Is merger still a choice for law firms?
The first principle towards mergers of law firms is that it must be considered as a means to an end. Merger is a scheme which allows certain aims to be fulfilled. These aims can be linked to growth strategy, gaining markets’ shares, approaching other types of clientele, strengthening the firm, ensuring economic stability, attracting new lawyers with a specific profile, pursuing competition…
We set out below the economic advantages and disadvantages linked to a merger:
Advantages of merging
- Revenues created by firm A’s benefits compared with firm B’s clients
- Revenues created by firm B’s benefits compared with firm A’s clients
- Revenues created by new clients interested by a firm created by the merger
- Strengthening of firm A and B’s profitable clients
- Economies of scale with efficient IT systems, marketing and communication libraries, savings,…
- Communication opportunities created by the merger
Disadvantages
- Loss of revenues linked to conflicts of interest between clients A and B
- Collateral damage in human resources (loss of certain associates)
- Loss of referrals of files by other colleagues
- Time needed to create a new culture and working methods between two groups of people
- Direct costs of merging- consultants, update of logos, communication tools, website, stationery, client info…
Those who have taken part or experienced merging know that managing economic aspects is a key element in an alliance but it is not enough to ensure success. The notion of ‘risk management’ has to be applied to creating a merger because failure often leads to structure break down or a fall in partner and associate numbers.
The Red Thread
There is a way of evaluating likelihood of accepting the merging principle between two law firms. In a law firm, this falls under four categories:
- Capital
- Culture
- Added Value
- Profitability
Each merger taking part will have to go through an audit taking these factors into account. At the end of the day, both firms will be able to negotiate, amend, correct, discuss various aspects and in conclusion, accept or refuse merging. It would be better for the candidate firm to assess such a scheme about merging in order to make a final important decision. A. Capital
Capital of a law firm is made up of:
1. Quality of lawyers
2. Quality of clients’ portfolio
3. The firm’s financial gain
Quality of Lawyers
One could say that judging the value of lawyers is subjective. Nevertheless, there are objective elements which should be considered: number of publications, lecturing charges, inhouse seminars held, …- these are all key elements which allow academic worth to be taken into account.
Academic value must be fulfilled by quality, with development of issues which affect reputation, leadership, media presence, atmosphere created in specialized press and if necessary, position of certain directories. Some lawyers are excellent academics but possess poor management skills with clients, and vice versa. In addition, some excessive individual personalities can jeopardise the firm’s internal network. The know-it-alls normally think they are the crème de la crème, whilst being totally out of sync with other co-workers. This threatens unity within the firm. Merging with a big name is not the exception to the rule because lawyers’ quality affects the clients’ quality, and if it is negative, it is unfavourable.
Quality of Clients’ Portfolio
Lawyers often convey “clients ownership”. But this clients’ portfolio is rarely managed as a real capital. However, type and quality of clientele are studied. It is clear that certain types of firms specialise in transactions and others more predominantly on accompanying the client on a daily basis. The relationship with the client therefore is different with a lawyer making ‘oneshot’ transactions and a lawyer making a daily follow-up for his/her clients. One can evaluate a clients’ database on the basis of objective factors such as listing on the stock exchange or listing in the top 500 for clients’ businesses. In some firms, the clientele is based on individuality and social harmony within a firm. It can be useful studying not only the value of a client but also the value of contacts within their firm. With regard to this analysis, possible conflicts between firm A and firm B are viewed with greater care. It is a difficult issue which some firms avoid.
Financial capital of the firm
Financial management of different firms can vary considerably. Some firms own their premises and IT network, others prefer to rent or lease. Some professionals have saved money, whilst others have fallen into debt. Without a balance of minimum capitalisation between two firms, a firm with a high debt has to compensate its partner firm by getting into more debt to pay off what is owed to the capital of the new firm. Like all merging-acquisition, at first it is essential to sift through the costs of both firms to see if the partners can fund themselves in an efficient way.
Culture
Each lawyer and each firm impart their own culture and values. The initial difficulty found in law firms is that this culture is slow and hardly known by partners. In fact, this phenomenon of ‘masked business culture’ imply that partners are not so committed to invest or implement the business plan. Commonly, after financial issues, the problem with ‘culture’ is the second determining factor in success or failure of merging. Do the prospective candidates speak the same language; have the same work visions, the same approach to clients and the same ideas ethically?
