The turbulent market for mid-tier practices propels some firms to glory while punishing the flat-footed and unlucky. Alex Aldridge tells the tales of success and woe from firms outside of the UK top 50

Sitting just off junction nine of the M27 between Southampton and Portsmouth is the unglamorous Segensworth business park, where for the last two years Blake Lapthorn – the 60th largest law firm in the UK – has paid £450,000 to rent vacant office space.

When the firm moved into New Kings Court on the outskirts of Southampton as part of a consolidation following a series of mergers, managing partner Walter Cha thought he would be able to sublet the space. But unsurprisingly, he hadn't counted on a global banking crisis and the subsequent recession. It was costs such as these that saw Blake Lapthorn's profit per equity partner (PEP) fall to just £65,000 in its 2008-09 year. Although this figure has since risen to £116,000, it is still well short of the UK top 51-75 law firm peer group average of £276,000.

Eighty miles up the road at the gleaming new City of London office of Bristol-based TLT, the scene is very different. "It's the kind of deal you could never have got when the market was stronger," says the firm's managing partner, David Pester, gesturing proudly towards a wall of floor-to-ceiling windows, beyond which looms the Gherkin and St Paul's Cathedral. Unlike Blake Lapthorn, TLT has enjoyed a robust year, with turnover rising 5.1% to £41m and PEP rebounding to a new high of £285,000.

• Case study: TLT

Elsewhere, around the disparate parts of the country in which firms in this 51-75 bracket are based, there are similar stories of contrasting fortunes. Like Blake Lapthorn, northern firm Cobbetts is paying rent on empty office space it acquired around the height of the market when subletting wasn't an issue. And recent further job cuts at Newcastle-based Dickinson Dees, as well as Bristol firm Clarke Willmott's scrapping of its 2012 trainee recruitment programme, show that it is not just the firms caught out by the property market that are still feeling the pain.

On the other hand, the mood is relatively buoyant at firms like City outfit Speechly Bircham, Midlands firm HBJ Gateley Wareing and the Thames Valley's Morgan Cole – whose conservative approach saw them go into the downturn in relative strength, placing them in a position to make recent shrewd acquisitions.

Such are the joys and trials of operating in this section of the market which, in contrast to the stable pecking order of the top 50, is a far more volatile place in which laggards and the unlucky can suffer hugely, while the bold and fortunate can manage periods of explosive growth.

Such forces, and the current gloomy business conditions, have led many to conclude that this fragmented camp is overdue a wave of consolidation that will allow the stronger firms to prosper and see the weaker firms either swallowed up, broken up or whittled back down to niche or purely regional players.

"While no doubt the majority of firms in the 51-75 group will buck the trend and grow, within three years I expect 35% of the firms in this category to have merged – for defensive reasons," says Barclays Corporate's managing director and head of professional services, Jane Galvin (pictured).

Growing too fast

It is easy to forget how recently Halliwells embodied the ambitious spirit that many firms with hopes of entering the top 50 would have aspired to. Having grown from a Manchester upstart to become the UK's 29th largest law firm at its peak in 2007, the expansive firm last year became the biggest-ever collapse in the UK legal profession.

Barely six months since Halliwells' demise and the risky decisions that ultimately undid the firm, its fate looks in many ways to be a one-off. But the way in which the Manchester giant overstretched itself as it sought to forge a national platform is recalled in the stories of several firms in the 51-75 camp.

Cobbetts and Blake Lapthorn, in particular, embraced the prevailing mood of expansion, winning plaudits of their own in the process. Both embarked on a series of mergers, which saw their respective revenues rise by around a third between 2004 and 2008. The Manchester-based Cobbetts expanded into the Midlands and Leeds through tie-ups with Lee Crowder and planning boutique Wilbraham & Co, before opening up in London in early 2007 with the hire of two partners from Wedlake Bell. South coast outfit Blake Lapthorn, meanwhile, took over Portsmouth's Sherwin Oliver and Oxford practice Linnells before in 2006 merging with Hampshire-based White & Bowker and then with 20-partner City practice Tarlo Lyons.

Some fast-expanding firms, such as Pannone (where revenue increased from £29.5m in 2004 to £50.8m in 2008), achieved most of their growth organically by ratcheting up trainee numbers and bringing in a host of lateral hires. Pannone housed them by knocking through the two buildings adjoining its office on Manchester's Deansgate. The firm's managing partner, Emma Holt – head of clinical negligence at the time – remembers "the sense of buoyancy and being on an upward spiral", adding: "How much easier it was back then, with clients more or less unconditionally accepting billable hour fee structures."

But the costs that many fast-growing firms were building up through duplicated roles and new offices would prove unsustainable once the market turned. "I remember one of my partners saying to me that we were earning too much and that it was getting embarrassing," recalls one top 51-75 managing partner. "We were all realising that the way we were operating had got to the point that it would result in serious problems if the market were to normalise."

With the credit crunch of 2007 and a banking crisis the following year, revenues began to dive. Many firms outside the top 50, which have historically been more reliant on the badly-hit property market, were particularly affected. Cobbetts, for example, for the 2008-09 financial year saw revenues fall by no less than 21% to £47.4m. Last January, in order to ward off a partner cash call, the firm moved to renegotiate a bank loan facility with Royal Bank of Scotland (RBS), which comprises a £2.5m overdraft and a £6.5m term loan secured by a debenture over the assets of its wholly-owned debt recovery subsidiary Incasso.

Cobbetts has also conducted three separate redundancy rounds, with 69 jobs going across the firm. Other firms in this bracket to cut particularly large numbers of staff between 2008-10 include Blake Lapthorn (53), Bevan Brittan (76) and Dickinson Dees (154), where a fourth redundancy round was announced in December, with two fee earners laid off from its seven-member banking team.

Unsurprisingly given the travails of RBS and HBOS, which traditionally dominated the Scottish market, firms north of the border have been particularly hard hit by the financial crisis. Revenue at Shepherd and Wedderburn dropped from £42.6m in 2007-08 to £35.3m last year, while the situation was even worse at Maclay Murray & Spens, with revenue for the same period falling from £61.1m to £52.3m. Brodies is the only Scottish firm in the 51-75 band to have bucked this trend, although after three years of consecutive growth between 2006-09, the firm's revenue fell last year by 8.4% to £35.8m.

Firms in the heavily real estate-oriented northern England market also suffered disproportionately, with Newcastle giant Dickinson Dees and Leeds' Walker Morris recording significant revenue falls between 2007 and 2008 which continued last year – by 5.2% and 3.6% respectively. It has been a challenging period for the two firms, which have historically been among the most admired and successful operating outside London and are both formerly top 50 practices. Dickinson Dees in particular has seen its status, which would once have been unchallenged in its northeast heartland, come under intense pressure.

"The last five years have been a game of two halves for us," says Dickinson Dees managing partner Jonathan Blair. "The first was a highly buoyant market which we capitalised on; in the second there has obviously been less work around – although we haven't seen client attrition."

Of course, not all top 51-75 firms have experienced this kind of rollercoaster ride. "At the time there were plenty of people pushing for us to behave more aggressively, but I've always taken a long view of the market," says HBJ Gateley senior partner Michael Ward. Derided by some at the time for failing to seize the moment, the outfits that followed a more conservative approach during the boom years now find themselves in a strong position.

Momentum and how to get it

One thing that does to some extent unite the successes and failures amid this band of law firms is, for want of a better term, momentum. In this volatile section of the market, in which firms risk hitting the 'ceiling' of the hard-to-challenge firms above while lower-cost rivals attack from below, it is possible to ride the wave of booming practice groups or well-timed investment decisions. The flip side is that they are equally vulnerable to these forces when they push against them.

In his book, The Momentum Effect, INSEAD business school professor JC Larreche argues that momentum is what differentiates a successful organisation from a struggling one. "Momentum accumulates energy from its own success," Larreche writes, "and provides ever-increasing acceleration for firms smart enough to build and harness it. These firms go from success to success, buoyed by a self-sustaining growth which sweeps all before them with disconcerting ease." The recent successes of the better-performing top 51-75 UK law firms are obviously of a lower-key nature than those enjoyed by Apple, Nintendo and the other multinational companies profiled by Larreche, but the principle of solid fundamentals that build momentum applies.

Speechly Bircham, HBJ Gateley and Morgan Cole are standout examples. While many firms in the top 51-75 bracket were still focusing on restructurings and redundancy programmes, these practices acquired, respectively, West End boutique Campbell Hooper, Halliwells' Manchester commercial business and Bristol-based insurance boutique CIP Solicitors. The result has been major revenue rises at all these firms. Last year, turnover at Speechly rose by 27.8% to £58.4m, while HBJ Gateley and Morgan Cole saw increases of 9.3% and 7.3%.

