Last year’s LB100 report saw firm leaders bullish, overwhelmingly characterising a boom market, even as macroeconomic indicators had started to flash warning signs.
This year, it seems, some of the confidence of stellar recent years has finally started to dwindle. Revenue has continued to grow, though at a slightly slower rate: with turnover up on average 8% across the LB100 table, to a total of £33.77bn. For context, this is one percentage point less than the 9% increase in the group’s top line to £31.35bn recorded in 2022.
Profit figures too are unprepossessing, with average profit per equity partner (PEP) flat at £1.043m, while average profit per lawyer (PPL) dropped 1% to £142,000 after last year’s 12% hike to £144,000.
Indeed, the market optimism that has lingered far longer after the Covid-era boom than commentators had any right to expect, is evidently on the decline.
This year, firm leaders are noticeably more reluctant to speak in depth on their financial results. Those that do tend to focus on the strength of their practices despite adverse economic conditions – namely spiralling inflation, interest rate hikes and the macroeconomic issues resulting from Russia’s continued invasion of Ukraine. In short, the ubiquitous ‘headwinds’ against which many firms are flying.
‘The main transactional markets are quiet,’ says Gowling WLG chief executive David Fennell. ‘It’s inflation and interest rates. We don’t perceive those markets picking up materially until interest rates and inflation settle down.’
‘The corporate market was more difficult than the preceding two financial years.’
Shane Gleghorn, Taylor Wessing
‘The corporate market was more difficult than the preceding two financial years,’ concurs Taylor Wessing managing partner Shane Gleghorn.
Rising interest rates and rocketing inflation produced a drop-off in transactional work from spring to summer 2022. At the same time, costs increased as lawyers and staff returned to the office and travel started to pick up again. All this in the context of an ongoing war for talent, which has seen salaries from NQ to partner-level rise inexorably, with Allen & Overy (A&O) and Linklaters among the firms that increased NQ pay in 2023, from £107,500 to £125,000.
There is undoubtedly much to be said for the relative resilience of the UK’s law firms in the face of such pressures. However, there is little evidence to suggest that leaders are changing their strategies to adapt to a more hostile environment. The cautious approach may pay off and something like the favourable conditions of two years ago may return. If they do not, law firm leaders may well find they will have to make bigger changes to their business models than many at present seem ready to countenance.
Top of the pack
The top 25 firms’ positions remained largely static. Revenue growth was in line with the broader average at a little under 8%, with the group’s total top line coming in at £26.4bn. Profits, however, suffered: PEP stayed flat at £1.23m, while PPL dropped by 2% to an average of £176,000.
DLA Piper stayed in pole position this year, with a 7% revenue increase bringing its total turnover to £2.833bn from £2.642bn last year. PEP jumped 33% to £2.145m – an eye-catching increase in a year that saw average PEP flatline – and on top of last year’s 35% hike to £1.612m.
The firm’s profit margin, however, dipped from 30% last year to 28% this year. And the rise in PEP is largely explained by a decline of 117 in the reported number of equity partners, down to 373 this year. Overall partner headcount increased slightly, to 1,309 from 1,304. DLA Piper said that the apparent change in headcount is a result of a change in how it reports its figures. While this does mean that the firm has not done anything so drastic as to change the status of more than 100 partners, it also means observers should take the headline PEP increase with a pinch of salt.
The Magic Circle firms, meanwhile, lagged behind both their top 25 peers and the LB100 firms as a whole on revenue. The combined revenue of the four global Magic Circle firms increased by less than 7% to £7.88bn. Average PPL stayed exactly the same as last year, at £345,000 while PEP dipped 3% from £1.98m to £1.92m.
‘Obviously the merger will be a priority going forward. There’s no doubt about that.’
Wim Dejonghe, Allen & Overy
A&O continued its steady rise through the ranks, leapfrogging Clifford Chance (CC) to reach second place after nabbing Hogan Lovells’ bronze medal last year. A 7% increase in revenue saw A&O cross the £2bn mark for the first time, hitting £2.08bn. CC also joined the £2bn club, with a more modest 5% uplift taking its turnover to £2.062bn. Linklaters added 7% to its top line, remaining in fifth place with £1.9011bn, while Freshfields increased revenue by 8% to £1.84bn, to come in at sixth place on the table.
Although it is the lowest ranked of the four international Magic Circle firms, Freshfields was the only one in that group to increase PEP this year, albeit with a minimal 1% rise taking it to £2.09m. PEP dropped by 2% at CC, 5% at Linklaters, and 7% at A&O, to £2m, £1.82m, and £1.78m, respectively. All four firms increased their equity partner headcount. A&O added 28, for a total of 490. CC added 8, for a total of 391. And Linklaters added 12, for a total of 479. Though it remains behind both A&O and Linklaters on equity partner headcount, Freshfields was again ahead of the pack on growth, adding 38 new equity partners to bring its total number to 477. ‘We want to grow more in the US and internationally,’ Freshfields global managing partner Rick van Aerssen says. ‘Ultimately, the quality of our business is driven by the quality of our lateral hires. We’ve been very fortunate with our lateral hires that we have had such a high quality come into the firm.’
