In The Lawyer UK 100 Annual Report this year - now established as the benchmark for any meaningful financial comparisons between law firms - you can read a comprehensive analysis of the legal profession.

We discuss current issues in financial management. The increasing market share of transatlantic firms is detailed on our City 50. For the first time, we also reveal in graphic form the different pay levels, from non-equity partner to average profit per partner to the top of equity - showing the firms with the flattest and steepest equity structures. In this issue of The Lawyer UK 100 Annual Report we are also publishing our groundbreaking study of average profit for all partners (APP). The APP index should be read in conjunction with the profit per equity partner (PEP) tables for a true view of partner compensation. And throughout the report, and particularly in the opening pages, we anatomise the performance of the increasingly powerful upper mid-market firms - now dubbed the silver circle.

The magic circle: looking up
2005 has been a year of recovery all round. The biggest sighs of relief were from magic circle partners. Average PEP for the big four of Allen & Overy (A&O), Clifford Chance, Freshfields and Linklaters was up a healthy 13.5 per cent from £630,000 to £713,000. Average magic circle revenue per lawyer was up 1.4 per cent from £353,000 to £358,000.

Meanwhile, the magic circle firms' war on costs seems to be paying off. Average cost per lawyer, meanwhile, was down from £234,000 to £230,000. But forget the magic circle for now. They are too big and too far away for other UK firms to have a serious hope of catching them. Their combined revenues of £3.17bn dwarf the rest of the UK 100. Their combined net profit of £1.112bn accounts for 37 per cent of the UK 100 total net profit of £2.989bn. Their global battles are on a completely different scale from the rest of the UK 100.

While the big four go galactic, the firms behind them are competing in an entirely changed market. In any case, the tier beneath is the most interesting because it has changed year by year.

Ten years ago the dominant firms outside the magic circle (which then firmly included Slaughter and May, of which more later) were the chasing pack of Ashurst, Herbert Smith, Lovells, Norton Rose and Simmons & Simmons. Of that five, only Herbert Smith still appears in the top 10 in the PEP table. Ashurst is only slightly off the pace at thirteenth. Lovells' bad year in 2005 saw its profits drop like a stone, while Norton Rose and Simmons are 20th and 28th respectively - and this has been a good year for Simmons, let's not forget.

So, the internationalist model has simply proved too unwieldy for many firms. Norton Rose and Simmons waded into mud and got stuck. Denton Wilde Sapte (DWS) lost its way completely. Even CMS Cameron McKenna, once seduced by the internationalist model, is quietly refashioning itself into a UK practice with a strong European alliance.

While the internationalist firms have stuttered, the focus and the sheer ambition of a handful of formerly sleepy mid-size firms has transformed the market.

As The Lawyer reported in its news pages this summer and last, the firms powering up the profit and revenues tables are Berwin Leighton Paisner (BLP), Herbert Smith, Macfarlanes, SJ Berwin and Travers Smith.

BLP and SJ Berwin show what a little bit of drive and a focus on core principles can do. Macfarlanes and Travers Smith, meanwhile, have long pedigrees in the City - but never underestimate the difficulty of maintaining that position. Look what happened to old City blue-blood Stephenson Harwood, which 15 years ago was a top-drawer firm. It is now stripped of its elite pretensions and appears to be turning itself into a merger-friendly finance and litigation outfit.

So what links them? Silver circle firms are content to advise a premium UK client base rather than service global institutions. A lot of the work is private equity-dominated, but there is a good amount of AIM business and a whole lot of real estate. It is sexy and it pays. (By the way, there is something else that characterises these firms: a disdain for an overtly managerial approach and a horrified avoidance of big firm bureaucracy.)

So it is our thesis that Slaughter and May straddles the magic circle and the silver circle. Yes, it has the same international kudos as the magic circle firms, it slugs it out with Linklaters for control of the FTSE100 and sits at the apex of the City, but at base it is not really fighting the same global battles as the big four. Nearly 89 per cent of its turnover is in London. Its best friends network is a classically sunny Slaughters approach to internationalism, compared with the grim-faced global orthodoxy of the big four. Its cultural and economic model is actually closer to Macfarlanes' than Clifford Chance's.

