As more law firm mergers are announced, the idea of pursuing a merger crosses many a law firm leader’s mind. The idea of grabbing greater market share, entering distant markets, bolstering capabilities, or addressing succession can spur thoughts of combination. Those potential results or outcomes can seem compelling and cause a firm to jump into
Charles Darwin said so profoundly “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
Our practice is seeing an increasing number of firms tested by their ability to adapt. The news reflects a growing number of firms in obvious transition. From high-profile names to lesser-known partnerships, the leaders of each firm faces pivotal decisions. Some of these firms will restructure or otherwise embark on a turnaround strategy. Others opt for merging with another group or offering themselves as an acquisition target in an effort to avoid dissolution. History has shown far too many end in a messy liquidation.
Identifying The Path That Leads To Decline
The decline of a once vibrant partnership rarely has much to do with the quality of lawyers engaged in the practice. And though the marketplace is certainly tumultuous, what is at the heart of survival and success for some, and the dire straits of a struggle to survive for others?
In his book Corporate Turnaround, Dan Bibeault identifies four key mistakes that lead to organizational decline. These mistakes, paraphrased to the legal profession are:
- Failure to respond effectively to a changing competitive environment
- Poor control over operations
- Operating with excessive financial leverage
Let’s look at each one a bit more closely.…
The typical press release announcing a law firm merger extolls the excitement, the opportunity to have one plus one equal three, and the great fit of culture, practices and people. It’s perfect until it is not. In fact, by some measures more than half of all law firm mergers fail. When the realization sets in that your law firm merger is a bad one and not the combination of your dreams, what can you do?
Besides whistling past the graveyard, you’ve got to do something. And while a solution stimulated by panic is not recommended, prompt action is advisable. As action plan options go, the following three options generally are presented and often are considered:
Law firm succession planning represents an important component to law firm longevity. The two forms of succession most often discussed-leadership and client relationship transfer-should be top of mind to any firm thinking about being an enduring institution. While leadership succession can be a significant challenge, creating an effective client relationship transfer strategy is among the most complicated things to achieve.
In client relationship transfer, it takes four different parties to make it work. First and foremost is the client without whom there can be no client relationship transfer. Surprisingly, too often the client’s thoughts and perspectives on relationship succession are not prioritized, at least to the degree desired by the client. If the client’s interests are neglected, there is little hope for a successful plan.
Fingerprints are unique. No two snowflakes are alike. And the more one looks at law firms, the more it is apparent that each law firm has its own personality. Whether small or large, local, national, or international in scope, general service or specialized boutique, driven by profit or public service, each law firm has its own DNA.
Though distinctive, many law firms share common characteristics. One shared by all law firms is the need to be financially healthy. Law firm financial health is the universal need of every law firm—without financial health a law firm’s future is seriously suspect.
Every institution is vulnerable, no matter how great. No matter how much you have achieved, no matter how far you have gone, no matter how much power you’ve garnered, you are vulnerable to decline. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall and most eventually do. –Jim Collins
Jim Collins, the author best known for his positive and uplifting books Good to Great and Built to Last, wrote another provocative volume in 1999. How The Mighty Fallwhich looks at the causes and stages of organizational decline.
It can’t be overstated. The legal services business is experiencing dramatic change. For law firms as institutions, it is obvious because more work than ever before is brought in-house by clients, and alternative service providers are rushing into the competitive landscape. Besides the increase in competition, there are technical and practice advances that have changed the way law firms do business. Legal project management, once a novelty, is altering the focus law firms are expected to bring to a task. Technology in law is evolving so fast that even law firms committed to investing in new tech have a hard time keeping up. And artificial intelligence is finding its place in the ultimate objective of meeting the legal needs of clients.
With all the industry change, most firms know that settling on the status quo is risky. Still, more than a few firms are slow to change. Some are overwhelmed by the idea of innovation itself or are worried about the appropriate time and capital to invest in its execution. Without adequate experience or guidance, a firm can be paralyzed.
Most law partnerships begin with a sense of shared aspirations, enthusiasm and trust. The founding partners and those subsequently added presumably maintain a fiduciary commitment to conduct consistent with the welfare of the other partners, as well as clients.
The fact is that this is often not the case.
Despite the seemingly “good” year that 2018 was for many law firms, experience tells us that ”good” can be a relative thing. While 2018 performance data compares favorably to the data from the prior years following the Great Recession, all is not completely rosy. Today’s law firms face more competition than ever as market share is shrinking, and the industry is being disrupted in multiple ways.
The recently released Thomson Reuters State of the Legal Market 2019report provides some industry information about how the 2018 results should be viewed. The report concludes that despite good results last year, a robust round of “high-fives” should be tempered. As Thomson Reutersnotes, shared competitive industry information, technological advances, client control of legal service use and terms, greater competition among law firms and other resources, have all greatly altered the legal services market. This change in landscape has, among other things, stimulated a war for talent, causing valuable lawyers with valuable clients to move from one firm to the next in free-agency run wild.
I have been thinking about the results from a recent survey conducted by the Zeughauser Group. Although the survey covered a variety of issues, the responses related to succession particularly struck me.
- When describing the top objectives for their firm, the most frequently stated objective was to “achieve long term stability.”
- When describing the biggest challenge facing their firm in the next 3-5 years, the biggest challenge stated was “transitioning leadership to the next generation”, closely followed by “transitioning client relationships to the next generation.”
- Finally, when asked about the biggest priority in the next 3-5 years the greatest priority was “building a more stable future.”