LB100 overview: The end of the beginning 

Could anyone have known what was coming? A year ago, the 2019 Legal Business 100 (LB100) report read: ‘After a credible performance, the profession now faces a slowing economy at home and abroad amid mounting unease generated by a government under Prime Minister Boris Johnson hitting an increasingly Trumpian tone on forcing the UK out of the EU.’

The report – coming as it did before Johnson’s landslide general election victory – drew on ominous imagery of Conrad, Coppola and Castro – reflecting a very palpable fear that it might be ‘Apocalypse soon?’ The message was clear, leading law firms, which increased revenues by 9% across the LB100 to hit £26.35bn, had performed well but an outlook clouded by a slowing economy, Brexit uncertainty and political instability meant harder times were coming.

This was then upstaged by the real apocalypse we have now in the shape of a global pandemic and the worst economic downturn of the post-war era. The UK economy has been ravaged by Covid-19, with national GDP plummeting a record-breaking 19.8% in April. As of late September, more than five million people were furloughed or temporarily away from work, according to the Office of National Statistics. Surely this time law firm results would demonstrate the profession bowing under the onslaught hitting many other sectors?

Not so much. The numbers in this year’s LB100 have to an extent contradicted such expectations, even though major firms, still defined by the painful lessons of the banking crisis, reacted quickly with a series of cost-cutting, capital-boosting measures as the pandemic gripped Europe. But profits at the UK’s top 100 law firms are sluggish overall. They are preparing for what is to come.

While hyperbolic apocalyptic scenarios might be the reality these days, the UK legal industry has continued its gravity-defying advance. The 6% growth in billings of the 100 highest-grossing firms to £27.82bn might be slower than last year’s 9% rise and 10% the year before that. Adding £1.47bn to the top line is less impressive than the £2.15bn added in 2018/19, but in a financial year blighted by a divisive general election, battles between The UK and Europe and rounded off by Covid-19 – these are remarkably strong top-line figures. Just ten firms recorded drops in revenue for 2019/20 – underlining the remarkable resilience of the group and indicating that worse is perhaps yet to come.

It is in profit terms where sacrifices have clearly been made, as firms have had to cover costs from the crisis and prepare themselves for a period of inevitable financial turbulence through 2020/21. The group’s total profit barely moved – edging up from £8.28bn to £8.33bn – showing the buffers have definitely been hit after last year’s 9% hike. Average profit per lawyer (PPL) matched last year’s 2% growth, rising by 2% to £116,000 but not keeping pace with a 4% increase in lawyer headcount across the LB100 to 75,167.

‘I take the view that financial sponsors will continue to be critically important as people look to rekindle economies and we’ll continue to see opportunities there.’
Matthew Layton, Clifford Chance

Partner profits are perhaps the biggest indicator of which way the wind is blowing. Average profit per equity partner (PEP) is flat at £845,000 – following a 5% increase last year and a 9% surge in 2017/18 – and it came amid 3% growth in equity ranks to 9,958 – the same rate as last year. The noises made by law firm leaders about PEP growth being a lousy indicator of business performance are becoming increasingly louder, especially amid broad redundancy programmes and widespread cost cutting. Thirty-nine firms individually recorded a fall in PEP compared to last year and while some of the biggest falls were down to a change in equity partnership structure (such as Stevens & Bolton’s move to all-equity), the expectation is that for 2020/21, the effect of the crisis and prevailing negative attitudes to PEP will have a more chilling effect.

Obviously, there are many caveats to this largely welcome news for the legal sector. The impact of regional lockdowns was only felt in earnest for six-to-eight weeks of many firms’ financial years and the pipelines that top-20 UK law firms maintain via large plc matters would offset the bulk of that hit over a 12-month period.

As Freshfields Bruckhaus Deringer managing partner Stephan Eilers frankly observed of his firm’s results during the Summer: ‘We’ve had 3% to 4% growth in recent years and Covid-19 did not have as much impact on revenue as we initially feared. These are not Covid-19 results.’

Top 25

It would be tempting to say the firms at the top end of this year’s LB100 are emblematic of Britain’s supposed innate fortitude and stoicism, but recent years suggest these attributes have an overstated presence in British culture. However, that is not to say resilience cannot be found – as this year’s top 25 demonstrates.

