For the first time, The Lawyer UK 100 Annual Report can map the progress of the UK's major firms on revenue, profit and headcount lines over the last five years and plot partners' returns on investment. We've done this in response to requests by several managing partners. We believe that producing a yearly snapshot of the top firms' finances - however well researched - is just half the story. Context is key.

Can you grow in turnover and keep your margins high? Figures over a five-year period should allow any student of law firm finances to discount blips, whether from IT spend or merger costs on the debit side, or by a couple of mega-jobs feeding into the top line.

We've taken figures we published in 1999-2000 and mapped them over five years. Of course, the legal profession was going through very different times. Back then M&A activity, fuelled by the technology boom, was at record levels, so we're starting from a high point. However, it was the end of the 20th century, with its international law firm mergers, partnership restructuring, brand management and increasing professionalisation, which together made the UK legal profession the global force it is today. It can't be dismissed as an aberrant period.

The cost of going global
What is clear is how international investment has affected the magic circle firms. We tracked their performances over the last five years (see graph opposite). All of the big four have had major international mergers: Clifford Chance in the US, Germany and Italy; Freshfields Bruckhaus Deringer in Germany; Allen & Overy (A&O) in Benelux; and Linklaters in Germany, Belgium and Sweden. Taking the figures from year-end 1999-2000, you can see how much these mergers added to revenues - Freshfields has grown by 107 per cent in five years, A&O by 102 per cent, Linklaters by 82 per cent and Clifford Chance by 62 per cent.

In pure percentage terms, Clifford Chance and Linklaters have both grown their partnerships more than their revenues. Linklaters has added the most partners since 2000 - 100 per cent more compared with its 82 per cent revenue growth. Clifford Chance has added 74 per cent more partners on its 62 per cent growth in billings. It's no coincidence that both Linklaters and Clifford Chance are now putting the brakes on the growth of their equity partnerships by extending the salaried layers.

Meanwhile, Freshfields has seen revenue grow by 107 per cent but has grown its all-equity partnership by only 88 per cent. Similarly, A&O has been cautious in making up partners - its partner headcount increased by 76 per cent as against its 102 per cent growth in revenues.

But the most important aspect of these statistics is how much (or rather, how little) of that revenue growth has translated into profits for the quartet. For the last five years, the big four have implemented growth strategies that have taken them all over the globe. There has been no concomitant increase in profitability - yet. Yes, the big four are always going to be vulnerable to a transactional downturn, but despite all their hedging, being global has meant that their profitability has taken a tumble. In fact, the beginning of the century was the best time to be a partner at a magic circle firm.

Mid-size firms shouldn't start gloating. Magic circle partners will argue that investment in the global business has been necessary rather than optional, and there is much merit in this argument. If you want to service a certain type of high-rolling client base - the investment banks, for example - you can't hope to do it without paying for the requisite IT system and the right offices on the notepaper.

The question is how far down the road you trudge, not whether you leave home at all. The global model is not fatally flawed, but contrary to many magic circle partners' hopes of five years ago, neither is it a get rich quick scheme.

Freshfields is the only firm of the big four whose international expansion has had a neutral effect. Its average profit per equity partner (PEP) of £675,000 is exactly what it was five years ago, before the merger with Bruckhaus Westrick Heller Löber. Linklaters is down 5 per cent to £674,000 compared with £710,000 in 1999-2000. And weirdly, A&O and Clifford Chance have both seen an identical drop in profitability of 18 per cent over five years, although A&O's stretched lockstep has its top equity partners on £952,000 this year compared with Clifford Chance's flatter structure; Clifford Chance plateau partners are on £630,000 this year. A&O also operates various ceilings for its partners in different jurisdictions, notably Benelux and Central and Eastern Europe.

Clifford Chance had its worst year for half a decade. Average PEP was £562,000, down from £644,000, but the good news was that revenue per lawyer (RPL) was up 5 per cent, from £337,000 to £354,000. For a firm where a quarter of its business is done in dollars, that's creditable. Here's a caveat: rather like auditors, The Lawyer UK 100 Annual Report asks for all figures, from work in progress (WIP) to headcount, as of financial year close. Clifford Chance lost a lot of lawyers in the US near the end of its financial year, but revenues were already booked, and this may have skewed the figures in the firm's favour. The total number of equity partners, for example, plummeted from 441 to 406.

Clifford Chance's global margin of 25 per cent is down on last year's figure of 29 per cent, although that is also a function of carrying no fewer than 220 salaried partners on the cost line. Of the big four, it showed the second-lowest decrease in margin; its London margin stayed strong at 36 per cent. Corporate billings were a problem at £1.2m per partner, but finance (£1.5m) and litigation (£1.9m) saved the day. Despite the firm's much-documented woes, its management is optimistic. Their firm is in better shape than it has been for several years; more than its competitors, it needed a downturn to shake itself out.

