As Legal Business was unpacking the 2018/19 financial results of the UK’s top 100 law firms, the Office for National Statistics reported that Britain’s economy had shrunk for the first time since 2012. The 0.2% fall in output in the second quarter of 2019 was the latest in a series of ominous signs for a nation that appears, at the time of writing, on course for a cliff-edge exit from the European Union amid a chaotic political landscape and falling currency.
As Legal Business went to press, a row was raging over government moves to prorogue Parliament in the run-up to the 31 October deadline to exit the EU, threatening constitutional wrangles and a no-deal Brexit. A nation famed for exporting democracy, its strong institutions and a stable business environment is looking more Banana Republic than Britannia resurgent by the day.
Little wonder that when canvassing commercial lawyers about the last financial year and looking ahead at the next 12 months, the mood is far more pessimistic than in the recent past. ‘We spent much of the year worrying about the likely impact of Brexit,’ says Simmons & Simmons senior partner Colin Passmore. ‘We saw a fluctuation in work levels in different sectors, a slowdown in banking in the run-up to the original Brexit date [29 March], then it picked up again.’
And yet, the headline figures of this year’s Legal Business 100 suggest that while apocalyptic scenarios might be around the corner for the country, the UK legal industry has continued its gravity-defying advance. If our 2018 report highlighted the strongest collective results of the decade, this year’s numbers are only slightly more subdued. The 9% growth in billings of the UK’s 100 highest-grossing firms to £26.35bn is marginally slower than last year’s 10% rise, but overall these firms added £2.15bn to their top line, more than in any other year since 2011/12. The group’s total profit shot up 9% to £8.28bn, matching last year’s growth. Total profit is now more than twice the size of 2008/09, when it reached £4.03bn.
‘The market can look at another good year for the UK legal industry,’ observes CMS’ UK managing partner Stephen Millar. ‘We often forget that this is a sector of the economy that completely excels on a global basis.’
‘The practice groups were ahead of budget, there was nowhere in the world that was particularly down – that’s not something that happens every year.’
Simon Levine, DLA Piper
But headline figures are somewhat inflated by merger activity, with two transatlantic firms recording their first financial years as combined entities – Bryan Cave Leighton Paisner (BCLP) in February 2018 and Womble Bond Dickinson (WBD) in November 2017. WBD has gone from a £100m, respected regional UK player to a £360m, top-20 firm overnight – forcing Fieldfisher back down into the 26-50 group in the process. Other mergers have helped overall lawyer headcount to rise 7% to 72,531 while average revenue per lawyer (RPL) grew by 2% to £363,000 – compared to last year’s 4% rise.
Average profit per lawyer (PPL) did not keep pace with last year’s 4% growth, rising by 2% to £114,000. The 5% rise in average profit per equity partner (PEP) to £847,000 is also slower than last year’s 9% surge, but it came amid a healthy 3% growth in equity ranks to 9,660 compared to a 1% fall in 2017/18. Although there is something reassuring about healthy levels of PEP growth, with many more firms retaining capital for investment, it is becoming less reliable as a yardstick for business performance. Indeed, the LB100 now contains ten firms that are not LLPs and do not operate conventional equity partnerships – including DWF and Irwin Mitchell in the top 25 – so these firms’ equity headcounts and profits are discounted for average PEP calculations across the 100.
Resilient but unspectacular
Just five firms saw revenue fall this year compared to nine in 2017/18, while 28 had double-digit growth in their top line, the same number as last year. However, as ever, there are some caveats. First, the strong performances came off the back of a brisk start to the financial year and only partly account for the more recent slowdown. Secondly, the more you look at the top of the market, the more you see the impact of economic headwinds.
