With an unerring consistency, the UK Global Elite has maintained its grip on the market throughout the recession and 2010/11 was no different. Some will have hoped that the global law firm may become an endangered beast, but if anything the last few years have made them stronger.
While it hasn’t been easy for the global giants, there has been a fair bit of soul searching, cost cutting and re-jigging of business plans, which has resulted in this group of six firms holding tight to a 36% market share of the entire LB100.
Allen & Overy, in particular, found its teeth again after a year of falling revenues, recording a 7% jump in fee income to £1.12bn. It’s easy to forget that as recently as 2006 the firm was a £736m business, around £140m behind Freshfields Bruckhaus Deringer. The gap between the two in revenue terms is now just £20m, and A&O has the joint highest five-year revenue compound annual growth rate (CAGR) at 9%, with Herbert Smith.
A&O’s appetite for global expansion has led to 12 new office openings in four years, with the most recent announcement detailing its first foray into Africa with a launch in Morocco.
Although Linklaters and, more frequently, Freshfields often win the loudest plaudits for managing themselves the most efficiently during the recession, A&O looks as well-placed as any firm.
A&O’s appetite for new offices can only be matched by Clifford Chance (CC). Shortly after A&O announced its Africa plans, CC revealed it also intended to open in Casablanca. Add to this the acquisition of two firms in Australia (Chang, Pistilli & Simmons in Sydney and Cochrane Lishman Carson Luscombe in Perth) and a new office in Turkey and CC’s year has been marked by global growth. Plus, unlike A&O, it has already signalled interest in South Korea.
Not bad for a firm that saw revenues decline over the previous two years. CC fought back in 2010/11 with a 2% increase in its fee income to £1.22bn, but this figure is still down from a high of £1.32bn in 2008. CC’s five-year revenue CAGR is the lowest of the group at 3%, however its underlying profitability saw a 13% hike in net income to £381m, the biggest jump of the peer group.
The firm is stuck between its desire to grow global reach and the importance of keeping a tight rein on headcount and leverage. Non-equity partner numbers shrank by 9%, from 190 in 2009/10 to 173 this year, while CC’s 2010/11 equity partnership grew by just under 2% to 379 up from 372 in the previous year.
‘In the current climate, being an English firm with an English heritage and being able to export English law has us as well placed as anyone at the moment.’ – Jonathan Scott, Herbert Smith
Overall headcount at the Magic Circle firm has seen the biggest change. In a three-year period, CC’s lawyer numbers have decreased by 18.7% from 3,582 in 2008 to 2,912 this year, marking a 6% drop from 3,096 in 2009/10.
However, bet against the firm at your peril. With profitability on the rise. it has rediscovered its form, and a leaner, more nimble CC has emerged. Barring a major catastrophe, its place among the UK Global Elite is assured. Managing partner David Childs goes one step further: he believes that the firm will be part of the new emerging Global Elite in the years to come. In his opinion there will be seven or eight global firms at the top of the market.
Herbert Smith can reflect on continued solid financial performance, growing revenues by 3% to £465m from £450m. However, the perennial outlier of the Elite still lags behind its peers in terms of profitability. Its net income is comfortably the lowest of the group at £117.8m despite the firm being some 600 lawyers larger than Slaughter and May. Its profit margin is 25%, again the bottom of the list. Management is looking to improve profitability, but that is not a short-term project. During 2010/11 35% of the firm’s revenues came from outside the City and that looks set to increase. Senior partner Jonathan Scott says that the firm is well positioned in terms of its client base and geography to increase profits.
‘In the current climate, being an English firm with an English heritage and being able to export English law has us as well placed as anyone at the moment,’ suggests Scott. ‘But we have to be mindful of any potential shocks in the global markets.’Elsewhere in the group, Freshfields had a muted 2010/11 – which was expected, thanks to some conservative budgeting. While revenues remained static at £1.14bn, profits per equity partner dropped by 7% to £1.3m. Slaughter and May aside, Freshfields has the lowest number of non-equity partners in the UK Global Elite at 29. Net income did suffer the largest drop of the group, down 8% to £544m, but remains the highest of the group. Only Slaughter and May can boast a higher profit per lawyer at £296,000 compared to Freshfields’ £244,000.
Slaughters remains the most prudent firm in the group and the most profitable in the entire LB100 (see ‘Profitability revealed’, page 66). It has the highest profit margin, profit per lawyer and PEP of all the UK firms and this has been a consistent performance: the firm’s five-year CAGR rates for revenue and PEP are a healthy 8% and 9% respectively.
Of all the UK Global Elite firms, Freshfields looks to be in the best shape in terms of headcount, global spread, revenue and profitability. While it may have been managing itself prudently through the recession, 2011/12 is likely to see the firm make strides on the global stage.