Freshfields dropped 2 per cent in turnover, from £800m to £785m, with PEP down 4 per cent, from £700,000 to £675,000. More worryingly, RPL was down 8 per cent, from £385,000 to £353,000. Given that law firms are fundamentally revenue businesses, you might expect any drop in billings to present problems - especially when most law firm costs are so fixed. But Freshfields' margin was an incredible 45 per cent.

Any discussion of margin should always be in the context of the equity make-up of a partnership. Freshfields, with its all-equity partnership and relatively low gearing, shows the highest margin of any firm in The Lawyer UK 100 Annual Report. And margins in Germany are even higher because of the lower gearing.

With Freshfields' lower gearing, its cost base is always going to be the lowest of the four. What's more, cost per lawyer (CPL) also decreased from £216,000 to £196,000. However, Freshfields' cost base has benefited a fair amount from currency exchange. A third of its lawyers are in London, with the bulk of the rest in Germany. That represents a considerable saving in sterling costs - especially when the German end of the practice is billing like there's no tomorrow. Alone of the big four, it managed to maintain its margin - 44 per cent last year and fractionally up this year to 45 per cent.

Linklaters posted static revenues. Its PEP went down from £734,000 to £674,000, with RPL exactly the same at £360,000. Cost per lawyer rose from £209,000 to £234,000, and its profit margin dropped from 42 per cent to 35 per cent. Tony Angel's permanent revolution at Silk Street is, well, permanent. Linklaters' management is clearly dealing with that softening attrition rate. It's painful to have to restructure the partner and senior assistant base, but it's being done. Within a year, the number of partners at Linklaters has decreased by 20 to 470, which, by the way, partly explains the rise in revenue per partner (RPP) from £1.47m to £1.53m.

There were no surprises in A&O's numbers. It was the only magic circle firm to put on revenue, inching up from £647m to £652m, although that was largely down to increased headcount. RPL was static at £347,000, marginally down from its previous £348,000. PEP fell 10 per cent, from £675,000 to £609,000, with the margin decreasing from 38 per cent to 30 per cent.

Divisions One and Two
International expansion has treated the chasing pack in different ways. Over five years, Lovells has turned in the most consistent and positive set of results. Like the big four, it's had to invest internationally through various mergers on the Continent. Revenues have increased by 56 per cent, partner headcount by 35 per cent and PEP by 38 per cent - and it's a predominantly equity partnership, which means that its figures are even more impressive.

On this measure, Lovells does rather better than its comparator firm, Herbert Smith. Note that Herbert Smith holds its equity very tightly, with equity partners making up 56 per cent of the partnership, but PEP has gone up by only 8 per cent compared with revenue growth of 46 per cent over five years. Meanwhile, Ashurst's turnover has gone up by 52 per cent in half a decade, but average profits have declined by 4 per cent.

We've occasionally given Simmons & Simmons and Norton Rose a pasting. Last year's figures for both firms were pretty dire, and this year's - for Simmons, at least - weren't much better. Both firms still have an awful lot of work to do (we suggest hiring Jim Wadia, now that he's finished his three years at Linklaters). At Simmons, RPL and RPP were broadly the same, so the increased turnover was derived from more bodies. The 8 per cent drop in PEP, from £300,000 to £275,000, was in line with this hesitation in really taking control of the cost base.

At Norton Rose it was a similar story, although a better CPL figure (£155,000 compared with last year's £173,000) contributed to the 4 per cent increase in PEP, from £390,000 to £405,000. It's worth noting that for both Simmons and Norton Rose, the finance practices have turned in consistently good figures. Over the course of five years Norton Rose has recorded an 11 per cent PEP drop on a 46 per cent turnover increase. Simmons has fared slightly better, with turnover up 52 per cent in five years and PEP up 8 per cent. But Simmons' average PEP of £275,000 still only puts it 48th in the profits table, so it still needs plenty of improvement.

One of the better performances among division one was CMS Cameron McKenna, which over the last five years has been remarkably consistent. Turnover has increased by a steady 23 per cent, and profits are up 22 per cent in five years - and this came against a background of moving to an all-equity partnership. Its 4 per cent drop in turnover, from £174m to £167m, this year was almost entirely attributable to ditching its offices in Hong Kong and Washington DC; PEP was up by 3 per cent, from £401,000 to £415,000 - and that on a largely equity partnership. Camerons' move is proof that firms should be bold in getting rid of its foreign investments when it's adding nothing to the bottom line .