• Case study: Speechly Bircham
  

Speechly managing partner Michael Lingens gives an insight into the sense of energy these firms are benefiting from. "Although we were forced to make a number of job cuts in the wake of the financial crisis [the firm axed eight fee earners from its property team], we went into it in fundamentally good shape," he says. "Then the Campbell Hooper acquisition came and changed the mindset. It was very good for us psychologically. It put us in growth mode." The next step, adds Lingens, will be "a number of foreign office openings". These are planned for 2012 in as yet unspecified destinations, although it is believed the firm is particularly interested in the Middle East.

While HBJ Gateley chief Ward (pictured) insists a period of consolidation is now on the cards, Morgan Cole managing partner Elizabeth Carr is, like Lingens, keen to expand further: "Our strategy of retaining a balanced portfolio wasn't regarded as fashionable, but it is working for us. As a result now there are some great opportunities to expand further." (It should be noted that Morgan Cole's self-enforced period of discipline came after it suffered a series of setbacks a decade ago as it struggled to cope with a period of expansion and a slowing economy.)

But it is not just the 51-75 firms that have made acquisitions that are demonstrating momentum. At private client-focused Farrer & Co, where revenue grew by 5.2% last year to reach £42.6m, partner numbers are up by 20% and staff headcount up by 18% since this time last year. "There are a lot of very good but unhappy people out there," says the firm's senior partner, James Furber, whose jovial tone suggests he is enjoying the fact that the old school approach Farrers adheres to – the firm is still best-known as the Queen's adviser – is back in fashion.

He puts much of this down to a disillusionment with the "middle manager culture" of many City law firms. Farrers' loyalty to a traditional partnership model, Furber adds, has been a key factor in enticing the likes of Keir Barrie, a private equity partner who joined from Osborne Clarke last year, and former Addleshaw Goddard head of construction Clive Lovatt.

• Case study: Farrer & Co

However, the recent robust performance by TLT illustrates that momentum is not the preserve of firms that benefited from conservatism during the boom years. The Bristol-based outfit was one of the fastest-growing firms of the last decade, more than doubling revenues from £17.5m in 2004 to £41m in 2008. Although this figure dropped slightly to £39m in 2009, the fall was far less than many of its rivals and swiftly recovered to the £41m mark for 2009-10.

Managing partner David Pester expects an even better performance this year on the back of a successful 12 months for the firm's recently expanded financial litigation team and a host a panel wins. "Momentum is attractive," says Pester, with the air of a man who believes he's on the cusp of something. He thinks the continuing "feelgood factor" at the firm played a major part in it attracting recruits of the calibre of David Pacey and Richard Clayton from Halliwells' now-defunct banking team, and private equity specialist Alistair Bird from Mayer Brown.

Pester also attributes a "freshness and air of engagement" among the firm's lawyers to its recent series of panel wins. These include places on the recently re-tendered Co-operative Group's commercial legal roster, Nationwide Building Society's commercial lending panel and RBS' City and regional litigation panels. With morale buoyed further by the move to 20 Gresham Street and last year's across-the-board pay increase, Pester is excited about the future: "I believe there are some huge opportunities out there for firms like us to win market share right now. I don't think we'll see a situation like this again for a long time."

Other firms gain momentum from exposure to busy practice areas. Firms with strong insurance and litigation practices like Weightmans have been aided by limited exposure to transactional work while insurance-driven Kennedys two years ago spectacularly broke into the top 50 and is now the 34th largest UK practice by revenue.

The problem with momentum, of course, is that it doesn't last, at least not on its own. Sustained success comes for firms that can consistently create their own momentum, or at least take advantage of opportunities. Without a coherent game plan, few firms in this band have managed to sustain success and achieve promotion to the top 50.

"That's the tricky thing about momentum: it is transitory. Without constant care, its power will prove fleeting," continues Larreche, citing Microsoft and Walmart as examples of companies that have struggled to recover since their momentum deserted them. Alan Hodgart, managing director at Huron Consulting Group, has no doubt that this rule will also apply to top 51-75 law firms: "A firm can get by on momentum for a while," he says. "But if there is no clear strategy, that upward trajectory can soon turn the other way."

Lessons from the magic circle

If the boom years were characterised by a sprawl into generalism as firms grew, the current squeezed market is all about achieving a tighter focus. "It doesn't work anymore to say that we do everything for everyone," says Michael Roch, co-founder of professional services consultancy Kerma Partners, summing up the prevailing sentiment. Although Roch accepts the undiluted full-service approach may continue to work for larger top 50 outfits, he argues that firms outside this group attempting to operate with such breadth will consistently find themselves overlooked in a period of subdued demand for legal services.

The model many top 51-75 firms are looking to as they seek to re-define themselves – the majority canvassed for this article have undergone some form of strategic review over the last three years – bears some resemblance to the super-sized boutique structure of the magic circle.

Over the last 20 years these elite firms have effectively become giant corporate finance boutiques – made up of a core of lawyers with high degrees of expertise in various niche aspects of finance law, around which a secondary offering in a broad range of corporate legal services is geared. While it may seem a stretch, there is a strong case for firms outside the top 50 to borrow from such City giants in eschewing the full-service model. "Magic circle firms say they are full service, but in reality they are just bloody good at finance and sell a range of products on the back of that," argues Hodgart.

Right now the firms in this bracket that most closely follow this model of building around a marquee practice are probably Farrers and Mishcon de Reya – both of which centre a fairly broad practice around the needs of their private clients. "We provide services to all types of super-powered private clients – from media and reputation management right through to acquisition advice," says Mishcons managing partner Kevin Gold (pictured).

Bevan Brittan and Lewis Silkin are also making a decent stab at this model. In doing so, southwest practice Bevan Brittan has re-organised around its traditional strengths in health and local government, while City firm Lewis Silkin is focusing on core areas of employment, media and property. Bevan Brittan chief executive Andrew Manning hopes this approach will mark the firm out from its rivals. "Most law firms spread themselves too thin," he says. "Our aim is to build real strength in particular areas."

There is a limit, though, to the extent that many 51-75 firms can adopt this strategy. Practices built around having a strong grip on particular regional areas – Cobbetts and Dickinson Dees, for example – obviously have a clear incentive to maintain a broad-church practice. One response to this tension between the desire to build practices with a national profile and the need for full-service regional practices has been to create a handful of 'calling card' niches.

Such examples include Cobbetts' raw materials group and Dickinson Dees' highly-regarded rail team. It remains a difficult balance to maintain, and there have been cases of allowing such niches to proliferate, dragging practices into a shapeless mass. Yet, if skilfully executed, it appears to offer a genuine option for firms looking to stand out in crowded market.

Other firms seek to explicitly make a virtue of their regional focus at the expense of rivals – hardly a revolutionary path, but one that has worked for a number of firms. Brodies is an example of a firm attempting such an approach, differentiating itself from rivals like Maclay Murray & Spens and Shepherd and Wedderburn by focusing exclusively on Scotland.

"Unlike our competitors, we have no interest in opening in London, or anywhere else outside Scotland," says the firm's managing partner, Bill Drummond. "We have more lawyers in Scotland than any other firm, and as a result we're especially visible to prominent companies in other jurisdictions that are doing business here." Brodies' commitment to this approach was illustrated by its decision last month to open up a third Scottish office in Aberdeen.

But focusing entirely on local markets – many of which look set to be hit by sustained cuts in public spending during this Parliament – comes with its own risks. For one, law firms' fortunes become strongly tied to the performance and development of the local economies, which can often prove as much a curse as a blessing.

There is little doubt that the traditional regional business centres like Leeds and Birmingham have been affected by the slow but remorseless drift of their banking and professional services community towards London. Arguably, Edinburgh has suffered a similar fate. This has put pressure on the top-tier local law firms that could once have counted on a steady diet of transactional work on their own doorsteps.

Conversely, the relative strength of Bristol and Manchester has helped to underpin the development of firms operating in those cities (Halliwells' collapse was largely due to excessive property costs, partner departures and a struggling London office rather than a distressed core practice in Manchester).

The desire to spread the risk of downturns in local economies is why most regional firms continue, to varying extents, to pitch the 'London work at regional prices' line – often, but not always, aided by a branch in the capital. Bristol firms have proved particularly successful at this approach, with burnt-out City lawyers seeking a change of pace proving susceptible to the southwest. "These days we think geography is less important," says Victor Tettmar, managing partner at Bristol-based Bond Pearce.

