The incredible bulk

Law firms’ volume businesses can enhance profitability. But do they make strategic sense? By Joanne O’Connor and Joanne Harris

For years, volume businesses have been regarded by commercial firms as something of an embarrassing secret. When both Addleshaw Goddard and Hammonds spun off their bulk arms, it seemed settled that commoditised legal services and commercial ambition were incompatible. As Addleshaws managing partner Mark Jones said last year: “There’s no long-term strategic fit between Enact [the firm’s bulk mortgaging arm] and a law firm that aims to position itself in the top 20 nationally.”

But for many firms, particularly outside London, volume business is far from a secret shame, instead contributing a significant chunk to turnover and profits.

Work suitable for commoditisation includes debt recovery, residential sale and purchase and personal injury (PI). To capitalise on economies of scale, many volume arms are located in custom-built premises with specialist IT systems. Employees are overwhelmingly not qualified solicitors. Instead, partners oversee the work, which is undertaken by paralegals, legal executives, and chartered insurers. And most are branded separately.

Most partners agree that the key to running a successful volume business is twofold: first, firms must attract the volume business; and second, they must invest to set up appropriate infrastructure to maximise economies of scale. Volume businesses involve vast investment in efficient IT systems, appropriate office space and staff. But as this year’s The Lawyer UK 100 Annual Report confirms, if properly resourced and managed, volume arms can outperform their legal counterparts and act as a counter-cyclical profits insulator during periods of economic slowdown.

In a year when profit margins of 23 per cent were considered impressive, many volume businesses have boasted whopping margins of between 30 and 40 per cent. Lester Aldridge’s LA Fast Track and LA Property, both located in Bournemouth boast a profit margin of around 40 per cent, while Clarke Willmott’s Taunton arm has a profit margin of 30 per cent.

For Shoosmiths, which last year posted a 67 per cent profit hike, volume business accounted for an estimated 50 per cent of the firm’s total turnover. Meanwhile, one of the South East’s brightest success stories, DMH Solicitors, attributed 27 per cent of its £15.2m turnover to its bulk arm.

Shoosmiths chief executive Paul Stothard says: “I don’t subscribe to Addleshaws’ view that these are businesses that need to be separate because you can’t be a serious commercial player doing high-end work at one end and low-end at the other. There ought to be room to do both extremes.”

Two of the UK’s biggest firms, Eversheds and DLA, retain their volume arms and would, for the moment at least, dispute Jones’s claim that bulk business has no strategic place in a top 20 commercial firm. Eversheds’ volume business, with a total staff of 332, or just under 9 per cent of total staff, contributed 11 per cent to total turnover last year, while DLA’s Bradford arm accounted for around 5 per cent of the firm’s total revenue.

But as reported by The Lawyer (28 June), DLA has been fielding inquiries from prospective buyers of the firm’s highly profitable debt recovery arm. Some estimates place the sale value of the business at around £35m, and should DLA go ahead with a disposal prior to its potential merger with US firm Piper Rudnick, it could mean a Christmas present of around £300,000 for each of the firm’s equity partners.

It is a situation reminiscent of both the pre-merger Addleshaw Booth & Co and Hammond Suddards. In 2003, as the Addleshaw Booth-Theodore Goddard merger was nearing completion, Addleshaw Booth’s management was left pondering the place of the firm’s bulk mortgaging arm Enact.

“Enact was not a core part of our business strategy and didn’t sit with our commercial ambition,” says Jones. “It was a question of branding.”

The firm was faced with three choices: either close down Enact, sell it off to interested parties or allow the management to buy the business. So, in 2003, a management buyout of Enact took place. The return to the Addleshaw Booth partnership was never made public, but Jones says the firm got a “good return on the sale”. The management team used Deloitte as adviser and Montagu Private Equity as venture capital provider, while Addleshaw Booth instructed KPMG.

Meanwhile, a clutch of Hammonds partners are still enjoying the spoils of the Summer 2000 incorporation of the firm’s volume arm.
In a move that effectively ringfenced Hammonds Direct from the Edge Ellison partnership, Hammonds incorporated its volume business just prior to the merger, making its equity partners the shareholders.

Debt recovery arm Drydens was similarly sold in February 2003. Hammonds managing partner Chris Jones says: “We thought that if these businesses went on their own, they could flourish.”

However, Hammonds is one of the few Northern-based firms to have dispensed with volume work. Several other top 50 firms in Leeds and the North West have retained their volume businesses and are doing very nicely out of them.

Chief among these is Leeds firm Walker Morris, whose chairman Peter Smart happily endorses the volume model. The firm’s two volume businesses – WM Online and WM Claims – contribute a fifth of the firm’s total turnover.

The former is a remortgaging arm, providing direct conveyancing online, while the second handles claims arising from road traffic accidents. Together they employ 200 people, none of whom are lawyers. Smart, who oversees both businesses in a managerial role, says they are profitable and simple to run – words echoed by Halliwells managing partner Ian Austin.

HL Interactive LLP, part of Halliwells, is an extremely profitable business turning over £6m with nearly £1.7m of that being profit – a margin of 28 per cent. It employs 100 people in Manchester and undertakes a variety of work, ranging from remortgaging to consumer debt. The firm’s aim is to build on the success of last year and continue to grow the business.

Other firms prefer to do volume business within the firm as a whole. Manchester’s Pannone & Partners is one of these, carrying out volume PI and remortgaging work as departments of the firm.
Lawyers doing volume PI work are also employed to do non-volume work – the volume side consisting of around 75 per cent of Pannones’ PI practice.

Meanwhile, remortgaging is run as a separate department and headed by managing partner Joy Kingsley, giving the 20 lawyers and 15 support staff the knowledge that their team is considered to be an integral part of the firm. The two volume arms bring in around a quarter of the firm’s turnover.

Kennedys and Weightmans both do volume work as part of other departments and for existing clients. Weightmans set up a debt recovery arm following a request from a large financial services client earlier this year and over time will expand it to a workforce of 20. Fellow insurance specialist Reynolds Porter Chamberlain conducts bulk work for its insurance clients out of the former RJ Cornish’s premises in the South West.

While volume business has proven a spectacular earner for a range of regional players, most have either rebranded their volume arm or are considering such a move. Eversheds, Shoosmiths, Thomas Eggar and Walker Morris, to name but a few, have all rebranded their volume arms in a bid to distinguish bulk operations from bespoke legal services. DMH, for example, is pondering rebranding its volume residential sale and purchase and PI arms.

But supporters of the model say there should be no cause for disposing of volume arms, as they can be a buffer when times
are hard. Run efficiently and well, volume businesses are nothing to be ashamed of.

Smart at Walker Morris says: “Some firms seem to be a little ‘sniffy’ about volume businesses, but our attitude has always been that if we can make money out of it, then we’re willing to be involved. And if we can’t, we won’t.

“As it is, the key drivers of our current profitability have come from our core lawyered work, with the volume services together providing a thin layer of icing on the top.”

Click here to view table: ‘Volume businesses’