While the second quarter of the Legal Business 100 (LB100) has seen a 7% increase to £2.93bn in its combined revenue over 2016/17, the group has been impacted by further consolidation at the start of the calendar year, which will see around £230m stripped from this total in our 2018 report. This group is starting to feel the squeeze from those above and below in the LB100 – making it the most variable section of the top 100.
Over the last financial year the second 25 accounted for 13% of the LB100‘s combined revenue, with average turnover increasing 5% to £117m. Average revenue per lawyer saw a 7% leap to £272,000, while profits per equity partner (PEP) also increased by 2% to £495,000 (see ‘Core Stats‘).
But the dynamic will change next year with the disappearance of Nabarro and Olswang following their tripartite merger with CMS Cameron McKenna, which went live on 1 May. This will leave two places open for firms in the second 50 to move up into, with the most likely candidates regional players Shakespeare Martineau or Freeths, which both went past the £70m turnover mark in the last financial year. Adding these firms’ revenues to the second 25 and discounting Nabarro and Olswang would give the group a total revenue of £2.8bn, a 2% increase on last year’s figure.
Withers has fallen back into this group despite an 8% increase in revenue to £174.5m, largely because of the double-digit growth of Stephenson Harwood, which enters the top 25 for the first time since the late 1990s. Another new entrant has come up from the second 50 to join this group: it has been another standout LB100 performance from Stewarts Law, which saw a 25% increase to its revenues to £77.9m and a 19% increase in PEP to £1.9m, moving the firm up eight places to 47 (see case study).
Stewarts Law managing partner John Cahill acknowledged the impact large disputes – such as the £4bn The Royal Bank of Scotland (RBS) rights issue litigation settlement – had on the firm’s revenue, noting: ‘We don’t expect our results to match some neat linear pattern. We won’t be hitting the same revenue figure we hit in 2016/17 in 2017/18.’
Best and worst
Of the more established firms in the second quarter, seven saw double-digit growth in revenue. Watson Farley & Williams saw a 21% increase to its top line, bringing it up to £159.8m. Discounting currency fluctuations, the firm saw 10% growth in real terms, according to co-managing partner Chris Lowe. PEP also increased by an impressive 30% to £620,000.
Lowe notes that the environment over the last 12 months ‘has been difficult’ but says the firm’s success comes down to it ‘doing well in our little bubble. I like to think of it as a bubble of opportunity. We need to make sure we continue to focus on building our sector strengths’.
Lowe says he now aims to deliver a 700-lawyer practice with £250m turnover by 2020, although this has not yet been set as an official target.
Other outliers include Fieldfisher, which posted a 34% increase in its revenue for this financial year to £165m with a 16% increase in PEP, which sat at £639,000 (see case study), while both Holman Fenwick Willan and Ince & Co experienced a 16% boost to their top lines (see box ‘Choppy waters’, below).
The result was particularly impressive for Ince, which has battled with a three-year decline in its revenues due to the firm’s heavy focus on the struggling shipping industry. Even stripping the effect of FX movement, the firm has still seen a 10% increase in real terms, according to managing partner Jan Heuvels.
Heuvels says it has been a year of ‘investment and growth’ for Ince, which has worked to ‘modernise the firm’. It has invested in lateral partner hires, new offices in Marseille and Cologne and new technology. It also implemented a shake-up to pay for both partners and associates, rewarding high performers with a pot made up of a third of the firm’s profits.
‘It was a good year. Some of the more gloomy predictions made following the Brexit vote didn’t turn out to be true.’
Charles Martin, Macfarlanes
‘We have situations now where more junior equity partners have a total profit significantly higher than say an equity partner who has held equity for a longer period of time and has a greater base pay, but hasn’t had an exceptional year.’
The second 25’s most consistently high-performing firm and Legal Business Law Firm of the Year is Mishcon de Reya, which saw a 14% increase to its top line, taking the firm past the £150m mark following a string of high-profile mandates. Mishcon again also saw a healthy increase in PEP, which grew 10% to £1.1m.
Most notably, the firm launched a successful legal action on behalf of a group of business clients to ensure the UK did not trigger article 50 without an act of parliament. The firm also represented claimants who settled last year in the long-running £4bn shareholder group action against RBS.
‘Our litigation department had three or four monster cases in the last financial year,’ managing partner Kevin Gold tells Legal Business. ‘The Sainsbury’s case against Mastercard being a particularly important one. The Brexit case was one which we fell into.’