"With most of our lawyers based outside London, our lower cost base means we can provide better value than City firms, without any lowering of quality because of the high standard of our lawyers." As an example of the in-roads regional firms have made into what was once regarded as London work, Tettmar cites his firm's winning of a place on the recently re-tendered Royal Mail panel alongside Beachcroft, with CMS Cameron McKenna the only City outfit gaining a spot.

Part of the firms' strategy in winning this work is to emphasise their high-end credentials, with virtually all the managing partners surveyed keen to emphasis their commitment to "quality work".Probably for this reason, there is an ambivalence at some firms about moving into potentially profitable volume businesses, even with the implementation of the Legal Services Act looming in October. Those to pursue opportunities in the volume area include Pannone, which last year secured a deal to handle some of the volume work as part of Thames Water's tie-up with Berwin Leighton Paisner. "We see legal process work as a growth area for us," says managing partner Emma Holt.

And over the last 18 months several firms, including HBJ Gateley, Cobbetts and Weightmans, have established separately-branded volume-focused businesses, indicating a belief that such business could become important to this group in the years ahead. "Separately-branded entities could well be a pointer to the future," says Patrick Gaul, managing partner of Weightmans, which last year set up a separately-branded company known as Converge to handle pre-litigation claims matters.

• Case study: Weightmans

Where there has been a more imaginative approach from these firms is in experimenting with billing practices, suggesting that there is considerable truth to the cliche that such practices are more client-centric than larger firms. Legal Week Intelligence's 2010 Client Satisfaction Report, based on responses from more than 900 companies, found firms like Bond Pearce, Cobbetts and Farrers scored well above average for value/billing practices and alternative billing options.

When leadership really matters

If firms in this weight class operate a number of different models, there is little doubt that strong leadership is particularly important when competing in a volatile market. Of course, strong management can mean different things. For some successful firms, it is displayed in a cohesive partnership, solid operational grasp and financial discipline – a conservative but successful approach.

For others, it can be about being able to push the firm in new directions, rather than retreating to a comfort zone, and a willingness to pursue ambitious targets. But by wide agreement, in a commercial environment where firms can no longer count on easy growth, those with weak managers are at a major disadvantage.

Partly this is because in a crowded market, it remains a challenge to achieve a clear position and sense of differentiation for clients. But what is striking is how differently many of these individual managers come across. During interviews for this piece, several leaders stuck to broad generalities, giving little insight into their true intentions. Others, however, were notably open.

Perhaps buoyed by their firms' relatively strong recent performances, Farrers' Furber and Weightmans' Gaul were easygoing and unguarded. But there were also managing partners of firms currently faring well who came across as brutally realistic, gloomy even – such as HBJ Gateley's Ward – and managing partners of struggling firms who seemed remarkably upbeat.

Despite their firms' recent travails, Blake Lapthorn's Walter Cha and Cobbetts' Michael Shaw (pictured) both emanated resolute optimism; as did Shepherd and Wedderburn's Patick Andrews and Maclay Murray's Magnus Swanson. As far as clues to the future go, these may be the best we have to go on.

Given that it is in the DNA of mid-tier law firms to revert to conservatism, successful managing partners need to be particularly shrewd judges of character, good politicians and often be capable of prodding the partnership to move along when needed. (Succession is also a key issue as law firm leaders tend to carry out longer management terms than for larger practices.)

Past decisions, the economic weather, subsequent momentum and good ideas will all factor in the future of these firms. But as Blake Lapthorn finally hands over the keys to the empty Segensworth office and the novelty of the view from TLT's new City base begins to fade – while various similar scenarios play out across the other 51-75 firms – it is the 25 leaders who, above all else, will determine the fate of these firms.

The plain reality for those operating in this section of the market is that there is no magic bullet or secret formula for success. Ultimately, they have to be more disciplined, more client-focused, better-run and luckier than most top 50 law firms if they are to prosper. The size, stability, diversification and barriers to entry that larger firms enjoy mean they can coast along for years – if not thriving then certainly not dying.

For good or ill, this is not an option for these challengers, at least not if they aim to stay competitive and one day give those sleeping giants a reason to wake up. In the end, it is hard to argue with the down-to-earth analysis offered by HBJ Gateley's Ward, who comments: "In terms of differentiating ourselves, I don't believe the challenges we face are any different to those that existed 20 years ago. The key issue will continue to be the level of service we provide to clients. At the end of the day, quality wins out."

For more, see Life begins at 50 – you've got to be great to get a promotion.

• [asset_library_tag 2595,Click here for a three-year table of top 51-75 law firm results]