London Mid-Market

Denton Wilde Sapte (DWS) is a very different firm from what it was five years ago. Back then DWS was the twelfth-largest law firm in the UK, with offices across Asia and an extensive European network.

Its peers were the likes of Ashurst, Norton Rose, Simmons & Simmons and SJ Berwin.

The past five years have been a time of massive change for all of those firms. Norton Rose and Simmons both suffered at the beginning of this period, but appear to be emerging with their identities more or less intact. Certainly both remain firmly among the large City firms hanging on to the coat-tails of the bullish silver circle (although Norton Rose itself dropped out of the top 10 last year).

DWS, however, has gone backwards. It now finds itself battling amid another bullish pack of London mid-sized firms. This year Taylor Wessing has overtaken DWS’s turnover and tops the group. DWS is the second-largest with a turnover of £155.7m, but it is the only firm that has seen its turnover slump during the past five years. Revenue has dropped by 12 per cent since 2003, when it stood at £177m. Importantly, DWS has also seen its revenue per lawyer (RPL) grow over the five-year period at a snail-like rate of just 18.1 per cent. In stark contrast, Stephenson Harwood, which also had its problems in 2003 and 2004, has seen its RPL rocket by an astonishing 125 per cent.

Both DWS and Stephensons have slimmed considerably since 2003. DWS had 727 lawyers in 2003 and 568 now. Stephensons had 344 in 2003 following its merger with Sinclair Roche & Temperley and has just 226 now. When Sunil Gadhia took over as chief executive of Stephensons in January 2004 both firms had some tough decisions to make.

Asia was one problem that both shared. As Gadhia said: “There was a prolonged recession in Asia and just as they were coming out of it Sars came along. I think it’s difficult to realise the impact that had from here. It was devastating.”

In separate moves, and emblematic of the differences between the two firms, DWS chose to axe its Asia operations, while Gadhia kept faith with his colleagues in Asia.

In April 2004 DWS announced that it was closing its Beijing, Hong Kong, Singapore and Tokyo offices, losing 12 partners, 50 lawyers and 100 staff in the process.

Differing strategies
One former DWS partner who was with the firm at the time says: “To make it big in Asia you have to invest, but we had no money to do it.”

In contrast, Stephensons’ Gadhia says: “I took over slightly after [the Sars epidemic] and I sensed the economy was turning and that we had good people who would perform well in a good climate.”

That decision has paid off. Asia is now a key driver of Stephensons’ growth. While London dominates with 83 per cent of the total revenue, the firm’s Asia offices grew by 14 per cent last year and have contributed to London’s success with a number of Asian companies flocking to AIM.

If DWS’s Asian slash and burn strategy was supposed to boost its profit, it has failed. DWS’s margin languishes at just 23 per cent, a 1 per cent rise in five years, while Stephensons has a margin of 30 per cent, although DWS’s costs per lawyer came in slightly lower last year at £209,000 compared with Stephensons’ £222,000.

While Bird & Bird, Olswang and Taylor Wessing had very little or no exposure to those Asian markets, all three were hit hard by the dotcom backlash. Olswang’s average profit per equity partner (PEP) had slumped from a dotcom high of £575,000 in 2000 to around half that two years later. At the time Bird & Bird’s was just £317,000, while Taylor Wessing’s had dipped to £344,000, some 17 per cent below the £415,000 it recorded in its final year as Taylor Joynson Garrett.

Each responded in a different fashion, but in contrast to DWS and Stephensons, they all plumped for expansion. Olswang diversified, looking to the real estate market for salvation in the shape of DJ Freeman’s property team in March 2003. It followed that up by scooping property boutiques Kanter Jules and Julian Holy Solicitors. In 2003 property accounted for just 15 per cent of Olswang’s turnover, a figure the firm wants to boost to 20 per cent.

In January Olswang made its first foray overseas in a typically opportunistic fashion when it snapped up two Freshfields Bruckhaus Deringer partners and one from EY Law to launch in Berlin. The team focuses on real estate and finance and plans to build the office out into the technology and media sectors to mirror the firm’s UK practice.

Taylor Wessing and Bird & Bird both turned to Europe in their efforts to bulk up. Taylor Wessing followed the long, slow integration of its Anglo and German arms with the capture of much of Landwell’s Paris office in November 2003. Since the 2005 financial integration of Taylor Wessing, revenue has risen by 26.6 per cent, while RPL is up by 30.4 per cent. Of the group, only DWS’s RPL has risen by less than 20 per cent during the past five years, and during the past three it has crept up by just 2.6 per cent.

