Herbert Smith grew its revenue by 3.4 per cent to £465.1m last year, but there was little else for managing partner David Willis to celebrate.
Turnover (£m): 465.1
Average PEP: 900
Equity spread (£k): 433-1,007
Profit margin (%): 25
RPL (£k): 438
Vision – Execution – Governance –
This may sound odd, given that average profit per equity partner (PEP) rose to a psychologically important £900,000, putting the firm comfortably within the top 10 on that particular ranking.
But an analysis of the underlying dynamic throws up some challenging questions for the firm, both culturally and strategically.
Net profit was £117.9m last year. The PEP rise seems entirely attributable to the fact that the firm tightened the equity from 136 to 131 partners even as it increased total partner numbers from 253 to 265. Non-equity partners now make up the majority of the partnership for the first time, at 51 per cent. Despite the firm’s aspirations to the top tier, this strategy contrasts enormously with the trend in the magic circle, which
is to keep the number of equity partners high.
At least financial management is tight, the firm having improved distributions to partners by three months over the past 12 months and with lockup dropping from around 148 days to 125. Nevertheless, the conservatism that has always been the hallmark of Herbert Smith has now become a drag on its progress, and Herbert Smith’s introverted management shies away from articulating in public the firm’s positioning in a changing global market.
The alliance with Gleiss Lutz and Stibbe has not shifted substantially in a decade, and with no financial incentive built in to cross-refer integration between the alliance partners is minimal. Herbert Smith’s corporate performance lags behind the disputes department’s by some way, with average profit per corporate partner at some £500,000 compared to £1.4m in the litigation team. While Herbert Smith’s energy practice is in the global top tier, its refusal to invest in a private equity practice has left it vulnerable now that global mega-deals have dried up.
The dip in profitability has left the firm a target of those US practices and magic circle firms such as Allen & Overy that are bulking up in litigation (the loss of a three-partner Paris disputes team and litigation partner Peter Burrell to Willkie Farr & Gallagher hit particularly hard).
However, litigation continues to be the powerhouse of the firm. It appeared regularly in The Lawyer’s top 20 cases of 2011 (The Lawyer, 3 January 2011) and has increasingly made the strategic running, as seen by its launch of a Belfast outpost, which opened in November 2010 to handle document production. Disputes partners, who are perhaps less wedded to the concept of Herbert Smith as a mini-me Slaughter and May, have also been vocal in pressing for a presence in New York.