Cobbetts: Tough guise

Cobbetts has hit the headlines over the past 12 months, but not for the reasons the firm’s management would have wanted. It was one of the first firms to launch large-scale redundancy programmes, making three successive rounds of job cuts this financial year. In addition entire teams with expertise in areas including property finance and social housing have left for rivals.

For longstanding managing ­partner Michael Shaw the fact that the firm has seen so many redundancies is a sign that it was ahead of the game in terms of taking decisive measures to help steer it through the economic crisis.
“I think we’re well-placed – we took action early and didn’t kid ourselves,” Shaw adds, arguing that some of the partner exits happened in the context of a root-and-branch review of the firm’s partnership system. “The firms that haven’t confronted issues early on will struggle to achieve any ­significant savings in the current year.

“My theory is that everybody’s going to be hurt by this, even ;commodity ;firms ;in litigation, at some point in the cycle.”

But is this the end of Cobbetts’ woes, or have they only just begun?

Reformed character

The three rounds of redundancies Cobbetts made since the start of the 2008-09 financial year resulted in a total of 69 job losses (see ‘Total redundancies’ table). Of these, 39 were fee-earners spread across the majority of departments, but with real estate particularly affected. The remaining 30 included eight related support staff in facilities, IT and finance, two professional support lawyers and 20 secretaries, who were all made redundant as a result of the introduction of a new document ­production service.

The job cuts accounted for around 10 per cent of total headcount. Many of these were in areas worst affected by the downturn – Cobbetts has both conveyancing and lower mid-­market corporate practices and so was bound to feel the pain.

But others are part of a drive towards greater efficiency. This is the legacy of a voracious merger drive Cobbetts embarked on during the early part of the decade that left it with duplicated roles. Even before the downturn it had sought to reduce total headcount, with the figure dropping by 9 per cent between 2005 and 2008, while turnover climbed by 19 per cent over the same period.

It could be argued that it was the same legacy that the firm was trying to address when it reformed its ­partnership at the beginning of last year. Shaw said at the time that it was an attempt to address “a mishmash of historical arrangements” (The Lawyer, 28 January 2008).

While attempting to bring order to that ‘mishmash’, the firm was forced to revamp the way in which partners were remunerated. Under the old system Cobbetts had full ­equity, fixed-share and salaried ­partners totalling 110 in 2007. The firm operated a modified lockstep arrangement whereby profit points were allocated upon performance by a remuneration committee.

From last year this was changed in favour of two broad types of partner: assured equity partners (AEPs) and ;variable equity partners (VEPs). AEPs have 10 per cent of their remuneration packages contingent on the firm hitting its budget, while VEPs have all earnings determined by points awarded by an elected committee. To complicate matters further, there is also a group of three partners that sits in a hybrid position between the two camps.

Essentially VEPs are full equity ­partners, AEPs are salaried partners and the three in the middle are fixed-share partners with capital in the firm. Shaw is at pains to point out that not all full equity partners would become VEPs.

The ‘new’ system saw the partnership reduced by 17, from 110 to 93, with three more made up in 2008. The immediate impact was that ­average profit per equity partner (PEP) increased by 20 per cent at the end of the 2007-08 financial year, up from £240,000 the previous year to £300,000, while the highest-paid partner took home £394,000, up from £322,000 the previous year. This is despite an improvement in the underlying figures that would normally predicate such a rise. Both turnover and the net profit margin nudged up by around 1 per cent.

It seems that the only thing that is really new about this system is the nomenclature – and the status of the partners managed out into the role of director.

“It’s incredibly complicated,” says one managing partner at a rival northern firm. “It looks like smoke and mirrors, an attempt to massage the figures.”
That does not mean that it was not a sensible move from a management point of view. It will have made the partnership tighter and more efficient, although this has to be balanced against the attendant bad PR and
ill-feeling this could generate.

The figures

So what about the underlying ­financials? Revenue stood at just short of £60m at the end of 2007-08, representing growth of less than 1 per cent on the previous year. Net profit margin is low compared with peers’. It was 14 per cent in 2008 compared with 15 per cent at DWF, 23 per cent at Halliwells and 27 per cent at Pannone.