Total revenue in the group rose by a steady 5% to £21.73bn, a bit shy of last year’s 9% hike to £20.77bn; impressive considering the end to 2019 was not marred by a global pandemic. Average revenue was likewise up 5% to £869.2m. Revenue per lawyer (RPL) matched last year’s growth to edge up 2% to £427,000 while profit per lawyer (PPL) laboured a 1% increase to £141,000. Further evidence that the Covid-19 lockdown has hit firm’s profits is the PEP average across the group, which was flat at £983,000 compared to last year’s steady 4% rise.

Focus in on the top ten – the strata that includes the Magic Circle and the international vereins – and the performance is similarly defiant: revenue across the group was up 5% to £15.19bn.  Average PEP, meanwhile, stood at £1.17m, with PPL and RPL standing at £163,000 and £474,000 respectively.

 

Indeed it was one of the international firms that set the pace this year, with Hogan Lovells, which managed just a 1% rise in turnover last year, notching a pacey 10% revenue hike to £1.76bn, up from £1.6bn. The growth in revenue was outstripped by a 13% rise in PEP to £1.18m, despite equity partner ranks increasing by seven to 536. The performance over 2019/20 makes for an eye-catching five-year record for the firm, with revenue up 63% over the period – the highest in the top ten.

‘It is important to remember that every crisis has an end point and while the current situation certainly brings challenges, it also brings about opportunities.’
Gareth Price, Allen & Overy

DLA Piper was another international player to record strong growth amid a challenging period in the global economy, upping revenue 8% for a second consecutive year to break the £2bn barrier. Practice group-wise, litigation was the largest contributor, generating 36% of revenue at £760m, followed by corporate, which generated £570m, some 27% of the firm’s turnover. PEP, meanwhile, underwent a 3% rise to break the £1m mark.

Internationalist counterpart Norton Rose Fulbright (NRF), meanwhile, had a more subdued year: revenue rose 1% to just shy of £1.5bn. PEP, meanwhile, underwent a 4% rise to £714,000.

‘I feel we are very financially healthy going into this period and are diverse across our practices and jurisdictions,’ says new NRF global chief executive Gerry Pecht. ‘So we have counter-cyclical practices, when one is not doing so well another is performing well. But you have to be prudent about the actions we take because these are uncertain times.’

CMS was another of the globetrotters to have a quiet, albeit resilient, year. Revenue was up a steady 3% to £1.24bn while PEP was up 1% to £577,000 with 24 partners added to its equity ranks. RPL, meanwhile, was up 4% to £310,000.

Elsewhere, The Magic Circle produced a steady showing. Collective turnover across the four international firms in the group was up 4% to £6.66bn. Clifford Chance (CC) was the pacesetter, upping revenue 6% to £1.8bn while PEP enjoyed a 5% hike to £1.69m. RPL and PPL stood at £600,000 and £222,000 respectively.

CC also noted the continued growth in its client portfolio of private equity and alternative capital providers, with revenues from this group of much-courted institutions rising nearly 70% in five years.

‘Our long-term strategy remains unchanged: investing in our globally diverse talent base and growing our practices sustainably to best serve our clients.’
Gideon Moore, Linklaters

Says CC managing partner Matthew Layton: ‘I take the view that [financial sponsors] will continue to be critically important as people look to rekindle economies and we’ll continue to see opportunities there.’

Allen & Overy (A&O) was not far behind over the year, with revenue growing 4% to £1.69bn. However, PEP did fall 2%, corresponding to the firm’s 2% increase in equity partners to 397. PPL for the year stood at £216,000, a drop of almost 6%.

‘The pandemic has been, and continues to be, a business challenge on the scale that I certainly haven’t previously experienced,’ says A&O global managing partner Gareth Price. ‘Logistically, financially, people and client-service wise, however you look at it, it has been a shock and we have adapted quickly. We anticipate tougher trading conditions in the year ahead, but it is important to remember that every crisis has an end point and also that while the current situation certainly brings challenges, it also brings about opportunities. We are focused on staying close to our clients, supporting each other and emerging even stronger.’

Freshfields recorded a steady year, with revenue rising 3% to £1.52bn, up from £1.47bn last year. The prevailing trend of the 2019/20 financial year has been the financial shortfalls caused by Covid-19 hitting firms’ profitability and in this respect Freshfields was no different, with PEP falling 1% to £1.8m while PPL dropped 14% to £268,000.

‘I’m happy with the year as a whole. We have been performing well notwithstanding the coronavirus.’
Paul Jenkins, Ashurst

Linklaters was the quietest of the big four firms, with revenues crawling forward just 1% to £1.64bn while PEP fell 5% to £1.6m. PPL dropped just shy of 11% to £240,000 as RPL tumbled 8% to £535,000.

