A reordering of the Magic Circle City firm hierarchy is underway with Linklaters and Freshfields overtaking CC as the top-earning UK firms. However, lest we should feel too sorry for these credit crunch victims, partner profits at CC are down to a rather comfortable £733,000 from £1.15m. Freshfields and Linklaters’ partners’ profits for the year are £1.4m and £1.3m respectively.
To put CC’s profit slump into context, Alan Hodgart, of the legal consultancy H4 Partners, reckons the average profit drop over the last year for the top 100 firms is “20 to 25 per cent”. Last year the combined turnover of the world’s 50 largest law firms topped $55bn with profits of almost $22bn.
However, according to an analysis by Legal Business magazine published today, turnover over the last year has remained “virtually static” and there has been “an 8 per cent drop in overall profit”. CC firm has fallen five places in the magazine’s global ranking.
However, David Childs, CC’s managing partner, is sufficiently confident to risk a “hostage to fortune” comment about the prospects of green shoots. “There are already signs that business is picking up again,” he reckons. The financial crisis has created “a lot of issues for clients and some opportunities as well”. “Sorting these out will require high-quality legal advice, particularly in areas where Clifford Chance is especially strong.” Barring an unexpected event, this year will be much better, he predicts.
So why has CC been so exposed? Tony Williams, founder of management consultant Jomati and former CC managing partner, reckons his old firm took “three large bets over the last 10 years” by focusing on the investment banks, commercial banks and in private equity. “All three fell over at the same time,” he says.
SMALL UK BASE
He also points out that compared to their Magic Circle rivals, the firm has a relatively small UK base. Rival Freshfields works with the Bank of England (for which, according to a Freedom of Information request, it was charging the Bank £715 an hour) and it was reported earlier in the year that Linklaters billed £33.5m in fees for its first six months of work advising on the collapse of Lehman Brothers.
Alan Hodgart argues that CC’s “strong bank lending position and involvement with the financial sector” left it vulnerable in a downturn. He says: “When the restructuring came along it was almost in a conflict position because it has been working with the banks on their lending policies and so the banks turned to people like Linklaters and Freshfields.”
Tony Williams describes the profit announcement at CC as “disappointing” but is philosophical about its fate. “I think clearly as a firm it will ride the cycles in a more pronounced way than others. That’s inevitable.”
He recalls the early 1990s “when I was a young partner. From the top in 1989 to the low in 1993, net profits came off 50 per cent, yet the firm invested more in its international network than any other period.” He points out that it weathered that storm, coming out in 1999 “second only to Slaughter & May in terms of profitability”.
CC’s seemingly unstoppable expansion, starting with the merger of Clifford Turner and Coward Chance in 1987, officially ended in January this year when it axed 8 per cent of its City staff.
David Childs insists that the firm is continuing to invest internationally, citing new offices in Abu Dhabi and Kiev, a capital markets unit in Singapore, expansion in India through a best friends agreement with AZB, a new licence to practice in Singapore plus lateral hires in Asia and the US.
So what do CC’s difficulties mean for the global law firm model? “The aspirations of firms like Clifford Chance, Linklaters, A&O and Freshfields were driven to a large extent by the global finance market and the relationships they had with the global investment banks,” says Professor Stephen Mayson, director of the Legal Services Policy Institute at London’s College of Law. “When you build a strategy in part on that and the market collapses, it brings into question the nature of that strategy.”
He adds “what we do not know is whether the global finance market will come back and if it goes to the same extent would be with same players”.
The global law firm model “goes hand in hand with globalisation”, reflects David Childs. “The firm’s international expansion has always been driven by our clients’ needs for high quality legal expertise in major jurisdictions,” he says. “What’s happened in the financial world this year has been unprecedented in that it has not been restricted to one region or one type of industry, as on previous occasions.”
But, Childs insists, that does not change the fact that “our international client base still wants to work with firms that can offer top level, consistent, integrated service across borders”. “In fact, this need for advisors who can deliver that is more important now than ever,” he adds.
It is premature to say that the global law firm model is “broken”, agrees Tony Williams. “Unless you believe that within five years we will be back to trading with beans, international capital flows will continue, although the centre of gravity might well move eastward.”