Consolidating firms are jostling for position in the race to dominate international and UK markets. But even amid fairer conditions, the course to victory is uncertain.
‘To reach a port we must set sail –
Sail, not tie at anchor
Sail, not drift.’
Franklin D Roosevelt, 1938
‘One feels from the body language out there that firms which have come through the recession successfully are beginning to unwind, beginning to stretch a bit, beginning to feel as though more business is coming back – particularly in the corporate market. The corporate partners who had to lay low for some years are starting to unfurl their wings a little bit and ruffle their feathers.’
This observation – from Marks & Spencer head of legal Robert Ivens – points to a trend that emerged in our recent Global 100 report and carries through to our review of the top 100 UK-based firms by revenue. After a long period of flat conditions, firms that built strong reputations for corporate, finance and real estate transactional work are starting to see deal flow return. However, the top-line gains made by the Legal Business 100 (LB100) as a whole have far more to do with continued merger activity than they do with an uplift in transactional work.
The number of lawyers rose by 6% to 65,111, with the number of equity partners increasing by 7% to 9,941. Around a quarter of the firms in the LB100 have been in acquisition mode either at home or abroad or have completed transformative mergers in the last two years. This includes a handful of major international players in the top 25 – Norton Rose Fulbright, Dentons, Herbert Smith Freehills, King & Wood Mallesons SJ Berwin (KWM SJB) and Ashurst.
Seven firms disappeared from the LB100 this year, consumed by a larger LB100 firm – such as a large chunk of Pannone going to Slater & Gordon and Manches being acquired by Penningtons – or else merged with each other (Bond Pearce and Dickinson Dees). Another eight firms will become four next year as CMS/Dundas & Wilson, Wragge & Co/Lawrence Graham, Charles Russell/Speechly Bircham and Blake Lapthorn/Morgan Cole all complete practically full financial years as single entities in 2015.
All this means, as it has done for the majority of years since the global financial crisis took hold, that judging firms on a per lawyer basis is an essential counterpoint to assess overall financial performance. These metrics show more modest gains – profit per lawyer (PPL), revenue per lawyer (RPL) and profit per equity partner (PEP) were all up by 3%, with RPL rising to £320,0000 on average, PPL standing at £98,000 and PEP £640,000.
These metrics are slightly lower this time around as we asked all firms to provide actual headcount data at the end of the financial year for the first time (see Methodology), rather than on average over the year. This will inflate overall headcount numbers slightly and reduce per lawyer metrics as well.
LB100 total revenue and profits: the past ten years
LB100 headcounts: the past ten years
The division of wealth: 2004 and 2014
Capital ships
After a pedestrian collective performance last year, the Magic Circle has gained momentum. Total net profits of those five firms were up an impressive 8% to £2.32bn, with combined revenues growing 5% to £5.55bn. This is a stark improvement on 2012/13, when combined profits were flat and revenues up by 1%.
The star performer of the group was Clifford Chance (CC) (see case study) with revenues up 7%, while PEP jumped to £1.1m, an increase of 16% but still below the Magic Circle average.
Linklaters’ growth this year was only just eclipsed by CC and moves to third in the overall table, with revenues up 5% to £1.26bn and PEP up by 6% from £1.26m to £1.34m. Managing partner Simon Davies attributes a substantial part of the growth to a more focused and aggressive stance on panel pitches in a bid to include clients outside of the financial services sector – major panel appointments in the last year included Bayer, Shell and William Hill, while one standout deal was advising long-term client Vodafone on its takeover of cable operator Kabel Deutschland for €7.7bn. However, it did miss out on a prize instruction, with fellow Vodafone panel member Slaughter and May chosen to advise the network carrier on its $100bn disposal of its stake in US cable operator Verizon late last year.
Freshfields, on the other hand, may have won roles on the privatisation of Lloyds TSB and has been fighting for AstraZeneca against repeated hostile bids from Pfizer, but after impressing in the 2012/13 financial year, its performance was surpassed by rivals. A modest 1% movement in revenues to £1.23bn led to a 6% increase in PEP to £1.48m. The firm has the worst five-year performance of the Magic Circle in revenue terms, down 4% since 2008/09.
Despite this, David Aitman, the firm’s global managing partner, is bullish. ‘We now have very strong transactional, regulatory and contentious practices that position us well to meet our clients’ needs as stability and confidence returns to the global economy,’ he told Legal Business. ‘A good set of results last year reflects the trust our clients have put in us.’
