15 October 2012 | By Matt Byrne
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Making the most of your office space is a management priority these days, as exclusive new data in the UK 200 reveals
In this year’s The Lawyer UK 200 annual report we broke new ground - almost literally.
Alongside the usual questions about turnover, profit and number of equity partners, for the first time we asked firms to tell us the total amount of office space (in square feet) they operated in, along with the total cost of the rent, rates and service charge.
Why you might reasonably ask? Well, for one thing this is generally data that is available in firms’ LLP accounts along with information on total borrowings (which, incidentally, we also asked for this year). Most firms were happy to oblige in providing their details.
Second, and more pertinently, a firm’s real estate represents one of its two biggest annual costs, the other being salaries. It is no over-statement to say a firm’s property can make or break it. Just ask Halliwells, a firm that was brought down partly because of a real estate deal, and at the other end of the scale, Norton Rose, Allen & Overy (A&O) or K&L Gates - all of which have made relatively recent morale-boosting moves to flashy new offices.
As Ropes & Gray’s UK co-managing partner Maurice Allen says in the introduction to this year’s UK 200: “Your main costs are people and real estate”.
Consequently, any thorough examination of the legal market’s economics would be incomplete without at least a nod towards the sizeable sums firms are paying to put an often extraordinarily glitzy - and occasionally very ordinary -roof over their lawyers’ and staff’s heads.
With the staff, fee-earner, lawyer, partner and equity partner head-counts that are also supplied by each firm for the UK 200, this year for the first time we have been able to calculate the occupancy costs for more than 70 firms (those that supplied data) in the top 200.
The tables in today’s feature highlight key new metrics such as square foot per person (ie the amount of space per each individual - fee-earner or support staff - in the firm), square foot per lawyer (see chart, left) and square foot per fee-earner, as well as the corresponding cost of each of those results.
There simply is not space in this article to publish the data on all 70 firms (indeed, many others provided square footage data without providing costs) but today we will be making this information available online, considerably improving your ability to make a comparative peer group analysis.
With real estate one of the biggest fixed overheads at any firm, occupancy cost is an increasingly live issue as work is disaggregated and farmed out to lower cost venues and a growing number of firms consider a move to open-plan working, partly as a way of squeezing more value out of the bricks and mortar in which they work. This is a critical new benchmark of both the efficiency and the culture of the UK’s top firms.
While this is the first time The Lawyer has produced these property-related metrics, real estate specialists have for years used a variety of calculations to benchmark professional services organisations, including a spectrum of costs per person and square feet (sq ft) per person.
According to Trevor Alldridge, managing director of workplace consultancy AOS Studley, the industry standard benchmark for London law firms is 166sq ft per person. That occupancy ratio rises to around 200sq ft per person in a cellular (ie traditional) floorplan and drops to around 150sq ft per person in open-plan.
The Lawyer’s data shows just how wide a range there is out there. A&O posted the largest square foot per person figure, at 340, while commoditised legal services provider Minster Law anchored that particular table with just 94sq ft per person. The average across the 70 firms The Lawyer analysed was 206.3sq ft per person.
A&O is also the firm in our research that spends most annually on real estate. The magic circle firm spends an astonishing £100m each year on the 1,726,947sq ft it controls. That works out at 766sq ft per lawyer at a cost of £44,385 per year each. On the data we gathered, next highest was Pinsent Masons, which last year spent £18.9m for its 371,493sq ft (making 427sq ft per lawyer at £21,749 each).
A&O topped several of The Lawyer’s new property charts. As the largest firm by some way in our data, it is to be expected that it should be number one not only in the total amount of money it spends annually on real estate and the total space it controls, but also in terms of the amount of space each of its 5,077 staff members enjoy (340sq ft) as well as how much that space costs for each to swing a file (£19,697). For the record, none of A&O’s top rivals (Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters) provided data, so The Lawyer is unable to make comparisons between magic circle firms).
A&O was also the number one traditional law firm in the cost per lawyer table (£44,385 per year per person) although for once it had to make do with second place overall (see chart, above), runner-up to commoditised play Minster Law, more of which later. However, A&O topped the cost per fee-earner rankings, at £36,101. Bringing up the rear on this latter table is East Midlands firm Flint Bishop, which forks out £2,347 for the 214sq ft each of its 98 fee-earners enjoys.
Returns to spender
Other big spenders in our sample of 70 firms include Watson Farley & Williams, which pays £10.7m for its 180,000sq ft; Hill Dickinson, which stumps up £8.97m a year for its 265,000sq ft; Trowers & Hamlins, which pays £7.6m for 154,830sq ft; Field Fisher Waterhouse, where £7.13m buys 205,429sq ft; and Olswang, where the annual property bill for its 159,100sq ft totals £7m.
