Stuck in the middle and blue

While the big firms cream off the profits, medium-sized rivals feel the pinch of a shrinking market. Martyn Robertson and Fiona Westwood outline some practical solutions. Martyn Robertson is an accountant and Fiona Westwood is a solicitor at Glasgow-based management and training consultants Robertson Westwood.

Look at the figures in the latest Scottish Law Directory and you would think the number of law firms in Scotland is fairly static. But what the statistics mask is an interesting trend – the number of sole practitioners and large firms is increasing while medium-sized firms are on the wane. Some well-established names have either reduced in size or disappeared altogether.

Medium-sized firms are traditionally broad-based, servicing the needs of private clients in particular. In the 1990s, their fee rates were forced down due to lack of work and the earlier abolition of fixed fees. Firms responded by reducing overheads. Partners took on more fee earning work, reluctant to fund support staff and sometimes afraid to delegate because they feared it might make their own role redundant. This in turn produced a vicious circle of partners lacking time to look at outstanding work, develop new contacts and clients and keep up with developments in law. The upshot? No financial resources to invest in the future, especially the cost cuts of computerisation.

These firms relied on an existing client base that had been eroded over time by increased competition from within the profession and from outside it as other professions muscled in on legal work. Now they are suffering for it.

On the other hand, many of the larger firms grew fat – moving to expensive and well-serviced offices, opening in a number of Scottish cities, recruiting more partners, associates and assistants, developing topical niches, building management teams of marketing, IT and financial managers and investing heavily in publicity, training and computers. Quite deliberately, they sought to cream off much of the profitable work, especially commercial and company.

Many small firms tried to counter this and seek profits by joining forces. And many believed amalgamation would also increase the resource base. But while such moves boosted client numbers, they often brought problems – competing cultures, staff resistance, partner power struggles, nervous clients and an unwieldy decision-making process while the partners got to know each other.

Others continue to hope the problem will go away. They work harder and harder for less and less return, trying to ignore the damage to client relations. Knuckling down to hard work, they argue, is the solution and soon there will be a return to the work levels and profitability of the 1970s and 1980s. Some hope. Even worse, the Scottish economy, according to recent surveys, is showing some decline in activity.

However, there are success stories. Some firms have turned themselves around and proved it is possible to be small and profitable. One solution is to focus on a niche market. Some smaller firms have opted to undertake only commercial work or litigation, a ploy they have found highly profitable. They service high quality, big money work and are able to convince clients they can be trusted over big firms by the quality of their response and visible partner input. This is a good option, but it is only truly available to a few and is often better achieved by the establishment of a new firm rather than by revamping an existing one.

However, any firm that hopes to arrest its decline needs not only a goal but an understanding of how best to achieve it. Market conditions are one part of the problem but many of the immediate hindrances to profitability stem from a firm's inability to move forward. Poor cash flow management – partners not setting fees at profitable rates and not chasing outlays or outstanding fees – is one factor. And inefficient work practices, with partners undertaking work best done by assistants and tackling areas of law where they have no expertise, lead to client complaints, which have a knock-on effect on profits. The solution is to change the attitudes and work practices of partners.

Professional partnerships tend to face a different problem. While the quality of their work is usually lauded, poor communications and management often cause difficulties and there can be confusion between partners working as managers and as fee earners. Add to this a history of difficult relationships and you get a potent mix of attitudes and behaviour that is only properly cleared with outside help.

But smaller firms should not despair. A turnaround in practices is possible and can prove a relatively quick and pain-free means of boosting profitability – once partners can be persuaded to change. If nothing else, they can take heart from others in the Scottish marketplace who prove that size does not matter.