How cost-cutting has yielded results at Baker & McKenzie

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How do you conjure up £78,000 more pay for each of your equity partners without generating any more income than you did previously? Well, for a start, try asking the guys in Baker & McKenzie’s London office for a lesson in cost-cutting.The firm, founded in Chicago but now with a strong presence in all major world business centres, is currently deemed the biggest law firm in the world by revenues. But there lies a more interesting story closer to home.

The firm’s London office released its financial results yesterday. For the sake of quick comparison:

Turnover: £120m (2008); £115m (2009); £120m (2010)
Average profits per equity partner (PEP): £572,000 (2008); £418,000 (2009); £650,000 (2010)
Net profit: £34m (2008); £25m (2009); £39m (2010)

According to these figures, the firm has returned to pre-recession levels of revenue generation, and has bettered its pre-recession profitability (for simplicity’s sake, we can perhaps assume that the collapse of Lehman Brothers in mid-September 2008 is where the recession began).

This brings about two interesting points.

Firstly, the firm’s London performance is very good when compared with its City peers (those firms with revenues around the £120m mark). Baker & McKenzie’s PEP compares favourably with much bigger City firms hovering just outside the magic circle.

Secondly, and perhaps most remarkably, the firm has generated £78,000 more in equity partner profits in 2010 than it did in 2008, despite revenues being identical.

This must presumably be down to cost-cutting. Commenting on the firm’s global results, executive committee chair John Conroy acknowledged that Bakers has employed legal and business process outsourcing over the past year to flatten costs, and will do so again over the coming year.

But the firm has benefited from outsourcing to its own offshore unit in Manila for some years. What has also served to reduce the firm’s costs has been the redundancies made in the firm’s City office after the Lehman Brothers collapse. In January 2009, 20 associates lost their jobs, and in March 2009, the firm announced that further cuts would be made, froze pay, and scrapped its all-staff bonus. London managing partner Gary Senior blamed the ‘exceptionally challenging’ economic climate when informing staff of the measures.

This sort of action was by no means uncommon among firms at the time, and those that did cut have tended to fare better with their financials this year (if, by fare better, we mean protect partner profits). The Bakers magicians in London seem to have fared better than most.