The top names in the legal industry give their thoughts on the financial year and what lies ahead
David Childs, managing partner, Clifford Chance
On the magic circle pulling away
"Our offices outside of London are now maturing. We are seeing significant revenue increases from these offices and they are becoming more profitable – the model is proving itself."
On the US
"The US recovered sooner from the business recession than London and three or four years ago you saw the US firms enjoying revenue increases the UK wasn’t. There is an element of catch-up going on but London firms are more and more profitable and in some cases overtaking. One assumes these results will make it easier for UK firms looking for a merger with a US firm."
On equity/leverage
"Firms have got better at managing the equity. Looking at Clifford Chance, we will be seeing an increase in the number of partners in the future because of the growth of our practices. It is clearly important that good young lawyers can see a route to equity but you have to balance that with revenue increases to ensure profit grows at reasonable rates. The small percentage increase in the number of partners disguises that a number of firms have reduced their equity partners and are making up partners to replace them – so there has been a level of ‘turnover’."
Tony Angel, managing partner, Linklaters
On the market
"A number of facts have driven the profits of the magic circle firms. It may be that the UK domestic market has not been as buoyant as the global market and within the global market the UK, and international law firms, have been increasing their share. Investment in growing international networks and the growth of London as an international finance centre have provided real opportunities to firms like ours. The sort of deals being done benefits firms with strong financial markets and cross border transactional practices."
On the US
"I think the US firms are quite surprised. When we and other global firms were making investments in building networks there was a real sense that scale was incompatible with doing top notch work but the fact all the firms have done so well shows if you handle it right you can do well and stay focused. US firms have been trying to grow over here for a long time but it takes time and heavy investment to grow internationally and it is a question of whether they have that appetite. We know that we want to grow in the US and there are now real prospects of doing that. Having the financial power to hire there is a very important tool."
On equity/leverage
"For the last five years it has been hard to become a partner but we have continued to make up a consistent number of people each year and we will continue to do that. It will always be hard to be a partner at a top firm but that doesn’t mean it should be impossible. If you are going to attract and retain the best people you have to give them partnership. The firm as a whole is smaller now than it was in 2003. We have more lawyers but fewer people in business services despite out international expansion over that period."
David Gold, senior partner, Herbert Smith
On Herbert Smith’s performance
"It has been a curious year for us. Turnover has gone up by about 13% and we have had a lot of growth but also a lot of expense. I would hope this year and next we would begin to see the advantages of that growth and investment. It is very important for the firm to achieve a balance between investment and profitability."
On the market
"The global players have done well this year. For some, everything has come together but for the mid-market downwards it has been more mixed. Quite a few have not seen the growth they were expecting."
On equity/leverage
"I think that most firms, either privately or publicly, have had a long, hard look at whether they can afford to keep everybody. There is an incredible wish to keep profitability up and you have to ask why. Lawyers have something of a herd-like mentality and we are all following each other so it is no longer sufficient simply to have a good year within the firm."
On the US
"The strength of the pound against the dollar means all the firms at the top end are looking very good against the US. I am curious as to whether they will try to do more over here to take advantage of the strong pound. It is good for those firms seeking a US merger."
Konstantin Mettenheimer, co-senior partner, Freshfields Bruckhaus Deringer
On Freshfields’ performance
"We are coming out of a very good year. It has been the firm’s best year ever. It is of course a lot to do with the market, but there has been a lot of hard work as well. It has been the best year for all regions of the firm, and across all them, the difference in profits was no farther apart than 20%."
On the market
"This year economic factors have been very positive and we are not seeing a slowdown yet, even though is getting just a little tighter for private equity funds. Next year I am confident we will have an even better year, particularly as we will not have the restructuring costs."
On the US
"As a capital market centre, London has been increasingly important, with a very large number of IPOs compared to New York’s very few. There has been a lot of capital flow and economic activity between Asia and the Middle East, not necessarily via London and New York. The jury is out on whether we will see the development of a third financial centre on top of London and New York, be it Dubai, Mumbai, Shangai, Hong Kong or Tokyo."
Jeremy Sandelson, London managing partner, Clifford Chance
On the magic circle pulling away
"The global magic circle are clearly pulling away from other firms in terms of the cross-border work that they can do. More and more clients appreciate the cross-border capability they can be offered on complex, high-value transactions. This year Clifford Chance won a lot of corporate work from clients that had never before have done deals in the UK and we are also involved in a lot of major cross border investigation work. This trend looks set to continue."
Ralph Cohen, managing partner, SJ Berwin
On the US
"As firms get more of a global reach they are impacting on US firms more and more. We are seeing internationalisation paying off. On equity/leverage All London firms have increased their salary rates quite considerably which we have seen coming through in the results. Firms are asking more of associates and there is an acute shortage of associates in some key areas. You get to a certain level – say the £500,000 PEP point – and then trying to squeeze more out of the machine becomes increasingly difficult, particularly if you are not going for the big de-equitisation push. At the end of the day it’s all just playing with the denominator. You cannot ask associates to do much more than they are doing. There are high levels of utilization and if you cannot drive the machine faster then you have to make it more efficient and increase recovery."
