Discounting revenues from the firm’s new offices, its year-on-year turnover figure fell by 1% from £98m in 2011/12 to £97m in 2012/13. A 12% dip in net income combined with a 27% increase in lawyer numbers means that PPL at the firm stands at £38,000 – down 31% on 2011/12.
‘My take on the last two to three years is that it’s been very lumpy, one quarter can be quite strong, one quarter quite quiet,’ says managing partner Simon Beswick. ‘The hope is that as we move forward, we will come away from a low point in the market, that it will be more consistent.’
Private client specialist Withers, which recently aborted merger talks with Speechly Bircham – a union that would have brought the combined entity comfortably inside the top 25 – has stayed firmly rooted in 28th place and has enjoyed a revenue jump of 33% over the last five years. However, it did suffer a 10% drop in PPL from 2011/12 while PEP dropped 5% to £363,000.
Case study: RPC
With double-digit revenue growth for the second successive year and lawyer headcount up 26%, expectations for the growth of RPC are high.
The firm’s financials show a 21% increase in revenue from £68m in 2011/12 to £82.1m this year.
And despite profit per lawyer dropping 8% and revenue per lawyer falling by 4%, RPC has no plans to add another name to its letterhead, with managing partner Jonathan Watmough reflecting that consolidation ‘naturally disjoints firms, people and clients’.
Merger talk has been a hot topic of debate among firms this year, especially those seeking to consolidate their interests in order to exist in a tough market.
‘We’re fiercely independent and we’d be tough to merge with,’ says Watmough. ‘We have a very distinct culture that we will protect at all costs. We also feel we can do it ourselves.’
‘In 2008 we resolved not to let a serious crisis go to waste, and so we invested very heavily during the downturn. We re-engineered the firm from the ground up – not just in terms of systems, but we’ve also seen a huge influx of the highest quality people who have made an enormous difference. In the last two years we’ve seen the benefits of that three year investment coming through strongly.’
This, he notes, was a mix of three strands of the business – advisory, disputes and transactional – ‘running well at the same time’.
‘Corporate has done really well and completely bucked the trend – we’ve had some huge transactions as well that are entirely disproportionate to our size and that’s a real testament to what we’ve got here now.’
In addition, Watmough notes the boost in the firm’s IP, technology, media (the media practice ranks in the first tier in The Legal 500) and outsourcing team which has grown eightfold since 2006, accounting for ‘very high quality market share’. The other ‘standout performer’ is litigation, in particular the commercial disputes team, which Watmough says ‘blew the lights out’.
Such is the confidence of the firm that it has invested solidly in lateral hiring in the last year, including Sukh Ahark from Davenport Lyons, where he was head of banking and finance, corporate partner Anthony Shatz from SJ Berwin, and Wragge & Co corporate partners Richard Haywood (Wragges’ former managing partner) and corporate head Maurice Dwyer. The duo joined fellow corporate partner David Marshall at the beginning of the year.
‘We’re trying to grow a balanced business,’ adds chief operating officer Richard Emanuel. ‘It’s not just a balance between different types of work or between market sectors. It’s a balance between happy clients and engaged staff. If you can do both of those well, the numbers will tend to look after themselves.’
The pressure has yet to hit Watmough and Co yet, as he concludes: ‘What seems to be happening is the high quality mid-tier City firms like us, Taylor Wessing and Travers Smith have reacted well in the downturn.
‘The quality of the work is very high and because of where it is coming from it is a little less pressurised in fee terms. Whereas some other mid-tier firms seem to have borne the brunt, so proving that it’s got nothing to do with size and more to do with the nature of the client base, sector focus and culture.’
The strongest performers in both revenue and profit terms in the group, Mishcon de Reya and Macfarlanes, share a common strength in private client. This was a practice area that became unloved by many law firms in the 1990s but those that have stuck with it have reaped the rewards during the recession, as the independently wealthy invest their cash at a time when bank lending has dried up.
Macfarlanes (see case study) continues to surprise with sustained growth over the last five years. Revenue this year was up by 12% to £114.2m and PEP amounted to £985,000 – impressive considering its size (50 equity partners and 21 non-equity partners) and lack of international expansion.
Competitor Travers Smith, also a traditionally independent firm with an exceptional corporate practice, has similarly shown little sign of being unduly affected by the slowdown in corporate and private equity work. Lean and fit for purpose, despite moving down one place to 42nd in the rankings, Travers posted 3% revenue growth to £86.2m, while PEP was very slightly down at £793,000.
