Silver Circle

The silver circle, as defined by The Lawyertwo years ago, consists of firms ranked below the magic circle in terms of turnover that can boast an average profit per equity partner (PEP) and average revenue per lawyer (RPL) far above the UK average. The firms also share the characteristic of being predominantly London-centric, despite having varying degrees of international success.

This year The Lawyer has reverted to a simple categorisation of UK-headquartered firms at the top of the rankings: the magic circle and then the silver circle. This is due mainly to the big four firms’ uniformly excellent performances, which are now challenging even the US elites’. A re-entry into the silver circle by Herbert Smith and Ashurst (last year categorised as ‘UK elite’ firms with Allen & Overy and Slaughter and May) is therefore not to be seen as a demotion, but rather as a simplification of categories. Indeed, Ashurst in particular has had a remarkable year. At peer firm Macfarlanes corporate partner Charles Martin, who will be senior partner next year, agrees with the grouping of the silver circle.

“There’s real demand at the moment from clients for high-quality legal advice,” he says. “All the firms in the silver circle espouse that theory: they insist on giving their clients the highest-quality advice. It’s a simple theory, but an important one.”

As for Slaughters, it does not quite fit into any category, which any partner at the firm knows only too well.

In truth, the silver circle splits down further. Macfarlanes and Travers Smith are comparatively small, with staff headcounts of 539 and 400 respectively. They are also restricted internationally: Macfarlanes has no overseas offices, while Travers retrenched in 2006-07 by closing its only foreign law office in Berlin (it still has a Paris office that only offers English law).

By comparison, Herbert Smith, Ashurst and SJ Berwin are far larger, with total staff headcounts of 2,012, 1,664 and 1,126 respectively. While Macfarlanes and Travers have become, if anything, less international in the past 12 months (as far as their offices are concerned), the big three of the silver circle have increased their international presences. Ashurst senior partner Geoffrey Green says within the silver circle “there are huge differences. Our business is more like Herbert Smith’s than the others’. We’re also more like Herbert Smith in terms of our size. But the real difference is in our international presence.”


Green makes the point that Herbert Smith, although strong under its own brand in Asia, chooses to operate its alliance in Western Europe with Gleiss Lutz and Stibbe. “But for us it’s very important that we do have one partnership. Our revenue outside London is now around 30 per cent of total fees, and we’re very proud of that,” he says.

This year SJ Berwin also saw the benefit of a targeted international expansion: Germany alone now contributes more than 12 per cent to firmwide revenue following its 2005 merger with Knopf Tulloch Steininger.

International growth is one reason why the most movement in the silver circle’s rankings has been within the bigger three than at Macfarlanes and Travers, whose results have been consistent across the board when compared with 2005-06’s.

The general picture
As a group, the silver circle experienced another solid year, with PEP rising on average by 15 per cent and turnover jumping by an impressive 18.5 per cent.

As Travers senior partner Alasdair Douglas says: “As an important macroeconomic point, London is now the financial centre of the world, which no one could have predicted in the early ’90s.

“This is why Macfarlanes, ourselves and others have done so well: the world has become very Londoncentric and it’s played right into our hands. I’d guess that, even if the magic circle is making money abroad, their centre of gravity has very much been London in the last couple of years.”

The silver circle firms have scored some choice cross-border deals in 2006-07 that required multipractice teams of which any magic circle firm would have been proud. Indeed, the silver circle dominated the frenzy for Anglo-Dutch steelmaker Corus, with Herbert Smith client and Indian conglomerate Tata finally beating Macfarlanes’ Brazilian client Companhia Siderúrgica Nacional with a £6.6bn bid. Not forgetting Ashurst’s triumphant instruction on the £16bn tripartite merger of its client Rusal with Linklatersclients Sual and Glencore. These deals highlight the fact that, although the silver circle remains London-centric, international clients, particularly those from Brazil, Russia, India and China, which are becoming increasingly acquisitive both within their own markets and in the developed world, find the firms attractive.

“I think what the generally strong performance of the group shows is that over the past three to five years there’s more than one route to being an extremely successful law firm,” says Ashurst’s Green.

But within the silver circle there have been great variations on an impressively spiked mean line on the growth charts.

On closer inspection
Herbert Smith posted both the worst PEP improvement (in the minus figures) and the worst turnover increase, although at 12.8 per cent, this is an indication of just how healthy the silver circle is when taken in aggregate.

Meanwhile, Ashurst boasted both the biggest increase in PEP, at 36.4 per cent, and the largest jump in fees, with a 28.5 per cent rise. The firm now ranks second in the silver circle when ranked by either turnover or PEP.

The group’s ranking by turnover has not changed on last year, with all of the silver circle boasting double-digit rises in the 2006-07 financial year. But while the firms might take the same running order this year, the pack is tighter. What looked to be an unassailable lead by Herbert Smith has narrowed, with Ashurst trailing it by a little less than £60m; this time last year that differential was £82m. SJ Berwin has also widened the gap between it and Macfarlanes by a good £20m on last year.

The real movement has been in profit, with the headlines belonging to Ashurst. It has leapt from the bottom of the silver circle to second place in the PEP rankings. What is more, Ashurst’s net profit has beaten Herbert Smith’s to top the silver circle table. How has it managed this? The most obvious answer is that Ashurst’s equity partnership has stayed fairly static in 2006-07, at 132 partners. That compares with 130 in 2005-06. Meanwhile, the number of non-equity partners has more than doubled to around 47.

On the flipside, Herbert Smith failed to score a rise in PEP in 2006-07, the only silver circle firm to do so. Its PEP actually dropped by 2 per cent, with its most junior partners taking most of the pain with a £1,000 dip at the bottom of equity. It should be noted, however, that while Ashurst’s equity remained static over the year, the opposite was true for Herbert Smith, with the number of equity partners jumping from 120 to 134. The total partner headcount also rose, from 206 to 217.

