London: Lower Mid-Market
3 September 2007
London’s smaller mid-market firms, which broadly speaking slot into the £50m-£100m turnover bracket (Salans aside) need to work hard to distinguish themselves in the cut-throat City environment. They might be on big panels,but they rarely feature on the biggest deals.
Salans and Charles Russell, for example, both made it onto the mammoth Barclays panel this year, but for wealth management and corporate recovery rather than on the big-ticket finance panel.
As such, the firms in this group face tough challenges in both benign and difficult market conditions.
On the face of it the firms in this group had a year of solid growth this year. But deeper analysis shows otherwise.
Average turnover increased by 10 per cent this year compared with last, but average profit per equity partner (PEP) was up by only 5 per cent.
And revenue per lawyer (RPL) inched up by just 1 per cent, from £278,000 to £280,000 on average across the group.
In essence, it appears firms in this turnover bracket are hiring lawyers at a faster rate than their revenues are increasing in an effort to gear up while the work flows in.
Take Watson Farley & Williams (WFW). The firm sits proudly at the top of the profit per lawyer (PPL) tree with a group-beating £116,000. But the year before that figure stood at £130,000. That represents a 10 per cent drop.
The firm has a lot more lawyers this year, which has wiped £20,000 off the RPL figure, while overall turnover inched up by £500,000, or just under 1 per cent, to £54m.
Michael Greville, managing partner at WFW, says: “We have, relatively speaking, a high revenue per lawyer, which is a reflection of the quality of work that we’re doing. We’ve also increased our leverage. The revenue went up, but we have more lawyers, and more junior lawyers, so we get less revenue per head out of them.”
To accommodate more lawyers, WFW almost doubled the size of its London premises last year. The firm took on another floor in its Appold Street premises, boosting space by 20,000sq ft to accommodate around 60 extra fee-earners.
The firm has focused on building up its international network and has launched a Greek law practice in Piraeus. In London the firm boosted its practice with the hire of Freshfields Bruckhaus Deringer of counsel Michael Wachtel.
Another crucial reason for WFW’s dominance of the PPL table is its equity structure. Some 53 of its 59 partners are equity, which brings down the cost per lawyer (CPL) figure, as fewer salaries appear on the firm’s cost base.
“You have to bear in mind we have a large equity partnership,” says Greville. “Ninety per cent of our partners are equity, so the profit pool goes to pay them. If we had more salaried partners much more would go on salaries costs.”
WFW may be leading the PPL table this year, but if it suffers another big drop in RPL other firms will take advantage to beat the firm to the top of the table come 2008.
Salans may be the biggest firm in the grouping with a turnover of £112m, but per lawyer it makes less than half the profit of WFW or LG. Its £47,000 PPL puts Salans at the bottom of the table, and by a long way.
The firm has by far the biggest international network of the group, which brings down the profit figure considerably.
Fees in places such as Warsaw, Bucharest and Kiev cannot compete with London. The same factors that keep CPL low at Salans, such as cheaper Eastern European offices, inevitably hit revenue as well.
A big increase in lawyer numbers during the year led to a £20,000 dive in RPL and kept Salans rooted at the bottom of the PPL table despite a PEP rise of 11 per cent last year.
The firm has expanded internationally at a faster rate than many of its rivals. Salans employed 526 lawyers at the year-end, a number that has grown by 118 lawyers over the course of its financial year.
Salans managing partner Steven Finch says the major increases in headcount came in the Berlin office and Paris, as well as Budapest and Shanghai.
“We’ve got the lawyers but not the income, because we took them in at the end of last year,” Finch says.
Salans ramped up its Asia group with a raid on Haarmann Hemmelrath, swallowing a 14-lawyer group in Shanghai. That move followed closely behind the acquisition of Travers Smith’s entire Berlin office.
Another reason for the firm’s position is its tightly held equity. Salans has 134 partners in total, but only 59 are equity level, meaning 75 partners draw their salaries from the cost base.
Neil Woodcock, chief operating officer at Salans, says: “One of the key factors which will skew the figures is the number of salaried partners. We’re constantly looking at the split between equity partners and non-equity partners.”
Salans’ recent focus has been on generating the most revenue possible from its key clients, which translates into encouraging its lawyers to bill to the maximum.
“We try to control costs, but these days the trick is to contain costs and maximise productivity. The biggest move is always making sure we’re taking on good clients and not leaking revenue from that point of view,” adds Woodcock. “We pay attention to costs, but we pay far more attention to productivity. From the internal performance of the firm, profit per lawyer is not something we’d look at.”