Simon Bromwich, managing partner, Ashurst
On Ashurst’s performance
"Most firms have reported good revenue and profitability growth, although the figures would tend to show we have done slightly better than our competitors. We take the view that we’re one of the top 7 firms in the UK and being within that group and recognized within that group is really important. I think we will carry on growing. I would not expect us to keep going at the rate we did last year but we need to keep growing the business and achieving profitable revenue."
Chris Carroll, managing partner, Travers Smith
On the magic circle
"The magic circle has really motored this year and there is now a huge difference in earnings between the top tier and most of the second tier UK international aspirants. The gap is quite stark."
On the M&A boom
"The move to concentrate on premium transactional work is interesting. Great in the boom but what happens when it ends? We have always been cheerfully dependant on M&A but I thought other firms liked to be better hedged."
On the US
"The profitability of UK firms has been helped enormously by the dollar conversion rate compared to a few years ago. The leading UK firms are now at the same PEP level as some of the leading US firms."
On equity/leverage
"It must be doubtful whether the model favoured by many firms of as few equity partners as possible earning as much as possible by driving as many assistants as possible as hard as possible is sustainable in the long run. The assistants are showing what they think of that model by voting with their feet."
Peter Martyr, chief executive, Norton Rose
On the magic circle pulling away
"It is entirely reflective of the M&A boom. They are very large and more advanced in global structure and are picking up a disproportionately large part of the M&A boom."
On the US
"I am not sure that many firms that do not already have a US presence would look at opening in a serious way. The US and in particular New York are hugely powerful legal markets and a difficult one to crack. However it might encourage those firms that already have a presence to expand. It is important not to draw long-term conclusions from short-term changes in the market. This has been a good year for UK firms but the US firms have had a lot of good years in the past. There is a little bit of catch up going on and the US firms will respond accordingly."
On equity/leverage
"Firms can’t just expand forever by lateral hires – they must reward their own people."
Dick Tyler, managing partner, CMS Cameron McKenna
On equity/leverage
"The EU is the world’s largest trading entity and the city has benefited as the London economy continues to boom. However the headline increases in profitability are driven by decreases in equity and headline charge out rates rather than increases in productivity and efficiency. I query whether that is sustainable. You can only fiddle so much with leverage before you lose quality control. The demographics of the profession are changing, with increasing numbers of people leaving and fewer people coming in, which has a trickle down effect throughout the top 50. There is a paradox in that you should not pay simply what other people are paying, but equally the profession is becoming more transparent and mobile."
On next year
"I am always nervous about looking more than 3 months ahead, but I would say that we can be fairly certain the market will be sustained beyond that. The City is increasingly linked to G7 rather than the national economy."
Sunil Gadhia, chief executive, Stephenson Harwood
On the market
"The performance of the leading London firms is a reflection of London’s increasing strength and dominance as a financial centre."
Peter Crossley, managing partner, Hammonds On the market We have seen a stellar performance by the magic circle this year. However, we are also seeing so called national firms capturing more than their fair share of work from top corporate clients. We certainly do not see any let-up in the corporate boom at the moment."
Nigel Boardman, corporate partner, Slaughter and May
"On the market On the negative side, litigation-dependant firms have not had a good year and may continue to suffer a fall out from the decline in work; however, we shouldn’t underestimate people’s ability to fall out with one another. Financing is becoming increasingly commoditised, which is a long-term trend hitting finance and everybody is trying to work out how to keep ahead of it. There has also been a shortage of restructuring and insolvency work. On the plus side, it has been a cracking time for M&A and general corporate work. Equity capital markets have been very strong, as have solvent corporate restructurings and returns of capital."
On the US
"The City has gained significant market share in the world financial and legal scene. Part of this is Sarbanes-Oxley. Also Arab money doesn’t like to go to the US, where it cannot necessarily get money back out again. New York is not as good as London for Asian companies to be headquartered in."
On London
"Ten years ago we were talking about Paris and Frankfurt being significant threats to London, this is no longer the case. As long as there remains differential treatment of personal tax, this will continue to be the case."
On equity/leverage
"Partnership culls will have hit leverage significantly. I would imagine that the magic circle has shed 600-700 partners worldwide recently."
Gordon Moir, chief counsel, BT international
On this year’s results
"I think these figures are reflective of the boom in M&A work since firms are ever more tied to the economic cycle - that is what is driving these profits. As soon as the boom drops so will PEP. If you have good panel and fee structures in place then these things don’t have an impact on you."
Barry Lawson, general counsel, Bridgepoint Capital
On fees
"I cannot imagine how there would be an increase in revenue without us clients footing the bill. But although we are not time sensitive buyers, it does not mean that we do not look for value for money. It is an extremely competitive market and it is my sense is that firms are not being silly with fees. Firms do not have carte blanche to charge through the nose- it is about mutual respect and building relationships."
Helen Mahy, general counsel National Grid
On fees
"Firms are more open about asking me to exercise discretionary bonuses - that would not have happened 2-3 years ago. We agree a bonus figure if it is a ‘win win’ situation. I do not find that I am paying extra for associates – we have agreed fee rates and no one has asked me to increase these outside of a normal fee review - and I do not think firms are passing on the increased rates to clients."
Mark Maurice Jones, EMEA general counsel, Kimberly-Clark
On fees
"Charge out rates of premier firms are astronomical and get bigger all the time. I do not get the feeling that top firms are too concerned by cost. I can negotiate reductions but that is usually dependent on the good will of the partner involved."