Two other consistently strong performers in this peer group, corporate specialists Macfarlanes and Travers Smith, had modest years by their own high standards, each recording a 4% revenue increase to post £167.6m and £125m respectively. Macfarlanes grew its PEP by 7% reaching £1.38m, but Travers struggled, with PEP falling 5% to under £1m.
After a year of uncertainty in light of the Brexit vote with this year’s general election throwing up more unpredictability, Travers managing partner David Patient is relatively confident about the firm’s result. ‘If you told me this time last year that we were going to have these results I would have said: “Great, thanks!” The months following the referendum was an anxious period.’
As for the firm’s outlook, Patient is wary of the hackneyed phrase ‘cautiously optimistic’. ‘The next couple of years will be very interesting. I have no idea what effect [these events] will have on the market. We could be navigating some choppy waters.’
Macfarlanes senior partner Charles Martin is just as sceptical of market chatter: ‘It was a good year. Not outstanding; it has had its challenges. But some of the more gloomy predictions made following the Brexit vote didn’t turn out to be true. The business held pretty firm: the results speak for themselves.’
Among those posting impressive revenue rises, there were some who saw a dip with BLM, Blake Morgan and Hill Dickinson all seeing a 1% decrease to their top line. Despite those ‘gloomy’ Brexit predictions and generally being less able to rely on the hedge of billing in a variety of international currencies as firms in the top 25, the group has managed to maintain relative strength given the odds. These firms, which are more exposed to the UK market than the international behemoths, have withstood an uncertain political environment on top of continued consolidation and significant pressure that the mid-market is facing.
As TLT managing partner David Pester says: ‘In our experience, after the initial shockwave of change, clients and law firms have worked out that you have to carry on and leave the things you can’t control aside. Pay attention to them but focus on what you can control.’ LB
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Which firms have the biggest UK business?
This table lists the top 50 firms by UK revenues. Once international fee income is taken out of the equation, the strong UK performance of firms such as Pinsent Masons and Eversheds Sutherland becomes apparent. Unsurprisingly, UK-centric firms, such as Macfarlanes, perform well, but it is interesting that all but a handful of firms have achieved revenue gains in the UK.
| Firm | UK revenue (change on 2016 in brackets) |
|---|---|
| Linklaters | £628m (4%) |
| Allen & Overy | £585m (9%) |
| Slaughter and May | £512m (4%) |
| Clifford Chance | £507m (4%) |
| Freshfields Bruckhaus Deringer | £450m (-10%) |
| Herbert Smith Freehills | £375m (0%) |
| Pinsent Masons | £355m (10%) |
| Eversheds Sutherland | £346.7m (2%) |
| DLA Piper | £315m (5%) |
| Hogan Lovells | £282m (7%) |
| Clyde & Co | £271.6m (5%) |
| Norton Rose Fulbright | £251m (9%) |
| CMS | £248m (13%) |
| Irwin Mitchell | £235.2m (6%) |
| DAC Beachcroft | £195m (2%) |
| Berwin Leighton Paisner | £192m (-8%) |
| DWF | £187.5m (2%) |
| Ashurst | £186m (0%) |
| Addleshaw Goddard | £180.2m (-6%) |
| Gowling WLG | £171m (3%) |
| Simmons & Simmons | £171m (-4%) |
| Macfarlanes | £167.7m (4%) |
| Mishcon de Reya | £149.5m (17%) |
| Nabarro | £131m (3%) |
| Charles Russell Speechlys | £130.9m (1%) |
| Taylor Wessing | £128.9m (2%) |
| Travers Smith | £123.5m (3%) |
| Stephenson Harwood | £122.7m (3%) |
| Osborne Clarke | £121m (7%) |
| Shoosmiths | £116.7m (9%) |
| Fieldfisher | £110.5m (16%) |
| BLM | £106.7m (-1%) |
| Kennedys | £104.2m (2%) |
| Bond Dickinson | £104m (0%) |
| RPC | £97.7m (2%) |
| Weightmans | £95m (0%) |
| Bird & Bird | £94.6m (8%) |
| Hill Dickinson | £93.5m (0%) |
| Mills & Reeve | £92.6m (8%) |
| Olswang | £91m (0%) |
| Burges Salmon | £87m (4%) |
| Trowers & Hamlins | £78.9m (12%) |
| Stewarts Law | £77.9m (25%) |
| Gateley | £76.4m (n/a) |
| TLT | £74.6m (4%) |
| Blake Morgan | £74.5m (-1%) |
| Withers | £72.9m (9%) |
| Holman Fenwick Willan | £69.8m (3%) |
| Watson Farley & Williams | £61.8m (8%) |
| Ince & Co | £48m (12%) |
Choppy waters: insurance and shipping firms in top 50 show resilience
Insurance and shipping specialists among the top 50 have recorded a year of revenue growth, with transport and energy finance specialist Watson Farley & Williams posting one of the best performances across the entire LB100 and top 25 firm Clyde & Co cementing its position as sector leader.
