11 October 2010
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Scottish firms are gearing up for a better time after two years in the doldrums, says Margaret Taylor
After a torrid 2008-09, Scotland’s law firms continued to suffer during the 2009-10 financial year. Of the top 20 Scottish firms by turnover McGrigors, which posted a revenue rise of 10 per cent, recorded the highest growth.
That said, the bulk of McGrigors’ increase can be put down to its October 2009 merger with Belfast firm L’Estrange & Brett, which took its Northern Ireland headcount from around 10 to more than 100, 10 of whom are partners. That means Harper Macleod, which saw revenue rise by 7 per cent, from £14.1m to £15.1m, experienced the greatest organic rise in the group. The firm achieved the uptick in turnover by pushing into growing areas such as insurance, insurance litigation and debt recovery when the financial crisis took hold.
Harper Macleod chief executive Martin Darroch says: “We had to make our changes in 2008 in terms of people and how to redirect them for the change in market conditions. All the obvious and clear targets we set ourselves have been achieved.”
Litigation is by far the firm’s largest practice group, accounting for 56 per cent of total turnover. Unlike many of its peers in the Scottish market, Harper Macleod has a fairly small exposure to the property market, with its real estate practice generating 21 per cent of revenues in 2009-10.
Darroch says the firm is continuing to reshape its practice and has begun making lateral hires in a bid to facilitate that.
“Last year we spent a lot of time looking at where we see the legal landscape going and made a couple of significant lateral hires,” he says.
These were Wright Johnston & Mackenzie partner David Bone and McClure Naismith partner Derek Hogg. Bone was brought on board to build a renewable energy practice, while Hogg was added to the firm’s mature public sector practice.
Darroch adds: “Bone is a well-respected practitioner and we’ve got a strong story to tell about where we’re going [with renewable energy].”
On Hogg, Darroch says: “He does social housing and we see significant growth potential there.”
Yet despite being one of the few Scottish firms to increase turnover in the past financial year, Harper Macleod, which did not make any redundancies during the recession, does not fare well in terms of revenue per partner (RPP) or revenue per lawyer (RPL), key indicators of bulk versus quality.
With the firm’s 43 partners generating an average turnover of £351,000 in 2009-10 the firm generated the lowest RPP in the top 20. When it comes to RPL its showing was only marginally better, with the firm bringing in £157,000 for each of its 96 lawyers. Only Morton Fraser, Thorntons Solicitors and Ledingham Chalmers posted lower RPL figures.
At the opposite end of the spectrum, private equity boutique Dickson Minto, which has offices in London and Edinburgh, posted the highest RPP and RPL figures, at £2.1m and £536,000 respectively.
This is a reflection of the high-value, specialised work that the firm, which has a tight partnership and small lawyer headcount, does. Private equity has been the driving force behind the London office’s performance since the firm was set up and is still its mainstay. While the firm was hit hard by the financial crisis, with its main source of revenue virtually drying up in the summer of 2008, its focus has moved more towards restructuring since the beginning of the financial crisis.
Private equity market revives
With the private equity market coming back somewhat during 2009-10, Dickson Minto was again to be found on a number of high-profile deals. It acted for Penta Capital when the private equity house backed the management buyout of motor insurer esure from Lloyds Banking Group. Partner Andrew Todd advised, with Linklaters advising Lloyds and Taylor Wessing acting for esure.
Unsurprisingly, given the level of revenue the firm brings in for every qualified lawyer, Dickson Minto is also one of the most profitable firms in the Scottish group, posting a profit margin of 39 per cent in 2009-10. That translated to an average profit per equity partner (PEP) figure of £821,000 and a top of equity payment of £1.1m.
Harper Macleod, on the other hand, had a PEP of £252,000 and an equity spread of £90,000 to £410,000.
Certainly there is a big difference between the high-end private equity work that Dickson Minto specialises in and the type of work Harper Macleod does - particularly as the bulk of Dickson Minto’s fees are generated in the lucrative City market - but Darroch admits that pricing pressure has become an issue for his firm.
“I have a genuine concern about pricing and where things are going,” he says. “There’s one commoditised area - remortgaging - that we’ve exited because the level of pricing was so low. We’ve reallocated those people to other areas.”
Another firm that has reshaped its practice by moving away from high-volume, lower value work is Shepherd & Wedderburn, one of the handful of Scottish firms that has tried to position itself as a UK rather than Scottish player.
The firm moved a portion of medical negligence work, and the team that handles it, in-house to client the Medical and Dental Defence Union of Scotland (MDDUS). The firm has also seen some of the work it does for HMRC move back in-house, with one Shepherds lawyer going on temporary secondment to the client, while it has handed the plot-sales work it did for housebuilder Taylor Wimpey back to the client, although no lawyers have moved across.
Shepherds chief executive Patrick Andrews says of the MDDUS deal: “We handed a good chunk of medical negligence work back in-house to the MDDUS. It was our team but they were working almost exclusively on medical negligence. This met our objectives.”
