Brexit negotiations stalling, trade wars looming, the high street hit by a raft of collapses – at first sight, there is plenty to suggest the UK has taken a trip back in time. Yet for those with a finger on the pulse in the City, it will come as no surprise to find this year’s Legal Business 100 (LB100) speaks of a standout year for Britain’s legal elite. Turmoil has mattered very little against the backdrop of booming transactional activity, interest rates near historic lows and the cheap pound.
While commercial lawyers spoke with wary optimism of healthy markets in the summer of 2017, caution progressively turned into bemused enthusiasm as the City realised it was living through its busiest winter for years during a period that seemed to resemble the Winter of Discontent. By spring, some were hailing the best financial year since the banking crisis. This year’s survey confirms that there is some substance to such claims.
Combined revenue for the UK’s top 100 firms was up 10% to £24.2bn this year, the largest increase in absolute terms recorded in the post-Lehman era, outpacing last year’s 9% growth despite a much lower impact from fluctuating exchange rates.
True, there is more than one international merger to be accounted for, with Eversheds Sutherland’s transatlantic tie-up kicking its headcount up by 50% and Norton Rose Fulbright adding Bull Housser in Canada, Chadbourne & Parke in the US and Henry Davis York in Australia. But an overall 5% rise in LB100 headcount to 68,099 still means average revenue per lawyer (RPL) grew by 4% to £355,000.
Overall profit rose 9% to £7.6bn, matching last year’s growth. Average profit per lawyer slowed, up 4% to £112,000 after a 5% rise in 2016/17. But with the total number of equity partners down 1% to 9,379, average profit per equity partner (PEP) rose 9% to £805,000 – a significantly pacier run than last year’s 6% increase.
A closer look leaves little doubt where that growth has come from. The top 25 firms in the table increased aggregate revenue by 11% to £19bn, the largest percentage increase in six years for the group. Combined with a 9% rise in average PEP to £950,000, it makes for the best performance for the top 25 since Lehman went down: the two other times in the last decade when revenue grew at a higher rate (2010/11 and 2011/12), PEP stayed flat or fell.
With the exception of legacy Berwin Leighton Paisner (BLP), all firms in this group turned over more than last year. Apart from BLP and Irwin Mitchell, PEP was higher across the board. The top quarter of firms now accounts for almost 80% of the total revenue of the LB100. Ten years ago it was a 73% slice of a much smaller cake.
To get a sense of how much bigger Big Law has become, the best indicator is that the top ten firms brought in £13.87bn in 2017/18 – just shy of the £13.96bn entire revenue of the LB100 in 2008. The advance of the top 25 has come mainly at the expense of the firms in the second half of the table. The aggregate revenue of £2.04bn for firms ranked 51-100 now accounts for just 8% of the entire 100, compared to 13% pre-Lehman, when they turned over £1.78bn.
It would be easy to conclude that the first decade since the global financial crisis has meant that the City is now divided between a small group of big firms getting richer and a huge number of small players on the verge of insignificance. But there is a lot more to the story than that.
Pretty vacant
The top ten firms in our table saw considerable movement during the last financial year as the impact of substantive mergers is recorded for the first time.
‘There’s a large strata of work which is price-insensitive: FTSE 100 global acquisitions, big-ticket litigation – everyone is chasing that work.’
Michael Chissick, Fieldfisher
Eversheds’ transatlantic union with Sutherland Asbill & Brennan in February 2017 meant the firm enters the group at the expense of Ashurst after turning over £782m. Meanwhile, the UK’s largest-ever legal merger saw CMS become the eighth firm in the £1bn club. After CMS Cameron McKenna tied up with Nabarro and Olswang last year, global revenue for the firm hit £1.14bn.
If a like-for-like assessment of the performance of these firms is difficult now, another player in the group that went through a similar shake up a few years back stands out as one of the most solid performers.
Hogan Lovells grew its top line 11% to £1.58bn and became the third-highest grossing firm in the UK. Of course, the weak pound accounted for some of the increase: in dollar terms, the transatlantic firm reported a 6% rise to just over $2bn. But what is more significant is that, coupled up with last year’s 19% rise in sterling terms, finally the firm has some genuine momentum after several years of stuttering post the 2010 union of Hogan & Hartson and Lovells.
‘It takes time for mergers to bed down and for clients to recognise the value that we bring,’ says deputy chief executive David Hudd. His firm has the best five-year performance among Britain’s top ten, growing revenues 53% since 2013.
Meanwhile, DLA Piper remains the highest-earning in the country, with a 7% rise in revenues to £1.8bn. In dollar terms it meant a 7% rebound for the UK/US verein after last year’s 2% dip, while its PEP – crucially – is a hair’s breadth off £1m. This leaves London’s big four Magic Circle firms as the only players in the top ten to have not gone through a substantive merger overseas in recent years.
And yet considering the excitement for the booming global markets, it is striking that Clifford Chance (CC), Allen & Overy (A&O), Linklaters and Freshfields Bruckhaus Deringer all grew turnover by an unspectacular 5% or thereabouts. Among them, CC emerged as the best performer after growing PEP 16% to £1.6m amid a 5% revenue uptick to £1.62bn (see case study).
Meanwhile, Linklaters’ 6% increase in revenue to £1.52bn failed to translate into a significant rise in profit as PEP remained close to flat at £1.54m. Managing partner Gideon Moore points to investments the firm made to ensure ‘we are well placed moving forward’, including a joint operations agreement with Shanghai’s Zhao Sheng Law Firm. ‘We look at the general direction of travel and the fact that clients are happy to pay us an increased level of revenue for our services.’
