Record makers

It has been a record year for the top firms in the UK legal market, with more revenue and more profit generated than ever before. In what was undoubtedly an outstanding year, The Lawyers top 100 firms generated a combined total of 12.39bn, an increase of 14 per cent on the 2005-06 financial year. The amount of total net profit also grew, to 4.26bn, a rise of 19 per cent.

It is appropriate then that this was the year in which The Lawyer chose to launch its new, groundbreaking publication featuring the financial results of more firms than ever before, The Lawyer UK 200 Annual Report.

The catalyst for the expansion of The Lawyers research is the advent of the Legal Services Act. The UK legal market is on the cusp of potentially the biggest change in its history: and it is certain that it will not only be the largest firms that are affected.

Many of the most vibrant, dynamic and profitable law firms in the country reside outside the top 100 when ranked by turnover. Take Sacker & Partners. The pensions boutique has been all but invisible for the past few years because in turnover terms it was not big enough to make it into the revenue-based table. This year it made it in at number 100. Its average profit per equity partner (PEP)? A record 874,000. That puts the 21-partner outfit ninth in the table of one of the key indicators of a firms success, namely PEP, ahead of Herbert Smith, SJ Berwin and Lovells, to name just three.

When the Legal Service Act becomes law it will pave the way for UK law firms to float on the stock exchange and allow them to raise more money for their equity partners and more funds for further expansion.

The first deal of this kind took place earlier this year in Australia, in the shape of personal injury outfit Slater & Gordon. It was a relatively small firm and not unlike several of those that populate the second 100 of The Lawyer UK 200. It proved that big is not always beautiful, and The Lawyer UK 200 was an attempt to reflect that.

The million-pound partners
That said, the most eye-catching numbers of the year were undoubtedly at the other end of the size scale. For the first time ever, the PEP at each of the UKs global elite firms Clifford Chance, Linklaters, Freshfields Bruckhaus Deringer and Allen & Overy (A&O) was more than 1m. It truly was a landmark year.

The past 12 months have been particularly good for the UKs top four firms, but they are the result of long-term investment; this was no overnight success. To reflect this, The Lawyer tracked the performance of the global elite over the past five years. Far more than a single years snapshot, the five-year results put the firms success into context.

Linklaters increased its revenue by 55.7 per cent over the five years, easily the best top-line performance in the magic circle. It is also the most consistent. A disproportionate rise has come in Asia and the US, says managing partner Tony Angel of the increase.

A&O was second, with a revenue rise of 37 per cent in the same period. But it has been far less consistent, with much of that revenue coming in the past year. Twelve months ago A&Os results were so relatively poor that it was in danger of dropping out of the global elite group. Last year it bounced back.

All of the magic circle firms claim to have seen revenue increases across the board over the period (at Freshfields it was 23 per cent, while Clifford Chance saw a 22 per cent rise over five years), but A&Os massive turnover rise followed two relatively weak years. It was propelled by the London office, where last year its corporate department had a stormer. Half of the extra turnover of 151m last year, which took total firmwide turnover to 887m, was generated out of the London office.

All that proportionally larger chunk of extra revenue being billed at premium London rates meant much more also went to the bottom line. When the recovery came, it came big, and it came in London.

The corporate story is a really big factor. Weve got our act together on the corporate side and weve tried to position ourselves for that, says A&O managing partner David Morley.

Peer pressure
In order to rank comparable firms meaningfully against each other, The Lawyer UK 200 broke the market down into peer groups. Each firm within these groups was then measured on another of the key indicators used by law firm managing partners to assess success, revenue per lawyer (RPL).
In each group, the firm with the highest RPL was ranked at the top of the table, moving down to the firm with the lowest. The RPL figure was itself broken down into its two constituent parts, cost per lawyer (CPL, or the amount of money it has taken to generate the revenue, including salaries and all other overheads) and profit per lawyer (PPL, or how much money the firm makes from each lawyer on average after the overheads are covered).

The performance of the group titled The Litigators underlined the fact that it was the transactional firms that did best last year. Berrymans Lace Mawer was the firm that suffered most in its peer group from the unexpected decade-long sustainability of the UKs economy. It was the only one in its group to see its turnover drop last year. The drop was slight, just 1 per cent, leaving Berrymans with a revenue of 44.4m, compared with 45m in the previous financial year.

Reynolds Porter Chamberlain fared a little better, with turnover flatlining at 59.2m, while insurance litigation powerhouse Barlow Lyde & Gilbert saw its turnover grow by just 1 per cent, from 75.2m to 76.2m. For the moment at least, litigation is not where its at in the City.

Overall the 2006-07 financial year was about booming revenue and profit, with the UKs top law firms reaping the benefits of a massively buoyant period in the corporate and finance markets.

The silver circle peer group consists of firms ranked below the magic circle in terms of turnover that can boast a PEP and RPL far above the average. The firms also share the characteristic of being predominantly London-centric, despite having varying degrees of international success.

At one of the five firms in the group Macfarlanes, corporate partner Charles Martin agrees with the grouping of the silver circle. Theres real demand at the moment from clients for high-quality legal advice, he says. All the firms in the silver circle espouse that theory: they insist on giving their clients the highest-quality advice. Its a simple theory, but an important one.

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.

At face value, DLA Piper was the best performer in the group during the last financial year. At 446.4m its turnover even outstripped Lovells 425m. However, this is where the importance of indicators such as RPL and CPL come into their own. Lovells posted the highest RPL in its peer group at 365,000 (although it also incurred the highest level of CPL at 248,000). DLA Piper, on the other hand, posted the lowest RPL, highlighting the overall lower levels of quality high-margin instructions it wins.

The Lawyer UK 200 is filled with thousands of facts such as these that help throw light onto an increasingly segmented and complex legal market. In its former incarnation The Lawyer UK 100 Annual Report the book helped define the top end of the UK legal market for almost 10 years, driving unprecedented levels of transparency among the top firms. It is probably not pushing it too far to claim it is partly responsible for encouraging a raft of major changes, notably the move to limited-liability partnership status. The extended version, launched this year, will continue with the same ambition of driving, not following, change.

You can view The Lawyer UK 200 at www.thelawyer.com.