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.

Two. That’s the number of essential conditions that any law firm merger participant should never eschew. No doubt there are other vital elements to achieving merger success, but two are so vital that their absence can doom the law firm merger of your dreams. These decisive factors, the ones merger parties must insist upon for the future, are quality leadership and culture.

When embarking on a merger strategy, identifying merger objectives is an important step. Staying true to those objectives through the merger process positions your firm for success. Merger candidates should also employ a compatibility matrix examining in detail the fit on matters of finances, compensation, culture, clients and operations. And developing a focused integration plan with identifiable follow-up activities and accountability contribute greatly to merger success.

But all those steps will mean little if the post-merger firm does not have strong leadership to lead it forward and the commitment to blend disparate cultures into one.

Leadership. Without strong leadership at the combined firm, fraying at the edges can expand to broken seams. A compelling vision will not be developed, critically correct decisions will not be made when needed most, and your peoples’ confidence in the future will be lost. The leadership vacuum will suck away the prospects for success. If the presence of a strong leader for the future is not obvious, it is wise to pause until confidence about this critical element exists.

Culture. Equally non-negotiable is the understanding of the elements and means to achieve a unified culture. In law firm merger, it is inevitable that differing cultures get brought together. While many firms have similar cultures, no two law firms have the same cultures. Being complacent that similarities alone will suffice undermines a firm’s future. Rather, a sound plan and resolve to blend two cultures into one is essential. If the merged firm cannot fuse into an institution that pursues common goals using uniformly accepted strategies, methods and conduct, its future becomes suspect.

Merger season is upon us. The details matter. But any law firm considering merger should never lose sight of the big picture. Quality leadership and culture are the big picture. If merger is in your law firm’s future, will these two must-haves be non-negotiable?

“Adaptability is the simple secret of survival.” – Jessica Hagedorn

 

 

 

The above quote from the writer and poet Jessica Hagedorn speaks to the incredible circumstances that most law firms have faced in the last year or so. In our practice we see clients responding to the environment in many ways, some are breathing deep and hoping for a return to “the good old days” and others are analyzing the environment in an effort to understand the change that is occurring as part of preparing to adapt. We have the following comments on adapting to change.

Adapting to change – At first blush the need to adapt is so obvious there would seem to be no need to discuss it. Then we see firm after firm, small to large, fail because of a reluctance, unwillingness or sheer inability to adapt.

In our experience there are 4 steps to adapting:

  1. Acceptance
  2. Evaluation
  3. Planning
  4. Execution

Step 1 -Acceptance

It has been long understood that all species operate in an environment of constant change.  The same is true for business. There are two choices, adapt or die.

In slowly changing environments, like the legal market during most of its history; responding to change doesn’t need to be hurried. In an environment like the legal market of the last several years, where change is rapid and accelerating, the appropriate response must be developed with a sense of urgency.

So, if the constant nature of change is an absolute, why do so many firms fail to adapt. I suggest that it can only be one of two things, lack of understanding of the effect on their firm, or a lack of the knowledge/capability necessary to do anything about it.

Step 2 – Evaluating Impact

There are numerous ways in which change may impact a law firm;

  • New competitors – this might include new law firms as well as a growing list of non-traditional service providers
  • Changing methods of service delivery fueled in large part by innovations in technology and/or process
  • Shrinking demand for certain types of services
  • Increasing experience and expertise among clients, in particular General Counsel, who are utilizing their power of choice —  resulting in pricing pressure, and in some cases the loss of an important client

Law firms must regularly engage in an evaluation process that attempts to understand the specific nature and ultimate impact of the changes their firms are facing.

Step 3 – Planning for Adaptation

This step includes discussing options for how a firm will respond to the primary changes it is facing.  Often this is a difficult step because the plan will almost always include the reallocation of resources in a way that improves the odds of success. A third party participant in the process can be very helpful in maintaining a level of objectivity.

Step 4 – Execution of the Plan

As is so often the case, execution can be the point of failure. A firm can expend all the resources — time and money – and end up with a killer-strategy that addresses change and scopes new opportunities. But we’ve all seen great plans fall victim to the pressures of daily realities. The plan winds up collecting dust in a desk drawer.

Meanwhile, change continues its march.

Firms that beat the “desk-drawer” fate typically do three things well:

  • Set up “short fuse” milestones for the implementation of the change plan,
  • Include a process designed to build consensus, and
  • Put the right people in charge of driving the plan.

It all begins with a full acceptance that our choices are to adapt or die.

Are you adapting?

