Dundas & Wilson has had a torrid few years. What can the new management do to turn the firm around?
A firm’s merger ambitions say a lot about its self-esteem. Take Dundas & Wilson. After the Andersen Legal network collapsed in 2002, member firm Dundas once again faced being just a big fish in a small pond in Scotland and talk among management soon turned to tie-ups, with Goddard and CMS Cameron McKenna named as the kind of firms Dundas should link up with.
By 2009, Stephenson Harwood was being floated as an ideal suitor. Around that time Dundas also flirted with the idea of tying up with German firm Raupach & Wollert-Elmendorff, Dutch firm AKD and an Austrian firm, which were all Deloitte network firms.
It was telling then when, in September 2011, The Lawyer revealed that Dundas was in merger talks with Bircham Dyson Bell. The small West End firm was almost a quarter the size of Stephenson Harwood, the smallest of three firms suggested as merger targets by Dundas’s management. In any event, the talks collapsed a month later.
“From a brand perspective in the industry, that was damaging,” says one partner at a Scottish firm. “It showed the firm was lacking real ambition and said a lot about where it was heading.”
Around the same time Dundas was hit by a stream of partner departures and announced a 30-strong redundancy consultation. The consultation was in keeping with the temperature of the legal market; chairman David Hardie’s press statement that it was not as if the firm was taking its staff out and shooting them was not. A little more of Dundas’s former sheen rubbed away.
The firm again hit the headlines in June 2012 when partner Keith Armstrong was forced to resign in the wake of suggestions that he had obtained confidential information about a client and had prejudiced a pitch.
Crowning matters, Dundas’s year-end figures for 2011/12 were woeful. Turnover was down by 12.4 per cent to £54.5m and net profit had dropped like a stone – down 35.2 per cent to £16.2m. Likewise, average profit per equity partner (PEP) fell by 35.4 per cent, from £325,000 to £210,000.
All told, the firm looked mired in dysfunction and, in March 2012, managing partner Donald Shaw, who had been in the role since 2006, stood down halfway through his second term, with Hardie following soon after.
Dundas has now voted in new leadership in the form of co-managing partners Allan Wernham and Caryn Penley, and chairman Laurence Ward. But what is behind Dundas’s poor run of form, and is there room in an unforgiving market for Wernham and Penley to turn things around?
The good old days
There was a time when Dundas was flying. The firm had joined Arthur Andersen’s legal network in 1997 and was prospering. Turnover was increasing by leaps and bounds – in the 1999/2000 financial year alone revenue shot up by 20 per cent – while the firm gained access to quality cross-border mandates and benefited from Andersen’s know-how. It was also during this time that Dundas developed its sector focus.
“Arthur Andersen helped modernise Dundas & Wilson because it really knew how to run a business,” says a source. “They really made us think about who we were trying to service and how, and we started to look more like a City firm. We didn’t just have corporate as a big beast department, it was broken down into various areas. It would have taken Dundas a lot longer to get to where it was by its own efforts.”
Not even the collapse of Arthur Andersen in the wake of the Enron scandal in 2001 could put the firm off its stride for long. The firm was forced to start again in terms of IT and back-office functions which cost it hundreds of thousands of pounds, but managed to extricate itself from the network cleanly and with the support of clients.
Turnover and PEP at the all-equity firm were up by 12 per cent in 2001/02 to £38m and £211,000 respectively. By 2004/05 turnover had grown another 17.1 per cent, to £44.5m, while PEP was £256,000. McGrigors was the only other Scottish firm among the top 50 UK firms.
Although it was slightly above Dundas in the turnover rankings, with revenue of £45.4m, its profit margins were much lower. Net profit at McGrigors was £11m while at Dundas it was £17.9m. At 40 per cent, Dundas’s profit margin was higher than even Linklaters’ at the time, which was 36 per cent.
Dundas was the undisputed King of Scotland in terms of prestige and had enviable relationships with the Scottish Executive and the banks. In particular, managing partner Chris Campbell (see box, page 29) was close to RBS’ chief executive officer Fred Goodwin and its general counsel Miller McLean, while the firm’s corporate recovery head Ian Cuthbertson – who died suddenly in 2009 aged 58 – was said to be close to the now disgraced Bank of Scotland corporate chief Peter Cummings.