Allen & Overy (A&O) moves just ahead of Freshfields and has been the strongest performer of the post-Lehman years, growing revenues 13% since 2008/09, when it posted £1.09bn, while PEP has grown from £1.05m to £1.12m over the same period – an increase of 7%.
Year-on-year performance has been solid, up 2% while PEP rose 7% to match the five-year profit performance. One significant factor in the increase in profitability has been the success of its Belfast office, opened in 2011, which managing partner Wim Dejonghe said contributed seven-figure costs savings during the last financial year.
Slaughters also performed well, with PEP increasing 10% to break the £2m barrier, way ahead still of any other UK firm in terms of partner profits. Slaughters has been at the forefront of a resurgence in European M&A activity, adding to its role as UK adviser to Vodafone in its Verizon sell-off with the Royal Mail IPO and Lloyds TSB privatisations, as well as recently being appointed to advise Irish pharmaceutical corporate Shire on its proposed $51bn takeover by US giant AbbVie. In much the same way as traditional Wall Street M&A firms have enjoyed a comeback, for Slaughters it’s been highly lucrative corporate mandates all the way.
Slaughters has invested considerably in its Hong Kong practice in the last year, not least through its first-ever lateral hire in its 125-year history – acquiring US securities capability by bringing in Morrison & Foerster’s co-head of China capital markets, John Moore. And while European markets remain a primary source of fee income for the Magic Circle (at CC, for example, the UK and Continental Europe accounted for £972m, or 72% of total revenues), Asia and the US are still very much the key centres of Magic Circle investment. A&O became the first Magic Circle firm to launch in Myanmar in May 2014, its twelfth office in the Asia-Pacific region, while Linklaters opened in Seoul last year.
Davies tells Legal Business that despite Linklaters’ continued efforts to grow its network across Asia, developing its US practice is still a top priority. A&O’s Dejonghe strikes a similar chord, saying: ‘The US remains a big challenge for all Magic Circle firms. We have seen improvement in business but we need to improve our market position compared to the domestic firms there.’
LB100 averages
How much have profits gone up or down by each year?
The success of the Magic Circle
Case study: Clifford Chance
The top Magic Circle performer this year is undoubtedly Clifford Chance (CC), which has timed a root and branch shake up of its executive to coincide with the unveiling of a positive set of financials.
After a rigorous election process corporate frontrunner Matthew Layton took over as global managing partner in May. In July, CC revealed a 7% rise in revenues to £1.36bn, while profit per equity partner (PEP) leapt by 16% to push average partner drawings back to over £1m.
This follows a blip last year where CC was outpaced by rivals, with revenue dropping 2% to £1.27bn and PEP falling 9% to £983,000.
£1.36bn represents record turnover for the 2,945-lawyer firm. Revenues are up 8% over five years, a stronger performance than both Linklaters and Freshfields Bruckhaus Deringer, and going some way to contradict the view in some quarters of the firm as the sick man of London’s elite.
Having succeeded David Childs on 1 May, Layton attributes the robust results to an uptick in US transactional markets that extended to Europe and Asia-Pacific. He further notes that the firm is now seeing the benefits of its long-term strategic investment abroad. Such investment included the launch of a joint Saudi and foreign-owned law firm in Riyadh in January, with a team of 30 permanently based Saudi and foreign lawyers. That same month, the firm announced it had entered into an association with Indonesian boutique Linda Widyati & Partners.
With all regions and practices experiencing growth, a geographic breakdown for the year saw the UK and continental Europe take the lion’s share of fee income at £469m and £503m respectively, while Asia-Pacific generated £195m and the Americas £152m. The firm’s Middle East operations brought in £40m, just 3% of overall revenue.
CC’s prominent City litigation team enjoyed a strong year too, securing high-profile investigation work, including an independent inquiry into the handling of the Financial Conduct Authority’s botched announcement of an investigation into the insurance industry, as well as winning the mandate to investigate allegations that The Royal Bank of Scotland deliberately drove its small business customers into restructuring for its own gain.
And despite the firm’s City office enduring a spate of corporate partner defections in recent years, with private equity players Kem Ihenaco and Tom Evans following the departure to Latham & Watkins of head of private equity David Walker in 2013, Layton’s ambitions for the firm are just beginning.
He says: ‘The key benchmarks are growth in the Americas; further growth in Asia; and becoming the law firm of choice for the leading global and regional businesses and the destination of choice for the most talented lawyers. Technological development should be right at the forefront of the business of law firms too.
‘I don’t set an agenda to make CC the most profitable firm but to make long-term investments for a sustainable future. And being agile and flexible, and having that willingness to experiment – that culture needs to be enshrined across the partnership.’