 

As every new year begins, the idea of law firm merger grabs the attention of more than a few law firm leaders. Although the pandemic impacted the number of law firm mergers closed in 2020, all indications for 2021 suggests a strong merger season. It is no wonder as a well-constructed merger is an effective tactic to achieve strategic goals.

Law firm leaders doing their first merger often ask, “how does a merger come together?” While all transactions have their unique aspects, virtually all mergers involve four distinct phases that are interrelated and build on each other. Poor analytics and execution in any one of the phases can undermine the prospects for success. However, with the exercise of care and good judgment consistently applied through each phase, a merger can deliver the original strategic goals that drove the idea of merger in the first place.

When contemplating merger, understanding these four phases and how they relate to each other is critical.

Phase One-Understanding the Reason for Merger. The reasons behind a firm’s decision to pursue a merger can be many. Some firms need a rescue, others see a need for additional capabilities or have a desire to enter a new and critical market. A frequent reason to merge is that the combination will add market share not easily gained through organic growth. Merger can also address leadership or succession issues. Whatever the impetus, the decision to consider merger should premised on meeting a strategic initiative identified through thoughtful and critical analysis. If a clear strategic goal is not apparent, stop.

Phase Two-Understanding the Important Criteria. In Phase Two, it is essential that the criteria for merger be identified before seeking a mate. Only once the criteria are clear should a firm pursue candidates-all the while remaining faithful to the identified criteria. Whether acting opportunistically or methodically, staying true to the criteria prevents the thrill of the chase from distorting tactics. It also provides the discipline needed to walk away from a bad deal that momentum would have you close otherwise. If the criteria are unclear, or a candidate fails to meet strategically identified “must haves,” then slow down or don’t go forward.

Phase Three-Zeroing in on the Right Merger Partner. When getting to the stage of evaluating prospects, a well-designed process turns to firm compatibility. In this phase, a firm should consider whether it and its prospect are compatible on matters of culture, finances, compensation systems, clients and operations. The fit of leadership styles and the potential for future leaders that can guide a unified firm also needs attention. Do the two firms have a similar vision for the future? While compatibility need not be perfect, a pass is best for any combination with too many misfits.

Phase Four-Making the Combination Work. While it is essential that the integration and blending of the two firms be planned before closing, execution post-merger with an attention to detail are vital to bringing two disparate firms together as one. Forging a singular culture and creating systems, processes and procedures universally applied will establish the new firm’s valued behaviors. Hard work post-closing is not only important to avoiding crisis during the next honeymoon period, but also important to building the next generation of leaders and performers.

Success in law firm merger takes work. Working through the four phases carefully and methodically, with purpose and commitment, helps dramatically. If you are thinking merger, will you keep these four stages in mind?

 

For the last decade plus, merger has been a strategic choice for many law firms. The 2020 pandemic had a negative impact on the quantity of mergers but, many including our firm expect there to be a major uptick in 2021.

Given the probability that firms will at least be considering merger as part of their go forward plan, it seems prudent to think about what a good merger partner should look like.

To that end, here are 10 questions you should answer before having a conversation with another firm:

  1. What principal characteristics of your existing culture are most important to you. A lack of cultural compatibility is difficult, if not impossible to overcome, and one of the reasons so many combinations fail.
  2. In what rate tier do your clients exist. A lack of similarity in realized rates drives conflicts in staffing client files, compensation and a host of other critical law firm areas.
  3. What additional expertise (whether new to your firm or additional depth in existing areas) will allow your firm to make desired progress in targeted areas of growth.
  4. What are your key financial metrics. A good merger partner will have economic metrics that are similar to yours (of course unless your firm is failing). Metrics significantly different from yours — whether better or worse — will lead to painful pressure for one party or the other on rates, hours and retention.
  5. What aspects of your current compensation system do you most value. Merging with a firm with a significantly different approach to compensation will almost certainly result in a different relative treatment among your existing partners, possibly with unexpected negative consequences.
  6. What size of merger target best serves your firm’s goals? Questions like are you comfortable being a small outpost of a mega firm, or even small relative to your merger partner are good questions to think about. The greater the size disparity in a combination the less “say” the smaller firm will have in future decisions.
  7. Is your firm facing succession issues? If so in what specific way would you like to see a merger partner solve those issues?
  8. In addition to your existing footprint, what additional geographic presence would bring value to your firm, and why?
  9. What type of governance are you and your partners most comfortable with. Firms are governed in a range of ways, from very democratic to tremendous authority being vested in a few. It is important to know in advance what you are comfortable with and what is off-the-table in terms of governing options.
  10. What level risk do you think is reasonable? Risk in a law firm includes bank debt, partner turnover, unfunded pension plans, pending or threatened litigation and loss of key clients. Understanding your risk-tolerance is key to a successful merger.