Ashurst is a late convert to the `smaller is more beautiful' theory. Following two failed US mergers, its only formal link is Washington DC and New York boutique McKee Nelson for structured finance transactions only. At £567,000, Ashurst's PEP is the lowest of the silver circle - recovering after the previous year's disastrous figures of £521,000. Revenue per lawyer was also up, from £318,000 to £328,000. Ashurst has actively managed out a number of partners in the last two years, which bespeaks a new rigour at Appold Street, although cost per lawyer remained static at £209,000. In the meantime, its remarkable private equity franchise and its highly visible roles on several headline public bids (ie Morrisons-Safeway, Philip Green-M&S, Deutsche Börse-London Stock Exchange) have confirmed the firm's transactional status and its membership of the silver circle.

Macfarlanes - Law Firm of the Year at The Lawyer Awards back in 2000 - has never faltered. Quite the reverse; it is now seen on much larger public bids than its private equity reputation would at first suggest. It has consistently been in the top five PEP performers among UK firms. This year it was fourth, behind Slaughters, the anomalous Dickson Minto and a resurgent Linklaters. Its revenue shot up from £67m to £74m, although revenue per lawyer actually decreased from £353,000 to £344,000. However, that was balanced by a reduction in cost per lawyer, from £201,000 to £171,000.

Travers Smith's history, on the other hand, is flecked with disappointment. With 50 per cent of its business corporate, it is simply not as well hedged as other firms in the silver circle. It had a stellar year, with deal after deal after deal. But while it is the firm that most US firms would love to snap up, it is oddly the most vulnerable of the silver circle to a downturn. For the moment, the rise in PEP from £415,000 to £575,000 underlines its strong status in the City. SJ Berwin has always produced a high profit, but the last few years have not been comfortable by its standards. 2004 (£510,000) and 2005 (£575,000) showed a return to form. But revenue per lawyer (RPL) is oddly weak at £290,000 compared with last year's £321,000. That is partly because of the integration of the lower-billing German practice into the figures. The German practice integration does not dilute end profitability, though, because most of the German partners do not hold equity. SJ Berwin has clearly been working on its cost management; cost per lawyer has dropped from £217,000 in 2004 to a very lean £181,000.

Straddling the silver circle and the internationalists is Herbert Smith. Its corporate business and profit profile puts it neatly within this elite group, but its strategy has been predicated on a large international offering, not least through its formal and branded alliance with Gleiss Lutz and Stibbe. Like the other silver circle members, it had a good year. Revenue per lawyer rose from £290,000 to £332,000, but cost per lawyer rose from £197,000 to £216,000. But that rise in cost base did not show in its profits: net profit was up from £78m to £92.9m and PEP was up 15 per cent, from £700,000 to £808,000. That profit jump would simply not be possible if it took on the true overheads of the German and Dutch practices, but Herbert Smith still hankers after acting for global institutions which demand multijurisdictional coverage. It is a tricky balance.

Berwin Leighton Paisner is moving up from the UK independent mid-tier to gain a foothold in this new elite grouping. It is not quite well enough established to merit full membership and is still in growth mode. Also, its RPL is a respectable £309,000, but is the same as last year, suggesting that its 19 per cent rise from £102m in 2004 to £121m is generated by more bodies. But like other firms in the silver circle, to which BLP aspires, it has good control of its costs base. CPL fell from £236,000 to £215,000. Its profile increasingly matches the other silver circle firms. It boasts one of the best management teams in the City and an entrepreneurial, unbureaucratic culture. What is more, it has a well-hedged business - corporate, real estate and a very neat restructuring practice - and is probably a lot more stable than Travers. The danger to BLP may actually be more cultural than economic. Its seemingly unstoppable growth has raised many expectations internally, and a significant portion of the partnership has been hired in laterally. This is not necessarily unstable - Ashurst's growth has been propelled partly by laterals as well, contrary to popular belief - but BLP's watchword has been forward movement. Consolidation may be more difficult to cope with.

