Herbert Smith heads for dry land

It may seem an odd move, but Philip Hoult says the firm has its reasons for pulling out of shipping at an apparently lucrative time.

At first glance, the news last week that Herbert Smith has shut down the bulk of its shipping practice appears rather strange.

The team – led by the well-regarded Nicholas Robinson, which was set up nine years ago by three partners from traditional maritime firm Holman Fenwick & Willan – had a solid, if not stellar, reputation within shipping circles.

The shipping market is broadly counter-cyclical and firms are reporting a small but significant upturn in work as a world recession looms.

What is more, Herbert Smith has just had a record year.

But when you take a closer look, the decision to drop the practice shows just how difficult it can be to make non-traditional bolt-on practices really work in the long-term.

Herbert Smith just could not squeeze out the profit margins that it gets in its other core areas of practice. And that is despite City tipsters' predictions that Herbert Smith has replaced Ashurst Morris Crisp as the firm most likely to challenge the dominance of the magic circle firms.

During the 1990s, the once lucrative shipping market became extremely competitive. Also, certain areas of traditional work, such as advising on cargo and charterparty disputes, are tremendously price-sensitive, as the P&I clubs, the insurance mutuals which handle many of the claims, have strong buying power.

Herbert Smith's shipping department, smaller than those at other City firms like Clifford Chance and Norton Rose, appears to have been unable to capture a large enough share of the top end of the work.

So Herbert Smith's management has now decided the firm needs to focus on its market-leading litigation practice and to consolidate its corporate practice.

It is also understood to be ploughing money into its international arbitration practice, which the firm has failed to market as successfully as arch rivals Freshfields and Clifford Chance.

Bearing all these factors in mind, Herbert Smith's decision to ask partners to resign appears a sensible one.

As firms use the New Year to examine the relative strengths and weaknesses of their practices, watch out for more bolt-ons to fall foul of the Christmas tool-kit.