In December 2005, following the departure of Chris Campbell to RBS, Dundas elected two managing partners – London-based real estate head Donald Shaw and Scotland-based projects chief Alan Campbell.
Although one source The Lawyer spoke with described Alan Campbell and Shaw as a complementary partnership that usually came to the right decision between them, the majority view was that the firm lacked direction under their stewardship.
“They took over a strong firm that was going in the right direction and where everyone had their heads up,” says one source, “But [Campbell and Shaw’s] appointment led to nobody driving the bus because they couldn’t agree on the direction the bus was going in and they were happy to leave it that way. There was a degree of discontent.”
Dundas’s turnover continued to rise until 2007/08 when revenue and average PEP peaked at £74.8m and £385,000 respectively, but one former partner says it was obvious that things were “on a cliff edge”.
The following year Dundas’s purple patch came to a crashing end. In 2008/09 turnover dropped almost 12 per cent to £66m, while net profit fell by 24 per cent, to £24m. The firm cut 43 jobs that year across London and Scotland. In 2009/10 it was much the same story. Turnover was down to £61m, although profit nudged up.
Of course, this was a rough time for all firms, but Dundas was particularly exposed to HBOS (as Bank of Scotland was then) and RBS. Bank of Scotland was estimated by one former partner to contribute more than £15m to the firm’s top line at one point, while RBS was an estimated £5m-£8m client and brought Dundas in on chunky work such as strategic, board-level acquisitions and disposals.
When RBS was nationalised and HBOS merged with Lloyds, their centre of gravity shifted from Edinburgh to London and the firm lost traction with the banks.
“Once the credit crunch hit in 2007 the firm didn’t refocus quickly enough,” claims one source close to Dundas. “It just didn’t adjust to the crisis facing the banks. The tide had gone out on the Scottish financial services industry, but there was breathtaking complacency about its position in the legal market.”
“Work was slow, margins were being pushed because of the firm’s relatively fixed costs and falling turnover, and we were fighting to win work,” says a former partner. “There was a degree of panic about winning work and people were pricing jobs at ridiculously low rates rather than saying ‘we’re highly qualified and deserve to be paid well’. I was seeing tenders going in that cited partner rates at a third of what we were getting paid from the same client.”
Sources at the firm at this time also say its sector approach, developed while it was part of the Andersen network, had turned out to be a burden. It was not being executed correctly and Dundas was not big enough to justify lawyers working in silos, particularly in a tough market when adaptability was key.
“Some of the partners tried to raise these concerns,” says one source close to the firm, “but they got the impression management wasn’t listening.”
It was a bad time to be a UK-focused firm, but according to one source there was little or no impetus at Dundas to try and win international work. Rather, the firm’s almost sole focus was on growing in London.
“From 2007 onwards it didn’t do anything except think that growing London would cure the problem,” says one source.
Shaw, who became sole managing partner in 2010 after campaigning that he could act more decisively alone than as part of a duo and that he would clear away surplus layers of management, was very much focused on London.
“Shaw’s strategy was all about London,” says one source close to the firm, “which you could understand because there was no room to grow in Scotland. There was a feeling of ‘let’s get to a respectable size and then find a merger of equals with someone’.”
But growing London was no easy task. Dundas’s property, energy and construction teams in London had made their mark, but the firm struggled to build credible corporate and banking practices.
“In Edinburgh Dundas was like the Slaughter and May of Scotland,” suggests one source. “But in London [in banking and corporate] it was lower than mid-market.”
Arguably, it was this that led to some of the firm’s key partners, such as Peter Willis and Patrick Brandt in 2012 and 2011 respectively, departing. Willis, a competition partner, needed cross-border M&A work flowing in to make his practice viable. Regulatory partner Brandt needed banking and fund clients that just weren’t there.
