3 September 2007
The mixed bag that is the London large peer group is testament to the City-focused success of firms such as DLA Piper, Addleshaw Goddard and Berwin Leighton Paisner (BLP). Five years ago none of these firms would have been mentioned in the same breath as Norton Rose, Lovells, CMS Cameron McKenna or Simmons & Simmons. This year, however, the focus on London demonstrated by the former group of firms, and the ground lost on the magic circle by the latter, throws them all together in the group headed ‘London large’. The task of comparing them is enlightening, if complex.
At face value DLA Piper was the best performer in the group in the last financial year. At £446.4m its turnover even outstripped Lovells’, which stood at £425m, while in percentage terms a 21.8 per cent rise in revenue, 27 per cent rise in net profit and 18 per cent rise in average profit per equity partner (PEP) assured its growth was comfortably ahead of its nearest rival’s.
Any firm should be able to post strong turnover growth in a given year. Landing a role on a dream deal can be enough to significantly boost the coffers and, all things being equal, this should make its way down to the bottom line. But partner profits do not necessarily give a true reflection of the state of a firm’s health, with the revenue per lawyer (RPL) and cost per lawyer (CPL) figures far more representative.
On this basis DLA Piper and Lovells share the dubious honour of being both the best and the worst performers. Lovells posted the highest RPL in the group, but also incurred the highest level of CPL. DLA Piper, on the other hand, managed to accrue the group’s lowest CPL while also pulling in the lowest level of RPL. How? Look to its highly geared structure, with ranks of junior lawyers on lower salaries in the regions, for the answer.
First Lovells. During 2006-07 the firm’s turnover rose by just 7 per cent on the previous year’s figure. Its £425m revenue was enough to earn it a second-placed ranking in the peer group, while its PEP of £599,000 saw Lovells come third behind DLA Piper and BLP. In terms of RPL the firm topped the chart, pulling in a respectable £365,000 per lawyer. However, this year’s lawyer figures are calculated on an end-of-year rather than an average basis, meaning that Lovells’ fluctuations in headcount (it lost a big chunk of its German operations, for example) will have had an effect on turnover. Its RPL nevertheless compares favourably to the silver circle firms’, coming in just below Ashurst’s £379,000 figure and beating SJ Berwin’s £355,000.
Lovells’ sizeable CPL figure of £249,000, however, meant the firm’s net profit rose by a paltry 2.3 per cent year-on-year, up from £133m in the 2005-06 period to £136m. According to managing partner David Harris, the high costs were down to one-off expenses, such as closing the firm’s Berlin office.
“We have offices in Munich, Düsseldorf, Frankfurt and Hamburg, and we were in the process of refocusing our banking team in Frankfurt when the banking team we had in Berlin decided to go it alone,” he says. “We reviewed our Berlin presence but felt there were much greater opportunities for development in our other German offices and it didn’t make sense to invest further in Berlin.”
Harris adds that there were some 30 people, including five partners, in Berlin, all of whom were offered the option of transfering to other offices in Germany. “One partner transferred to Frankfurt, but the rest left,” notes Harris. “We have to treat them as partners we’re getting rid of and the cost of that’s quite high.”
In addition to the Berlin closure, Lovells lost around 30 partners during the financial year, with slightly fewer than half managed out. These exits are part of Lovells’ continuing drive to focus on areas and lawyers that are most important to the business.
“Since I’ve been in the managing partner role I’ve been much more involved in developing the practice, and that means taking a tougher stance,” Harris says. “We have to assess more critically where we want to grow and how.”
Greater attention to strategic planning may be required, however, if this tough stance is to be stopped from further ramping up the firm’s cost base. It is worth noting that, after footing the bill for firing so many partners, Lovells splashed out on a hiring spree that resulted in almost 20 lateral partners being appointed in the first half of 2007.
In DLA Piper’s case, the firm is clearly managing to rake in the fees and the firm as a whole is benefiting from its tightly managed low cost base. However, DLA Piper has by far the highest number of lawyers of all the firms in the peer group and that pushes it to the bottom of the table in RPL terms, with £224,000.
