Stuck in the middle
5 March 2012 | By Margaret Taylor
14 February 2013
23 December 2010
4 February 2013
8 September 2008
20 June 2008
The big firms are getting aggressive, the small firms are consolidating. Where does that leave the mid-market?
A small band of firms operating in the mid-market – including Charles Russell, Clarke Willmott, Cobbetts, Dundas & Wilson, Lawrence Graham and Trowers & Hamlins – have been cast adrift amid the tidal wave of change that has hit the legal services market over the past few years.
With the Legal Services Act revolutionising the sector at the high and low ends – think QualitySolicitors, LawVest and Russell Jones & Walker – while international mergers and spin-out boutiques have transformed the top and bottom of the market, those left in the middle are looking more than a little squeezed.
At the same time, continued pressure in the transactional markets has seen the big firms move down the food chain in their aggressive hunt for revenues. Competition for market share has never been so fierce.
Stagnant revenues and deflated profits mark out these squeezed middle firms. At a time when the leaderboard of The Lawyer UK 200 has undergone unprecedented change, with firms being taken out through merger, takeover or insolvency, these mid-market players have all slid down the rankings.
The middle ground is looking like an increasingly lonely place to be.
It was probably a little unfortunate for Lawrence Graham (LG) that The Lawyer’s visit to its Thames-side HQ was scheduled directly after a trip to Weil Gotshal & Manges’ new London office. After the elegance of the US firm’s Fetter Lane pad, which screams sophistication with its understated colour palette, classy furniture and designer light fittings, anywhere else was destined to look, well, a bit middling – even an office building that just five years ago had £16m lavished on it.
But that is the thing about LG: it does middling well. In fact, it could be said to epitomise the legal market’s squeezed middle. The problem, according to one law firm consultant, is that LG appears to be passive while the market in general has been in active overdrive since the meltdown of 2008.
“It’s still got a reasonably decent brand, it’s just got a sense of malaise,” the consultant says. “I get the feeling that it’s a firm that really needs to shape itself up. We’re in a market now where, if you’re not grabbing market share from others, they’ll grab it from you. It’s being attacked on all fronts and there’s no cunning plan or secret strategy.”
Ten years ago – even as recently as six years ago – firms could get by without a cunning plan. A look at historical data from The Lawyer UK 200 shows that between the 2000-01 and 2005-06 financial years LG hovered around number 35 in the turnover leaderboard, with revenues growing 34 per cent from £49.3m to £66m over the period.
But as the global markets took off, other firms began nuancing their practices, playing to their strengths and looking for ways to differentiate themselves from the crowd. When the juggernaut of a recession hit, they were the best placed to reposition for the new world order.
One law firm consultant points out that LG now languishes behind former peers such as Addleshaw Goddard and Berwin Leighton Paisner (BLP), while another stresses that LG’s stick-to-the-knitting strategy is to blame.
“If you go back a fair way they were a bit like most other firms in that part of the market; there was no real focus to what they were doing,” says the latter. “Around the time that people such as BLP started to focus more specifically on certain practices, LG just kept doing what it was doing.”
Between the 2004-05 and 2010-11 financial years, BLP’s turnover grew by 89.3 per cent and Addleshaws’ grew by a less impressive 16.5 per cent while their rankings in the UK 200 went from 20 to 13 and 16 to 21, respectively. Over the same period LG’s turnover dropped 3 per cent and it has slid down the rankings from number 33 to 53.
All things to all people
The move from cramped, rundown offices on the Strand into spacious, purpose-built premises on More London should have been the catalyst LG needed to really mark out its place in the market. But having focused on what the firm’s 2005-06 LLP accounts term as “five key industry sectors” – financial services, real estate, insurance and reinsurance, hospitality and leisure, and banking – during the boom years, during the slump LG actually began positioning itself as even more of a generalist.
From 2008-09 onwards, its LLP accounts detail the “many different industry sectors” the firm works in, with the list made up of financial institutions, private capital, real estate, hospitality and leisure, technology, public sector, energy and resources, healthcare, publishing and media, and support services.
For some laterals, who were attracted to what they saw as a feisty post-move firm that was looking to push itself as a nimble player with a few highly focused specialities, this was at best a strategic U-turn and at worst a breach of promise.
“I went in on a platform that promised to play to the strengths of the firm’s niche areas,” says one such partner, who has since left LG. “I was told I was joining a young, dynamic, thrusting firm that was going to become a multi-niche boutique, but instead it reverted to type, looking back to 10 years ago, and pretended that the credit crunch wasn’t here. But it was.”
