In July this year The Lawyer revealed exclusive research that suggested the appearance of cracks in the long-held dominance of the four-firm magic circle.The biggest clue that Allen & Overy (A&O) had lost ground on its peers came when it made a tentative merger approach to Freshfields Bruckhaus Deringer. News of the move stunned the market. It also confirmed that A&O's management, primarily senior partner Guy Beringer and managing partner David Morley, recognised that urgent action was needed to remedy the situation.

So, as previously discussed in The Lawyer, it is our belief that over the past half a decade or so, and certainly in the past 12 months, A&O has lost ground on its closest UK-headquartered rivals Clifford Chance, Freshfields and, most notably, Linklaters. This, more than anything further down the top 100, constitutes the 'new order' in the UK legal market.

The most contentious decision in reordering the market is the one right at the top of the table. This year we have separated A&O from its three closest peers (on revenue and global footprint) and included it in a group with Slaughter and May, Herbert Smith and Ashurst. These are the three firms outside the magic circle that we believe lead the UK market based on a combination of quality of clients and lawyers, levels of revenue, international scope in both work and presence, and average profit per equity partner (PEP). Together these two groups reflect the seven leading firms, nationally and internationally, in the UK.

But the positioning of firms is not the only innovation in this year's survey. You can have all the numbers in the world, but unless they are in context, they are meaningless. So this year, for the first time, The Lawyer has analysed the entire top 100 on the basis of peer groups. This has allowed us to dig a little deeper than before into the financial make-up of all the top 100 firms and genuinely relay which are performing well and which are dropping off the pace. The firms within each group are ranked on the basis of revenue per lawyer (RPL), a much harder figure to manipulate than PEP. This is then broken down into cost per lawyer (CPL) and profit per lawyer (PPL). These figures give the truest indication of the UK's elite to date.

On top of that is another key innovation. Last year we introduced a measure unique to The Lawyer UK 100 Annual Report, average earnings per partner (EPP). This figure was designed to level the playing field between all-equity firms and those with legions of salaried partners, which were nevertheless making great PR capital out of average PEP figures that in truth did not reflect the firm's entire partnership.

The EPP figure is achieved by adding a firm's net profit to the money that goes to paying salaried, fixed-share or junior equity partners. The total is then divided between the entire partnership, giving the EPP. This, it should be pointed out, is a different figure from the average earnings of firms' salaried, fixed-share or junior equity partners. So, just to be clear, we have included both.

In 2005 we applied this to a selection of 30 firms across the market. The findings were both astonishing and illuminating. For example, as expected the PEP and EPP at Freshfields, which operates an all-equity model, were identical. At DLA Piper, which in 2005 had a PEP of £535,000, the EPP dropped by 44 per cent to £311,000.

The new measure confirmed what the market had long suspected. Firms such as DLA Piper were sharing out that profit with a proportionately smaller group of partners. This year, for example, DLA Piper's proportion of equity partners has shrunk even further, from 31 per cent of partners in 2004-05 to 29 per cent last year, meaning its PEP now stands at £604,000 and its EPP is £283,000. The average remuneration for a non-equity partner is just £149,000.

The Lawyer reveals the results of this year's research, which for the first time includes an EPP figure for every firm in the top 100.

Also included in The Lawyer UK 100 Annual Report 2006 is an edited and updated version of a feature that appeared in The Lawyer earlier this year. It generated a massive response and dealt with a subject that is only likely to become more relevant over the next year: the post-Clementi world of external investment for law firms.

Floating a law firm is about to become a reality. In the spirit of generosity that we like to believe infuses these pages, we offer The Lawyer's very own stock-tipping service in each individual firm's write-up for those lawyers who like to be ahead of the pack.

The chief reason for separating A&O from the rest of the magic circle is its performance over the past six years. The year 2000 was last time the UK legal market reached the kind of heights witnessed last year. Since then the PEP at Clifford Chance and Freshfields has grown by 18.2 per cent and 23 per cent respectively. Linklaters' PEP has ballooned by almost 50 per cent. And A&O? All but stagnant, with a mere 6 per cent rise in PEP in the years since 2000.