At the same time Willis left, insolvency specialist John Verrill also departed for Chadbourne & Parke. Finance partner Ross Caldwell left for Taylor Wessing in October 2011 while Richard Lampert, who is understood to have been doing work for prominent client Scottish Widows while Shaw was in management, quit for Eversheds in February this year.
The firm’s lack of clout in banking and corporate is understood to have irked some Scottish partners, who often made uneasy bedfellows with London anyway. One former lawyer in London describes negotiating a price with a client only to discover that colleagues in Glasgow were telling the same client they could do the work cheaper. Sources suggest that part of the problem was a lack of understanding of – or communication about – what the office was for.
“People weren’t always clear on what basis the London office would compete,” says one former partner. “Were they there to buy work that could then be done in Glasgow or were they there to build a practice?”
All in all the partnership appeared fragmented while management inertia remained. In a bid to make Dundas more transparent, around 2010 the firm began publishing partners’ monthly drawings. For some, this had the opposite of its intended effect.
“It just became more obvious that there were haves and have-nots,” says the source. “Regardless of who was managing partner it was clear there was a clique of partners in Edinburgh and West Lothian.”
Meanwhile, there was a growing feeling that Dundas had taken its eye off the ball in Scotland. Restructuring mandates were being spread a lot more evenly among other Scottish firms than before, while firms such as Brodies and Burness, and even DLA Piper and Eversheds, were becoming serious competitors.
Shaw is said to have been aware of this prospect when he began his strategy of focusing on London, telling partners, “the risk we have is that growing in London means leaving the back door open”. Yet he still failed to head it off.
The failed link-up with Bircham Dyson Bell was the straw that broke the camel’s back. Only around a third of partners knew about the discussions and when they did find out the reception was lukewarm at best.
Although some of the litigation partners were said to have spotted some synergies, few could see the point of the merger. Particularly baffling was the fact that Bircham had a large private client practice. Dundas had been a staunch corporate adviser since parting company with its private client team – which became Turcan Connell – in 1997. One source says that acting for an individual was seen as “almost a capital offence”.
“There was a significant failure among those pushing for the talks to understand what the result of the merger would be,” says a source close to the firm. “It would have been a disaster, creating tensions between sets of people who were used to different values in business and different ways of operating. It would have been a titanic struggle to unify the combined firm. That’s nothing against either firm – they were just too different.”
Shaw stepped down in March 2012. The circumstances surrounding his withdrawal from management are difficult to discern, but a rough consensus can be reached from various sources in and around the firm at the time.
It would seem that partners in Edinburgh – seat of the firm’s power base – who had grown dissatisfied with Dundas’s performance under Shaw, went about collecting the requisite number of signatures from fellow partners to trigger another election as per the rules of the partnership deed. Shaw is said to have stepped down immediately after being presented with the signatures. He did not respond to requests for comment.
When Shaw stepped down, restructuring partner Penley and real estate partner Wernham stepped in to fill the managing partner role in the interim.
The pair then stood on a joint ticket in the management elections in June. For the first time at Dundas, elections and hustings were held on the same day, with the entire partnership summoned to Glasgow. Penley and Wernham won the vote, seeing off competition from corporate partners Colin Massie and Michael Polson.
Given Dundas’s previous experience with dual managing partners, their victory may appear a little odd, but the crucial difference is that both Penley and Wernham will continue to act for clients while sharing management responsibilities. Wernham will focus on ICT, facilities and training, and will be more external-facing. Penley is responsible for the firm’s finances and HR, and is more internal-facing. Even one partner who never warmed to the idea of dual managing partners in the past believes this time it was the right move.
“At this time when there are so many issues, having joint managing partners is a good thing,” says a source close to the firm.
Facing the facts
So, can Penley and Wernham turn things around? It’s hardly surprising that Dundas’s new management team does not want to discuss the circumstances surrounding Shaw’s withdrawal. But the fact that the pair also declined to give out the firm’s half-year figures despite insisting that the numbers are ahead of budget does not exactly engender a sense that the new management is embracing transparency.
That said, the pair do not shy away from facing up to the firm’s flaws – at least, those of the past.