Looking at net profit, all firms bar Herbert Smith posted very healthy doubledigit rises. Perhaps this is to be expected in the current frothy M&A market: out of all the silver circle firms, Herbert Smith is the least geared towards taking advantage of a market beneficial to corporate teams. The firm is famously litigation-heavy, with the team contributing 34.9 per cent to firmwide turnover with a third of the firm’s partners. Although the corporate team (including competition, tax, pensions, private equity and equity capital markets) contributes more than 45 per cent to firmwide turnover, it does this with 47 per cent of the firm’s partners – a much higher rate than at the other ‘big’ firms of the silver circle, Ashurst and SJ Berwin.

Another area where Herbert Smith does not score highly is private equity. This is a practice area that unites the other four firms, all strong players. When one considers that within M&A private equity capital topped $700bn (£380.43bn) at the end of 2006, then it is little wonder that firms with decent private equity practices have prospered, even if it is more partner-intensive than other areas of work.

To be fair, Herbert Smith’s expansion over the past 12 months in Europe and Asia impacted on profitability. True, Ashurst also opened in Stockholm, but Herbert Smith’s global footprint grew by far more than any of its peers’ in 2006-07. Indeed, its London contribution actually dipped in 2006-07 to 79 per cent.

But looking at overseas contributions generally, Ashurst is still more international, which makes its overall performance all the more impressive. Around 30 per cent of Ashurst’s turnover is generated in its foreign offices, and managing partner Simon Bromwich told The Lawyer that every jurisdiction in the network had had its best year ever.

Cost vs profit

Macfarlanes is the most cost-efficient firm of the silver circle. Its basic margin is the most impressive of its peers’ at 51.2 per cent, the only ‘positive’ margin (or more than 50 per cent) of the group. Macfarlanes’ closest rival is another corporate-heavy, internationally restricted City firm – Travers. But even Travers’ costs outweighed its profit, with a 48.6 per cent margin. To drill down even further: while last year Macfarlanes was the only silver circle firm where the cost per lawyer (CPL) was less than the profit per lawyer (PPL), the firm managed to increase this margin in 2006-07.

In 2005-06 there was all but a balance at Macfarlanes between what a lawyer cost and what a lawyer generated in profit. But in 2006-07, a lawyer cost Macfarlanes £13,800 less than in the preceding year. Macfarlanes’ Martin tells The Lawyer: “There’s no great magic to it: we work hard across the board and we run a tight ship; we like to do good work for good clients; we pay our people market rates and we don’t have swanky offices.”

There was a £5,000 dip on what a Macfarlanes lawyer generated for the firm compared with 2005-06, however. Indeed, Macfarlanes was the only firm of the group that did not improve RPL in 2006-07 – perhaps an indication of the amazing year it had in 2005-06 rather than proof of any great drop-off. Macfarlanes can still boast an RPL well above the average, at £447,800. While last year Macfarlanes’ RPL beat all firms’ but Slaughters’, the magic circle has caught up with (and in most cases overtaken) Macfarlanes in the RPL rankings.

Ashurst has also improved its margins. It ranks third by its basic profit margin, with 46 per cent. It has kept CPL static at £205,000, while it has upped PPL by more than £20,000.

Costs went up, however, at both SJ Berwin and Herbert Smith. The latter saw CPL suffer a double-digit rise to £273,800 while only pushing up PPL by 5.3 per cent. SJ Berwin’s PPL fell by £1,000. CPL rose by around £20,000.

Travers’ RPL leapt by 40 per cent. Breaking this down, although the firm saw CPL jump by 48 per cent, lawyers’ profitability also skyrocketed by 41 per cent. Do not expect any knee-jerk changes from the firm in response though. “We remain focused on our core strengths, such as private equity and financial institutions. We’re not interested in diverging beyond those,” says Travers’ Douglas.


Leverage obviously skews any PEP result: the more associates running after one partner on a deal, the more profit should be able to be generated. There is a split in the silver circle in the favoured leverage models of the firms, with the larger firms (Ashurst, Herbert Smith and SJ Berwin) favouring a model that hovers around 1:5. Of those firms, only Ashurst has markedly altered its model in the past year, going from 1:3.6 in 2005-06 to 1:4.5 in 2006-07.

Macfarlanes had leverage just above 1:3.5 in 2006-07, with no substantial change on 2005-06, while Travers had the lowest of the silver circle at 1:2.1.

Of course, one would expect the comparatively litigation-heavy Herbert Smith to have a higher leverage model than Travers’, where more than half of revenue is generated by pure corporate. But Ashurst’s move is still striking. Green said: “It was in response to demand. As with many firms we remained pretty flat from 2001-02 until about 2005. There was natural growth in trainee intake, but beyond that it was flat. Because the corporate business didn’t grow, we, like many corporate-dominated firms, didn’t grow. That’s obviously now changed.”

The differences can also be explained because Ashurst, Macfarlanes and Travers kept their equity partnerships static. As set out above, Herbert Smith’s 11.7 per cent boost to the equity partnership obviously impacted on PEP.

But take Ashurst’s smaller equity partnership in line with a firm that overall is growing (it increased its total lawyer numbers by 21 per cent in 2006-07) and it is easy to understand how leverage changed so markedly in 12 months.

Macfarlanes has also added to its associate body. While equity partner statistics were exactly what they were last year, the firm’s lawyer headcounts grew substantially, by 19.2 per cent.

It should be borne in mind that firms are paying on average 18 per cent more for their associates than they were a year ago, which obviously impacts on the bottom line, particularly if there are more of them than there were a year ago. Even highly profitable silver circle firms have to watch the economics carefully.