Profits up at Shepherds
Despite seeing turnover drop by 11 per cent in 2009-10 to £35.3m, Shepherds did see a slight improvement in profitability over the year, with its profit margin rising from 19 per cent to 23 per cent. While this is still some way off where Andrews would like it to be - he says ideally the firm’s margin “would have a three in front of it” - he says the firm made a number of key investments in the past financial year, including four lateral hires.
These hires were London disputes partner Guy Harvey from Dickinson Dees; Edinburgh-based employment head Neil Maclean from Anderson Strathern; London property partner Michael Scott from SJ Berwin; and Aberdeen-based oil and gas head Kevin McGrory from Fairfield Energy.
“We’ve been trying to strike a balance between doing what we need to do to get through a challenging market and looking to continue to invest in the business and take advantage of the opportunities the market has thrown up,” says Andrews.
As a result of Shepherds’ turnover slide the firm has been overtaken in the table by Brodies, albeit by just half a million pounds.
The result is a shake-up of the so-called ’big four group’ of leading Scottish firms. This is of particular interest given that Brodies is the only member of the group to focus solely on the Scottish market, with Dundas & Wilson, Maclay Murray & Spens and McGrigors, like Shepherds, all positioning themselves as nationals, placing a growing importance on the City as compared with Edinburgh.
Brodies managing partner Bill Drummond has always been resolute that his firm will not expand outside Scotland, pointing out that, when the Scottish firms with London offices are stripped out, Brodies is the biggest Scottish firm overall.
“We’re number one where it counts,” he says.
Having no direct exposure to the London market has been of benefit to Brodies, with the Scottish economy, which lagged the City’s in the boom years, taking less of a hit in the down market.
That said, Brodies’ turnover has suffered as a result of the downturn. Having experienced stellar growth under Drummond in the eight years to 2007-08, recording a double-digit turnover rise for each of those years, during 2009-10 the firm posted turnover of £35.8m, a drop of 8 per cent on £39.1m the previous year. The firm’s profit margin fell by three percentage points, from 28 to 25 per cent, while PEP fell by 3 per cent, from £333,000 to £323,000.
The firm, which has a bias towards litigation, which accounts for 34 per cent of total revenues, fared reasonably well in terms of RPL and RPP. While at £575,000 and £182,000 respectively, these figures do not stand up to comparison with a transactional firm such as Dickson Minto, they rank Brodies in the top half of the table on both counts. Notably, its RPP was slightly higher than Shepherds’. At £201,000 the latter did post a higher RPL, although given that Andrews says the firm has a solid stable of corporate and finance clients in the City, its RPL would be expected to be considerably higher than a firm giving litigation and property advice to clients in the lower value Scottish market.
Of the firms at the top of the table McGrigors, which has a September year-end, also had a fairly poor showing for RPL, showing that the turnover it added in the 2009-10 year is a feature of a large number of lawyers doing low-value work, meaning the additional turnover will not have a major impact on the bottom line. Indeed, for the 2009-10 year the firm’s profit margin was just 21 per cent.
That said, of the four Scottish-headquartered firms that have invested heavily in their practices outside Scotland, McGrigors alone can really lay claim to the national tag.
In addition to the L’Estrange & Brett deal, the firm has considerably bulked up its Manchester offering with the addition of a three-partner construction and engineering team from Hammonds, consisting of David Moss, Paul Giles and Richard Anderson. They brought a team of associates with them.
McGrigors managing partner Richard Masters says: “We’re now up to about 25 people in Manchester. That’s been a huge boost for us there. It’s another step in the right direction in terms of building the national footprint.”
While Masters admits that 2009-10 was “a year of consolidation” for the firm, the challenge now will be to turn its investment in building a national practice into a more solid financial performance.
The L’Estrange & Brett merger should have fully bedded down by the end of the current financial year and the Manchester practice should also be making its mark. The firm would therefore be expected to have an RPL figure worthy of a firm at the top of the leaderboard, while turning its additional turnover into an uplift in profit.
By far the most profitable firm in the top 20 is Dundas, which lost out to McGrigors for the top spot by turnover. In the 2009-10 year Dundas, which has an all-equity partnership, had a profit margin of 41 per cent. The firm fared well from corporate recovery work, with partner John Verill advising the Football League early in the financial year on the administration of Southampton FC, and the firm winning a choice mandate coordinating the plethora of international legal teams involved in trying to discover where US fraudster Bernie Madoff hid his money.
A London premium
At £23m against a total of £61m, just under 40 per cent of Dundas’s turnover is generated in London. Conceding that work done in London can be charged at a premium to similar jobs undertaken north of the border, managing partner Donald Shaw says he would like to see the firm’s City practice grow at the expense of Scotland.
“I’d like to see [the turnover split] be 95 per cent England and five per cent Scotland,” he jokes. “The ideal would be to have our shape the same as the UK legal market.”
