The power of 10
The past decade has brought recession, consolidation and a cultural revolution to the legal sector in the UK. Catrin Griffiths and Margaret Taylor assess how the top firms have evolved and defined the changing times
In 1999 The Lawyer published its first-ever list of top 100 firms ranked by financial results. Back then The Lawyer 100 made headlines in a way that would become predictable over the next decade; the fact that a trade magazine had identified the firms with partners earning over half a million pounds was big news, particularly since the City’s top earning partners, at Slaughter and May, were making £728,000. Back then the top group of firms - a group that would later become identified as the magic circle - was drawing an average profit per equity partner (PEP) of £564,000. It seemed like unimagined riches.
Fast-forward a decade. That level of PEP has been attained and surpassed by numerous firms, with nine of the top 100 boasting PEP of more than £1m at the end of 2007-08. This level of profitability has not been maintained though. This year, only a handful of firms - Allen & Overy (A&O), Freshfields Bruckhaus Deringer, Linklaters, Slaughters and Silverbeck Rymer (a member of the bottom 100 and operating a radically different business model) - were still able to keep PEP above £1m.
But the success stories of the legal sector are not all about who makes the biggest profits; a comparison of 1999 and 2009 enables us to see which firms have progressed the most on their own terms.
The past decade in the commercial legal sector has seen two downturns, a series of mergers and a wholesale cultural revolution. Throughout the 1990s most firms were starting to reshape themselves, but the concept of law as a business was still viewed as slightly grubby. The current vogue for outsourcing work to overseas jurisdictions has its roots in what the national firms were doing a decade ago. Dibb Lupton Alsop (now DLA Piper) and Hammond Suddards (now just Hammonds) were already seeing the benefits of referring work to cheaper parts of their networks. Even more importantly, the dotcom M&A boom that kicked off in 1999 created a profit-hungry culture that is still with us.
The money sluicing through the City then helped to underwrite many firms’ investments in overseas expansions, the fruits of which can be seen now. Germany in particular began to open up, while a whole range of US firms, attracted by the City’s riches, launched in London.
But with all these changes during the decade, the most astonishing thing about the top 100 in May 1999 is how similar the pecking order is to today’s leaderboard. Although most firms have doubled or even tripled in size, they have been running to stand still. The ranking by turnover in the top 20 was virtually the same as today’s order (although taking alliances into account has a radical effect on the pecking order - see page 44).
What is different is the scale. The entire top 100 turned over £5bn in fees at the start of the 1999-2000 financial year. Ten years on and that market has increased by 186.5 per cent to £14.4bn, with law going truly big business. The total number of partners at the top 100 firms has grown by 71 per cent from 7,172 to 12,287. The average revenue per partner (RPP) has grown by 49.4 per cent from £597,000 to £892,000. And the average top of equity has grown from £323,000 to £564,000 (and that’s in one of the toughest years on record.)
Some firms have transformed themselves in that time - and not necessarily via mergers (although for some significant examples of those see box, page 10) but via a throroughgoing examinations of culture, costs and client bases. And whichever way you look at it, there is one out and out winner - Linklaters.
The Linklaters-Freshfields Bruckhaus Deringer rivalry has set the pace of the magic circle over the past five years. The ever more conservative Freshfields is increasingly embracing the Slaughters model and is hedged by its premium-billing, euro-denominated business in Germany. Linklaters may have a similarly strong UK corporate business, but internationally has had to make more running, has had to integrate completely different businesses, has spun off more, and has become a byword for radical vision and restructure which has, in turn, defined the rest of the market.
Linklaters’ stellar performance over the second half of this decade masks the difficulties the firm endured between 1999 and 2004. In May 1999 Linklaters lagged behind Clifford Chance on turnover by £140m, although it was still comfortably ahead of Freshfields and A&O.
On average PEP though, Linklaters was bottom of the entire magic circle at £502,000, behind Freshfields’ £555,000, A&O’s £595,000 and a rampant Clifford Chance at £605,000. Since then the firm has made a stunning financial comeback, with average profit more than trebling in London to £1.59m (£1.3m globally). Top equity partners earned £650,000 in May 1999; now that figure represents the bottom of Linklaters’ lockstep.
