This year’s Legal Business 100 coincides with the most inauspicious of anniversaries after a year with the most inauspicious of beginnings. A decade since the start of the global financial crisis and just over a year since the result of the Brexit referendum, the perception is that political and economic uncertainty has ultimately had little impact on the performance of top 100 UK law firms. Particularly on those at the top.
The drama has been well documented. UK and European markets continued to show resilience, mainly aided by foreign investment, despite the last financial year starting off with six to eight weeks of post-referendum impact. By Christmas, transactional practices were upbeat and grew stronger into 2017. Then article 50 was triggered just before the end of the financial year and unease settled in again.
Against this backdrop, total revenue and profits of the UK’s 100 largest firms showed their largest year-on-year increase in three years, both increasing by 9% in 2016/17, with combined revenue passing £22bn and total profits reaching £7bn. Average profit per equity partner (PEP) also grew by 6% to £738,000, as revenue per lawyer (RPL) and profit per lawyer (PPL) were both up 5% to £342,000 and £108,000 respectively.
The surge in profitability came despite modest increases in fee-earner headcount, as total lawyer numbers increased by 4% to 64,578 and the equity partner total moved up by 4% to 9,483. However, unlike in previous years, there was little in the way of significant law firm consolidation to bolster the overall top line, save for the full results of the 2015 combination of UK-based Wragge Lawrence Graham & Co with Canada’s Gowling Lafleur Henderson being reported for the first time and accounting for Gowling WLG’s ascent. Next year, the picture will change as the mergers of CMS Cameron McKenna/Nabarro/Olswang; Eversheds and Sutherland Asbill & Brennan; and Addleshaw Goddard and HBJ – all taking effect in 2017 – come into play. Another key Scottish player will also disappear from the table in 2018 after Maclay Murray & Spens is consumed by the world’s largest law firm by headcount, Dentons.
Some firms have seen significant increases in headcount after busy 12-month periods of brisk international expansion and firmwide recruitment, notably DWF (lawyer headcount up 21%) and Trowers & Hamlins (22%) in the top half of the LB100. In addition, firms such as DLA Piper and Clyde & Co also acquired a string of international offices in the last financial year. Cumulatively, firms in the top 25 added 25 new international offices to their network in 2016/17.
For others, there was a pronounced fall in headcount. Berwin Leighton Paisner (BLP) saw its fee-earner numbers fall by 12%, including scaling back in intellectual property as nine lawyers left the firm, while Ashurst’s losses in different locations – not just in London but also in Paris and in the US – meant its total lawyer numbers were down 6%.
‘Firms with significant non-UK businesses and which account for it in sterling will show growth without any real growth. The statistics will be completely misleading.’
Quentin Poole, Gowling WLG
Notwithstanding shifting fee-earner numbers, fluctuating currencies meant 22 of the top 25 firms recorded organic revenue growth this year – 10% on average – outperforming the second 25 on some key metrics for the first time in a long time (see ‘Core Stats’). The top 25 still accounts for three quarters of the entire LB100 revenue, while the bottom 50 firms only grew by 5% on average in the last financial year. The fact that many firms in the upper reaches of the LB100 bill significant proportions of their revenues in US dollars and euros has given them a natural hedge against a spiralling pound.
One billion club widens
The top seven firms – each with global revenues exceeding £1bn – did particularly well for revenue growth during the last financial year, aided by material impact from dramatic swings in currencies against the pound from their substantial foreign practices. Cumulatively, the one billion club is now worth more than £10bn for the first time; five years ago, this figure was just over £8bn.
Among them, Hogan Lovells saw an impressive 19% revenue growth in sterling this year. Significant gains have been evident at firms that account in dollars, which have benefited by an advantageous conversion into sterling for the purposes of the LB100. DLA Piper, which recorded a 3% drop in global turnover in its home currency, shows a 6% rise in this table, while Norton Rose Fulbright, which also had a 3% dip in turnover in US dollars, has reported an 8% year-on-year increase in sterling.
As Gowling WLG’s head of international projects Quentin Poole observes: ‘Those firms with significant non-UK businesses and which account for it in sterling will show growth without any real growth. The statistics produced this year by international firms will be completely misleading.’
‘A weaker sterling made the UK an attractive place for overseas investment, so we saw an increase in the M&A space and real estate – and we were on the receiving end as we have a well-balanced business,’ counters Osborne Clarke UK managing partner Ray Berg, whose firm accounts globally in euros.
Of the top seven, the Magic Circle enjoyed its strongest collective performance yet since the financial crisis. Jointly, London’s big four global firms have increased their market share and now turn over £5.83bn as a group.
Individually, Freshfields Bruckhaus Deringer failed to match its strong showing last time out, posting just a 0.2% revenue increase following its 7% jump in 2015/16. With the top line static at £1.33bn, a silver lining came via a 5% increase in PEP from £1.47m to £1.55m following a year of cost efficiencies. However, this does not hide the fact that average revenue growth for the group is 9% for the year, while average PEP is £1.49m (below Freshfields’ PEP) – but the growth rate is 12%.
‘While tech has a critical role to play, just standardising technological delivery is not the answer to everything.’
Matthew Layton, Clifford Chance
Managing partner Stephan Eilers says: ‘It didn’t go through the roof, but it was a solid year. Revenue was up a little, but in financial terms it was basically flat. PEP has grown in line with what we’ve done in the years before.’
As one Freshfields partner says: ‘We fell back £100m in revenue because we shrank the firm. We lost 50 partners, of course we’re going to lose revenue. And we’ve refocused; we’ve moved away a bit from financial institutions.’
The latest setback for the firm came when co-managing partner Chris Pugh stepped down from his role in July, less than halfway into his term. This was the second unscheduled c-suite departure since the team took up the role in January last year. In June 2016, executive partner Michael Lacovara left to join Latham & Watkins.
In contrast this year’s standout performer is Allen & Overy (A&O) – the strongest Magic Circle firm over the last five years – after a subdued 2015/16 (see case study). It grew its top line by 16% to £1.52bn and PEP by 25% from £1.21m to £1.51m (to put it on the same level as Linklaters). The results even show well on the ‘constant currency’ basis – preferred by some international firms to artificially eradicate FX movement – with revenues up 6% and PEP up 14%.
Clifford Chance saw the second-highest rise in revenue of London’s top four, with income up 11% to £1.54bn. PEP also climbed by 12% (2% on a like-for-like currency basis) to reach £1.38m. The firm revisited this year an overhaul of its lockstep, which is understood to give a select band of top performers the equivalent of 150 ‘super points’, against a current ‘core ladder’ of 40-60 points. Meanwhile, a growing number of partners in markets deemed to be less profitable are now capped at 70 points.
Highlight matters for the firm last year include acting for the winning consortium on National Grid’s £13.8bn sale of its gas pipe network and advising on the €12.25bn acquisition of pan-European logistics outfit Logicor’s warehouse business from The Blackstone Group by China Investment Corporation, the second-largest European real estate transaction on record.
Observing the currency effect, managing partner Matthew Layton says: ‘Our revenues are about a third in euros, a third in dollars and a third in sterling. So we were nicely hedged. We’ve also had a tight control on improving efficiency, productivity and the quality of the revenue all around.’
‘2016/17 was something of a rollercoaster ride for many businesses. Activity took a massive hit following the referendum and took a good three months to recover.’
John Joyce, Addleshaws
Meanwhile, Linklaters also saw a notable revenue increase of 10% to £1.44bn – a 2% rise in constant currency terms – as PEP increased by 7% to £1.51m. These results come after a 2016/17 working on a number of significant transactions, including also advising on National Grid’s sale of 61% equity interest in its UK gas distribution business. Linklaters also advised Unilever during a hostile takeover bid from Kraft which, had it succeeded, would have been the second-largest takeover in corporate history.
Given Linklaters’ fairly uneven run financially in recent years, managing partner Gideon Moore is more than pleased with how 2016/17 panned out, particularly given the political backdrop during the year: ‘If someone had told me at the beginning of the year that we would have this performance, I would have taken it.’
Best and worst of the rest
Despite almost universal revenue increases among the top 25, a handful did suffer reverses in profitability. And, as the only firm to have a dip in revenue this year, it is unsurprising that Addleshaw Goddard suffered the biggest descent.
Addleshaws’ PEP plunged by 26% to £504,000 from its record high of £679,000, a disappointing result for the firm that also saw a 2% fall in revenues from £201.8m to £197.8m. (However, the firm did say that revenue reported for 2015/16 included a conditional fee uplift and actual revenue was £194m, so turnover is up 2% on that basis.)
According to managing partner John Joyce, 2016/17 was ‘a very turbulent year, something of a rollercoaster ride not just for us but for many businesses. Activity took a massive hit following the referendum and took a good three months to recover’.
Despite entering the top 25 for the first time since the late 1990s as its revenues jumped 12% to £176.4m, Stephenson Harwood’s PEP dipped by 6% to £707,000, although equity partner numbers also increased by 9%. Managing partner Sharon White says the firm was expecting the drop and ‘as much as anything it’s about balancing the investment we need for the longer term health and growth of the firm against the short term’.
