As consolidation continues to fuel growth at the world's 50 largest law firms, Georgina Stanley analyses their performance during the last financial year

Driven by international mergers, the world's 50 largest law firms by revenue saw turnover climb by an average of 7.4% last year to reach a combined total of $63.5bn (£40bn).

Six firms in the group – Baker & McKenzie, DLA Piper, Latham & Watkins, Skadden Arps Slate Meagher & Flom, Clifford Chance and Kirkland & Ellis – achieved turnover of more than $2bn (£1.26bn) in 2013, closely followed by three more magic circle firms: Linklaters, Allen & Overy and Freshfields Bruckhaus Deringer.

Four firms in the global top 50 – Norton Rose Fulbright, Dentons (which merged with Salans and Canada's Fraser Milner Casgrain), Ashurst (which completed its financial integration with legacy Australian firm Blake Dawson) and King & Wood Mallesons (KWM), which merged with legacy UK firm SJ Berwin – underwent international mergers over their most recent financial years, covering either 2013-14 or the 2013 calendar year, boosting revenues across the group significantly.

Leaving these firms out of the equation, average revenue growth across the rest of the group stood at 3.7%, an increase achieved by just over half of those in the global top 50. This contrasts with only five firms meeting or exceeding the average revenue growth figure including the merged firms. eduardo-leite

Taking the latest tie-ups into account, seven of the 30 largest law firms in the world by revenue now operate with verein-style structures, which allow revenues to be pooled while profits are not shared across regions. Alongside the full financial integration seen at Ashurst last year and Herbert Smith Freehills (HSF) the previous year, the consolidation reflects the growing trend for firms to turn to growth through merger in response to mounting pressure on fees and no increase in demand for legal services.

The growing use and acceptance of such structures means three firms within the top 10 now have verein structures; Bakers – which this year reclaimed its position as the largest firm in the world by both headcount and revenue – DLA and Norton Rose Fulbright.

"We are seeing a legal market that is becoming more truly global," comments Bakers chairman Eduardo Leite (pictured). "I don't believe it's enough anymore for any firm with serious ambitions to be predominantly based in one or two markets. The next few years will see further consolidation in the global legal market and the rise of a global legal elite. Our ambition is for Bakers to lead that global elite."

Peter Martyr, Norton Rose's newly re-elected chief executive, adds: "Everyone wants to compartmentalise law firms but the world of law has changed a lot in the last five years. Expressions such as 'white shoe' have become outdated, and none of the firms in question are on Wall Street. Equally the 'magic circle' was an expression formed in the mid-nineties. Everyone expects these labels to change and for new ones to develop.

"I think we are a hybrid – our origin is the City but we have gone global in a different way. I say we are as close to being a global firm as we can be. It is about aiming to provide the highest-quality work in chosen areas of strength. If that would make us 'elite', then that is what we would be."

Leaving merged firms out of the mix, the 50 largest global firms had a varied year in 2013-14. Only two experienced organic double-digit revenue growth: Simpson Thacher & Bartlett and Quinn Emanuel Urquhart & Sullivan, which both saw turnover soar by more than 14%. The next largest rise in revenue was posted by K&L Gates at 9.3%, followed by Shearman & Sterling at 9%.

"In the midst of all the changes within the legal industry, there remains an absolute imperative to provide exceptional legal counsel and client service," says Shearman senior partner Creighton Condon. "The simple fact is, a 'clients first' culture must drive the way we do our work and make our decisions."

At the opposite end of the spectrum, Bingham McCutchen, O'Melveny & Myers and Weil Gotshal & Manges saw the largest drops in turnover, ranging from a dip of 7.4% at Weil through to 12.6% at Bingham, which is currently in advanced merger talks with Morgan Lewis & Bockius.

Two of the top performers by revenue growth (Quinn Emanuel and Simpson Thacher) also feature in the top five revenue per lawyer (RPL) ranking – a metric that arguably paints a clearer picture of the performance differences between firms than either revenue alone or profitability.

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With far smaller footprints than many of their rivals, Sullivan & Cromwell and Quinn Emanuel both posted RPL of nearly $1.6m (£1m), compared with under $500,000 (£315,000) at the worst performers by RPL: Eversheds International, CMS and KWM.
Profitability performance was equally mixed, with the highest average PEP figure across the group standing at $4.49m (£2.83m) at Quinn Emanuel, compared with $625,000 (£394,000) at Dentons, which had the lowest PEP across the 50 largest firms. Dentons, diluted by its broad international presence, also saw the steepest
drop in average PEP across the group at 20.4%.

In contrast the top performers by PEP growth, Davis Polk & Wardwell and Simpson Thacher, enjoyed a similar percentage rise in partner profits at 19.8% and 18.8% respectively.

Commenting on performance across the group as a whole, Davis Polk managing partner Tom Reid says: "There is a variety of firms [within the group] and you are seeing many visibly and publicly suffering. Some firms, and we are blessed by being in that pack, have actually managed to grow their firm and improve their financial performance and that is our story over the last three or four years.

"We see ourselves as one of the New York elite firms with one of the top international offerings. Our practice is focused on the key areas we need to have strengths in for our clients."

William Dougherty, chairman of Simpson Thacher, adds: "The legal matters for which clients seek our advice are cross-border, complex and challenging. Our clients were busy in 2013 and continue to be in 2014, and our activity levels reflect that."
Despite the number of cross-border mergers in recent years, the ranking – which includes the international revenue from global networks such as Eversheds International – shows the extent to which US firms dominate the global legal market.

Including DLA Piper, Hogan Lovells and Norton Rose Fulbright, only 11 firms either headquartered in the UK or formed through transatlantic mergers of equals feature within the global top 50. All of the remaining firms are from the world's largest legal market: the US, with no representation from continental Europe and KWM the sole representative from Asia-Pacific, unless HSF is included.

Growth across the group also goes some way towards demonstrating the uphill battle UK firms face trying to crack both the US and the international elite.

Comparing the global top 50 with the UK top 50 and stripping large mergers out of both rankings, average growth across the 50 largest UK firms was flat, compared with the 3.7% increase globally.

Commenting on the dominance of the US and New York in particular, Davis Polk's Reid concludes: "I think New York remains the fulcrum of the legal services world, and the dominance of New York firms is going to continue for the long term."