But for Linklaters that performance has come at a cost. The firm has had not one, but two restructurings in the space of 10 years. This has not made it popular among its own constituency - the most recent restructure led to one disaffected associate suing the firm. Yet its business results are unsurpassed: Linklaters has effected a stunning financial comeback to the extent that its performance is the one that defines the magic circle.
Neatly, global managing partner Simon Davies was promoted to the partnership in that pivotal year of 1999.
“At that point we were definitely an English law firm in the City of London,” he admits. “The journey over the decade has been to become a leading global law firm. Back then we had a few overseas offices, but the catalyst was Linklaters & Alliance.”
And yet despite its enormous turnover leap in the following two years to £505m (a 66 per cent hike that included four months’ worth of Oppenhoff & Rädler fees after its January 2001 merger), over the two years that followed Linklaters was struggling to keep up. Its ambitious European project was costly and culturally fraught. The costs of integrating its alliance firms - Oppenhoff in Germany, De Bandt Van Hecke Lagae & Loesch in Belgium and Lagerlof & Leman in Sweden - dragged it down further.
In 2001-02 PEP dropped by 18.8 per cent, from £800,000 a year previously back to £650,000, putting Linklaters squarely behind the rest of the elite
peers. The mergers were disruptive and integrating various partner remuneration systems even more so.
“Ten years ago we had a handful of salaried partners,” recalls Davies. “As part of the European mergers we had a huge increase in them, but we’ve moved away from that now. You have to merge, you have to show profit and loss to get true alignment. In the absence of common purpose it’s difficult to achieve anything.”
Linklaters’ corporate practice - the engine of the firm - was also suffering in the first downturn of the decade. It was given breathing space by the finance department and the gamble in investing in banking at the start of the decade had come good. Indeed, the performance of the finance group stopped Linklaters’ profit rot that year, with the banking partners outbilling their corporate colleagues in 2002-03. Revenue per partner (RPP) in finance was £1.59m that year and in corporate it was £1.35m. An overall revenue of £223.2m bested the corporate turnover of £216m.
By 2005 Linklaters was overtaking Clifford Chance on turnover in London, with £410m against the latter’s £402m. Linklaters London now turns over £577m - 44 per cent of its global business - but the battleground is outside the UK.
Yet despite all the growth outside London, Linklaters has pruned its overseas offerings, spinning off its Eastern Europe practice last year. With managing partner for Central and Eastern Europe Jason Mogg at the helm, the firm jettisoned its offices in Bratislava, Bucharest, Budapest and Prague.
The firm formed by these practices, whose Kinstellar branding is an anagram of Linklaters, maintains referral ties with Linklaters.
In July Clifford Chance did the same thing, albeit on a smaller scale. It has closed in Hungary, one of a small number of Clifford Chance locations to operate a 30 to 70-point lockstep as opposed to the firm’s normal 40 to 100-point ladder. The resultant spin-off firm, Lakatos Köves & Partners, is expected to maintain a referral relationship with Clifford Chance.
While Clifford Chance managing partner David Childs claims the decision to shut in Hungary was taken because the country is no longer key to its international clients, the need to preserve profitability was clearly also a key concern. This is a preoccupation that Clifford Chance shares with Linklaters.
Profit still figures
There is no doubt that Linklaters’ obsession with profitability has driven the firm and it has been much criticised in the process. For several years there were plenty in the magic circle who did not believe the profit figures coming out of the firm because of the way it fudged its profit distribution across Europe. The onset of more transparent financial reporting three years ago - when Linklaters stated what the average PEP for all equity partners was compared with the average PEP for all full equity partners (the large German contingent was on a lower version of the UK ladder) - has now dispelled much of that scepticism. The differential between the global and UK PEPs has now narrowed to £200,000 on average.
In any case, an absolute PEP figure is not really the issue for magic circle firms; it is a firm’s relative performance that matters. And as part of that imperative, Linklaters is rather better at anticipating threats to its margin.
Its first restructure under then manager Tony Angel took considerable time to conceive and execute, but its recent ‘New World’ project was born with some rapidity. Yes, it was conceived as a reaction to changing market conditions, but inevitably it was also a move to defend its profitability. Up to 50 partners have been deemed surplus to requirements along with a total of 200 lawyers and 200 business staff. That level of shake-up will have aftershocks for some time to come.
