Collapses among big Scottish law firms had more to do with management failings and the partnership system than big bank-mania and ‘Scottishness’.
When Glasgow-headquartered McClure Naismith called in the administrators at the end of August it was the third Scottish firm in as many years to do so.
Like Semple Fraser and Tods Murray before it, McClures fell into an ostensibly Scottish trap, with all three signing exorbitant leases after being on the receiving end of an RBS- and HBOS-related fees bonanza. When the banks failed and the work dried up, rents that had accounted for a sizeable chunk of turnover became unmanageable and the firms’ bankers duly called in the administrators. The cruel irony for McClures and Tods was that both banked with Bank of Scotland.
Bearing in mind that many other firms that also got fat on the back of bank-related work are currently thriving, is it really fair to say that McClures, Semple Fraser and Tods failed because of their Scottishness? Or does their collapse say something deeper about the law firm model and the inability of lawyers, particularly in smaller partnerships, to be effective managers?
Firm failures have not been limited to the Scottish market – Cobbetts, Halliwells and Heller Ehrman are testament to that. What was peculiar about the situation that led to the demise of McClures, Semple Fraser and Tods, however, was just how reliant Scotland’s top firms had become on the country’s banks – and just how big the Scottish banks had become relative to the market in which they originated.
Ashurst Glasgow managing partner Mike Polson, who at the time of the 2007 financial crash was head of corporate at CMS legacy firm Dundas & Wilson, notes that when RBS and HBOS were headquartered in Scotland the work they were doing went well beyond the country’s
“Significant decision-makers and deals teams were based in Scotland but they had UK- and Europe-wide remits,” says Polson. “There was also a huge appetite for lending at the time and a lot of that was underpinned by property in some shape or form. There was a demand for professional services locally in Scotland so you had Scottish firms acting on transactions that went well beyond Scotland.”
That the banks could dole out such mandates is not surprising: at its largest RBS’s balance sheet dwarfed the UK GDP figure, with the bank’s business interests stretching from Germany to Hong Kong and including everything from investment and private banking to insurance and train leasing.
But with Scotland accounting for less than a tenth of the UK’s GDP, the fact its firms were getting a look-in on such volumes of work meant the market was being artificially propped up. When that prop was removed firms were left exposed.
“Between 2004/05 and 2008 there was a disproportionate amount of commercial property and banking work coming to firms in Glasgow and Edinburgh, mostly from Scottish banks but also from Irish banks,” says FRP Advisory partner Tom MacLennan, who acted as joint administrator on all three Scottish-firm failures.
“The market for commercial property, banking and to a lesser extent corporate in Scotland vanished very quickly in 2008/09 and it will never come back.”
When McClures went into administration Law Society of Scotland chief executive Lorna Jack released a statement that did not so much commiserate with the firm’s misfortune as point the finger at the profession for its failure to keep pace with the modern world.
“The profession is undergoing phenomenal change with digitalisation and technology, changing expectations from clients and new entrants to the market all requiring firms to adapt and innovate in the way they do business,” she said. “It underlines the need for firms to be flexible and to modernise in what is a highly competitive market.”
Harper Macleod chief executive Martin Darroch finds the sentiment a cynical one, particularly as the regulator has failed to keep pace with the rest of the UK in terms of implementing alternative business structures (ABSs), yet he has some sympathy with the notion that elements of the profession have been unwilling to change their working practices.
“There’s a whole host of firms in the Scottish context where there’s a lot of arrogance – they’re owed a living and the work will come,” he says.
Burness Paull chairman Philip Rodney notes that “there was almost a sense of entitlement among firms – that they occupied a part of the market and were entitled to that”.
While this seeming unwillingness to change could be interpreted as parochialism – we’ll run our firm this way because this is the way we’ve always run it – it should more accurately be characterised as traditionalism. With so many firms, particularly those at the smaller end of the spectrum remaining wedded to the partnership ethos, it can be difficult for them to make any kind of decision, let alone a difficult one.
Stephen Gold, who led his own firm Golds Solicitors into a 2007 merger with Irwin Mitchell and now acts as a consultant to a range of Scottish firms, says there can be a reluctance in partnerships to take tough decisions, especially if they relate to people leaving or having their income cut.
“There’s a culture of collegiality that stops hard decisions being taken,” he says. “I think that these busts occurred because management took poor decisions or didn’t take decisions that needed to be taken, and cumulatively the result of that has been what it’s been.
“It’s been very Darwinian and firms that have not been well led and well managed have suffered the fate that any business would in the same circumstances.”
As Darroch at Harper Macleod says: “Unless you’re willing to transform the business and understand that that’ll take a bit of time you’ll just die.”
