Our Management Partner of the Year, Bill Drummond, begins his fifteenth year running Brodies in May. We track his firm’s success amid a turbulent Scots market and ask if Brodies’ rise signals the decline of the country’s traditional elite
Bill Drummond wore his trade mark kilt as he stepped up to be named Management Partner of the Year at the Legal Business Awards in February. The attire was fitting, not because Brodies’ longstanding head is a staunch nationalist, but rather because Drummond has led his firm to startling success on the back of an unashamed focus on his home field.
Not everyone has been so fortunate. The Scottish market has been hit particularly hard over the last five years, arguably more than any other ‘regional’ legal hub in the UK. Scotland’s leading law firms have suffered badly from the diminishing status of Edinburgh as a financial centre since the banking crisis erupted in 2008. The woes of UK banks had a disproportionate impact on Scotland given the huge ambitions and dramatic humbling of national champions like The Royal Bank of Scotland (RBS) and Halifax Bank of Scotland.
The impact on local leaders, such as Dundas & Wilson, McGrigors and Maclay Murray & Spens, has been similarly stark. The trio had become heavily extended in the hope of building national UK brands. When the market turned they faced huge pressure on revenues, strategic angst and a series of merger discussions, culminating most dramatically so far in McGrigors’ takeover last year by Pinsent Masons.
If the challenge of competing in the City has proved problematic, at home Scots firms have faced debilitating market conditions and have been easy targets for English law firms looking to offer a UK service north of the border. Further evidence of the pressure on Scots practices emerged as Legal Business went to press, with 20-partner Semple Fraser confirming its intention to call in administrators. An internal e-mail sent to staff stated that ‘the business is no longer sustainable in this market’.
Confirmation that DLA Piper is to shut its ten-partner Glasgow arm at the end of April further underlines this gloomy outlook.
Yet Brodies – along with a select band of quality mid-tier players – has proved seemingly immune to such woes. Since Drummond took the reins in 1998, the firm has increased turnover more than five-fold from £8m to £42.8m, and profits seven-fold to £17.6m. 2012 was yet another strong year, with Brodies recording one of the highest turnover increases for the 2011/12 period in the LB100: 16%.
This success is not just short-term. The firm’s five-year revenue compound annual growth rate is 7%, easily the highest in the Scottish peer group and all achieved without a merger. The firm achieved eight consecutive years of double-digit growth up to 2008. Key clients include Shell, RBS and Heathrow.
‘A force of nature’
Brodies’ rise has become synonymous with Drummond. Despite a brief interlude early in his career at Shepherd and Wedderburn, he is Brodies man and boy, becoming a partner at the Edinburgh-based outfit’s property team four years after qualifying in 1986. In 1997 he was elected managing partner, beginning his tenure in 1998. Five election rounds later, he begins his sixth consecutive term on 1 May, making him one of the longest-serving leaders in the UK top 100. Brodies’ constitution states no more than two terms in the top role unless the incumbent is actively encouraged to run again. While Drummond quips that ‘I’ve made it look such a horrible job that no-one wanted to stand against me’, by wide consent he is seen as a forceful and effective leader in a market in which the personal approach carries a lot of weight.
He is also widely credited with modernising the image of the firm. In the late 1990s Brodies was a stuffy stalwart, trading off strong niches in litigation, private client and agriculture. Described as a ‘real force of nature’ by one rival managing partner, Drummond was not shy in expressing his desire for the firm to quickly progress, despite initially taking the role at a relatively youthful 38.
‘It was necessary to change image but neither the lawyers nor the practice,’ recalls Drummond. ‘I was probably known as someone who was internally quite vocal in the sense of wanting the firm to progress as an organisation, modernise and the partners must have felt: “Let him get on with it – what’s the worst that can happen?”.’
One of the firm’s key clients is Macdonald Estates and its chief executive, Dan Macdonald, has known Drummond for 15 years. He says that although Drummond is impatient with poor performance and inertia, he has built a strong relationship with the partnership and staff. He comments: ‘Bill’s got an innate ability to take a hard enough line, a very commercial line, in running the business but equally he appreciates the people that he’s got.’
Ken Barclay, managing director of the corporate banking division in Scotland at RBS, and one of the top Scots financiers, takes a similar view of Drummond, who he has known since 2006. ‘Bill’s a tremendously driven individual and has led the partnership courageously and with vision for the past 15 years,’ he tells Legal Business. ‘He’s courageous in the sense of taking a view early on how the Scottish market was likely to develop and acting on that.’
For his part Drummond concedes that he aspired to be a galvanising force, arguing that it is this ambition for Brodies that has been central to his long run at the helm. He says: ‘They recognised that they were not re-electing someone who would just say “steady as she goes”. The firm absolutely had to change – the market was changing, the clients were changing, everything. If you get me, you get a desire to keep changing and improving.’
‘Our client base clearly expects us to have a London proposition so it’s not even a credible option for us to say we don’t want to be in London.’
Allan Wernham, Dundas & Wilson
‘He was ambitious,’ recalls Philip Rodney, chairman of local rival Burness Paull & Williamsons, the firm that has, alongside Brodies, emerged as Scotland’s most upwardly mobile operator of recent years. (Not only do the firms have comparable strategies but Drummond’s wife, Caroline, is a partner at Burness.) Rodney observes: ‘He was not going to accept that they were always going to be where they were – he had some hunger to change it. It’s still work in progress in some areas but he’s made some great strategic hires.’
Impressive financials aside, Drummond has lived up to that billing. In the Scotland chapter of the 1999 edition of The Legal 500, a year after Drummond took over, Brodies had 27 partners and 93 fee-earners in a single Edinburgh office and was top-ranked in four practice areas (agriculture, environment, planning and family law). In 2012 the firm had four offices, 69 partners and 259 fee-earners – and was ranked in the first tier in ten practice areas and second tier in an additional 22 categories.
The Drummond years: Brodies’ turnover and net income 2003-12
Caledonian ways
Larger rivals once dismissed Drummond and his firm as parochial and lacking vision and some quietly maintain that opinion today. Indeed, during the boom years the local ‘big four’ – Dundas, Maclays, McGrigors and Shepherd – often claimed to have outgrown the Scottish market. Drummond’s strategy of making Brodies the best Scottish-only firm was widely derided.
Drummond has been consistent on that stance for years and, in terms of financial performance and headcount, that strategy appears to be vindicated, with the once vast gap between Scots leaders and the chasing pack dramatically narrowing in recent years.
A comparison with Maclays is instructive. Maclays’ turnover in 2012 was broadly flat at £46.9m and the firm hasn’t grown in revenue terms in the last five years. Its 27% profit margin is a little way behind Brodies’ 30%, as is profit per lawyer (£48,000 to Brodies’ £50,000). In 2005 there was a huge gulf between the firms – in Maclays’ favour. Turnover was up 13% to £43m, while Brodies managed just £18.3m. In the same year, Maclays had around 80 lawyers in London and touted aims to ‘grow exponentially through our City office’ with the aim of challenging the upper mid-tier of City firms. Today, Maclays has less than 60 lawyers in the capital and last year aborted merger discussions with Bond Pearce (soon to be Bond Dickinson). A glance at the five-year compound annual growth rates between 2007 and 2012 for the leading Scottish firms show how the big four have suffered relative to Brodies and Burness (see graph, page 62). Maclays’ revenues are down £14.2m since 2008.
Shepherd, arguably the most conservative of the big four, did not grow as rapidly as its rivals in London but nonetheless has looked to build a strong UK and international practice and slowly expanded its London team to around 60 fee-earners. It has experienced pretty flat revenues and profits in recent years. In 2008, turnover was £42.6m and net income was £10.9m, while in 2012 revenues were £37m, net income was £10.52m and total lawyer headcount was down 19% on 2008. But its profit margin, at 28%, is at its highest level since 2007 and chief executive Stephen Gibb is bullish about the firm’s prospects.
‘We’re at our second-most profitable period ever at the firm and we’re looking at stronger revenues for 2013. The firm is in the right shape to be robust and we have no debt on the balance sheet, so we’re in a strong position,’ he says. (Gibb’s analysis does reflect a consensus view that Shepherd had weathered the downturn better than its peer group.)
Dundas, for a long time considered legal royalty nationally, has suffered more dramatically in recent years, not least because RBS was such a lucrative client. Putting in one of the poorest performances in the LB100 in 2012, turnover was down 12% to £54.5m and has fallen 27% since 2008. Since the banking crisis the firm has been dogged by claims of strategic dissent, partner departures and linked to a string of merger bids. The firm has also had a hard time in London since opening in 2002. Very public failed merger discussions with London firm Bircham Dyson Bell, in late 2011, were received as an outright strategic misfire. This year has already seen a fresh run of partner departures, raising new questions over its direction. There have also been claims (which have been convincingly denied) that it is being primed for a takeover by Eversheds.
Scots lawyers also point to the departure in February of Dundas’ well regarded head of insolvency and restructuring Claire Massie for Pinsent Masons as a very significant loss.
During the bull market Dundas appeared to go to great lengths to reposition itself from Scots leader into UK player, a position that firms like Brodies and Burness Paull & Williamsons were able to exploit.
This is something that Allan Wernham, Dundas’ recently-elected co-managing partner, is intent on addressing. ‘We have undervalued the role that pre-eminence in Scotland plays in our overall brand proposition,’ he admits. ‘We’re working to restore that in Scotland as we think that’s very much within our grasp. We see ourselves as the pre-eminent firm in Scotland and we will make sure everyone knows that.’
‘The firm recognised that they were not re-electing someone who would just say “steady as she goes”.’
Bill Drummond, Brodies
Wernham argues that the relative success enjoyed by Brodies and Burness has little to do with the big four’s focus on London. His take: ‘Our client base clearly expects us to have a London proposition so it’s not even a credible option for us to say we don’t want to be in London. Yes, there is clearly a pattern that firms like us have seen a bit of a battering at the revenue line and they have a common denominator in that they’ve got a London office but I’m not sure that you can say it’s because you’ve got a London office.’
Yet such an analysis surely underplays the basic fact that the pressure on the business of the Scots elite firms since the banking crisis has meant that they face the brutal reality of an even more competitive London market, hugely stretching their limited financial resources. Many would argue it takes well over £100m in annual revenues to have a realistic shot at building a national UK practice; Scots leaders have tried – and so far failed – to manage that feat with less than half that income.
So while firms like Dundas still gain most of their revenue in Scotland, in London they struggle to establish themselves even as mid-market players.
Such considerations are known to have played a role in McGrigors’ decision last year to agree an effective takeover by Pinsent Masons, which saw the firm’s proud name abandoned and many of the Scots firm’s partners initially lose equity status.
Gibb, however, reiterates the case to be in the Square Mile. ‘It has been extremely important for us to have a London office and clients expect us to have that in order to compete. We wouldn’t have our place at the top table without it.’
Brodies’ Scotland-only stance dates back to 1998 and has been reviewed every three years since. Drummond says that it would consider launching in London if clients called for it. ‘I accept we have had a different strategy and I accept that it has worked in terms of numbers but it has not just been invented by us to respond to the challenging market,’ he comments. ‘Our financial performance says more about our ability to adapt and change with our clients and the market than it has to do with not being in London.’
Growth compared: Brodies’ compound annual growth rate v rival firms
Plenty of luck, plenty of vision
So is Brodies’ success down to fortune or strategic foresight? The answer, almost certainly, is sizeable amounts of both.
For one, larger rivals have been dealt an unremittingly awful economic hand over the last decade. Having established a commanding position in the 1990s, Dundas and McGrigors secured pivotal positions in two, much-touted accountancy-linked legal networks, respectively for Andersen and KPMG. The Enron-related implosion of Andersen in 2002 and KPMG’s decision to largely break from its legal network in 2003 set back the ambitions of Scotland’s then unchallenged heavyweight duo. This pressure was compounded by the longer-term erosion of Scotland as a finance hub as London’s status soared through the 2000s and then the devastating impact of the banking crisis on Scotland’s two key financial institutions.
‘We didn’t change the strategy to take advantage of the misfortune of other firms but the strategy worked because clients felt unloved by the big four.’
Philip Rodney, Burness Paull & Williamsons
These setbacks provided a huge opportunity to the better organised mid-tier Scots players. But if this was a huge stroke of luck for Brodies – which until very recently would have had little hope of following larger rivals into London – Drummond and co must be applauded for seizing their moment so wholeheartedly. Indeed, there is little precedent in the UK legal market for mid-tier practices to so rapidly upset a well-established local hierarchy.
Burness has shared Brodies’ stay-at-home strategy and it has likewise delivered in spades. In the 2012 LB100, it posted the second highest profit margin of any Scottish firm (42%) and a profit per lawyer of £75,000, well above either Dundas or Shepherd. And its hand looks to be getting even better: the well-regarded merger of Burness and Aberdeen’s oil and gas specialist Paull & Williamsons took effect on 1 December, creating a firm with 60 partners and 158 fee-earners. Revenues will be around £37.6m, potentially placing Burness Paull & Williamsons ahead of Shepherd, and giving the firm an enviable position in the much-touted energy market.
Not every one has been so successful at making ground in the close-knit Aberdeen legal community. Shepherd concedes that it has struggled to make progress and Maclays in December saw its local arm hit by a four-partner departure for former merger suitor Bond Pearce, including head of oil and gas Uisdean Vass.
‘There’s always a bit of luck but mostly it’s because we saw it happening – it wasn’t a coincidence,’ says Rodney. ‘It’s something that we have been focusing on for the last six or seven years. Our hunch was that Scottish firms trying to reinvent themselves as UK firms wouldn’t work. I know from speaking to Bill many years ago that’s the way he called it as well. We didn’t change the strategy to take advantage of the misfortune of other firms but the strategy worked because clients felt unloved by the big four. Both firms got out the message that said: “We are not looking to merge or open in London. We want to stay in Scotland and look after you”.’
RBS’s Ken Barclay cites Brodies’ intent focus on the evolving economy as key to its success: ‘The firm has a triennial strategy review, where the whole partnership goes away and everyone rolls their sleeves up and looks at how the firm can develop and take advantage of active markets. It allows the firm to refresh its strategy and invigorate the partnership.’
However, one Scottish senior partner counters: ‘Focusing on Scotland is a strategy I would compare to, say, a bank that didn’t get involved in sub-prime mortgages, and so when it came to all the puff coming out of that market they didn’t have as far to fall. In sticking to the more traditional parts of the business they were more robust. But modern firms must take risks, the market has changed and playing safe will see them left behind.’
Drummond maintains that the firm did take risks. Real estate is a major part of Brodies’ business, accounting for 29% of revenues, and one that suffered as much as anyone else’s in the downturn, while corporate accounts for 18% of revenue. The last five years haven’t been an unmitigated success either for the firm: growth hit the skids when turnover only grew by 6% in 2008/09, before falling away in 2009/10 when the firm reported an 8% drop in revenues. But the diversity of its practice means it was relatively well hedged (disputes is its largest practice area, accounting for 30% of turnover) and having a disputes-driven relationship with major banks proved a major boon.
He comments: ‘It was a good thing that we were doing proportionately more relationship and litigation work but we were also developing the transactional side of the business during those periods of double-digit growth. It was the diversification of not just our service lines but also our client base that was helpful.’
Bold moves
There is an assumption in all this that Brodies has been risk-adverse and it is true that its strategy was shaped as much by pragmatism as vision. However, Drummond has proved more than able to move when needed, evidenced by the firm’s opening in Brussels in 2011 led by partners Mark Clough QC and Christine O’Neill. The office opened to provide EU policy advice to Scottish businesses.
But it is Brodies’ expansion into Aberdeen, which Dan Macdonald says came ‘at exactly the right time’, that has been particularly impressive. The firm launched in 2011 through the hire of two partners – Paull & Williamsons’ Colin MacLaren and Clare Munro from Bond Pearce – and has grown to nine partners and 48 fee-earners in less than two years. The firm has also been expansive in terms of lateral hiring, hiring eight partners in 2011 and another nine in 2012. The firm’s partnership has swelled from 53 partners in 2008 to 69 in 2012.
Comments Barclay: ‘Timing is everything and Brodies’ expansion into Aberdeen was particularly well timed, just as northern Scotland was becoming an important legal market. The firm built up strength in a short period of time with the hire of some good people and has won some excellent work.’
Neither has this expansion come at the expense of the bottom line, with profit per lawyer close to boom-time levels (£50,000 this year; £56,000 in 2007). Macdonald says that there is little danger that Drummond’s ambition would compromise the firm. ‘What I see in Brodies – and Bill in particular – is definitely minded towards expanding the firm but only on the basis that he looks after his customer base in Scotland first and that will always come first to him,’ he says.
‘We think there’s heaps more to do in Scotland before we start looking at investment elsewhere so it’s not even vaguely on our horizon,’ comments Drummond. ‘Why would we? London’s stuffed to the gills with highly capable law firms from every country.’
He adds: ‘I would argue that because of the economic problems we’ve had over the past four or five years that there is more potential now than there has been before to grow services in Scotland, not just in the new emerging areas but also for the more traditional areas to return to a measure of health.’
Gibb concedes that Brodies has become a far more influential player in the Scots market. ‘Bill’s done a terrific job through some turbulent times, so congratulations to him,’ he says. ‘From our perspective this strategy wouldn’t work and it will be interesting to see how the rivalry between Brodies and Burness will develop over the next five years.’
As to how long the 54-year-old lawyer will continue running the firm, few are betting on a quick handover. Says Barclay: ‘Bill is still a young man. They found him young and he always wants to keep on going – for him the work is never done.’
On 27 February, Drummond made the national news as he was unanimously elected chair of the Scottish Council for Development and Industry. He has been on the board of the body since 2004.
‘The role has been very important to me personally as it has helped me to track economic development. Because the firm allows me to do this it’s a visible sign of our commitment to Scotland. I don’t know if it puts a penny on our bottom line but it helps awareness and helps me talk about the Scottish marketplace.’
It’s a commitment that has served the firm well so far, though it will be interesting to note how Brodies aims to develop its business now that it arguably has the resources to attempt something other than a pure Scots play. Still, with Scotland’s traditional leaders facing huge challenges over the next few years, and English rivals making steady inroads north of the border, fighting for strategic dominance in its home ground looks set to keep Brodies occupied for some time to come. Which is fortunate. LB
mark.mcateer@legalease.co.uk