It’s common in the legal industry to talk about unprecedented change but there are many rules of professional gravity unchanged for 20 years to keep feet on the ground and most lawyers in their place.
For one: top-tier City firms were far larger, more international and at least twice as profitable as their mid-tier and smaller London cousins. They also generally outgrew the also-rans, carried on winds of transactional booms. These rules couldn’t be challenged. Except, for the first time in recent memory, such notions are being challenged, and with an intensity that few in the profession have fully grasped.
There have been many years in which major UK firms have been predicted to post disastrous results only to collectively grind out perfectly respectable numbers. This year, with a reviving domestic economy, busy deal markets and plenty of regulatory and disputes activity, larger UK firms have unveiled numbers that are at best disappointing. London’s Big Four City firms are barely tracking inflation over five years (a time horizon that takes out the reset year of 2009/10).
And even allowing for a depressed eurozone and currency impact knocking about 3% off the biggest firms’ revenues, a less charitable view is that the performance of London’s top firms through 2014/15 raises very troubling questions about their strategic position.
If the Magic Circle can’t do better than this amid a global M&A boom (which they are not getting enough of because it is increasingly driven by acquirers and/or investors in the US) and a robust run in the UK economy, not to mention continued growth in Asia, where they have strong networks, when can they? Not that the situation looks any better for the chasing pack beneath them, with the malaise at Ashurst particularly notable.
Overall, the top 100 saw revenue pretty much unchanged on 2014 at £20.6bn, thanks in part to a shift in our methodology that removed King & Wood Mallesons from the table. Even like-for-like, the top 100 firms would have increased revenues by just 2% – probably the first time in the last 20 years the group has failed to exceed domestic GDP growth.
Profit per equity partner averaged £667,000 across the hundred, a marginal increase thanks to continued rigour on costs, but is still well off the record of £703,000 set way back in 2008. With the exception of strong relative performances from Allen & Overy, Simmons & Simmons, Pinsent Masons and Addleshaw Goddard, nowhere is this lack of momentum more apparent than in the top 25 that has traditionally driven the world’s second largest legal market.
Conversely, quality mid-tier players, London firms and boutiques continue their robust form for the third year running. Only this year, they have comprehensively outpaced larger firms – demonstrated, among others, by Macfarlanes, Stephenson Harwood and Mishcon de Reya. Capping off this through-the-looking glass quality to the trading period, the revival in the mid-tier has extended even to several brands like Addleshaws, Nabarro and Fieldfisher that have struggled to sustain form in previous years.
It is hard to overstate the significance of this. If these trends continue for several more years it will shake the foundations that the modern legal profession is built upon. As we noted recently, the importance of momentum to law firms is unappreciated. Right now all the momentum is with leaner and more focused operations at the expense of the UK model of the sprawling global law firm. Large firms are at a point where they are facing competition from above by US advisers while expanding in-house teams and re-invigorated domestic players advance from below. All the while the clouds of the global economy are once more darkening. This is a dangerous squeeze. If continued, it won’t have a fairytale ending.
For more coverage of this year’s LB100 see: The LB 100 2015 – Through the looking glass