Competition among law firms is as brisk as ever. Gaining an advantage requires more than hard work-it requires strategic thinking that causes a firm to be different in a positive and noticeable way. Simply working harder or relying on strategies that performed in the past is not enough.

If business as usual is not sustainable and differentiation essential, firms must consider not being all things to all clients, must bring greater focus to their clients’ needs, become more efficient, cost-effective and value conscious.  Firms also must consider advanced technology solutions, master project management, and “think outside the box.”

Firms seeking to differentiate face their old nemesis: change.  To conquer change and drive differentiation, firms must have and/or use the following five things:

Courage.         Differentiation means moving away from comfort zones.  It means changing the way business is done with the possibility that there is no turning back.  And it likely means narrowing service offerings and investing in specialization not invested in before.  Differentiation can mean saying good-bye to practice areas and personnel that for years have been a part of the firm.  Pivotal change like that takes courage.  Without it, recasting a firm through differentiation is difficult.

Knowledge.    The idea behind differentiation is not change for change-sake.  It is focusing on a new direction that offers more promise.  No new direction can be pursued without knowledge about the firm’s existing strengths, the opportunities in its markets, and the cost/benefits from pursuing a new direction.  Mere hunches are not enough.  Without a factually based and analytically tested plan, knowing whether the current state should be replaced by a future-state amounts to guesswork.

Judgment.       When moving from the status quo to something else, forks in the road will be confronted.  At those forks, critical decisions will need to be made.  The exercise of sound judgment is essential if the path towards differentiation is to succeed.  A firm embarking on a new and more focused way forward must be blessed with decision makers that have exhibited wisdom in the past.  If leadership’s judgment is suspect or untested, outside advice should be sought to supplement in-house mind power.

Resolve. It goes without saying that a firm seeking to differentiate must believe in its strategy.  When possessed with that belief, it is essential that the firm have the resolve to follow through on its plan.  Because it will be moving away from the comfort of the status quo, and bumps in the road could be felt, the firm must remain confident it is new direction.  As challenges are confronted, the firm’s commitment to the plan must be demonstrated by forging ahead.  If resolve is lacking, for a whole host of reasons failure is more likely.

Leadership.     A strong leader or leadership group must be in place before differentiation is possible.  People being asked to invest in the new way, many less courageous or simply uncertain, will gain strength from leadership that believes in the path forward and acts in ways consistent with that belief.  Strong persuasive attributes will be needed constantly as doubters, opponents, and uninformed overreact to challenges along the way.

Making your firm stand out is greatly aided by courage, knowledge, judgment, resolve and leadership.  Does your firm have those attributes?

 

 

 

Growth through lateral additions is a hit or miss proposition at best. Numerous survey reports indicate that far fewer that 50% of lateral additions meet the expectations of the hiring firm. There are a number of reasons for this poor performance. Three that almost always foreshadow disappointment in the near term include:

  • Exaggerated estimation of portable business,
  • Lack of cultural fit and,
  • Lack of strategic fit.

All three of these can be addressed by taking two steps that most firms fail to take.

Step 1

Clearly define strategic growth objectives. Strategic growth is growth that:

  1. Allows the firm to better serve current or emerging needs of existing clients,
  2. Allows the firm to capitalize on an emerging market opportunity of significance,
  3. Shores up a weakness that is limiting the firm in a material and defined way, or
  4. Strengthens the firm in an area in which it holds a strategic market advantage.

The strategic growth objectives should be enumerated in writing with specifics as to level of experience required, area of expertise needed, physical location, and any other characteristics that define a successful candidate for the specified strategic objective.

Step 2

Seek input from your firms attorneys. Depending on your firm’s size, solicit specific lateral recommendations from all attorneys — or, in larger firms, to an appropriate segment of partners/shareholders. A prioritized list of strategic growth objectives should be distributed along with a simple question – what attorneys do you know personally that would a) fill one of our strategic objectives and b) be someone you would really like to practice with?

Potential hires that meet strategic growth objectives and are personally connected to one of your attorneys greatly increase the odds of a successful lateral addition.