‘Covid-19 came at the tail end of what was a strong year for us. Notwithstanding the change in circumstances arising as a result of Covid-19, we have been able to continue to support our people and our clients,’ commented Linklaters managing partner Gideon Moore. ‘Our long-term strategy remains unchanged: investing in our globally diverse talent base and growing our practices sustainably to best serve our clients.’

Outside the Magic Circle Herbert Smith Freehills (HSF) showed some steel to increase turnover, with revenues up 3% to £989m, with the firm forced to wait a while longer before it breaks the £1bn barrier. The firm also adhered to the wider trend of economic difficulties damaging profitability, with PEP falling 10% to £858,000.

However, there were still encouraging metrics for HSF: EMEA produced a 12% increase in output while the firm’s deep Asia presence produced an 11% growth in turnover and bucked the global trend by growing profits 28%. The firm’s New York outpost also grew, with turnover up 27% while the firm’s New Law business lines were up 9%.

Says chief executive Justin D’Agostino: ‘There is a huge amount of optimism, there’s been significant growth in Asia, EMEA, and New York, all the jurisdictions where we wanted to grow. We have been pleasantly surprised at how well revenues have held up. We certainly felt the impact of Covid-19 very early on. But we also saw how, when Asia came out of it earlier, capital markets and disputes came back very quickly. Capital markets are still very busy now.’

Elsewhere, recently named Law Firm of the Year Eversheds Sutherland produced another strong showing, growing turnover 6% to £942.7m while PEP defied trends by growing 1% to £893,000. PPL was also up, growing 1% to £70,000.

Highly commended in the Law Firm of the Year category, DAC Beachcroft (DACB) has been pushed down into the second 25 this year, despite revenue being up 6% to £258m while PEP underwent a 4% increase to £590,000. Moreover, it has generally been an expansive period for the firm. In 2019, DACB lured across a five-partner City insurance team from Norton Rose Fulbright while also launching in Paris and Belfast. Meanwhile, in January of this year, the firm doubled its Madrid presence after securing a tie-up with three-partner insurance boutique Asjusa.

Pinsent Masons, meanwhile, demonstrated that the resilience evident across the LB100 could extend to national players, with revenue increasing 3% to £495.5m, though PEP did undergo an 11% drop as the firm continues to hold back partner profits to prioritise internal investments. According to firm managing partner John Cleland, 2019 is already ‘ancient history’, as the year ahead will ‘present challenges the like of which we have not seen before.’

While no firms in the top 25 contracted over the year – a commendable feat given the context – two firms in the group failed to record turnover growth. Bryan Cave Leighton Paisner was unmoved at £679m, with the global pandemic hitting just as the firm appeared to be settling after its 2018 transatlantic merger. PEP, however, did manage to grow, increasing 2% to £650,000.

Ashurst was the other in the group to fall flat. Revenue remained £644m for 2019/20, while PEP suffered a 7% setback, standing at £903,000 for the year in the context of three equity partners added to its ranks.

‘We had a strong first three quarters and then activity was affected by the pandemic in Asia-Pacific from late January,’ says global managing partner Paul Jenkins. ‘I’m happy with the year as a whole, with an increase in revenue year-on-year and PEP above budget until the last quarter. We have been performing well notwithstanding the coronavirus, with double-digit revenue growth in Hong Kong and Singapore and double-digit revenue growth on the Continent and in our US offices.’

Jenkins’ words broadly summarise the feeling among the top 25, with a difficult year-end having a material impact on the group but underlying strengths are offsetting the worst of the damage. Moreover, disaster response work in finance, regulation and employment gives an initial boost to advisers, even as the hard times set in for the long haul.

But nitpicking aside, this remains a remarkable performance for an industry that, despite being habitually written off as poor at technology and operations, shifted to blanket remote working in days with striking collective élan. And this economic-calamity-meets-logistical-Everest was tackled during the crucial fourth quarter of the year.

The results confirm the impression that London’s elite is emerging in good shape from the crisis, thanks to the benefits of large, cash-rich plc clients and their role as go-to counsel when the business environment goes pear-shaped.

For now, firms at the top end of the UK legal profession will be pinching themselves, but complacency is not an option, with the remainder of 2020 not even the beginning of the end. But it is, perhaps, the end of the beginning. LB

thomas.alan@legalease.co.uk

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Distribution of lawyers by region

LB100 averages

Division of wealth: 2010 and 2020

LB100 total revenue and profits: The past ten years

The annual change in total profits across the LB100

LB100 headcounts: the past ten years