In view of the economic discomfort endured by the top 26-50 firms this year, they still turn over an average of £61m more than the top 51-100 firms, and the revenues in the second 50 have been as considerably inflated by the raft of consolidation as they are in the top 25.
‘I wouldn’t single out a particular tier of firm,’ says Travers Smith’s managing partner Andrew Lilley. ‘Every business model’s strength has a flip side. The economy still isn’t putting any wind in your sails for free – everything is more of a grind, for every piece of work you have to turn over that many more stones.
‘I’m sure it feels like that whether you’re in a firm ten times the size of ours or if you’re in a firm a tenth of our size. But the UK legal profession on the whole has proved itself pretty resilient over the past few years.’ LB
sarah.downey@legalease.co.uk
Insurance and Shipping: Securing Growth
A historically regional, unglamorous and increasingly commoditised practice, the strength of insurance-driven firms in the LB100 post-Lehman has been a notable trend, not least because of the notoriously value-conscious approach of clients in the sector. Competition has intensified both through consolidation of key players such as Clyde & Co/Barlow Lyde & Gilbert and Beachcroft/Davies Arnold Cooper and continued pressure at the volume end, with key insurance clients Admiral, Ageas, and RAC gaining alternative business structure licences to establish their own legal offerings.
The rapid ascent of national insurance firms to the top-25 of the LB100, including Weightmans and DWF, has put further pressure at the top end of the market. Nonetheless insurance-heavy firms such as RPC and Kennedys continue to post impressive revenue growth.
LB100 firms continue to feel confident over demand for insurance services. Private-equity backed Parabis Law (which descended three places to 36th in this year’s LB100) broke into the Scottish legal insurance market with a single-partner regulated law office named Parabis Scotland and hired local rival HBJ Claim Solutions’ litigation head Tony O’Malley to offer claimant and defendant insurance services. Its defendant insurance arm Plexus Law also merged with Greenwoods (ranked 97th in the table) in May this year adding £25m to the top line.
Further consolidation includes international dispute resolution firm Kennedys (which rose two places in the LB100 to 29th), which merged with well regarded aviation boutique Gates and Partners in June.
‘We are very focused around claims and disputes primarily for insurers, reinsurers, big corporates and public bodies. We are continuing to see good flows of work from our client base and believe this will grow as our clients grow, particularly in more emerging economies. Since over 90% of our practice is litigation for this client base we expect most of our growth will come from here,’ says Kennedys’ chief executive Guy Stobart.
Top-20 UK firm Clyde & Co created an insurance giant in 2011 through its merger with Barlow Lyde & Gilbert. The 1,081-lawyer firm, which posted a 17% increase in turnover at £336.6m as well as a 4% increase in profit per equity partner (PEP) to £580,000, also announced in May that it would launch a Madrid office following the appointment of a four-partner insurance team from DAC Beachcroft’s local office.
Nonetheless, chief executive Peter Hasson says the ‘tough’ UK market hasn’t been easy.
‘Clients have adjusted to their changed position post-financial crisis. You can see it in the way they are approaching law firms. There have been panel and supplier reductions and more use of service-level agreements. There is now a much greater role of procurement in purchasing of legal services. All of these factors are important,’ says Hasson.
‘Law firms have been slightly slower to adjust. In the insurance market, firms like ours are a little more ahead in terms of what clients are looking for in suppliers. Firms that don’t have a clear strategy and don’t execute strategy properly won’t do well.’
On the shipping side, the partnership at Hill Dickinson is bearing the burden of heavy investment into its yacht and shipping practice, among other things, with a cash call of £2.8m issued to partners last month. With profits already down 15% in 2012/13 against a modest 2% increase in revenue to £112.8m, it has been an expensive year for its partners.
Having launched a new office in Monte Carlo in March, 200-year old Hill Dickinson attributes the move to a strategy that will return it to greater levels of profitability, something managing partner Peter Jackson confesses the firm ‘struggled with last year’.
‘We have projections that indicate that it’s possible. It’s been a very successful area for us. The marine industry will contribute significantly towards that. It won’t be the sole reason. We’d like to see the Monaco base strengthen our position in the yacht world. We are probably the leading practitioner in the UK. In due course, we’d like to see a further strengthening of our practice in the Middle East,’ says Jackson.
In contrast, the two top-ranked firms for shipping in The Legal 500, Holman Fenwick Willan (HFW) and Ince & Co, are performing well financially.
HFW, which has over 200 shipping lawyers and 19 master mariners across 14 offices worldwide, managed an impressive turnover increase of 14% to £141m (and a striking 82% growth in the last five years), while PEP was flat and profit per lawyer grew 7% to £91,000.
