NEWS ANALYSIS
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Cover MAX SCHINDLER/PIXELLATE Photograph SHUTTERSTOCK
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BEYOND THE
LB100
Our LB100 analysis last month showed again that turnover growth isn’t a true indicator of financial performance. In this report, we identify a handful of firms outside of the LB100 outshining their peers MARK MCATEER In our latest Legal Business 100 report – published last month – firms swelled their coffers by an average of 6% in 2010/11. But this modest increase includes firms that achieved eye-watering increases in turnover thanks to some significant domestic mergers – such as Shakespeares, a Midlands firm that has gone through three mergers since 2007 and two in the last year, and saw revenues increase 71% to £28.4m. On the other hand, some firms really suffered – Trowers & Hamlins’ 12% dip in revenues to £78.6m being a standout example. The threshold for making the LB100 was even higher this year: Bath-based Thrings squeaked into 100th place with a turnover of £21.8m, up 6% from the £20.5m posted by Martineau and Veale Wasbrough Vizards in 2010. It’s clear that revenue isn’t everything – a number of high-grossing firms have low profit margins, and firms that have increased their top lines through mergers or bolt-ons face a challenge in the coming year to deliver profitable growth. By contrast there are a number of firms that remain on the periphery of the LB100 that have performed better than their more vaunted rivals. With this in mind, we take a look at a handful of firms that didn’t make the LB100 and compare their performance in 2010/11 to the average performance in the LB100 peer groups that would house their competitors.
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STAR PERFORMER West End media specialist Harbottle & Lewis pulls in less than half the gross fees of the average firm in the London Midsizers group, and its revenue growth of 2% to £17m is also a quarter of the peer group average. However, chief operating officer Derek Godfrey is unlikely to be losing much sleep over this. Although the firm’s 2010/11 financial results remain unaudited at press time, provisional figures show that its profit margin (32%), net income growth (25%) and profit per lawyer or PPL (£75,000) outperform many of the firms in the peer group. Only four of the 22 London Midsizers firms better Harbottles’ profit margin: Sacker & Partners (43%); Stewarts Law (41%); Bristows (35%); and Russell-Cooke (34%). Its 23% PPL growth is bettered by only two firms in the group: Penningtons (30%) and Lewis Silkin (24%). Godfrey says that the firm has spent a couple of years investing in lateral hires to bolster the quality in the partnership, while at the same time taking a hard line with the cost base to ensure that all parts of the firm were delivering value. Both these initiatives have paid dividends. ‘We’ve always considered ourselves a top 100 firm even though for the last few years we’ve been outside in terms of fees,’ he says. ‘The people we’re competing against are in the top 100. u
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NEWS ANALYSIS
REVENUE GENERATION Revenue -
Peer group averages 25 equity ptnrs, 34 non-equity ptnrs, 160 total lawyers
Harbottle & Lewis* 18 equity ptnrs, 11 non-equity ptnrs, 73 total lawyers
Powell Gilbert* 5 equity ptnrs, 2 non-equity ptnrs, 23 total lawyers
Cost = Profit
PEP 2011
£600k
£500k
£400k
per lawyer per lawyer £300k
£200k
PROFIT MARGIN
£100k
per lawyer
£0
London Midsizers
TURNOVER TURNOVER 2011 2011
(change from (change 2010) from 2010)
(change from 2010)
£39.1m
(8%)
25%
£253k - £187k
= £66,000
£395,000
(6%)
£17m
(2%)
32%
£233k - £158k
= £75,000
£306,000
(25%)
£8.7m
(38%)
48%
£378k - £195k
= £183,000
£840,000
(55%)
* 2010/11 figures are unaudited at press time
u
‘I was brought in three years ago to turn this into a more profitable organisation because we all felt there was untapped potential here.’ Significant investment has included hiring two film and television partners from Reed Smith in March 2010. Jonathan Berger and Peter Armstrong ‘gave us a West Coast studio presence that we hadn’t previously had’, according to Godfrey, which he says gave the firm a hedge against any decline in UK film work brought about by government cuts to the British Film Institute. Unsurprisingly, media and entertainment work makes up a significant proportion of the firm’s revenue stream: combined with other areas such as employment and private client it makes up 37% of the firm’s turnover, while work for media clients forms a large part of its corporate and disputes work as well. The firm also added a personal injury business in January 2010, with the addition of father and son team Daniel and Leon Marks from Finers Stephens Innocent. ‘We feel we have a higher quality partnership now than we did going into the economic downturn,’ says Godfrey. The firm has not made any significant cuts to personnel – Harbottles has maintained its equity partner numbers and hasn’t tried to artificially inflate profit per equity partner (PEP) by reconfiguring the profit share. However, Godfrey says the firm has been able to take a hard line on costs through an active programme of only replacing departing staff if there is a clear business need and ensuring that business development spend is targeted and adding value. ‘A combination of all those things means we feel we are a much stronger fi rm than we were,’ he says. ‘We hope this year’s financials are the start of what will be a much-improved set of results.’
