Opinion: An eye to the future or pie in the sky?

Simon Slater, managing director of First Counsel’s advisory business, presents a chairman’s statement for a hypothetical law firm of 2012.

It’s the summer of 2012. The London Olympics are about to begin. New governments have been elected in the US, Japan and the UK. The world’s leading economies are emerging strongly from a prolonged period of shallow recession. And major law firms around the world are responding to significant changes in law-firm ownership, governance, regulation and competition. It’s a new frontier.

What follows is the ‘Chairman’s Statement’ just published in the annual report of one of the world’s leading 25 law firms of the day – the L&A Group plc (Legal and Advisory Group).

Chairman’s Statement – L&A Group plc

Results

The year to 30 April 2012 has been highly successful for the Group, both financially and strategically.

Turnover rose 14 per cent during the year to £1.41bn (2011: £1.24bn). Profit before tax was £477m, an increase of 19 per cent on the figure of £401m on the year to 30 April 2011.

Such strong results have led the board to recommend a 20 per cent increase in the final dividend to 6.00 pence (2011: 5.00 pence), bringing the total dividend for the year to 9.00 pence (2011: 7.50 pence).

We are especially pleased with the further improvement in the Group’s cash position, which at 30 April 2012 stood at £116.3m (£79.5m at 30 April 2011), notwithstanding the payments for acquisitions and pension contributions mentioned in the chief finance officer’s review. In addition, our pipeline of instructions is robust and operating cash flow remains strong.

Our financial partner, ProServe Capital (the private equity company), agreed terms for the Group to acquire its remaining ten per cent stake in the company and 100 per cent of shares are therefore now under Group control. We are indebted to ProServe Capital for their guidance since providing capital for expansion on incorporation of the firm in 2008 and then supporting us with the flotation of the business in 2010.

The strength of our financial position means we are well placed to invest in the future development and successful execution of our strategy, and we are making excellent progress in our mission to offer a full range of premium legal and advisory services to major corporations and other organisations operating in the major financial centres globally.

Strategy

During the year under review, we have seen further significant recruitment into our corporate, tax, finance and consulting divisions in Asia and North America, underpinning the continuing importance of China and the US to the success of the Group. In addition, we opened our second office in India, in Bangalore. We have also implemented a new management structure, integrating the EMEA (Europe, Middle East and Africa) regions into one simplified organisation. Jan Schmidt was appointed group chief operating officer for the region.

The international M&A market has developed apace over the past year and we continue to extend and strengthen our revenue streams across the Group to maintain our position as an adviser of choice. The chief executive’s review gives details of a number of instructions, which illustrate this trend (together with a more detailed look at the progress of the business by region and country, operating division and industry sector). As a result, we believe there is now clear evidence that the time is right to ensure the Group is able to offer its services on a truly integrated, global manner and we will be focusing on achieving this over the coming year.

We are continually seeking to improve the quality of services we provide to our clients, through effective cross-border client-relationship management and by investing in technology and systems both to support this and to help us achieve greater efficiencies.

Economic conditions

A year ago, we anticipated the accelerating growth in M&A activity. This has provided a springboard for the growth of other parts of the Group, notably the management consulting and tax divisions. The market for finance and real-estate services, though more static, has remained buoyant, while conditions for the disputes division have been more challenging. However, there are early signs that the economic cycle in terms of commercial litigation, forensic and regulatory work will soon take a turn for the better and we recently recruited our 100th advocate (a barrister in London), as part of a drive to better position the Group to respond to the upturn when it happens.

In line with our long-term strategy, we disposed of the Group’s last remaining volume legal-services business during the year. This was acquired by Smith & Jones LLP for a consideration of £154m.

Meanwhile, we acquired one of Asia’s leading niche IP practices, Ng Jai Lo Law Office, in China, for a consideration of £71m. This is in the process of being integrated within our corporate division.

Europe remains the economic engine room for the Group, but the growing importance of Asia, the Indian sub-continent, and the cities of New York, Sao Paulo, Dubai and Sydney are proof that our international strategy is in line with general economic and geo-political trends. Revenue from our operations outside the UK now account for more than half of total Group revenues for the first time and now stand at £716m (51 per cent).

During the year, we have closed our operations in New Zealand due to the gradual decline in demand for our services there.

Other milestones and achievements

Our European consolidation has included the acquisition of a 35 per cent interest in our associate Russian operation. Since the year end, we have also agreed to purchase the outstanding minority interest in our Spanish business and have established representation in Sweden;
Our involvement as lead advisers to the London Olympic Games Organising Committee has been a source of great pride for the Group, bringing together experts from around the practice (in the UK and other jurisdictions), and we continue to be very busy on the project as the games reach their crescendo;
We have opened a fourth office in the Middle East, in Qatar;
The importance of working together to deliver seamless services to our clients around the world has been recognised by a strong focus on developing our corporate culture internationally through joint training and management development, divisional and inter-divisional conferences and integrated systems;
Around the world, our people continue to play a deep and active role in the many and varied communities in which we operate, and we are immensely proud of the recognition we have received this year for our efforts from the International Business in the Community Foundation (IBCF);
The strategic emphasis we are now placing on delivering our services globally is helping to generate significant benefit for shareholders, as evidenced by the increase in Economic Value Added in excess of the cost of capital to seven per cent (2011: 3.1 per cent).

People

Our ability to attract, develop, reward and retain people of the highest calibre is evidenced by the quality of the teams we offer and the strength of the value proposition enjoyed by our clients. We are conscious of the professionalism and commitment demonstrated by all 3,800 of our people worldwide and grateful for our teams’ hard work, which has enabled us to deliver such an excellent set of results.

In a world in which, on the one hand, globalisation shows no signs of abating and yet, on the other, companies appears to be down-sizing their operations (with fewer global conglomerates comprising multiple subsidiary structures), this is no mean feat.

We remain mindful of the need to keep our operating divisions as small and nimble as they need to be while retaining the critical mass to compete. We recognise that our people work best in smaller, specialised teams, and maintaining the right balance will continue to be an imperative.

Board of directors

On 9 October 2005, Peter Mann was appointed senior independent director. At the same time, Sir James Kendal was appointed chairman of the Remuneration Committee, and Nigel Hill joined the Audit Committee. More recently, Maurice Duvalier has been appointed global head of compliance and taken his seat the board. Meanwhile, Philip Paine has stepped down from the board to take up a new position as special government adviser to the Legal Services Board, the UK’s governing body. We are grateful for his enormous contribution to the Group.

Outlook

The board is confident about the prospects for your Group in the coming years. Clients appreciate and value the way in which we deliver our services. Our people enjoy challenging careers, share in our success and are loyal to the cause. The economic outlook in the markets in which we operate remains favourable.

We are therefore confident that the strategy we have put in place will ensure we continue to add value for shareholders.

Sir Nigel Digby-James

Chairman

4 July 2012

With acknowledgement to several chairmen of quoted professional-service organisations on whose statements this is loosely based – Simon Slater.