The Litigators

At the start of the 2006-07 financial year, the UK’s litigators had braced themselves for another tough 12 months. The UK’s sustained economic growth under Gordon Brown, as both Chancellor of the Exchequer and now Prime Minister, has lasted much longer than everyone – litigators included – expected.

When the economy is doing well the City is simply looking to make money. It can rarely be bothered to hire dispute resolution practitioners to reap back a few lost million
here and there.

Many of the litigation-heavy firms had expected to see the economy start to fall off the cliff around two years ago and so have had to adjust their strategies accordingly.

Berrymans Lace Mawer is the firm that has suffered most in its peer group from the unexpected decade-long sustainability of the UK’s economy.

The firm was the only one in its group to see its turnover drop last year. The drop was slight – 1 per cent – and saw Berrymans bringing in a revenue of £44.4m, compared with £45m in the previous financial year.

Managing partner Terry Renouf says the firm had analysed the strengths in the market and the strengths the firm had developed. “It’s true that litigation has struggled for
many firms in recent years,” he adds. “This is why we’re focusing on more lucrative areas for the firm, such as fraud, insurance and professional indemnity.”

The insurance business has also hit hard times, but if the economic downturn does hit soon (some are expecting this to be in October, or at least by the beginning of next year), then Berrymans’ high-risk strategy could pay off.

Reynolds Porter Chamberlain (RPC) is another litigation firm heavily reliant on the so-called more lucrative areas of the insurance market. It fared only slightly better than Berrymans, seeing turnover flatline at £59.2m.

At the beginning of the year RPC had projected a 10 per cent growth on the previous year, a target that it failed to meet. The firm put this down to the difficult market and the fact that it consolidated its two offices into one at Tower Bridge at the beginning of the financial year.

For insurance litigation firm Barlow Lyde & Gilbert (BLG) it was pretty much the same story, with the firm seeing its turnover increase by just more than 1 per cent, with
revenue increasing from £75.2m to £76.2m.

This, however, takes into account the fact that BLG had to adjust its books after the firm mistakenly recorded its turnover for the previous financial year as £79.4m. As senior partner Richard Dedman puts it: “Last year’s figures were high as there was confusion over where certain cash was supposed to go as a result of the the change in the FRS5 accounting rule.”

If the balance sheet from 2005-06 had not been amended, BLG would have seen the largest drop in turnover, 5.3 per cent.

BLG is currently undergoing a strategy overhaul to combat its stalling performance, with new chief executive Clint Evans being parachuted in to try to ramp up the business.

Last year BLG’s restructuring had already kicked off with its commercial litigation practice undergoing a stark overhaul.

The restructuring of the firm’s dispute resolution team saw the 54-partner practice, which was split into specialisms, merge into a general commercial litigation arm.

Clare Canning, who heads the division, points out that the new team was a response to BLG developing its litigation brand outside its traditional specialist areas and showing its clients that it can provide an all-round package.

“It’s clear to us that clients are becoming ever-more sophisticated consumers of legal services and want to instruct specialist litigators rather than looking to their existing advisers, who may deal in the main with
non-contentious matters,” she says.

The overhaul was an interesting move considering others in the group, such as Davies Arnold Cooper (DAC), have taken the opposite approach by hiving off insurance litigation from other specialisms.

Given market conditions, Clyde & Co, DAC, Holman Fenwick & Willan, Ince & Co and Kennedys all saw reasonable growth.

Clydes topped the revenue table with fees of £135m and a 31 per cent profit margin.

The firm was one of six in this 10-firm peer group to achieve a margin of almost a third, with Holmans and BLG coming top of the pile with 36 per cent apiece. All six firms put their larger-than-expected margins down to the
streamlining of their administration systems.

Personal injury (PI) powerhouses Irwin Mitchell and Russell Jones & Walker (RJW)came bottom of the profit margin tables, seeing 20 and 13 per cent margins respectively. Both, however, have expanded at a phenomenal rate over the past 12 months.

Irwin Mitchell’s figures account for both post and pre-merger investments. In the previous financial year the firm merged with PI firm Alexander Harris, while after the
2006-07 financial year Irwin Mitchell merged with Scottish-based volume business Golds (the latter firm’s turnover is not included in the figures). Irwin Mitchell’s average profit per equity partner was down by 5 per cent to £500,000 as a result.

For RJW, the revival of Claims Direct and its post-Clementi repositioning saw the firm undertake much investment in the 2006-07 financial year.

The two PI specialist outfits do top the average revenue per lawyer (RPL) table, however, with RJW securing the number one spot with an astonishing RPL of £424,000.
Irwin Mitchell was second with £306,000, while Berrymans came out with the lowest RPL of £147,000.

RJW also comes top for cost per lawyer (CPL) at £369,000, while its profit per lawyer (PPL) stands in the middle of the pack at £55,000. The firm’s figures highlight the fact that any comparison of this peer group’s performance on revenue and PPL grounds must take into account the structures of these firms, which differ substantially.

Irwin Mitchell and RJW, unlike the other firms in the group, have far more dependency on other fee-earners and administrators due to the high-volume nature of their work.

RJW, for instance, has a call centre through which it routes the more administrative types of legal claims. Administration and support staff numbers, many of whom man the call centre, are more than double the number of fee-earners, at 365 compared with 168.

This means that RJW’s leverage of equity partner to fee-earner at the year-end was 1:9.3 – much lower than Irwin Mitchell’s 1:22.8, which is the highest in the group.

Irwin Mitchell’s leverage is more than double that of second-placed Berrymans’, which has a leverage of 1:10.1. Irwin Mitchell has more than 1,100 fee-earners compared
with Berrymans’ 436.

Taking this into account, when comparing the average revenue per fee-earner, it is in fact Holmans that comes out on top with a revenue per fee-earner of £255,000. RJW continues to do well at just £3,000 below the leading firm, but Irwin Mitchell lags behind in ninth place with a revenue per fee-earner of £109,000.

The result of the differing structures of the firms in this peer group also means that the average CPL is highest for RJW and Irwin Mitchell, as this does not take into account the substantial amount of legal work undertaken by the firms’ fee-earners.

RJW comes out with a CPL of £369,000 and Irwin Mitchell with £306,000.

The rest of the pack together have an average CPL of just £175,000, with Berrymans having the lowest at £116,000.

The organisational differences also put RJW and Irwin Mitchell at the top of the pack in relation to the average revenue per equity partner (REP). Irwin Mitchell posted a £2.5m REP, while RJW came second with £2.4m.

All the firms, apart from full equity partnership firm RPC, posted REPs of more than £1m. RPC fell behind at £850,000.

All 10 firms in this peer group are forecasting that the next financial year will result in healthier revenue growth than that of 2006-07. But then, they were saying that two years ago. Several firms, such as RPC, have already reported that the 2007-08 financial year started with 30 per cent revenue growth month-on-month.

For the insurance firms, the increase in natural disasters, such as the Sheffield and Gloucestershire floods of the summer, and the beaching of MSC Napoli earlier this year, will see much work come their way this year.

Overall, however, the performance of all these firms is down to whether the UK’s economic growth is sustained. If it is, then the litigators’ figures next year may show they have still not overcome their current rough patch.