A friend and great thinker on this topic, Eric Fletcher, recently posted an article that is worth a read. The article includes a model for successful lateral pursuits. Do yourself a favor and check it out!

Merger is a tactic that never ceases to be popular with law firms. Among other things, a merger can create excitement, offer greater financial opportunity, provide a rescue, or promise a firm and its people a more promising future. As merger activity unfolds, a law firm leader may soon feel initial enthusiasm damped by unwanted attrition from portions of the firm.

Despite the perceived positives, merger can be unsettling to a firm’s personnel, including its key contributors. Uncertainty abounds and producers, non-producers, associates, and staff wonder whether a combined firm, from a personal standpoint, will be good or bad. Indeed, uncertainty can result in unanticipated departures that can tarnish a firm’s appearance and attractiveness. And in this frenzied time of law firms competing aggressively for lateral additions, this risk can be particularly acute. Without adequate advance preparation, departures can adversely affect the merger discussions and, in some instances, spell their doom.

Because merger discussions can foment anxiety at all levels, attention to dealing with that anxiety is a must. Most particularly, it is important to prepare for potential departures prior to diving deep into the merger waters. To do so, law firm leaders must:

Recognize that Turmoil May Arise. Before any merger discussions get started, leadership must understand that anxiety at the firm will increase in a multi-fold way. Contributors of all degrees will wonder whether a merged firm is a place they want to work. Once merger is in play, normally calm people can become skittish. Leadership must be sensitive to this potential and act to provide a calming influence.

Understand that Intangibles Matter.   Merger preparation means that data will be assembled to identify a firm’s strengths and explain its weaknesses. These analyses, especially regarding the firm’s producers, will focus on their economic contributions and downplay or explain away the negatives associated with some of the more challenged firm segments. Yet the firm’s real weakness can be the lack of glue or adhesion in its component parts. Leadership must identify where fissures might erupt and take steps to bond around them.

Negotiate Knowing that Departures are a Possibility. Nothing can hamper merger discussions more than experiencing lawyer departures after having touted those same lawyers as key pieces of the proposed combination. For that reason, no one component of your firm can be oversold. Negotiations should emphasize that the firm is greater than the sum of its parts and is an institution of great value.

Confront Departure Issues Head-on. If you have an idea that a departure is possible, deal with that risk directly. Visit the potential expat to address any disaffection that is fueling those thoughts. While this is where persuasive powers are critical, it is also critical that leadership address with other attorneys any fallout if departures do occur. For those that remain, a departure of one or more lawyers may create panic. Eliminate their concerns with a factually backed analysis of the firm’s remaining strength.

Provide Comfort to the Merger Partner. In instances when the departure cannot be averted, inform your prospective merger partner about the departure quickly with an analysis that emphasizes the remaining value of the institution. If you have been successful in tamping down any panic, consider informing your potential merger partner that additional departures are not expected and why. Finally, if your firm’s original pitch presented the firm as an institution more valuable than the sum of its parts, a leader’s ability to comfort a potential merger partner is enhanced greatly.

Pursuing merger is a high risk/high reward proposition.  It should not be pursued without understanding that lawyers may leave the firm in the midst of the initiative.  Can you firm withstand departures and make a merger work?  Can you firm continue if merger discussions cause departures, and no merger is consummated?

 

 

 

Following a pandemic driven drop in the number of law firm mergers in 2020, based on what our practice is seeing, 2021 will see a substantial increase in combinations. It seems like scarcely a week passes without an announcement of another law firm merger.

We have been particularly interested in the pending Thompson Knight – Holland & Knight transaction.

This reported combination appears to be experiencing some unwanted attritionthat is fairly common in large mergers. This article reminded me of how important it is to ensure that key firm assets understand the strategic value and support the deal.

There are a number of solid strategic reasons for law firms to consider merging. In my opinion, three at the top of the list are:

  • The addition of specific expertise and technical capabilities necessary to better serve existing or targeted clientele;
  • Succession planning; and,
  • Financial stabilization.

I have been encouraged by the fact that two of the recent mergers our firm was privileged to consult on were specifically driven by succession concerns. In each case, senior partners made the strategic and selfless decision to seek a culturally compatible merger partner in order to provide a platform of future opportunity for its younger lawyers.

