Crisis could be existential for some of Scotland’s professional services firms
The humbling of Scotland’s once proud and buccaneering banking sector, coupled with the near certainty of a recession in Scotland and the UK as a whole, spell hard times ahead for many in the country’s professional services sector.
Before the credit bubble burst, Scotland’s battalions of lawyers and accountants had never had it so good. Work was flowing in on deals involving the Royal Bank of Scotland and HBOS as the two banks carved a path into global capital markets.
Even after the collapse of Northern Rock in September last year, Scottish dealmakers hoped that small and mid-market transactions would continue, even though leveraged buy-out markets were seizing up elsewhere.
However in April, Alistair Darling, the chancellor, reduced the attractiveness of private company sales when he harmonised UK capital gains tax at 18 per cent, and reality struck. Professional services firms had been so busy, few had noticed the financial tsunami that was bearing down on them.
Now that deal flow has collapsed and both of Scotland’s leading banks have been part-nationalised, many of the country’s professional services firms are wondering where they go from here.
Apart from in Aberdeen’s booming oil and gas sector, which has been sustained by the high oil price, and with the exception of a recent £570m US deal by Clyde Blowers, corporate finance activity has all but dried up. Sandy Manson, chief executive of Johnston Carmichael, the independent accountancy firm, says: “There are certainly leaner times ahead for firms focused on high level M&A.”
Other factors putting the brakes on growth for professional services firms include the shrinkage of the country’s quoted company base. In recent times ScottishPower, Scottish & Newcastle and Abbot Group have fallen into overseas hands, while Ardana, the Edinburgh-based biosciences company, has gone into administration.
Michael Polson, head of corporate at law firm Dundas & Wilson, expects more Scottish plcs to go the same way. “What concerns me is where are the replacements going to come from? There don’t seem to be enough dynamic and aggressive companies along the lines of Stagecoach and Wiseman Dairies,” he says.
Frank Blin, Scottish managing partner of PwC, argues that as long as such companies’ new owners practice “subsidiarity”, then it need not be doom and gloom. He describes how Scotland can even benefit where acquired businesses become regional hubs for particular specialisms.
Mr Blin cites Iberdrola, the Spanish energy company, which he believes could transform its ScottishPower subsidiary in Glasgow into a hub for renewable energy. “These sorts of hubs will still need risk management and assurance advice,” he says.
A third issue facing professional services firms is that public private partnerships — a highly profitable business strand from 1999 onwards — have all but dried up as a result of the SNP government’s antipathy for the funding method and the delayed introduction of its replacement, the Scottish Futures Trust.
“The fact of the matter is that Scotland is over-lawyered,” says one financial source who preferred to remain anonymous. “There’s just about enough work to go around in the boom times. But how they’re going to cope with this bust I don’t know.”
Professional services firms that have had the misfortune to focus on hard hit sectors such as commercial and residential property are going to struggle the most. Generalist firms will find it easier to ride out the downturn, transferring resources into areas that are buoyed up by downturns – such as corporate recovery, litigation, dispute resolution, wealth management and private client work.
Scotland’s largest law firm, Dundas & Wilson, retained a strong corporate recovery practice throughout the bubble years. Its London-based team has recently been advising “Big Four” accountancy firms on the insolvencies of businesses including the retailer Floors 2 Go.
“There are clear indications that some sectors are feeling very threatened,” says Ian Cuthbertson, a partner at D&W. “These include those that are vulnerable to changes in consumer spending, or those that financially over-extended themselves.”
McGrigors, another law firm, has strengthened its restructuring practice by appointing Mark Parkhouse, former head of restructuring and bankruptcy at Reed Smith, and is focusing on regeneration consultancy. Alison Newton, McGrigors’ head of regeneration, says: “We work hard to give our clients innovative legal solutions that will make their regeneration plans quickly come to life.”
Mr Manson at Johnston Carmichael predicts further consolidation among smaller and medium-sized firms in Scotland, especially among those that lack a succession plan.
“We’re also going to see more alliances between chartered accountancy firms and other providers of services, such as financial services or law, in order to provide a one-stop shop for clients,” he adds. This will accelerate once the Scottish government’s plans to allow law firms to form multi-disciplinary partnerships become reality early next decade.
PwC has set itself a “stretch” target of 6 per cent growth on its £100m turnover in Scotland. Mr Blin believes this is going to be possible because of what he describes as “a flight to quality.
“Clients are increasingly going to need advisers who have been there and done it. And ones that are capable of bringing real insights,” he says. However he acknowledges that the next couple of years are going to be “very hard and tough both for us and our clients”.
This article on Scotland’s professional services sector was published in the FT’s Doing Business in Scotland supplement, published with the FT on 31 October, 2008.