What is marking Linklaters out is the imaginative use to which it is putting its high profits. It is now able to buy in talent and has been one of the biggest lateral hirers among City firms over the past two years. In turn, that means it has been able to drive major strategic decisions.
Take the dramatic pruning of its German business in late 2007. Linklaters’ ability to pay top of the lockstep to Düsseldorf-based Freshfields laterals Ralph Wollburg and Achim Kirchfield and build an entire office around them is a case in point.
The only place where Linklaters is still making little headway is the US, despite some good hires over the past couple of years. The firm dallied with the idea of
off-lockstep deals in the US, much as A&O and Clifford Chance had, but its London corporate partners rebelled at the notion.
Going it alone
The other stellar performers in the UK 200 over the past decade have tended to hold out against growth through merger. Take Slaughters. As the City’s pre-eminent corporate firm in 1999 it had everything to lose, but did not, and it still tops the PEP and RPP tables. There have been other stories of strategic derring-do among other firms, which have resulted in entire transformations in league positionings since 1999.
Bird & Bird is an example. The IP/tech-focused firm, which has never merged, has enjoyed meteoric growth over the past decade, with turnover rising by an astonishing 631 per cent, from £25.5m at the end of the 1998-99 year to £186.3m at the end of the most recent financial year.
PEP growth has not been so exponential. The 2008-09 figure of £481,000 sits just 25 per cent above the 1998-99 total of £384,000, but that is hardly surprising given the amount of investment it has made in international expansion. Indeed, until 2003 Bird & Bird’s equity partners agreed to sacrifice profit in the name of expansion, with the firm opening in Sweden, Paris, Brussels, Hong Kong, Germany, Italy and the Netherlands in the intervening period. By 2005 this was paying off in increased profit, but the firm has continued to invest and expand and now boasts one of the most comprehensive pan-European operations of the top 50. Furthermore, its entirely respectable £481,000 PEP underlines how solid Bird & Bird’s progress has been. And through it all, Bird & Bird has never wavered from its brand.
Unlike Bird & Bird, Stephenson Harwood’s success story has been less obvious. At the start of the decade it looked dangerously like a has-been and performed poorly in terms of turnover and profit until at least 2004.
But the ten-year perspective tells a different story. The firm’s revenue has grown by 83 per cent over the past 10 years, from £46.5m to £85.1m, while profit growth has been more spectacular: from a starting point of £185,000, PEP hit £610,000 for the past financial year, a jump of 230 per cent.
Although Stephensons did accomplish a merger in 2002, it was possibly one of the least inspiring of the decade - with fading shipping litigation boutique Sinclair Roche & Temperley - a firm with a dysfunctional culture and a huge amount of debt. Absolutely nobody predicted that Stephensons would escape the doldrums in style. Since that merger, its growth has been largely organic, and the driving force behind much of that growth has been Sunil Gadhia. Gadhia, now the outgoing chief executive, has led the firm for six years and has done much to help it shed it ‘shipping boutique’ tag.
“Our three strongest performers in recent years have been corporate, finance and litigation, while the key sector is financial services, which includes acting for banks on ship finance deals, which we think is a key differentiator from other shipping practices,” says Gadhia. “Around 50 per cent of our clients now are in financial services.”
Well-rounded and unshowy, Stephensons simply concentrated on the basics. One might surmise that its unfortunate experience with the Sinclair Roche merger made it wary of the dramatic gesture. In many ways, it was a defining moment.
Like Bird & Bird, Clyde & Co has been consistent over the past decade - consistently good. Aside from the acquisition of aviation boutique Beaumont & Son in 2005, which dented its PEP figure the following year due to the addition of 11 equity partners, Clydes’ growth has been organic.
Although the firm’s practice mix meant it faced tough times around 2001, it never lost its focus and has blossomed into one of the most global of UK firms.
Unsurprisingly, Clydes’ expansionist strategy impacted on PEP to some degree. This was most noticeable in 2006, although the 11 Beaumont partners would have had a dilutive effect. Still, over 10 years turnover has grown by 239 per cent and PEP by 148 per cent.
The international diversification has certainly paid off for Clydes, with £77m of its 2008-09 turnover of £185m coming from its overseas business. The fact that it now bills so much in euros and dollars was also a help during the past year, given the uplifting effect of currency fluctuations over that period.