Unfortunately, a significant percentage of mergers are driven solely by the misguided idea that  getting bigger is better.

Why do I say “unfortunately” and “misguided” Isn’t growth a good thing?

Simply put — I believe the numbers-driven strategy is the root cause of a majority of failed merger initiatives. Getting bigger often only magnifies and compounds existing deficiencies.

If your law firm is considering a merger, what is driving the pursuit.

Law firm mergers can accomplish a great deal, so it is no wonder they are popular. The number of mergers consummated each year is steady if not growing. Strategically designed and executed law firm mergers can boost combined firms to places otherwise difficult to achieve in the time frames desired.

Even though many mergers make sense and receive the accolades deserved, there are other combinations that fail. Indeed, by some assessments, fifty percent of all mergers fail. Failure can be traced to many reasons, but when post-mortems of failed mergers are performed five ill-conceived notions behind merger are frequently observed. Based on that history, merger contemplated by leadership should be rethought if its impetus is premised on any of the following rationales or motivations:

Obsession with Growth. Without question, growth is a prominent feature with all mergers. But more than the result should be the impetus for pursuing merger. Many mergers that fail can trace their failure to an obsession with growth and allowing that obsession to dominate thinking. The move to merge must be borne of sound strategy, analysis, and due diligence, not a belief that bigger always is better. Growth will be a subsidizing inevitable by-product.

Desire to Dominate in the Wrong Areas. A law firm may be known for a particular specialty and the strategic desire to dominate that specialty may drive decision making. When thinking of domination, it is advisable to look at the coveted area and ask, is it sufficiently profitable, does it have an inspiring future, will it help or hurt other areas of the firm? Applying basic business analytics should be employed so that any merger boosts the brand long-term and is, in the long run, accretive. More “meh” from a merger helps little.

The Clamor for Excitement. It is not uncommon for a faction within a firm to appeal for action to jolt a seemingly staid and stodgy firm to life. Excitement is good, but the big splash that goes with a merger will recede from the consciousness sooner than often imagined. While the excitement may have been fun, a merger fundamentally must strengthen the firm. Being saddled with nothing more than the burden of a bigger firm is the antithesis of exciting.

“Keeping Up.” Closely tied to a clamor for excitement is the interest in “keeping up” with competitors that have grown or merged. While competing is all about keeping up or overtaking your market rivals, channeling that desire into a non-strategic merger is not the answer. All firms are different, and just because another firm merged successfully, doesn’t mean a merger is for you. Strategy, analytics and due diligence, not fads, should drive mergers.

To Fix the Unfixed. Firms with challenges frequently compound those challenges by adding more variables to day-to-day life. A firm with problems should address those problems before jumping into the merger world. Worse still is a merger birthed with the belief that the merger partner will cure ills nagging the present. Bypassing a pre-merger fix will only make things worse in the long run.

When examining the scene of failed law firm mergers, one or more of these five fingerprints often can be lifted. If your firm is thinking about a combination, are its thoughts based on questionable impulses or well-thought-out strategies and analytics?

 

It has been a good while since I have written on this topic but two recent events prompted me to address it again.

The first: last week, Bruce Matson, former General Counsel of LeClair Ryan, reportedly (subscription required)  admitted embezzling $2.5 million dollars from a client trust account.

The second situation relates to a client — a relatively small firm located on the West coast. In this instance my client discovered that an employee has misappropriated more than $300,000 over a period of several years. The now former-employee was also unfortunately a gambling addict.  Consequently, virtually none of the funds are recoverable and a criminal prosecution is providing little relief.

SURPRISINGLY COMMON

I am shocked at the number of times I’ve seen this happen inside a law firm. No firm is immune, and there is no set pattern. The size of the firm doesn’t matter.  The villain might be a partner or a staff member. And it may be theft from a client trust fund or an operating account.

But in virtually any situation the abuse of trust could have been prevented.

 Most lawyers (therefore, most law firm management teams) have not been trained to design basic internal control processes that safeguard firm resources. As a result, many law firms provide numerous opportunities for financial abuse.

