Time for action

There is an uneasy feeling seeping through the Scottish legal market right now. A number of firms – chiefly MacRoberts, McGrigors and Maclay Murray & Spens – are going through what could be charitably described as a transitional period. Others – those that inhabit the ferociously competitive combat zone of the mid-tier – continue the battle for the best lawyers and clients, while trying to hang on to their unmerged, independent status. As one Scottish recruiter puts it: “It’s all gone quiet here in the last 18 months.”

But it is not all gloom. “If there’s instability in the market, that’s our opportunity. We haven’t lost a lawyer in over two years.” That bold statement comes from Lorne Crerar, managing partner of the relatively youthful (16-year-old) Scottish mid-sized firm Harper Macleod. Crerar’s firm, which boasts 85 fee-earners, is best known for its social housing and sports practices. It is less well known as being among the most profitable firms in the country, with an estimated average profits per partner figure of almost £250,000.

Crerar prefers not to confirm the estimate, but is happy to point to his firm’s success in hanging on to its lawyers as a reason for its recent good fortune in a succession of major tenders; these include tenders for the Scottish Executive, the Student Loans Company and Interbrew UK. “I’ve noticed very recently that one of the key questions we’re being asked is what our staff retention is like,” he reveals. “It’s only in the last seven or eight months.”

Low: Losing six partners in six months
High: Continuing strength of construction team, with double-digit growth

That time period neatly coincides with August, which was when MacRoberts began to wrestle with its staff retention issues in earnest.

Corporate partner Jim McGinn was the first to leave, setting up his own business last summer. He has so far been followed by five partners, including two from the projects team and rated corporate specialist David Davison. Head of corporate and chartered accountant Neil Cunningham has resigned and leaves next month for a position outside the law.

Arguably, MacRoberts’ biggest loss, though, was that of Lindy Patterson, its high-flying and forthright construction head, who joined one of Scotland’s big four firms, Dundas & Wilson, in November (later to be followed by Davison). Losing Patterson (a lateral hire from Fyfe Ireland in 1997) was a double blow. Not only was she a rainmaker, she was joint managing partner. She was seen by the market as a force for change at MacRoberts and the partner most likely to drag the firm into a more modern style of legal partnership.

With her exit, the firm not only lost a noted construction expert, it would appear to have lost the impetus for reform.

The dividing lines in MacRoberts were clearly drawn. On the one side was Patterson, with Cunningham and Davison stacked up behind; in the other was the firm’s other joint managing partner, John Macmillan, with Ian Dixon and David MacRoberts, a member of the founding family.

“There’s a family ethos that still runs through the firm,” says a former partner. “It means it’s a pleasant place to work, but there’s a constant struggle between that family-run business style and the corporate drive and ambition.”

That struggle appears to be over at MacRoberts, although it is too early to say whether the return to conservatism will be in the long-term interests of the firm.

“When you’re managing a partnership, you can move things forward only at the pace that the majority will allow you to go,” commented one Scottish senior partner. “The difficulty for MacRoberts is that, if you take out the hungry, driven people, there will be a swing back of power to the reactionaries. If you’re serious about taking a business forward, you can’t afford to let the Luddites back.”

There are indications that another well-known figure is also about to leave MacRoberts, a rumour vigorously denied by Macmillan.

“Certainly not that I’ve heard of,” he claims. Macmillan is even more adamant when quashing the ever-present rumours about the firm’s merger plans. “Absolute nonsense,” he states.

Macmillan says he is “very confident” about the prospects of the firm’s next financial year, which begins on 1 May. “The construction team is ahead of budget; the projects team took a dip in the last two years but is now back strongly to the extent that we’re looking for three new recruits; private client continues to hit target year on year; and property is a rip-roaring success. Even in corporate, where every firm in the country has experienced a long, fallow period, we’re expecting a resurgence.”

Macmillan also dismisses claims that the firm’s partnership is, as one source put it, “laden down at the top, with a number of older partners hanging on and maybe not contributing, while the younger partners don’t have enough power”.

Thirteen of the firm’s 24 partners are at the top of the lockstep, Macmillan says, while the spread between top and bottom has always been small. “It’s less than 2:1,” he added.