Business culture between ‘them’ and ‘us’ has to be handled on a partner level to create a melting pot. Associates and secretaries should also be taken into account in the evaluation.
Questions to ask:
- Are we dealing with an autocratic or democratic firm?
- How are the decisions made within the firm: managing partner, executive committee, partners’ general assembly?
- What autonomy are partners left with?
- What information is available and how do we communicate with partners ?
- Should we invest in partners or are they just owners of the firm?
- How are they chosen?
- What is the partnership’ and individual partners’ turnover?
- Has the firm which we are approaching or which is approaching us defined a clear strategy? Aren’t they just trying to escape structural difficulties?
- Do we have the same view market?
- Is the vision of the future deciphered unanimously by partners or exclusively by individuals?
Firms which have avoided the culture issue are likely to face a boomerang effect a couple of years later. A multinational merger works in a different way to a national one.
The internal image of a firm can be vastly different to the external one. Beyond important points of view between merger partners, each firm will have a difficult job in tracking down key elements on which to judge the values and culture of the firm. Furthermore when each firm expresses their intentions, supporting action plans based on the past will be vital.
The people factor is so delicate in a merging process between lawyers that only a ‘partners’ retreat’ or a weekend off to exchange views and ideas are often recommended. If need be, the task can be ‘mediated’ by an outside impartial observer who will redesign the vision and strategies of firm A and B. In this case, the objective is not creating a hierarchy of values but perception of compatibility.
Added value
1+1=3 Mathematical formula reached by merging. This chapter is about perception of added value which will offer mergers to clients for each of their firms, to prospective or potential clients, partners and associates. Individuals initiating the merging process evidently have to question the market view with regard to merging. Merging within two niche structures will not be seen in the same way between a full-service international firm and a niche structure. In some cases, merging has almost no outside impact vis-à-vis the market structure.
Does merging have a limited impact in cities, regions and on a national or international level? The link between a firm in a capital city and a firm in a province will usually go through an acquisition instead of merging. A specific type of communication can be envisaged in a capital city and a metropolitan one.
Perception of ‘users’ in merging, i.e. clients, give the task at hand a purpose.
Undoubtedly, a process of merging has to link with an adequate communication policy.
Profitability
Generally, profitability of a task plays a dominant role in merging but this is not always the case. If revenues are the foundation of an argument between negotiators, it is definitive not only because lawyers have an equal importance but also because it is an issue backed by figures and therefore easier to compare.
Key figures to study in the merging sector are:
1. Hours worked by partners
2. Timetabled hours
3. Margin calculations
4. Partner/associate ratio (leverage)
1. The lawyer sells his/her time. The majority of firms therefore have a clear idea of hours worked by putting it on a ‘time sheet’. Some firms have clear billing aims imposed by partners and associates. This does not happen in all firms. Furthermore, invoicing is a practice in certain establishments whilst others record less ‘officially’ worked hours. It is important to define a working method of billed and billable hours and the number of billed hours if so at the end of the day, disappointment is avoided.
2. The hourly rate and fee calculation are two other important factors. Whether the merger is national or international, fees charged in a capital vary considerably to fees charged in a metropolitan area, according to the local market. Also, some firms have different price policies according to a well-established scheme and using alternative methods such as subscription, fixed rates and discounts.
3. Calculation of margins displays the total amount available, which is distributed between partners after business costs are covered. Partners often have a tendency to focus on billed hours and fees.
4. Finally, the leverage (the ratio of partners to associates) creates a most interesting comparison. Some firms have a 1/1 ratio (one partner to one associate), others have 1/5 (one partner to five associates). The distinction here lies in ‘equity partners’ and ‘non-equity associates’ who do not profit from shared benefits. It goes without saying that an increase of partners results in a reduction of shared benefits. Some firms which have severely restricted their partnership will be reluctant to merge with firms which have broadly opened the doors of the partnership to numerous individuals. Sometimes, lawyers advise clients on legal aspects of merging or acquisition. They are often less capable of merging with other firms due to managing issues, legal matters, finance and psychological- elements which govern the success of a business plan.
The assessment set out is not infallible. However it is highly advisable to collect as many objective data as possible in order to avoid working on the basis of an emotional process. An assessment of this nature constitutes a useful way of getting candidates to. At a time when everyone is watching each other’s moves, it is important to embark with a compass on board.
Prof. Laurent Marlière
SCIPION
