Allen & Overy’s double-digit growth, revealed last week, is an indicator of another major shift within the magic circle.

In one fell swoop, A&O went from the back of the pack in revenue terms to trump both Linklaters and Freshfields Bruckhaus Deringer, becoming the second biggest magic circle firm in 2016/17.

A&O overtook its rivals thanks to a high turnover growth rate (16 per cent) and a 26 per cent spike in average profit per equity partner (PEP) to £1.5m.

This is the narrowest gap in revenue ever recorded between Clifford Chance and A&O – just £20m separates the latter from being the biggest magic circle firm by turnover.


But this isn’t the first time that the magic circle has been recalibrated. The Lawyer reported a ‘new world order’ in 2009 when Clifford Chance was relegated to third place in revenue and its PEP plummeted to half of its rivals’. The new pecking order was thus: Linklaters, followed by Freshfields, Clifford Chance and A&O.

Clifford Chance’s annus horribilis was soon behind it; the firm regained its top spot in 2010 despite a further 5 per cent drop in revenue to £1.2bn. Linklaters was relegated to second place that year after an 8.8 per cent drop put it at £1.18bn. Put simply, Clifford Chance had lost the least of the bunch.

The traditional line-up remained relatively stable for two years. In 2012 and after more than a decade as the magic circle’s smallest member by revenue, A&O moved up the food chain for the first time, breaking ranks to advance ahead of Freshfields thanks to a 6 per cent revenue increase from £1.119bn to £1.183bn.

This had been a long time coming, as the firm worked to close the gap by investing in international offices in emerging markets.

But it didn’t last. A&O found itself back in the bottom spot the following year, thanks to its own flat financial results and a good year for Freshfields, which posted a 6.6 per cent revenue boost to £1.22bn.

It regained some ground in 2014, landing in third place behind Freshfields thanks to a revenue boost to £1.234bn.

A year later, boosted by a higher turnover than its rivals Linklaters and Freshfields, A&O made its second grab for the top spot. With a 4 per cent global turnover growth to £1.28bn in 2015, the firm was £69m away from Clifford Chance, which at the time had suffered a 0.7 drop in turnover to £1.35bn.

This gain was – again – short lived. In 2016, the line-up went back to its traditional format. Clifford Chance regain momentum with a 2.7 per cent increase in turnover to £1.386m, while a 6.6 revenue gain for Freshfields allowed it to position itself in second place. A drop in revenue growth to just 2.2 per cent meant that A&O was overtaken once more by its peers and returned to fourth place.

Data tell us that A&O is walking a well-trodden path to the top. But this year’s results show one important detail – never before has A&O been so close to being the largest magic circle firm by revenue.

How did A&O do it?

For A&O, the revenue hike is a vindication of its bold initiative of growing its global footprint , a strategy initially met with puzzlement by other magic circle firms, which have tended to retrench their geographical spread.

As the most adventurous of the cohort, A&O took the initiative to invest in emerging markets, boosting its revenue considerably in 2012. The remaining three have remained quite cautious about international expansion. In 2015 when A&O’s PEP and revenue growth placed it below Clifford Chance for the first time, the firm had worked on developing its offering for emerging economies, and expanded its office network to span 75 per cent of the global economy. According to this year’s Global 200 report, the office count stands as follows: A&O in the lead with 44, followed by Clifford Chance with 34; Linklaters with 28; and Freshfields with 25.

It was the firm’s cross-border cross-selling that really made the difference in this year’s financial results.

It has reported an eighth consecutive year of revenue growth. The firm said a total of 74 per cent of revenue came from matters involving two or more countries, while 30 per cent of turnover derived from work involving five or more countries.

Managing partner Andrew Ballheimer explained the growth, saying: “It’s a combination of different things. Each of our practice groups are on fire and we’ve invested in fast-growing areas, such as Asia.

“We’ve also noticed an increase in cross-border matters, which are our sweet spot and we believe our offices are much broader now than any of our peers. We’re now in over 40 locations worldwide.”

Like-for-like metrics

This year, the magic circle’s like-for-like metrics told a rather less positive growth story.

