UK top 50 results 2011: leading law firms grind out growth in tough trading as revenues reach £12.33bn

The UK's top law firms have endured turbulent market conditions to achieve their best growth performance since 2008 with the top 50 expanding its revenues by 3.6% over the last financial year.

Legal Week's 2010-11 results show the UK top 50 increased its revenues from £11.89bn to £12.33bn – returning income across the group to almost exactly 2009 levels. The average revenue growth of top 50 law firms was 5.3%.

The performance was matched by a modest increase in profitability, with the group as a whole seeing profits per equity partner (PEP) rising 4.4%. The result is a contrast to 2010 when the UK's largest law firms achieved an 8.8% increase in PEP despite falling income due to widespread redundancies and deep cost-cutting programmes.

The results will be viewed as a respectable outcome by the UK's leading law firms, given the sluggish economic recovery and the continued dearth of transactional activity.

The magic circle, however, lagged the top 50 as a whole for the second consecutive year, though the group managed to increase revenue by 2.2% to edge back over the £5bn mark. The expansion came largely on the back of 6.7% growth at Allen & Overy (A&O), leaving London's 'big four' tightly grouped in revenue terms.

A&O managing partner Wim Dejonghe commented: "Across the top 50 the markets are still patchy and the pressure is on, both in terms of competing for deals themselves and on pricing. [But] we have made considerable investments throughout the year which will begin to pay off in the coming years."

Clifford Chance managing partner David Childs told Legal Week: "It was very much a two-speed year where we saw a striking development in growth markets while the developed economies were much slower. Asia revenues grew by 16% and the Middle East by 17%. That is why we are continuing to invest in those markets."

A jostling pack

Although the City's legal elite put in comparable performances, there were widely diverging fortunes at chasing pack and mid-tier London practices.

While the closest rivals to the magic circle such as Herbert Smith and Ashurst were in an effective holding pattern, with growth tracking inflation in 2010-11, the UK-based profit centre of Hogan Lovells managed its third successive year of above-trend performance to see revenues grow sharply to £582m, while profits lifted to £740,000.

Other strong performers in the City included Berwin Leighton Paisner and Stephenson Harwood, which hiked income by 19.9% and 16.4% respectively, while profits rose well above trend at both firms. SJ Berwin also secured what will be regarded as a crucial rebound in profits and solid growth after its bottom line was savaged in the two previous years.

At the other end of the spectrum, the UK-based profit centre of SNR Denton saw one of the sharpest revenue falls, of 9.4%, while its PEP fell to the lowest level in the top 50.

As expected, leading insurance and shipping law firms continued their three-year run of ambitious expansion, with the group averaging revenue and PEP growth of more than 10% (see page 10). Large national and regional firms managed a modest revival after a lacklustre two years, driven in part by a group of ambitious firm players operating in the £60m-£120m revenue class. Standout performers in this group were Wragge & Co, Gateley and DWF.

The global view

Despite evidence of the continued resilience of the UK legal market, there will be disquiet among the most ambitious firms that the profits gap has widened between the two global legal power blocks of the US and UK. The top 100 US law firms achieved an 8.4% hike in PEP in 2010 to average $1.37m (£856,000), well above the £535,500 seen this year in the UK top 50.

City observers are also watching the rash of multi-profit centre mergers that have recently gone live to gauge their impact on the evolving cross-border market. Judged on a group basis, Hogan Lovells, DLA Piper and Norton Rose appear set to become more imposing players on the global legal stage.

DLA Piper co-chief executive Nigel Knowles said: "It's going to remain tough out there for a lot of firms that have nothing to differentiate themselves from the competition. Firms need to be either among the global elite or be a global business, otherwise they need to find a niche."

With little prospect of a rapid return to strong trading conditions, many expect more consolidation and expansion in key emerging markets as leading UK law firms strap in for a low-growth environment for several years.

Hogan Lovells co-chief executive David Harris said: "The market has been challenging, no doubt, but we are seeing real opportunities and activity and are making good progress across our practice… We have done a massive amount in the last 12 months."