Legal Business Blogs

Comment: Apocalypse never – City leaders’ 2020 results show resilience to test the most confirmed Cassandra

Given the savaging that Covid-19 has done to our collective sense of time, forgive a quick history lesson on the halcyon days of 2019. Pulling together the LB100 report for the 2018/19 period, Legal Business reflected: ‘After a credible performance, the profession now faces a slowing economy at home and abroad amid mounting unease generated by a government under Prime Minister Boris Johnson hitting an increasingly Trumpian tone on forcing the UK out of the EU.’

Even the most casual reader of that year’s LB100 report would have noted the ominous imagery drawing on Conrad, Coppola and Castro as British institutions that summer buckled under the weight of entrenched discord. The message was clear, leading law firms, which increased revenues by 9% across the LB100 to hit £26.35bn, had performed well but an outlook clouded by a slowing economy, Brexit uncertainty and political instability meant harder times were coming.

As it was the apocalypse forecast then was upstaged by the apocalypse we have now in the shape of a global pandemic and the worst economic downturn of the post-war era. Surely this time law firm results would demonstrate the profession bowing under the onslaught hitting many other sectors?

Not so much. To put it mildly, the numbers emerging in recent weeks have flatly contradicted such expectations, though major firms, still defined by the painful lessons of the banking crisis, reacted quickly with a series of cost-cutting, capital-boosting measures as the pandemic gripped Europe.

With more than a dozen top-50 UK firms having now published their results, including all four Magic Circle firms that issue on-the-record numbers, we can see that financial performance generally is hardly down on 2019/20.

While overall profitability has been more obviously dented, revenue growth has only fallen back slightly and in a few cases, perhaps most strikingly with Clifford Chance, actually exceeded last year.

Obviously, there are many caveats to such welcome news for the legal sector. The impact of regional lockdowns was only felt in earnest for six-to-eight weeks in their financial year and the pipelines that top-20 UK law firms maintain via large plc matters would offset the bulk of that hit over a 12-month period.

As Freshfields Bruckhaus Deringer managing partner Stephan Eilers frankly notes: ‘We’ve had 3% to 4% growth in recent years and Covid-19 did not have as much impact on revenue as we initially feared. These are not Covid-19 results.’

The largest London-bred law firms reporting would also have seen modest flattering of their performance thanks to renewed weaknesses of sterling over the period. Moreover, disaster response work in finance, regulation and employment gives an initial boost to advisers, even as the hard times set in for the long haul.

But nitpicking aside this remains a remarkable performance for an industry that, despite being habitually written off as poor at technology and operations, shifted to blanket remote working in days with striking collective élan. And this economic-calamity-meets-logistical-Everest was tackled during the crucial fourth quarter of the year.

The results seen so far confirm the impression that London’s elite is emerging in good shape from the crisis, thanks to the benefits of large, cash-rich plc clients and their role as go-to counsel when the business environment goes pear-shaped.

CC hiked revenues by 6%, building in part on an unsung five-year growth track in the US, pretty much sealing the reputation of managing partner Matthew Layton as the details man who ground out the results through focus, professionalism and a decades-earned rep as a straight bat. While legal hacks may long for a chief with a punchier turn of phrase, Layton’s legacy when he hands over in 2022 is on course to have made the managing partner gig a role that ambitious CC partners actually want.

A&O, meanwhile, put in a very credible 4% income hike given that much of its leadership and practice heads spent half the year engaged in a fruitless attempt to seal its ambitious merger with O’Melveny & Myers.

Freshfields saw a solid 3% revenue hike with PEP largely holding up in a year of extensive investment to keep it as the most profitable of London’s big four. Given its run of impressive US expansion and the hedge that comes from having top-tier global businesses in antitrust, restructuring and disputes alongside that much-vaunted deal machine, and it’s easy to see why there’s renewed confidence at the former occupiers of Fleet Street.

In relative terms, Linklaters put in the softest run of its peers, coming off a much stronger 2018/19, but still managed to just about eke out top-line growth. Perhaps that is inevitable for a firm that invested in public M&A with the current state of deal markets – and Linklaters must surely want a little more muscle in its contentious practices – but it is hardly a problem in current markets.

The mood at the Magic Circle leadership is now as confident as it has looked for a while given the expectations that core clients will be looking to such outfits to help them face a world, if not brave but certainly new. ‘The world is changing and no one is expecting it to go back to what we have done before,’ reflects Freshfields global client partner Alan Mason. ‘There will be a lot of work helping clients adapt to the post-Covid world.’

Layton echoes such sentiments, eyeing the chance for top law firms to come out of this crisis not just stronger in their own industry but the wider business community. ‘I have focused on how we position to come out of this crisis – we have a role as a leading global firm in how the world reshapes.’

As Legal Business argued recently, this crisis looks the best chance for Magic Circle firms to revive their position on the global stage after a decade in which the London elite were losing far too much ground to key US rivals.

Further down the pecking order a series of results from top-40 firms are likewise robust, with Ashurst, Herbert Smith Freehills, Simmons & Simmons and Pinsent Masons among those posting credible numbers. While the market chatter had for months forecast a solid showing from the London elite, such fortitude from the chasing pack and mid-market did not yet look a given.

True, 2020/21 will almost certainly prove a tougher year, with the impact of the sharp global downturn and the likelihood of new spikes of Covid-19 playing out across the entire trading period. And while the pandemic at a stroke wiped Brexit from the nation’s consciousness after three years of fevered debate, the prospect of a hard, messy exit from the EU now looms at the moment when the UK economy will see most Covid-19 support schemes withdrawn. Professional services and knowledge industries like legal services were largely able to ride out the impact of Covid-19 even as other sectors were decimated, Brexit will be a different story.

Yet even here most major law firms have built in a significant hedge, with sizeable European networks and advanced contingency plans, and the mood among managing partners is one of bemused bullishness. Having uniformly modeled a far tougher hit, the consensus is that current trading is holding up much better than expected. ‘I worry that it will get much worse,’ confesses one head of a top ten global firm, ‘but that’s just my paranoia, there’s no actual cause to back it up.’

It barely needs saying that the going will be a lot tougher for the less well-run, generalist outfits outside the UK top 40 through 2020 and beyond, with the same leader noting: ‘If you went in weak before, Covid-19 is the final straw.’

Some of this, of course, is pure fortune. Running highly-diversified product lines based on smart, well-trained knowledge workers offering high-value non-discretionary spend services to the corporate sector is a good place to be in most markets and a fantastic one right now.

But the UK’s leading law firms have taken those assets and deployed them with considerable skill in challenging, chaotic times (while treating their staff better than expected). As usual the legal industry will get no credit for this collective result in the wider business sphere but this perennial pessimist may even have to sign off this column without my trade mark portents of doom.

Well played.