These sentiments are echoed by other partners in the same position.
“At the time I joined it was an exciting time to be there,” says one. “Then they struggled with market conditions. There was a sense that the firm had lost its way and we weren’t sure how it was ever going to get out of the mid-market condition.”
“What they’re doing at the moment is to some extent reverting to what might be regarded as more solid ground,” adds another.
Those partners who felt they had been sold a false dream started voting with their feet.
Yet the management team rejects the suggestion that LG has steered off course. When we meet at 4 More London Riverside on a blustery January afternoon, managing partner Hugh Maule and senior partner Andrew Witts are incredulous that anyone could doubt the firm’s vision.
Maule is emphatic – “We’ve not lost our way. Those comments don’t resonate. We don’t find them right or fair” – although he does concede that LG has been reluctant to embrace change.
“We looked at our strategy in 2008 and adopted the same strategy we’d had in place for the prior three years,” he says. “We’ve been very clear as a partnership for six or seven years as to the key jurisdictions that we want to concentrate on. We have a very clear view of those.”
Looking at the firm’s international coverage, LG gained a foothold in Monaco after taking over Everhseds’ private client-focused base there in 2003. It also has offices in Dubai and Moscow, and focuses its attention on winning outbound work from India, mainly taking Indian companies to AIM, a sector the firm excels in with around 40 AIM clients on its books.
The firm is about to gain a presence in Singapore via an alliance with local firm PK Wong & Associates, with former senior partner Penny Francis relocating to Asia full time while private capital partner Nick Jacob and corporate partner Geoff Gouriet will split their time between London and Singapore. A similar setup is also planned for Brazil.
That LG should choose to enter Singapore at a time of mass overlawyering in the city-state is unsurprising. The firm did, after all, miss the groundswell of the Russian boom, entering Moscow post-crash just weeks after former peer BLP.
While the latter took 70 lawyers from top Russian firm Pepeliaev Goltsblat & Partners for its launch, LG’s approach was decidedly more cautious, with the firm merging with local boutique Aurora and sending London corporate and finance partner Richard Elphick to work alongside that firm’s four partners.
Similarly, it launched in Dubai at the end of 2007, just a year before many firms had to drastically scale back their presences in the emirate.
Although Maule says the firm “started in Dubai at a fairly inauspicious time […] and haven’t made anyone redundant, we’ve seen firms throwing people into Dubai and throwing them out again”, it could be argued that because the firm launched so close to the crash it had not had time to build anything that would need scaling back.
Which is not to say that these offices have not had some success. Notable client wins for Moscow include Ukrainian state oil and gas company Naftogaz, which LG advises on foreign legal projects after winning a competitive tender last year, and Gazprom, which the firm advised on the development of the multibillion-pound Shtokman project, an offshore gas field belonging to Russia. The firm also won a spot on Lukoil Overseas’ legal panel shortly before launching in Moscow. In the Middle East LG counts Saudi-based conglomerate Saad Group among it clients.
Steady as she goes
For Maule, the firm’s caution is one of its strengths. “We approach things in a careful, considered fashion,” he says. “If you want to be critical we’re slow; if you want to give us a bit of credit we’re doing it sensibly. We don’t want to get it wrong. We need to be careful about the way we enter these markets.”
But the legal industry is critical. As one recruiter close to LG says, the firm’s foray into international markets “doesn’t look like a strategy”, while another states that “they don’t have an international strategy. They probably shouldn’t be anywhere; they’re probably wasting their money.”
From the firm’s point of view choosing to enter Singapore, even during the law firm equivalent of a land-grab, is a no-brainer since the firm has been doing private capital work there for years. Brazil, too, seems an obvious choice given that Witts has made a name for himself – and LG – by acting for the Brazilian government and the City of São Paulo in relation to a long-running corruption case against the former mayor of the city, Paulo Maluf.
“We’ve been operating in South East Asia, in Hong Kong and Singapore particularly, for over 20 years; we’ve got a good name in the market,” points out Maule. “We see Singapore as a hub. We don’t want a proliferation of offices in all sorts of jurisdictions. We’ve been very clear. We’ve been uncannily unanimous about it. We’ve been unanimous on the jurisdictions that we’ve chosen, which is remarkable for a bunch of lawyers.”
