Freshfields leads as profit analysis paints new picture of top 50

Freshfields Bruckhaus Deringer has emerged as the most profitable firm in the UK top 50, with 2012-13 financial results showing profit margins across the group have remained broadly static.

Freshfields comes out top when ranking the top 50 firms by profit margin, with net profit as a percentage of revenue standing at 44.9%. Linklaters places second with a 43.7% margin, with Macfarlanes and Travers Smith – the 28th and 40th largest UK firms respectively by revenue – ranking third and fourth and Allen & Overy (A&O) completing the top five.

Average profitability across the 42 top 50 firms that fully disclosed their financial results stands at 25.2% for 2012-13, flat on the previous year's figure of 25.8%. 

However, this disguises sizable fluctuations across the group, with SJ Berwin posting the largest year-on-year profit margin increase, up from 27.6% to 35.7%. Conversely, Trowers & Hamlins saw a significant decrease with profit margin down almost five percentage points from 24.9% to 20.2%. 

Of the magic circle, A&O and Linklaters increased their profit margin last year, while Freshfields and Clifford Chance – which, at 31.8%, has the smallest margin of the group, despite having the highest revenue – saw dips. When ranked by profits per equity partner (PEP) the magic circle fills the top slots. 

Quentin Poole (pictured), senior partner at Wragge & Co – which sits among the UK top 10 by profit margin – said: "Some firms calculate PEP that only account for the averages of earners at the top end of the equity, skewing the results. Other firms might have skewed data if they are part of an international network. It is harder, however, to disguise profit margins, therefore they paint a more balanced picture of how a firm is performing."

RPC managing partner Jonathan Watmough added: "A lot of firms sweep profit margins under the carpet. But PEP, which is a measure that firms have become obsessed with, is known to encourage negative behaviour in the profession. Margin is a key differentiator between firms that shows the efficiency and quality of a business, and how well costs are being controlled."

At the other end of the scale, Weightmans, Shoosmiths and DWF have the lowest profit margins with 14.3%, 12.9% and 11.1% respectively, although DWF argues its figures have been impacted by rapid growth through mergers, with the profit margin standing at 14.6% when the firm's revenue is decreased to take account of the fact the combinations took place part-way through the year.

DWF managing partner Andrew Leaitherland said: "This has been a remarkable year with four mergers – growth of this nature requires significant investment, which constrains our ability to expand our profit margin, but the benefits are clear as we've deepened our expertise and now have a national presence."

A&O managing partner Wim Dejonghe added: "Any one metric only gives part of the story, but profit margin is a very important element and one that every professional services firm needs to look carefully at. To me, profit margin is mainly influenced by a firm's cost base, leverage and pricing. 

"The more components a metric such as PEP has, the easier it is for firms to play around with the figures. With profit margins there is much less danger of this."

UK top 50 – top firms by profit margin

Freshfields – 44.9%
Linklaters – 43.7%
Macfarlanes – 43.1%
Travers Smith – 39.6%
Allen & Overy – 39%

Slaughter and May, Hogan Lovells, Norton Rose Fulbright, Berwin Leighton Paisner, Irwin Mitchell, Parabis Law, Ince & Co and Mishcon de Reya did not fully disclose profits.