He adds that Harbottles’ business tends to be less volatile than other firms in the London Midsizers peer group, so while it didn’t perform as well as some firms during the boom years, it hasn’t suffered as much of late either. The outlook for the firm is very healthy for 2011/12, forecasting an 11% increase in revenue, alongside a 14% leap in net income. Godfrey says that these predictions are the result of deals that were forecasted to pick up in autumn
2010 but didn’t really gather momentum until after Christmas. ‘If that activity is sustained throughout this year then the natural consequence will be the projected growth figures that we have budgeted for,’ he says. ‘We’re three months into the year and activity has held up, so at the moment we’re sitting here in a fairly optimistic frame of mind.’
BOOMING BOUTIQUES
‘We consider ourselves a top 100 firm even though for the last few years we’ve been outside in terms of fees.’ Derek Godfrey, Harbottle & Lewis
The merest glance at the LB100 in recent years shows that, Global Elite aside, if you want to make some serious cash (and enjoy some autonomy at the same time), join or form a boutique practice. Niche pensions firm Sacker & Partners has been a star performer in the LB100 for years, with profit margin and PPL figures that put most other firms in the top 100 to shame. During the 2010/11 year, the firm’s PPL stood at £204,000 – 204% higher than the London Midsizers average of £66,000, while the firm’s 43% profit margin sits well ahead of the peer group average of 25%. Litigation specialist Stewarts Law was the standout performer in this year’s LB100. With a 42% leap in revenue to £28.5m, the firm went straight in at equal 83rd place in the table. The firm’s PEP came to a staggering £890,000. With just five equity partners and revenues that are just a fraction of those in the LB100, IP boutique Powell Gilbert is further proof of how a well-managed specialist practice can be extremely lucrative. Although its 2010/11 financials are also unaudited at this stage, the profitability metrics speak for themselves: a margin of 48% is just one percentage point lower than the biggest margin in the entire LB100: Slaughter and May, with 49%. The firm’s PPL of £183,000 stands up against any firm outside of the Magic Circle.
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NEWS ANALYSIS
Co-founding partner Tim Powell points out that while the IP litigation market can offer good, high-margin work – there have been year-on-year fluctuations in terms of profitability. Therefore, the firm’s PEP figure of £840,000 has been rather inflated by a strong year compared to 2009/10 where the PEP was £542,000. Since Powell Gilbert was established four years ago, Powell says the PEP figure has averaged out at £710,000 each year. Fellow name partner Penny Gilbert says that even the worst year of financial performance since the firm incorporated far exceeded expectations and is a vindication of the boutique model. But, as she points out: ‘The key to success is finding a practice area that is genuinely standalone and offers sufficient quality so that clients will want a bespoke service.’ Sacker & Partners would no doubt echo that view.
