The Global 100 overview: Atlas shrugged

Political shocks, gyrating currencies and choppy markets – it has been yet another testing year for the Global 100. Legal Business looks at those shouldering the burden and those buckling under

Twelve months ago, the global legal community was reeling from the shock UK referendum result to leave the EU. Senior industry leaders shook their heads and predicted even more turbulent markets in what was already an uncertain global economy.

London – and its law firms – was under threat from financial institutions starting to relocate activities to mainland Europe. Meanwhile, US law firm leaders warned further uncertainty was on its way in the shape of the US presidential elections. Still, few saw Trump becoming the leader of the free world. Until he did. Then, closer to home for the legal industry, in January King & Wood Mallesons’ (KWM) European arm collapsed, making the legacy SJ Berwin the largest European law firm failure ever.

Three milestones in what has been yet another eventful year globally and for the legal industry. But while no law firm would declare itself immune to the slings and arrows of outrageous economic and political fortune, the performance of the 100 largest firms by revenue has been resilient. Richard Hall, head of M&A in Europe for Manhattan heavyweight Cravath, Swaine & Moore, sums it up: ‘Looking back to 2016, my assessment is a strong market both domestically and internationally, notwithstanding significant headwinds, including Brexit in Europe and political uncertainty in the US. 2016 was down in the US and Europe dealflow-wise, but not as far down as we thought it would be.’

Back in 2015 Legal Business predicted that the group would break the $100bn barrier by 2017. That has not yet happened: gross revenue for the Global 100 now stands at $98.82bn, an increase of 3% on our 2016 report, matching the overall revenue growth last year. But, unlike last year, top-line performance is not flattered by consolidation: other than Gowling WLG, a Canadian/English combination that flips into the table in 79th position this year, the growth is largely organic. There will be far more consolidation-related uplift in our 2018 report when the combined revenues of CMS Cameron McKenna Nabarro Olswang, Arnold & Porter Kaye Scholer and Eversheds Sutherland – three deals that took effect in the first half of 2017 – kick in.

For 2016, overall gross revenue was also muted a little by readjustment: KWM has restated its 2015 and 2016 turnover, discounting the EUME business that has gone into administration, while Herbert Smith Freehills (HSF), after producing currency-adjusted financials for the past few years, has reverted to reporting actual revenue and profit (see methodology). When viewed in the context of a modest 2% rise in total lawyer numbers from 122,945 to 125,122 (compared to a 6% increase in 2016), average revenue per lawyer (RPL) is $790,000 – an increase of 1% – an improvement on the 2% fall in RPL in 2016.

Global 100 headcounts

Global 100 total gross profits and revenues

Global 100 averages

Profit-wise, the picture is stronger. Gross profit for the Global 100 this year stands at $39.78bn (+5%), although average profit per equity partner (PEP) is flat at $1.6m as the number of equity partners increased by 2% to 24,173. The most reliable indicator of profitability – profit per lawyer (PPL) – shows a healthy increase of 3% from $308,000 to $318,000 on average compared to a 2% reverse last year. Only 22 firms reduced their lawyer headcount over 2016 – 31 did the same in 2015 – demonstrating that PPL has not been artificially inflated by a reduction in fee-earners.

One reason for the uplift across profitability metrics is that the Global 100 this year is even more US-dominated than it has been since Legal Business first collated the results of the 100 largest-grossing firms in the world in 2008. That year, a quarter of the firms had origins or the majority of their lawyers in the UK, Europe or Asia. Now, that contingent is down to just 18 firms and two of that number – Dentons and Squire Patton Boggs – are US-driven operations. The diminishing presence of non-US firms is clearly linked to currency. The increasing strength of the dollar has pushed firms that account in sterling, euros or Australian dollars either down the table, or out of the 100 completely. The Global 100 this year has no independent European firms for the first time ever (FIDAL, ranked 100th in 2016, drops out of the table), while three UK-based firms – Taylor Wessing, Bird & Bird and Berwin Leighton Paisner – fall out of the 100. The greenback conquers all – a striking contrast to our Global 50 report in 2007, when there were two dollars to the pound and the Magic Circle firms were at the height of their powers (see ‘Reversal of fortunes‘).