With Cobbetts forecasting a 5-10 per cent drop in profit at the end of the ­current financial year, its margin could be a problem.

Shaw brushes this off. “It’s very unlikely that firms will encounter ­terminal problems because of lack of profit. They’ll face problems because of cashflow,” he insists.

That is an interesting statement to make considering that Cobbetts is not exactly flush with cash either. Cash at bank and in-hand fell from £2.16m in 2006-07 to £587,000 in 2007-08, the equivalent of around 1 per cent of total turnover.

In this kind of market there is ­plenty of talk about firms that are undercapitalised looking to ­reorganise their finances. A number of former Cobbetts partners claim that the firm is looking to ­implement a cash call, with partners being asked to put money in by 1 April this year. Shaw says that talk of a cash call is “categorically untrue”, although he confirms that the firm is using undrawn partner profits from 2008 totalling £2m as a buffer. That sounds like a prudent move and is much needed, as being spread across four UK centres is not cheap.

Cobbetts took on new headquarters in Mosley Street, central ­Manchester in 2006. It is currently letting eight floors of the newbuild totalling 104,000sq ft. As it is occupying only floors three to eight, it has engaged agents to let out the first and second floors. The advertised rate is £28 per sq ft, although it is expected that it will go for closer to £25 per sq ft. If it fills the space it will prove a nice little earner, ­generating £762,500 in ­annual rental income. If it does not, the empty space will become just an extra expense on the firm’s books.

Cobbetts’ debt is also relatively high. Its LLP accounts for the 2007-08 financial year reveal that short-term debt had increased from £949,000 to £1.29m year-on-year. That said, the firm’s long-term debt has, notably, fallen to nil.

Shaw insists that Cobbetts has a good relationship with its bank, Royal Bank of Scotland (RBS), and is not in “any sort of intensive ­management unit”.

“Unlike some firms we routinely renewed our banking facilities in the autumn without any renegotiation of covenants nor request for security to be granted – this has meant that we’ve been able to file our accounts in a timely manner,” Shaw said in an emailed statement to The Lawyer. “We have a good but routine ­relationship with RBS, who are our bankers, and have continuity in our relationship managers (ie unlike some law firms we’ve not been
placed into any sort of intensive ­management unit).”

Stick to the core

Like other firms, such as Halliwells and Hammonds, which have their roots in the North, Cobbetts may have been a victim of its own ­ambitious growth drive, but at its core it has some decent practice areas. Litigation, restructuring and insolvency are all relatively well respected. It has a good AIM practice and, while AIM has been all but dead for the past year or so, over 2008 Cobbetts ranked fifteenth in a ­Hemscott table by total number of AIM clients, and was joint first (with Fasken Martineau) in the basic materials sector. Deals included advice to Russian mining company Highland Gold on Millhouse’s ­acquisition of a 40 per cent ­shareholding for £196m. There is a bit of lower mid-market corporate work going on, but not a lot to write home about.

After some mediocre mergers in UK regional centres, Cobbetts’ approach to London is evidence that the firm may have learnt from ­previous mistakes (and those of its competitors). The firm launched a niche corporate finance practice in the City in 2007, which helps funnel work to other parts of the country.

“We’ve seen immediate competitors launch in London and fail and we were determined not to go down the same route,” comments Shaw. ­“London has to complement the thrust of the rest of the practice, which it does quite naturally.

“I don’t anticipate that we’ll open in another regional centre in the short term and we won’t be reducing the scale of our operation in Manchester, Leeds or Birmingham. In the short term the most likely operation we’d expect to increase investment in is London, but I’m not overegging it.”

Shaw also points to “general ­tightening up” and “basic discipline regarding which days you get the bills out” as measures the management has taken.

This may not sound like rocket science to many top 50 law firm managers, but if Cobbetts wants to compete against firms operating with greater cash reserves, lower debt and stronger brands in an ­increasingly difficult climate, it has a lot of catching up to do. And that may involve further bad PR.