The price per square foot range within just this group of firms is remarkable. Topping this particular group of six large firms is Watson Farley, which on these figures is paying £59 per square foot, while Hill Dickinson is stumping up just £34 per square foot (the spread across the entire 70 is considerably wider, with London minnow Wedlake Bell paying most, according to the data it supplied, at £76 per square foot, while South West firm Porter Dodson, ranked 198th in this year’s UK 200, has the cheapest deal, paying just £10 per square foot for its 30,000 total square footage. The average cost per square foot across all surveyed firms is £31.2. (See chart, right.)
Indeed, several firms in this year’s UK 200 appear to be getting remarkably good deals on their property. Scottish firms in particular score well when it comes to affordable real estate, a fact that perhaps partly explains the recent spate of mergers north of the border.
Harper Macleod, for example, pays just £4,028 for each of its 105 lawyers, who have 287sq ft each to rattle around in. In total, Harper Macleod controls 30,000sq ft of space that costs it just £421,000 a year, or £14 per square foot. Per person, including all fee-earners and all staff, that works out at 113sq ft per person - £1,581 each.
The data throws up a stream of comparisons that confirms the wide disparity between the prices UK firms are paying for their real estate and the conditions in which fee-earners and staff are working.
Take Kemp Little. The London TMT boutique is regarded as one of the UK’s best-managed firms operationally and in terms of its legal practice. Yet there is little the 14-partner outfit, ironically based on Cheapside in the heart of the City, can do to reduce its property costs.
Each of Kemp Little’s 50 fee-earners and staff has precisely 200sq ft in which to operate. That costs the firm £12,000 per person. The other firm in The Lawyer’s real estate table (although its £5.9m turnover in 2011/12 was not high enough to secure it a place in the top 200 table) that also has 200sq ft per person is North West firm SAS Daniels. The cost there per person was just £3,200 last year.
From a purely practice focus point of view a closer comparison with Kemp Little is Wiggin, a technology and media-based boutique that has a small London office but is based primarily in Cheltenham in Gloucestershire. Staff and fee-earners have 203sq ft per person, costing the firm just £3,734 per year. (It might cheer Kemp Little to know, however, that its revenue per square foot of £890 outstrips Wiggin’s £775.)
Dip the other side of the 200 divide to Charles Russell, where its 545 staff and lawyers have 199sq ft each to rattle around in, but the cost per person rockets to £11,376.
There are, of course, many variables with any data set, a fact that makes sweeping conclusions dangerous. Does a firm’s total square footage include a portfolio of properties around the country with varying costs or is it a single site operation in the heart of London? How much flexibility does it have with its property to make meaningful changes, such as a move to open-plan, that could help it reduce costs? And how willing, culturally, are the firm’s owners to make such a change?
Certainly, Alldridge believes property issues are front of mind at many of the firms he has seen, particularly when there is a lease event that is likely to provide the opportunity to make meaningful changes.
“Most firms we have engaged with claim they think about reducing the amount of space they occupy when faced with a lease event, and the most commonly considered action is a move to open-plan,” says Alldridge. “Smaller firms in particular are showing a clear trend to move to open-plan to reduce costs.
AOS Studley’s research suggests that larger firms seem to be considering open-plan not so much for cost-saving purposes but rather for workstyle changes to promote greater collaboration for cultural change. We also note that larger firms are giving themselves the flexibility to increase their density through moving to open-plan, in case of future headcount increases, resulting perhaps from a merger or acquisition.”
As Alldridge’s colleague Hugh Stallard, who was interviewed for this year’s UK 200, points out, there are several other changes firms can make if they are finding their property costs too high, including a reduction in secretarial and back-office staff and an increase in the use of paralegals.
As Stallard reflects in this year’s UK 200, the shifting balance towards a more equal gender workforce is also leading to more consideration of work-life balance.
“The debate over work-life balance and efficient operating procedures coupled with embracing modern technology means many lawyers are able to work remotely, connected by high-quality IT links,” says Stallard. “This has a direct impact on the size and layout of offices required. The rapidly changing business environment means firms increasingly require greater lease flexibility, including the ability to offload surplus accommodation. With capital a scarce commodity and a desire to minimise establishment costs per fee-earner, a fundamental rethink on the way offices are used is taking place.”
As Stallard points out, establishment costs include not only rent, rates, service charges and utilities, but also total life-cycle costs including the original cost of fitting out.
“Heavily partitioned layouts cost more as they require greater initial capital commitment, a longer period to fit out and high-end lease reinstatement costs,” adds Stallard. “Not surprisingly, there’s a strong trend among firms towards more open-plan environments with specialist facilities to encourage agile working and reduce costs. Many are embracing modern technology and home working.”
In this year’s UK 200 The Lawyer’s separate efficiencies survey asked about the changes firms have made recently to make more efficient use of office space. Some 35.5 per cent said they had moved to open-plan working, suggesting that many are taking action to address one of the largest overheads in the business.
Not everyone, however, is convinced that open-plan is the way to go, at least not without careful planning.