MISSING GUARDRAILS

None of us enjoy considering the possibility that colleagues might actually steal from the firm. But while leadership strives to inspire trust, an awareness of some of the typical methods used to embezzle funds can result in firms establishing processes that serve to prevent a brand of theft that might occur.

A short and incomplete list of ways in which funds are misappropriated include:

  • “Shadow” vendors are established, complete with a company name and address, in order to receive payments that wind up in the hands of the individual committing the fraud. This is a common approach; the payments (checks or electronic transfers) typically start small and increase in frequency and amount over time.
  • False expense reports are submitted for reimbursement. Again, these tend to grow as the thief is successful. In some cases, the firm is the direct victim in others the fraudulent charges are passed through to clients who unwittingly absorb the loss.
  • In larger firms, fictitious employees are sometimes set up in the firm’s payroll system.
  • Some law firm allow an individual to have sole control over authorizing and issuing and accounting for payments. In some instances the perpetrator has made direct payment to themselves, family members or personal creditors.
  • In other cases, firms allow the same person to receive and deposit client payments while, at the same time, having the authority to “write-off” client receivable balances. This can lead to an employee endorsing a client payment to their own benefit and then eliminating the client receivable with no one the wiser.

These are just a few of the countless ways in which law firm and law firm client funds are misappropriated.

PROTECTIVE MEASURES

The question is what should one do to decrease the probability of such a loss. The short answer is to engage a local accounting firm to review your firm’s procedures and design an internal control process. As your firm grows the process should be re-evaluated by an external accounting firm. Ideally, as the firm grows have the firm’s books and records audited.

In addition, there are a host of things that can be done to decrease the probability of loss. Here are seven ideas that represent easy protective measures:

  • Have background checks conducted on all new employees
  • Make sure a person independent of handling cash deposits has authority to “write-off” client receivables
  • Separate the responsibilities of making disbursements and reconciling bank accounts
  • Require two signatures for larger payments
  • Separate payroll review from payroll preparation
  • Have all requests for reimbursement signed by another person
  • Maintain an annual budget for all types of expenditures and receipts and diligently review variances to that budget

In addition to the above, a firm of any size should consider fraud insurance. This won’t provide protection from the event, but can limit economic exposure.

In thinking about this blog post I did a simple google search on law firm embezzlement during the last year and was discouraged by the tremendous number of reported incidents.

How long has it been since your firm’s internal controls have been evaluated?

Law firm succession can be easy, and it can be hard. It tends to be easy for the law firms blessed with talented people, a deep and repeatable client base, and a stellar reputation. Transition from one generation to the next can be natural and seamless. Unfortunately, not all law firms enjoy such a profile.

Most law firms find law firm succession a greater challenge. These firms, grinding daily to succeed in the here and now, are susceptible to succession failure. Because everyone at the firm is busy pursuing the short-term rewards that drive their behavior, interest in succession barely makes it into the firm’s consciousness. So, while the firm may be enjoying a strong and steady performance today, starting an initiative to create a comprehensive succession plan can be difficult.

Developing a workable plan in firms not naturally gifted towards succession requires four steps:

Identify the Extent of Shared Aspirations in Favor of Succession and Act. Nothing is more important than shared aspirations. To see if they exist, the owners must meet and honestly discuss whether preserving the firm’s legacy is valued. If few owners care about succession, then playing out the string and preparing for the eventual firm wind-down is the logical approach. But if succession is a goal shared by all (or at least most), the shared aspiration must be converted into action. When resolve for succession exists, a plan can be created, debated and adopted. A firm’s high-minded determination for succession must result in action, or opportunity is lost.

Drill Down into the Details. Any resolve to create a succession plan requires, as a first step, identification of the kind of succession needed. Are your succession requirements related to leadership, client transfer, or both? A firm’s approach to preserving its legacy can depend greatly on accurately identifying the succession plan’s focus. Only when the challenge is clear can the plan hope to create the solution.

