It comes as no surprise that many law firms around the world have seen their coffers shrinking. The proximity – and perhaps reliance – on clients in the banking and finance industries ensured expectations were lowered before financial results were due. Surprises however, did come for some.

The extent to which overseas practices, especially the Asian offices of international firms, accounted for total revenue were highlighted by many firms. A changing of the order also happened in the Magic Circle ranks this year. DLA Piper underwent the most controversial partner defections and restructuring since the crisis began, yet came out on top by total revenue.

So was it a successful business model, strategy or restructuring efforts that helped some firms come out better than others? As ALB found out, some results – and the measurements used to weigh them – may not be as transparent as they seem.

Yearly results

The crisis helped shake up the Magic Circle ranks this year when Clifford Chance, marked by a 37% drop in PEP and 7% drop in revenue, lost its title as the world’s highest-grossing law firm. Linklaters won by revenue and Freshfields by PEP.

Last year, the behemoth firm recorded double digit growth: an 11% rise in turnover and 13% rise in PEP. This year, however, it was grappling with banking sector clients with higher exposure to the financial crisis, and a lower number of more lucrative deals. For example, the firm completed 61 M&A deals worldwide, compared to 148 in the same period last year, according to Thomson Reuters figures. On the other hand, Linklaters – buoyed by its role on the lucrative Lehman Bros bankruptcy case – recorded a turnover of US$2.13bn, which grew by 11%. It worked on 84 M&A deals compared to last year’s 137 but rose three places to fourth in the global league tables by deal volume.

Allen & Overy’s revenues rose 7.7% to US$1.8bn – PEP however, dropped 9% and the firm trails behind Clifford Chance in the ranks. Freshfields revenue rose by 9% and PEP stayed the same as last year. Out of all the Magic Circle firms, Freshfields saw the lowest drop (20%) in the number of completed M&A deals. The firm actually rose seven places to second place this year. On face value, it may come as a surprise that DLA Piper took the top gong as the highest grossing law firm by revenue, recording US$2.26 bn. Skadden recorded US$2.2bn*, followed closely by Baker & McKenzie with US$2.11bn.

However, the problem with these metrics is vast. First, there is a difference between US and UK financial years – most US firms reported their figures as at December 2008, compared to UK firms who released theirs in June. When the financial crisis began to make its presence known in a firm’s billings remains to be seen, but on the whole, most US firms were able to capture the market before the crisis stepped up. Baker & McKenzie argued that its results were affected by a longer exposure to the crisis in its official fiscal year. Add this problem to the variable exchange rates seen over the year, and the weakness of the pound over the dollar, and the rankings become a little more complicated. Freshfields and Allen & Overy cited the weakness of the pound as a significant factor in their results. Ted Burke, chief executive officer of Freshfields, said: “It is worth noting … our revenues were enhanced significantly by fluctuations in exchange rates – over 60% of our income is in euros and dollars.” There’s also the issue as to whether using total revenue is an accurate measure of a firm’s profitability, since in the end, what really matters is whether end profits rose. In Allen & Overy’s report, profit before taxation dropped, from £447.2m last year to £430.9m pounds this year.

Most of the firms listed in the table responded in some way to the crisis by undergoing restructuring or redundancy consultations, which may help recoup losses. Allen & Overy’s restructuring program cost £26m with more than 37 partners leaving the firm. Linklaters did not reveal how many partners left, but 200 lawyers and another 200 staff were cut from its headcount. Clifford Chance reduced 80 lawyers in London, with no indication given of how much it saved.

Eastern focus

The Asian region seemed like a beacon of light for some firms. This year, a substantial amount of revenue came from Asia and Middle East office billings. More than half of Allen & Overy’s revenues came from outside the UK. Clifford Chance cited these growth markets as some of the highlights of the firm’s performance over the year. For Lovells, the contribution from the firm’s Asia and Middle East practices also grew, bringing in 10% of the firm’s £531m. “2008 was a year of tremendous growth for the firm across Asia and the Middle East by every measure,” said Lovells managing partner, Crispin Rapinet. “We saw increases in fee-earner numbers across the board, our partner ranks increased and although things tailed off for us and other firms from November, Asia proved resilient.” The firm said its growth figure in the region for last year was 30%.

DLA Piper recorded £584.9m from the markets in Asia, Europe, Africa and Middle East–a significant number when combined with its Australia and New Zealand offices (DLA Phillips Fox) at A$218m. With UK and US firms feeling the pinch from clients to cut down on legal bills, they are now focusing on ‘lower cost’ jurisdictions where more clients are willing to pay a higher legal bill.

According to Suzanne Rose, global director of operations at Legalbill, it’s a given for firms to focus on more lucrative jurisdictions. “The nature of the legal industry is such that law firms will move to “higher ground” – [either] a practice area, client industry, geographical location, or strategic alliance,” she said. "They can be paid their standard hourly rate when they can no longer expect clients to pay them at the high-end of their billing rate range. Clients are asking … law firms to provide them [with ]the greatest value at the most reasonable cost and are moving their business accordingly.”

“They are looking at alternative resources such as outsourcing for some low-end legal services either directly or through their short-list law firms. Law firms have to adapt by becoming more cost-efficient in their delivery of services – this doesn’t come easy,” she stated. “It is easier to find new sources of revenue by expanding into ‘emerging markets’ and grabbing a share of these markets and riding this new wave, of what will be highly profitable work for a time.”

A fine result

At the end of the day, does all the focus on turnover really matter? That’s the question weighing on the profession worldwide as many believe the health of a law firm is based on how it bills clients. Billing hourly or on a fixed rate and keeping clients loyal all factor more importantly into the firm’s final financial results. However, Legalbill’s Rose proposes a new type of measurement of firm profitability, dubbed the ‘profit index’ – the ratio of PEP to revenue per lawyer.

Although this is a more accurate measure of a firm’s ability to convert revenue into profit, she said the index does not indicate a firm’s future health, since it is a snapshot of the last 12-36 months of results. Rose also looks to more qualitative measurements. "The law firm investing in the development of its people and the calibre of its practice – these are indicators of the long-term health and viability of the firm. Lawyers would be wise to invest a portion of their time developing people, building client relationships and improving the quality of their practice – this type of investment renders returns for years to come. Partner compensation should be based on financial performance and on the partner’s investment in the future.”s

One of the reasons why some firms have remained coy about their figures could well be the reaction of clients. As some general counsel have said, the results give more reason to push for alternative legal billing. In the next year, focus will be on loyalty – both from the law firm to the client, and whether that client chooses to ride out the storm with the law firm in hand, or take their business elsewhere.