This year we’ve broken the Scottish Big Four up. Most likely to the chagrin of Maclay Murray & Spens and Shepherd and Wedderburn, rival firms McGrigors and Dundas & Wilson have joined the Major UK group by virtue of national coverage, reputation and having revenues of over £60m.
While in terms of market share and quality, the Big Four are still regarded as one competitive unit, and all firms have significant businesses operating throughout the UK, Maclays’ turnover of £48.6m is some way behind that of D&W’s £62m.
However, it now tops this peer group by some considerable margin ahead of S&W, which posted fee income of £37.3m. This is despite posting a 7% drop in revenue (the only firm in the peer group to record a loss), and has now posted declining turnover for three years in a row.
Additionally, net income at Maclays is also slightly down (-4%), so despite a drop in total fee-earners from 325 in 2007 to 285 this year, profitability hasn’t improved as revenue has declined.
Despite widespread increases in turnover, generally, the mood in Scotland this year is not overly optimistic, with little evidence of any significant upturn. ‘Economic growth in Scotland has been and will continue to be slow,’ says Burness chairman Philip Rodney. ‘The market for legal services here will not, in our view, improve over the next few years. A lot of firms are finding it very tough. At best many are flatlining.’
Douglas Connell’s firm, Turcan Connell, has withstood most of the storm in the past three years, thanks to its business model, which is more focused than most, being geared almost exclusively around private client. The firm had posted 11 consecutive years of double-digit growth before things started to slow down in 2009 but has always maintained revenue growth and continues the trend this year with turnover up by a fraction.
‘We ourselves are in a relatively strong position but I would prefer to have reasons for being more bullish,’ says Connell. ‘The report card generally is “little or no progress over the last two or three years and the outlook is not particularly positive”.’
According to Connell, balance sheets in many cases continue to be weak and the banks seem to be quite exposed to the sector. ‘In the current reporting season, turnover seems generally to be flat and profitability may be up simply because some costs have been taken out rather than much real change in the top-line or at partner level. Property commitments, with quite a lot of relatively new leases now coming out of rent-free periods, mean that amalgamations may not be financially feasible,’ he says.
However, despite some understandable dour scepticism north of the border, there are pockets of good news. S&W has reclaimed its spot behind Maclays and ahead of fierce rival Brodies, which overtook it last year.
The two are very close, both in headcount and revenue terms, with S&W taking the plaudits this year for stronger revenue and net income growth – a 6% and 25% jump respectively, compared to Brodies’ 3% change in revenue and 12% increase in net income.
However, Brodies maintains a much stronger PEP figure – £365,000 compared to S&W’s £263,000 – and this is down to the fact that Brodies not only has fewer equity partners than S&W, it also has fewer equity partners than non-equity partners internally. Burness, which has one of the healthiest profit margins of all the Scottish firms, re-entered the LB100 last year as one of only two Scottish firms to post a rise in turnover and profits (the other was Dickson Minto). It has consolidated its position with a 17% leap in net income and an impressive 10% improvement in turnover.
‘What is particularly gratifying is that trading was improved across all departments,’ says Rodney. ‘Our PEP increased by 22% to £372k. This follows a strong 2009/10 where our turnover increased 8%. An increase in turnover of 18% over two years, when the Scottish economy was performing poorly in general, would seem to demonstrate that we are continuing to increase our market share.’
However, Rodney adds that the key metrics for measuring performance as far as Burness is concerned are profit per lawyer and profit before partner distributions. Little wonder: the firm’s PPL figure was up by 24%, and at £77,000 is second only to Dickson Minto in this peer group.
Rodney is bullish about the reasons his firm has outperformed much of the market at this stage: ‘We have focused on quality, not size – value, not price,’ he says. ‘Our strong performance reflects the success of many of our key clients as they roll out ambitious plans in a challenging environment which also produces opportunities.’
One firm that has truly returned to form after a wobble a couple of years ago is Dickson Minto. Not a Scottish firm in the conventional sense, more of a private equity boutique, the firm was hit hard during the downturn after being an immensely successful and extremely profitable firm for many years.
Last year saw the firm rally impressively in terms of revenue and net income growth and this year sees more of the same: revenue jumped 12% in 2010/11, while profit per lawyer has increased by 6%. Proof that there is money to be made in Scotland, despite noises to the contrary.
Anderson Strathern, which dropped out of the LB100 last year with drops in both revenue and profitability, has also rallied this year. While significant revenue increases at firms across the UK still keep the firm outside the top 100, revenues are up slightly while profit per lawyer has surged 19%. The acquisition of niche property firm Bell & Scott in July will give the firm 56 partners and should catapult the firm back up the rankings with projected revenues of £23m. LB