While the UK lurches through a Brexit drama entirely of its own making, mid-market and boutique London-based firms have focused on diversifying their services or using their unique offerings to differentiate themselves from the pack.
The combined turnover for the 18 City firms that sit in the second 50 of this year’s Legal Business 100 (LB100) is £839.7m, an increase of 8%. Average revenue increased 15%, reaching £46.7m. But, inevitably, the top-line growth of the firms in this group is distorted by some sizeable merger activity. Two of those firms have seen large jumps in revenue and headcount: Gordon Dadds, which after acquiring a large chunk of Ince & Co in 2018 and following its initial public offering (IPO) in 2017 – has seen turnover jump 68% from £31.2m to £52.6m under its new Ince branding (see case study). Bircham Dyson Bell, which merged with Reading stalwart Pitmans in December 2018, saw turnover climb from £33.7m to £52m as a result – a spike of 54%. With that level of artificial top-line growth, profit levels are hard to sustain. A 4% growth in the number of equity partners across the group has contributed to average profit per equity partner (PEP) only moving up 3% from £416,000 to £427,000.
However, there have been some standout performances. Lewis Silkin recorded a 12% uptick in turnover to £58.9m, as well as a substantial 31% increase in PEP from £298,000 to £393,000, with only one fewer equity partner than last year. Joint managing partner Giles Crown says the employment, immigration and rewards side of the business – for which Lewis Silkin is particularly well known – has grown significantly in the past two years, up by 24% last year and 23% the year before. Organic growth is a recurring theme for this peer group, with many firms stressing the importance of enhancing existing teams and diversifying service lines in a slow and strategic manner, relative to revenue – and Lewis Silkin is no exception. ‘Our strategy is to be genuinely distinctive in terms of our specialist areas but also in the way we advise and we’ve been doing that in a number of ways – we’ve been diversifying the services that we offer,’ says Crown.
He adds: ‘The middle is not a great place to be without proper differentiation’, leaving mid-market firms with two options – to become larger or to be distinctive in specialist areas and services. Low-cost and flexible businesses, such as the fixed-fee HR and employment law service rockhopper and non-legal services, such as its HR-focused business service Worksphere, will be fully integrated within Lewis Silkin’s core legal offering. ‘You can see a lot of firms who just offer an extremely broad range of services, trying to gain scale almost as a defensive measure to not get swallowed up,’ notes joint managing partner Richard Miskella.
Meanwhile, 2018/19 was a record year for Boodle Hatfield as revenue increased 10% to £28.7m and PEP rose 35% to £638,000. The private wealth-focused firm reports residential property tax work as being its top-performing area. Senior partner Sara Maccallum says: ‘We have a goal of extending our reach in some of our international markets. We’ve done very well in recent years in terms of clients from the Middle East. We’re trying to grow a couple of other international areas where we’ve already got some penetration.’
‘A lot of firms offer an extremely broad range of services, trying to gain scale almost as a defensive measure to not get swallowed up.’
Richard Miskella, Lewis Silkin
There was also a return to form for one of the most-established boutiques in the UK, pensions specialist Sacker & Partners. Year-on-year revenue is up 14% to break £30m and PEP is up 21% to £906,000 – all this despite lawyer headcount increasing more than a quarter. On a five-year track, performance is also strong, particularly for a boutique practice – the top line has grown by 29% over that period.
Behind the lines
Stewarts has a different perspective of its financials than recent headlines in the press might suggest. The UK’s largest litigation-only firm increased revenue in 2018/19 by 11% to £69m following a 20% drop in turnover the previous year. But according to managing partner John Cahill, revenue leaps are not representative of how the firm is doing: ‘What’s important is that a financial spike, such as seen in our trading year 2016/17 when we resolved a long-running and very substantial contingent matter, is not seen as the baseline for good performance, and that in the years that follow, a perfectly reasonable financial performance is not accompanied by headlines about revenue and profit plummeting.’
He argues that other metrics are more significant, such as ‘zero debt, no requirement for an overdraft facility, and £65m of our own money invested in WIP and disbursements on contingent cases’. PEP decreased this year by 13% from £1.42m to £1.23m. However, Cahill says that this is a consequence of broadening the partnership to promote younger partners – the number of partners at the firm increased from 56 to 62 over the last financial year. Cahill also says that the firm is able to meet all its priorities within the cash flow it generates and is not contemplating any alternative business structure or external investment, which he says is often a recipe for short-term gain followed by long-term pain.
Floating law firms is still a trend in its infancy – despite the number of listed firms in LB100 increasing – and provides an alternative to bank borrowing or using partner capital as investment. The success of Gordon Dadds, a mid-market firm that has gained scale and profile after listing, demonstrates a strong possible outcome for any firm considering an IPO. But there is still a lack of confidence in listed firms and doubts over whether they will generally perform well.
‘I’m cynical about listing or bringing in private equity. It’s only justifiable where the firm needs significant capital to increase its turnover potential.’
Stephen Parkinson, Kingsley Napley
Kingsley Napley senior partner Stephen Parkinson comments: ‘I’m relatively cynical about listing or bringing in private equity. The only circumstances in which it’s justifiable are where the firm needs access to a significant amount of capital to increase its potential for raising turnover’.