Who's next?
The next question, of course, is which firms will be the next to join the silver circle. There is a good case for Clyde & Co, the king of EC3, although its global spread suggests that its natural home is among the internationalists.

Ditto very much for DLA Piper Rudnick Gray Cary, the law firm to have defined the first half of this decade. It has moved from the national to the international multi-office model without sacrificing profit, although the adjusted average earnings per partner (see page 11) of £311,000 shows that the tiny equity partnership has helped its figures. Given its trajectory so far, it is unlikely to adopt a Macfarlanes model - but its business vim could bring some respectability back to the internationalist camp, which is currently inhabited by a set of law firms wrestling with strategic and economic issues.

CMS Cameron McKenna is another example to ponder. Having set its stall out in the late 1990s as an international alternative to the magic circle, it has in the last five years sloughed off its Central Asia, Hong Kong and Washington DC offices. Its only organic overseas presence is in the emerging markets of Central and Eastern Europe - dovetailing nicely with its projects practice, for example. Its international offering is through the CMS alliance, which puts it nearer a Herbert Smith model than it is to Simmons, say. Although its drop in turnover was partly attributed to accounting changes, its RPL dipped alarmingly from £301,000 to £266,000.

Mayer Brown Rowe & Maw (MBR&M) also sits between the UK mid-sizers and the internationalists. Yes, it has global reach through the Mayer Brown merger, but unlike Dechert or Jones Day, the UK office has crucially maintained not only its own cultural identity but also a distinctive UK corporate client base.

Taylor Wessing also sits in the same position, but through a German rather than US merger. However, its international investment and European management structure is much more coherent than many of the internationalist firms'.

There are fewer truly UK-focused firms that are credible contenders for the silver circle over the next few years. Wragge & Co has wobbled a little in recent times, but has returned to form with a PEP figure of £307,000. That said, its opening in London may prove to have been too little, too late.

Addleshaw Goddard, through its takeover of Theodore Goddard, is a good bet - and probably the smartest merger in recent times. In the last five years its average PEP has increased an astonishing 68 per cent from £240,000 in 2001 (the Addleshaws PEP prior to its takeover of Theodore Goddard) to £404,000 in 2005. Expect it to follow the BLP route into the silver circle before too long.

Another outside bet is Nabarro Nathanson. Yes, it still needs a more visible City corporate practice, but the base is strong. Similarly, Olswang, which has refashioned itself from being a media boutique to being real estate, corporate and litigation-led. Small wonder it was an attractive alliance partner for US giant Greenberg Traurig.

The reconfiguration of the UK's upper mid-market is an ongoing process. What distinguishes the best of the firms is the determination to get things right at home. In a few years' time, some of them may well have to expand more internationally. But their positions at home gives them time, money and - guess what? - a lot of clout with potential US merger partners.

But beware. Gouldens - now Jones Day - could have merited a foothold in the silver circle. But when Jones Day came calling, Gouldens' hard-won City culture just disappeared. Membership of the silver circle is not neccessarily for life.

• Average PEP for magic circle was up 13.1 per cent to £713,000 from £630,000 in 2004
• Average PEP for top 50 was up 10.6 per cent to £431,000 from £390,000 in 2004
• Average PEP for top 100 was up 10.5 per cent to £343,000 from £311,000 in 2004
• Average RPL for magic circle was up only 1.3 per cent to £358,000 compared to £353,000 in 2004
• Average RPL for top 50 was up 2 per cent to £270,000 compared to £263,000 in 2004
• Average RPL for top 100 was up 0.4 per cent to £233,000 compared to £232,000 in 2004
• Average CPL for magic circle was down 1.7 per cent to £230,600 compared to £234,600 in 2004
• Average CPL for top 50 was down 1.2 per cent to 184,300 compared to £186,500 in 2004
• Average CPL for top 100 was up 0.3 per cent to £168,100 compared to £167,600 in 2004