Practical magic - will the magic circle emerge from recessionary hunker?
With results in from three of the magic circle and pretty good indications from Linklaters (Freshfields Bruckhaus Deringer's being embargoed until tomorrow), the UK's leading law firms are shown as expected to have managed another year of managing. The numbers are basically fine. With the exception of Allen & Overy's (A&O's) 7% hike in revenues, the group has come in roughly static or with marginal growth in the top line. Profits are around where they have been in recent years – Clifford Chance (CC) edging up 8% on profits per equity partner (PEP) to scrape over the £1m PEP mark. All of which leaves the group of transactional deal machines as unassailable as they were before the wheels came off the deal wagon three years ago.
July 06, 2011 at 07:03 PM
3 minute read
With results in from three of the magic circle and pretty good indications from Linklaters (Freshfields Bruckhaus Deringer's being embargoed until tomorrow), the UK's leading law firms are shown as expected to have managed another year of managing.
The numbers are basically fine. With the exception of Allen & Overy's (A&O's) 7% hike in revenues, the group has come in roughly static or with marginal growth in the top line. Profits are around where they have been in recent years – Clifford Chance (CC) edging up 8% on profits per equity partner (PEP) to scrape over the £1m PEP mark. All of which leaves the group of transactional deal machines as unassailable as they were before the wheels came off the deal wagon three years ago.
The recession has had its impact, of course – the group as a whole are still billing less collectively than they were in 2008, while profitability has been sustained only by a prolonged push on costs.
For many, profitability is somewhat open to debate right now. Profit is inevitably shaped by a number of short-term discretionary judgements made about the business and its accounting. Put it this way: in such a competitive context, there is a healthy scepticism among leading law firms as to the basis on which their rivals are reporting profits.
And, even if accepted without reservation, numbers suggesting that profits have easily withstood the worst recession since the early 80s are misleading. The mindset of London's globe-trotting big four has changed enormously over the last three years. The expansionary zeal has been abandoned in favour of a hunkering down, arguably at the expense of a vision for the future.
This shift has not seen a withdrawing of horizons inwards – internationalism is too embedded in their thinking now and, if anything, the group has continued to trim in London while expanding in key international markets. But the mood has moved towards conservation rather than growth.
In this context, A&O, the smallest and most regularly dismissed of the group at the time of the credit crunch four years ago, has been a laudable exception. The firm has maintained its hunger for strategic expansion, sustaining an aggressive series of hires and office launches.
This translates into a £104m increase in fees over the last three years – which comes against shrinking revenues at its peer group – bringing the firm right up with the pack it recently lagged. Three years ago, CC generated £313m more than A&O in annual income – now the figure is £99m.
Overall, you wonder how much longer some of the proud law firms that have defined the City's ambitious spirit will remain in so defensive a crouch. There's precious little evidence that we are soon returning to the years of plenty. At some time, the law firms looking to book their place in the emerging global elite will have to remember how to grow the business again – the good times won't do it for them.
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