The phrase has long been a cliché among industry circles, but no-one is better at being cautiously optimistic than a law firm leader. For years, individuals have been compelled to temper any bullishness on market outlook with a healthy recognition that disaster is probably just around the corner. After all, few things make the sting of a downturn worse than the humiliation of hubris. Yet this year’s Legal Business 100 (LB100) has again seen all those risk-averse catastrophists not only surviving but thriving.
To say much has changed since our 2020 report would be an understatement. Last year in profit terms, the message was clear that firms were cutting their cloth accordingly in light of a seemingly inevitable bout of financial turbulence in the year to come.
Then, the LB100 group’s total profit barely moved – edging up from £8.28bn to £8.33bn – showing the buffers have definitely been hit after the previous year’s 9% hike. Average profit per lawyer (PPL) matched the preceding year’s 2% growth, rising to £116,000 but not keeping pace with a 4% increase in lawyer headcount across the LB100.
The playing field is now very different. Average PPL surged an incredible 11% to £129,000 and average profit per equity partner (PEP) showed even more resilience with a 12% increase to £949,000. In this context, it would appear churlish had those firms that tightened their belts last year with cost cutting and furloughing staff not repaid what money they availed of the government bailout scheme.
Pacesetters
Looking at the performance of the top 25 firms by revenue, there is a tangible sense that things could have been much, much worse. The 3% growth in average revenue to £897m from £869.2m is muted after last year’s 5% increase, but it is far from the worst outcome of a year the market had predicted would be a disaster. Average revenue per lawyer (RPL) was less impressive, up just 1% to £431,000.
In contrast, the profit figures for the group are truly striking, with average PPL of £155,000 marking a 10% increase that defied last year’s muted showing of £141,000. And, while it is a ubiquitous refrain that PEP is an unreliable indicator of success, a 19% surge to £1.114m after last year’s £938,000 PEP average cannot be ignored.
‘Across the firm there was no underperformance – we delivered consistent growth, which was very satisfying.’
Paul Jenkins, Ashurst
Ashurst was one of four firms in the group to achieve double-digit revenue growth, with a pacey 10% turnover hike from £644m to £711m even outdone by a 15% spike in PEP to break £1m once more at £1.038m. A pre-merger firm topped £1m PEP in the 2007/08 financial year, before profitability nose-dived as at most firms amid the global financial crisis.
Paul Jenkins, Ashurst’s global managing partner, reflects on financials bolstered, as at many transactional firms, from an international deal boom. ‘I was particularly pleased with double-digit growth across a range of our regions and we achieved 10% revenue growth as a firm. As you would expect, that translates to significant growth across our geographies. We delivered double-digit growth in Continental Europe and Asia, with a particularly impressive trajectory in the UK, Germany, Paris, Luxembourg and Singapore. Across the firm there was no underperformance – we delivered consistent growth, which was very satisfying.’
Jenkins says the focus on five priority industry sectors continues to pay off, with those areas making up 84% of the firm’s overall revenue after last year representing 80% of turnover. ‘That’s part of the secret of our success. We had 26 laterals join us and recruitment in those industry areas and our internal promotions have reflected that focus. However, we are sufficiently agile to look at new opportunities as they arise in different sectors.’
He also flags Ashurst Advance, its new law offering, as having grown by more than 10% of the total production hours for the firm, and says there are plans afoot for the consulting business to be rolled out into the UK after success in Australia that has seen revenue double each quarter on the back of advising financial institutions.
Listed firm DWF boasted the most eye-catching progress with a 14% hike in revenue to £338m, coinciding with plans for a double acquisition – that of Devon-based compliance training business Zing 365 Holdings for £1.8m and an agreement to buy out Barnescraig & Associates, a Canadian insurance claims and loss adjusting business, for £2.2m. DWF said it predicts that the new service lines will add £3m of revenue and £500k of adjusted profit before tax in the next financial year.
A greater cause for cheer was DWF’s £34m adjusted profit before tax figure, a robust 120% rebound from the £13.8m reported for the same period last year. The firm insists that the £34m profit ‘exceeds market expectations by c.15%’.
Simmons & Simmons and Addleshaw Goddard heralded 12% turnover growth apiece in the context of what would be deemed standout years at any firm. Addleshaws’ revenue stood at £320.6m compared with £288m in 2019/20, marking an eighth year of successive income growth and, following further planned investments in new offices, infrastructure and people, the closing cash position of £108m is ‘a record for AG, underpinning the firm’s balance sheet strength’.
‘One of the benefits of being a lawyer is that people come to you in the bad times as well as the good – it has always had that countercyclical nature.’
Jeremy Hoyland, Simmons & Simmons
Profit also saw impressive growth, after a slight fall last year. Total distributable profit reached £136m and PEP hit £849,000 – a 23% leap from the previous year, when PEP fell 5% to £690,000. The firm added 36 new partners in the past year – 23 laterally hired and 13 internally promoted – across key practice areas including capital markets, civil fraud, corporate governance, infrastructure, projects and energy and international arbitration.
