LB100 Major International – One Verein Day

The Major International peer group made its LB100 debut last year and there’s no doubt that it was a timely introduction.

Comprised entirely of firms eschewing full financial integration in favour of looser Swiss Verein-type structures, the players included under this banner have continued to blaze a trail with their entrepreneurial approaches to law firm growth.

CMS, which includes former Major City firm CMS Cameron McKenna, is a new addition to the table following its milestone decision to report its financials on a firmwide rather than country-by-country basis. The group employs the European Economic Interest Grouping (EEIG) model favoured by PwC. As other City firms announce their intention to secure ambitious international mergers, it seems a prudent bet that this table will swell further as the Verein model continues to be used as a preferred route to expansion.

‘To me it became apparent last year that this group structure, whether you want to call it a Verein or an EEIG, has evolved with firms like Norton Rose and Hogan Lovells – and I’ve always wanted to make sure that CMS stays in that pack,’ says Duncan Weston, managing partner at CMS Cameron McKenna. ‘I think what is most exciting is that for the first time firms outside the Magic Circle are shaping themselves for global growth.’ The model is certainly attractive: international hedging of your business coupled with little or, in CMS’s case, no financial risk. This attraction is especially clear when you see DLA Piper sitting comfortably at the top of the LB100 rankings with a turnover of £1.4bn, up 12% on last year. However, a closer second glance reveals that growth comes with certain caveats.

DLA Piper’s turnover may be mouth-wateringly high, but it’s accompanied by a profit margin of 25%, which falls eight percentage points behind the lowest profit margin recorded by a Global Elite firm – significantly Clifford Chance, which is DLA Piper’s nearest rival in terms of turnover. And while DLA Piper’s £85,000 profit per lawyer (PPL) is far from paltry,
it still pales in comparison to the PPLs of Global Elite firms – again Clifford Chance’s PPL is the lowest in its peer group, but at £143,000 it still dwarfs DLA Piper’s figure. It is clear that in the main, the firms in this group are not particularly profitable overall.

While Norton Rose may have recorded the best turnover growth among the Major Internationals, the most profitable firm was Hogan Lovells.

Despite turnover falling 4% to £1.04bn in 2012, Hogan Lovells’ 36% profit margin and PPL of £152,000 wouldn’t look out of place in the Global Elite group. In stark contrast, Squire Sanders’ 18% profit margin is more in line with a UK regional firm or a volume insurance outfit. However, Hogan Lovells is the only firm to reduce its headcount in the peer group, which will reduce costs.

Of course, as none of these firms are fully financially integrated, the profit figures are all rather meaningless. Profits fluctuate markedly between geographical centres and when none of your LLPs are actually forced to pool earnings, the eventual figures become an exercise in cutting your coat to suit your cloth. As a case in point, CMS’s combined global figures this year add up to a profit margin of 34%. In 2010/11, CMS Cameron McKenna’s profit margin was 21%. So simply pooling the figures has seen its margin appear 13 percentage points healthier.

In fact, as CMS Cameron McKenna, which is the largest part of the business, accounting for 33% of overall revenues, saw turnover grow less than inflation at 1% that growth in profitability needs to be explained.

‘You could say that the Swiss CMS firm has done really well because the Swiss franc is now worth five times what it was the year before and if you convert it into pounds it looks fantastic,’ says Weston.

 

 

Weston also points to UK-led efficiencies in the business, such as Integreon, as pushing up profits. But whichever way you cut it, it is an indisputable fact that there will always be economic inconsistencies across international networks. The volatility of the current market just makes it more obvious.

‘If you look at Europe you’ve really got a two-speed system going on at the moment,’ says Peter Martyr, group chief executive of Norton Rose Group. ‘There’s the stronger currency bloc and the not so strong currency bloc and that’s what is reflected in market activity.’

Norton Rose knows all about currency headaches. Its recent acquisitive spell saw it add Deacons Australia to the group in 2010, quickly followed by Canada’s Ogilvy Renault and South Africa’s Deneys Reitz in 2011 before heading back to Canada to pick up Macleod Dixon in 2012. The firm’s financial year is now governed by three year-ends, an ever-lengthening list of currencies and various regulatory regimes.

‘I think there’s an awful lot of rubbish being talked about in terms of firm structures at the moment and there’s an awful lot of misinformation out there,’ says Martyr. ‘I know exactly what our figures are in every single office in the world but the convention on publishing figures is not universal and in some markets it is not done. We have respected that by not separating out our revenue figures, instead giving the group revenue of $1.32bn, which is an increase of 9% like for like across the Group.’

In terms of the UK side of the business, turnover is up 5.3% to £178m. So that 9% growth has clearly been led from international offices that make up the Norton Rose UK LLP. Or has it? It is becoming increasingly difficult to see through the opaque structures of some firms in this group. LB

maria.jackson@legalease.co.uk