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Sterling Results

The Am Law 100 has been published; now it is time for the Brits to show their hands. The fiscal year for most U.K.-based law firms ended on April 30. Their financial results, many of which will 
be announced in the weeks to come, will begin to reveal the true impact of Brexit on the country’s legal industry.

While the United Kingdom’s shocking decision to leave the European Union led to an initial flurry of advisory work, that short-term fillip was offset by a broader slowdown, particularly in transactional activity. Yet law firms are likely to post gains, primarily because of Brexit-related currency fluctuations.

Having hit $1.50 immediately before the vote, sterling spent most of the following months below $1.30. For U.K.-based firms with significant international networks, that volatility will inflate their financial results as foreign revenue is favorably converted into sterling for consolidated accounts. (The opposite will be true when they are converted to U.S. dollars for our Global 100 survey in October.)

Allen & Overy, which has almost two-thirds of its lawyers based outside the U.K., posted a record 13 percent rise in revenue during the first six months of the fiscal year, for example. In early May, with the firm’s full-year results yet to be audited, managing partner Andrew Ballheimer says, “On any measure, this will be a strong year for our business.”

In fact, any U.K.-based firm with a large overseas presence that doesn’t announce hefty gains in its sterling revenue figure for the last fiscal year should be asking itself very serious questions indeed.This currency boost will be less pronounced at the bottom line, however. While the exchange rates mean that non-U.K. revenue is now worth more in sterling terms, so too are non-U.K. costs—local office rent, staff salaries and so on. A flip side to the cheap pound is that it has enhanced the already considerable buying power of the U.S. firms in London. Witness the flurry of high-profile hires made by the likes of Goodwin Procter and Latham & Watkins over the past 12 months.

Further down the U.K. legal pecking order, the picture becomes less clear. Private client firms have been kept busy by a raft of legislative changes, for example. Mid-market transactional work remains slow. “Without winning market share, many transactional practices will have found growth hard to come by,” says David Patient, managing partner at Travers Smith, a leading transactional firm. (Patient says his firm had a good year, all things considered.) Across the market as a whole, it looks like a year of flat to low growth. In the panicked weeks after the Brexit vote, I’m sure many firms would have happily taken that.

But it is important to remember that any market reaction up to this point has been largely speculative. The U.K. only started the formal two-year process to leave the EU in March. Throw a surprise general election into the mix this June—even if the result appears a foregone conclusion—and it looks like the new fiscal year will be marked by continued disruption and uncertainty.

The currency gains also mask more systemic efficiency and cost issues. Some U.K. firms are struggling at around 1,100 chargeable hours per lawyer, according to three sources with knowledge of the situation. In a market of low growth, rising costs, increased competition and intense pricing pressure, that puts a real squeeze on profitability.

Over the past seven years, the average revenue per lawyer across the U.K. top 50 has only risen by 4.3 percent in sterling, according to Legal Week data, while average profit per lawyer has inched up a meagre 1.4 percent. The Am Law 100, by comparison, has seen those metrics increase by 9.3 percent and 24.2 percent over the same period. British firms will need to face up to these challenges if they don’t want to fall further behind their U.S. rivals.