New managing partner George Eddings is confident of the firm’s offering.
‘We need to consolidate what we’ve got,’ he says. ‘We’re in the area we want to be in. We want to populate more people into those offices. Some people think it’s a feel good factor opening offices, but it’s a huge drain on management and resources.’
Ince & Co has been in the business for over 140 years, and although it revealed a conservative 2% increase in revenue to £93.2m, it is part of a consistent growth pattern which has seen the firm boost turnover by 45% in the last five years. Profit per lawyer increased 7% to £78,000, while PEP stands at £250,000 for the 2012/13 year.
Ince’s expansion plans for its maritime practice included the launch of its third Chinese office in Beijing last July. Headed by contentious shipping partner Wai Yue Loh, it follows the firm’s formal law alliance in Singapore with Incisive Law in a bid to generate English and Singapore advisory work in the maritime sector.
Others to follow suit of the dominant maritime firms of late include RPC, which launched an office in Hong Kong in association with local firm Smyth & Co last August with a four-partner team from legacy Barlow Lyde & Gilbert, while Clyde & Co announced its Singapore-based joint venture with Clasis in early July which is to include a maritime practice.
For advisers focused on the premium and international end of the litigation market, the wind is still in their sails.
Which firms have the biggest UK business?
This table lists the UK revenues only of the top 50 firms. Once international fee income is taken out of the mix, national firms like Eversheds and Pinsent Masons creep up the tables, while international vereins like CMS and Norton Rose Fulbright slide well down the list.
| Firm | UK revenue (change on 2012 in brackets) | |
| 1 | Linklaters | £514m (0%) |
| 2 | Freshfields Bruckhaus Deringer | £464m (8%) |
| 3 | Allen & Overy | £452m (1%) |
| 4 | Clifford Chance | £443m (0%) |
| 5 | Slaughter and May | £430.5m (0%) |
| 6 | Eversheds | £330.5m (0%) |
| 7 | Herbert Smith Freehills | £310m (-2%) |
| 8 | DLA Piper | £283.1m (0%) |
| 9 | Pinsent Masons | £270.6m (37%) |
| 10 | Hogan Lovells | £254m (-6%) |
| 11 | Berwin Leighton Paisner | £203m (-9%) |
| 12 | Clyde & Co | £202m (21%) |
| 13 | Irwin Mitchell | £198m (9%) |
| 14 | Ashurst | £190.6m (5%) |
| 15 | Norton Rose Fulbright | £186.7m (5%) |
| 16 | DWF | £185.6m (82%) |
| 17 | DAC Beachcroft | £174m (13%) |
| 18 | Addleshaw Goddard | £165.6m (-2%) |
| 19 | CMS | £162.9m (3%) |
| 20 | Simmons & Simmons | £144m (2%) |
| 21 | SJ Berwin | £121.8m (2%) |
| 22 | Macfarlanes | £114.2m (12%) |
| 23 | Nabarro | £114.1m (1%) |
| 24 | Parabis Law | £110.5m (2%) |
| 25 | Wragge & Co | £108m (3%) |
| 26 | Hill Dickinson | £107.5m (2%) |
| 27 | Dentons | £107.3m (1%) |
| 28 | Taylor Wessing | £104.5m (4%) |
| 29 | Squire Sanders | £102.5m (8%) |
| 30 | Kennedys | £89m (6%) |
| 31 | Shoosmiths | £87m (6%) |
| 32 | Olswang | £86.2m (0%) |
| 33 | Travers Smith | £86.2m (3%) |
| 34 | Stephenson Harwood | £84m (2%) |
| 35 | Berrymans Lace Mawer | £83.6m (4%) |
| 36 | Mishcon de Reya | £83.4m (14%) |
| 37 | Weightmans | £82.1m (6%) |
| 38 | Thompsons | £79.5m (n/a) |
| 39 | RPC | £78m (15%) |
| 40 | Osborne Clarke | £76.4m (-2%) |
| 41 | Field Fisher Waterhouse | £75.3m (-2%) |
| 42 | Burges Salmon | £73.7m (4%) |
| 43 | Bird & Bird | £71.8m (2%) |
| 44 | Mills & Reeve | £70.2m (2%) |
| 45 | Holman Fenwick Willan | £70m (5%) |
| 46 | Charles Russell | £68.9m (8%) |
| 47 | Trowers & Hamlins | £61.5m (-3%) |
| 48 | Withers | £59.8m (-4%) |
| 39 | Ince & Co | £59m (3%) |
| 50 | Watson, Farley & Williams | £44m (-3%) |