BEAUTIFUL SOUTH Firms in the South peer group of the LB100 have endured some very lean years of late and 2011 was no exception. It was the only peer group to post negative turnover growth on average and the top performer in the group, TLT, managed just 6% revenue growth – the LB100 average. Despite posting revenues comfortably behind the firms in this group, Guildford-based Stevens & Bolton is one standout performer among the amorphous mass of firms that sit in the huge geographical spread of firms in the South. Its revenue growth of 13% to £17.1m is light years ahead of the other firms in the group. Net income grew by 28% to £5.1m, with only a handful of firms in the entire LB100 performing better. Like many, Stevens & Bolton had its best financial year to date in 2007/08 – pre-Lehman Brothers crash – coming very close to making it into the South peer group with a turnover of £17.2m. But after a couple of lean years the firm has all but returned to its zenith: the same
Indeed there is a healthy breakdown of revenue coming from different practice areas (corporate 24%; disputes 27%; real estate 20%). Disputes has, unsurprisingly, contributed a larger slice of turnover compared to 2008 when it amounted to just 19% of overall income. ‘Within the broad band of dispute resolution we include intellectual property, and that has probably been the single biggest success story for us for the last few years, going back to IP head David Wilkinson joining us from Bristows,’ says Baxter. IP is a common denominator among firms that have performed well in the LB100 in recent years, generating good income when other practice areas have struggled. IP-heavy firms – Bristows, Bird & Bird, Taylor Wessing and Field Fisher Waterhouse to name a few – have all posted solid numbers. But it is Stevens & Bolton’s policy of investing in significant lateral hires from City firms (see ‘Dream ticket’, LB192, page 36) to offer a quality alternative to clients outside of London that has arguably paid off the most. With pressure on fees forcing general counsel to look at cheaper options, the experience on hand at Stevens & Bolton has been an attractive proposition. ‘There’s no question that you get in front of large corporates, particularly where in-house teams are briefed to save costs,’ says Baxter. ‘Where you already have a relationship you have an opportunity to win a larger slice of the cake.’ One area where Baxter has seen a significant up-tick in work is in international referrals from foreign law firms. ‘Our firm is an attractive proposition to foreign firms looking to refer work into the UK who maybe find the City prices a little bit frothy but want something close to London that’s high quality,’ he says. ‘We seem to be doing quite well on that and that may have created a bit more balance when the UK economy wasn’t doing so well.’ The firm is not a member of a formal referral network but has a ‘best u
‘Intellectual property has probably been the single biggest success story for us for the last few years.’ Richard Baxter, Stevens & Bolton can’t be said for some of its rivals. The firm is particularly pleased to see a strong PEP figure of £300,000, despite increasing the number of equity partners from 15 to 17 in the last year. Managing partner Richard Baxter says that the net income figure will have been inflated slightly by moving the profits paid to two non-equity partners into the equity partner pot, but the firm has seen healthy recovery in its three main practice areas – corporate, real estate and disputes – and that has underpinned recent good results.
REVENUE GENERATION Revenue -
Peer group averages 24 equity ptnrs, 36 non-equity ptnrs, 188 total lawyers
Stevens & Bolton 17 equity ptnrs, 19 non-equity ptnrs, 96 total lawyers
Cost = Profit
PEP 2011
£600k
£500k
£400k
per lawyer per lawyer £300k
£200k
PROFIT MARGIN
£100k
per lawyer
£0
South
TURNOVER TURNOVER 2011 2011
(change from (change 2010) from 2010)
(change from 2010)
£31.7m
(-1%)
15%
£170k - £144k
= £26,000
£205,000
(4%)
£17.1m
(13%)
30%
£178k - £125k
= £53,000
£300,000
(12%)
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NEWS ANALYSIS
u friends’ relationship with independent
foreign firms overseen by the chair of the firm’s international practice group and former head of corporate at Simmons & Simmons, Ken Woffenden. Baxter, a former Clifford Chance corporate lawyer, adds that a healthy mix of deal work has also been key to moving the firm forward. He observes that too many firms have been largely dependent on entrepreneurial leveraged deal activity – the area that was hit hardest by the banking crisis. ‘Although there’s talk of banks lending again they are really only lending to established relationships and supporting refinancing, rather than supporting new deal teams to do things like MBO and MBI work,’ he says. ‘Quite a few firms were dependent on that sort of work and that really did fall off a cliff and hasn’t recovered.’ The other factor that has aided the firm’s strong performance has been avoiding a knee-jerk reaction to dwindling turnover by slashing staff overheads. The firm is 16% larger now than it was in 2008, growing from 79 lawyers to 96 during the period. Baxter says this has made things easier as work has started to recover again. ‘We’ve always operated a lean model on the support side, and that’s healthy,’ he says. ‘Perhaps some larger firms became a bit bloated on the support side during the more heady years. We didn’t have to do too much on the support side because we were already lean.’
