UK 200: Are Slaughters and BLP the best-managed law firms?

Which firm is the UK’s best managed? The short answer is that it’s impossible to say definitively. Too many factors contribute to any large organisation’s overall quality for a meaningful assertion to be made from merely a handful of indicators.

On the other hand, there are a range of factors that can offer credible clues. Many of these relate to a firm’s financial performance, the majority of which are contained each year in the UK 200 series of market reports.

For the first time The Lawyer has taken a selection of these factors including average profit per equity partner (PEP), revenue per lawyer (RPL) and profit margin and aggregated them, on a weighted basis, to offer a new suggested ranking of the UK 200 (see Methodology).

The aim is to identify leading firms in the UK, at least from the perspective of financial health.

How to crunch the numbers

We have used two baskets of similar metrics, with one taking a single-year view (absolute) and the other looking at a three-year perspective (growth). This approach is designed to reveal which firm performed best during the 2014/15 financial year on the some of the most critical financial metrics and also which firm shows the most significant improvement since 2012/13.

To be very clear this feature, based solely on data included in the current UK 200 series, is intended as a starting point for a discussion. What it does not take into account is a raft of other qualitative and quantitative indicators such as the number of pro bono hours a firm might undertake, or the wider benefits packages it offers, or service quality innovations such as tech-driven initiatives, or retention rates, its international platform, or client feedback.

In short, this article does not pretend to offer a 360-degree review of the top 200. Equally, our methodology, chosen metrics and weighting of the latter is entirely up for debate (see box). Should an improvement in revenue per lawyer (RPL) be given more weight than the absolute top of equity in any given year, a figure that can be more easily distorted or manipulated to achieve a higher result if desired? Similarly should net profit growth over a period of years rank higher than absolute PEP in one year? Most likely, yes, but as always there are arguments for and against.

With this article our aim is to start a conversation, not to be definitive, and so we reiterate that the weighting of the metrics is entirely up for discussion.

That said, the choice and weighting of these indicators was helped significantly by numerous conversations with legal market leaders, including managing and senior partners as well as several well-known consultants.

Alan Hodgart of Hodgart Associates, for example, says: “I would rank absolute PPL (profit per lawyer), PPFE (profit per fee-earner) and PEP much higher than the growth. A firm with a low base can achieve a high growth rate in a year but still have a relatively poor actual number. I would rank actual PEP in the top group of variables: it isn’t the only performance measure but it is a very important competitive tool and shouldn’t be downplayed. I probably wouldn’t include profit margin at all but include the overall cost to revenue ratio. The other measures of profitability (eg PPL) cover anything the profit margin would show.”

Slaughters and BLP lead the charts

This year’s number one firm in the single year group is Slaughter and May, which scores top marks across the entire UK 200 for PEP and PPL and is in the top 10 for profit margin, RPL and RPP.

Also in the top 10 are all four magic circle firms – Linklaters, Freshfields Bruckhaus Deringer, Allen & Overy and Clifford Chance – along with Macfarlanes and Travers Smith and three firms that are effectively some of the UK’s most successful super-boutiques – Dickson Minto, Sackers and Stewarts Law.

Single-year rankings

In short The Lawyer’s one-year weighted financial metrics ranking has produced in microcosm what many consultants have been saying for years how the elite market will eventually crystallise – global powerhouses rubbing shoulders with focused, highly profitable boutiques and very little in between.

When the three-year metrics are analysed in terms of growth a different number one firm emerges: Berwin Leighton Paisner (BLP).

Three-year rankings

BLP scores particularly highly on the improvement in PEP over the three-year period, rising by 64 per cent. It also saw PPL rise by 56 per cent over three years, profit margin by 25 per cent and RPL by 24 per cent.

The three-year view also includes creditable mentions for the UK’s first publicly-listed law firm, Gateley, and four from the Independents, The Lawyer’s second 100 ranking (TWM, Wright Hassall, Porter Dodson, Coffin Mew and Pemberton Greenish).

The only firm to appear in both groups is Macfarlanes (ranked fifth in the single-year view and third over three years).

The halo effect

What do these metrics signify? While there is little debate about the significance of total turnover, at least as an indicator of a firm’s growth trajectory, it is also generally accepted that average PEP is useful indicator of the quality of work a firm is handling.

“There is a halo effect of a high PEP,” says Mark Brandon, strategy director of Motive Legal. “It can have a huge intangible and indefinable impact on morale, recruitment and the perception of a firm in the market.”

Equally it is widely accepted that PEP, like other metrics such as the top of equity or the equity spread, can easily be manipulated to achieve a higher result. The ‘halo effect’ Brandon refers to makes it easy to see why manipulating PEP, while perfectly legal, is so attractive to firms.

In contrast, metrics such as RPL are generally harder to manipulate and are therefore seen as a more reliable sign of financial robustness and work quality.

As one UK managing partner puts it, “for me the bottom line is if you focus on RPL then everything else follows, unless you spend money on unnecessary things which don’t support your objectives”.

One legal market specialist comments: “Inevitably any of these metrics are imperfect, [and] I don’t think you should also forget some of the financial hygiene metrics such as debt levels, pension deficits, WIP and debtors as these can be a useful indication of the health of the business and its sustainability. Another of those metrics to look at is chargeable hour targets, level of utilisation and level of realisation.”

Taken as a group a firm that performs well on several of these metrics is likely to be one that is well managed and performing near or even at the top of the market.

Methodology