Simmons experienced similar growth, with revenue up to £437.2m and profit surging 35% to £171m. A 31% increase in PEP to £988,000 means the results far outstripped the muted 4% revenue growth and 6% profit increase of 2019/20 as instructions multiplied in the pandemic.
Managing partner Jeremy Hoyland is upbeat: ‘One of the benefits of being a lawyer is that people come to you in the bad times as well as the good – it has always had that countercyclical nature. There’s an element of the exceptional in the results, but if you look back at our last four or five years of results there is something of a trajectory.’
Reflecting ubiquitous market trends, the year saw an increase of work in the firm’s ESG, asset management and TMT practices, as well as growth in Simmons’ flexible resourcing platform, Adaptive, which increased income by 30% in 2020/21. The firm hired 23 lateral partners and promoted 13 lawyers to the partnership. Six of the newly-promoted partners were women, exceeding the firm’s target of 40% female partner promotions per year.
Top ten – slow and steady
‘The international firms have fared well. The firms that are in a majority of the major markets have been OK. Likewise, when thinking of the Magic Circle, practices that are leading in their markets have done well – there’s a flight to quality when times are tough. Firms with strong brands have benefited.’
The words of Justin D’Agostino, chief executive of Herbert Smith Freehills (HSF), are certainly borne out in the top ten where the big four Magic Circle firms reside. While the picture is only slightly less dynamic than in the wider quartile, there are notably fewer casualties than anyone had a right to expect of the overhead-heavy group. Total revenue across the top ten was £15.62bn, an increase of 3%, while RPL increased less than 1% to £477,000. Meanwhile, average PPL grew 9% to £177,000 and PEP surged 13% to £1.319m.
Pacey headline stats at HSF saw profit jump 30% to £366.9m from £283.2m, an emphatic comeback after profit tumbled 8% in 2019/20 amid steep operating costs. PEP shot up 28% from £857,000 to nearly £1.1m and a 5% rise in revenue meant the firm passed the £1bn turnover threshold for the first time. Revenue grew to £1.038bn from last year’s £989.9m, marking eight consecutive years of growth.
Says D’Agostino: ‘We were planning for a significant downturn. No-one predicted just how robustly the sector would perform. Demand was significantly up – there was a lot of money in the system and M&A was picking up quickly, and strangely capital markets would go into a boom period. We realised quite quickly that we were going to be busy.
‘We talk a lot about the numbers but actually they are the consequence of a series of good behaviours.’
Gareth Price, Allen & Overy
‘To back this up, our own strong results were driven by revenue growth in our international offices, particularly Asia-Pacific. Not everyone was able to get their Asia-Pacific operations back up and running like that.’
Another case in point was Allen & Overy (A&O), which bolstered revenue 5% to £1.77bn from £1.69bn last year and – after a 2% PEP dip in 2019/20 – bounced back with a 17% PEP surge to £1.9m.
Gareth Price, A&O’s managing partner, insists the numbers must not be viewed in isolation: ‘We talk a lot about the numbers but actually they are the consequence of a series of good behaviours. On the client side, the partners looked at it and said: “We need to own the responsibility, we’re guardians of the business, not owners. What do we do now?” It unleashed this incredible collaboration around giving not generic updates to clients, but advice tailored to help them. They asked how they could go one step further and cut through the noise for the clients.
‘In a sense the world shrank when we became better connected through technology. We lost things at the same time but we found a connectivity that we didn’t know we had through this collaboration on clients. These things, the people and the client piece, allowed us to put in the financial performance that we did.’
Price is similarly bullish on the US strategy: ‘We’ve increased our US partnership by 44% since 1 May 2020 through a pandemic! When I look at what we’ve achieved and how we’ve got there – we’ve done it with team hires in a differentiated way, pushing into areas we’re not known for being in. No-one would say – “Allen & Overy and IP”. We’ve shown courage in executing on our vision and the partners are backing us to carry on doing that. There’s more to come. We’re not done yet. Expect more investments in the US.’
He adds that this would not be at the expense of the historic engine rooms of A&O – London, Benelux and the Middle East, all of which have been ‘incredibly successful and all at the top of their game, but we need to keep on investing’.
Freshfields also managed to weather the crisis with aplomb, recording a 5% rise in revenue to £1.59bn from last year’s £1.52bn as PEP hit £1.91m – a notable 5% increase on last year’s slight drop to £1.82m.
Critics may still dismiss the firm’s progress in the US as window dressing but that is defied by a continued onslaught, including launching a seven-partner office in Silicon Valley and augmenting its technology, life sciences and antitrust practices with hires there and in its New York and Washington DC offices.