Create Milestones. Measuring success towards any objective is important and in succession it is no different. Yet because succession is a long-term project with rewards realized later, it is essential to create markers of success that can be celebrated and rewarded as the initiative proceeds. Unlike year-end bonuses or compensation setting that occur in the ordinary course of a law firm’s business, succession plan implementation doesn’t typically lend itself to immediate gratification. To stay on target, it is vital to fete and reward milestones met yearly-long before succession has been completed. Without milestones, succession will struggle.

Put Someone in Charge. A ship without a captain drifts with the current. To avoid a similar fate for your succession plan, appoint a succession plan leader or project manager with credibility and respect. Put the full weight of leadership behind him or her. But more must be done. To enhance credibility for the initiative, make that person accountable for meeting expectations and reward that person in tangible ways as progress is made. And since accountability also means addressing performances that fall short of expectations, deal with inadequate progress in a responsible, direct, and prompt way. Accountability with tangible responses from leadership will show the rest of the firm that succession is a high priority.

Succession commonly is outside the ordinary course of most firm’s operations and can become an afterthought. Focusing on these four steps now can prevent later regret that more was not done. Will your firm take those steps?

One of the most underappreciated factors associated with law firm success or failure is the effectiveness of leadership.

The fact is, no single factor has a greater impact on the success or failure of a business than the quality of its leadership. During a period of increasing change in the legal services industry a well-defined means of developing effective leadership is a must.

First, let’s debunk a myth – effective leaders are born, they are not made.  Much has been suggested about “natural born leaders” and there is no substance to the suggestion. This should be good news to members of law firms. With enough focus, desire, dedication and effort, effective leaders are developed.

There are three primary steps to creating effective law firm leaders.

  1. Identify interested lawyers.  Firms should routinely engage its members, (including junior associates) in activities that will provide insights as to who has interest in leadership.
  2. Develop the capability. Once identified, find opportunities to develop their leadership experience and knowledge. Opportunities include:
    1. Assign leadership positions,
    2. Provide leadership assignments,
    3. Connect the leader to be with a mentor (inside or out of the firm) and
    4. Direct them to educational programs intended to develop knowledge and build a network of other emerging leaders.
  3. Obtain feedback. All effective leaders are consciously or unconsciously committed to learning. They strive to become better. Nothing provides a stronger learning experience than lessons learned on the job. A formal system of routine feedback, from all applicable personnel, provides the opportunity for that learning.

Maintaining an appropriately sized group of emerging leaders is critical to law firm success. Prudent firms proactively develop that leadership capability.

What is your firm doing to prepare tomorrow’s leaders?

Some law firms seem to be full-time participants in law firm merger activity. As new markets are entered and competitors gobbled up, the voracious law firms bring to their transactions a wealth of experience their counterparts often lack. If your law firm is thinking about merger for the first time, will a lack of experience lead to rookie mistakes that are a source of regret forever?

Avoiding ever-lasting errors requires a number of things. For starters, good professional help, be it legal, financial, or strategic, is essential. A do-it-yourself merger, even if your M&A practice group is stellar, is fraught with risk. But beyond the professional assistance, a driven curiosity in five merger elements can guide first-time merger participants towards fewer mistakes and happier outcomes. Being inquisitive about the following five things may not assure eternal bliss, but they likely will prevent abject misery.  

Understand the Terminology.  In most mergers, the more experienced firm opens discussions with a language unique to it that describes basic concepts. The terminology may seem unintelligible, it may seem a little familiar, or it may match perfectly with concepts at the novice firm.  But don’t assume that familiar sounding terms have a familiar meaning. Unless all the nomenclature is understood, key components of any proposed transaction will be missed, and post-closing life may be disappointing.

Check References. A lot of firms seeking to merge or acquire other firms have been doing similar transactions for a while.  If so, dig deep into the firm’s track record of integration, post-merger success and failure.  Calls to former partners for references on the other firm is simply good diligence. You’d be surprised at how much you learn.

Understand the Firm Policies.  No one would contemplate a merger without digging into the other firm’s constituent documents.  Don’t stop there.  A lot of what gets done in a firm is contained in its policies.  Many law firms use policies extensively as management tools-those tools can make day-to-day life very different from the glorious stories told while courting.  Understand the policies-they will provide a glimpse into future.