Looking at the other two in the pack, it is safe to conclude that the final outcome has not matched initial expectations. A&O followed up a strong performance in 2016/17 with a modest 4% rise in both revenue and PEP to £1.57bn and £1.64m respectively, though it remains the strongest Magic Circle performer on a five-year track, having hiked its top line by 32% since 2013.
Conversely, Freshfields came to the end of a troubled 12 months by pulling off the second-best performance in its peer group. This was the year in which co-managing partner Chris Pugh stepped down halfway through his term and private equity heavyweight David Higgins quit for Kirkland & Ellis a few weeks after the firm had overhauled its compensation structure to ensure richer pickings for its top performers. And yet Freshfields grew PEP by a convincing 12% to £1.73m along with 5% revenue growth to £1.4bn. It still means it is among the worst performers in the top 25 on a five-year track, with revenue up by just 15% since 2013. But it is a considerable improvement on last year, when revenue was flat.
‘We look at the fact that clients are happy to pay us an increased level of revenue for our services.’
Gideon Moore, Linklaters
Moving fast
However, it is among the firms ranked 11 to 25 where the most intriguing dynamics emerge. As many as eight firms in this group grew their top line by more than 10% and five of them managed to double it up with a similar (or much higher) uptick in PEP.
The numbers leave little doubt that this is the group that has really reaped the benefits of the booming transactional activity.
‘There’s a large strata of work which is price-insensitive: FTSE 100 global acquisitions, big-ticket litigation – everyone is chasing that work,’ says Fieldfisher managing partner Michael Chissick. ‘If you add up the value of those deals, it’s a small amount of the market compared to the day-to-day stuff, which is why we’re increasingly sensitive to the high-volume proposition.’
Once dismissed as the poster child for mid-tier drift, Legal Business Awards Law Firm of the Year Fieldfisher enters the top 25 this year after a largely organic 25% rise in revenue to £207m. Its growing reputation in the tech sector and the boom in GDPR privacy work has given the firm the best five-year performance in the entire LB100 as it hiked its top line 118% since Chissick took the helm in 2012/2013 and makes it one of only two to have more than doubled turnover in that period.
The other is Osborne Clarke, which turned over £239.6m, 15% up on last year and 112% ahead on half a decade ago. ‘Wherever we go, the brand, our sector focus, our general culture and style of providing legal advice seem to work well,’ says international chief executive Simon Beswick. ‘Whether it’s Shanghai, Brussels or Milan, it seems to go down well with the clients.’
Gowling WLG, Simmons & Simmons, Bird & Bird, Taylor Wessing and DAC Beachcroft were also among the firms seeing a double-digit percentage rise in revenue.
Taylor Wessing (see case study) and DAC Beachcroft coupled this with a surge in PEP by 20% to £580,000 and 22% to £528,000 respectively.
‘We have a very simple proposition,’ says DAC managing partner David Pollitt, whose firm hiked revenue 11% to £230m: ‘Focus on what we do well and by implication not on stuff we don’t do well or are not famous for. Maximise those areas where we have a competitive advantage: insurance, health and real estate, and some of the mid-market corporate work that we do.’
The smart view is that the top 25 firms are still a long way from regaining the momentum of the pre-Lehman years. This year’s rise in revenue and PEP is still a far cry from the movements recorded in 2007/08, when those metrics surged by 15% and 14% respectively.
It is a different world now. The threat from the other side of the Atlantic has got much more potent, with giants such as Kirkland & Ellis and Latham & Watkins running more profitable and faster-growing businesses, taking market share off the City elite.
All of this is felt most keenly in the highest echelons of the UK legal profession and it is one of the key factors adding to pressure on the UK’s top ten. Most of the chasing pack have found the winning formula in sector specialisation, via a recognised brand and a focus on what they do best.
The US question for Britain’s top firms is far from resolved. The merger talks between A&O and US outfit O’Melveny & Myers are among the hottest topics in the City. Meanwhile, next year’s LB100 will see the impact of another deal, as Bryan Cave Leighton Paisner enters the rankings as the first fully-integrated transatlantic firm for years.
Threats from the US aside, the robust transactional activity has very much carried on into the summer. What remains difficult is predicting what will happen next.
‘Many are very pessimistic about the future – politics, Brexit and economic issues,’ observes Pollitt. ‘If there is a note of caution, it is because of the B-word,’ adds Simmons’ senior partner Colin Passmore.
But similar predictions were made 12 and 24 months ago and proved misplaced. As CMS’s UK managing partner Stephen Millar recalls: ‘We have been dealing with uncertainty since 2008. Business seems to be immune from bigger issues or has got used to it.’
And few would argue with Pinsent Masons’ Richard Foley when he says – echoing his sentiments of 12 months ago – ‘The law is still a very good place to be. The UK legal market is huge and still very fragmented. That creates tremendous opportunities for those who get it right.’
And the institutions seizing those opportunities now hail from diverse sections of the market, across the entire LB100 and the top 25. The days when being part of a tier was a sure sign of success or failure are as distant a memory now as the 2000s boom. As some things seem familiar in this turbulent age, others still change. LB
marco.cillario@legalease.co.uk
Legal Business would like to thank Mason Hayes & Curran for its sponsorship of the Legal Business 100.
Distribution of lawyers by region
LB100 averages
The rich get richer: 2008 and 2018
2008
Total turnover of the LB100 was £13.96bn of which:
2018
Total turnover of the LB100 was £24.23bn of which: