Stuck in the middle

Mid-tier firms are no longer vying to be mega-firms, and are instead sitting happy on middle ground

Lawyers trade in definitions. They also like to apply them to their own profession. Just as the accountants have their 'Big Four', the terms 'top tier', 'first tier', 'second tier', 'mid-tier' and 'boutique' are an accepted part of the industry vernacular - a catchy way to describe the traditional segmentation of the market. 

As market conditions change, however, definitions need to be revisited. While 'mid-tier' has shades of 'middle-of-the-road', it generally refers to firms of a particular size - ranging anywhere from 20 to 100 or more partners. There is some debate as to the overlap between second and mid-tier practices, but the firms that adopt the latter mantle willingly accept where they sit in the scheme of things. And they are, in the main, happy about it.

For some years, predictions on the future of Australia's legal market have centred on a drift towards 'mega firms', where a few large practices will dominate, and so-called boutique firms with niche specialisations. If such predictions are realised, they will most certainly sound the death knell for traditional mid-tier practices. But while consultants, such as McKinsey, have suggested (in a 2001 report) that "all but the world's largest law firms are in peril", there is evidence that not only are larger firms losing clients to their less top-heavy peers, but also that many smaller firms are punching well above their weight. The recent Legal Beacon survey of legal services buyers around the country backs this up, revealing that when it comes to caring about clients, the middle is not a bad position in which to be.

"I'm pleased you're using the term 'mid-tier' and not 'second tier'," says Brett Heading, a partner at McCullough Robertson in Brisbane. "We've never liked the term 'second tier'. The largest 'Queensland only' firm, and about the third largest in the state, McCulloughs has gained a solid reputation through work for clients that include some of Queensland's biggest buyers of legal services. Heading dismisses talk that so-called 'mid-tier' firms such as his are destined for the scrapheap. "I've been hearing that for the last 12 years - that we were doomed because we were a large, independent firm in a state," he says. "But it hasn't happened. What it comes down to is that we've got some really energetic, outstanding lawyers. And as long as you have [them], you'll survive."

Stephen Purcell, managing partner of long-established Henry Davis York in Sydney, attributes the firm's strong growth over the past five years to a "pretty simple business model" of "not trying to be things that we're not". Purcell concedes that the days of the full-service, mid-sized practice are numbered. "That's just not a point of differentiation, because you're just a 'mini-me' of a national firm," he says. But while HDY may be smaller in size,  it more than holds its own in the market. "Certainly in terms of our firm, I do not regard it as of second tier quality in any way, shape or form," says Purcell.

"We have excellent lawyers here. A lot of our lawyers are from the tier-one firms; they have a few years there and then they join us.

And we have a pretty much blue-chip client base. Our client base would stack up very well against the really big firms." That client base includes financial services heavyweights such as Westpac, Commonwealth Bank, St George and BankWest, reflecting the firm's banking and finance focus. Other clients include Woolworths, Perpetual, the 'Big Four' accounting firms, and major insurers. "There's plenty of opportunities to get more work, and probably at the expense of the larger firms."

Chris Arnold, chief executive of Melbourne-based Abbott Stillman & Wilson, says competition for work has led some of the firm's bigger competitors to aggressively undercut on fees. His firm would rather focus on relationships and service. "We've tendered for some fairly large property work, and we've seen one or two of the top-tier firms there savagely cutting rates - in one case, under-cutting us just in order to get the work," he says. "If they've got resources that aren't busy or they're absolutely desperate to get the work, that's fine. But to me, discounting ... is not the way to go."

Regardless of size, sustaining a profitable practice in the current market is still tough. Dibbs Barker Gosling CEO Paul Gregory says firms most likely to feel the squeeze are those that are neither boutique nor have the depth of practice clients increasingly require. "There'll continue to be pressure on firms that are not of critical mass in the city," he says. "I'd be concerned if I was a partner in a 10-partner or 15-partner firm - they're a little bit in no man's land."