Understand the Firm Strategic Plan.  Read the other firm’s strategic plan to be sure its strategy and tactics are clear-but also read between the lines.   Understanding a firm’s overall strategy helps you determine whether your firm fits within the other firm’s plan.  For example, if the experienced firm’s strategy seeks to eliminate low margin practices, some targeted firm practices may not fit well.  Worse yet, if your prospective merger partner doesn’t have a strategic plan or it is old, the quality of management has to be questioned.

Compare the Values of Ownership.  No doubt your suitor is pouring over your data in an attempt to determine whether a merger will be a financial net benefit or burden.  You should do the same and not assume that just because it is a familiar name it is financially stronger.  You should assess the value of your equity pre-merger and post-merger.  Do the values at the other firm compare favorably? How a delta in comparative net equity, and other financial disparities, is resolved may be the difference in doing the deal or not.

When agreeing to merger for the first time, getting it right is very important because a second chance is seldom given.  With so much at stake, shouldn’t you methodically cover all the bases before saying “yes?”

First generation law firm leaders find themselves confronted by a classic “good news-bad-news reality.” The good news is that they are nearing the end of what for many has been a rewarding career. The bad? Most have no clear path of succession— for client relationships or leadership responsibilities.

There are a host of reasons; but the reality for most is an unplanned career dilemma — remain active long enough to develop and execute a succession plan, or go ahead and step away and put equity (not to mention legacy) at risk  post departure.

Faced with the dilemma, many law firm leaders find themselves entertaining a merger as a succession solution.

For those considering merger as a succession strategy, there are five compatibility issues to consider.

Culture

There is a lot of confusion about what culture really is. Simply put culture is what work life is like inside a firm day to day. What characterizes behaviors…what do conversations sound like…what topics and issues capture attention and imagination.

There is a strong correlation between a firm’s culture and what the firm most values. Not what it says about these things on the website or in recruiting materials; but where investments are made and stakes put in the ground. Eloquent copy describing a shared commitment to client service, community, collegiality, and collaboration are common. Too often there is a world of difference between what the website says and what the law firm is.

When entertaining a merger, combining with a firm with a compatible culture is essential to continued happiness and long-term retention of personnel at all levels.

Client profile compatibility

In addition to the obvious issue of legal conflicts of interest, compatibility of client/work profile is critical to executing a merger that will meet a firm’s succession goals.  The more dissimilar the profile of clients in terms of sophistication of work, size of client companies and the related rate structure, the more difficult it is to achieve an effective integration of the two firms. A merger between a firm that represents large multinational companies on “bet the company” matters and a firm that does more routine work that yields a lower rate structure is problematic from the word “go,” no matter how much both parties want to believe otherwise.

Compensation system

Differences in the cornerstones of each firm’s compensation system — the degree of subjectivity in the system, the level of draws, the balance between draws and catch-up distributions, open vs. confidential, broad based participation in compensation setting vs. a small controlling body — all of these factors provide an opportunity for conflict. Finding a merger partner with similar compensation system values and function will help in achieving succession objectives.

Financial ambitions

Every firm is different in terms of financial performance and objectives. A lack of similarity in what is valued will yield dissatisfaction, a sense of us versus them and, over the long haul, a combination that will drive attrition from one side or the other.

Leadership style

Finally, the issue of compatible leadership is a critical consideration when a merger is considered as a solution to succession issues. A group of partners that have existed in an environment with a leader that routinely engaged partners, allowing them to actively participate in the decision making and policy-setting process will be unhappy in a new environment that doesn’t include such involvement.

A merger can be a solid, even dynamic solution to issues of succession; but a critical success factor is the honest evaluation of leadership styles on both sides of the equation.

Conclusion

The market for mergers has become very hot again. Law firm leaders looking to merger as a succession solution will likely find a number of options. It is easy to be seduced by the perceived upside. Leaders who devote appropriate attention to these five factors will be much more likely to engage in combinations that survive the test of time…and deliver succession solutions for clients and firm personnel alike.