Law firms braced for third year of stagnant financials

Top firms anticipate another year in the doldrums this results season; picture more positive away from City giants

The City’s top law firms are expecting a third successive year of minimal growth as the UK economy has failed to ignite in the way many anticipated a year ago.

None of the top 10 firms questioned by The Lawyer predicted that fee income would show an improvement of more than 5 per cent this financial year, with the majority saying they would be satisfied with a financial performance that mirrored last year’s.

All four magic circle firms suffered declines in revenue during 2009-10, and while there is no expectation that the downward curve will continue, none predict a bounce-back even to 2008-09’s levels.

Of the four firms, two have predicted a revenue increase of no more than 2 per cent, while the others have stated that they would be pleased to achieve similar results to last year’s in terms of turnover.

One managing partner said he expected the gap in profit per equity partner (PEP) between the top and bottom pairs of the magic circle to narrow slightly. In recent years, Freshfields Bruckhaus Deringer and Linklaters have pulled away from Allen & Overy and Clifford Chance in terms of their relative PEP ­performances.

“I wouldn’t be surprised if there was some squeezing [of that gap],” commented the managing partner.

Away from the magic ­circle the overall picture is more mixed, although a few firms are expecting a bounce.

One top 30 firm expects profit to be up by as much as 30 per cent on the back of a 7 per cent hike in turnover, highlighting the continuing drive to reduce costs across the City.

A top 20 managing ­partner commented: “I think we’ll be fairly static [in revenue terms], although maybe down a bit. We might see an increase in our profit, but for the markets as a whole I don’t think the ­figures will be massively sexy.”

DLA Piper joint chief executive Nigel Knowles is one who predicts a healthy increase in profit at his firm.

“In terms of revenue, we’ll be slightly up, and in terms of profit we’ll be materially up,” he told The Lawyer. “There’s been a general pick-up across the board.”

A City senior partner who has predicted a flat year for his firm said: “If you look at the [firms that] will show revenue increases of any ­significance, quite a lot of that will be revenue brought in through lateral hires.”

Another City managing partner, who expects his firm to post a revenue dip of as much as 10 per cent, said the past financial year could be divided into two distinct parts.

“Last November I’d have been optimistic, but in ­January and February we saw a slow start to the ­calendar year.”

The managing partner, whose firm is traditionally rooted in its transactional practices, cited events such as the uprisings across North Africa and the Middle East and the tsunami that devastated Japan as key ­factors that stunted growth, with dealmakers remaining nervous about the pace of the global recovery.

However, the story is more positive away from the City powerhouses.

At least three of the major national firms told The Lawyer they expect to show revenue increases of more than 5 per cent, with one predicting a double-digit hike.

“It would be a brave firm that predicts a 10 per cent growth next year,” said another senior partner at a national firm. “However, we’d be ­disappointed with no growth.”

One firm that has already revealed its hand is Forsters, with the Mayfair firm ­posting a 20 per cent PEP rise coupled with a 12 per cent boost in turnover. Fee income stood at £25m, ­giving a PEP figure of £360,000.

Managing partner Paul Roberts said: “There’s still no debt market, but we have a good roster of institutional clients that have cash and can raise money through non-debt means.”

The performance is even more encouraging given that the firm brings in around 50 per cent of revenue through its property department, a practice area that is still widely viewed by senior management in the City as being in recession mode.

Other areas that have continued to struggle include equity capital markets and, aside from a few ongoing matters and big-ticket ­mandates, restructuring.As one senior partner commented gloomily: “It’s hard to think of a practice area that’s outperformed expectations.”

Additional reporting by The Lawyer staff