Broad shoulders

Collective growth may be solid, but there have been some striking individual performances. The most telling change has come at the top. Kirkland & Ellis, despite the brickbats thrown at it by rivals in recent years, posted a 15% year-on-year revenue increase from $2.3bn to $2.65bn, putting it in second place behind the world’s largest firm for three years running: Latham & Watkins. Kirkland’s presence in second spot breaks a run of eight years where either Baker & McKenzie or DLA Piper (or both) held one of the top two positions in the Global 100.

And, despite one rival management figure matter-of-factly declaring ‘the culture is horrible’, few dispute what Kirkland has achieved. ‘Kirkland made an astonishing leap this year,’ says Bruce MacEwen, president of law firm consultancy Adam Smith, Esq. ‘It was already up where the air is thin and grew revenue 15% off a big number. When you’re growing like that, everybody likes to take pop shots. While I wouldn’t recommend it for being warm and fuzzy, Kirkland is clearly doing something right.’

‘The success experienced by Kirkland & Ellis doesn’t surprise me, particularly when you look at how well it has hired out of the Magic Circle in London,’ says Nick Shilton, chief executive of SSQ. ‘It has hired a fleet of first-rate practitioners and put paid to the myth that Magic Circle partners do not have portable practices. What Kirkland has done in London mirrors what it has done in its home jurisdiction and most recently in Boston.’

While Kirkland posted the second-highest year-on-year revenue growth of all Global 100 firms in 2016, Houston’s Baker Botts made the biggest leap overall, increasing turnover by 20% from $704.5m to $846.5m. One factor behind this performance was two lucrative matters for key client Liberty Media Corporation in 2016: on a lawsuit between Liberty and Vivendi Universal, where a New York court found Vivendi liable for breach of contract and securities fraud, and awarded Liberty $775m; and advising Liberty on its acquisition of Formula One from CVC Capital Partners for £8bn.

Seven other firms posted double-digit revenue growth in dollar terms: Paul, Weiss, Rifkind, Wharton & Garrison; Quinn Emanuel Urquhart & Sullivan; K&L Gates; Milbank, Tweed, Hadley & McCloy; Covington & Burling; Cravath; and Fried, Frank, Harris, Shriver & Jacobson. In terms of profitability, a top performer this year was also Baker Botts – increasing PPL by 47% in one year from $422,000 to $619,000. Other firms to post strong year-on-year PPL performance include Weil, Gotshal & Manges, which has bounced back from a difficult couple of years to post a 9% lift in revenues to $1.27bn, a 19% increase in PPL and a 22% lift in PEP to over $3m. Elsewhere, Squires turned in a credible year-on-year performance for the much-maligned verein firms (see box, ‘It’s the clothes on top that really matter’, below), with PPL up 33% and PEP up 16% to just shy of $1m, against a 6% increase in the top line.

 

‘While I wouldn’t recommend it for being warm and fuzzy, Kirkland is clearly doing something right.’
Bruce MacEwen, Adam Smith, Esq

Upside down

Given the already-noted currency effect, it is no surprise that the UK firms that remain in the Global 100 have seen the worst year-on-year performance in dollar terms, despite growing or flat revenue when viewed in sterling (see box, ‘The currency effect’, below).

Freshfields Bruckhaus Deringer saw the worst performance in the table, with an 11% fall in revenues from $2.03bn to $1.8bn, despite posting unchanged revenue in sterling (£1.33bn). The annual jostling for position between the big four Magic Circle firms means that Freshfields is the back marker after dominating in 2015/16, with Allen & Overy (A&O), Clifford Chance (CC) and Linklaters all reporting double-digit growth in their home currency for 2016/17. Of the UK-based firms in the Global 100 (not counting vereins), only A&O and Clyde & Co showed positive turnover growth in US dollars, but only because they reported turnover growth in their home currency of 16% and 14% respectively.

