Glass half empty? Half year results

Given the current market turmoil, reasonable half-year results are allowing many managing partners to breathe a sigh of relief – but some might be hiding bad news.

Glass half empty? Half year results It has been a tough year in the business world and for law firms that is translating into a mixed bag of half-year financial results.

A year ago 20 per cent turnover growth was the norm, with Halliwells, then one of the UK’s top 30 firms in ­revenue terms, standing out from the crowd after posting a single-digit ­revenue rise.

This year there is no norm, but in a market where uncertainty is a ­permanent feature and revenues have risen, fallen and stagnated at random, one thing seems sure: even single-digit growth is to be coveted. Double-digit is the Holy Grail.

Some firms are remaining tight-lipped about their half-year revenues. Magic circle firm Freshfields Bruckhaus Deringer, which claimed that ­currency fluctuations played no part in ­boosting its extraordinary 2007-08 profit, claims that, with currency movements making the financial ­situation difficult to assess, it is “more meaningful” to look at activity levels rather than turnover at this stage.

Of those that are willing to ­disclose their turnover figures, there have been a few that have experienced ­positive growth over the first half. Among these is Trowers & Hamlins, which outstripped its own budget to post revenue growth of 16 per cent over the first six months of this year (the firm had ambitiously projected growth of 15 per cent).

Despite a rocky financial ride in the 2007-08 financial year, when fee income growth of 14 per cent was coupled with a drop in average ­profit per equity partner of 8 per cent, and despite a large real estate practice, Trowers has attracted £42m in ­revenues so far this year, up from £36.1m last year.

Senior ;partner ;Jonathan ­Adlington admits that the real estate group, which is the firm’s biggest practice area, posting a growth in income of 3 per cent, was hit by a dearth of commercial conveyancing and major regeneration work ­during the first half of the year. The practice group was saved, he says, by its ­exposure to public sector non-­housing work, which grew by 46 per cent on the back of a boom in domestic PFI work in Building Schools for the Future and the waste sector.

Despite the strong showing, Adlington is aware that the outlook for the rest of the year is challenging.

“We’re pleased with the results and apprehensive, but quietly confident,” he says. “We’re targeting 15 per cent growth for the full year. The second half is generally better for the overseas offices, which saw things slow down with Ramadan and the summer.”

Other firms celebrating double-digit growth at the half-year stage include Clyde & Co, Lovells and Norton Rose.

At Clydes, chief executive Peter Hasson points to the firm’s ­international network of offices as being behind the firm’s 10 per cent increase in fee income, stressing that its UK base has seen no growth over the first six months of the year.

“The UK has stayed fairly flat, with corporate and property down, but litigation and other contentious areas going up,” he says. “As with other firms, we hadn’t anticipated the speed at which corporate would fall off, but other practice areas were within ­normal budget ranges or above.”

At Lovells fee income was up 15 per cent, while Norton Rose saw an 11 per cent increase.

Lovells managing partner David Harris points to the counter-cyclical nature of the firm’s practice as the main driver of growth, while Norton Rose chief executive Peter Martyr highlights the strength of Asia and the Middle East offices as ­contributors to his firm’s growth.

“We’ve seen a significant increase in bank restructuring work,” says Harris. “Litigation is busier and IP has been less susceptible to economic changes.”

“The worst-performing areas stayed flat,” reveals Martyr, “though banking and corporate finance, as normal, contributed most to ­revenues. The biggest jump in growth was in regulatory, which was good double-digit growth.”

The most interesting aspect of this year’s first-half figures is that there is absolutely no trend to define them. Although last year the credit crunch took hold as the second quarter got underway, half-year figures were barely affected, with the strength of the preceding M&A boom ensuring that even full-year revenues remained robust. Even firms with halfway decent corporate practices were all but guaranteed a strong showing.

This year there is little to link the firms that have experienced growth. With its real estate bias Trowers, whose only international presence is in the Middle East, has little in common with Lovells, which is present in every major market in the world and which sees no practice group contribute more than a third of total revenue.

Similarly, neither firm could ­legitimately be grouped together with the corporate and finance-focused Norton Rose or litigation firm Clydes.

The same could be said of the firms that have fared less well this year, though. While Freshfields refused to confirm its fee income for the first half of the year, joint senior partner Konstantin Mettenheimer says that activity levels across the firm are “basically flattish”.

An hourly rate survey carried out for The Lawyer by Legal Budgets showed that the magic circle had increased its rates by around 6 per cent this year (The Lawyer, 13 October), but given that clients are getting ever more adept at ­negotiating discounts, it is fair to assume that fee income at Freshfields is also flat.

This is also the case for Nabarro, which attracted a £64m revenue at the end of the first half of this year, as well as at the halfway stage last year.

While Freshfields and Nabarro, which are ranked third and 23rd respectively in The Lawyer UK 200 Annual Report 2008, operate in ­different spheres of the legal sector, their fate on the turnover front is tied by the fact that both have seen an uptick in restructuring and litigation work, while corporate and real estate have stagnated. But the kind of work the firms are doing is poles apart, with Freshfields’ corporate practice enjoying a far higher profile than Nabarro’s, while Nabarro’s real estate practice is far more crucial to the firm’s results than Freshfields’.

Equally disparate is the group of firms that has seen revenues drop over the first half, with Addleshaw ­Goddard, Eversheds and Wragge & Co all falling into that camp.

While the obvious link between the firms is their networks of regional UK offices, for Eversheds chief executive David Gray the very fact that they are firms providing a paid-for service means that economic turmoil would necessarily dent their revenues. He feels that no firm will be able to avoid the reality of reduced revenues as the world slides ever closer to a potentially long and deep recession.

For Quentin Poole, senior partner at Wragges, while his firm has already seen the credit crunch hit its financial performance, for the rest of the legal sector the worst is yet to come.

“My sense is that firms like us and other national firms, which have diversified across a range of practice areas, have felt the downturn earlier than other City firms,” he says. “But it seems to me that the impact of the recent problems in financial markets will be felt by the larger City firms.”

Certainly the outlook is not good. At this stage in the year firms will still be billing for work they did at the start of the year, when pipelines were being propped up by the tail-end of last year’s work. Now, despite there being a handful of choice credit crunch-related mandates being doled out largely to the transatlantic elite, the number of instructions has seriously declined. Firms that are posting revenue growth at this stage may well find that at the full-year stage they, too, are in negative growth territory.

“I’m always cautious about half-year figures,” admits Lovells’ Harris. “They’re not necessarily an indicator of what will happen in the full year, and in the current climate it’s difficult to predict what will happen.”

At a time when uncertainty reigns, even the best-managed firms must face up to the prospect of a grim period ahead. Which is not to say that no winners will emerge from the recession.

“Downturns are the times when there’s the opportunity to invest in the market,” insists Poole at Wragges. “Everything’s much more ­fragmented. The winners and losers in the next five years will emerge in the downturn.”