On paper, an 11% jump in average revenue to £135.5m for the second 25 looks like a great leap forward from last year’s 5% increase to £122.6m, and this rate of growth compares favourably to the top quartile’s 9% hike to £830.7m. But as usual the figure must be taken with a pinch of salt.
Tempering excitement that the group is outstripping the top 25, Womble Bond Dickinson (WBD)’s transatlantic merger has inflated revenue and catapulted it into the top tier, squeezing out last year’s top-25 entrant Fieldfisher. Swapping WBD for Fieldfisher means that around £140m is artificially added to the £3.39bn total revenue of the group. Without it, average turnover would be around £130m – a more muted 6% increase.
After an impressive year of 12% revenue and 16% profit per equity partner (PEP) growth, Scottish independent Brodies (see case study, page 83) along with Midlands stalwart Browne Jacobson are new entrants into the top 50, with the latter increasing its top line by more than 6% to hit revenue of £77.6m and climbing three places in our table to reach 49th position.
Other metrics are less striking. Average revenue per lawyer within the group stayed flat at £267,000 and profit per lawyer is static at £65,000. However, where the 26-50 group shone was in its 13% growth in average PEP to £566,000 – a significant uplift on last year’s 3% PEP increase to £501,000. (Note, however, this figure is an average of 23 firms – it excludes Gateley and Keoghs as these firms do not operate conventional equity partnerships.)
Ahead of the curve
After moving into the top 25 last year, Legal Business 100 (LB100) pacesetter Fieldfisher finds itself back in the second 25 through no fault of its own. With a 17% revenue hike to £242m and a third consecutive year of growth, Fieldfisher continues to be a beacon of the mid-market in a sea of mostly average performances.
PEP increased by a sturdy 10% and has nearly doubled over the last five years. The results exceeded the single-digit growth predicted by managing partner Michael Chissick the previous year under the storm cloud of Brexit uncertainty and in that context, Fieldfisher has taken the wise step of bolstering its presence beyond the UK, with a 48% uptick in revenue coming out of Germany, including via its newly-opened Frankfurt arm. UK revenue also outstripped Chissick’s conservative predictions to grow 11% while new offices in Barcelona, Madrid, Guangzhou, Luxembourg and, most recently, Dublin, are also geared towards hedging against a Brexit-related downturn.
Meanwhile, Stephenson Harwood’s PEP increase of 9% to £727,000 will have come as a fillip after two consecutive years of decline and the recent 12% addition to its top line to £213m make it a clear winner in this group (for more, see our assessment of Stephenson Harwood).
Travers Smith continues to draw plaudits as one of the more upwardly mobile in its class. A tenth consecutive year of growth yielded an 11% increase in turnover to £162.5m, combined with a less dramatic 3% PEP increase to £1.25m. But it is the well-documented performance of the firm on a five-year track that makes it an outlier, with revenue growing 70% and PEP up 42% in that time.
Reflecting on the year, managing partner David Patient says the business is in good shape to withstand the inevitable challenges. ‘There was a collective effort from everyone, not just private equity partners. Disputes has had an absolutely storming year and they are still going gangbusters. We have a balanced business that is not too reliant on transactions.’ He also points to a strong – and hopefully Brexit-proof – infrastructure M&A practice, heightened activity in the pensions sector and the funds team, as well as a ramped-up investment in tech.
‘In the financial crisis, our profits dropped 30%. We promised ourselves we would get to a more resilient business mix and we have achieved that.’
Charles Martin, Macfarlanes
Macfarlanes also garners kudos as a leading performer in the second quartile although 2018/19 was less pacey for a City stalwart that has made double-digit revenue and PEP growth a habit in recent years. A ninth consecutive year of growth translated to an 8% revenue uptick to £217m and PEP was marginally down to £1.72m – quite a contrast to the 20% revenue and 26% PEP growth the previous year. Notwithstanding, Macfarlanes’ five-year track has been enviable, the firm having grown revenue 55% and PEP 45%.