Alan Mason – one of the global managing partners that took the helm in January 2021 along with Rick van Aerssen and Rafique Bachour – is bullish. ‘Being part of the firm’s new leadership team and relocating to the US after leading the successful opening of our Silicon Valley office in July last year was probably a career as well as past year highlight. We’ve got a fantastic team in Silicon Valley and have been extremely busy since we opened. 2021 has turned out to be no different, with many big transactional and litigation matters for Bay Area-based companies. There is so much opportunity to work with amazing clients at a local and global level. We have a team of diverse, market-leading lawyers serving our client base, for whom our ability to advise on complex M&A, global antitrust and other boardroom issues are critical to their strategies.’
Freshfields also won plaudits during the year by becoming the first Magic Circle firm to elect a female senior partner in the form of admired Asia disputes head Georgia Dawson.
Dawson echoes the sentiment of many leaders: ‘From a client perspective, investment in innovation and tech-driven client solutions continues to be a priority. Freshfields was among the first in the legal sector to think about innovation in a strategic way, and we are completing a major digital transformation programme in response to new and emerging client needs. Client expectations for seamless digital legal service delivery are always increasing, and the winners will be the law firms who put clients and their digital requirements at the heart of their strategy.
‘The winners will be the law firms who put clients and their digital requirements at the heart of their strategy.’
Georgia Dawson, Freshfields
‘As hybrid working becomes the norm, continually assessing and adapting how we are working to ensure we are as effective as possible, while also ensuring that these new ways of working – with some people at home while others are face to face – don’t impact on our ability to create an inclusive workplace where everyone feels they belong.’
Clifford Chance (CC) and Linklaters meanwhile followed a trend of marginal revenue uptick for the year, tempered by robust profit figures.
Linklaters, which is also under new stewardship after M&A star Aedamar Comiskey succeeded Charlie Jacobs as senior partner and global finance head Paul Lewis succeeded managing partner Gideon Moore in July, saw only 2% revenue growth to £1.67bn. The slight increase was nevertheless an improvement on the marginal 0.7% growth of last year. More notable was the firm’s rebounding profit: pre-tax profit stands at £815.3m, a 12% jump from last year, while PEP grew 10% to hit £1.772m.
CC’s 1% turnover increase to £1.828bn from £1.803bn was not much to write home about but a 9% PEP uplift to £1.85m from £1.69m, along with an 8% increase in partnership profit to £716m from £666m, certainly was.
Managing partner Matthew Layton notes: ‘We saw the transactional side come back very strongly at the end of the year. In terms of signs going forward, our deal pipeline for the first few months of next year is looking very good. Demand levels are very high, it’s more than just nine months of work squeezed into three months.’
The firm’s contentious practices were less fruitful this year. Says Layton: ‘It’s more just a timing issue. The pipeline looks strong at the moment. Investigations require people to travel, it’s a lot harder to do that remotely. In 2008 there was a hiatus in disputes as people dealt with their immediate priorities and then litigation came out in the following 12 to 18 months. There will be pandemic-related disputes.’
Overall there were mixed results at an international level for CC. Continental Europe was up 2% in local currency terms, but the Americas region suffered a 2% drop, while Asia-Pacific and the Middle East were down 5% and 6% respectively. A standout from the firm’s previous set of results was a 13% uptick in US revenues, which makes this year’s reverse all the more notable.
Distance left to run
The UK elite has again emerged relatively unscathed from the year that was, but law firm leaders agree that they foresee challenges other than financial in the year ahead.
Ashurst’s Jenkins echoes the concerns of many: ‘Obviously there’s a significant war for talent at the moment, that’s a pressure on all firms, so we all have to think about how we differentiate ourselves. We’ll continue to see people wanting flexibility and taking the option to go elsewhere if that’s not offered in a meaningful way.’
A&O’s Price concludes: ‘It turns out that dealing with a crisis is quite straightforward – you just put one foot in front of the other. But bringing people back from the challenge and building to the new normal – that’s what’s going to make the next 18 months so complicated. That’s really what we’re focused on right now – how we will be who we want to be for our people and our clients in the new normal.’ LB
nathalie.tidman@legalease.co.uk
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LB100 total revenue and profits: The past ten years
LB100 headcounts: the past ten years
Division of wealth: 2011 and 2021
Legal Business 100 averages
The annual change in total profits across the LB100
Distribution of lawyers by region
Distribution of lawyers by practice area
Breakdown of fee income by practice area
Debt to equity – the viability question
This year we asked firms to state their debt positions for the first time. Perhaps unsurprisingly, less than half of LB100 firms provided this and information was particularly less than forthcoming from firms in the Top 25, despite the general understanding that modest borrowings represent sound financial hygiene. From those that did provide this information, we were able to come up with a debt:equity ratio by dividing total debt by net income for illustrative purposes only. As these ratios are guidelines, rather than official, we have ranked the participating firms in bands.