The problem is that, as Herbert Smith proved last year when its decade-long European alliance with Gleiss Lutz and Stibbe imploded, alliances take a lot of time and investment to get right but ultimately do not work. LG of all firms should know this given that its own international network was disbanded in 2006.
According to Witts, the associated firm route makes more sense than a series of office openings because it allows the firm to gain footholds without having to worry about day-to-day housekeeping issues.
“What we’re very keen to preserve is quality and if we’re having these relationships, which we hope we will, for years, we’ll invest a lot of time up front to make sure these relationships are properly meaningful,” he explains, adding that he believes this approach shows that LG is “a lot more entrepreneurial than other firms”.
That the firm is canny is clear from the way it handled the financial side of its move to More London Riverside. Having borrowed almost £3m in 2005-06 to fund the initial cost of the move, LG rolled a further £13m into this the following year. Although it was stung by being locked into paying interest of 6.27 per cent on a large chunk of the loan when the UK base rate dropped to 0.5 per cent, the firm took advantage of a 34-month rent-free period to pay down the bulk of the capital. And having remained in the Strand building right to the end of its lease there, LG actually received a £2m payment from its landlord on exiting.
But that does not necessarily make the firm entrepreneurial, and in any case there is a fine line between caution and paralysis. Nowhere is that more evident at LG than in its handling of proposed changes to its partnership deed.
With the document last receiving an overhaul in 1997, management had wanted to add a gardening leave clause, something the deed does not currently contain, alter some restrictive covenants and tidy up the language to make it more fit for purpose. Despite engaging the services of a QC to help with the documentation, 17 partners refused to sign and 18 months later the changes still have not been made.
“Trying to get 70 partners who are all lawyers to agree on something can take a while,” admits Maule. “The consultation can be elongated.”
For the firms operating in the squeezed middle, though, time is not really in plentiful supply. With the market fragmenting at lightning speed, the days of waiting and watching before making a move are over. That much is clear when you see US conservatives Cleary Gottlieb Steen & Hamilton, McDermott Will & Emery and Paul Hastings clamour to gain first mover advantage in South Korea.
Just try telling LG that. Despite stressing that Germany is a “critical jurisdiction for our business” and that the firm “can’t envisage not having somewhere in Germany”, Maule seems in no rush to plant the LG flag on German soil.
“We’ve been scouting [the market] to get a feel for what’s right and what’s not right,” he says. “If we get to 2020 and we don’t have something by then we’d feel we’ve failed because we do think it’s critical.”
Whether LG will make it to 2020 at all is a matter of opinion, with the firm regularly touted as a possible merger partner. Maule and Witts laugh off suggestions that it is close to doing a deal with Nabarro, though Maule comes close to losing his temper when pushed on the point.
It could be LG’s only option, though.
Those close to the firm suggest that without a merger it will have no hope of lifting itself out of what one consultant terms “the lower end of the mid-market”.
“It’d make an interesting proposition as a merger partner,” the consultant says. “It’s a profitable firm and it’s a decent size. They need to take hold of it and strategically focus it. They could get something quite strong if they joined with another firm; on its own it doesn’t have anything like the same strengths.”
It is not that LG is blind to the changes going on in the market: just weeks ago it advised Australia’s Slater & Gordon, the world’s first listed law firm, on its A$80m (£53.8m) acquisition of Russell Jones & Walker, after all. It is just that, knowing LG, trying to engage Weil’s interior designer would be as radical as it would get.
Trowers & Hamlins: Hit by revolution and the Coalition
It was all going so well for Trowers & Hamlins back in 2005-06. The firm posted one of the highest revenue increases in that year’s The Lawyer UK 100, with the figure jumping 28 per cent to £56.4m, while average profit per equity partner rocketed by 70 per cent from £278,000 to £472,000.
With the bulk of this performance coming from Trowers’ hefty weighting to real estate and the Middle Eastern markets, however, the successes were not to be sustained. The firm continued to grow, albeit at a slower rate, until 2007-08, but from then on revenues stagnated before going into reverse in the 2010-11 financial year.
Trowers’ LLP accounts for 2010-11 state that turnover fell in that year “due to the difficult prevailing economic and political conditions in the UK and overseas”, but that only tells half the story.
The firm was hit particularly hard by political conditions overseas because, with non-UK offices located only in the UAE, Bahrain, Oman, Egypt and Saudi, it had no international hedge against the Arab Spring. Closer to home, its mainstay public sector practice had the rug pulled from under it when the Coalition Government decided to start slashing budgets.