Taylor Wessing’s progress has been steady compared with its peers’. Bird & Bird has grown by 43 per cent during the past three years, while another firm in the group, Trowers & Hamlins, has grown by 54 per cent. Olswang has grown by nearly 30 per cent. Only Nabarro, a synonym for slow, steady conservatism, has grown more slowly during the past three years with a 23 per cent growth in revenue. But Nabarro has seen its RPL rocket by 52.5 per cent since 2003 without recourse to any overseas expansion. And with a profit margin of 39 per cent, it might argue it does not need to.

“We’ve never been after big headlines,” says Nabarro senior partner Simon Johnston. “We’ve never opened an office with one bloke, his cat, his dog and his budgerigar in some obscure place. Merger of international development is not a strategy in itself. We want to be a stronger and fitter business and we think we’re doing that.”

Over the past five years Nabarro has boosted its profit margin from 34 per cent to a very healthy 39 per cent. The firm has built out its corporate and commercial teams with a few lateral hires, upped its associate hours target to 1,500 and introduced a bonus scheme for associates. Forty two per cent of the firm’s associates bagged a bonus last year.

Johnston said: “Our momentum started three years ago when the real estate market began to motor and when corporate started to emerge from the dotcom downturn.”

Bird & Bird has emerged from that downturn with quite a splash and five years on has legitimate claims to being a truly pan-European law firm. If you take the Taylor Wessing Anglo-German union out of the equation, Bird & Bird’s growth has been the most dramatic during this period. Total revenue has risen by 84 per cent, from £62.5m in 2003 to £115m this last year.

During this period Bird & Bird has opened offices in Frankfurt, Lyon, Madrid, Milan, Munich and Rome. The firm’s overseas offices now account for around 55 per cent of total turnover. UK turnover dropped below 50 per cent around two years ago.

Chief executive David Kerr says that what the firm is now aiming for is balance. Bird & Bird’s growth has been relatively hassle-free considering the phenomenal rate of expansion.

“That’s due to the sector focus,” said Kerr. “We were targeting lawyers in each country who would fit with the strategy and we only expanded on the back of a single, unified partnership. We always rejected any flaky association or alliance.”

A surprising 35 per cent of Bird & Bird’s revenue comes from litigation, which has thrived despite the general downturn in the practice area. The firm is known for its IP litigation, but it is also strong in particular niches such as public procurement litigation in France and Germany.

Much of the firm’s transactional work is cross-border in nature, be it commercial projects such as outsourcing or mid-market M&A and restructuring. The firm also has 30 lawyers in China, where it acts for companies such as Lenovo.

Trowers & Hamlins is the baby of the group (turnover is the lowest at £68.1m), but it also looks to be the coming force. Total revenue has soared by 83.6 per cent in the past five years, while PEP has rocketed by a staggering 124 per cent to £559,000. RPL has risen by 37.5 per cent, while the firm keeps a tight grip on costs. The firm’s relatively low RPL of £253,000 (the lowest of the group) reflects its roots and its continuing presence in such low-margin areas as social housing. The firm’s overall margin is the lowest of its peers at just 18 per cent.

But the rise and rise of the firm’s Middle East presence is what really grabs the attention. Trowers’ Middle East offices reaped around £12.5m last year, around 19 per cent of total revenue, and is projecting more than £15m for the current year. In contrast, the social housing group contributes around 13 per cent.

It is this arena in which Trowers comes head-to-head with DWS, which has long considered the Middle East a strength. That strength was hit hard by the loss of Rahail Ali to Lovells this year and the firm is now reliant on the practice of Middle East head Neil Cuthbert. Cuthbert would be an obvious target for preying firms, and while DWS can accommodate him on its ‘super-lockstep’ and ‘super-bonus’, there is only so far that lockstep can stretch. Other firms could tempt him with a bigger package.

Eighty per cent of the firm’s revenue comes from the UK, but DWS finance director Steven Watson says the firm is growing more in the Middle East and CIS, where it has 50 lawyers across Russia, Kazakhstan and Uzbekistan focusing mainly on energy.

Watson said: “The overseas offices do produce a lower revenue per lawyer because of lower rates, but it’s more profitable. It’s a strange mix. If you’re growing more overseas than you are in the UK that revenue per lawyer figure will go down.”

DWS also has offices in Cairo, Istanbul, Paris and Milton Keynes. It is an odd mix of offices. And if they are not growing and the UK business is not growing, what you are left with is a firm that is stagnating.