“MacRoberts has always been a fairly egalitarian place. Going forward, we’ll be focusing on our core strengths and growing our niche strengths,” says Macmillan.

It may also be a bit more wary of lateral hires.

Maclay Murray & Spens
Low: Last year’s redundancy programme
High: Strong leadership in Magnus Swanson

Going for growth through lateral hires is something that Scottish blueblood Maclay knows all about. The firm has, in recent years, appeared to be on a mission to put enough bums on seats to call itself the largest in Scotland. Last year it achieved its aim, pipping Dundas with 69 partners (although it fell short on turnover by £4m, with total revenues of £36m).

How long it will hang on to this status is debatable. The firm had bulked up by acquiring smaller firms, such as the employment boutique Mackay Simon and family firm Fenners in London.

But last November the firm announced a redundancy programme, which saw 12 lawyers and support staff culled from across the firm.

There is nothing particularly unusual about that in the current climate, except that with Maclay, the rumours that a significant number of partners are also for the chop absolutely and stubbornly refuse to go away. It appears as if the firm is now having to work out the problems created by a too-rapid expansion.

The Fenners acquisition in particular raised eyebrows in the Scottish market. “At the time they made great play out of all seven partners joining as equity partners,” remembers one Scottish partner at a rival firm. “We couldn’t understand it at the time, because the turnover of that firm was £1.75m, which meant that each partner was bringing in less than £300,000. That’s not particularly sustainable as partners, let alone equity partners.”

Chief executive Magnus Swanson is adamant that the rumours are wrong and will be proved as such over time. “I’m absolutely comfortable that the employment team, as we have them structured and grouped, are putting in a good performance,” he insists. “I’m not saying I’m making anyone redundant anywhere. We’ve been through a very sensible episode – you know the scale of it, and that’s now getting to be historic. The persistent rumour that we’re about to cull half the partnership or whatever is unfounded.” (See news.)

The rumours last week reached almost farcical proportions. The Glaswegian legal market was on fire with talk of a red and yellow card system that Maclay was allegedly employing to either fire or warn partners. “That’s not true either,” Swanson insists. “I can deny it.”

Away from the rumour mill, Swanson prefers to be upbeat about the prospects for his firm’s 11-partner London office. “We’d look at London as a growth area strategically,” he says. “It’s a huge legal market and we’re tiny. The recipe, with the overheads being structured up north and support functions mostly up north, does give you a bit of a competitive advantage. If we can continue to get the good people, I think we’ll grow London.”

Low: Still to come in November, when profits guarantee ends
High: Reasserting independence from KPMG

Of all the Scottish firms that have endured a rocky time over the last few months, none have been through the mill to the extent that McGrigors has. If nothing else, then at least in terms of its public face.

“The question everyone wants answered, including members of the firm itself, is ‘who is it?’,” says one recruitment consultant.

“Accountant? Scottish? UK? International? Independent? KLegal? What?”

Formerly McGrigor Donald and tied to KPMG, McGrigors now finds itself in the position of having to do what its rival Dundas has already done with the Andersen Legal network. “The difference,” says one senior partner at another firm, “is McGrigors has to deal with a slightly more tricky scenario. Dundas & Wilson didn’t have any choice in the matter. The world was effectively tumbling around their ears.
The issue McGrigors partners have to deal with is that it’s a voluntary situation. They’re dismantling something that they’d put together. That may have more management challenges.”

No one in the Scottish market would claim that the difficulties facing McGrigors, which last year posted a turnover of £41.5m and average profits per partner of £236,000, are life-threatening. The consensus is that it will remain a substantial and important competitor. The KPMG extrication is just something it has to get on with.

But the big question that the process raises is: what happens when the KPMG guarantee, believed to be currently underpinning the profitability, goes in November? The three-year deal, struck at the time of the McGrigor Donald-KLegal merger in March 2002, is believed to subsidise McGrigors’ profits if they dip below an agreed level.

“KPMG obviously has an incentive to refer work to McGrigors so that it hits its target and it doesn’t need to stump up the subsidy,” says a partner at another firm. “From November, all bets are off.”