All but two of the 13 firms active in these sectors increased turnover, four of them by double-digit percentages. However, revenue growth has not always translated into increases in profitability, as many in this group invested heavily to keep up with the increasing need for international coverage, practice growth and technological improvement in an increasingly competitive market.
The five-year performance of insurance and shipping firms shows sustained growth across the sector, with all but three increasing their revenues. DWF has almost doubled its turnover since 2012, growing 97% to £201.3m. Overall, the 13 firms are now worth £2.17bn, with average profits per equity partner (PEP) of £445,000.
Clydes’ revenues grew by a healthy 14% since last year, passing the half-billion-pound mark to £508.1m. But the top-15 firm saw PEP stall at £651,000 following a year of investment to expand its global operations. It hired a ten-partner team from Troutman Sanders to open in Chicago and Washington DC and recruited two partners from Noerr to enter Germany with a launch in Düsseldorf. A merger with Miami-based Thornton Davis Fein added five partners, along with 35 lawyers and staff.
Senior partner Simon Konsta says: ‘By and large we’ve seen continued consolidation in the market – we’re seeing insurers operate in a global and increasingly connected way.’
Meanwhile, Kennedys’ turnover rose 8% to £149.9m, boosted by a strong western European and South American performance. Senior partner Nick Thomas says the firm’s focus on disputes – which accounted for 91% of income – means it weathered the uncertain economic conditions following the Brexit vote. The firm merged with London boutique Waltons & Morse in November 2016, adding marine insurance and shipping claims to its portfolio. ‘There has been a decline in shipping activity in general. But not in the work we do – cargo claims, hijacking, piracy,’ says Thomas.
‘We’ve seen the continued consolidation – insurers are operating in a global and increasingly connected way.’
Simon Konsta, Clyde & Co
However, PEP stalled at £406,000. The firm invested in a spate of office openings across Central and South America – Santiago, Bogotá, Lima, São Paulo and Mexico City – and increased lawyer headcount by 13% to 785. Kennedys also invested heavily in technology, developing tools to support clients in areas such as insurance claims, fraud detection and settlement. ‘We have been investing in these tools for almost four years now, probably £3m a year,’ says Thomas.
Elsewhere, RPC’s modest 2% revenue increase to £102.8m coincided with an 11% fall in PEP to £322,000. A surprising result for a firm that has performed consistently well over the past five years. Managing partner James Miller links the fall in profit to the firm branching out into management consultancy in 2015: ‘We have invested heavily in RPC Consulting: that was always predicted to be a continued investment. But when we add to that the slow growth [in revenue], it affects the whole performance. No-one here is in any way despondent. Law firms run on an annual basis, but we always take a three-to-five-year view. We started investing in consulting two-and-a-half years ago, and this will pay enormous dividends.’
Conversely, Weightmans and DAC Beachcroft managed to buck the trend by increasing their PEP by more than 20% against modest revenue growth. Weightmans managed this through a slight reduction in fee-earner headcount and equity partner numbers, while DAC also reduced equity partner headcount slightly. Both are responding to the need for wider geographic coverage through alliances with international insurance firms. DAC established Legalign in January with German firm BLD Bach Langheid Dallmayr, US firm Wilson Elser and Australian outfit Wotton + Kearney.
The only two firms posting negative five-year revenue growth are Ince & Co and Hill Dickinson. Ince reversed its course in 2016/17 after three years of revenue freefall, bouncing back 16% to £88.5m thanks to a strong performance in corporate and marine and energy insurance work. But gross income is still down 3% from five years ago, the smallest of the insurance and shipping group in terms of revenue.
Hill Dickinson has been the slowest performer for a number of years, with revenue falling 8% since 2012 to £101.7m. While turnover was down 1% on last year, PEP dropped 9% to £274,000. Such a performance is perhaps why, at press time, Hill Dickinson was in talks with fellow LB100 firm Keoghs to sell off a £23m chunk of its insurance business group.
‘The economic outlook has significantly challenged the shipping sector,’ says Hill Dickinson chief operating officer Iain Johnston. ‘The Baltic index has been at a record low for many years, and there are many players in this market.’
Johnston says the firm is working to a ‘pretty cautious budget because of Brexit’ for the 2017/18 financial year. ‘At the moment we are performing slightly ahead of it and ahead of last year.’