Meanwhile, BLP’s partner profits fell by 8% from £687,000 to £630,000, despite revenue increasing by 7% to £272m and its significant fall in lawyer headcount. However, the firm added to its partner ranks organically this year and reported its highest-ever promotion round, while at the same time investing in its alternative legal businesses.
Managing partner Lisa Mayhew says that the firm’s revenue was buoyed by a ‘discernible flight to quality’ in its real estate business. She also pointed to the 26 new partners that have been brought in as a key factor in its growth. Nine of the new partners arrived as lateral hires, while 17 were promoted.
Standout performers among the top 25 (minus the ‘One Billion Club’) in profitability terms included Ashurst, Pinsent Masons and DAC Beachcroft. After a tough year following disappointing financial results for 2015/16, Ashurst grew PEP by 11% to £672,000 as revenue also increased 7% to £541m. However, the firm lost a raft of partners over the course of the year, including the bulk of its Paris office to Freshfields and Gibson, Dunn & Crutcher, two Asia finance partners to A&O, three structured finance partners to Paul Hastings and financial regulation stars Rob Moulton and Nicola Higgs to Latham. But for managing partner Paul Jenkins, 2016/17 represents a significant turnaround.
‘It’s been a team effort. It’s been the matter of getting the right people in place across the firm that are leading our people with me and getting our partnership engaged. I am very happy with our results. It’s personally satisfying, but the important thing is that partners are very happy that we’ve set ourselves a target and met it. It means we can set ourselves a target that is even more ambitious this year and I have the confidence that we can meet it again.’
DAC Beachcroft was the leading performer in PEP terms, increasing partner profits by 21% to £432,000 from £358,000, despite only increasing revenue by 3%, while Pinsents’ PEP jumped by 16% from £552,000 to £638,000 as the firm broke the £400m barrier for revenue. Senior partner Richard Foley notes: ‘If you have momentum in your business you have to build on it. We’ve grown as a business by about a third in revenue terms over the last five years, so we’re obviously getting something right.’
The year ahead
‘It’s been a year of huge volatility and uncertainty – the achievements are particularly sweet in a year that was difficult, in a year where the tide was not rising’ – so says Herbert Smith Freehills (HSF) chief executive Mark Rigotti, whose firm produced 11% revenue growth to £920.5m after opting to report actual rather than currency adjusted financials for this year and last. And, while leadership at LB100 firms point to the spectre of Brexit lurking in the hinterland, few can identify specific effects on their business during the past year (see Last Word).
The profession as a whole globally is trying to take out cost and the winners will be those who sustain the service focus and deep teaming.
James Palmer, Herbert Smith Freehills
Instead the LB100 C-suite is focused on the tangibles and have worked hard to ensure, in the main, that firms are as resilient as possible to the actions of Donald Trump and Theresa May. The top-and-bottom-line growth among the top 100 firms shows they are committed to investing in new ways of delivering legal services in practice areas and geographies that can lead to revenue gains, along with improving the bottom line through greater efficiency and use of tech.
While it is clear that the top 25 firms continue their growth mode, rising costs and a crowded market have also continued to enhance the importance of technology and automation in business models. With Rigotti stating that alternative legal services now represent 5% of HSF’s revenue and A&O managing partner Ballheimer attributing some of its recent outstanding performance to its diverse portfolio of legal tech products and services, this has been tackled by different firms with various degrees of success.
‘A team leader’s job in the past was to make sure they have the people with the right skills, with the right clients and cost base. Moving forward, if it’s possible to automate or do something in a smarter way, that will be the norm,’ says Gowling WLG head of innovation and digital Derek Southall.
Overall, it seems that firms are starting to realise that investment in tech itself is not a silver bullet. The predicted end of lawyers as technology takes over has been oversold and key players are far more sceptical.
Layton argues: ‘At the end of the day we are still a relationship business and clients come to us because they trust in the individual relationships. So while tech has a critical role to play, just standardising technological delivery is not the answer to everything.’
Firms in the top 25 have shown their resilience, despite predictions of a very difficult market, and continued to outperform their peers in the rest of the LB100. But whether that is a sign of their practice and geographical diversity or a reflection of an increasingly crowded middle market continues to be debated.
‘Overall, most firms are adapting quite well to the market we’re in. The profession as a whole globally is trying to take out cost and the winners will be those who sustain the service focus and deep teaming,’ concludes HSF senior partner James Palmer.
‘Continued uncertainty in the UK market because of Brexit is unhelpful,’ says Foley. ‘Positively, the continued improvement in the way firms innovate to deliver legal services creates significant opportunities for some. Law is not a bad place to be. It would be nice to have more external market stability, but you can’t have it all.’ LB
Legal Business would like to thank Mason Hayes & Curran for its sponsorship of the Legal Business 100.
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