What it means to be mid-tier
Gregory is no stranger to the mid-tier, having joined Dibbs with 28 years at Abbott Tout under his belt. He says being a "mid- or second-tier" firm is "where we [Dibbs] want to position ourselves anyway". "It is difficult to provide that full service, no doubt. That was one of the reasons for the merger," says Gregory, referring to the 1 January 2001 union between Dibbs Crowther & Osborne and Barker Gosling. "In the first year, we employed 40 new lawyers. One of the reasons for the merger is that we knew our size was not attractive to young lawyers; we were not seen as progressive; we were struggling to retain [them]." The firm now has around 58 partners and more than 300 staff across offices in Sydney, Melbourne, Canberra, Perth and Brisbane. Gregory says the firm is "actively pursuing" full financial integration of all offices."The imperatives are to continue to attract and retain good people," he says. "To continue to take opportunities for lateral acquisitions when they come along."

Anthony d'Arbon, CEO of Acuiti Legal, says the constant flux in the market due to economic and political factors dictates a flexible business strategy. "The market now will be nothing similar in six months time - that's the only guarantee there'll be," he says. "If we're acting a certain way now and we don't make adjustments for anything that happens in the future, well, we're silly. That's a good thing about the firm in that it does constantly look at itself - what we're doing for our clients, what our clients are asking of us and whether we have the resources to service them."

The product of the split between the Sydney and Melbourne partnerships of Middletons Moore & Bevin in November 2001, Acuiti Legal embarked on an aggressive lateral hiring strategy with mixed success. But dispute resolution partner Erin Devery says any departures are just part of the general ebb and flow of legal practice. "We took on the industry focus strategy and we're continuing to develop that. Some people, for their own reasons, decide a particular firm's not for them and they want to explore other opportunities. That's fine, great for them."

Devery says while re-branding as Acuiti was a "brave step", it was one that clients accepted. "Client reaction was really very positive & Obviously, it was initially a bit radical, and some more conservative clients were perhaps maybe initially not completely comfortable with it," she says. Adds d'Arbon: "But no client was lost."

Despite talk of a mid-tier squeeze, d'Arbon - who has also worked at Blake Dawson Waldron and Tress Cocks & Maddox - describes Acuiti's profit targets as "on track". "I don't know if anyone else is feeling pressure, but we had a budget that was met. No partners are leaving."

Paul Gregory says Dibbs Barker Gosling experienced a 15% growth in fees last financial year. "It's exceeded our expectations," he says. McCullough Robertson, meanwhile, claims to be on par with its major competitors in the profit-per-partner stakes. Says Heading: "We compete favourably from the information that we have."

Not another mega-firm
John Chisholm, the CEO of Middletons in Melbourne, says the firm has no desire to be "another mega-firm". "It is an already fairly crowded market at that big end of town," he says. "For Middletons to go into growth for growth's sake or to merge with similar-sized or larger firms - I don't see that's a value proposition for anyone."  As a medium-sized firm, Middletons is also better placed to take advantage of opportunities as they arise. "It's not a Queen Mary or something that you have to slowly turn around," says Chisholm. "Hopefully, we're big enough to have the capacity and the skills to [handle] most matters."

He describes the firm's "de-federation" from Acuiti as "probably the best thing we have ever done". "I don't want to dredge up old reasons. At the time, this partnership felt - and still feels - that financial integration was absolutely critical to take the firm where it wants to be in the future." And that, says Chisholm, is national. The firm has a small office in Sydney, with three permanently based partners, which it is keen to expand. "We need to be larger in Sydney, but not growth for growth's sake.

"In the two years since  [the split] we could have done another federation - [we've had] several opportunities - or even a merger. But we are happy with what we're doing at the moment."

Abbott Stillman & Wilson is another Melbourne firm with Sydney aspirations. Chris Arnold says the firm is looking at its "strategic options" in Sydney. "Our client bases are increasingly ones which operate across states so, if you're looking to provide a comprehensive service, you need to have the ability in other states [to do that]." But expanding into other markets should be approached with caution, as the collapse of Cornwall Stodart's union with Marshall Marks Kennedy illustrates. "You've really got to be very careful in selecting who you align yourself with. I don't think it's a very smart move to actually set up your own firm in another state."

