Sharper focus

A prediction that the legal services market will be flat for the next 12 months or more, coming from a firm that recently reported 20% growth in the past two years, does catch the eye. Is it throwing down the gauntlet to its competitors, or simply warning its own people that the good times may be about to end?

In Burness’s case it is doubtful that the latter applies. With turnover in the year to 31 July up 10% to £23.4 million, and net profit by 14% to just under £10.5 million, the firm was able to declare a 10% bonus to eligible employees. That was top of announcing a profit per equity partner figure of £373,000 – believed to be one of the highest in Scotland, though the firm prefers total profit as a true measurement.

Yet chairman Philip Rodney, announcing the results, warned in the same breath of “entering difficult economic times”, predicting: “The market for legal services here will not, in our view, improve in the short to medium term and, indeed, may contract in 2011-12.”

Nearing the end of his second three-year term at the helm, Rodney has seen his firm take a recessionary dip and pull out again. His current forecast, he tells me, extends beyond Scotland. “I think we’re in for a hard five to 10 years. I see the economy being flat for an extended period of time, and I think that’s true of the UK, as well as of Scotland.”

Taking the cake

Recent financial news has not been encouraging, but one would not think so from Rodney’s comment that every department improved its performance this past year. Particular mentions go to corporate finance, funds, energy and renewables, litigation, IP/IT, and employment. So what helps Burness stand out?

“One thing is that we are very sure of our place in the market. We don’t try to be all things to all people; we’re very focused on value rather than price, but if you came to any of our management meetings the focus would be very much on how do we improve our product.

“That’s where you start, just making sure everything you do is tip-top, and in terms of strategy what’s been very important is listening to our clients so that our service lines and delivery match their current and future needs.”

What emerges in addition is that this is a firm that anticipates how the market is developing and decides how to react. Just to say that the legal services market will be flat, masks changes taking place that will provide growth for some sectors while others contract.

“It isn’t that there will be a fixed cake,” Rodney explains. “I think the cake will take a different shape. Its overall size will be the same, but different areas will be active over that period. The overall spend on legal services won’t increase substantially, but certain parts of the market will be stronger than others and the focus has to be on those areas and providing those services which are relevant to the market that we’re in.”

Naturally there will be individual business success stories as well, generating legal work.

“One of my clients once said to me, ‘When times are good you can make money; when times are bad you can make a fortune’; and those who can identify – I’m talking both about businesses and professional service firms – which parts of the market will prosper, and can focus on them, are going to do well. Those that just take the view that this will blow over in time will fail.”

London calling?

Burness has to date resisted the lure, if such it is, of attempting to open south of the border. I suggest that if the cake is not going to grow, it seems a higher risk strategy for an ambitious practice to look only to the Scottish market. Rodney disputes the analysis.

“Our focus has been on Scotland and it’s a strategy that’s worked very well for us, for a number of reasons.

“One, we can reasonably aspire to be a top firm in Scotland rather than a bit player in a bigger market.

“Two, it means that we can focus all our investment here rather than it being diluted. But most importantly, it allows us to sell into the London market and work with magic circle or silver circle firms who trust us to handle their clients and not steal business. The difficulty with opening up a London office is that you’re immediately seen as a competitor to those firms.”

Burness, it appears, is one of those firms doing well from the London market without having a physical presence there.

Rodney drops a hint as well that he has reason to believe that some Scottish clients of firms with London offices are “feeling a wee bit unloved” because their advisers’ focus is elsewhere.

Local outlook

I wonder as well if he has a view on what his outlook means for the smaller general practice.

“I think it’s going to be hard for the high street firm,” he replies. “I don’t pretend to have a full understanding of the market in which they operate, but I think that in times like these there is a space for the small niche practice that really knows what it’s about and is famous for something. It will be harder for small general practices, but a firm that has a specific niche and focuses on it and excels in it will be able to do well.”

A perhaps surprising point emerges when we move to the prospects for alternative business structures – which Rodney thinks will have a “significant” impact, without indicating that Burness is likely to make any moves in that direction. Contrary to many assumptions, he suggests it is the smaller firms that could benefit most from them.

“I think there are a number of high street firms that will prosper or will find it easier to survive the challenges with an external investor, but it will have an impact on everybody inasmuch as there will be certain measurements of efficiency that all firms will be expected to display.”

So he doesn’t believe it’s really for the bigger firms?

“It’s possible in the London market, but I don’t think it will happen here, because you have to ask yourself, what would a business be prepared to trade its independence for? If it wants capital it would be on the basis that either people want to take it out for themselves, and that creates its own problems, or alternatively it would be to invest in a particular project, and I don’t think successful firms really need that or would be prepared to sacrifice their independence for that investment of capital at this stage.”

Quick on your feet

Returning to market conditions, Rodney’s forecast, taken with the fact that some firms will undoubtedly continue to grow, necessarily means market attrition, especially with some sectors still feeling a shortage of work. He does not, however, anticipate any dramatic collapses. “What we saw last year in England is that it actually takes a lot to put a firm out of business. We saw it with Halliwells” (the Manchester based firm where a mishandled investment in expensive offices turned bad), “but that was an exception. I think we will see a slow erosion of some firms over the period.”