Despite this, Freshfields joint managing partner Stephan Eilers is phlegmatic: ‘Revenue was basically flat, but PEP is up in line with what we’ve done in the years before. Why flat? To be honest, we don’t know. The economic development of firms has become so volatile that we cannot point to a specific area or development. The normal experience is that either one of the transactional practices move forward or the contentious practices have a good year. This year it has been solid or flat all over, so we didn’t have this compensatory mechanism.’

‘Why flat revenue? To be honest, we don’t know. The economic development of firms has become so volatile.’
Stephan Eilers, Freshfields

 

 

In contrast, A&O had a breakthrough year in sterling terms – revenues up 16% and, despite only seeing a 3% turnover increase in our Global 100 table from $2bn to $2.06bn, it is the best-performing firm in the Magic Circle this year (the strength of the euro providing some uplift to leading London firms in sterling reporting). On a five-year track, it is the only UK-based firm to post meaningful organic revenue growth in dollar terms, breaking the $2bn barrier by growing turnover 9% from $1.89bn. Managing partner Andrew Ballheimer says while some of the firm’s core practice areas – corporate, banking, disputes and real estate – have had ‘stonking’ years, he believes the firm’s ongoing investment over the last five years has paid off, particularly in its alternative delivery business, such as aosphere, and products, such as derivatives tool MarginMatrix.

‘Our alternative delivery businesses have also had a positive impact on our revenue. If you add up each of the component parts, there’s a lot of revenue there and I am not sure many other firms have that at the same level. It is the equivalent of a large office in A&O in terms of revenue.’

He also states that increasing geographical diversity of work is a distinctive factor: ‘If you look at how much of our work is multi-jurisdictional, it makes a real difference to our bottom line because that is a premium offering, a premium product. Thirty percent of our revenue is derived from matters involving five or more countries, and that’s an increase. Seventy-four percent of our revenue is from matters involving two or more countries and that is also a slight increase. Our office network is now broader than that of our peers.’

Overall, in home currency terms, the picture is much stronger for many UK-based firms: CC, Linklaters and HSF all reported double-digit growth in revenue (although for HSF the growth is against a lower-than-originally stated revenue for 2015 – the firm opted to provide actual rather than currency-adjusted financials this year, which meant 2015/16 revenue was £38m lower than the £870m reported last year). Eversheds recorded an 8% revenue increase for the UK business for the last financial year, while its transatlantic tie-up beds in. Co-chief executive Lee Ranson says: ‘To have turned in this kind of result against the backdrop of Brexit, and continued political and economic uncertainty in many of our key markets, speaks to the strength and resilience of our business.’

He notes, however, a 2% dip in PEP, citing the investment in tie-ups in Germany and the US as having an effect on the bottom line. ‘We are making sure we are investing for the future. The acquisition in Germany [of Heisse Kursawe in 2015], investment in new recruits, systems, technology and the US combination – all of that comes into play. The combination we achieved was not an investment we budgeted for. Combinations have front-loading, due diligence and time costs, but those investments eventually pay back. This is organic growth; I’m very pleased.’

Another law firm leader with some cause for cheer in 2016/17 is Ashurst managing partner Paul Jenkins, whose firm has made something of a recovery after some difficult years since its merger with Australian practice Blake Dawson in 2013. With revenue up (in sterling) from £505m to £541m and PEP up 11% to £672,000, it was a result the firm needed this year.

 

‘It’s been about lifting profit, driving revenue, and there are a number of things I’ve put in place to achieve that.’
Paul Jenkins, Ashurst

 

 

‘I took on the role in June [2016] and it was a challenging period through the first three or four months,’ notes Jenkins. ‘But otherwise it’s been about lifting profit, driving revenue, and there are a number of things I’ve put in place to achieve that. Part of that has been around improved financial discipline, improved financial reporting and partner engagement.’