May you live in interesting times
Bird & Bird and Osborne Clarke both turned in interesting performances. The firms major heavily on tech, and both had their glory days at the height of the boom. This year, 2003-04, saw a slight return to form for both of them after a miserable few years. Bird & Bird's turnover went from £62.3m to £71m, with PEP up from £317,000 to £327,000. Osborne Clarke's gross fees went from £60.9m to £64.6m and PEP jumped from £233,000 to £303,000.

But can they ever relive those days of high summer? It's unlikely. Both have spent considerable money and management time trying to build up their European offering, but return on that investment is slight. Osborne Clarke has managed a 1 per cent increase in PEP over a turnover increase of 85 per cent in five years, while Bird & Bird has declined by 4 per cent on a staggering 106 per cent rise in revenues.

In both cases, the European offering may be in place, but it's doubtful whether either firm has the muscle power to keep it moving. Forget the guff about referral networks - they won't last forever. This may be the time to do a US deal; as our report on page 39 shows, US mergers have benefited a number of UK firms' market share.

And here come some plaudits. On a five-year investment, among the best firms to be in are Barlow Lyde & Gilbert, Clyde & Co and, according to the figures, Irwin Mitchell.

Irwin Mitchell is remarkably opaque on how it has apparently been so successful. As we said last year, it's a wonder. A warning to managing partners: it's all very well to give out statistics, but if you don't have the narrative to back up the figures, then the rest of the world can't help but be sceptical. We might stop short of saying we don't believe you, but a move to LLP status would be interesting.

So let's move on to two firms whose performances are considerably more transparent. Both litigation specialists (something any US firm would understand), they have nevertheless taken different routes.

When Clyde & Co was shortlisted at The Lawyer Awards this year for Law Firm of the Year, several City partners snorted with mild derision. Scoff not, you transactional heavies: Clyde & Co has managed what few internationally-minded firms have been unable to. It is as global as many of the top 10 - 21 per cent of its revenues are now generated outside the UK. It has grown by 55 per cent over five years, increased its partnership headcount by a mere 19 per cent and its profits by an astounding 66 per cent.

Meanwhile, Barlow Lyde & Gilbert's revenues have grown by 53 per cent on a 16 per cent increase in partners in the same period, while its profits have shot up by 81 per cent. And it has achieved its impressive growth with a pretty much all-equity partnership. It's a whole lot more conservative than Clyde & Co, but to manage that growth over five years from a London base is a massive feat of quality control.

What of the merged firms? Berwin Leighton Paisner - Law Firm of the Year at The Lawyer Awards - is one of the few where the merger really has worked. One suspects that this is less through the constituent parts and more to do with the determination of the management and the buy-in from its lawyers. In any case, it has had a spectacularly good three years. Since its merger, revenues have increased 18 per cent, from £86.2m to £102m, on exactly the same partner headcount, and PEP has rocketed by 63 per cent, from £260,000 to £425,000.

Elsewhere, mergers have not always delivered on their early promise. Hammonds' merger with Edge Ellison in 2000 gave it bulk, but there's still work to be done. PEP went down 18 per cent this year, from £330,000 to £272,000, and that profit line has been wildly inconsistent over the last few years: £310,000 in 2000-01, £195,000 in 2001-02, £330,000 in 2002-03 and £272,000 in 2003-04. Obviously, Hammonds is strongly geared to transactional work, so it's a revenue rather than a cost problem. Yes, it has a multi-office setup, but its CPL is on the low side at £160,000, so that cannot be its excuse forever. On the upside, the international network is coming good and the firm is seeing its biggest growth on the Continent.

Other merged firms have made much more steady progress. Pinsents' PEP has hovered around the £270,000-£280,000 bracket for the last three years. Denton Wilde Sapte has been firmly planted in the £310,000-£330,000 bracket. They're both solid businesses, but their relative low placings in the PEP table make them vulnerable either to the US firms or aggressive outfits such as DLA.

Ah, DLA. There's no getting away from it - DLA really has been a success story. It's shown a 97 per cent growth in revenue in five years on a 46 per cent increase in partner headcount, yielding a 57 per cent increase in PEP within half a decade. The equity is one of the most closely-guarded in the City, but different structures work for different law firms, and DLA's salaried partners can earn up to £300,000. DLA's focus on commercial services - IT, employment, real estate, PFI, IP, competition and regulatory - is an entirely different model from the transactional obsession of so many of its competitors. And this time next year it may not be DLA, but DLA Piper Rudnick. Who would dare bet against it?