Take the top 25 firms in the UK. Total revenue of the group rose by 9% to £20.77bn, just shy of last year’s 11% surge to £19bn. But this was in large measure due to the sharp uptick in headcount from the BCLP and WBD consolidated figures. RPL growth in the group was far more subdued, moving upwards by 2% to £417,000 compared to last year’s 6% hike to £409,000. Average PPL was shy of last year’s 5% growth to hit £139,000, an increase of 2%, but PEP halved its pace of growth, moving up 4% to £986,000 after rising 9% last year.
Zoom in further to focus on the top ten, the group that includes the international vereins and London’s Big Four Magic Circle firms – and the switch from a comforting overall picture to worrying specifics gets starker.
Indeed, the top ten’s £14.5bn collective turnover is higher than that of the entire LB100 a decade ago (£14.19bn). But average year-on-year growth is subdued, and the five-year track uninspiring. If firms were ranked based on their revenue growth since 2013/14, none would feature in the top 25.
Eversheds Sutherland was the only firm in the top ten to record double-digit revenue growth this year, building on its 2017 transatlantic merger with a 14% revenue uptick to £890.2m while PEP rose 8% to £886,000. Co-chief executive Lee Ranson sees the results as ‘a validation of what we have done in the States’. Accordingly, the firm started the new financial year with launches in Chicago and San Diego.
‘Asia, Europe and the US were all active most of the time. There were suggestions the markets could slow around January, but we didn’t see it.’
Gideon Moore, Linklaters
Meanwhile, the country’s highest-grossing firm, DLA Piper, closed in on becoming the first £2bn UK law firm after posting a second consecutive year of solid revenue and PEP growth, both rising 8% to £1.95bn and £1m respectively. ‘The practice groups were ahead of budget, there was nowhere in the world that was particularly down – that’s not something that happens every year,’ says co-chief executive Simon Levine.
But the other transatlantic firms had a more challenging time. Revenue at Norton Rose Fulbright barely grew in dollar terms, resulting in a 3% drop in sterling to £1.47bn. Hogan Lovells’ turnover rose by just 1% to £1.6bn after last year’s 11% surge, although the firm remains the strongest five-year performer in the top ten thanks to a 46% rise in revenue between 2013 and 2018.
The performance of London’s Big Four – as is typical post-crisis – was solid but unspectacular. Linklaters posted the strongest set of results of the group, with revenue up 7% to £1.63bn while PEP spiked 10% to £1.7m after remaining flat in 2017/18. The £105m the firm added to its top line meant it moves up two positions in our table to third place – the biggest jump of any unmerged firm in the top 25 this year.
‘Asia, Europe and the States were all active most of the time,’ says managing partner Gideon Moore. ‘There were suggestions that the markets could slow down around January but from our perspective we didn’t see it.’
Other members of the London elite had fewer reasons to cheer. Clifford Chance followed up on last year’s 16% jump in PEP with a muted 1% rise to £1.62m this time around, while revenue rose 4% to £1.693bn. Allen & Overy (A&O) and Freshfields Bruckhaus Deringer both increased their top line 5%, to £1.627bn and £1.472bn respectively. The former increased its PEP by a mere 1% to £1.66m while the latter saw a stronger 6% growth to £1.839m. The five-year perspective on the big four is even less spectacular. Average revenue and PEP for the group are up 26% and 30% on 2013/14, to £1.6bn and £1.65m respectively. Compare this increase with some of the firms in the second 25 – Fieldfisher’s revenue is up 133% in five years, while PEP is up 94% (see ‘Best and Worst’, below).
Focused and running
The real engine behind the industry’s strong performance in 2018/19 were specialised firms, which mostly outperformed the generalists by miles.
Some of these firms sit in the 11-25 bracket of the table. This group has more than doubled its collective revenue in the last decade, from £2.84bn in 2009 to £6.27bn today, and now accounts for nearly a quarter of the LB100: up from a fifth ten years ago. While a meaningful year-on-year comparison for newly-merged WBD and BCLP is not possible, all other firms in the group grew their revenue, seven of them recording double-digit increases.