Estimates of the size of the guarantee per partner vary, although it has been put as high as £100,000. The level of referrals, meanwhile, is around 15 per cent of turnover. But as another rival partner says: “Even if the partners are taking home £50,000 each less as a result, they’re not going to enjoy that experience.”

The issue for McGrigors, then, is how it will fill that hole. And indeed, what is the size of the hole it has to fill?

Shonaig Macpherson, McGrigors senior partner, says she is not prepared to comment on the guarantee or the effect of its withdrawal. “There are certain arrangements regarding partners’ income,” she admitts, “but I’m not prepared to go into details.”

Macpherson does say that she is keen to preserve the goodwill between the firm and KPMG and anticipates that McGrigors will continue working with the accountant after November. “I’m absolutely confident that the referrals will continue,” she emphasises.

Signs of life
The picture in Scotland is by no means all bad, however. Shepherd + Wedderburn (turnover £25.6m) is not everyone’s idea of dynamic law in action, but its impending rejig of management will see no change in its successful, if low-key, strategy of growing “not rapidly, but gradually”, according to outgoing chief executive Paul Halley.

“In 1999, the Shepherd + Wedderburn strategy was to become a UK firm with UK clients serviced from offices in Edinburgh, Glasgow and London,” says Halley. “The aim was simply to continue to evolve and develop – to ensure a quality product by focusing on the client, and to open a very focused operation in London by utilising the UK client base. I don’t see that changing.”

The five-partner London office, founded on a techmedia corporate finance basis, has endured a difficult time, but as Halley says, “we’ve stuck with it through thick and thin”. Recent success in winning work from brokers Collins Stewart and Beeson Gregory has helped stabilise the office, which like its Scottish rivals leverages off its cost advantages.

The chief criticism of the firm at the moment, aside from the perennial ‘ultra-cautious’ tag, is that the election of Patrick Andrews to chief executive is a retrograde step. The son of a former Shepherds partner, property specialist Andrews is seen as very conservative. “That perception is the wrong one of Patrick,” claims Halley. “It’s just that, as a firm, we prefer not to shout from the rooftops.”

One firm that is unlikely to be accused of hiding its light is Dundas & Wilson, but then its undoubted success in extricating itself from the wreckage of Andersen Legal has given it something to shout about.

The arrival of both Patterson and Davison are emblematic of the firm’s success. Davison in particular had ambitions to operate on a larger scale, which he was unable to fulfil at MacRoberts. That pent-up ambition found an outlet at Dundas, which is Scotland’s biggest-grossing firm, with revenues last year of £40m.

“I think the overall market reaction to the Andersen episode was that we did a good job,” says Dundas managing partner Chris Campbell. “At the beginning, when the dark clouds began to gather, we would have struggled to laterally hire. A year later, when we were out, a lot of people said, ‘they did bloody well’. That helped put Dundas & Wilson high on their list of where they want to be. To some extent, it’s become the aspirational brand in Scotland.”

London is the big challenge for Dundas. The strategy (which is not rocket science) is to act for the significant number of UK multinationals it already counts as clients in London. The current roster includes National Grid Transco, London & Regional Properties, Scottish Widows and Bank of Scotland. In Scotland, meanwhile, the firm has bucked the trend this year, with corporate coming out as the most profitable of its groups.

Biggart Baillie is also performing well, as evidenced when it picked up the Law Firm of the Year award at the Scottish Legal Awards in February. The firm has assimilated the Steedman Ramage lawyers it acquired just over two years ago and entered The Lawyer 100 for the first time last year on the back of its 40 per cent increase in staff numbers and 50 per cent boost in turnover in the last
two years.

Brodies continues to be driven forward by its solid property practice, which has handled more than £150m worth of investment deals in the last six months alone. Turnover was 15 per cent up after nine months of the last financial year.

Burness, when not dodging the ever-present merger rumours, recorded an overall growth in business of 22 per cent during the calendar year 2003. Its three core areas of property, dispute resolution and corporate recorded business growth of 35 per cent, 25 per cent and 9 per cent respectively.

There is plenty of life in the Scottish market – it is just not an easy one at the moment.