The Lawyer UK 200 preview: Profit margin: Profitability still a key indicator of success

As well as turnover increasing, the top 20 firms have also maintained their margins. Joanne Harris reports

It is all very well turnover rising, but unless a firm manages to increase its profitability then it is difficult to argue that the year has been entirely successful.

Good news, then, for the top 20 firms, as the majority managed to increase or hold their profit ­margins steady during 2010-11.

The biggest profitability rise came from SJ Berwin. The firm’s margin rose by six percentage points between 2009-10 and 2010-11 to 29 per cent, thanks to efforts made to improve its efficiency.

The net profit of £51.7m came with turnover of £179m, and resulted in a 40 per cent increase in average profit per equity partner (PEP) for SJ Berwin’s partners.

Across the City at Berwin Leighton Paisner, margins were up almost as much – from 22 per cent to 27 per cent. The increases bring both Berwins more in line with the top 20 margin average of 29.5 per cent.

That average is heavily skewed by the high profitability of ­Slaughter and May, Linklaters and Freshfields Bruckhaus Deringer. This trio of firms all boast profit ­margins of 40 per cent or more, although Freshfields’ margin ­actually dropped between 2009-10 and 2010-11.

Despite the four percentage- point drop, a margin of 48 per cent is not to be sniffed at and ­Freshfields remains the UK’s ­’richest’ firm overall, with a net profit of £544m. Slaughter and May has widened the gap between it and Freshfields with a one ­percentage point increase in its margin, which now stands at 53 per cent.

Margins in the rest of the magic circle vary from Linklaters’ 43 per cent, steady on the previous year, to Clifford Chance’s 31 per cent, up two percentage points from
2009-10. Allen & Overy continues to sit in the middle with a margin of 38 per cent.

The rest of the top 20 has a broad range of margins. After a one percentage-point drop this year, Bird & Bird’s 18 per cent ­margin is equal to that of Irwin Mitchell at the bottom of the table.

DLA Piper’s 19 per cent margin is only just higher, but the firm did increase its margin from only 17 per cent the previous year.

Other firms to see their margins improve this year include Hogan Lovells, up two points to 32 per cent; and Clyde & Co, Taylor Wessing, Simmons & Simmons and Eversheds, all of which gained one percentage point.

Meanwhile, Pinsent Masons and Herbert Smith saw their margins narrow slightly to 21 and 25 per cent respectively, both down by ­a single percentage point.

The biggest downward change in margin was at Norton Rose. The firm’s merger with Australia’s ­Deacons led to a greater change in turnover than net profit, although both figures were up substantially compared with 2009-10.

Lowest-paid equity partners: Clarke Willmott (bottom of equity £35,000)

Highest-paid equity partners: Slaughter and May (top of equity £2.1m)

Lowest-earning partnership: Optima Legal (earnings per partner: £92,000)

Top-earning partnership: Slaughter and May (earnings per partner £1.9m)

Biggest gaps between top and bottom of equity

DLA Piper: £225,000-£1.7m (£1.475m gap)
Gordons: £250,000-£1.7m (£1.45m gap)
Watson Farley & Williams: £200,000-£1.4m (£1.2m gap)
Berwin Leighton Paisner: £321,000-£1.4m (£1.08m gap)