Every silver lining…

You might be forgiven for thinking that the worst of the recession is over, given some of the rebounds in financials we’ve seen this year.

Most notably, there’s been a remarkable improvement in the fortunes of three firms that had been faltering badly: LG increased net profit by 81 per cent; Denton Wilde Sapte (DWS) grew PEP by 22 per cent; and Eversheds lifted PEP by 28 per cent. But as features editor Matt Byrne points out in our analysis this week, those figures should be used with considerable caution. All three firms took a scythe to costs over the last year: there were no more biscuits, no more flowers and, of course, hundreds of redundancies.

This ferocious attack on overheads is entirely prudent, but from now on any future increase in profits can only be made on an increase in revenues – and that ain’t happening any time soon.

Take the magic circle, which has led the way in revenue growth over the last decade. For the last couple of years turnover at the big four has essentially flatlined. Allen & Overy’s results last week (more here) and Linklaters’ today (see story) show that the big boys are working just to tread water.

Indeed, for global firms there will be precious little growth in Western markets unless it’s through acquisition – and as one senior magic circle partner notes, the game is not about revenues. That was always Clifford Chance’s mistake when its main differentiator from the rest of the magic circle was that it was simply the biggest. If Freshfields overtakes Linklaters it gets bragging rights for a year, but gone are the days when being the number one law firm in the world by turnover was anyone’s strategic goal.

So with growth in the immediate future looking to be stagnant, let’s return to the strategic options. With DWS having cut out all the costs this year, it could never seriously have hoped to replicate the same margin in 2011, so its merger with Sonnenschein was pretty canny. LG’s performance cannot be seen as anything other than putting up a For Sale sign to US firms. There’s more to be read into this year’s figures than simply profit and loss.