Similarly, the hunger displayed by Wragge & Co at the start of the decade has stood it in good stead over the past years, although the firm did have a muted few years between 2002 and 2004.
Over the past 10 years turnover has grown by 146 per cent, helped in part by the spurt it experienced during 1999-2000. That was largely due to the fact that Wragges increased its fee-earner headcount by 82 during that year and, while turnover has continued to rise well, profitability has never quite caught up. Over the period PEP has only risen by 11 per cent.
That is not to say the firm has not been a success story. Given that profit did not recover until 2004-05, it is not surprising that PEP has not rocketed. More so given that Wragges is alone among the successful medium-sized contingent that has remained all-equity.
Despite its regional roots Wragges has done well to grow in London, having launched in the City in 2001 via the acquisition of IP boutique Needham & Grant. While that firm’s Gregor Grant, who initially led the London office, has since left (for Marks & Clerk Solicitors in February 2005), Wragges was originally quick to make headway in the tough London market, boosting the office with the big-name hire of property partner Gerald Bland from Herbert Smith just a year after opening. (Bland later left the firm, but it was enough to put the Brummies on the map in the capital.)
Wragges’ London office now has around 80 lawyers and turned over £20.9m in the past financial year.
While these firms have made minor acquisitions and bolt-ons, the mid-market has not yet seen the sort of apocalyptic consolidation predicted by certain management consultants. However, the past decade has seen plenty of mergers, although few of them have been transformative.
Coincidentally, in 1999 five classic medium-sized firms were bunched together consecutively in The Lawyer 100. All of them subsequently merged.
Notably, these moves were hatched in the gloomy years between 2000 and 2004. The first of the group to merge was Wilde Sapte, which got together with another regular merger hunter Denton Hall in February 2000. For both firms it was only a matter of time before they effected a deal. Wilde Sapte had dallied with three of the top five accountancy firms in 1998. Denton Hall, similarly, had been in talks with Cameron Markby Hewitt and McKenna & Co in 1996, while talks with Richards Butler and Theodore Goddard turned sour in 1998.
While the merger led to a string of partner departures (Wilde Sapte equity partners James Johnson, Nick Syson and Jonathan Shann and junior equity partner Matthew French left because of it, to name but four), the figures for the first full year of merger were reasonably strong.
Ten years ago Denton Hall’s PEP was £256,000 and Wilde Sapte’s £235,000, while the former’s revenue per fee-earner (RPFE) figure was £161,000 and the latter’s £206,000. Between them the firms housed 153 partners.
In spite of the partner departures, in the post-merger year (2000-01) the enlarged firm had 194 partners, a PEP of £331,000 and a RPFE of £200,000.
The years since the merger have not been especially kind to Denton Wilde Sapte, with 2001-02 seeing a string of laterals leaving and joining the firm and 2002-03 witnessing a massive reduction in lawyer numbers. The axing of its Asia operations and more departures were the mark of 2004-05. It is hardly surprising, then, that in 2008-09 the firm’s PEP, at £300,000, was 9 per cent below the level it was at in the first year post-merger.
Partner headcount has not recovered either, standing at 181 at the last year-end, although each person is now generating a larger amount of revenue. That said, while the revenue per lawyer (RPL) figure was £273,000 at the end of 2008-09, at £212,000 the RPFE number was not far above that seen in 2000-01.
In contrast, the following year Berwin Leighton merged with Paisner & Co. That enlarged entity has fared considerably better than Dentons in the intervening years. Ten years ago Berwin Leighton’s PEP of £266,000 and RPFE of £196,000 compared with Paisner’s £170,000 PEP and RPFE of £154,000.
While the disparity in PEP would not have made the firms obvious partners, they were keen to work through their differences to make the deal a success. Under Paisner’s merit-based system, 55 per cent of remuneration was lockstep-based and 45 per cent came from a performance fund. The firm had three categories of partners: senior equity, junior equity and salaried. Berwin Leighton’s modified lockstep had a small performance fund of 2.5 per cent. The compromise saw the implementation of a modified lockstep plus merit, with 80 per cent lockstep and a performance fund of 20 per cent.
