Last year, The Lawyer 100 asked firms for a raft of new information. Aged work in progress (WIP) and debtors, average equity partner capital contributions, recovery rates, bad debt provisions… the list was lengthy.

As it was the first time, we weren’t sure what to expect. Many industry insiders said we wouldn’t get anything as the information was too sensitive. In part they were right. There was a sense of shock among many managing partners that we’d attempted to drill down into law firm finances in quite so much detail.

But several firms did respond, with no fear that the sky would fall in. We gathered enough information to make a stab at highlighting firms with good or poor financial management.

This year it’s a different story. Whether prompted by the inexorable progression to limited-liability partnership (LLP) status, or the debate over how to recognise income, the vast majority of firms were willing to discuss the billing cycle in some detail.

Sixty-one firms provided precise figures on year-end WIP and debtor days as well as revealing their lockup targets. Most of the remainder gave at least some of this information (see individual write-ups). Only a few were so reticent as to balk completely at putting a figure on the amount of capital that is locked up in their firms. It is a sea change from last year and a clear indication that the legal market truly is, at last, becoming more transparent. Much as the rest of industry (and, of course, the clients they serve) has had to do post-Enron.

This is the first time that attributed statistics of this nature have been published on such a scale. The results give another insight into the types of firms that make up the top 100 to sit alongside the headline turnover and profit per equity partner (PEP) figures. They show the kinds of practices these firms operate and, as Tony Williams of Jomati puts it, are an indication of “which firms are, or are not, billing and collecting the cash properly”. Taken together with the figures in the main table, we believe the results are the most accurate picture ever published of the state of UK law firm finances and financial management.

To streamline the research this year we asked only for figures on total lockup. For many managing partners this is the key figure, the yardstick by which they are measured not only as efficient heads of a law firm, but also of a major business. We asked for year-end levels rather than an average, believing this to be the best way of getting both the most up-to-date information and the best with which to make meaningful and fair comparisons. We stress that we are not ranking firms on the level of WIP, as this will depend entirely on the type of practice they are.

The WIP figures are, to The Lawyer UK 100’s knowledge, all provided at selling price; and being year-end figures the WIP is, or should be, as low as it will be all year. The debtors inevitably tend to be longer.

As management consultant Peter Scott said of the year-end billing bulge, “for most firms it’s a case of ‘if it moves, bill it’”. Collecting the debts comes later.

For the purposes of this feature we took a representative sample of 40 firms. Turnover in the sample ranged from Allen & Overy’s (A&O) £652m to Keoghs’ £15.3m. Total lockup ranged from Pannone & Partners’ 266 days to Hammonds’ 73 days. In between was a wealth of data that helps to build up a picture not only of the kind of firms they are, but which are the best-managed firms in the market.

As the biggest firm in the list, A&O’s figures give an insight into the workings of one of the global players, and it’s hugely impressive stuff, with a total average lockup at year-end of just 96 days. The split between WIP and debtors fits the expected year-end profile of a transaction-led firm exactly, with WIP all but billed out at 34 days and debtors twice as long at exactly two months.

Watson Farley & Williams is even more impressive in terms of clearing WIP before year-end, with just 14 days outstanding. But its debtor days are twice as long as A&O’s at 130 days, which was the longest in the sample except for Newcastle player Ward Hadaway (although this firm’s total lockup is the third-longest of the 40 firms). Reducing the length of those debts and converting them into cash must be a target for Watson Farley during the current year.

Another firm with a long debtor tail is Trowers & Hamlins (not in the table). At year-end it had 31 days WIP and 137 debtors. Again, the WIP figure at a firm known both for its Middle East practice and its social housing and public sector projects practice is acceptable, but the debtors, at some four months, is too long.

Mills & Reeve has a more even WIP-to-debtors figure than Trowers, with WIP at 72 days and 85 debtors, although it could still be improved. The figures suggest that the firm has a reasonable credit control department but may not be billing its clients regularly enough. Meanwhile, the tightly run Taylor Wessing lopped some eight days off its debtors figure to bring overall lockup down to an extremely efficient 88.4 days.

Hammonds runs the tightest ship of all, however, beating its 85 days target by 12 days at year-end. It’s an impressive performance and even the firm’s average lockup across the year at 101 days would be weeks ahead of most of its competitors’. The 19 per cent margin, however, confirms that low lockup alone won’t make you profitable.

In fact, one of the key findings to emerge from the figures, which is illustrated by the table, is that there is no correlation between lockup alone and a firm’s profit margin. Hammonds’ low margin and rock-bottom lockup contrasts sharply with Pannones’ top-of-the-table 266 days lockup and 34 per cent profit margin. The reason is down to the kind of work a firm undertakes (ie litigation heavy or primarily transactional), which has the greatest effect on the length of its lockup. As Baker Tilly partner George Bull points out: “It’s crucial to make an individual interpretation of each firm and its figures.” Consequently, whatever the practice area, if a firm is run tightly it is likely to be profitable, but other factors need to be taken into account. For these factors, and more, see the individual write-ups beginning here.

The Clementi Review

Aside from the FRS5 row, the other major development this year that could feasibly have an impact on law firms’ finances was the Clementi Review. The primary aim of the review, to modernise the regulation of the legal profession, could in the future lead to law firms attracting outside capital. Which raises the question: which firms would be most likely to take the cash? And if any did, in which ones would you invest?

There are quite a few firms in the top 50 that might lean towards outside investment, and for different reasons. The entrepreneurial Olswang would top most outsiders’ lists as a contender, while Wragge & Co and Berwin Leighton Paisner are also possibilities. Some firms would consider it purely for the kudos of being the first (Kemp Little got great mileage out of being the UK’s first limited-liability partnership).

For others it may simply be a way for partners to capitalise on their equity. But the most valid reason to go to the capital markets is if you’ve got a big strategy to make it worthwhile. As Barclays director Marke Lane points out: “There’s little point doing it simply to make a fast buck.”

In these circumstances, DLA would fit the bill. Post-merger with Piper Rudnick, the firm would be rivalling the big four in terms of size. Outside capital could fund further growth, further acquisitions and even diversification of the business. “I wouldn’t put it past Nigel Knowles to want to take over a bank, for instance,” quips Lane, “not the other way round.”

But DLA is probably not one to put your pension on as might be Slaughter and May or Macfarlanes. There are still too many questions about the success of its bold international plans. Managing a global top five player and maintaining quality across all offices is a different game from doing that on a micro level across the UK or even Europe.

Whatever the reason for taking the outside buck, a firm would still be faced with the fascinating culture clash of having external directors sitting with partners who’ve been used to managing their own destinies and are now having to be responsible to shareholders. The positive for the firm is that partners could use it to incentivise their staff by offering shares.

Clementi could also offer more clout for finance directors and non-lawyer chief executive officers. Currently they are managing many firms but remain employees. What fun it would be to see finance directors, most of whom are also accountants, become law firm owners. On second thoughts, perhaps this trend is still some way off.