True, DLA Piper cannot command as high a premium as Lovells across the board, while its practice mix, with corporate, finance and litigation contributing roughly the same proportion of revenue each, compares less favourably with Lovells’, where the bulk of revenue derives from the more lucrative combination of corporate and finance.
That said, the firm should be commended for keeping its costs so low considering its aggressive expansion tactics over the past year. As Nigel Knowles, joint CEO at DLA Piper, points out, the firm forked out to open a number of offices in locations such as Dubai, Saudi Arabia and Oman, and has also since set up in Warsaw. In the context that the Middle East contributed just 0.6 per cent (£2.67m) of turnover while the firm took the headcount in the region from zero to 47, the unattractive RPL to CPL ratio is to some degree vindicated.
So what of the other firms in the peer group? If DLA Piper and Lovells can be seen to represent the disparate and paradoxical nature of the London large list, Simmons can be viewed as the solid performer right in the middle of the table. For other firms in the group this might be seen as an honour, or indeed something to aspire to, but for Simmons it actually represents a fall from grace.
Having experienced double-digit growth in both turnover and profitability, the firm had a good year in 2006-07, but not good enough to retain its place in the UK top 10. Despite this, Simmons’ middle ground position in terms of RPL and CPL proves it still has the qualities one would expect of one of the country’s top partnerships: it pulled in a solid level of RPL compared with its peers’, while keeping costs reasonably low. RPL came in at £297,000, while CPL sat at £205,000.
Part of the reason for the firm’s slide down the rankings is that US firm Fried Frank Harris Shriver & Jacobson poached five partners from Simmons’ Hong Kong office last September, followed by a further three and a number of associates in December. This instantly knocked £5m off the revenue figure, affecting RPL and profitability in the process.
On the costs front, the firm poured resources into boosting its partnership, making up 15 partners at the beginning of the financial year and hiring a number of senior associates as partners. None of these joined the equity partnership. Additionally, the firm opened a five-partner office in Amsterdam and also embarked on a merger with Spanish firm Mochales & Palacios. Despite the negative impact last year, this should be enough to propel the firm back up the rankings in the current financial year.
Other strong performers during 2006-07 in terms of revenue were BLP and Camerons, which both sit above Simmons in the RPL chart. However, like Lovells, while these firms boasted respective RPL figures of £348,000 and £311,000, their CPL postings were also among the highest in the peer group. Camerons made only two lateral hires during the year, but pays its newly-qualifieds at around magic circle rates.
BLP, on the other hand, had its biggestever year for investments. BLP managing partner Neville Eisenberg says as part of this the firm recruited more people than it ever had in the past, including 15 laterals. In addition to this expense, the firm also racked up significant costs through refurbishing its Adelaide House headquarters.
“We’re completely refurbishing our main building and we had that to cost last year,” says Eisenberg. “It’s a two-year project, but the main effect was felt last year. We have facilities with the bank but haven’t taken out any major debt to finance this.” Further expense came from opening small offices in Paris and Singapore.
The firms that joined DLA Piper at the bottom of the RPL table were Addleshaw Goddard and Norton Rose, which attracted £285,000 and £262,000 per lawyer respectively. Norton Rose posted a turnover growth of 11 per cent last year, taking total revenue to £233m.
Norton Rose’s performance in general was robust, with net profit up by 22.6 per cent to £76m, which translates to a PEP rise of 15 per cent to £512,000. The firm also managed a comparatively low CPL figure. Despite moving into its spanking new Thames-side offices on London’s South Bank early in 2007, Norton Rose incurred costs of just £176,000 per lawyer over the period. In the context of the peer group, only DLA Piper had a lower CPL.
The figures represent a return to form of sorts for Norton Rose. Although it dropped out of the UK top 10 last year after turnover rose by just 4 per cent and failed to make a reappearnce this year (it stayed lodged at 11), in 2006-07 Norton Rose beefed up its profit margin to 33 per cent. It is not magic circle levels, it is not even silver circle levels, but it is a hell of a lot healthier than in previous years.