But that is not the only measure by which A&O over the past six years has lost ground to its key UK rivals. A snapshot of PEP among the magic circle in 2000 shows A&O (on £744,000) trouncing all three of its rivals. That year Clifford Chance, Freshfields and even Linklaters all lagged behind A&O, with PEPs of £685,000, £675,000 and £710,000 respectively.

Although A&O increased its PEP last year by around 20 per cent, its figure of £788,000 also now lags behind all three rival firms' and is £43,000 behind Freshfields', the global elite firm to which it is nearest on a PEP of £831,000. Linklaters, with an average PEP last year of £1.06m, is frankly out of sight of A&O.

Other financial indicators are also damning, such as PPL. Last year, of the major City firms, only Slaughter and May and Macfarlanes (both at £235,000) had higher PPLs than the four firms in the magic circle. Freshfields' PPL was £215,000, Linklaters' was £181,000, while A&O's stood at £153,000. Clifford Chance lagged behind the group of four global players with £127,000. But over the past couple of years Clifford Chance, led by managing partner David Childs, has taken an axe to its practice. Childs' ruthlessness in implementation helped Clifford Chance boost its PEP last year by 24 per cent to £810,000. There is little evidence so far of a similar drive at A&O.

Of the three firms in the global elite, Linklaters shone brightest last year. The firm's performance in getting its PEP up above £1m was the highlight of a year that also saw it increase its overall net operating profit by 29 per cent.

According to management consultant Partha Bose, "if you ask any US lawyer who they think the UK's premier law firm is, they'll all say Slaughter and May".

Last year's performance will have done nothing to alter that. Slaughters remains the UK's most profitable firm with a PEP figure of £1.12m.

Its RPL at £557,000 - by far the highest of any corporate firm in the country - places it firmly in the elite category. Compare it, for example, with the £46,000 PPL generated at the non-elite Eversheds.

Slaughters' international 'best friends' approach confirms its status as an avowedly UK-centred organisation. Ashurst may be more international in terms of its footprint (around a third of its business is based outside London), but its lack of any US capability to speak of is the chief barrier to its entry into the global elite.

That notwithstanding, Ashurst's record since 1999 and 2000, together with a prestigious client base that includes JPMorgan, Goldman Sachs, Royal Bank of Scotland and Merrill Lynch, shows that the firm is very much in the ascendancy.

Ashurst's PEP has increased by 22 per cent since 1999, its last standout year. As the firm's managing partner Simon Bromwich puts it: "Watch our PEP - we're not that far off A&O."

The silver circle is a group of firms identified last year in The Lawyer UK 100 Annual Report as outperforming the majority of its peers when it came to key indicators such as PEP and RPL.

Twelve months on and three of the firms at its core - Macfarlanes, SJ Berwin and Travers Smith - show no signs of slipping.

Macfarlanes confirmed its reputation as possibly the City's best-run firm with not only a PEP of £945,000, but an RPL of £466,000, ahead of all bar Slaughter and May. Its lower cost base means it manages to squeeze the same PPL as the UK elite firm (£235,000), but from a lower revenue. Indeed, if you want to talk 'elite', then there are only three firms in the entire market that achieved a PPL of above £200,000 last year - Slaughters, Macfarlanes (both at £235,000) and Freshfields Bruckhaus Deringer (£215,000).

What is particularly striking about this group is not just its performance during the past 12 months, but its consistency over the past six years. Since 2000 the average PEP figures at Macfarlanes, Travers and SJ Berwin have grown by 80 per cent, 66 per cent and 27 per cent respectively.

The already high margins have improved all round, except for that at Macfarlanes, which would really have to go some way to beat last year's 50 per cent. This year it stayed the same, while SJ Berwin climbed to 38 per cent and Travers posted an incredible 49 per cent margin.

Addleshaw Goddard's position in the national group confirms its status as one of the market's best-run firms, whereas Cobbetts' figures confirm that managing partner Michael Shaw really does have his work cut out.

Cobbetts comes equal bottom of the RPL table for national firms with £170,000. Indeed, only nine firms in the top 100 had a similar or poorer figure. And only Bond Pearce, Marineau Johnson, Keoghs and Weightmans made less PPL than Cobbetts.

As reported by The Lawyer (10 July 2006), turnover at Cobbetts has risen by 488 per cent since 1999, from £11m to £53.7m this year. But over the past four years Cobbetts' profitability has actually dropped, from a £210,000 PEP high in 2002 to this year's £190,000.