National presence
Dibbs Barker Gosling's Gregory sees a national presence as "very important". Although Dibbs' Brisbane office is a "strong, viable practice", the firm needs to grow in Melbourne. "It's hard to find a firm in Melbourne that fits."

Purcell says HDY has no plans to open offices in other major capital cities in a bid to establish a national presence - except, perhaps, in Melbourne. "We just don't see it as suiting us to do that, given who we are and our client base and where we're located," he says. "Sydney is the financial hub of Australia. So, given our quite clear focus on financial institutions, I think we're in the right city." But he acknowledges the squeeze potential in being a state-only firm. "There's always the possibility that some clients will say 'unless you are national, you won't get our work'."

Carter Newell in Brisbane is another firm that is happy to remain State-based. CEO Peter Ellender, who joined the firm this year, says its lawyers are more than able to service clients around the country from one office. "It's really providing a value for money service that enables us to do that," he says. "We do have to travel more than some of the other firms to be with clients when needed. But we've also set up our own infrastructure to assist there to some degree, and working remotely is not an impediment these days."

Changing market
Mid-tier firms are also benefiting from a noticeable trend of lawyers opting for smaller practices in lieu of big-firm life. "I think there's always people looking to leave those larger firms," says Purcell. "They are very large businesses now, and a lot of partners feel as if they don't have a real say in the business." Some have also witnessed a change in their firm's culture as result of partners being 'bolted on'.
"One thing that comes through very strongly in the client surveys we've done is that we're regarded as very accessible at the partner level," he says. "And I think that's one thing that perhaps some of the larger firms don't get as big 'raps' on."

Arnold says that in the mid-tier is where Abbott Stillman & Wilson wants to remain. "We have no intention of growing to be a first-tier firm," he says. "We're never going to be a BHP legal services provider &But over the last couple of years, we've actually been taking clients off some of the bigger firms, because we've been able to offer them the quality of work that they expect, but at mid-tier rates and with the sort of relationship they expect. They're better looked after." The firm recently won over a major client with this strategy. "Over a 12-month period, we've converted them from just starting to do some IT work, [to] now doing their M&A work," he says. "Certainly I think it's possible - just providing a consistent quality of service, and just keeping in their face."

According to Purcell, there is always room for a high-quality firm regardless of size. "Gilbert + Tobin and us are both showing you can be a good second-tier size firm but have excellent quality people and a quality client base," he says.

"And we are really competitive against the really big firms - not all of the work, but for most of the work they do, we're at their heels all the time."

Major mid-tier deals

Abbott Stillman & Wilson
RACV's sale of residual properties
The firm recently represented RACV in connection with the sale of its residual properties, including: the club headquarters, 123 Queen Street (15 floors with office and accommodation); the RACV offices, 422 Little Collins Street (eight floors); Normandy Chambers, 430 Little Collins Street (historical building).

Acuiti Legal
Carter Holt Harvey's A$330m+ acquisition of CSR Timber business
Acuiti recently represented Carter Holt Harvey in its A$330m+ acquisition of the CSR Timber Panels business and the Oberon Sawmill. Other recent major transactions include: acting for the private investor consortium in its A$121m acquisition of 9 Castlereagh Street in Sydney's CBD; for Hochtief as an industry participant in the successful consortium for the A$5.6bn purchase of Sydney Airport; the Transfield-led consortium on the acquisition of Yarra Trams as part of the privatisation of Melbourne Public Transport.

Carter Newell
Alpine MDF A$8m share sale
Partner Bernard Avery led a team in representing the Singapore-based vendors in connection with the A$8m sale of 100% of the shares in Dominance Industries Pty Limited (now Alpine MDF Industries Pty Limited) to Sumitomo Forestry Company Limited of Japan. The company owns and operates a modern MDF manufacturing plant in Wangaratta, North Eastern Victoria. Carter Newell handled all due diligence preparation work, the negotiation and drafting of the various agreements, related approvals and contractual matters and has had primary responsibility for all legal work for the company since its inception in 1994.