“I wonder how carefully some firms balance the cost reductions of open-plan with the potential productivity disadvantages if the move is not carefully thought through,” says Jeremy Dutton of Huron Consulting. “Planned properly, there are ways to reduce the disadvantages of open-plan. I once did some qualitative research, however, in a firm about how suitable its lawyers and secretaries found its open-plan offices for their roles. The open-plan was very open. It was striking how exposed that firm’s lawyers could feel to their colleagues, with the result that it could actually reduce the number and depth of conversations people had with one another and with clients, compared with when they occupied cellular or shared offices. Ironic, when part of the idea of open-plan - or the idea that is frequently sold to staff - is that it increases communication.”
The identity of the ‘firm’ with the measliest amount of space per person - and presumably the highest level of open-plan working - may not surprise close observers of recent developments in the UK legal market. Minster Law this year topped several tables, notably the average profit per equity partner ranking, with an astonishing £2.2m.
Yet, as with many things associated with Minster, not everything is as it seems at first glance. For example, the firm is not a firm but a limited company and its average profits per equity partner are company profits nominally allocated to a single director, chairman Adrian Christmas, and which were last year re-invested into the business.
Minster’s position in The Lawyer’s real estate table, however, underlines the shape of its business and highlights how different it is from most of the general partnerships and LLPs that populate the rest of the UK 200. Minster had a total of 69,029sq ft last year, putting it in 25th place in the total space table and securely in the top third of the firms that contributed data. Yet squeezed into its offices last year were 732 people, generating Minster’s £104.1m total revenue. That works out at just 94sq ft per staff member, the least in the table.
Conversely, when the data is ordered by space per lawyer, Minster comes out on top, with a football pitch-esque 2,227sq ft per lawyer, closely followed by fellow volume legal services provider Optima Legal, with 1,531sq ft. (Curiously, Minster’s square foot cost per lawyer, at £45,161, is both the highest in the table and yet pretty close to A&O’s, at £44,385). Both operations have more than 500 staff in total, but in Minster’s case just 31 of those are qualified lawyers while at Optima a slightly higher 49 of 521 hold a practising certificate.
For many, in certain segments of the UK market, this is the shape of things to come.
How do firms measure up?
Among the plethora of new real estate-related metrics that The Lawyer has included in this year’s UK 200 is a measure that might be unfamiliar to most lawyers but with which professionals in other sectors are on first-name terms.
For many major retailers, revenue per square foot is a key metric. It’s a simple enough equation. Divide last year’s total turnover by the amount of square footage in which each firm operates to see how much cash is being generated in each square foot.
The table left shows the range of revenue generation per square foot in some of the leading UK firms. The full table of 70 firms ranges from £197 per square foot at Sheffield-based Wake Smith to £1,508 at Minster (pensions boutique Sacker & Co tops the table if only more traditional firms are considered, with £960 per square foot).
But once again it’s worth highlighting some of the key differences between Minster and most of the other firms in the table. The firm is based on two sites - its headquarters in York plus a ‘contact centre’ near Wakefield that opened in 2007 with 12 people and now has 400. In 2007, Minster would have been ranked at 89 in the UK 200. This year its £104.1m turnover placed it in 32nd place.
On a recent visit by The Lawyer to Minster’s offices, the reporter found all staff divided into teams with names, with the call centre people in teams named after tropical islands, complete with corresponding desk decorations. The call centre floor was also half-empty - Minster’s staff work shift patterns and take calls 24/7.
The Lawyer’s new metric also shows that Allen & Overy’s revenue per sq ft (£685) is still higher than Harper McLeod’s (£643), despite the former’s lawyers having on average more than 2.5 times the space to swing a cat in.
Property in proportion
The figures provided by the 70-plus firms also allow for an analysis of relative property costs both as a proportion of total revenue and as a proportion of total costs.
As Huron’s Jeremy Dutton puts it: “Assuming consistency of approach in the collection of the data, this can put property costs in perspective”.
For example, as Dutton says, Allen & Overy might spend as much on property (£100m) as the total revenue of a mid-tier London firm but, with its property costs at 8.5 per cent of revenue, they appear proportionate for where the magic circle firm is competing in the market.
The data also shows some significant differences between firms that are competing in the same area, adds Dutton.
“Take Fox Williams and DMH Stallard, two firms that happen to be next to each other in the table and, at least in the London market, are competitors,” he says. “If DMH Stallard were able to reduce its property costs to the same proportion of revenue as Fox Williams’ property costs, it would add a competitively significant increase to DMH Stallard’s reported PEP, of more than 20 per cent. Each percentage point of reduction would drop straight to the bottom line. DMH Stallard might also suffer higher costs because of its regional offices whereas as Fox Williams has just the one office.”
Where property costs are a high proportion of revenue, continues Dutton, that could also be at least as much a feature of low firm-wide revenue as it could be of high costs in themselves for the actual property, something which looks to be the case with DMH Stallard.