Herbert Smith Freehills (HSF) chief executive Mark Rigotti says the days of focusing on revenue growth ‘are gone’ after the firm revealed today (4 July) less than one percent turnover growth for 2017/18 against a 12% increase in profit per equity partner (PEP).
Revenue at HSF during what it described as a period of encouraging growth was £926.8m, barely up on last year’s £920.5m. HSF’s profits, meanwhile, rose 8% to £277.2m and PEP was up from £760,000 to £852,000. The firm’s financial figures are not currency-adjusted but foreign exchange impacts were described as marginal.
HSF chief executive Mark Rigotti told Legal Business the discrepancy between revenue and profits was ‘because we focused on client relationships, we’ve had some big ones come home for us this year. Clients are putting pressure on prices, the old days of putting rates up and focusing on revenues are gone’.
In terms of highlights, Rigotti pointed to strong regional performances. HSF’s Paris office has achieved a 30% increase in revenue over the last five years, while turnover in Madrid and Germany saw similar increases. HSF’s alternative legal services hub based in Belfast, where revenue has grown by 90% on a five-year basis, was also performing well
The most robust regional performance was in New York, however, where the office saw a 40% climb in revenues over the last year. It is no secret that HSF has been seeking a US tie-up, and Rigotti said HSF was building up new financial services capability in New York.
But he played down immediate possibilities of a transatlantic merger: ‘Our strategy is clear – focus on and strengthen our current US client relationships; continue a strengthening of our New York office and position for sensible strategic combination opportunities. About 25% of our clients are US-based so we will continue to serve them.’
Rigotti was also keen to highlight the performance of the firm’s corporate department, due to HSF’s perception as a disputes-heavy outfit. The corporate division acted on nearly 120 cross-border deals with a combined value of $200bn in 2017, most notably representing Sky during takeover bids by 21st Century Fox and Comcast, worth £18.5bn and £22bn respectively.
HSF’s results follow a mixed financial performance at the Anglo-Australian firm last year when revenue grew 11% but profits marginally fell.
Comparing HSF’s results to the early benchmark set by major City firms makes for unfavourable viewing – Clifford Chance (CC) recorded a 5% income hike to £1.623bn, with PEP up by nearly 16%, while Ashurst reported a modest 4% uptick in revenue to £564m, alongside 11% growth in PEP.
HSF also announced yesterday (3 July) a shake-up of its compensation packages for UK associates, moving away from a PQE system to a more merit-driven setup.
The firm introduced ‘career milestones’ whereby pay will be determined by performance. The total cash potential for junior associates, which incorporates NQ to 2 PQE, is £92k-£114k. HSF has also scrapped annual performance reviews in favour of a more flexible approach based on regular feedback and conversations.
Rigotti said the shake-up wasn’t designed to reward any particular in-demand practice areas: ‘We feel it is fair to those that are making a bigger contribution to be rewarded. We needed flexibility to be able to achieve that.’