Everyone knows the legal industry has been a different place since the banking crisis but it is only when you take the long view that you realise how dramatic these changes have been.
For this month’s cover feature, we looked at three mid-tier law firms that have sustained above-trend growth for ten years. To identify our trio we looked long term at the performance in the LB100, focused on organic growth. Our working assumption was that, while top firms dominated until the credit boom, in relative terms smaller practices excelled over the last ten years. It turned out we had underestimated just how wrenching that post-Lehman shift has been.
Stripping out shops that executed large-scale mergers, have been taken over or who entered or exited the top 100 during the ten years, left us with 53 firms for a roughly like-for-like comparison of underlying growth. The top firm is Mishcon de Reya, holding the spot after nearly quadrupling its income between 2007 and 2017. The rest of the top ten is comprised of largely mid-weight players, including Watson Farley & Williams (WFW), Fieldfisher, Osborne Clarke, Stephenson Harwood and Holman Fenwick Willan, with all of these firms comfortably doubling revenues. With the exception of Bird & Bird, none of this group generated even £100m at the height of the 2000s’ boom. Equally striking is that many of the top-tier legal brands rank in the lower reaches of the table. Allen & Overy (A&O) sits in a lowly 24th slot. Freshfields Bruckhaus Deringer, Clifford Chance and Linklaters, meanwhile, cluster in the bottom third of the table, coming after a 2016/17 when their revenues all got a sizeable forex-induced bump. Other major firms in the bottom quartile for revenue growth include Simmons & Simmons, Eversheds Sutherland and Addleshaw Goddard. So much for the notion of the big law firms pulling away or a flight to quality.
This is not an exact science, the many firms focusing on team hires and bolt-ons stretches our concept of pure organic expansion, but you only have to glance at an equivalent figures for 1997 to 2007 to see how dramatically the industry has changed. Not only have growth rates for major UK law firms more than halved, the winners and losers are in unrecognisable patterns. While Freshfields, A&O and Linklaters sit in the top quartile, many star performers of the following decade did terribly against peers. The single worst-performing firm in our data for 1997 to 2007 – WFW – increased its income just 61%. The same firm went on to triple that growth rate during the following decade.
Investigating three of these standout firms we offer some thoughts on what is driving this kind of super-growth, and why larger law firms have lost the ability to sustain it. There appears to be a theme of success through simplified business models and investment priorities. Law firms – relying on hard-to-manage professionals and diversified product lines – seem to do better when they give their staff a very clear structure and cut down the operational noise. Moreover, a 20-year reading of the financial data strongly suggests law firms handle organisational complexity very badly.
No doubt many of the factors underwriting these successes remain elusive but with the gap between the gravity-defying growth of the winners and the entrenched inertia of the losers being so wide – some of the truisms in the industry about what drives performance look not just in need of revision as flat-out wrong.
For analysis on the best-performing LB100 firms of the past decade, read ‘Reversal of fortunes – how three mid-tiers outgunned the City elite for a decade’