Freshfields rises to top of the pile as the most profitable law firm in the City

Freshfields Bruckhaus Deringer is the City’s most profitable firm, beating both Slaughter and May and Linklaters on the net profit it earned last year.

The firm’s net profit for 2005-06 is revealed as the highest in the market in The Lawyer UK 100 Annual Report 2006, published today (4 September). It stands at £433m, £58m more than Linklaters’ and almost £300m more than Slaughters’.

Freshfields was also the top international outfit in the margin table, a key indicator of a firm’s efficiency. It was behind Macfarlanes in third place with a 49 per cent profit margin. Macfarlanes managed 50 per cent, while ‘class action’ boutique Avalon Solicitors had a profit margin last year of 73 per cent.

The table showing the UK’s top 20 most profitable firms in terms of net profit closely resembles the equivalent in terms of total revenue. The only firms not to feature in the net profit table are Denton Wilde Sapte and Hammonds, which fell to the 24th and 25th places respectively, with their places being taken by Macfarlanes and Wragge & Co.

The top 20 firms ranked by margin looks very different. Clifford Chance disappears from the top 20, with its 30 per cent profit margin ranking it at 43, while Linklaters drops from second to ninth and Allen & Overy from fourth to fifteenth.

UK 100 debutante Burness, which entered the top 100 list this year with an £18m turnover, claims twelfth position with a 39 per cent margin, while the newly merged HBJ Gateley Wareing also makes the top 20 with a 37 per cent margin. Most impressive of the bottom 50 firms by revenue is Brabners Chaffe Street, which made £9m profit on £21m revenue, representing a 43 per cent margin.

In the 2005-06 financial year 11 firms posted profit margins of 40 per cent or higher – the industry benchmark for premier league performance. More than half (54) the top 100 had a profit margin below 30 per cent, a level regarded as below par for a City firm.

Some of the biggest names in this bracket include DLA Piper, which managed a profit margin of just 22 per cent, while posting an average profit per equity partner (PEP) of £604,000. Other surprises include Newcastle’s Watson Burton. Although its PEP broke £700,000 last year, the firm’s margin was only 22 per cent, just ahead of its Tyneside rival Ward Hadaway‘s (21 per cent). The figures show the benefit (for equity partners) of a tight equity partnership. However, they also highlight the fact that firms with proportionately low numbers of equity partners need high margins of work to compensate the partners. In this regard the figures for Cobbetts confirmed that managing partner Michael Shaw has his work cut out. The firm managed only a 17 per cent margin, but it also has one of the tightest equity partnerships in the top 100 with just 48 full equity partners out of 139. As the managing partner of one top 100 firm put it: “A low margin and low PEP with a narrow equity is a risky place to be.”

The combination of figures for net profit and margin arguably offer a more accurate picture of a firm’s true profitability than the more easily manipulated average PEP.