Henry Davis York
Colonial's A$244.9m acquisition of Commercial Tower developments
The firm recently represented Colonial First State Property Limited in its acquisition of a 50% interest in the Commercial Tower developments at Freshwater Place, Melbourne and King Street Wharf, Sydney, with a combined cost on completion (including acquisition costs) of $244.9m. Both properties were acquired through a complex corporate and trust structure. HDY undertook the due diligence required by Colonial on both properties and negotiated numerous transaction documents, including rental support deeds, co-owners' agreements, development agreements and implementation deeds.

McCullough Robertson
Moorvale Coal Project
Partners Damien Clarke (business & revenue), Dominic McGann (projects & utilities) and senior associates Michael Rochester (construction) and Janelle Moody (business & revenue) have handled all legal work for the greenfield Moorvale Coal Project from inception. The firm acted for ASX-listed Macarthur Coal Limited, which has a 77% in the project, with other JV participants include high-profile Japanese steel mills, Japanese trading companies, the Chinese government, and another McCulloughs client, AMCI Australia Pty Ltd. Construction of the mine and associated facilities is slated to take place over nine months, with railing coal to begin in late 2003. The mine is expected to produce up to 21.4m tonnes of coal over an eight-year period.

Mid-tier case study: Sparkes predicts slower growth

Last financial year, Sparke Helmore was named in a leading business survey as one of Australia's fastest growing firms.

Not only has it doubled in size in the last three years, the firm has also experienced average year-on-year growth of 19% in the past decade. Now with offices around Australia, it is fast shedding the 'Newcastle firm' tag with which some have labelled it - and is developing a new, national skin.

"We don't set out with a strategy for [this kind of] growth," says national managing partner Gary Flowers. "It's been driven on the back of specialisation in key markets & by focus." That focus, initially on government and insurance related work, has broadened to include workplace relations, construction, resources, technology and property.

It has not all gone according to plan. Flowers admits the collapse of HIH, a major client, in 2001 "took A$3m off the bottom-line". But the firm managed a swift recovery. "In that year, we pretty much still grew by 30%," he says. Insurance work now accounts for around 45% of Sparke Helmore's revenue base, down from around 55% a few years ago.

Alistair Little, chairman of partners at Tress Cocks & Maddox in Sydney, which was also hit hard by HIH, says it remains to be seen how Sparke Helmore's strategy will work for it in the future. "&I don't know. I know they have been targeting the top-end, they have been trying to get more commercial and corporate 'oomph' and to build on some of the contacts they have with government. I don't know how well they have succeeded in that regard."

But the firm is particularly strong in routine insurance work, says Little - although the market for this is likely to contract. "They've managed to do the work cheaper, and turn it around more reliably than other firms that have tried to do it that way." Tress Cocks is another firm to have expanded beyond its home market, opening an office in Melbourne in 1992 (merging with Barker Gosling in 2000) and in Brisbane in 1997, targeting health-related work.

Flowers attributes Sparke Helmore's continued growth to a combination of regional and national expansion, with the opening of offices in Adelaide, Brisbane, Perth, Canberra and Muswellbrook in the past three years to add to a Newcastle, Sydney and Melbourne presence.

In Perth - a market Flowers describes as in a "state of flux" - the firm is taking a "softly, softly" approach. Upon opening an office there last June, it picked up a number of workplace relations clients - and lawyers, including some from a prominent firm that has experienced a wave of partner departures. Then in November last year, the firm set up shop in Canberra, picking up partners Michael Will and Robert Walsh and their teams when Freehills closed its Canberra office last September. On the back of a strong government client base, it has won a number of appointments to key Commonwealth government panels.

But Flowers does not expect the current rate of expansion to continue. While on track for around 20% growth this year, he predicts a more modest 10% to 12% in 2004. "You'd be a brave man to sit here and say we're going to continue to double in size every three years," he says. "I'd expect a levelling out & We'll continue to keep evolving, although we want to build on the basis of the capabilities we have." The firm has largely focused on organic growth, but much like any mid-tier firm is not averse to a merger approach. "We never say never & The big thing for us is cultural fit."

The firm is planning to re-brand within the next financial year. "It's really aimed at getting a feel for what clients perceive about us and addressing that & It's not simply around a change at large. It's about us understanding what the perception of Sparke Helmore is in the marketplace."