Lateral hiring, in particular in the US, has been a popular theme among the Magic Circle firms. CC managing partner Charles Adams puts the firm’s drop in PEP down in part to the costs associated with this: ‘Clifford Chance is a multi-jurisdictional, multi-product firm. We compete with US firms in some of those sectors and geographies. Where we do compete, we have to be able to remunerate our people at competitive rates.’
CC has announced a new four-year growth plan focused on increased lateral hiring in core sectors including private capital, energy transition, infrastructure, tech, and healthcare and life sciences. Freshfields has similarly continued to build through lateral hires in key sectors around the world and in the US in particular. The firm also saw a changing of the guard, with respected litigator Mark Sansom succeeding Claire Wills as London managing partner on 1 May 2023.
However, it is A&O that is likely to face the most change in the coming year. All eyes are on its merger with Shearman & Sterling, which will, as A&O Shearman’s slick marketing material has it, create a global law firm with £3.4bn in revenue – close to DLA Piper in the LB100, and behind only DLA, Kirkland & Ellis and Latham & Watkins in the Global 100 table. Partners at both firms voted overwhelmingly in favour of the union, with support from more than 99% of votes cast at each firm. The firms will combine as A&O Shearman from May 2024 at the latest.
‘Obviously the merger will be a priority going forward,’ A&O’s senior partner Wim Dejonghe says. ‘There’s no doubt about that.’
The firm’s modest but respectable performance was also overshadowed by the announcement, on the same day that it released its financial results, that managing partner Gareth Price had resigned for ‘personal reasons’. Abu Dhabi capital markets partner Khalid Garousha will serve as interim global managing partner until 30 April 2024, when the firm will install a newly-elected leadership. With Dejonghe reaching the end of his second four-year term, due to be his last, the A&O we feature in next year’s report may look very different.
The only other change in position among the top ten saw Eversheds Sutherland pass Herbert Smith Freehills (HSF), reaching ninth place with a 9% increase in revenue to £1.19bn. PEP went up to £1.29m – a modest 8% increase that was nonetheless the fifth-largest among the top 25 firms. Notably, Eversheds achieved this despite increasing equity partner numbers by 20 to 262.
‘It’s been one of those years where the breadth of the business has been a major positive for us,’ says Eversheds chief executive Lee Ranson. ‘In the previous financial year, we saw the big transactional side of the business generate income, which this year was not as busy. However, pensions, labour, and real estate all performed extremely well.’
Ranson also notes ‘standout’ performance in the Middle East – part of an international strategy that saw the firm open an office in Frankfurt in January and announce an exclusive referral deal with King & Wood Mallesons in July. Eversheds will refer all international clients seeking Chinese counsel to KWM, while KWM China will hand Eversheds its clients requiring legal advice in the UK, Europe, the Middle East, Africa, and South America.
Thirteenth-place Clyde & Co posted the highest year-on-year revenue increase of any firm in the top 25, with a jump of 21% taking its turnover to £788.6m. While this jump in revenue is in large part due to the firm’s acquisition of BLM, which went live in July 2022, the firm’s strong performance is another example of the benefits of hedging your practice areas well: 78% of its revenue came from dispute resolution. Many in the market also point to a strong year for insurance – a key sector for not just Clydes, but Kennedys too, being the sole new entrant into the top 25, with a 10% revenue increase to £313m pushing Macfarlanes into the second quartile.
Addleshaw Goddard also put in a solid showing, moving up two places to occupy the 19th spot, after reaching £443.2m in revenue with an increase of 18% – the second-largest increase among the top 25. The firm’s five-year track, meanwhile, has been the most impressive in the first quartile, at 83% growth since 2018. ‘Addleshaws has expanded into the right areas,’ notes one commentator. The firm has benefited from a steady international expansion strategy that focuses on moving into jurisdictions where it can offer full-service support. It has opened five new offices since 2019, and most recently entered the Irish market with a tie-up with Dublin firm Eugene F Collins, first announced in February 2022.
‘Clients are getting a bit less tolerant of people who aren’t engaging in technology. As an industry, we need to work on efficiency.’
Jeremy Hoyland, Simmons & Simmons
Fieldfisher’s year-on-year growth was also robust at 11%, reaching £370m, and the firm was second only to Addleshaws on a five-year track, posting a 79% increase in that timeframe.
‘Dispute resolution, tax, and personal injury experienced exceptional growth’, says Fieldfisher managing partner Rob Shooter. ‘Corporate and real estate performed really well in a difficult market.’
