South coast: moving on but still cautious

They have started recruiting again, some are moving to larger offices and most are confidently organising themselves for the battle that is looming over the legal services market. Solicitors on the south coast are not complacent, but, having survived the toughest recession in recent history, they now want to look ahead. They are ambitious but remain cautious, and their hearts are definitely still in the region rather than beating with grand schemes for national expansion.

But the words on everyone's lips '“ Tesco law '“ is making lawyers think about the post-recession days very differently. Mergers are at the top of the agenda in many cases, and some are even considering opening their firm's capital to external investors.

Solicitors around Britain have been looking at Tesco law from the safety of their legal skills and clients' preference for personal contact to fend off the suggestion that their business may be at risk. This arguably still holds water in the private client sphere but even there lawyers now accept that their positions may not be as safe as they once thought it was.

'Clearly Tesco law will initially be a threat to solicitors firms but while many people will just go for the cheapest price many clients still require a quality service with a personal touch and are prepared to pay more for that,' says Geoffrey Onoufriou, partner at six-partner firm Eric Robinson.

The firm has one office in central Southampton catering for commercial clients and a network of four offices on the high street in and around the town, and Onoufriou believes the proximity with clients will set firms apart from volume businesses.

'The service provided by 'Tesco law' is likely to be impersonal with perhaps different people handling the same case,' he says. 'The more complex the case or the more sensitive the issue, clients will prefer the personal service of an established firm with solicitors they can identify and relate to.'

Eleven-partner firm Steele Raymond, in Bournemouth, started off as a commercial firm but, since its creation in 1979, it has gradually moved into private client too, specialising in more complex tax planning advice, which few local firms undertake.

Chairman John Andrews shares Onoufriou's view of the market '“ in particular that the more difficult work will not go to Tesco. But he says law firms cannot ignore Tesco law and the capacity of strong retail brands with the capacity to compete with solicitors. In many ways, this competition is already here, according to Andrews, with legal services available over the internet. But the arrival of the big retailers on the legal scene will change how firms operate, charge for their services and communicate with clients.

John Calver, senior partner at 13-partner firm Laceys, is more sanguine but he acknowledges how the arrival of the big high street brands will change the market and clients' expectations.

'Being a lawyer is difficult,' he says. 'Tesco and the others don't want to do anything that's difficult. They want to get the work in, take a cut, and pass on the work to somebody else. But we're going to have to address this. We'll have to be meaner, leaner and quicker.'

Tesco law is not just a concern for smaller firms, larger practices are also paying attention. At Coffin Mew, for instance, chief executive Vincent Denham says firms will have to be more efficient and be prepared to accept to work to thinner margins. For the 27-partner firm, this is also likely to require a move up the scale from a £12m to a £20m annual turnover.

Experience of the volume providers, however, provides a measure of perspective. Laceys' John Calver says people who have used conveyancing factories usually don't go back to them because of the poor customer experience. Likewise Jeremy Allin, Lester Aldridge's chairman, says quality of service at these organisations is likely to be very low, with little continuity and poor client responsiveness.

Will you marry me

Confidence in what the profession can deliver, however, is only one side of the situation. The imminence of the Clementi deadline, the impact of the recession and this year's dramatic rise in professional indemnity premiums are threatening to shake firms out the market, possibly leading to a decline in legal capacity in the region, according to Steele Raymond's John Andrews.

Against this backdrop, merging is becoming a compelling proposition. Andrews says his own firm is openly looking to merge and is thinking of possible partners.

Over at Laceys, John Calver says that there will probably always be new small firms bubbling up '“ either because individuals cannot find a partnership elsewhere or aren't interested in joining large organisations '“ but that the trend is for bigger firms, 'because you can grow more quickly and make economies of scale'.

But Calver warns of the dangers of growing too quickly through mergers. 'You have to be careful not to outgrow your hinterland, or you could implode if there is not enough work locally,' he says. Laceys' history includes small mergers but in recent years it has been more difficult to find the right match for the 13-partner firm.

Eric Robinson has also considered merging but, according to Geoffrey Onoufriou, the six-partner firm's strong presence on the high street is viewed with some reservation by commercial firms, 'and smaller firms are inhibited by our size'.

Things are unlikely to be any easier at the next level up. Coffin Mew's plans to grow its turnover from £12m this year to £20m in the next few years may have to involve a merger or acquisition. Meanwhile, Paris Smith, the Southampton-based 28-partner firm is also looking for a suitable bride.