Recent moves have seen Trowers pull out of Saudi (although this decision was less a strategic statement and more the result of the firm losing its last Riyadh associate to its local ally) and launch a public sector-focused office in the crowded Birmingham market.
The firm has no plans for any major strategic changes, though.
“Following the successful completion of a number of joint UK and international deals over the past year we anticipate our corporate and real estate practices both in the UK and overseas to deliver the most growth,” states senior partner Jonathan Adlington. “We’re a City, national and international law firm and we’ll remain as such. We have no present aspirations to become a multidisciplinary partnership, take in private equity or merge.”
Dundas & Wilson: Same strategy, different outcomes
Scottish-headquartered firms Dundas & Wilson and McGrigors had remarkably similar trajectories. Until 2008.
Both were giants in the context of the Scottish legal market before joining legal networks operated by the international accountancy giants, KPMG’s K-Legal in the case of McGrigors and Andersen Legal for Dundas. The firms pulled out of these respective agreements – Dundas in 2002 and McGrigors in 2004 – but it was not until 2008, when McGrigors merged with City litigation boutique Reid Minty, that clear differences between the firms began to show.
Initially viewed with scepticism in the market, questions still hang over the quality of the Reid Minty deal. However, it gave McGrigors a much-needed leg-up in the City litigation market and marked the first of many transformative moves from the firm.
After taking over Belfast firm L’Estrange & Brett, bulking up in Manchester, launching in Doha and signing a referral agreement with US firm Husch Blackwell, McGrigors will merge with Pinsent Masons in May.
Though the deal will hardly have the magic circle giants quaking in their boots, with combined turnover of around £280m the merger will lift McGrigors clear of the mid-market, ranking the combined firm next to the likes of Ashurst and Simmons & Simmons.
Dundas, meanwhile, has seen turnover flatline at around the £60m mark. Although managing partner Donald Shaw has long made it clear that the firm needs to bulk up in London – in the 2010-11 financial year 39 per cent of turnover came from the City – the firm last year walked away from a proposed tie-up with West End firm Bircham Dyson Bell.
Shaw says Dundas has no plans to take advantage of the Legal Services Act and states that the firm’s plan for the next three years is to “strengthen our position in our key markets and sectors”.
Charles Russell, Clarke Willmott, Cobbetts
Money’s too tight to mention
What do Charles Russell, Clarke Willmott and Cobbetts have in common? All three have had to renegotiate fairly hefty debt facilities since the 2010-11 year-end.
Notes in the ‘going concern’ section of the firms’ LLP accounts reveal that they all have reasonably large debt positions relative to turnover. Clarke Willmott has a portfolio of bank loans totalling nearly £5m, the bulk of which are secured over the firm’s assets.
At the end of the 2010-11 financial year Cobbetts refinanced with Lloyds Banking Group, with facilities comprising a one-year £1m revolving loan, a three-year £3.25m revolving loan, a three-year £3.25m term loan and an overdraft of £2.5m that is up for renewal at the end of June this year.
Similarly, Charles Russell’s LLPs reveal that at the end of 2010-11 the firm, which meets working capital through a bank overdraft, had outstanding bank loans of £8.8m.
They have all looked at ways of improving their top and bottom lines: Charles Russell converted its salaried partners into fixed-share members; Clarke Willmott flogged its wealth management arm for £6m; and Cobbetts engaged in ultimately abortive merger talk with DWF.
But trading conditions remain tough.
“In common with other businesses the current economic conditions continue to mean that demand for our services could be impacted in the short term,” Charles Russell’s LLP accounts state.
“The current economic conditions continue to create uncertainty, particularly over the level of demand for legal services in the professional services sector and the availability of bank finance in the foreseeable future,” echo Cobbetts’ accounts.
Looking to the year ahead, Charles Russell expects litigation to offer the best opportunity for the firm to grow revenues and predicts that a greater proportion of its work will come from overseas.
“The firm plans to grow, both in terms of fee income and profitability,” says a spokesperson. “We’ll probably find that a greater proportion of our fee income is from international clients.”
Clarke Willmott is taking a more radical approach, with plans to take advantage of the Legal Services Act for some parts of its business.
“We’re developing a number of initiatives, from enhancing efficiencies and our commercial approach to providing legal advice to improving our IT and financial management systems, all of which aim to put us ahead of the game,” says chief executive Stephen Rosser.