Regional firms are experiencing mixed fortunes. Can they take advantage of a less London-focused client base?
Regional and national firms dominate the second half of the Legal Business 100 (LB100), but typically they do not enjoy the same success as the London-based firms that also occupy the lower end of the table. This year, 32 firms ranked 51-100 are regional or national law firms based outside London, totalling £1.2bn in revenue from 6,308 fee-earners.
The average firm in the group turns over £38m, with revenue per lawyer coming in at £193,000. The regional firms are mostly less profitable than their London counterparts, with an average profit per lawyer (PPL) of £42,000 and profit per equity partner (PEP) of £301,000, far below the £72,000 PPL and £405,000 PEP posted by the 18 London firms in the second 50.
Consolidation among a number of outfits within last year’s 100, notably the merger of Morgan Cole and Blake Lapthorn to form Blake Morgan, and the acquisition of Dundas & Wilson by CMS Cameron McKenna, has allowed more high-performing regional firms to make the cut this year, notably two from the South East – Stevens & Bolton and DMH Stallard.
This performance in PEP is comfortably ahead of the average for the entire bottom half of the LB100 and has been a consistent feature of this firm, building on a successful model that hinges on offering London levels of pay to attract experienced partners from City firms.
Managing partner Ken Woffenden says: ‘While we have seen growth right across the firm, we have seen particularly strong increases in corporate/M&A, IT/IP and litigation this year. On the transactional side, over the last 12 months we’ve handled deals with an aggregate value in excess of £1.5bn. We have also enjoyed some major client wins, including our appointment to BP’s legal panel for employment work, Nintendo, Tommy Hilfiger and the AA.’
Manchester: the northern powerhouse
Manchester has seen its star rise further and faster in the last couple of years, thanks to the advent of northshoring resulting in a diverse range of law firms entering the market for varying reasons.
‘One of the things you will see now if you look at the Manchester skyline is a lot of cranes because there is a massive demand here for quality-grade office space,’ says Graeme Orchison, head of TLT’s Manchester office. ‘That is a sign of the times. Construction lawyers are very busy… corporate lawyers, deal makers, real estate lawyers on the transactional side of things… and that feeds the other disciplines. I don’t think I have ever been busier.’
With its highly qualified pool of legal talent available at cheaper rates than London, significant corporate clients and international airport connections – not to mention the planned high-speed rail network – the city is an attractive proposition for law firms. This has resulted in a wide range of new entrants to the market in recent years, including Latham & Watkins, Fieldfisher, Nabarro and TLT. Clyde & Co has also expanded its presence with a new office, while one of the most significant moves was Freshfields Bruckhaus Deringer announcing its intention to launch a low-cost hub in Manchester earlier this year.
‘Manchester is a very lively market,’ says Eversheds’ chief executive Bryan Hughes. ‘In the UK, sometimes the regions get forgotten, but they are very large markets with thousands of talented individuals, lawyers and many successful companies.’
‘There is an attraction for a lot of City-based law firms who have been looking to get a price arbitrage by moving into or moving some of their operations into Manchester,’ adds Pinsent Masons managing partner John Cleland. ‘The legal market there is a strong one. My sense is that it is hot. And it is one where we are winning more than our fair share.’
But with so many new entrants, alongside those more established legal offerings from firms such as Addleshaw Goddard, Pinsent Masons and Eversheds, there is a danger that Manchester’s legal market, arguably already saturated, could become the focus of a war for talent.
‘Manchester will continue to be attractive,’ says Orchison. ‘As the second market outside London, we will always be attractive. Do I think it is saturated? Probably not. Do I think there are challenges facing all of us as a result of what’s going on? Absolutely yes. The biggest challenge is people. Not just recruitment but also retention.’
However, at another South-East firm and regular LB100 fixture, Thomas Eggar, managing partner Vicky Brackett warns that life for many firms is challenging.
‘The word on the street, anecdotally, is that it is really hard work in the mid-tier – really tough. And if firms are showing double-digit growth at revenue level, I don’t think that’s true. It may be through merger and consolidation; it may be through a lateral that’s promising them half a million in revenue. But that is not organic growth. That is not clients giving them work.’
Thomas Eggar’s financial performance was flat in 2014/15, with revenues staying at £41m, while PEP was £259,000, the result of the firm running off its personal injury business. Brackett says the firm will look for a merger to improve its strategic positioning, but not at any cost.
‘We are approached almost every day for a merger. We would merge for a few reasons. The first would be for geographic advantage – there are areas of work we do that would be complemented by particular geographies. We would merge for a deepening to a particular service line that we are selling well – the expertise merger.
‘I am not an advocate of taking a firm the same as ours and adding it together just so you have a bigger turnover, because all you do then is have more of the same and more of the costs. So you double your costs and double your revenue and you literally get two plus two equals four. You need the profitability to drive the investment frankly.’