The firm is feeling the pain of an extremely rapid expansion and intense investment over two years and has struggled to raise not only its average PEP, which last year remained static at £190,000, but also its margin. Although Cobbetts did raise RPL last year from £130,000 to £170,000, its CPL mushroomed from £89,000 to £141,000. If this level of cost continues the firm will need a lot more from its lawyers next year to achieve Shaw's ambition of hitting a PEP of £300,000 in two years.

Nigel Knowles at DLA Piper might justifiably complain that it is unfair to rank the firm that has become a global powerhouse in this bracket. In a sense, DLA Piper almost deserves a category all to itself (as, further on in this feature, does Avalon Solicitors, albeit for different reasons). But carping aside, its profile is remarkably similar to the national firm average and suggests that it has not yet entirely escaped its roots.

Wragge & Co's figures, incidentally, place it at the top of the PPL table. It is the only national firm that makes six figures in this category, proving the worth (at least in reduced overheads) of a strategy that essentially remains that of a single-site firm.

Simmons & Simmons' rebound in fortunes was not just limited to its 22.1 per cent rise in PEP, which reached £470,000. The firm tops the RPL list for large London firms, with a figure of £388,000. It was also second only to Berwin Leighton Paisner (BLP) on PPL with £116,000, compared with BLP's £122,000.

Figures for Norton Rose and Denton Wilde Sapte (DWS), meanwhile, confirm that both firms' best days are behind them.

Certainly any lingering hopes that Norton Rose partners might have had of one day making the grade as a UK or global elite firm will have been dashed with a PPL of just £79,000. Yes, that is less than Brabners Chaffe Street's (no offence, Brabners).

DWS came bottom of the PPL league with a measly £65,000.

Olswang chief executive Jonathan Goldstein raised the bar for midmarket performance this year when he described £500,000 PEP as "the benchmark by which the leading firms in this market are judged".

The comment reflected a confidence at Olswang that the London midsized group table illustrates. An RPL of £358,000, plus its PEP of £531,000, confirms that Olswang had a cracking year. The firm was one of only three in this group to make a six-figure (per lawyer) return on its investment in talent, the other two being Watson Farley & Williams with £132,000 and Lawrence Graham with £107,000.

Trowers & Hamlins had a strong 2005-06 with a 41 per cent growth in PEP to £472,000. Yet its PPL was just £52,000, extracted from its RPL of £269,000. Only Salans, with its ranks of Central and Eastern European offices, produced a lower PPL (£49,000) from this group. Both latter firms' PPLs were well below the average for this group, which last year was £83,000.

The London lower midsized group is one of the largest, comprising 13 firms with a variety of practice areas. Of these Fladgate Fielder is the only firm to break through the £300,000 RPL barrier.

Known for being tightly managed, Fladgates' £89,000 PPL beats those of competitors Charles Russell in the midsized group and Norton Rose among London's large firms.

At a similar level of profitability is IP boutique Bristows and property specialist Forsters. Mishcon de Reya and Finers Stephens Innocent also do well in the table, posting RPL figures of £288,000 and £274,000 respectively.

Costs for most firms in the London lower mid-bracket are around £200,000 per lawyer, which is higher than in other firms of similar size in other parts of the country. Rents and salaries are major factors for firms looking for a foothold in the capital.

Penningtons Solicitors has the distinction of being the least profitable firm in London based on its PPL figure of £33,000. Penningtons is also the only London firm in the UK 100 to have an RPL below the £200,000 mark.

Avalon Solicitors rewrote the rulebook with its off-the-scale performance, which beggars belief; but when you take it out of the equation, the North East leads the North West.

Newcastle's Watson Burton leads the peer group with an RPL of £260,000, but it is not the most profitable on a per lawyer basis in the region once its PPL figure of £57,000 is considered.

That honour goes to Walker Morris of Leeds, although at £82,000, its PPL is only marginally ahead of North West firm Brabners Chaffe Street's, which has a PPL of £80,000.

Bolton-based Keoghs, with a PPL of just £23,000, and Liverpool's Weightmans with a PPL of £25,000, show the tight margins regional firms can operate within.

