After Der Sturm
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19 April 2013
Firms in Germany had a solid 2010-11, recovering from the turmoil of the previous financial year. Ulrike Barth reports
In Germany the all-time lows of last financial year seem to have been forgotten, for the moment at least. The market, following the hitch of 2009-10, is clearly shifting positively for Germany’s top 50 firms by revenue. This year total income rose to more than €3.6bn (£3bn), the highest for five years.
The downturn last year was still there to be seen on a wide scale. Back then 22 of the 50 firms in our ranking posted falls in revenue. Three reported a double-digit drop, while 28 cut the size of their teams.
This year’s top 50 shows a much more positive picture across just as wide a base. Only six firms in total posted a drop in revenue, while a further six reported stagnation or growth of less than 1 per cent. Some 74 per cent of the top 50 reported increases of more than 3 per cent. Of these, 17 - or 34 per cent - achieved double-digit growth. It all points to a wholesale recovery.
Headcount figures show a similar trend. For the most part firms are hiring again, even if the overall employee figure for the top 50 - at 7,480 - has not quite reached 2008-9 levels.
The main factor driving the general upturn in the legal market has been the resurgence of transactional and corporate business, with both the private equity market and public M&A mandates returning. The finance field has also improved again, as mid-cap transactions have engendered improved security and the number of deals in this segment of the market has increased.
Alongside this, the market for complex capital markets instruments is back, as the return of high-yield bonds shows. And the workload for restructuring and litigation is still there. Things might not be quite as they once were, but this has all helped the German legal market emerge from the hole it was in.
There are small signals, however, of big change. At first sight, Germany’s top 10 seems pretty much static, consisting of the same firms as in past years. But look within that top 10 and things are more interesting. Most notably, CMS Hasche Sigle has overtaken premier independent Hengeler Mueller for the first time.
It is hardly spectacular news that Germany’s top national firm has been shafted into third place, but the interesting bit is who has done the shafting. In the past, Clifford Chance made Hengeler fight for second place, but the German powerhouse has been overtaken by CMS Hasche Sigle, a firm that has used an entirely different business model to increase its market share at a time when the likes of Hengeler and even Freshfields Bruckhaus Deringer and Linklaters are having more and more difficulty holding on to bread-and-butter deal work.
The changing of the guard in second place, with CMS Hasche Sigle overtaking Hengeler, is symptomatic of a change in the market. Almost all firms in the ’corporate powerhouse’ group, in which we have put Hengeler, are suffering from competition from the broad-based firms - we call them ’jacks of all trades’ - that make a high proportion of their cash in their dominant corporate and finance practices.
The other two groups we have identified are the ’deal factories’, which have sizeable corporate or finance practices, but, unlike the powerhouses, are not dominated by them, and the ’specialists’ such as tax boutique Flick Gocke Schaumburg.
The corporate powerhouses regularly advise on the huge deals but also have a certain flow of standard M&A work due to the way their businesses are structured. But even this fundamental work is slipping away from them as a result of fee pressure from clients. It is increasingly going to the jacks of all trades, which have both breadth and a focus on corporate. They comprise the biggest and most diverse group in the market.
One look at the typical characteristics of the jacks of all trades reveals where the main difference between the corporate powerhouses and the deal factories lies: their headcount strategy. The jacks of all trades are constantly building up their teams - by an average of 3.3 per cent this year, in fact. This continuing expansion secures them a bigger slice of the cake, enabling them to increase their share of overall total revenue in the market to 39.2 per cent. Almost half of all employees (49.3 per cent) in the top 50 in 2010-11 worked at one of these firms.
But one firm’s gain is not necessarily another’s loss. The corporate powerhouses will have to be prepared to kiss goodbye to a slice of their more standard work, but many have already anticipated this through internal restructuring, partly through staff cuts. Firms focused on corporate work and deals are generally not giving in to the temptation to buy market share, instead concentrating on optimising their business model. In other words, they are making the best of the situation.
There is still a huge gap between these powerhouses’ businesses and those of the jacks of all trades. Of the four firm types, the corporate powerhouses have by far the largest average turnover (€158.1m), marking them out as an elite group.
The qualitative difference between the four types of firms is particularly clear on inspection of figures for revenue per lawyer (RPL), the indicator of the value of mandates and firms’ productivity. Overall, the top 50 firms are on the up in this respect: RPL increased to an average of €481,645 last year. The deal factories and corporate kings are in one league when it comes to RPL, with the jacks of all trades and specialist firms in another.
The deal factories have an average RPL of €617,957 and the corporate powerhouses €611,466 - both significantly above the average. The specialists, meanwhile, have an average RPL of €441,661, while the jacks of all trades come in last by this measure, at €369,592, partly because this group consists of quite a wide range of firms. A few individual firms do a lot better than this.
The RPL comparison also shows another trend: the deal factories are edging clear of the corporate powerhouses and are now further ahead than last year. The explanation appears simple: the deal factories are best placed to profit from the growing number of transactions. They managed an average increase in revenue of 7.1 per cent, the highest of any of the four groups.
Yet this does not do away with the question of how sustainable the trend is. The positive effect of a resurgent transactional market can quickly fizzle out. Indeed, one reason for the upturn in law firms’ transactional businesses is the deal-jam that built up during the downturn and has only recently been giving way. Some market players are already preparing themselves for a dip in deal volume.
The corporate powerhouses are keeping a close eye on whether the deal firms will manage to hold onto their superior RPL in the long term or find themselves shoved back into fluctuation by a volatile market.
But for the large global firms, led by Freshfields and Linklaters, the long-term competition is from somewhere else. For them, how they fare in Germany is not really at the heart of their strategy: they show more interest in global expansion alongside steady growth in productivity and profitability.
Nonetheless, the German practices are certainly impressive when it comes to productivity. Freshfields’ German practice produced a RPL figure of €725,000 compared with €660,000 across the whole network. Its Vienna office is more productive still, turning over €769,000 per employee. Linklaters is not far off in Germany. It turned over €636,000 per employee, just a tad short of the €664,000 across the rest of the firm.
Germany might not be the centre of attention right now for global firms like these, but the jurisdiction is certainly treating them well.
This article first appeared in Juve. Translated by Joshua Freedman
Peer group performance
Jacks of all trades – full-service law firms: Turnover growth: 9.3%
Total revenue, 2010-11: €61.87m
Average revenue per lawyer: €369,592 (+6.6%)
Average number of lawyers:160
Specialists – firms with a strong speciality that dominates their practice:
Turnover growth: 10%
Total revenue, 2010-11: €49.75m
Average revenue per lawyer: €441,661 (+1.3%)
Average number of lawyers:135
Change in number of lawyers:-0.7%
Deal factories – firms with a strong transactional or finance practice:
Turnover growth: 3.2%
Total revenue, 2010-11: €53.65m
Average revenue per lawyer: €617,957 (+7.1%)
Average number of lawyers: 92
Change in number of lawyers: -2.6%
Corporate powerhouses – firms with a dominant transactional or finance practice:
Total revenue, 2010-11: €158.1m
Average revenue per lawyer: €611,466 (+6%)
Average number of lawyers: 242
Change in number of lawyers: +0.5%