Charles Martin, Macfarlanes’ senior partner, insists the year has been dynamic as the firm persists in its post-financial crisis strategy of striking an evenly balanced practice of transactional, advisory and contentious. ‘In the financial crisis, our profits dropped 30%. We promised ourselves we would get to a more resilient business mix and we have achieved that. As we move into more turbulent times, we are well placed to respond robustly.’
He points to highlights in transactional, including an increase in alternative capital providers, including hedge funds and credit funds, resulting in the shape of the work being different to previous years. ‘There has been some excellent advisory work in competition and tax. At the same time, the contentious practice has been very busy, with lots of big international disputes and investigations.’
He echoes the popular view that it does not do to be too generalist. ‘The idea that you can’t be all things to all people is even more true now than ever before. You need to be clear on what you do and don’t offer – make sure that what it says on the tin is what’s in the tin. That’s partly down to client sophistication. GCs are using their buying power and deep market knowledge to choose the right firm for the job. We benefit from that.’
Could do better
Less fortunate was HFW, with a very slight dip in revenue to £178.9m as profit dropped 9% to £43.3m and PEP fell 10% to £481,000 – counter to the group’s average 11% growth. The firm opened new branches in Rio de Janeiro and Abu Dhabi during 2018/19, with the costs of those investments taking their toll and creating a stark contrast to the 2017/18 financial year, when HFW racked up an 8% rise in revenue and a 12% profit hike. A longer track has been rosier, showing 28% revenue growth over the last five years and a post-Brexit future-proofing reduction in UK exposure with 61% of revenue generated outside of the UK during the year.
2018/19 saw RPC sell a 50% stake in its management-consulting business, RPC Consulting, to software company Marriott Sinclair, making a direct comparison with the previous year difficult, but the firm says like-for-like revenue and net profit for its legal arm alone were up 4% in 2018/19, even though overall turnover is down 4% on the £112.7m posted last year.
The 27% PEP surge to £441,000 is more striking, even if it was partly the result of its equity ranks shrinking by nine to 74 partners. The year saw RPC Consulting turn a profit for the first time, having been loss-making for its first three years of life on the back of a 33% increase in turnover to £9.3m in the year to April 2019.
James Miller, RPC’s managing partner, points to particular strength in commercial disputes, media and tech, retail, litigation and corporate but says that every group exceeded budget. Insurance, a mature practice for the firm, also grew 6%. The acquisitive Sports Direct is a long-standing client of RPC and turned to the firm to advise on pre-pack administration arrangements for its acquisition of House of Fraser last year and more recently Jack Wills.
Miller is alive to the challenges ahead: ‘It really is starting to look like a crystal ball with a tea cosy on top of it! People will have to move quickly and they will need help to do that, even if they have a good in-house function. We want to continue growth in commercial disputes, retail, tech and reinsurance to make sure we are delivering what the clients want.’
He notes that tech investments are part and parcel of running a law firm these days, echoing the view of many regarding client expectations. ‘Clients want more relevance. Long gone are the days when you said to a client: “Can I introduce my employment partner?” You can’t approach it in a haphazard fashion. You’ve got to understand their business, but I don’t think that’s demanding.’
For private wealth specialist Withers, 2018/19 was a year of swings and roundabouts as 9% revenue growth to £193.2m was countered by a 12% drop in partner profits, largely the impact of bolstering headcount in the UK, Asia and the US. Despite the firm’s focus on international expansion, the UK business outpaced global growth with an 11% increase in turnover to £79.7m. The firm did, however, continue to bring in the majority of its revenue from abroad, with its international offices accounting for 59% of turnover. While Withers bought out six-partner UK tech law boutique JAG Shaw Baker in August last year, seeing 26 lawyers join its ranks in London and Cambridge, in the following months expansion was targeted mainly at its 15 international offices.
‘We don’t play games in reaction to price pressure. If people want cheap they can go to Poundland.’
David Patient, Travers Smith
Chief executive Margaret Robertson is focused on integrating the new hires and optimistic that the investments will pay off next year. ‘We’ve had a great year in recruitment and have made lateral and group hires in all three regions. It has been good to scale revenues and add strength and depth in core locations. We are looking forward to the impact of those investments kicking in next year. We have invested heavily in the tech practice and will continue to grow that, whatever happens with Brexit.’