The answers to these questions, and the impact the answers will have on your approach to a merger possibility will vary depending on whether you are acquiring or being acquired; but the greater the variance between how you feel with respect to these 10 issues, and the reality of the world you’re considering will be a predictor of the success of the combination.

If a strategic merger is in your future, smart leaders will engage in identifying   the things that are most important to their partners; far too many mergers occur without defining in advance what a firm is seeking, and why.

If you are interested in additional materials we have published related to law firm mergers click here.

For firms that operate on a calendar fiscal year, 2020 is done. Over. Finished. The uniqueness of 2020 presented challenges not anticipated as last year started, but remarkably most firms adjusted and endured. As they now take a deep breath and prepare for the merry-go-round of 2021, firm leaders can apply some lessons from the past year as they move forward.

Among the lessons learned, leaders discovered how to manage with new work-from-home flexibility, activating or acquiring systems to establish efficient remote platforms, communicating with banks, landlords and vendors to get through the crisis, and in some cases aiding liquidity through PPP loans. In many instances law firms achieved results never thought possible given the challenges faced. As planning for the next year takes place, knowing which experiences to draw on is an important key to a successful 2021.

With that in mind, here are four thoughts about assessing 2020 as you plan for 2021.

Don’t Be Fooled by the Non-repeatable. Being hoodwinked about the future because year-end numbers were good is not a good thing. Take a careful look at the “why” instead of just the “what.” Some things that contributed to the 2020 performance may not happen again. Obvious candidates would include one-time concessions from vendors or landlords, unanticipated work for clients as they attempted to navigate the unknown pandemic world, and PPP loans that may or may not be available in the future.

Successful Changes with Long-term Promise Should be Kept. It was a whole new way of doing business this past year, and in some cases the changes implemented proved to be eye-openers. Many of the changes demanded by the situation were intended to be short-term ones to be discarded as normalcy returned. A good exercise for 2021 and beyond is to review each change that expediency required and test it to see if it has long-term promise. If so, it could represent a new way of doing business that should be kept.

Listen to Your People and Clients. Adjustments made in 2020 may have been vital to survival or perhaps revelatory as you look back. Their implementation may have been acceptable to your people and clients then because “we are all in this together.” But as firms begin to return to the routine, attitudes towards the necessary of 2020 may become less accepting. As you see the opportunity for some daylight, engage your people and clients to learn how they feel about last year’s changes and their support for their continuance.

Consider Where You Fell Short. Even if you closed the year with a sense of a job well done, you might have been able to do better. Just because you survived an existential crisis you should not become complacent. A post-mortem will allow you to consider your mistakes as well as the best practices of industry leaders and take those lessons forward into 2021.

Planning for 2021 presents unique challenges. Will 2021 be like or different from 2020, or a little mixed? Listening to the lessons learned without being drowned out by the noise is as important as ever. As the new year dawns, will you look back as you look forward?

 

 

 

 

Most firms are in the final stretch of 2020, wrestling with collections, budgets, PPP loan forgiveness, promotions and compensation decisions. All of these are important activities. But, while focused on wrapping up 2020 let me suggest one more subject that deserves attention — something that stands a chance of making a real long-term difference.

I suggest that you spend some time really wrestling with this question: “What one thing, if accomplished in 2021, will leave us a healthier, happier firm — better positioned to compete in the new year and beyond?”

A few months ago I came across the book The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results, by Keller and Papasan. The premise of the book is that we all face a tremendous number of distractions and demands on our time, most of which make no significant difference in our lives or the endeavors most important to us.

But if we take the time necessary to determine the most important thing to accomplish today, this week or this year, we can make a difference that really matters.

This isn’t a particularly complex concept, but it is one that far too few law firms (or individuals for that matter) seriously consider…much less, actually execute.

If you are in a law firm that doesn’t have a strong culture of planning, start by gathering the senior members of your firm for a discussion about the “one thing.” The dynamics will surprise you. Agree that you won’t be distracted…that you won’t attempt to solve every issue…but you’ll focus on identifying your “one thing.”

Agreeing on the “one thing” is more than half of the battle; but you will still have to execute. Things are more likely to really happen with some accountability built into action items. I recommend a regularly scheduled meeting with your partners during which progress towards the “one thing” is discussed. To accomplish the “one thing” requires a relentless, unwavering commitment to make it happen.

With these simple tools, you and your partners can take a giant step toward being in a better position when you take stock of 2021, and plan for the next year.

What do you think?