In 2001-02 the merged firm, Berwin Leighton Paisner (BLP), boasted a PEP of £260,000 and an RPL of £207,000. By the end of last year both PEP and RPL had grown strongly, with the former rising 59 per cent to £414,000 and the latter growing by 60 per cent to £331,000. At the same time the partner count has increased, from 125 post-merger to 184 at the end of 2008-09.
BLP had a remarkable six years immediately following the merger, more than doubling turnover from £86.2m in 2001-02 to £186m in 2007-08 and consolidating its leading position in real estate. Unsurprisingly given this real estate focus, the firm has been affected by the recession - current PEP of £414,000 is now back to where it was in 2003-04 - but having been formed at a time of general economic gloom it is not averse to using economic weakness as an opportunity.
Like Linklaters, BLP is investing in laterals to build out strategically. Whether it will work in the long term is a gamble, but it has made a series of stunning hires, including Teacher Stern sports and media litigator Graham Shear, Clifford Chance litigator Nicholas Fletcher, A&O leveraged finance partner Andrew Bamber and former Kirkland & Ellis private equity partner Raymond McKeeve.
Another firm that has used merger to reinvent itself is Addleshaw Goddard, the firm that emerged from the 2003 tie-up between Addleshaw Booth & Co and Theodore Goddard. In the first full year after its merger (2003-04) the firm had a PEP of £321,000 and an RPL of £244,000. At the latest financial year these numbers had grown to £405,000 and £280,000 respectively. That translates to respective growth figures of 26 per cent and 15 per cent.
Pinsents is one of the few firms to have defined itself through amalgamation, from the Pinsent & Co-Simpson Curtis merger in the mid-1990s, which united two regional powerhouses in Birmingham and Leeds and gave it the muscle to attack London, to the its 1999 takeover of private equity boutique Biddle.
After some stasis in the early part of this decade (and an abortive attempt to merge with Nicholson Graham & Jones, now part of K&L Gates), the 2004 merger with Masons has bedded down into a solid national firm with increasing global ambition (recently augmented by its alliance with Salans), and the financials have helped it boost PEP by 24 per cent, from £250,000 to £310,000 (although in 2007-08 the figure stood at £500,000).
For several years after the merger Pinsent Masons’ PEP soared. At the end of the 2005-06 financial year the firm’s PEP leapt by 70 per cent, up from £234,000 to £400,000. Turnover was also up, rising 15 per cent to £172m.
The positive effects of the merger were not immediate though, and it took both firms some time to get the most out of the tie-up. Six months after the December 2004 merger, Pinsent Masons’ figures were disappointing. At £234,000, PEP was lower than at both Pinsents or Masons and turnover had not budged an inch, standing at £150m.
The merger costs, believed to be around £3m, took a bite out of Pinsents’ profitability in its first year and the firm also lost partners. Senior partners such as insurance dispute practice head James Crabtree left for Taylor Wessing and Bristol commercial property group head Beverley Pike went to Clarke Wilmott.
Pinsents and Masons had a combined 131 equity partners in 2003; by the end of the 2005-06 year the merged firm had 115. While that was not a great change in partner numbers, the departure of senior partners and their replacement with junior partners could have added as much as £25,000 per partner to PEP.
That said, Pinsents worked hard to improve its drab financials post-merger, focusing on raising revenue and dropping costs. Managing partner David Ryan and his management board led initiatives to build special client teams with a mix of partners from the two legacy firms. The teams pooled their contacts and cross-sold, and the firm started to win seats on some juicy panels as a result.
While 2008-09 was unquestionably a tough year for the firm, the solid groundwork put in place immediately after the merger should continue to bear fruit in future years.
Rising to the occasion
The recession has presented UK law with plenty of problems, but there is no definitive evidence that the traditional legal model is a busted flush. The fact that most partners are bemoaning the worst market in a decade is a product of short memories, since on average partners are richer than 10 or even five years ago.
In fact, despite the difficulties and heartsearching that a recession provokes (the 4,000 or so employees made redundant across the top 200 firms in the past 18 months will testify to this), it also creates a sense of opportunism. Some of the most successful firms in The Lawyer UK 200 have used hard times to reinvent themselves. It is what you do in a downturn that counts.
Please click on the image to view the Top 25 Firms of 1999.