Thoughts on ways to improve the management of professional services firms

Saturday, July 09, 2011

Allen & Overy's profit conundrum

Back in February 2010 I recorded UK law firm Allen & Overy's Australian opening. Then in February this year Clifford Chance entered the Australian marketplace. Both moves were part of a shift east towards new growth markets.

Wednesday 6 July Allen & Overy announced their results for the year ending 30 April 2011, effectively the end of the firm's first full year in Australia. The results were headlined "Robust growth and investment" with the key features summarised as:

  • Turnover up 7% to GBP1.12bn (USD1.87bn; EUR1.26bn)
  • Profit per equity partner stable at GBP1.1m (USD1.8m; EUR1.2m)
  • Distributable profit up 6% to GBP455.8m (USD759.8m; EUR512.6m)

On the surface, not bad. However, I was curious to know more, so downloaded the accounts. These showed a considerable increase in the number of partners and an actual decline in operating profit, as well as a small decline in the firm's net assets. How, then, did A&O achieve an increase in distributable profit so that profit per equity partner remained stable?

The answer lies in the treatment of Canary Wharf costs. I quote:

The Board decided that as the cost of exiting the Canary Wharf office is only payable in the future and benefits the partners in the future, for the purpose of determining the distributable profit for the current year, the charge would not be taken into account.

This may be fair enough, but it does suggest that the quoted key figures on firm performance may be a little misleading when it comes to assessing the firm's actual results.

So far as Australia is concerned, an article by Samantha Bowers in Friday's Australian Financial Review noted that A&O in Australia has grown from 17 to 21 partners with about 100 lawyers. She quotes Finance Director Jason Haines as saying that Australia had produced high revenue growth but not much profit growth since A&O in Australia were still in an investment phase.  

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