The firm reported a 17% increase in revenue generated by dispute resolution, second only to its 18% increase in revenue from IP work. Looking ahead, Shooter sees further opportunities in disputes and regulatory. ‘Anything to do with the environment will be a rich seam of work going forwards. Europe in particular offers opportunities, with environmental regulations continuing to increase.’
Simmons & Simmons managing partner Jeremy Hoyland also notes ‘a very good year’ in disputes. ‘The transactional side was not quite as strong as in previous years, but then that’s a universal theme, isn’t it?’
Conrad Davies, UK managing partner of Osborne Clarke, goes even further. ‘Disputes was fabulous. You’d expect it to be strong, but it’s well outperformed our expectations.’ The firm’s UK PEP, however, dipped 14% to £687,000.
HSF slid one spot to tenth place, but nonetheless increased revenue by 8% to £1.186bn, with PEP up slightly (1%) to £1.173m. Chief executive Justin D’Agostino is one of the few top 25 firm leaders to comment on group litigation and competition. ‘We saw increased client demand there,’ he notes. ‘The largest class actions we’re seeing are with our biggest clients, such as Google and Meta.’
Look to the future
D’Agostino’s reference to large tech clients is telling. Freshfields has put an integrated disputes, regulatory, and transactional offering for clients such as Google at the core of its global strategy. While firms from A&O to sector specialists like Bird & Bird point to tech as a resilient sector in a difficult market, with many more also citing life sciences and energy transition as focuses for future investment.
‘We’re seeing lots of activity in energy, tech, and life sciences’, notes Gowling WLG’s Fennell, whose firm in March became one of several to open an office in tech hub Frankfurt. Hogan Lovells’ chief executive Miguel Zaldivar also notes a desire to become ‘the pre-eminent provider of solutions’ in ‘the highly regulated sectors like life sciences, energy, technology, and financial services’. Ashurst, meanwhile, increased its top line by 10% to £879m, and reported that more than 85% of its revenue came from its five key focus industries of banks and private capital, real estate, technology, infrastructure, and energy and resources.
Few full-service firms, however, report any marked shift away from non-contentious work and towards disputes. This perhaps reflects a recognition that, while dispute resolution may be a good hedge in tough times, the countercyclical boom is rarely enough to offset the effects of a downturn in transactions. There has been no rise of disputes-only firms through the ranks. In fact, Stewarts dropped out of the top 50 after its revenue fell by 27% to £83m, with PEP down 56% to £1.22m. A much-awaited boom in insolvency and restructuring work is also substantively yet to materialise.
Similarly, despite some comments to this effect last year, the traditional City stalwarts have yet to be bowled over by an onrush of domestic challengers. ‘The mid-tier firms are picking up some of the specialist work’, admits Shooter. ‘But that tends to be more niche.’
The main change in the London market remains the dominance of the US firms. ‘They’re taking some of the lunch of some of the leading City firms,’ comments Shooter, in what may be viewed as something of an understatement.
Meanwhile, firms across the board face increased pressure from clients to deliver more for less. While the billable hour remains unlikely to disappear, many firm leaders reported increased pressure to invest.
‘Clients are getting a bit less tolerant of people who aren’t engaging in technology,’ notes Hoyland. ‘As an industry, we need to work on efficiency. We need to demonstrate to clients that we are using technology to be as efficient as possible.’
And yet, despite it being high on the list of priorities among law firm leaders, there has been little in the way of sweeping technological innovation. ‘There’s huge potential in generative AI, both internally and in advice to clients,’ says Bird & Bird chief executive Christian Bartsch. Still, even those most enthusiastic about the technology’s potential do not see immediate developments as likely. ‘We’re really exploring that as a firm,’ says Bartsch, ‘looking at how to train our people so they have the skills they’ll need in the next five or ten years as this technology becomes more and more important.’
At present, investment in tech still tends to take the form of upgrades to basic infrastructure, while firms’ use of AI is for the most part limited to research and document review and drafting.
This may present future challenges for firms not operating at the elite end that rely on commoditised work. There are signs of increasing momentum. A&O unveiled a partnership with legal tech startup Harvey AI in February, with Macfarlanes following suit in September. But there is as yet little evidence of technologically-driven disruption at the top end of the market.
Market pressures have not yet translated into firms in the group cutting their headcounts, with the total number of lawyers and total partners each increasing by 5% among the top 25 firms, and by 5% for lawyers and 7% for partners across the LB100 as a whole, to 80,785 and 22,006 respectively.
OC’s Davies echoes a common sentiment among peers: ‘We are hoping to see our transactional teams come out strong in the autumn.’
However, not all firm leaders are quite so sanguine. Commenting on the wider macroeconomic conditions that history has taught us will probably get worse before they get better, Shooter is candid: ‘Anyone who’s not concerned is burying their head in the sand.’ LB