Slack tide
While the Magic Circle has clearly upped its game in the last 12 months, the 20 firms that fill the remaining spots in the top 25 have found profitable growth harder to come by. However, the overall picture of the upper quartile has been distorted so much by significant merger growth that meaningful year-on-year comparisons in financial performance are elusive. Six law firms have seen startling leaps in fee income as a result of significant merger activity in the last 24 months – Norton Rose Fulbright, Herbert Smith Freehills, Dentons, KWM SJB, Ashurst and DWF, while others such as Bird & Bird and CMS have made smaller but significant deals. The merger of Squire Sanders and Patton Boggs, which took place this summer, will have another inflationary effect in 2015.
In terms of individual organic growth, the year-on-year performance of these 20 firms has been steady but no more. Two chasing pack firms posted stronger numbers after struggling for growth for several years. Hogan Lovells came close to matching CC’s year-on-year performance with turnover up 7% to £1.1bn and PEP up 12% to £772,000, while Simmons & Simmons is showing signs of a return to form after a disappointing five-year performance, with solid gains in both revenue and profitability over the last 12 months as revenues rose 7% in 2013/14 to £268.6m, while PEP moved up 5% to £553,000.
Growth was widespread among the top 25, although stacked short, and there were recoveries by firms that floundered last year, particularly this year’s standout performer in the upper quartile, Berwin Leighton Paisner (BLP) (see case study), which saw PEP rise by 26% to £543,000 on the back of a revenue increase of 6% to £246m.
Taylor Wessing has managed to put in a robust performance in revenue terms over the last five years, and its 2013/14 growth of 6% from £228m to £241.2m was equally solid, matched by a 4% increase in PEP to £421,000. The firm’s managing partner Tim Eyles says, while the Magic Circle will still be chosen for the big ticket mandates, the mid-market has become tougher for unfocused firms. This makes Taylor Wessing’s sector focus on the tech, media and communications, life sciences, private wealth and energy industries a fundamental part of its strategy.
Distribution of lawyers by region
‘We’re pushing up the value chain all the time,’ he says. ‘The more recognised we become in those sectors the easier that movement upwards gets.’
For Rob Day, London managing partner at KWM SJB, the race for work not snapped up by the Magic Circle can only be won in international waters, hence the deal SJ Berwin brokered with Asia giant King & Wood Mallesons last year.
That said, many firms are still very much talking up the strength of London as an international legal market and a significant source of income still for even the largest firms with international aspirations. Bryan Hughes, chief executive at Eversheds, which has ten UK offices and saw global revenues edge up by 2% while posting double-digit growth in PEP, comments: ‘We experienced 7% growth in London, which is reflective of the strength in London rather than the UK as an economy. London has been hot all year.’
And despite Ashurst’s focus being heavily geared towards Asia after its tie-up with Australia’s Blake Dawson went live in 2013, chair Ben Tidswell notes: ‘The game has changed. Evidence is that most firms are feeling the benefit of an uptick in the UK market. However, there has been a withdrawal internationally, with lots of big firms scaling back in some jurisdictions.’
Nonetheless, there has been abundant evidence of clients putting the squeeze on firms domestically with shrinking law firm panels, while also vigorously carving up mandates so that a greater proportion of the work is funnelled down to value firms, alternative business structures (ABSs) and legal outsourcers.
Marks & Spencer’s Ivens tells Legal Business: ‘You have all these [ABS firms] on one side, who are approaching legal services from a much more flexible, low-cost model. And then you have a bit of a gap in the middle and then you have the law firms. There is a difference between the client’s perception and their self-perception. They say “of course we are open to any form of negotiation in relation to fees” – fixed fees, blended rates, caps. But the reality is that that’s not in their DNA. That’s not the way they want to operate.’
James Tsolakis, head of legal services for commercial and private banking at The Royal Bank of Scotland (RBS), says: ‘The ABS model is taking work away from everyone, everywhere, in different kinds of ways. The work is being segmented much more carefully than ever before and if somebody else can handle work at a similar quality and at a better price then work’s being reallocated in that fashion. As firms get better at disaggregating instructions, you’re going to get more of that going on. Panels will continue to get smaller, so there will be some losers through that process but those that survive will have a bigger prize to play for.’
Author of Tomorrow’s Lawyers, Richard Susskind, adds his take: ‘The firms that are sailing right now are ones that have very impressively but radically reduced their overheads. They’ve got rid of people but ramped up their utilisation. But in the long term, all of this is good practice but they need to be leading in the markets that are emerging rather than markets of the past.’
