Revival of the fittest

The biggest 50 firms in the UK have had an outstanding year, as our lead story demonstrates. For the fullest picture, you’ll have to wait for the publication of the definitive guide to law firm finances when The Lawyer UK 100 Annual Report comes out in September, but our analysis of the top 50 firms’ preliminary figures highlights the health of the commercial legal sector.

The magic circle has had its best results for ages. For the past couple of years the running has been made by lean, aggressive domestic midsizers such as Berwin Leighton Paisner. But the four magic circle firms are getting their houses in order.

So much so that the unthinkable is happening: Linklaters‘ profit per equity partner (PEP) is actually catching up with that of Slaughter and May. The smart money next year is on Freshfields, which is about to undergo a Linklaters-style shake-up and which has been a dominant force in M&A this year.

Clifford Chance has enjoyed a huge comeback too. Not only did it record a similar percentage increase in PEP to Linklaters’, but it has also overtaken Allen & Overy‘s (A&O) PEP figure – a statistic that ought to worry A&O partners.

A&O, which has a vastly weaker corporate offering and – worse still – a money pit in the shape of its US operation, will have to put on a spurt next year if it is to avoid being left behind. At the moment it is the most vulnerable of the magic circle.

The full table on page 4 demonstrates the extent of law firms’ profit growth. In 2005 only five firms in the top 50 scored £700,000-plus PEPs. This year there are nine. Even more strikingly, last year 22 firms got PEP over £400,000. This year there were 34.

Most law firms have spent the past two years cutting overheads, so all revenue growth is going to be reflected very quickly in bottom line profit figures. Indeed, average PEP at the top 50 is up by 19 per cent on the previous year, while average turnover growth is up by 13 per cent.

But central management can only excise so much cost from the business. The responsibility for revenue growth, which is the true driver of profit, remains firmly with the line partners. This is what lies behind the move by Lovells’ David Harris to up partners’ targets, as we reveal this week.

After all, if you want that sort of money, you’re going to have to work for it.