Top 50 law firm results 2009: magic circle and insurance firms shine as strongest performers buck the slump

The UK's top law firms have suffered a dramatic fall in profitability and a shrinking market in what has been confirmed as the worst trading conditions for the profession since the early 1990s.

Legal Week's 2008-09 results, the first comprehensive picture of the performance of the UK's top 50 law firms, shows that profits per equity partner (PEP) across the group on average fell by 17.3%.

Driven by the strength of the euro and dollar, the top 50 as a whole managed to grow revenues against 2008, with total revenues up 2.9% to £12.3bn. In real terms, however, the top 50 saw a minor dip in revenue.

The performance marks a dramatic slowdown on recent years, during which major law firms have regularly managed double-digit growth (see breakdown, below). In contrast, eight top 50 firms this year saw revenue fall by more than 10%. PEP across the group fell from £616,000 in 2007-08 to £501,800.

The slump in activity was directly attributed to the collapse in confidence in the second half of the financial year in the wake of the collapse of Lehman Brothers and the wider crisis in the global banking system.

However, despite tough market conditions, top City firms emerged as stand-out performers due to the relative resilience of international practices and a string of high stakes mandates from embattled banking clients.

As such, the magic circle, with the exception of Clifford Chance, comfortably outperformed the top 50. The five firms as a group achieved revenue growth of 3% while profits fell by 12.3%. Notably, the robust performance of Freshfields Bruckhaus Deringer and Linklaters leaves the duo well positioned to compete with key international rivals in New York, which are forecasting steep falls in profitability in their 2009 financial year.

Linklaters managing partner Simon Davies told Legal Week: "It was a year of exceptional circumstances – [we had] a lot of crisis work where our people responded incredibly well. There has been something of a shake-out and there is no reason to think that the flight to quality will not continue."

Likewise, Allen & Overy (A&O) maintained well-above-trend growth despite a sweeping restructuring and heavy exposure to the battered finance sector.

Winners and losers

There were mixed fortunes for City firms below the magic circle with firms like Lovells, Norton Rose and Herbert Smith emerging as strong performers for the second year running.

Norton Rose chief executive Peter Martyr commented: "We have managed to keep our promise of continuing with our strategy so overall we've had a relatively strong year."

However, firms with substantial exposure to property and private equity saw sharp falls in profitability with Ashurst and SJ Berwin both seeing PEP fall by more than 35%.

Mid-pack City firms like Macfarlanes, Travers Smith and Nabarro were also hit by the slow domestic market, leading Travers managing partner Chris Carroll to dub trading conditions as "the perfect doldrums" for his firm's model.

Notable exceptions saw Stephenson Harwood belie its sleepy image to secure a place as one of the most profitable City firms outside the magic circle, while Bird & Bird maintained expansive form to crash into the top 15 in revenue terms.

Insurance-driven firms, as expected, emerged as the standout performers, as a group seeing PEP growth of 7.2% – the only group to increase profitability. In contrast, regionally-based practices were poor performers, with PEP falling on average by 23.9% across the largest firms.

As such, three insurance-heavy practices – Kennedys, Berryman Lace Mawer and Reynolds Porter Chamberlain – entered the top 50 this year, while regional firms Dickinson Dees, Cobbetts and Maclay Murray & Spens exited the league.

The results also show a wide divergence between individual firms with the revenue rankings within the top 50 changing dramatically for the first time in recent memory.

That slow recovery

Top firms are now focused on whether enough has been done to respond to tough market conditions with most firms predicting a slow recovery. As yet headcount across the top 50 has barely changed on 2008, though this is expected to change as the full impact of a wave of redundancy programmes takes effect during the current financial year.

Many firms are expecting legal demand to remain flat or to see minor falls during the current financial year, though law firm leaders will look to September to gauge if there is any sign of a modest upturn in the second half of 2009-10.

A&O managing partner Wim Dejonghe said: "I don't think the industry has ever seen a drop in volume like this. Firms have had to react swiftly, but I am convinced it has been the right thing to do. Restructuring work has picked up and although there are some signs of improvement, we are still cautious. This won't be a v-shaped recession."

Martyr added: "I don't think people should expect [2009-10] to be a better year. It might get relatively better in the second half but there is nothing to give you the sense that matters are going to get worse."

UK top 50 – performance in context

Year                          2002    2003   2004   2005     2006    2007    2008      2009   
Turnover growth   8.6%    5.1%    4.6%   8.2%    13.1%   14%    12.5%    2.9%
PEP growth           -0.9%   -1.1%    6%    11.4%    19%    13.5%   7.3%    -17.3%