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Efficiency as a driver of legal innovation
Thomson Reuters
Simon Janion, founder of recruitment firm EJ Legal, argues firms with strong management inevitably lead the pack, singling out individuals such as Sir Nigel Knowles at DLA Piper, Neville Eisenberg at BLP, Andrew Leaitherland at DWF, Kevin Gold at Mishcon de Reya, Charles Martin at Macfarlanes, Tim Eyles at Taylor Wessing and Simon Beswick at Osborne Clarke. ‘Most of the firms that you can think of that have had sustained periods of growth tend to have a charismatic individual at the helm surrounded by a management team of very confident people that have bought into that individual’s vision,’ he says. ‘You can always identify the one individual who embodies the spirit of the firm. The spirit of a firm is what attracts high-performers. It’s not specific to a type of law firm – there are firms in every group who lead the pack of their peers.’
Simmons, Freshfields, Linklaters and Addleshaw Goddard are the only firms in the top 25 that haven’t resorted to a transformative merger and are still pulling in less revenue than in 2009. But despite this deceiving statistic, the ‘old’ normal hasn’t returned and isn’t expected to in the future. While strong transactional firms are enjoying more lucrative times after a long period in the doldrums, things are clearly not going to settle down into the pattern they followed up until 2008. There are still plenty of rough patches of water out there and storms brewing. It seems successful law firms these days are forced to sail close to the wind in more ways than one. LB
jaishree.kalia@legalease.co.uk; tom.moore@legalease.co.uk
Legal Business would like to thank Thomson Reuters for its sponsorship of the Legal Business 100.
Case study: Berwin Leighton Paisner
A strong turnaround in the most recent financial year has gone some way towards repositioning Berwin Leighton Paisner (BLP), after its attempt to push itself to the top of the market floundered in 2012/13 when falling revenue led to eye-watering drops in profitability. Profit per equity partner (PEP) slipped 35% from £660,000 to £430,000 in the LB100. The firm responded with a major restructuring, including asking more than ten partners to leave.
And while managing partner Neville Eisenberg blames last year’s ‘blip’ on City leaders dropping their own fees to hoard work, BLP’s 6% rise in revenue to £246m and 26% increase in PEP to £543,000 is apportioned to initiatives that offer clients flexibility to slice and dice their mandates to achieve lower legal costs.
Eisenberg comments: ‘The introduction of our integrated client service model, which is linked to our biggest investment last year – at least in terms of time and effort – of opening a legal services office in Manchester, is the most important thing we’ve done over the last 12 months.’
He also attributes the firm’s recovery to strong growth in its flagship real estate practice, which has continued to be the engine of the firm despite a flurry of high-profile exits to DLA Piper, including real estate finance head Laurence Rogers. Litigation, which has been a major success over the last five years, has also performed well, with the disputes group securing a landmark judgment against retailer Game last year after the Court of Appeal decided that rent will be charged for each day occupied by a company in administration.
Outside of London, the firm’s real estate group also propelled growth in Russia and Germany, while a good showing in the capital markets and aviation finance practices provided a boost in Hong Kong.
‘Compared with five years ago we are now far more international and the amount of international work being done in London has increased dramatically,’ says Eisenberg. ‘Our Hong Kong office grew fairly strongly, but if you look at our Asia business as a whole, that’s an area where I’d like to see stronger growth and we’re planning for that this year.’
Despite the turnaround in BLP’s financial fortunes, 2013/14 was marked by a series of notable departures, including head of contentious tax Liesl Fichardt to Clifford Chance and highly-rated head of restructuring and insolvency Ben Larkin to Jones Day. And, after head of banking and finance Matthew Kellett announced he would be leaving the firm towards the end of 2013, the firm launched an independent review of its finance practice. The move is expected to streamline the practice in general, while developing BLP’s position in infrastructure finance.
The volume of equity partners leaving undoubtedly contributed to the resurgence in PEP, with equity partner numbers down 10% this time around. In July, BLP confirmed that it is considering changes to its partnership deed to make it easier to manage partners out, specifically reviewing partnership retirement provisions.
However, BLP also made key hires of its own, with the arrival of real estate partner Karen Friebe moving from DLA being one of the standout recruits.
‘What we found a year ago was that we had a lot of senior lawyers in the firm whose performance wasn’t as high as it would ideally be so there’s no doubt that we were successful in addressing the mix and bringing on more junior people,’ says Eisenberg. ‘The mix of lawyers within the firm has changed and that’s positive for a whole bunch of reasons, including junior lawyers having the opportunity for career progression. It’s a very good recovery year, but more importantly, we feel it’s one that puts us in good shape for the future.’