Six months into their current financial year, the United Kingdom’s largest firms are continuing the impressive growth that characterized the 2006–07 financial year.
In an era of increasing transparency in law firm performance, many managing partners spent the first week of November confirming double-digit growth in revenues, with two Magic Circle firms reporting that they’re on pace to reach or exceed the $2 billion mark for the year. (The financial year for most U.K. firms runs from May 1 to April 30.)
Banks may be facing dramatic losses thanks to the credit crunch, but U.K. law firms continue to enjoy the kind of benign economic conditions that have seen them enjoy huge growth in revenues and profits.
Of the three Magic Circle firms that have so far announced revenues for the past six months, all confirmed increases of 15–20 percent over the same period last year. Clifford Chance reported an increase of 18 percent, giving it six-month revenue of £680 million ($1.40 billion); Freshfields Bruckhaus Deringer confirmed that its income had gone up by 18 percent to £560 million ($1.15 billion); and Allen & Overy achieved 16 percent growth with revenue of £456 million ($939 million). Outside of the Magic Circle, two other leading City firms, Ashurst and Herbert Smith, saw half-year revenues grow by 25 percent and 26 percent to £147 million ($301 million) and £183 million ($377 million) respectively.
None of the firms released any information on their profitability, but, says one managing partner: “Given these growth rates, and depending on how the U.S. firms are faring, it wouldn’t surprise me if there were at least three U.K. firms among the ten most profitable in the world.” Last year only two U.K. firms, Linklaters and Slaughter and May, were among the top ten Global 100 firms as ranked by profits per partner. The credit crunch, which hit the United States and Europe in August, had no impact on the firms’ first quarter performance, from May through the end of July, and firms have largely managed to maintain their performance through the second quarter. “There’s definitely a time lag which saw us through the second quarter,” the head of one top-20 firm says. Law firms often feel the effects of a downturn well after the banks, as they continue to collect fees for work carried out in the months before. And, as Jeremy Black, an associate partner in accountancy firm Deloitte’s professional services group, points out: “The fact that there is a lot of change and uncertainty in the market doesn’t necessarily hurt law firms.” While the big-ticket M&A deals disappeared in August and structured finance has been hit, the smaller deals market remains active, and some multibillion-dollar deals have since returned, such as BHP Billiton’s $140 billion bid for mining rival Rio Tinto Group.
The half-year announcement of revenues is a relatively recent development in the U.K. legal market. As recently as 2004 most firms declined to release their six-month revenues. Part of the explanation for the increased disclosure lies with the limited liability partnership (LLP) status adopted by the majority of leading British firms. In the U.K., LLPs must file annual financial reports, a development that has clearly instilled a culture of greater transparency at law firms. Managing partners also cite a highly competitive London legal press as another prime factor. “You’ve won!” quips the London head of one New York firm to a reporter.
“We all wish we didn’t have to be more transparent,” says the head of one Magic Circle firm with a sigh. Of course, the era of semiannual reporting has coincided with a period of almost unprecedented financial growth for U.K. law firms. They may not be quite so willing to cough up their figures when the credit crunch bites at more than just the banks.