Other standouts include dispute resolution and arbitration in London, New York and Hong Kong, while the funds practice based out of Tokyo has grown significantly. Robertson’s list of the firm’s ambitions includes having at least a third of business coming out of the US (it currently accounts for 30%), continuing to grow the funds practice and arbitration business in Hong Kong and Singapore, as well as adding family office clients in Asia.
Hill Dickinson, still recovering from the sale of its insurance arm to Keoghs in February 2018, has had another disappointing year in revenue terms, taking a 7% hit to £90.5m on the back of a 5% decrease in 2017/18. One silver lining of the disposal – which constituted 20% of the firm’s business, worth £22m – has been a robust PEP showing thanks to a scaled-down partnership, with 51 equity partners enjoying an 11% PEP increase to £371,000.
Peter Jackson, Hill Dickinson’s chief executive, is nevertheless sanguine, noting an uplift in NHS and private healthcare work along with a recent stabilisation of the shipping market after years of recession. ‘With the return of confidence to the shipping business we’ve seen growth in Q1 of budgets and met our aspirations. But if as an end of summer present I could get a crystal ball, I would be very happy.’
Boom or bust?
The desire for a crystal ball prevails among management of the 26-50 band for good reason. Market uncertainties presaged in last year’s LB100 have yet to materialise, but most agree it is only a matter of time. Challenges range from the obvious political uncertainty and Brexit, to pricing pressures from clients, to the impact of newly-qualified (NQ) salary wars (although granted this is mainly the concern of the top 25), to the cost of tech.
Lothar Wegener, co-managing partner of Watson Farley & Williams, a firm that has seen a solid 6% revenue increase and PEP move up 10%, says: ‘We are still a small firm in an international context and we have to live with the fact that tech initiatives have to fit into the size of our business. Under my and [co-managing partner] Chris Lowe’s stewardship, investment and retaining profit go together. We have doubled spend to more than £20m on legal services – including legal tech, communications and compliance – in the last four years.’
Richard Crump, HFW’s senior partner, sums up some of the challenges that will define the market next year. ‘The main one is price, but also around added value – clients are more interested if you are able to provide anything in addition to more traditional legal services.’
Few of the mid-market management predict an influx of City law firm initial public offerings, but Michael Ward, chief executive of the UK’s first UK-listed law firm, Gateley, espouses the benefits. ‘Being listed means there is no appetite for standing still. We still plan on acquiring non-legal businesses that complement our offering. Having the ability to make acquisitions gives us an advantage.’
Gateley is a success story of the LB100, increasing turnover 20% to £103.5m in the year to 30 April 2019, up an impressive 67% from when it listed in 2015. Profit after tax lifted 11% to £13m, as laywer headcount rose 17% to 460.
And it will be interesting to see how the thorny issue of associate pay increases plays out next year. Says Chissick: ‘It’s absolutely bonkers. We’re not going to try to compete. How are you going to provide value services when you’re paying 23-year-olds over £100k?’
Travers is the only firm in the cohort that sees the necessity to compete, lifting NQ base pay to £85,000 with the potential to earn up to £110,500 with bonuses. But Patient has less time for an increasing push-back from clients on pricing. ‘Clients choose us, not because we’re the cheapest but because we’re Travers Smith,’ says Patient. ‘It is reasonable for clients to expect to get value and that we are providing a service as efficiently as possible. We don’t play games in reaction to price pressure. If people want cheap they can go to Poundland.’
In the absence of a crystal ball, the question will be whether those firms pulling away will see investments pay off in time to weather the inevitable storm. LB
nathalie.tidman@legalease.co.uk
Diversity: gender balance at senior level
Which firms have the biggest UK business?
This table lists the top 50 firms by UK revenues only. Once international fee income is taken out of the equation, the relatively strong UK performance of Global 100 firms such as Ashurst and Eversheds Sutherland becomes apparent.