Thinking inside the box
But why is it so hard for some firms to take tough decisions when others around them are regrouping in the face of changing market conditions?
Michael Greenspan, managing partner at business psychologists Kiddy & Partners, says part of the problem is that to get ahead in a partnership lawyers must “excel at producing and excel technically”, but that leaves them poorly equipped for management.
“Inherently, the way to get ahead in a partnership is to be quite focused and narrow,” says Greenspan. “When you get into a firm leadership position the requirements shift quite dramatically, but no-one tells you they’ve shifted.”
On top of that, firms that cling to the collegiality of partnership eschew hierarchical relationships, meaning few will challenge decisions that have effectively been taken collectively, while groups making decisions are far more likely to be risk-averse than individuals.
“There’s almost an inverse relationship between the size of the team and its candour and willingness to do things differently,” says Greenspan.
This certainly seems to have been the case at McClures. Although partners knew the firm was failing and were busy securing new positions in the run-up to its demise, none had been willing to force its ruin by leaving ahead of its administration – and none had apparently challenged the firm’s management in the years between 2007 and 2015.
One managing partner who approached several McClures partners ahead of the administration says there was a sense that partners knew what was happening but chose not to do anything about it.
“There was a lot of affection within McClures for the firm and a lot of loyalty,” the managing partner says. “We spoke to a number of partners there and they were hugely loyal. There was something they liked about the culture there.”
When managers are part of this culture, says Greenspan, it can ultimately cripple partnerships.
“Leaders often fail to realise that they have to find the balance between what we call ‘box one, two, three’ thinking,” he explains. “CEOs have to find the balance between box one, which is perfecting what you have, box two, which is about reshaping your business and expanding into an adjacent space, and box three, creating long-term growth opportunities.
“CEOs [of corporates] know they need to do that but often in professional services businesses, leaders don’t realise they have to do that. They get stuck in box one but markets change, economic cycles change and competitors change –and then firms find themselves in a defensive position.”
Why some firms thrived
Scotland’s firms were particularly susceptible to this kind of management paralysis because their partnerships were small enough to fall into the collegiality trap.
Yet, as a look at the top 15 Scottish firms from 2010/11 and 2014/15 shows (see tables, below), many have thrived, with the loss of bank-related work forcing them to make tough decisions about their direction. With most building out into full-service operations to capture every type of work originating at the banks, that has meant streamlining to focus on a smaller number of areas.
“There are two key strategic questions for any business: where do you play and how do you win? In other words, which markets do you want to be in and how do you stand out?” says Gold.
“Firms like McClures have not successfully answered those questions but firms that are doing well have said our markets are this, this and this, and we’re not going to do anything else. Within those markets we’re going to acquire deep experience and invest in that.”
One such firm is Burness Paull, which was created via the 2012 merger of Glasgow’s Burness and Aberdeen’s Paull & Williamsons and now focuses on sectors of importance to the Scottish economy such as oil and gas, financial services, property and infrastructure, and the public sector.
The firm is very much led by chairman Rodney and managing partner Ian Wattie, and so has a clear management hierarchy in place, although Rodney says that partners must play their part too.
“Firms are organisms – partners are part of that and have responsibilities,” he says. “They can’t just say it’s up to management.”
Finding the balance between strong management and collegiality stumps many firms though, with an undying attachment to what a firm is supposed to stand for often stopping them from doing anything that carries not only a financial risk but a risk to reputation too.
“Strong management and a strategy is what you need to start with, then firms need to focus on where culture begins and ends,” says MacLennan.
Failures of management
There is no telling whether McClures, Semple Fraser or Tods would have been able to pull off a similarly transformational deal with another firm in the years following the recession, and MacLennan for one believes it is unfair to castigate them for not doing so.
“If you take the timeline of 2008 to 2012 the whole market was affected and the will of other firms to consider acquisitions or mergers wasn’t there,” he says. “For a lot of firms the only option was to try to restructure, reduce costs and battle away.
“The Shepherd & Wedderburn-Tods Murray deal [the former bought Tods out of pre-packed administration in 2014] wouldn’t have happened in 2010 because every firm was taking steps to reduce costs, but many have come out the other side stronger. It was a different story in 2014 – firms had restructured and were willing to consider an acquisition.”
However, there was nothing bar indecision stopping McClures, Semple Fraser and Tods from getting their own houses in order, with the absence of decisiveness – something Greenspan terms “the flipside of innovation” – proving their ultimate undoing.
Although these firms were victims of Scotland’s temporarily inflated market and a form of traditionalism that has permeated the upper end of the Scottish market, they did not go out of business because of their Scottishness. They collapsed because of failures of management – and for that read failures of partnership.
