The Recession's Winners and Losers
A five-year analysis shows that U.K. firms were much harder hit by the recession than their U.S. and Australian counterparts.
The world's legal market continued on its upward path last year. Given the sluggish growth, at best, of the globe's major economies and the ongoing economic uncertainty surrounding some members of the European Union, that in itself should be considered some achievement. Total revenues for the world's 100 largest law firms grew by just over $3 billion last year, hitting $85 billion, up from $81.9 billion in 2011. Total lawyer numbers also grew by a shade under 4,000 to reach 108,378, a year-to-year increase of 3.8 percent.
On the downside, that growth in revenues represents a slowdown from 2011, when the cash pile for the top 100 grew by 6.8 percent. Productivity stalled, as average revenue per lawyer—our most reliable measure of the legal sector's health—was flat ($784,297 in 2012, compared to $784,419 in 2011).
For the first time in our global rankings, DLA Piper took the top spot as the world's highest-grossing firm, displacing Baker & McKenzie. DLA's gross revenue grew by 8.6 percent in 2012, reaching $2.44 billion, surpassing Baker, which saw its top line grow by 4.6 percent, to $2.42 billion. DLA's revenue per lawyer grew 0.8 percent, to $605,000, while Baker's increased 1.7 percent, to $590,000. (This is the third year that The American Lawyer has counted DLA's American and international practices as a combined firm.)
As DLA Piper's numbers show, there are growth opportunities in the world's legal market. But for the most part, firms remain unsure of just how sustainable the tentative signs of a recovery are, and they continue to be exposed to sluggish markets. "It's a bit like that line from Jaws: 'Just when you thought it was safe to go back in the water,' " says Norton Rose Fulbright chief executive Peter Martyr. "Everything seems safe, but then there's another setback which unsettles activity."
Of the 10 highest-grossing firms, four are British—Clifford Chance, Freshfields Bruckhaus Deringer, Linklaters, and Allen & Overy—but in the five years since the collapse of Lehman Brothers, all have lost ground to their U.S. rivals. In total, 23 firms headquartered outside the U.S. made it into the top 100 by revenue. (Both DLA Piper and Hogan Lovells have a plurality of their lawyers in the United States, so we consider them U.S. firms for the purposes of this analysis.) When firms are ranked by head count, the number of non–U.S. firms grows to 36, including eight from China (King & Wood Mallesons is the only firm with an indigenous Chinese business to make the "Most Revenues" list).
While growth of Chinese firms is expected to be one of the most prominent trends in the Global 100 over the next five years, runaway organic expansion is unlikely to be back on the agenda. "If you look at the elite global legal market overall, you should not expect to see very strong growth over the next few years," says Linklaters managing partner Simon Davies. "There are some growth opportunities, but, at least for established markets, they mostly involve taking market share."
In many ways the downturn since 2008 followed a familiar narrative: a core group of U.S. firms outperforming their foreign peers, thanks to the depth of the American litigation market and, more recently, improvement in the U.S. economy. Of the 10 worst-performing firms ranked by compound annual growth rate (CAGR) in revenue per lawyer over the last five years, seven come from the United Kingdom, with Clifford Chance, Freshfields, and Linklaters among them. Of the best-performing firms ranked by revenue per lawyer CAGR, three are U.S. entities that are known for the strength of their litigation practices—Quinn Emanuel Urquhart & Sullivan, Kirkland & Ellis, and Gibson, Dunn & Crutcher.
Given all that, one might have expected the British firms to have pulled back from their long-held plans for global domination. Most were hit hard during the slowdown, as a short spike in economic crisis work in such areas as restructuring gave way to depressed transactional flows.
But that expectation would be wrong. In the last three years, even as they endured the worst of the recession, the U.K. firms have doubled down on their global ambitions. Offices, alliances, and full-on mergers have been launched in Australia, Norton Rose Fulbright has gone from one of the City of London's forgotten firms to a billion-dollar business, Lovells has thrown in its lot with Hogan & Hartson, Clyde & Co is well on the way to becoming the global firm of choice for the insurance sector, and Herbert Smith Freehills has opened in New York. Allen & Overy alone has added 11 new offices since 2009 while increasing the size of its equity partnership from 358 to 442.
"The more recessions you go through, the more you realize that you need to focus on two things—survival and taking advantage of opportunities as they emerge," says Norton Rose's Martyr. For his firm this has meant a series of transformational combinations in Australia, South Africa, Canada, and, in June of this year, with Fulbright & Jaworski in the U.S.