Confidence is returning to the national UK economy, to the relief of clients and law firms alike. But, as our Regional Insight report shows, growth in legal services is still a relative term across local markets in continued flux.
The outward indicators are generally strong. Based on economic forecasts in 2014 from the likes of the International Monetary Fund and PwC, the UK is on track to become the fifth largest economy in the world by 2020, overtaking France.
But while PwC’s July 2014 economic outlook for the UK made the bold assertion that ‘all major industry sectors and regions are now showing positive growth trends’, inevitably those regions are starting from different positions, facing varying dynamics and contributing to the overall growth at significantly different rates.
Following a survey of more than 1,200 clients and in-depth interviews with around 40 in-house counsel up and down the nation, our inaugural Regional Insight report looks at local economies as they intersect with the legal market across eight major areas spanning England, Scotland, Northern Ireland and Wales. The research aims to draw out the key characteristics of regional markets and assess their impact on the UK economy. We also highlight the local aspects and legal challenges and opportunities, bringing into sharp relief the haves and the have mores.
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Stepping out
It is clear from the economic and legal industry analysis that two of the most flourishing locations outside of London are Bristol and Manchester. Business confidence is particularly high in the progressively minded Manchester, which has a larger economy than the whole of Wales and was ranked second behind London as a key driver of growth nationally and regionally in a Grant Thornton report published this autumn. If the UK has a poster child for the faded industrial heartland re-inventing itself for the modern age of knowledge economies, Manchester is it and the city looks to be probably the most strategically interesting legal hub outside of the capital.
It is no coincidence that these markets have seen an influx of City law firms in recent years, with Berwin Leighton Paisner (BLP)’s arrival in Manchester in the summer the standout example of 2014. BLP’s new office ostensibly houses its low-cost Lawyers On Demand offering and is evidence that City advisers coming out to the regions intend to compete on price.
The repositioning of key regional legal markets post-Lehman has been particularly acute, not least through the emergence of second-tier players in cities such as Bristol, Birmingham, Edinburgh, Leeds, Liverpool, Manchester and Newcastle that have moved in as the original national players like Eversheds and DLA Piper have shifted their focus.
Having taken stock of their market position since the recession, many firms have opted for consolidation through mergers and acquisitions to establish more depth in core practice areas and achieve wider geographical coverage.
The traditional dominance of larger national firms in key regions has been systematically eroded on a number of fronts. Firstly a focus on London and international strategic imperatives has drawn these firms’ attentions away from their regional heartlands, while increased overheads in the pursuit of those strategies has made it difficult for these firms to compete on price outside of London, particularly with clients becoming increasingly cost-conscious and focused on value.
In a nationalising and segmenting legal market, it has likewise become easier for certain advisers to thrive in hubs like Birmingham if they can demonstrate a clearer cost advantage and efficiencies over City and larger national players.
In addition, the focus on the capital has led to an inevitable brain drain of talent towards the City that has notably increased in recent years. This is a double-edged process – stemming not just from a focus on acquiring and moving talent in London by these national players but also from increased interest by City firms in the quality of resource available at these national firms. This is noted by Bronagh Kennedy, group general counsel of Severn Trent Water, who says: ‘In some areas of practice, top talent tends to be attracted towards London.’
This shift in focus to London and international markets hit certain firms hard during the global financial crisis. This is most striking in Scotland, where the original ‘big four’ law firms of Dundas & Wilson, Maclay Murray & Spens, McGrigors and Shepherd and Wedderburn were reduced to just two after Dundas and McGrigors were taken over by UK firms in recent years. These takeovers were facilitated as a result of the Scottish legal elite being exposed by their over-reliance on work in Scotland from the major banks that eventually moved south. Ultimately, the gap left at the top of the market created a space for the likes of Brodies and Burness Paull to move into for domestic Scottish work. The good news for Scots lawyers is that our research indicates further recovery with the region’s clients the most bullish of our eight groups.
In Birmingham, the door has opened for the likes of Shakespeares and Gateley to take advantage. Shakespeares in particular has been on a significant merger drive during the last five years to become a force in the Midlands. The firm has gone from an £18m practice in 2009 to a £50m business today, largely through the acquisition of smaller firms throughout the region.
Chief executive Paul Wilson comments: ‘We are committed to building our regional presence, providing economies of scale. None of the individual firms we’ve merged with would have been able to afford to invest in people and technology. And because we have economy of scale, it allows us to be price competitive.’