Three out of the four firms have used comparative data based on 2016’s currency exchange rates. By this metric, Clifford Chance’s revenue grew by 2 per cent and 8.5 per cent increases in profit and PEP.

Linklaters also benefited from the changes in currency; at constant currency the turnover increase stands at a more modest 1.7 per cent, while profits remained at £611.9m.

A&O’s turnover grew 6 per cent on a like-for-like basis. Profits were up 15 per cent, while PEP increased by 14 per cent.

Freshfields, which decided to calculate like-for-like figures based on this year’s currency exchange, had a 5 per cent drop in revenue from £1.4bn. Net profit followed suit with a 7 per cent drop from £658.9m and PEP would have dipped by 4 per cent from £1.57m.

Based on these metrics, the fastest growth was still recorded by Allen & Overy with a 6 per cent boost to £1,388.6. At the top thanks to a 2 per cent increase was Clifford Chance, with £1,407.6. On like-for-like numbers, A&O is £19m away from Clifford Chance. Linklaters is £52m away from A&O’s revenue thanks to a 1.7 per cent boost, and Freshfields is £32.3m lower – £77m away from Clifford Chance.

Magic circle constant currency revenue growth (£m)
2016 2017 Percentage change
Clifford Chance 1,380      1,407.6 2%
Allen & Overy 1,310      1,388.6 6%
Linklaters 1,310      1,332.3 1.7%
Freshfields 1,400      1,330.0 -5%

Observers have expressed surprise at Freshfields’ decision to report a drop in constant currency revenue. Why report these figures at all? A magic circle insider told The Lawyer that the motivation to report these is simple – to avoid fee-earners and staff asking for an increase in take-home earnings. It’s all about managing expectations.

PEP wars

Just over a decade ago, The Lawyer made the controversial decision to split the group a second way – Clifford Chance, Linklaters and Freshfields on one side, and A&O on the other. The reason behind this was performance-related.

While the other three firms’ PEP ballooned in the first six years of the 2000s, A&O’s remained stagnant, with a 6 per cent rise in total. At the time of the statement, the firm’s PEP was £43,000 behind that of Freshfields and £272,000 behind Linklaters.

Freshfields and Linklaters have long been pitted against each other where PEP is concerned – as explained further down in this blog (‘Linklaters won the PEP battle, but will it win the war?’).

After years of battling for the top PEP figure, Freshfields took the lead in the PEP stakes in 2010, with Linklaters close behind. Despite close competition, the firm managed to hold on to the top spot until 2015, when Linklaters overtook it thanks to headline financial work boosting its powerhouse corporate team. In the same year, Freshfields’ PEP dipped by 7.5 per cent to £1.369m.

Using the same metrics as the turnover section above, a different picture of growth presents itself within the magic circle. Few would remember that Clifford Chance’s average PEP in 2010 grew dramatically to reach £933,000. This might be because it lagged significantly behind its peers, the closest being A&O with £1.1m. Leading the pack at the time was Freshfields with £1.4m – its highest revenue for the next three financial years as it felt the effects of a choppy M&A market and the loss of a series of high-profile partners in 2011.

Of the four, it was A&O that showed most stagnant PEP growth – and the most dramatic boost in 2017. For four years between 2010 and 2014, the firm’s PEP remained frozen at £1.1m. In the year it overtook Freshfields and Linklaters to become the second biggest magic circle firm, its PEP shot up by 8 per cent from £1.12m to £1.21m. At the time, the then-managing partner Wim Dejonghe said that 71 per cent of the firm’s work was cross-border, a high of three years.

This year, Linklaters regained the top spot, inching above Freshfields’ £1.547m growth with a 7.8 per cent hike to £1.568m. But the big surprise was A&O, which this year had the biggest jump of the cohort and of its own recorded financial history: 26 per cent to £1.5m.

This leaves it less than £50,000 away from Freshfields and £125,000 away from Clifford Chance’s £1.375m. Does this mean that the two-horse PEP race may welcome a third player?

An unstable global economy has directly impacted UK and international firms’ revenues – making few willing to firmly bet on what will happen in the upcoming financial year.

All of our data tells us this rearrangement is unlikely to last for more than one financial year. But A&O’s growth strategy signals further bursts ahead – the rest of the magic circle should be worried.