And with it, no doubt, some further consolidation. Not that merger necessarily implies a rescue package, by any means, though it is not a means of growth that Burness has adopted since the 1998 amalgamation that brought Rodney himself to the firm. He gives the safe answer that “It’s not something we’re actively looking for, but we’re always looking for opportunities in the market.”

Rodney underlines his message of the need to be proactive in order to prosper, when I ask whether he is optimistic for the future of the profession.

“I’m optimistic that those firms who can actually provide a service focused on a specific market can succeed. I can’t say I’m optimistic for the profession as a whole, because I think that firms that are complacent or don’t understand their position in the market will find it difficult.”

To achieve that success, in essence, a firm not only has to work out what its client base is, but has to get inside its mindset in order to define the services it will provide.

“People really have to understand the sectors that they serve.”

Rodney cites the American management guru David Maister (www.davidmaister.com), who said that lawyers “should spend less time reading law journals and more time reading trade magazines”. Which, he hastens to add, should not put them off reading the Journal: “but I do think they have to understand the sectors in which their clients operate”.

He concludes by returning to his main theme. “I do want to make it clear that whilst I think the overall cake won’t change in size, I do think it will change in shape.

“Areas of law in which firms such as ours have traditionally operated will have changed in five years’ time. And it’s being sensitive to what these changes are, and being nimble enough to be able to change the dynamic of the firm to focus on these, that will mark out the successful firms.”

Hear what Philip has to say in our exclusive video interview, visit www.journalonline.co.uk/videos

All the right ingredients 

Total understanding of client needs is key to success, growth firms agree

Burness is not alone in experiencing current growth. The Journal asked some of the firms who have made new office moves in recent months how they view prospects.

"The view that the Scottish legal market is a 'fixed cake' is simplistic and, in my view, defeatist”, says Bill Drummond, managing partner of Brodies, whose Aberdeen office, opened this year, already has 16 lawyers. “Of course, there will be little or no long-term growth for law firms that see things that way. The market for legal services is evolving all the time and there are significant opportunities out there if you are prepared to seize them.” Generating growth is a challenge, he accepts, but one that must be faced, and should be achievable by others who are “adaptable, willing to develop services relevant to new markets and, above all, listen to their clients”.

Like Philip Rodney, Patrick Andrews of Shepherd and Wedderburn, which recently moved to new larger Glasgow offices, predicts a flat or contracting total market in the coming year, but “expects to see opportunities for firms like ours to grow their UK and international practice bringing work from other jurisdictions back into Scotland”. He mentions a range of global markets including India, USA, and Africa.

Litigation practice Digby Brown also recently took up much larger Glasgow premises. Partner and executive board member Fraser Oliver explains that the firm has made a “substantial investment in terms of recruiting, training and developing groups of highly qualified people who are specialists in their field”, providing a strength in depth that has allowed the firm to continue to win significant new business.

On a smaller scale, Glasgow and Lerwick firm Inksters has opened an Inverness office particularly for crofting work. Founding partner Brian Inkster says it stems from a marked increase in such work for the firm throughout the Highlands over the past couple of years, “and it seemed a natural progression to enhance that service by opening an office nearer to where the client base was actually located”. He adds that if Inksters is a barometer, there is still growth in the market, including in property, wills and powers of attorney. “Despite what you read about the state of the property market there is certainly a lot more activity this year than there was last year, and there is no sign that this is going to do other than grow over the next 12 months, albeit perhaps gradually.”

Interestingly the two larger commercial practices also claim there is continuing interest in property. There is “a desire to deal in assets that are realistically priced”, Drummond observes, and a pent-up demand for family housing that “will be responded to in time by the large-scale residential developers who are re-capitalised and just waiting to get cracking”.

Andrews claims continuing strong performance in real estate, which along with energy, financial services and infrastructure will be a key area of focus going forward.

Drummond further suggests that “Advising on matters of EU law and regulation is an example of a high level legal skill that is an evolving market for Scottish law firms”, also citing devolution related work and “providing solutions to clients’ disputes – effective litigation skills will always be in demand”.

There is no doubting the answer to the question what should a firm prioritise in order to achieve growth. "Legal firms should first and foremost be fixated on their clients and on understanding the challenges they face in order to deliver the services they need”, says Drummond. Oliver replies: “Firms need to concentrate on providing real added value for their clients and be really good at what they do”, adding that Digby Brown’s funding product, “Compensate”, is proving attractive: “People are happy to pay for a service which allows them to seek access to justice.”

Inkster’s formula is: “prioritising what your particular legal practice excels at and maximising that area or areas by appropriate marketing”. Importantly, Drummond adds that it isn’t just about gaining market share at the expense of your rivals, but “looking at how the knowhow you have developed through providing expert services to clients can be delivered in other areas…. offering services that are not being provided currently, or” – here he echoes Andrews – “looking at where those services would be relevant elsewhere in the UK or further afield”.