The renewed focus is starting to have an effect on the fortunes of the firm. The overall profit margin rose from 20.8 per cent to 22 per cent over the course of the past year. In London this figure went up from 22.7 per cent to 24.6 per cent. That said, the Salans model of exotic international offices and tight equity means the firm is unlikely to ever catch up with its peers for PPL.
Charles Russell, also towards the lower end of the PPL spectrum in this group, suffers from similar office variations to Salans’, but on a domestic level.
The firm has offices in Cheltenham, Guildford, Oxford, Cambridge and Geneva and is built on two central pillars of litigation and private client work. Regional offices command regional rates, which are on the whole likely to be less than London’s. Charles Russell opened its Cambridge office in March this year, while high demand for private client advice led to a Mayfair office launch two months later.
James Holder, managing partner at Charles Russell, claims the firm is making sure its regional offices punch above their weight. “The cost of a secretary in Cheltenham is less than in London, the overheads in the offices are less,” Holder says. “Sometimes we’re doing work outside London which is London-based. It’s not outsourcing as most people think of it, but it’s similar.”
Although being second bottom for PPL in its peer group is not an achievement to be particularly proud of, the firm did experience a 7 per cent uplift in PPL, up from £67,000 last year.
The strongest performer in this category was Withers, which saw its PPL rocket by more than 30 per cent, from £75,000 to £104,000. The firm benefited from a drop in CPL, from £240,000 to £220,000, and a £9,000 increase in its RPL. With a strong foothold in the booming private client market, Withers made much of its connections to secure some lucrative high-end litigation work from its clients.
A leading example of this was the firm’s work on Charman v Charman (2006) the largest divorce case ever in the UK. The firm acted for John Charman, who was ordered to pay out £48m to his ex-wife. Withers took the case to the Court of Appeal, but eventually lost.
While Field Fisher Waterhouse, Withers and Salans all enjoyed PEP rises of more than 10 per cent, WFW and LG saw theirs fall by around 5 per cent.
LG managing partner Penny Francis blames the move to new offices at More London Riverside and the cost of leaving its previous offices for the dip in profit.
“It’s down to the cost of the buildings,” says Francis. “We have a significant rent-free period, but because we’re an LLP we have to account for the rent.”
Francis added that the rent-related cost equated to around £35,000 per partner and said that the past 12 months, during which LG maintained three buildings before its move to its new South Bank headquarters, was “always going to be an expensive year”.
The move took a bite out of the firm’s PPL. Although RPL increased by a healthy 5 per cent, from £299,000 to £314,000, CPL overtook this increase, growing at a rate of 7 per cent.
LG’s overall revenue remained static at £66m, which the firm attributed to partner exits over the course of last year. That is putting it mildly: LG has a habit of losing entire practices rather than just the odd partner here and there.
Last August LG lost most of its IT and outsourcing team when three partners, including department head Mark Lewis, left the firm. The firm’s shipping practice was also rocked, and effectively ended, when partner Mike Lax and two associates left to set up boutique Lax & Co.
However, LG has, like its peer group rivals Charles Russell and Withers, continued to invest in the lucrative private client market to recuperate lost revenue. The firm nabbed Simmons & Simmons’ entire private client group last autumn in a canny move that will partly soften the blow of its IT and shipping losses.
The move highlights one of the key issues that all firms, regardless of peer group, is conscious of: Charles Russell’s Holder says that attrition rates are high up the list of key indicators for any firm, and for good reason.
“Replacing people means you have to spend money on recruitment fees, and then there’s the time taken winding down and then winding up with the new person. I wouldn’t put us in with the worst for this category at all,” he argues. “One expects some level of attrition, but if you can control that you can control expenses.”
This analysis of the £50m-£100m group is a snapshot of a market in benevolent times. More work means more demand for lawyers, resulting in wage inflation and ultimately a growing cost base. This may not be a concern for firms while the market remains buoyant, but the sunny weather cannot last forever.
Woodcock says: “In the good times the tendency is to let the fixed cost base drift up. Sooner or later there’ll be a downturn in the cycle and the firms that are going to catch the worst cold are the ones that let their costs drift up.”
Firms in this peer group rarely get to charge magic circle fees, but are susceptible to magic circle costs such as rent and salaries.
They have fewer opportunities to build up war chests and so they have to be careful to avoid boom and bust. Shrewd management and careful growth is the key.