“When Caryn and I became managing partners we saw we could quickly make an impact by removing a lot of the structures that had become too complex for a business of our scale,” says Wernham. “Our structure had led to a lack of engagement of some partners with what we were trying to achieve strategically. We wanted to remove any hiding places and make it clear that all partners, including ourselves, must have a direct role in looking after our clients and being externally focused.”
Wernham adds that while Dundas’s sector strategy was “right in theory” the firm’s implementation of it created extra layers of management that sat separately from the line management of the partners.
“If we’d been a £200m firm it might have been the right structure, but for our size it meant that too many of us were too inwardly focused,” he continues. “Our structures also led to quite a bureaucratic style of communication – lots of emails and papers but not enough direct engagement. Now we have regular informal partner meetings in each of our four offices, with discussion focused around our clients and our opportunities.”
Wernham insists that “the fundamentals of the business are very strong – fantastic clients, great lawyers and no debt”.
At least that should provide a decent platform for an improvement in Dundas’s fortunes. And removing layers of bureaucracy looks like a positive step, but are Penley and Wernham up to the task of getting Dundas’s partners on the same page? As former board members, there is a danger that they will be no different from previous management, although some insiders seem to believe they can deliver the goods.
“Caryn is exceptionally able,” says one source. “She’s resolutely diligent and makes sure the best interests of the firm are served, and has done an exceptional job getting Dundas to where it needs to be. Wernham is also very able and will do a good job.”
There is still talk of groups of partners looking to leave in London, but at least the firm no longer seems paralysed. In February it announced that it was opening a new, corporate-focused office in Aberdeen and in July it said it was launching a Legal Services Unit, staffed by paralegals, designed to do routine work more cheaply for clients.
Notwithstanding its internal problems, Dundas must still deal with the external pressures facing Scotland-headquartered firms. In 2008 there were three Scottish firms in the UK top 50 (Dundas, McGrigors and Maclay Murray & Spens). In 2011/12, following the merger of Pinsent Masons and McGrigors, there were none.
In 2012 there has also been a rush of mergers and other strategic moves in Scotland (see Timeline, below), with firms attaching themselves to larger, London-headquartered counterparts or adding resources locally. Is Dundas’s London-Scotland full-service split a viable model in the changed market?
Even if management does get the firm back on track, there is still a mountain to climb.
Chris Campbell – the leader and the legend
Chris Campbell – who became managing partner in 1996 aged just 35 – is widely held to have been the architect of Dundas’s success. Even now, former colleagues talk about the man in reverential tones. Indeed, with the exception of DLA Piper senior partner Tony Angel, it is hard to name another law firm leader who attracts so much praise.
“He was exceptional,” says a source at the firm during Campbell’s era. “He was a strong leader who changed Dundas & Wilson from a sleepy Edinburgh firm into a giant commercial practice.”
But all was not plain sailing for the firm under Campbell – there were issues around getting Scottish partners engaged with the London office, but the firm knew where it was going.
So Campbell’s announcement in spring 2005 that he was leaving to join RBS as director of group legal services and deputy general counsel was an unwelcome surprise, not least because he had just signed on for another four-year stint as managing partner. However, since he was leaving to go to a client, Campbell was out the door in no time and with little fuss.
For many people, the day Campbell left the firm was the day its fortunes changed.
“[Under Campbell] the firm was never micro-managed,” says another former partner, “But when Campbell left, that approach started to change and it became much more introspective.”
The flipside to Campbell’s dominant management style, says one source, was that anyone else who wanted managerial responsibilities was forced to suppress their aspirations or leave the firm. Further sources in and around Dundas during Campbell’s reign, however, dismiss this notion, but concede that he was rarely challenged.
“People weren’t exactly scared of Campbell, but they weren’t far off,” says another former partner. “Certainly, nobody ever really stood up to him. In many ways that was quite good. It was and still is difficult to run a partnership by committee. When Chris left there was a power vacuum and people rushed in to fill it. Many people who had been thwarted in the past had to be given titles – milk monitor and the like – just to keep them happy.”