Like all firms keen to tie the knot, Paris Smith is looking for one that would complement it in terms of culture, including the firm's collegiate approach to management. 'But it's very difficult,' says senior partner Nick Vaughan. 'A merger with one firm may be good for the private client department but not so good for the commercial department, or vice-versa.'

The big question though, is whether the purpose of a merger is mainly one of survival '“ achieving economies of scale to compete with other local firms and the likes of Tesco '“ or whether it is part of a bigger plan to take a local firm to regional or national level.

John Calver puts it neatly: 'If you grow too much you have a different agenda: do you become a regional firm?' For Paris Smith's the answer is clear. 'We would be interested in someone with a similar investment policy and looking to expand as a large regional centre, probably towards the Thames Valley,' says Nick Vaughan.

Such moves would propel Paris Smith, Coffin Mew and others currently in the 20-30 partner bracket into the same league as Lester Aldridge, a firm already playing the regional and even national game in some areas, or Foot Anstey further west.

Bring in the non-lawyers

But other structural changes could be afoot as law firms are also keen to explore the much-vaunted opportunities of the Legal Services Act.

Six-partner firm Eric Robinson is keen to consider how it might come together with other professionals. Accountants, maybe? Like all other firms around Britain, their conundrum will be whether a merger with a firm of accountants risks cutting off the firm from other referrers.

The option is also firmly on the radar at Laceys. 'I can see reasons why one might link up with accountants or surveyors '“ including making them partners in the firm,' says John Calver, but, similarly, 'how broad is our reliance on work from certain referrers would be a determining issue.'

Meanwhile, at Lester Aldridge, while there are no plans for opening the firm to non-solicitors, Jeremy Allin says 'there is always room for imaginative solutions to allow particular specialisms to be developed, where we can set up models to provide core services for a particular industry sector'.

A specialist in the care sector, Allin himself already brings in consultants on a project basis, as do his colleagues in the planning department. 'There may be merit in putting it under one roof and selling it as a complete package to the client,' he says.

External investment on the agenda

This is how far Allin suggests his firm will go down the Clementi route, with no intention to open the firm to external investors at this stage. Not only is he doubtful that a firm like his would be interesting to private equity, he also reckons that, from the firm's perspective, there will be other ways of funding growth or projects that don't rely on external investment.

Back at Paris Smith, Nick Vaughan says the firm is open to the idea, though similarly not convinced it would necessarily suit either the firm or the investors.

'The advantage is that you have a broader base from which to invest further, but a legal practice is a collection of individuals, each with their own presence and reputation in their areas of expertise,' he says. 'The problem for an external investor is how you capitalise on that, because it is not just legal know how but also market knowledge.'

Generally there isn't as much despondency about external investors as there once was. The problem for firms is that the current models do not readily lend themselves to external investment. But lawyers like Allin accept that it could make sense for certain types of work, such as personal injury. And personal injury is precisely the area that Moore Blatch, the Southampton-based 20-partner firm, has identified as one that is ripe for private equity. In May 2008, Moore Blatch split out its personal injury and clinical negligence department into a separate LLP '“ Moore Blatch Resolve. The rest of the firm continues to offer the full range of private client and commercial services that have made its reputation.

'The firm's PI department was only set up in 2000 but has been generating significant income,' says managing partner David Thompson. 'If we want to grow it, it needs funding on a larger scale, especially if we want to compete with the large service providers that will come in under Clementi. We decided to hive it off as a separate business with its own funding line, rather than leave it in the current firm where it would compete with other departments for funding.'

A sign that it is clear about its intention to make full use of the liberalisation of the legal services market, Moore Blatch has also appointed a non-solicitor as partner '“ accountant and finance director John Davies '“ making the firm one of 60 or so, out of the 109 in Britain that have moved to LDP status, to have a non-lawyer partner (see this issue, page 2).

For the time being though, the priority is on consolidating positions and securing the medium term ground before Clementi kicks off next year. The good news is that after a few years in the doldrums firms on the south coast are recruiting again. Many are keeping their trainees on and taking on their usual contingent. The problem, as Paris Smith's Nick Vaughan said, is a cultural one: for too many prospective lawyers, private client work is not regarded as very sexy, which results in a shortage of talent. And that's a shame, because this is where all the good work is at the moment and for the foreseeable future.