Lawyers may, as Gold says, “make fantastic advisers and not great entrepreneurs”, but when the bed’s made is the only option really just to lie in it?
McClures, Semple Fraser and Tods Murray – what happened?
In 2005 Tods Murray was the first Scottish firm to move into costly new offices on the back of flowing banking fees, with the firm taking on 41,000sq ft in Edinburgh’s Fountainbridge development, where trophy client Bank of Scotland was already based.
The deal, agreed the previous year for an annual cost of just over £1m, was followed in 2006 by McClure Naismith’s relocation to purpose-built offices in Edinburgh’s Ponton Street. That firm took a 16-year lease on almost 16,000sq ft, moving from two New Town offices after what then senior partner Kenneth Chrystie described as a “very busy” year for the firm.
Semple Fraser, meanwhile, took a 15-year lease on 30,500sq ft of prime Glasgow real estate in July 2008.
Behind the flashy moves were high price tags, which were revealed in the firms’ LLP accounts.
In the 2007/08 financial year McClures and Tods Murray allocated 5 per cent of turnover, the equivalent of £795,570 and £1.04m respectively, to cover their property costs.
In 2013/14, Tods’ last year in operation, rent accounted for around 8 per cent of the firm’s £12.3m turnover, with interest payments on a £2m loan also eating into cashflow.
In 2012/13, the last full year for which McClures filed accounts, its rent had risen to £944,000 while its turnover had fallen to £12m, also making the proportion 8 per cent.
At Semple Fraser the picture was even worse, with its 2006/07 rent bill of £394,000 equating to 3 per cent of its £15m turnover while its 2009/10 bill of £1.2m was equivalent to 11 per cent of its £11m turnover.
While the firms could do nothing about these fixed costs, nobody was able to do anything to improve their top lines either, with each ultimately calling in the administrators, McClures and Tods at the behest of Bank of Scotland and Semple Fraser off its own bat.
How things have changed – and why
The top end of Scotland’s legal market has changed massively in the past five years, as the tables above show.
For one thing it is smaller. With former leaders Dundas & Wilson and McGrigors now part of UK players CMS and Pinsent Masons respectively, the top 15 Scottish firms collectively turned over £427.8m in 2014/15 compared with £463.9m in 2010/11.
Albeit the latter figure includes numbers from 16 firms because McClure Naismith and Tods Murray were in joint 15th place in 2010/11, it represents an overall drop of 8 per cent during a time when new leaders Brodies and Burness (now Burness Paull) grew by 60 per cent and 119 per cent respectively.
Also, many names on the leaderboard have changed. Burness and Paull & Williamsons merged to create Burness Paull, Biggart Baillie and Tods Murray are gone after the former was taken over by DWF and the latter bought out of pre-packed administration by Shepherd & Wedderburn, and BTO Solicitors and Lindsays have slipped in as a result of the bottom end getting smaller.
What does stand out, though, is that the firms that have done well over the five years are the ones that have taken decisive action in the face of an ever-more competitive market for fees.
Shepherd & Wedderburn, which suffered several years of stagnating revenues after 2007, has pulled away from Maclay Murray & Spens after the benefits of a 2009 redundancy round and partner pay cut finally put it in a position to take over Tods’ book of business at the end of 2014. The firm has grown its top line by 29 per cent in the five years, while Maclays’ turnover has contracted by 10 per cent.
Morton Fraser, which like McClure Naismith, Semple Fraser and Tods took on a large property liability just as revenue streams began to dry up, has seen its turnover grow by 24 per cent over the five years – something that is crucial, given that its fixed costs cannot be eliminated.
The firm, which in 2009 took on a 15-year lease on more than 36,000sq ft in Edinburgh’s £20m Quartermile development, bolted on turnover via the takeover of Edinburgh firm Skene Edwards and Glasgow outfit Macdonalds, and also focused on cutting as many other costs as it could, eradicating a £1.75m debt position during the 2013/14 year.
Thorntons, meanwhile, has entered the leaderboard after deciding to focus on the east of Scotland while driving the business in five areas: private client, investment services, personal injury, land and rural business, and IP and technology.
Having taken over Cupar’s Steel Eldridge Stewart and St Andrews-based Murray Donald in 2014, the firm this year took over Montrose-based Watts Law, with turnover rising by 30 per cent in 2014/15 to £19.4m.
Like Brodies, Burness Paull, personal injury firm Digby Brown and Harper Macleod, what these firms have in common is focused managers and clear strategies.
This won’t stop the markets around them changing, nor will it insulate them against those changes, but it does mean they have the wherewithal to take decisive action when necessary – and that’s got to give them a competitive advantage.