Smaller Stephenson Harwood is back from the brink

Stephenson Harwood is back from the brink” />His firm looked on the verge of collapse just three years ago, but now Stephenson Harwood chief executive Sunil Gadhia appears to be presiding over a minor miracle.

This year Stephensons’ average profit per equity partner (PEP) rose by 45 per cent to £407,000 from £280,000, while most firms saw an increase of between 15 and 20 per cent.

Partners at the bottom of the firm’s equity will pull in £242,000 this year, which is £2,000 more than the top equity partners received three years ago. In the same period the firm has more than doubled its equity plateau to £575,000.

Gadhia says: “We’ve managed the business effectively, so as much of the revenue increase as possible has gone to profits.”

But what is the real story behind the astonishing figures? Despite the fact that total revenue grew by just £5.1m, the 42 equity partners each made an average of £120,000 extra profit this year, totalling £5.3m.

With the firm’s premises and IT costs all remaining fixed, the secret is people and the distribution of equity.

“One or two equity partners have left during the year and a couple of the new people, laterals for example, would not necessarily join with an actual profit share at £407,000,” says Gadhia.

Stephensons made 10 lateral hires this year, including most recently White & Case senior associate Mark Bisset for its aviation practice and Charlotte Hill, CMS Cameron McKenna’s head of funds management.

In January, the firm lost its head of M&A Kevin Dean, who quit for Kirkpatrick & Lockhart Nicholson Graham. But it is not just the partners who are more profitable – the whole firm is simply smaller.

This is reflected in the revenue figures. Average revenue per qualified lawyer is up to £310,000, more than doubling the £141,000 billed in 2003.

In 2003 the firm had 99 partners and 344 lawyers on its books. This year it has 28 fewer partners and 147 fewer lawyers overall. And they are much more focused on core sectors, such as financial services, real estate and aviation.

Gadhia says: “We’ve made changes at a basic level and ensured the headcount is appropriate for the size of the business.”

But despite its eye-catching PEP figure, the real miracle is the firm’s first rise in turnover for three years.

No sleight of hand on the balance sheet accounts for the growth. Stephensons has been revaluing its work in progress (WIP) in anticipation of FRS5 rules for several years.

The firm has also tightened up its lock-up rate, getting the bills out faster. But with interest rates at a low, Gadhia insists that this has made the firm only marginally more profitable.

Asia has been a key driver in the growth of Stephensons’ business. Offices in Hong Kong, Guangzhou, Shanghai and Singapore have helped the firm build a name advising foreign investors eyeing the Chinese market, as well as Asian companies coming to AIM to raise funds.

London still dominates, accounting for 82 per cent of the firm’s revenue. At the head office, aviation and real estate have performed well, with the latter picking up ABN Amro and Deutsche Bank as new clients. The firm advised EDF Energy and Thames Water Services on an £8bn Ministry of Defence PFI initiative, and the firm’s four largest commercial litigation disputes were worth more than £2bn.

Stephensons has followed the classic management route of slimming down and handling bigger, more profitable matters in its core markets. This has driven turnover growth and, with a lower headcount, profitability.

Essentially, before financial management and client wins have any effect on the business, all the employees must put in the most valuable commodity – and that, according to Gadhia, consists of “good, old-fashioned hard work across the board”. And Gadhia can get back to the tricky business of finding a decent merger partner.

Stephenson Harwood’s financial results
2005-06 2004-05 2003-04 2002-03
Average profit per equity partner £407,000 £280,000 £234,000 £200,000
Top of partner equity £575,000 £400,000 £336,000 £240,000
Bottom of partner equity £242,000 £164,000 £136,000 £150,000
Worldwide turnover £61.1m £56.0m £58.6m £62.5m