Are regional firms set to profit from City losses?
22 March 1999
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21 April 1998
The news that private health company Bupa is to sideline City firms in favour of regional firms and barristers, as revealed by The Lawyer last week, caused a flurry of excitement in the regions.
In the words of one regional marketing manager who rang The Lawyer: "I've got 50 partners up my butt trying to find out what's going on."
Bupa head of legal Paul Newton says the move was prompted by "ridiculous" City rates and a management drive to cut down on escalating costs.
Regional firms see the decision as a vote of confidence and indicative of a trend. But should City firms really be worried?
There is no question that regional firms can offer cheaper charge-out rates because they do not have the astronomical overheads and huge salaries that typify the City.
Senior partners at a City firm command about £400 per hour. Regional firms claim that someone in the same position at a provincial firm charges about 40 per cent less.
This difference has come to the attention of many company lawyers, who have to justify legal budgets to their cost-conscious management.
Newton says: "There is enormous pressure on us from management to cut the amount we are charged for legal services. If we look at the raw hourly rate, it is ludicrous."
Paul Attwood, company solicitor at food retailer Iceland, which spent £250,000 on outside legal advice last year, excluding conveyancing work, says: "City firms do charge a lot for work. There is lots of empty space in some City offices and we are the ones who are paying for it."
A consequence of the change is that corporate clients are increasingly asking for detailed financial information from firms so they can monitor closely what they are paying for.
Nick Jarrett-Kerr, chief executive at Bristol firm Bevan Ashford, says such requests have become more common in the past two years.
"At first we provided information without knowing what it was being used for, but clients are now analysing leverage ratios to see how the work is being divided between the associates and junior and senior partners, and are not just taking the headline rates," he says.
He adds that companies are also tightening up on who has the authority to ask outside firms for legal advice.
Regional firms say they are happy to comply with clients' demands for information on the firm's finances - it gives them a chance to show the cost advantages of dealing with them.
Chris Jones, managing partner at Hammond Suddards, says: "As far as we are concerned, the customer is always right. City firms have not had the pressure on them to pitch for business."
Perhaps unsurprisingly, City firms appear less enamoured with the idea.
Head of Denton Hall's corporate group Tony Grant, says: "Clients do ask for overheads but we are not prepared to tell them things like what the profit structure of the firm is."
David Dunnigan, head of global corporate markets at Clifford Chance, says he too is reluctant to reveal such details to clients: "If I am employing someone to do a service for me, the main thing I am interested in is who is going to get the job right."
Of course, this approach leaves City firms wide open to accusations that they are not offering good value for money.
For example, Chris Caisley, chairman of Leeds firm Walker Morris, says: "City firms still charge too much and have the work done by lower-quality fee earners at the end of the day.
"An issue with international companies is that they are finding that work has been passed to junior lawyers and they are still being charged full rates."
Robert Gibber, senior lawyer at Tate & Lyle, says: "What people really get annoyed about is that lawyers are renowned for exceeding the budget."
Most of the regional firms interviewed say that over the past five years they have succeeded in winning general legal work, such as employment and contract issues, from large companies. This is work that would traditionally have gone to City firms.
Caisley says: "We are competing with major law firms, attracting clients in Manchester who at one time would have sought advice in London. There has been a sea change."
But there is still a perception that when it comes to complex and high-value deals, only the City firms will do. The clients, it seems, want the experience and kudos of a big City name.
Christopher Pearson, head of legal services at BICC, says cost is not an issue for transactional work. "I go where the skills are and where the business is - and that is in the City," he says.
Gibber agrees. "Someone is my position cannot take advantage of regional overheads," he says.
Gibber uses the bigger firms for stock exchange issues and significant M&A activity. "If we were making £500m on an acquisition, I doubt that I could seriously walk into a boardroom and say I was making sure I was saving 30 per cent on legal services."
He adds: "We could use regional law firms for this type of work but there would be difficulties. You need someone nearby and if we have to put a partner in front of a director there has to be an element of branding."
Dunnigan believes that regional firms do not have the experience to compete in the international, cross-border market. "I have never seen a regional firm come in and do this," he says.
But many of the large regional firms believe they are capable of doing the same work as City firms, and to the same standard - the problem lies in persuading clients to move the bigger deals their way.
Neil Upton, a partner in the financial projects group at Birmingham-based Wragge & Co, concedes: "City firms are getting all the premium work. We are getting beyond Division One and have done all the Division Two work.
"It is the syndrome where people think a firm can't be fired because it has such a prestigious reputation."
Upton says regional firms are fighting against cultural factors, such as big City financial institutions recommending clients go to larger firms and not the regions.
Osborne Clarke is a case in point. The Bristol-based firm completed £2bn worth of deals in 1998 and considers corporate finance to be one of its national practice areas. Yet head of corporate finance Margaret Childs says the firm is better placed to "erode" the work done by middle-tier City establishments than to compete with the top-tier firms.
Nevertheless, many believe this situation will not last much longer. As Bupa has indicated, there is a limit to how much City firms can trade on their reputations and keep their accounts to themselves.
UK ranking by fee earners: Average profits per partner: £480,000
Number of international partners: 91
Foreign offices: 23
UK ranking by fee earners: Average profits per partner: £198,000
Number of international partners: Foreign offices: 6
UK ranking by fee earners: Average profits per partner: £520,000
Number of international partners: 82
Foreign offices: 20
Allen & Overy
UK ranking by fee earners: Average profits per partner: £530,000
Number of international partners:68
Foreign offices: 19
Linklaters & Alliance
UK ranking by fee earners: Average profits per partner: £460,000 (Linklaters UK alone)
Number of international partners: n/a
Foreign offices: 28
UK ranking by fee earners: Average profits per partner: £250,000
Number of international partners: 31
Foreign offices: 10