 

Two tribes

Given the continual strength of the dollar, the trend of the last five years towards US dominance continues apace: 86 firms are either American or American-driven. And despite Los Angeles (Latham & Watkins, Quinn Emanuel, Gibson, Dunn & Crutcher) and Chicago (Kirkland) having encroached on Manhattan soil to dominate the Global 100 in terms of five-year growth metrics, the phalanx of 18 New York-based firms continues to have a commanding presence in the global market. Average RPL is $1.27m; PPL is $596,000; and PEP is $3.21m. However, an interesting comparison would be against the averages of those six significant challenger firms based outside Manhattan – Latham, Kirkland, Sidley, Gibson Dunn, Ropes & Gray and Quinn Emanuel. For this group, average revenue growth over the last five years is 48%; RPL is $1.28m; PPL is $659,000; and PEP is $3.13m. There is little to choose between the two groups on key metrics. The average revenue growth over five years shows just how far those firms have come, a trend that is also apparent over a decade as well.

On a quartile basis (see ‘Core stats‘), the second quartile of firms ranked 26-50 once again has the strongest averages across all key metrics: RPL is up 1% to $881,000; PPL is flat at $350,000; while the average PEP of those 25 firms is $1.9m, an increase of 1%. The top quartile, however, achieved a larger increase in PEP year-on-year: up 3% to $1.8m on average.

New York’s Paul Weiss now heads up the second quartile in 26th position and has consistently been one of the strongest performers of the group. Turnover in 2016 moved up 10% to $1.22bn, which means the firm has grown its top line by 57% on a five-year track. Chair Brad Karp says the firm’s core transaction and disputes practice areas were ‘firing on all cylinders’.

‘It all comes down to extraordinary talent, a commitment to unparalleled client service and a record of outstanding results. Our firm has focused intensely on building market-leading practices in five key areas – public M&A, private equity, litigation, regulatory defence and restructuring. We’ve made significant investments in each of those five areas in recent years and have been disciplined in not dabbling outside of those areas.’

 

Holding up

Despite a resilient performance, most elite firms are strapping in for another 12 months of jolts and uncertainty, as the Trump presidency continues to generate controversy and unpredictable policy in the US, while a minority UK government gets stuck into hugely-challenging Brexit talks having just had its parliamentary majority slashed in June’s general election.

Says Shilton: ‘The first half of 2016 was strong, then the referendum result came as a surprise to many. I’m not surprised that overall revenue increased, but I would question how much of that was the result of higher charge-out rates than increased demand for legal services. Deal activity has been better for some firms than others, and the geopolitical climate has made the market uneven and unpredictable. The gloss on that for Global 100 firms – particularly those active in London – is that the appetite for recruiting partners across most practice areas has remained voracious, particularly the US firms. This is not just US firms hiring from UK firms – we have seen plenty of US firms hiring from other US firms in London. A few years ago this was a very rare occurrence.’

 

‘Revenue increased, but I would question how much was the result of higher charge-out rates than increased demand for legal services.’
Nick Shilton, SSQ

 

 

One US leader notes: ‘From what I’ve heard from other law firms it has been a very choppy year so far. Deals are down because of global uncertainty. A lot of litigation and regulatory work is down at most firms because the financial crisis-driven wave of disputes and investigations, which began in earnest in 2007-08, is basically over.’

Says Slaughter and May head of corporate Andy Ryde: ‘The political uncertainty we are now facing will slow down M&A volumes significantly. That said, there will be situation-specific transactions, and the balance between the weak pound and the strong FTSE has created a new environment where different types of deals are being considered, and where there will be opportunities that wouldn’t have been there before.’

Opportunities are critical, where they come. Certainly KWM, which began 2017 in the worst way possible, will be hoping that market dislocations will create more opportunity for less-established players and new approaches to legal service delivery. Says recently-appointed global managing partner Sue Kench: ‘There’s a margin in anything, there’s opportunity for disruption and you can’t take that for granted.’ LB

mark.mcateer@legalease.co.uk

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