A new management team of chief executive Matt Meyer, managing partner Ed Turner and finance director Andrew Moran all took their positions in 2009 and the firm has hit the ground running. Offices in London’s Tower 42 and a key strategic alliance signed last year with Keystone Law in Singapore are all positive growth signs. Next year the firm is budgeting for a 7% increase in turnover and a 19% jump in net income – so this is a firm on the rise. Turner says that the firm has pushed on with its strategy of leveraging off its strength in Cambridge while developing its London and international ambitions. ‘Responding to client needs and matching their ambitions – Singapore being one example – has perhaps allowed us to retain existing clients and take some market share away from less ambitious competitors,’ he says. The firm now has one full-time employee in Singapore who is on secondment to a client and the firm also has a licence to practise as a foreign law firm. The drive into London and internationally is largely down to the firm’s technology client base, which Turner says has helped the firm through the tough market. ‘On the corporate side we have a significant exposure to the technology sector, which has been pretty resilient,’ he says. ‘We’ve seen some fairly good transactions emerge recently, again on the technology side. But the nature of what we have done has changed. We’re strong on insolvency and restructuring and that has been a good source of revenue, particularly in London.’ London has also helped develop the firm’s corporate practice for technology clients in Cambridge. ‘By going into London we’ve been able to ramp up our investor-side client base and then hold on to some of our investee clients,’ Turner adds. However ambitious the firm may be, there are no plans as yet to follow the route of other firms in the region and pursue a merger
‘We’re strong on insolvency and restructuring and that has been a good source of revenue, particularly in London.’ Ed Turner, Taylor Vinters
CENTRAL SUCCESS At first blush Cambridge-based Taylor Vinters’ financial performance for 2010/11 is hardly earthshattering: its profit margin is low at 17%, as is its PEP of £208,000. But when compared to its peers in the Central peer group, which includes firms fighting for traction in a market dominated by large national firms from our Major UK category, it looks much more impressive. Yes, the standout firms in the group were Shakespeares and Birketts, with revenue growth of 71% and 35% respectively, but
these leaps were the result of significant merger activity. Taylor Vinters’ revenue growth of 6% to £15.9m could only be matched by one firm which didn’t do a merger – Browne Jacobson, the largest firm in the group. Taking this into consideration, it’s even more impressive that Taylor Vinters nudged up its PEP by 4% and increased PPL by 28% to £31,000, despite taking the bold step of opening a London office in 2009.
REVENUE GENERATION Revenue -
Peer group averages 26 equity ptnrs, 31 non-equity ptnrs, 156 total lawyers
Taylor Vinters 13 equity ptnrs, 16 non-equity ptnrs, 88 total lawyers
Cost = Profit
PEP 2011
£600k
£500k
£400k
per lawyer per lawyer £300k
£200k
PROFIT MARGIN
£100k
per lawyer
£0
Central
TURNOVER TURNOVER 2011 2011
(change from (change 2010) from 2010)
(change from 2010)
£29m
(15%)
18%
£188k - £154k
= £34,000
£205,000
(4%)
£15.9m
(6%)
17%
£181k - £150k
= £31,000
£208,000
(4%)
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NEWS ANALYSIS
REVENUE GENERATION Revenue -
Peer group averages 29 equity ptnrs, 15 non-equity ptnrs, 173 total lawyers
Harper Macleod 21 equity ptnrs, 21 non-equity ptnrs, 106 total lawyers
strategy to boost top-line growth. Turner says that the firm isn’t opposed to the strategy but finding the right fit has been a challenge. ‘I think we need to achieve top-line growth; we need to leverage our cost base but we need to do that in a way that is sustainable,’ he says. ‘Bolting on top-line growth for the sake of it isn’t where we want to go. It isn’t a wrong strategy – it’s just not right for us at the moment.’ The aim is to stick to what has worked so far but not get too carried away. The intention is to work with what Taylor Vinters already has and make it as profitable as possible. ‘We say in our business plan that £25m to £30m is about where we feel we might start to lose the balance that we enjoy between selfdetermination and profitability,’ says Turner.
