Law firm innovation.  The idea of innovation is lauded, discussed and encouraged.  When it happens, either through technological advances, the launch of a start-up alternative service provider, or the unveiling of an approach never thought about before, the legal services industry takes note.  In an industry searching for a new stability after 10 years of something less, the idea that new ways are needed for “doing the law” finds little argument.  Innovation already has brought a great deal of change-there is no indication it will stop.

For law firms only comfortable with the status quo, the avalanche of innovation can be both unwelcome and threatening.  Every mention of an advancement or breakthrough can add to a sense of helplessness. Many firms once successful in the old ways don’t know where to begin when it comes to innovation.

A law firm’s task in tackling innovation is not to change the industry or seek its acclaim.  Rather, every law firm can innovate by advancing its delivery of legal services to where clients perceive greater value and law firm owners enjoy better financial stability.  Law firm innovation does not need to transform the industry, it only needs to transform the firm.  Because most firms have room to become more efficient, more effective in delivering value, and more profitable, innovation is within the grasp of every law firm.

Innovation for a firm stuck in the status quo requires the following five important steps:

Recognizing that Standing Pat is Not the Answer.  Law firms worried about falling behind must subscribe to the Zig Ziglar admonition “the first step in solving a problem is to recognize that it does exist.”  This is especially true for law firms weighed down by the hide-bound ways of the past and struggling with moving to the future.  Once leadership recognizes that change in approach is necessary, innovation is possible.  But until that occurs, there is little chance a firm will be able to keep pace with the changing legal services world.

Reflecting on the Firm’s Strengths, its Clients and its Financial Condition.  Upon realizing that change is needed, the firm must take stock of itself, its clients, and its financial standing.  Understanding what it does well and what it does not will bring into focus its strengths and weaknesses.  The firm’s lifeblood, its clients, must also be understood to make progress.  Any plan must focus on nurturing and expanding client relationships. The firm’s financial performance must be assessed and dissected before a path to greater financial strength can be created.

Committing to Create a Plan to Improve Value Delivery and Profitability.  For a firm to innovate, it must be committed to improving the delivery of legal services.  Improved delivery enhances the value clients perceive, improves the firm’s chance for repeat business, and grows the firm’s reputation.  Client growth must improve the firm’s profitability or it is counterproductive.  For this reason, all client relationships should be looked at holistically to test whether they improve a firm’s financial performance.  If any do not, their continuation should be questioned.

Welcoming New Ideas-Be Willing to Be Bold.  In its purest form, innovation involves the implementation of new ideas that improve results.  A firm thinking about moving its practice to a better place must be ready and willing to consider new ideas.  Leadership must create an atmosphere where “outside the box thinking” is welcome.  Not all new ideas will be adopted, but freedom to suggest them is essential.

Considering Best Practices of Other Firms or Known Innovators.  Worth considering are the best practices of other firms that have moved on from stale to more dynamic practices.  Transformative techniques or practices of other businesses not in the legal services industry may also provide useful guidance.  In other words, innovation need not be original thought-it just needs to be a way to better results for the firm.

Every law firm is ripe for innovation.  Sometimes innovation is dramatic; other times less so.  What is your firm doing?

 

 

 

Whenever you see a successful business, someone once made a courageous decision. – Peter Drucker

We have previously written  about the unique nature of the law firm turnaround and how commitment from owners is one of the keys to turnaround success. In Part 2 we will look at resource management (or cost management) as a second key to success.

Cost Management – Relieve the Pressure

Turning-around a troubled law firm, or any business for that matter, is difficult. To give the challenged firm the greatest chance of success it is critical to relieve the organization of as much financial pressure as possible.

Although there are other steps that we will discuss, managing a firm’s cash commitments to as low a level as practical is the first and most important step in minimizing financial stress. Typically, the two largest demands on the financial resources of law firms are:

• The cost associated with personnel

• The cost associated with lease space.

Managing People Cost Continue Reading Relieving Pressure in the Law Firm Restructure/Turnaround

Law firm mergers are a regular occurrence in today’s American legal landscape.  Large or small, they happen because law firms and their leaders see merger has meeting a perceived need.  Whether seeking greater market share, pursuing untapped lucrative markets, responding to a demographic challenge, or fixing inadequate succession preparations, a merger can represent the right solution.  But mergers are neither easy nor assured of success.  Indeed, many mergers don’t achieve their desired goals and in some cases, render a firm worse off.

Not all law firms pursue merger with the right level of discipline or knowledge. This can be especially true for law firms embarking on merger for the first time.  By being new to this dramatic form of law firm transition, leadership may be uncertain about the process or a tad overwhelmed.  Merger as an initiative can seem daunting, especially when leadership thinks about how important it is to get the merger right.  In almost every instance, getting the merger right is a function of finding the right merger partner.

How does a law firm find the right merger partner?  There are five fundamentals that increase the likelihood of finding the right merger partner, and if followed, improve a law firm’s odds in getting the merger right.  The five fundamentals are:

Have a Strategy That a Combination Serves.  The most important fundamental when considering merger is to have a strategy that merger serves.  The idea that merger itself is a strategy is wrongheaded.  Merger should be a tactic to further a firm’s strategy, whether it be a need to add needed substantive abilities, build-out existing specialties, or become more deeply rooted in a client’s business that is growing in a currently unserved market.  The merger can be the jump start on the underlying strategy.  But merger should not be the strategy itself.