Kingsley Napley has enjoyed healthy turnover and profit growth in real terms, increasing revenue by 7% to £42.8m while PEP grew 16% to £388,000 from £335,000. Like other mid-market firms, it is trying to keep pace with larger City practices that are investing in innovation and technology. Parkinson says: ‘We’re doing our bit to try to create more client-friendly platforms so clients can access data about their case,’ adding that technology has taken over some work that would have otherwise been done by paralegals.
Wedlake Bell went through a small merger with four-partner boutique Stitt & Co last year and made several hires. Revenue has subsequently lifted slightly by 4% from £34m to £35.4m. But acquisition costs and increasing the partnership by ten have resulted in a 13% PEP drop, which managing partner Martin Arnold says was anticipated. Despite the expected fall in PEP, he adds the firm is on track to achieve targets set for the next year.
Hunker down
Litigation firms are largely confident that Brexit will in fact bring more work into the UK and that a no-deal Brexit will not deter international clients from coming to London. As head of a disputes-only firm, Cahill remains calm about the political and economic climate: ‘We’re likely to be better insulated from Brexit-related issues than many other law firms. We run a litigation-only business and litigation is likely to be less affected than full-service firms undertaking non-contentious, transactional work.’
Brexit could increase activity in the short term for Lewis Silkin as well, according to Miskella: ‘In a hard Brexit scenario, there is likely to be a lot of short-term employment work and a lot of interest in immigration.’ But the firm does not regard itself as being completely shielded as it is currently feeling the impact through delayed investments and transactions, suggesting that companies are holding off on strategic plans, acquisitions and other developments. ‘There’s been a lot of deferred investment and that’s a lot of stored up activity in the market that will have to play out at some point,’ Miskella notes.
Meanwhile, Kingsley Napley is reporting that there has been no visible impact from Brexit and, according to Parkinson, the real estate, corporate and commercial practices have all been busy. ‘It might be the nature of our practice because we tend to act for entrepreneurs, whereas the huge firms act for FTSE100/250 companies.’
For the same reason, Harbottle & Lewis has been more preoccupied with regulatory changes that could impact its client base more significantly than Brexit. The firm has enjoyed a particularly strong run of form over the last five years and 2018/19 was no exception – revenue was up 8% to £38.5m – but one of the biggest changes for private client and personal tax firms is the non-dom tax legislation that means for the first time, non-domiciled residents who have been living in the UK for 15 of the past 20 taxable years will be taxed on a worldwide basis. Managing partner Glen Atchison admits: ‘In our more commercial practice where there are more cross-European border transactions, it’s an ongoing saga.’
While the overall performance of London mid-market and boutique firms flatters to deceive, some are stepping up and, according to others, are chipping away at the market leaders. Although they are not necessarily displacing top-tier firms entirely, they are most certainly challenging and keeping pace as clients see clear benefits to engaging with specialists with lower overheads. LB
Fastest-growing LB100 firms: revenue 2014-19
| Firm | 2014 | 2019 | Change |
|---|---|---|---|
| Fieldfisher | £104m | £242m | 133% |
| Osborne Clarke | £142m | £268.5m | 89% |
| Freeths | £49.9m | £89.8m | 80% |
| Stephenson Harwood | £121m | £213m | 76% |
| Birketts | £31.7m | £54.4m | 72% |
| Foot Anstey | £27.5m | £47.2m | 72% |
| Mishcon de Reya | £104.6m | £177.8m | 70% |
| Kennedys | £128.5m | £216m | 68% |
| Clyde & Co | £365.1m | £611m | 67% |
| Travers Smith | £97.2m | £162.5m | 67% |
Slowest-growing LB100 firms: revenue 2014-19
| Firm | 2014 | 2019 | Change |
|---|---|---|---|
| Hill Dickinson | £111.6m | £90.5m | -19% |
| Thompsons | £80m | £65.4m | -18% |
| Ashurst | £586m | £641m | 9% |
| Brabners | £30m | £33m | 10% |
| Weightmans | £97m | £97.3m | 12% |
Fastest-growing LB100 firms: PEP 2014-19
| Firm | 2014 | 2019 | Change |
|---|---|---|---|
| Fieldfisher | £412,000 | £800,000 | 94% |
| Addleshaw Goddard | £390,000 | £730,000 | 87% |
| Freeths | £254,000 | £461,000 | 81% |
| DAC Beachcroft | £343,000 | £570,000 | 66% |
| Norton Rose Fulbright | £417,000 | £687,000 | 65% |
| Bevan Brittan | £287,000 | £466,000 | 62% |
| Shepherd and Wedderburn | £265,000 | £415,000 | 57% |
| Shoosmiths | £290,000 | £453,000 | 56% |
| Pinsent Masons | £403,000 | £611,000 | 52% |
| Foot Anstey | £263,000 | £400,000 | 52% |
Slowest-growing LB100 firms: PEP 2014-19
| Firm | 2014 | 2019 | Change |
|---|---|---|---|
| Thrings | £415,000 | £209,000 | -50% |
| Cripps Pemberton Greenish | £261,000 | £203,000 | -22% |
| HFW | £554,000 | £535,000 | -13% |
| BLM | £437,000 | £223,000 | -10% |
| Kingsley Napley | £417,000 | £388,000 | -7% |
| Weightmans | £309,000 | £289,000 | -7% |
| Russell-Cooke | £236,000 | £225,000 | -5% |
| Withers | £373,000 | £354,000 | -5% |
| Winckworth Sherwood | £742,000 | £719,000 | -3% |
| Wedlake Bell | £319,000 | £311,000 | -3% |