Bristol fashion: South West firms stride ahead
House prices have soared in Bristol in recent years, mostly as a result of an exodus of professionals down the M4 from London for a better quality of life in what is by many yardsticks the most prosperous of the major UK cities outside the capital. This dynamic plays out in the local legal market, as while Bristol has attracted large City players, such as Simmons & Simmons, the indigenous firms have long looked beyond the region for growth.
Osborne Clarke vehemently resists attempts to refer to it as a Bristol firm, while Burges Salmon generates the majority of its revenue outside the South West in key sectors such as energy. TLT, which has pushed past the £60m barrier to post revenue growth of 52% over the last five years, has been through a period of expansion that has seen it push into London, Scotland, Northern Ireland and latterly Manchester.
Growth at TLT comes at the end of a three-year strategy, presented in 2012, which has also seen headcount grow by a third from 669 to 928, while last month the firm made six partner promotions, bringing total partner headcount to over 100.
Noted for prudent financial management during the tenure of longstanding managing partner David Pester, some of the revenue was ploughed into investments, with the firm spending £2m on IT and a further £3m on infrastructure and people. Significant client wins for the national firm in the year to 30 April include making it onto both Barclays’ and Sainsbury’s panels.
The investment has inevitably taken its toll on the profits of a firm that has always operated on a low margin and typically preferred to finance expansion out of profits rather than borrowing. Consequently, profit per lawyer is down 21% against a 6% overall increase in fee-earner numbers, while profit per equity partner (PEP) is down 23% to £231,000.
‘You can’t build a sustainable business without investment and this needs to be planned, targeted investment with clear goals,’ says Pester. ‘For TLT, 2015 has been a year of significant and planned investment across the business on the back of several years of expansion. We have an established reputation of building scale tactically while deepening and shaping our expertise to client need and demand. All of this has helped us increase our market share of UK work in the last year.’
Not all firms hailing from Bristol have enjoyed a strong run. Clarke Willmott, which until last year was one of the worst-performing firms over a five-year track (and still down 2% over that period), has been far more robust in the last two years, following up on last year’s 9% growth with a 10% boost to the top line in 2014/15. PEP stayed flat at £200,000 against a 23% increase in lawyer numbers this year.
Collectively, the firms based in the South West, discounting Osborne Clarke or half-Bristolian Bond Dickinson, average £41m in turnover, with average PEP of £336,000 – ahead of the overall averages for firms ranked in the second 50 of the LB100 (see Core stats).
Outside of Bristol, Ashfords, Michelmores, Thrings and Foot Anstey (shortlisted for National/Regional firm of the year at this year’s Legal Business Awards) all posted double-digit revenue growth.
North/south divide
Geographically, firms based in the South West are generally outperforming other areas (see box, ‘Bristol fashion’). A standout example is Foot Anstey, relative to the LB100 as a whole. Having posted year-on-year turnover growth since the recession took hold, the firm matched its strong performance this year with revenues up 16% to £32m, while PEP was up 14% to £300,000. For managing partner John Westwell, who has been at the helm since 2008, some firms in the second half of the LB100 have certainly taken advantage of the turmoil in the market over the past five or six years.
‘Post-recession, for some of the 50-100 firms it has been about investment, making key hires and embedding these hires so when the economy improves these people are well positioned,’ he says. ‘These entrepreneurial firms have been able to take that risk and invest, and are reaping the rewards.’
Examples of this kind of entrepreneurialism can be seen all over the regions. These include Harper Macleod in Scotland, which makes the LB100 for the first time this year (see box, ‘Scottish play’) and has made considerable ground in a turbulent market by capitalising on its strength in disputes.
The Midlands has been dominated this year by talk of Gateley becoming the first law firm to become a plc, putting in a strong showing in revenue terms ahead of its first official financial statement in mid-September moving it into the top 50 of the LB100.
Another important Midlands development was the merger of Shakespeares and SGH Martineau to form a top 50 firm with revenues of around £75m in June. However, some reconfiguration will be needed as both firms reported slight falls in revenue in their last financial years before the union, with PEP more or less flat as well.
Scottish play: resurgence of major players continues
If last year’s LB100 report hinted at the recovery of long-suffering key players Maclay Murray & Spens and Shepherd and Wedderburn, this year has seen that renaissance gather momentum, particularly for Shepherd and Wedderburn, which has thrived in a year that saw it rescue a large chunk of now-defunct Tods Murray. The firm has managed to increase profitability while growing lawyer headcount by 21%.
Turnover is up 25% year-on-year to £48m, while growth is 36% over a five-year track. While the top line was inevitably bolstered by the October 2014 acquisition of 170 staff from Tods Murray in administration, chief executive Stephen Gibb says that revenues on a like-for-like basis were up 10%, while profitability growth has been impressive, with profit per equity partner (PEP) up 26% to £335,000, while profit per lawyer has remained flat, despite headcount rising by a fifth. This contrasts with our report two years ago, which reported a 16% dip in revenues over five years to £35.9m and PEP down to £251,000.
Says Gibb: ‘The landscape for Scottish law firms has changed considerably over the last few years, particularly at the top end. We’ve always known that we punch above our weight, the quality of the work we do is traditionally very high. We recognised that making a meaningful push beyond £40m and into £50m territory, and back into the top four Scottish-headquartered firms, meant a significant team hire or acquisition. This [the Tods acquisition] has helped us achieve that in one bound.’
Despite evidence of a tough market, with Dundas & Wilson consumed by CMS Cameron McKenna and leaving the LB100 this year, Scotland has contributed two new entrants, Anderson Strathern and Harper Macleod. These were the only two firms to win spots on all six panels of the Scottish government’s legal framework, announced in July.
Harper Macleod’s growth has been particularly noteworthy. Just four years ago the firm posted £17.1m in revenues and 107 lawyers. Headcount has grown 30% during that time, and the firm now has 137 lawyers compared to just 61 in 2009. Turnover growth has been consistent – it has grown revenues every year since 2008 and is up 29% since 2013, posting £22.1m and entering the LB100 for the first time.
‘The most important thing for me in terms of our year-on-year performance is that if you look at other firms they’re up and down all the time,’ says chief executive (and chartered accountant) Martin Darroch. ‘In terms of turnover, we’re on an upward trend. We’re working harder and watching what we’re spending.’
That isn’t to say that the top Scottish performers haven’t continued to do well: Burness Paull has seen revenues pass the £50m mark for the first time, up 11% to £51.3m and profits up 12% to £23.2m. Brodies, which has seen revenues grow 62% over the last five years to become Scotland’s largest independent firm by revenue (and pick up National/Regional Firm of the Year at this year’s Legal Business Awards), saw impressive year-on-year growth again in 2014/15, also up 11% to £57.9m, while PEP passed the £500,000 mark, up 12% to £532,000.
‘The past financial year saw gradual improvement in the Scottish and wider UK economy,’ says managing partner Bill Drummond. ‘Improved economic stability led many clients to invest in their businesses and ventures and revisit their personal affairs, and as a result our lawyers have been busier than ever, with those handling disputes and regulatory issues becoming particularly active in the second half of the year.’
Gibbs sums it up, reflecting on recent developments that have seen Simpson & Marwick enter into merger talks with Clyde & Co and McClure Naismith’s position become precarious. ‘After a relatively benign period, the market is again seeing signs of further consolidation. The stronger firms are well positioned to leverage on opportunities and as a result headline performance at the top end is consistently positive.’
Speaking to Legal Business, Emma Shipp, former managing partner at legacy SGH Martineau, said there were many synergies between the two firms, which knew each other well as part of Birmingham’s close-knit legal community.
‘From the Martineau perspective, it gave us extra strength and depth in areas where we needed it. We could see that we could give a better offering to clients, more service streams. We had reached a point where, as SGH Martineau, it was difficult to see how we were going to take it to the next level without substantial growth and investment, and, really, that was where we were coming from in terms of the merger.’
The picture remains uneven in the north of England, where regional centres such as Manchester (see box above), Leeds and Newcastle are still dominated by larger national and international players (DLA Piper, Addleshaw Goddard, Pinsent Masons, Eversheds and Bond Dickinson). Ward Hadaway, a major player in the North East, stumbled this year with revenues down 1% to £33.3m, while PEP fell 18% to £225,000. Despite showing 20% revenue growth over a five-year track, its weak showing this year follows a modest performance in 2013/14.
In Leeds, both Walker Morris and Gordons had average years, with the former posting flat revenues over the last five years and again this year, while the story is broadly similar at Gordons. Each firm’s revenues are down 1% and 2% year-on-year respectively.
As such, while there are pockets of strong performance all over the country, such as Devon-based Ashfords, which saw revenues jump 11% and PEP rise by 14% this year, many firms are yet to show a complete recovery from the choppy conditions that were so evident post-recession. But as the healthy number of firms entering the LB100 from the regions show, there are plenty of opportunities for non-City players to make headway as clients shift their focus and priorities.
‘Being part of and understanding growing regional economies will clearly be important for any law firm supporting a UK-wide client base,’ says TLT managing partner David Pester. ‘But, if the Manchester powerhouse is a precedent, we could see the type and volume of work moving out of London start to gather pace in the coming years as firms look to utilise investment in technologies that support cross-office and remote working, manage cost and access growing regional talent pools.’ LB
mark.mcateer@legalease.co.uk; kathryn.mccann@legalease.co.uk
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