The clearest example of the pay-off of a focused strategy is Ashurst. After a decade of poor form, the firm posted one of the strongest sets of results in the LB100 thanks to a refocus on infrastructure, energy and TMT. ‘We have played to our strengths in terms of our sector strategy and focus,’ says managing partner Paul Jenkins. ‘It has been a huge success with our clients and people.’ Firm revenue rose 14% to £641m and PEP was up 31% to £972,000, although the still-poor 9% top-line growth on 2013/14 (the third-worst in the entire LB100) shows it will take a few more years for the firm to demonstrate it has fully turned the corner.
‘Nobody is saying: “The pipeline for the next year is fantastic.” Everyone is looking in chunks of two to three months.’
Colin Passmore, Simmons & Simmons
One firm that can be confident about its five-year performance is Osborne Clarke (OC), which has increased its top line 89% since 2013/14 to £268.5m, the second-best five-year performance in the UK top 100 – off the back of its international expansion. Although its PEP growth stalled this year, it has risen 37% since 2014 to £703,000.
‘Success drives success and gives your people more confidence,’ says international chief executive Simon Beswick. ‘Our sector route to market, the aim to help all businesses with their digital transformation, the consistency of that focus and strategy, which is still future-proofed, starts us off in a good place.’
But there is more. Clyde & Co has grown revenue 67% over the last five years (see case study), while tech-focused Taylor Wessing is approaching the £350m revenue mark after the second consecutive year of double-digit revenue and UK PEP growth to £339.7m and £655,000 respectively. Addleshaw Goddard also recorded growth over 10% in top line and PEP and is one of the strongest performers for profitability in the last five years (see case study). Growth at Simmons and DAC Beachcroft was less spectacular at 6% but it came off the back of a strong previous few years.
Newly-floated DWF recorded the fastest revenue growth in the top 25 at 15% (12.5% attributable to organic growth) to £272m, although profit after tax fell 42% to £12.2m, impacted by the £20m cost of the firm’s year-long march to an initial public offering (IPO). Next year’s financials will offer a clearer picture of the pay-off of the largest law firm IPO to date.
On a cliff edge
Overall, the UK’s top 25 firms showed notable resilience amid increasingly challenging conditions in 2018/19. But the months ahead will test them a lot more – everyone is preparing for the dreaded worst-case scenario.
‘Nobody is saying to me: “The pipeline for the next year is fantastic.” Everyone is looking in chunks of two to three months,’ says Passmore. ‘In the days of presidential tweeting and the Brexit deadline looming, you cannot go much further.’
The UK’s scheduled departure from the EU on 31 October is understandably top of the list of concerns. According to WBD’s co-chair Jonathan Blair: ‘31 October feels real now, it feels different to what it had felt before. We’ve had a strong Q1 and are on target. We are keeping an eye on corporate transactions. I would be surprised if they weren’t affected.’
But this is hardly the only challenge ahead. If the pressure from the fast-growing London arms of US rivals has been a common theme over recent years, over the last few months the threat has mutated. First, it has expanded its target beyond the Magic Circle into areas of the mid-market, with Taylor Wessing losing six partners in tech, life sciences and tax to Goodwin Procter in 2019. Second, it has gone beyond the trophy partner level, pushing many UK elite firms to raise their newly-qualified associate rates to around £100,000 to partly close the gap with higher-paying US rivals.
Other worrying signs come from continental Europe, from a German economy on the verge of recession to Italy’s increasingly populist political landscape. These factors might lead to catastrophic scenarios, but they will not change what has become a well-established trend in the last decade: specialists thrive, generalists struggle. LB
marco.cillario@legalease.co.uk
Legal Business would like to thank Consilio, Mayer Brown and Totum for their sponsorship of the Legal Business 100.
Distribution of lawyers by region
LB100 averages
The rich get richer: 2009 and 2019
2009
Total turnover of the LB100 was £14.19bn of which:
2019
Total turnover of the LB100 was £26.35bn of which: