It’s been a turbulent ride for the Scots legal market post-banking crisis, but with the independence vote settled, the region is feeling more buoyant.
Client survey analysis
A significant proportion of Scottish respondents (40%) expect an increased need for legal services in the next six to 24 months, compared to a UK regional average of only 24%. It is welcome news for the Scottish legal profession, especially as clients north of the border spend considerably more on legal services than in other UK regions.
This data confirms a relative resilience of the Scottish economy and the heightened levels of business activity, despite the uncertainty leading up to the referendum on independence.
‘A lot of companies are thinking about what they are going to do in Scotland,’ says Bill Drummond, managing partner of Brodies. ‘Banks are reorganising themselves, and oil and gas is a very busy and fast-moving sector.’ Drummond points to the general growth in exports from Scotland as another illustration of the positive economic sentiment. With Scotland choosing to remain in the United Kingdom, uncertainties over currency and trade have also been settled. Our survey shows that 58% of Scottish respondents were anxious about the impact of independence on their business prior to the referendum.
Unique market
The survey demonstrates the distinguishing characteristics of the Scots economy, with 19% of respondents coming from the oil and gas sector (against a UK regional average of just 4%). In addition, Scotland’s thriving renewables sector is shown with 9% of survey participants hailing from this industry.
Despite the impact of the financial crisis and its severe impression on The Royal Bank of Scotland and Bank of Scotland (now part of Lloyds Banking Group), Scotland’s financial services industry is still substantial, particularly the hedge fund/asset management segment. In our survey, 38% of financial services respondents come from the fund management sector. Commercial banking, retail banking and investment banking are also prominent. ‘Investment managers are big business,’ Drummond comments. ‘They have access to the knowhow and people that provide a really good working environment. There are considerable advantages around the universities, the workforce and the knowhow in our cities that sustains these kinds of businesses.’
The perception of Scotland as a UK region or a provincial market, creates a certain angst among many Scots and for good reason. Our survey underlines the size and power of the Scottish economy.
Like the rest of the UK, Scottish respondents are concerned about the increased regulatory landscape (45%), internal and external compliance (29%) and employment issues/disputes (29%).
Our survey responses also reflect the sophisticated nature of the legal services sector in Scotland, with 22% of Scottish respondents indicating their legal advisers had provided a successful model or structure for alternative fee arrangements. This is some way ahead of the UK regional average of 14%. It may be explained by the well-developed legal services industry in major Scottish cities such as Edinburgh, Glasgow and Aberdeen.
When it comes to selecting legal counsel, Scottish clients focus principally on the quality of legal and commercial advice, service delivery and responsiveness. Scotland’s many large and significant companies are also often engaged in cross-border trade and transactions, leading to specific international requirements when seeking legal services. ‘Not all firms have the capability to work across lots of jurisdictions, so that’s one of the things that we take into account,’ remarks Carolyn Jameson, general counsel (GC) at Skyscanner.
Scottish companies are naturally concerned about costs and pricing, but this is far from the overriding factor in choosing counsel. Anecdotal evidence from individual interviews suggests that clients are not yet ready to commit to alternative business structures.
Greg Bargeton, head of legal at William Grant & Sons, comments: ‘We have looked at them and we have spoken to a number of them actually, but the truth is it’s still fairly early days and I’m not sure.’ Bargeton is still principally focused on quality: ‘We expect first-class advice, we expect it delivered in a user-friendly way and in a way that appreciates the wider commercial concerns of the business.’
In essence, clients want what they have always wanted, but with steady improvements in service delivery and application of the law. Keith Ruddock, GC and company secretary at The Weir Group, reflects: ‘Law is not just a commodity. It really is an art and that’s the differentiator. ’
chris.crowe@legal500.com
Market View – Opportunity knocks
This inaugural Regional Insight report could not come at a more important time for the legal market and wider business community in Scotland.
Having only recently begun to emerge from the deepest recession in modern history, improving economic conditions are leading to increased business activity across Scotland. Our real estate, corporate M&A, energy and finance teams are all seeing increased transactional activity, and concerns over regulatory issues and business-to-business disputes are also moving up the agenda. These trends are reflected in the finding of this survey that 40% of Scottish respondents anticipate an increased need for legal services in the next six to 12 months.
The past year has been dominated by the sometimes febrile, but always stimulating, debate over Scotland’s constitutional future and while the historic independence referendum of 18 September may have delivered a decisive vote in favour of Scotland remaining part of the UK, the devolution process will continue apace in our separate legal jurisdiction. More powers are to be devolved to the Scottish Parliament and we can safely anticipate more law emanating from Holyrood. As this report found, two of the key concerns for respondents in Scotland are increasing regulation, and internal and external compliance. Business life is going to get more, not less, complex and law firms need to be prepared to support clients in these key areas. It is so important to businesses that they can move quickly to take advantage of market opportunity, secure in the knowledge that they have the legal angles covered.
At Brodies we are 100% focused on developing and delivering both core and new services that respond to our clients’ changing needs and address the challenges they are likely to face in the future. Listening to clients has been fundamental to our sustained, organic growth as a firm, and in turn their support has allowed us to maintain our independence and make investment decisions, without external interference, to drive innovation and constantly improve the services we deliver.
This commitment to innovate and develop new services is reflected in the launch earlier this year of our commercial services division. This new division aims to support the core commercial and business needs of clients, by helping them to manage both complex and day-to-day commercial activity with the support of leading commercial contract experts as well as specialists in intellectual property, technology and outsourcing, procurement, corporate tax, employment, employee benefits and pensions. This service is supplemented by BOrganised, a pioneering new online contract management service that allows clients to keep on top of their contracts throughout the contract lifecycle, 24/7, to reduce the risks of missed deadlines, poor decision-making, increased costs, wasted management time and potentially, litigation.
I hope that you will find the results of the Regional Insight report as informative as I have, and I would like to take this opportunity to thank those of you who took the time to respond to the survey and provide the valuable feedback that allows firms such as ours to respond to your changing needs. We look forward to working with you in the future, and to seizing the opportunities that the improving economic conditions and constitutional developments in Scotland will present.
Contact
www.brodies.com
bill.drummond@brodies.com
Client profiles
Peter Tyson, Standard Life
A FTSE 100 company, with around 1.3 million individual shareholders in over 50 countries, Standard Life is headquartered in Edinburgh, where its original business was established in 1825.
Peter Tyson heads up the group legal services division, with around 78 staff in total, which supports the various UK business areas and handles matters such as commercial contracts, dispute resolution and IP protection. Tyson has worked with Standard Life for 12 years and was involved in the demutualisation and initial public offering in 2006 as well as several of the large corporate transactions since then, such as the sale of Standard Life Bank and Standard Life Healthcare.
Regulatory change is still part of the current UK long-term savings and investment markets, particularly in the pensions area, with significant knock-on effects and work for the group legal services teams.
Group legal services takes on trainee lawyers and secondees each year and this brings real benefits to the legal teams, external firms and individuals involved. The department has time recorded for ten years, which helps to quantify its involvement and demonstrate the contribution made by the in-house legal team to the wider business.
When it comes to external legal advice, Tyson says his team looks for knowledge, experience, commerciality, conciseness and focus, as well as commitment, clarity, timeliness and speed of response. For the external lawyers on the UK panel, the most important criteria are communication and how easy they are to work with.
Keith Ruddock, The Weir Group
‘The areas that always tend to worry me most,’ says The Weir Group general counsel and company secretary Keith Ruddock, ‘are those that could impact the reputation of the company.’ The engineering group supports mining and oil and gas operations primarily, as well as being active in the power and industrial sectors.
The company’s global activities, which include operations in 70 countries generating revenues of £2.4bn last year, mean that keeping abreast of global political events is critical. ‘We have had new sanctions introduced recently in relation to Russia – we have operations in Russia and we supply to various companies there – so it’s trying to make sure that we are clearly on the right side of that line,’ says Ruddock. This ever-present issue has led to the development of quite a high level of in-house sanctions knowledge.
Being an international company requires monitoring compliance across multiple jurisdictions, which is another key challenge. But despite such activity, the company’s Scottish heritage is very important.
Ruddock’s in-house team currently numbers 27 staff globally, but capacity or a need for a specific expertise often still necessitates going to external advisers. A local perspective can be useful. ‘We have a number of facilities around the UK, so there will be cases when instructing a local firm in Yorkshire or Lancashire might be perfectly sensible. In the same way here in Scotland, there are areas where really it just makes perfect sense to instruct a local firm.’
At the same time, the team is not bound to any particular geography, so it is really the capacity of the firm and its reach that matters. The company doesn’t have a formal panel, instead using a number of existing relationships. ‘A lot of the rationale for appointing an external adviser comes down to chemistry,’ says Ruddock. ‘That doesn’t mean you want a cosy relationship – not at all – but you have to feel that whoever you’re working with is somebody that you’re comfortable working alongside, who will be there when things get challenging and who you enjoy working with.’
When the company needs a specific skillset, which current relationship firms cannot offer, Ruddock will ask them who they would recommend.
When they are instructed, becoming ‘engaged and aligned with the business’ is something he looks for. ‘Now, of course they have to be objective in their advice, they have to be challenging at times and maintain a professional distance to an extent, but a really good law firm will make you feel as though they’re absolutely on the same side as you, and that they’re doing their utmost to reach a good outcome for you. That’s very powerful.’
Greg Bargeton, William Grant & Sons
Greg Bargeton, head of legal at Scottish whisky producer William Grant & Sons, has a unique portfolio of concerns, needing to continually keep a weather eye on any legislation globally that aims to further restrict the company from selling or marketing its products. He explains this now has its own ominous terminology: ‘“Dark markets” – meaning that a government has decided to limit the opportunities we might have to market alcohol. So it’s an increasing concern that we have to stay compliant with these regulations that are in flux as public opinion and government responses change.’
Despite its roots as a family-run business started by William Grant, who built the Glenfiddich distillery in Dufftown in 1886, the company and its brands are now in over 180 countries, so its concerns mirror those of any large global corporation. Anti-corruption compliance and training for staff is a key area for Bargeton’s team to monitor.
Bargeton runs the company’s global legal operations from the UK with a team of five lawyers. However, he tries to keep work in-house, the aim of which is ‘to be close to what the business is doing and also to be as involved as possible in terms of strategic projects that are fundamental to the company. So we take the time to create the understanding and relationship with our business colleagues.’
Given the global outlook of the company versus its Scottish base, Bargeton’s view on regional expertise is mixed. For him, it should cover more than just Scotland, as being able to bring a local perspective is important in all regions across the world where the company operates. But Bargeton concedes that: ‘Certainly in the UK it’s crucially important to us that a firm understands Scotland and the perspective of a Scotch whisky producer.’
Carolyn Jameson, Skyscanner
This financial growth is reflected in a programme of international expansion that has seen new offices in Singapore, Beijing, Glasgow, Barcelona, Miami, and, most recently, Sofia – in addition to its Edinburgh headquarters. Regulatory work arising from the group’s multijurisdictional footprint is a major source of work for Jameson’s team. Contractual work is another mainstay but she is keen to stress that the interesting work remains in-house. ‘We keep as much work in-house as we can. We don’t ever adopt the approach where we just pass things out rather than get involved ourselves. We’re here to do the work, not just to act as a postbox to an external firm,’ she says.
Occasionally specialist matters come along where outsourcing becomes necessary but the team maintains a hands-on approach and stays heavily involved. An example of this was its recent successful appeal of the Competition and Markets Authority’s decision to accept commitments in relation to online hotel room booking that reduced the transparency of pricing for consumers. Skyscanner was not involved in the original investigation but Jameson felt strongly that ‘it was taking hotel searching backwards, meaning that consumers would need to go into multiple websites to be able to compare prices’.
The company’s outlook is global and this informs the law firms it chooses, although ‘Scotland is a lovely place to be and we’re happy that we’re here,’ says Jameson. What it comes down to, she stresses, is relationships – ‘we always like to use firms that we enjoy working with, so we tend to opt for firms that are less stuffy.’
Stephen Small, The National Trust for Scotland
The National Trust for Scotland solicitor and trust secretary, Stephen Small, says being based in Scotland throws up some unique issues. There are political issues, such as the land reform agenda, which is currently of concern to the legal team. The Trust has particular powers, including not only a statutory power to dedicate land that it owns as inalienable but also the power to enforce conservation agreements, which are title conditions over land that it does not own.
Recent reforms have made these powers much more open to challenge. ‘There has already been recent legislation on rights to buy for instance,’ says Small. ‘There’s a new land reform group just working on fresh proposals, through the Community Empowerment (Scotland) Bill in Parliament – and we’re quite focused on that.’
The legal team may only comprise two people, but ‘we try and do as much as we can in-house’, says Small. Nevertheless, he says, the Trust is a very broad charitable organisation, but also quite a large commercial entity as well.
‘We do a lot of different things in a lot of different places, and obviously we can’t be specialist in everything – we know enough to know that we don’t know,’ he says.
In this situation, he says he is not a fan of the full-service-firm approach and does effectively have a non-formal panel. In order to select these advisers, the Trust operates within a procurement mechanism – so higher value pieces of work would be tendered, but lower value pieces of work would not.
‘It’s all about value for money and the specialist knowledge of the firms in question,’ he says. ‘We tend to use Scottish firms, but I suppose that’s because we tend to almost exclusively operate within a Scottish law environment.’
Small is positive about the contribution that law firms can make, having noticed a welcome uptick in the pragmatism of law firm advice. ‘A lot of solicitors have realised that’s what they have to do now. Improving the quality not just of their technical advice, but also of their general understanding,’ he says. ‘It’s not just enough to offer the special technical advice, or being able to carry out the transaction. They have to have what the client has and more.’
catherine.rodgers@gcmagazine.com, catherine.mcgregor@gcmagazine.com
Economic overview
Clichés over Scotland’s resilience abound, but the nation’s recent economic performance continues to stoke the legend. It has the highest employment rate of the four countries that make up the UK and one of the lowest unemployment rates of any region, with only South East England outperforming it.
Uncertainty over Scotland’s constitutional direction, with the recent referendum on independence, has not exactly aided its economic cause. But despite the unsettled conditions one of the country’s main economic forecasters, the EY Scottish Item Club, raised its growth forecast this summer for the economy to 2.4% for 2014 – 0.7% higher than its estimate a year ago. The economic forecasting group said that Scotland would experience further growth of some 1.9% in 2015 and 2016.
Despite this, Scotland’s oil and gas output is expected to contribute significantly to GDP for the foreseeable future and the nation is also leading the way in the UK’s initiative to decarbonise energy production. The Scottish government has targeted half of electricity to come from renewable sources by 2015 and 100% by 2020. These ambitions are fuelled to a large extent by the nation’s ability to harness its plentiful wind, wave and tidal power. The broader energy sector is also driving Scotland’s fiscal health. It is a net exporter of electricity with ScottishPower and SSE being major UK utilities.
Financial services remains a primary driver of the national economy. While the economic malaise that resulted from the financial crisis hit Scotland especially hard in 2008 and beyond, it has experienced a notable rebound. Unemployment as of May 2014 sits at 6.4%, compared to the UK average of 6.8%, though the employment rate of 73.5% is still short of the 74.9% figure achieved in the summer of 2007.
The financial crisis clearly tainted confidence in Scotland, not least because two of its biggest victims, The Royal Bank of Scotland (RBS) and HBOS (now part of Lloyds Banking Group), had to be bailed out with taxpayer money. RBS in 2014 alone announced some 30,000 job cuts. Despite this, there is still buoyancy in the financial services industry, especially when considering the fast-emerging investment and fund management sector, where Standard Life, Brewin Dolphin and Alliance Trust are three significant names with a major presence in Scotland. In September, Edinburgh-headquartered Standard Life sold its Canadian unit to Manulife Financial for £2.2bn.
Real estate is also thriving again. In housing, Scotland shares the rest of the UK’s shortfall, while growing market confidence is providing an impetus for the commercial property sector. In 2013, private equity fund manager Moorfield Group acquired Quartermile, the mixed-use redevelopment of the former Royal Infirmary site in central Edinburgh.
In addition, Scotland expects an uptick in food and drink exports, as well as corporate transactions in the sector. Marine Harvest, a leading seafood company, recently sold its Shetland and Orkney fish farms to Canada’s Cooke Aquaculture. Loch Lomond Group also recently sold several businesses, including the divestment of Loch Lomond Distillery Company to Exponent, the private equity firm.
Despite the decision by the Scottish electorate to reject independence, the nation is still facing profound change, with the UK government making firm commitments towards further devolution. As a result, business and enterprise in Scotland has been preparing itself for a period of adjustment for some time. ‘Change is coming of one sort or another, but we are used to change in Scotland. We have had Holyrood as the Scottish Parliament since 1999,’ says Bill Drummond, managing partner of Brodies.
In contrast, Burness Paull and Brodies have been the Scottish law firm success stories post-recession. Burness Paull – the result of a significant merger between Edinburgh’s Burness and Aberdeen’s Paull & Williamsons in late 2012 – had a strong year, with revenues up 20% and profits per equity partner up 29%. Brodies, meanwhile, is the largest independent Scottish firm by revenue, the strongest performer in terms of organic growth over the last five years, seeing its turnover grow by a third without any merger activity inflating the top line.
Drummond’s prognosis is upbeat. ‘We can’t say the economy is firing on all cylinders, but in Scotland unemployment is falling and these are the hard indicators that something reasonably positive is happening.’
chris.crowe@legal500.com