Every silver lining...
You might be forgiven for thinking that the worst of the recession is over, given some of the rebounds in financials we’ve seen this year.
Most notably, there’s been a remarkable improvement in the fortunes of three firms that had been faltering badly: LG increased net profit by 81 per cent; Denton Wilde Sapte (DWS) grew PEP by 22 per cent; and Eversheds lifted PEP by 28 per cent. But as features editor Matt Byrne points out in our analysis this week, those figures should be used with considerable caution. All three firms took a scythe to costs over the last year: there were no more biscuits, no more flowers and, of course, hundreds of redundancies.
This ferocious attack on overheads is entirely prudent, but from now on any future increase in profits can only be made on an increase in revenues - and that ain’t happening any time soon.
Take the magic circle, which has led the way in revenue growth over the last decade. For the last couple of years turnover at the big four has essentially flatlined. Allen & Overy’s results last week (more here) and Linklaters’ today (see story) show that the big boys are working just to tread water.
Indeed, for global firms there will be precious little growth in Western markets unless it’s through acquisition - and as one senior magic circle partner notes, the game is not about revenues. That was always Clifford Chance’s mistake when its main differentiator from the rest of the magic circle was that it was simply the biggest. If Freshfields overtakes Linklaters it gets bragging rights for a year, but gone are the days when being the number one law firm in the world by turnover was anyone’s strategic goal.
So with growth in the immediate future looking to be stagnant, let’s return to the strategic options. With DWS having cut out all the costs this year, it could never seriously have hoped to replicate the same margin in 2011, so its merger with Sonnenschein was pretty canny. LG’s performance cannot be seen as anything other than putting up a For Sale sign to US firms. There’s more to be read into this year’s figures than simply profit and loss.
Readers' comments (4)
oops | 5-Jul-2010 2:23 pm
Or just get Duncan Weston in to outsource your entire support function. First, he'll ask you why you're not taking a cut in salary to save jobs. When you sign up, it'll soon become apparent that he's been negotiating to outsource you for 18 months. Then, when billing goes well, he try to smooth things over by offering you drinks to say thanks as if nothing's happened. Nice.
Unsuitable or offensive? Report this comment
oops again | 5-Jul-2010 2:35 pm
Duncan has de-equitised the partnership and dehumanised Cameron McKenna.
Unsuitable or offensive? Report this comment
Anonymous | 6-Jul-2010 4:36 pm
The magic circle partner saying it's not about revenues is not a reflection of the market as a whole - this is not one-size-fits-all. Small falls in revenues year on year soon equate to a shrinking business and a tacit admission that a firm grew too big too fast in the preceding years. Stabilising revenues is just as important, perhaps more so, than profitability (particularly on the rather silly PEP measure). Also, opportunities will come for some in Western markets as some firms fail or waste away.
Unsuitable or offensive? Report this comment
Anonymous | 7-Jul-2010 10:43 am
I'm not sure where the idea that an increase in revenues "ain't happening any time soon" comes from. Many mid-market firms are now reaping the benefit of a realignment of their businesses in the downturn and from their investment in counter cyclical business areas. LG has a market leading mid-market corporate recovery and restructuring group, for example, and a very strong finance litigation practice both of which have contributed very strongly to the top line growth in the past couple of years.
And the idea that mid market firms are massaging PEP figures to make themselves more attractive to US merger partners is just patronising and absurd.
Unsuitable or offensive? Report this comment