Another trend that is developing among these emerging players is a new breed of regionally-diverse firm. Whereas the borders between north and south in particular were more clearly defined in the past, there has been notable consolidation of geographies through mergers. Notable examples in the last 18 months include Bond Pearce and Dickinson Dees forming the quintessential North/South hybrid Bond Dickinson; Blake Lapthorn and Morgan Cole forming Blake Morgan; and Cambridge-based Mills & Reeve merging with George Davies in Manchester.
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Daily bread
The need for a new breed of nationally-spread and competitive regional players is reflected by the needs expressed by regional clients across the board (see executive summary). In the pursuit of high-end transactional work, there is an argument that some law firms are neglecting the daily needs and pressures of many clients up and down the UK. Answering the question: ‘What are the key business/legal issues that might keep you awake over the next six months?’, respondents across the UK overwhelmingly identified the increased regulatory landscape as a major concern (noted by 46% of all respondents) and internal and external compliance (45%) and finally employment issues and disputes (36%).
Our research also demonstrates that the stark trend of major bluechip companies aiming to bulk up their in-house teams to develop their own staff and save costs rather than lean on external advisers is being clearly replicated at smaller, regionally-spread clients and mid-caps. That trend will continue to have major implications for legal advisers up and down the country.
Such is the level of competition in the regional market for work, some of the established regional players can no longer rely on price advantage over the City firms for mandates in Leeds or Glasgow. Indeed, Paul Taylor, EMEA counsel at North West-headquartered Pearson VUE, recalls on page 32 how a City firm won a pitch for his work after coming out better on price than some of the regional rivals.
There has never been a better time to be a purchaser of legal services across the UK. With a new breed of hungry challengers aiming to colonise key regional markets and City and national players often working harder to compete on price, the buyer’s market looks to be here for the long run.
caroline.hill@legalease.co.uk, mark.mcateer@legalease.co.uk
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Executive summary
The Regional Insight survey gathered responses from more than 1,200 clients over the late summer and early autumn of 2014, to a series of questions about the size of their teams and the law firms they instruct. The results were broken down into each of the eight regions in the report.
The key legal/business issue keeping clients awake at night is the increased regulatory landscape (46% of respondents acknowledged this issue among others), followed by internal and external compliance (45%); and employment law issues/disputes (36%). More than half (56%) regularly instruct external law firms on employment/HR law, among other areas, followed by litigation (51%) and real estate (47%).
The market is broadly stable with modest signs of growth. Nearly two-thirds of clients surveyed (63%) expect their need for external legal services to remain unchanged in the next six to 24 months; while of the remaining respondents, 24% were forecasting an increase in demand against 13% expecting a decrease.
Over half (55%) rely on personal recommendation when selecting external advisers, followed by recommendation from their existing legal advisers (42%) or recommendation from another business (32%).
When it comes to billing, UK regional clients are clearly in favour of fixed fees, with 51% saying they would prefer this method. Only 13% would like to use an hourly rate, although another 22% would prefer a cap on the billable hour. Eighty six per cent of all clients surveyed said none of their law firms had come up with a workable model for alternative fee arrangements.
As for the key criteria for selecting an external law firm, clients inevitably selected quality of legal advice as the most important aspect, with a mean score of 9.58/10 (with ten being very important). Other essential criteria included service delivery/responsiveness (9.12/10) and quality of commercial advice (8.82/10).
Methodology
The inaugural Regional Insight report is the culmination of an extensive three-pronged research project into the economy and legal market within eight distinct regions across England, Wales, Scotland and Northern Ireland.
Taking all the regional responses together to get a picture of the UK as a whole, the majority of respondents (31%) had company revenues of between £5m and £10m, followed by £101m-£200m (9%) and £201m-£500m (9%). Twenty seven per cent of the companies responding were privately owned, with another quarter public companies. By far the most popular industry for responses was financial services – 14% of all those surveyed – followed by real estate (12%) and healthcare (8%).
Of the medium-to-large business surveyed, most clients (38%) have an annual legal spend of up to £250,000, with 19% spending up to £500,000 and 15% spending between £1m and £2m.
Regional reports within Scotland, the North East, North West, Yorkshire, The Midlands, Wales, the South West and Northern Ireland drill down into the dominant local industries, investment and infrastructure and where growth is coming from. Researchers have spoken to some of the leading regional law firms within each region about their major clients, deals and the pressures and flux within the local legal market.
Running alongside the regional reports and general client survey, over 40 clients have been interviewed across all of the eight jurisdictions in the form of a series of mini profiles in each chapter.
Our client survey, which reaches a far wider client audience of over 1,200 companies across the eight regions, assessed what keeps clients awake at night, their level of external spend, and changing legal needs and attitudes towards alternative legal providers, among other questions.