£600k
£500k
£400k
PEP 2011
(change from 2010)
£31.5m
(4%)
30%
£197k - £136k
= £61,000
£392,000
(8%)
£17.1m
(14%)
28%
£161k - £117k
= £44,000
£224,000
(38%)
firms in our insurance group, Harper Macleod has done pretty well of late. ‘There are some areas in the past that other firms may have turned their noses up at – the commoditised areas particularly,’ says Darroch. ‘We don’t turn our noses up at anything. It’s about looking to see whether it’s an opportunity to do something different. As such we’ve seen significant growth in our insurance practice.’ Although litigation has grown significantly to contribute a much larger share of total revenues, Darroch points out that all practice
FLYING SCOTSMEN With a couple of notable exceptions, the mood of Scottish firms again this year was a little bleak. Reports of flat performance, combined with a flat outlook have left firms feeling… well, flat. But at Glasgow’s Harper Macleod, chief executive Martin Darroch can’t understand what all the doom and gloom is about. Maybe it’s because he’s a chartered accountant, not a lawyer. Or maybe it’s because his firm is posting growth that few Scottish firms can dream of, with fee income up by 14% to £17.1m and PEP climbing by 38% to £224,000. Harper Macleod has defied LB100 convention in recent years. It has continued to grow revenues year-on-year since 2008. Its profitability has improved as well – with no reduction in headcount. Net income is up 38% this year to £4.7m, while the firm has 60% more lawyers than in 2009, from 61 to 106. One major factor behind this recent success is the proportion of revenue derived from its litigation practice: 57% of the firm’s fee income comes from its disputes practice, which includes insurance-focused work. And, like the
Cost = Profit per lawyer per lawyer
£300k
£200k
PROFIT MARGIN
£100k
(change from (change 2010) from 2010)
£0
Scotland
TURNOVER TURNOVER 2011 2011
per lawyer
‘In profitability, although there have been some minor fluctuations, there’s been a good stable base.’ Martin Darroch, Harper Macleod
areas have grown – just not as much as litigation. ‘The most important thing for me in terms of our year-on-year performance is that if you look at other firms they’re up and down all the time,’ he says. ‘For us, in terms of turnover we’re on an upward trend and in terms of profitability, although there have been some minor fluctuations, there’s been a good stable base.’ When asked why the firm has been successful in leveraging good profitability out of the business, Darroch’s response is simple: ‘We’re working harder and watching what we’re spending.’ One example of watching overheads is Harper Macleod’s pulling out of expanding into new premises in Edinburgh in 2008 but adding to the space it has in its headquarters in Glasgow. ‘We’ve good, fantastic offices but have avoided moving into a palace – that’s a pretty hard sell to clients. Property is only an asset from 9 to 6, after that it’s a liability.’ The firm didn’t take a common approach during the global financial crisis of cutting back on staff numbers. In fact, Darroch says the firm decided to retrain 20% of its non-partner fee-earners into areas that were not as exposed to the downturn. He adds that the firm is mindful of getting the maximum return out of good work for quality clients, which include Clydesdale Bank, William Hill, Heineken UK and The Royal Bank of Scotland Insurance. For Harper Macleod, the emphasis is not on scale. This is why although some firms may have grown their top line through acquisitions, this isn’t a priority for this firm. ‘It’s not about the size of a firm: for us it’s about the quality of work we are doing for the calibre of client for the appropriate return,’ says Darroch. ‘I think that’s where some go wrong – they are always chasing turnover. It’s not about being biggest; it’s about being best.’ LB mark.mcateer@legalease.co.uk
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