Maclays, which in 2009-10 ranked third in terms of turnover and RPP and fourth in terms of RPL, has also made no secret of its ambition to grow its London base, although London’s contribution to turnover has shrunk as a proportion of the total.
In 2008-09 the firm’s City arm generated around 30 per cent of revenue, but this dropped to 25 per cent in 2009-10, with Aberdeen contributing 10 per cent and Glasgow and Edinburgh each accounting for 32.5 per cent.
Chief executive Magnus Swanson says his long-term goal of achieving a merger remains on the table, although he admits that any deal would be especially difficult given the ongoing market conditions.
“There are still opportunities in London,” he says. “I don’t think there’s any inconsistency in running a tight ship and remaining ambitious to grow. We were keen to do a merger in London and will remain keen, but not with just anyone. We’ll proceed with more caution but the ambition remains.”
Maclays is not the only firm to look at merger as a means of growing, with the Scottish legal market beginning to catch on to the growing trend among law firms to combine forces as a means of competing.
It is understood that Anderson Strathern and Biggart Baillie have held talks about a potential merger. While it is not clear whether there will actually be a tie-up between the two firms, such a merger would have the potential to be transformative. With a combined turnover of £36.7m, a merged entity would overtake Brodies in the turnover stakes, again changing the make-up of the top four firms. That said, at £412,500 and £162,000 respectively, the two firms’ average RPP and RPL figures would be well below those of the other top firms, highlighting the quality differential between the work they are doing.
While merger is one way of bolstering a firm’s turnover in the face of adverse economic conditions, some firms have chosen to batten down the hatches and focus on getting their own houses in order instead. Tods Murray is one. The firm suffered considerably during the recession, with fee income falling 37 per cent from a 2005-06 high of £23.4m to £14.8m in 2009-10. The firm was hit in the past couple of years by its large exposure to the property and finance markets.
However, executive partner David Dunsire believes that the firm’s worst days are now behind it. “Tods Murray today is a different firm from what it was even two years ago,” he says. “At the start of the downturn, our response was to re-evaluate the business and restructure the firm to support a client focused, partner-led strategy. While it’s still early days in that transition and trading conditions remain tough, our activity levels have increased over the last six months, which is encouraging.”
Dunsire points to the firm’s appointment to the Santander legal panel as evidence that the tide is beginning to turn. He also notes that Tods Murray has received a number of instructions from investment bank Goldman Sachs, most recently advising on a property-secured bond issue that allowed Tesco to raise £958m by using a portfolio of 41 stores that included 12 in Scotland.
Banking partner Roddy Maclennan led a 12-lawyer team on the deal, the fourth financing the firm has completed in relation to a portfolio of Tesco supermarkets.
Regardless of the stance law firms are taking to market uncertainty, there has been a marked rise in the number of lawyers, who in Scotland particularly tend to view their positions as ’jobs for life’, switching firms.
Anderson Strathern strengthened its private client department with the hire of Tods Murray partners John Biggar and John Fulton during the 2009-10 year, while its potential merger partner Biggart Baillie lost a trio of partners - corporate head David Allan, insurance head Elena Fry and corporate partner Catherine Feechan - to Brodies.
In Aberdeen, Ledingham Chalmers took on residential property partner Mike Cunningham from Hutcheon Rattray & Co and consultant Ron Wadsworth, who had been a partner at Stronachs.
Edinburgh-headquartered Lindsays hired Brodies corporate partner Jamie Millar, who has since become president of the Law Society of Scotland, and Morton Fraser took on Glasgow employment partner Lindsey Cartwright from Maclays and hired Brodies corporate partner Iain Young as a consultant.
Maclays has seen a number of senior lawyers depart for in-house roles, with corporate partner Robbie Brown joining Wood Group as head of legal and company secretary, employment partner Maureen Burnside leaving after 22 years to become company secretary at Robert Wiseman Dairies and litigation partner Alayne Swanson becoming a sheriff. These follow the February 2009 departure of longstanding corporate partner Gordon Brough to take on the role of global head of legal at Aberdeen Asset Management.
Yet the moves are not so much a product of people becoming disaffected with their firms but more a sign of a nascent feeling of optimism about the market. This is borne out by the number of firms investing in new premises, with Shepherds preparing for a Glasgow office move, MacRoberts moving from its Glasgow city centre location to Atlantic Quay in June and Morton Fraser signing a 15-year lease on 36,000sq ft in Edinburgh’s Quartermile development.
Glasgow firm Semple Fraser even launched a new base, opening in Manchester in October 2009 with an office headed by property partner Ewan Thomson, who relocated from Edinburgh.
After two years in the doldrums, Scotland’s law firms are cautiously gearing up for better times in 2010-11.
CLICK ON THE IMAGE BELOW TO SEE THE TOP 20 SCOTTISH FIRMS BY TURNOVER.