North West firm Hill Dickinson is the lowest-ranked firm in the group on RPL figures with £156,000, trailing well behind Weightmans' £167,000.

Manchester boutique Pannone, which often features in surveys on quality of working environment, cracks the £200,000 RPL mark, but the high cost base it shares with Watson Burton and fellow Newcastle firm Dickinson Dees keeps its PPL figures in the mid-£50,000 range.

Avalon, the 100 per cent 'class action' boutique, is unique - even its CPL figure is more than double the rest of the firms' from the North at £518,000, while its £1.9m RPL figure gives it a PPL figure of £1.4m - a figure above every other firm's in the UK 100.

THE LITIGATORS

Russell Jones & Walker's (RJW) practice is 90 per cent litigation, with a large proportion of its revenue consisting of its volume personal injury division, which trades under the Claims Direct name.

Although both turnover and average profit last year showed steady growth, both being up by 10 per cent, its RPL was the pick of the bunch of the UK top 100 litigators. The firm's 93 lawyers generated an impressive £414,000 each, although that PPL of just £49,000 could use some work.

But not as much work as Berrymans Lace Mawer: the insurance-focused firm with the lowest PPL in its group also posted the lowest PPL in its class at just £29,000.

The firm's profit margin, 18 per cent, might be good for a firm that is focused predominantly on insurance litigation, but it is among the lowest in the UK 100.

Overall, however, the figures prove that in 2005-06 litigation was not the place to be. Not a single firm in this group made more than £103,000 PPL last year. Not a good result.

THE SOUTH

Although Thomas Eggar and Burges Salmon vie closely for first place on RPL, Burges Salmon has the edge when it comes to profitability.

Thomas Eggar's costs are £182,000 for each lawyer, the highest in the southern group, and Burges Salmon's lawyers are each £24,000 more profitable as result.

With Burges Salmon's PEP at £410,000, more than £100,000 more than its closest rivals', this year the firm has confirmed its reputation as the top southern operation. Thomas Eggar does well to compete, considering its revenue is the fourth lowest in the South at £30.8m.

Bottom of the pile comes DMH Stallard with an RPL of £158,000 and a total profit of just £4.6m. DMH Stallard's problems growing RPL are partly down to the fact that it is still digesting its January 2005 merger between DMH and London outfit Stallard. The figures look better because it has managed to keep CPL down to a respectable £124,000, producing a PPL of £34,000.

This figure beats Bond Pearce's, Bevan Brittan's and Clarke Willmott's, all of which posted some of the lowest PPL figures in the country, hovering around the £28,000 mark.

SCOTLAND

The Scotland group can be split into four separate tiers. Dickson Minto sits at the top of the group with a RPL of £483,000, more than double that of its nearest rival Tods Murray. Slaughter and May and Avalon Solicitors are the only firms in the UK to post higher RPLs.

Those Scottish firms with an RPL of more than £200,000 - Tods Murray, Dundas & Wilson and Maclay Murray & Spens - form the second tier. Of these, Dundas is by far the most profitable, with each lawyer making £87,000 for the firm.

The third tier clusters Shepherd & Wedderburn, McGrigors and Brodies together on or around an RPL of £184,000. Of the group Brodies can boast the tightest grip on costs and therefore the best PPL figure at £67,000. McGrigors' £47,000 PPL is the worst of the traditional big four in Scotland, which comprises Dundas, Maclays and Shepherds.

In a tier of its own at the bottom of the Scotland group is Burness with an RPL of £149,000, the second lowest in the top 100. But keeping CPL under £100,000 means the firm still manages a respectable £286,000 PEP.

WALES AND THE MIDLANDS

Wales and the Midlands is a hotly contested peer group, with two firms sharing the top spot for most profitable firm in the region.

South Wales-based Hugh James leads the way when ranked by RPL, with an attractive figure of £271,000. But it shares the top spot when ranked by PPL with Howes Percival of the East Midlands on £76,000.

In fact, the Welsh firms show up their Midlands-based rivals, with Cardiff-headquartered Morgan Cole posting an RPL of £199,000 Mills & Reeve, the Norwich-based firm with offices in Cambridge and Birmingham, as well as a London presence, has the highest turnover of any firm from the Wales and Midlands group with £49.1m, but it finishes in the middle of the pack when ranked by RPL with a figure of £193,000.