Be Faithful to the Firm’s Strategy in the Search. Upon deciding that merger can implement a firm’s strategy, it is essential that prospective merger candidates have the characteristics that are consonant with the firm’s objectives.  Simply put, a firm needs to know what kind of firm it is looking for in a merger candidate and only look at those kinds of firms.  It takes discipline to remain faithful to pursuing firms with the identified characteristics, especially when firms attractive in other ways indicate a willingness to merge.  Yet an attractive firm missing the elements that further the firm’s strategy is not a suitable candidate for advancing the firm to where it wants to go.

Test Compatibility Thoroughly.  When a prospective merger partner appears to meet strategic requirements, it may be far from clear that the right choice has been found.  Upon identifying a potential candidate (because it checks most or all the boxes for advancing the underlying strategy), its compatibility needs to be tested.  In most instances, compatibility can be assessed by focusing on five compatibility metrics:  culture, finances, clients, compensation and operations.  If the two firms do not fit well when considering these five metrics, it is advisable to decline the opportunity.  Two incompatible firms do not make for a good match no matter how perfect the strategic fit may seem.

Think Beyond the Closing Date. A merger that comes together is a wonderful thing.  But the job of making a merger succeed, even ones whose compatibility is evident, requires a great deal of work beyond the courting and closing.  Any two firms brought together should invest heavily in integration and assimilation preparations so they become one.  In addition, the two firms will need to create systems, processes and procedures that facilitates the uniform treatment of all personnel.  Treating everyone alike will encourage consistent behaviors and can go a long way to forging a single culture out of two firms.

Be Ready to Walk Away.  Merger discussions are time consuming, can create excitement, and can generate a lot of reasons “to do the deal.”  Yet for a merger to be worthwhile it must be compelling.  If the match falls short of that standard, it is best that it not be pursued.  Despite the momentum towards a deal that makes some of sense, if it does not speak strongly for its consummation then serious consideration should be given to calling it off. Walking away from a deal does not mean failure, it means that the search for the right match continues.

Getting a merger right is a function of finding the right candidate.  Following these five fundamentals will guide leadership to the right result.  Why make it more complicated?

“Hope is the denial of reality. It is the carrot dangled before the draft horse to keep him plodding along in a vain attempt to reach it.”  – Margaret Weis

Most business people are familiar with Built to Last and Good to Great, both terrific books by Jim Collins. He published a less known book, How The Mighty Fall, that I like a lot. In it Collins describes a phase that many struggling companies go through — the phase of Denial of Risk and Peril.

Denial is a phase that I have seen many-troubled law firms go through; unfortunately for some it is the final phase prior to dissolution.

There are two primary scenarios in which denial can seem to magnify (or even hasten) the decline, and intensify the struggle:

  1. Undervaluing (or underestimating) the risk associated with a significant undertaking; or,
  2. Disregarding mounting evidence of decline.

Denying the Risk Associated With Major Initiatives

Struggling law firms often entertain significant changes (to the firm or in its culture) in order to “right the ship.” I define a major change as one that, if it were to go very wrong, might trigger the demise of the organization. Some examples include:

  • Downsizing through the termination of individuals, groups or offices;
  • Acquisition of another firm or practice;
  • Being acquired;
  • Restructuring management/governance; or,
  • Modifying the compensation system.

Major changes are often necessary for a struggling firm, to be sure. However, a move from the frying pan into the fire is to be avoided. The overwhelming tendency is to undervalue the risk associated with major moves. To counter that tendency the prudent leader will seek to have the “worst case” scenario fully developed and discussed prior to decision-making. It is best to initiate major change with caution and counsel.

Denial of the Evidence of Decline

By definition, struggling law firms are operating in variance to desired levels. In the most extreme of cases – failed law firms — it is typical to find that there was mounting evidence indicating a decline – evidence that was discounted or ignored.  Examples of mounting decline include:

  • An increase in the level of undesired attrition/turnover
  • Increased debt
  • Declining profit margins
  • Falling revenue levels
  • Loss of meaningful client relationships.

SUCCESSFUL LEADERS RESIST DENIAL

Law firm leaders must be vigilant in monitoring the performance of the organization. Steps should be taken to ensure that the firm doesn’t veer too far for too long, from operating performance norms or targets. The longer the firm operates in variance, or the greater the degree of that variance, the stronger the corrective action needs to be.  And the more frequently the performance needs to be monitored.

Often the leader of a law firm in decline becomes more insular, protecting the firm from “bad news” and trying to prevent alarm. The prudent leader will honestly communicate with confidence and conviction, while broadening the number of people from whom input and advice is solicited.

Is denial adversely impacting your firm?

 

In the case of many law firms competing in today’s legal environment, growth is important.  Some growth is done quietly while other expansion is discussed widely.  Growth in the form of law firm merger gets everyone’s attention-indeed announcements about law firms joining together in merger seem to be made weekly.

For every merger announced there are many others that don’t make and go quietly into the night.  Most failing efforts can be traced to the numerous factors that make merger so complex. Make no mistake, mergers are complicated and sometimes difficult.  When law firms are inexperienced in merger, the idea of merger can seem daunting and leaves the novice firm unsure how to make a merger work.

While all mergers and their negotiations are unique, virtually all mergers go through four distinct steps that help determine whether merger will succeed.  Within these four steps, law firm leadership must exercise discipline to assure that each step is carefully vetted and examined before moving to the next step.  A lack of discipline, or moving prematurely onto the next step due to excitement or deal fever, can lead to a risky merger.  Performed with discipline, however, and these four steps can improve a law firm’s chances in the merger game.  The four important steps are:

Making an Informed Decision About Merger.  Even though merger can be transformative for a law firm, thinking that merger can be a panacea for various ills is unsound.  Thoughtful reflection is required. There must be a clearly articulated business reason to consider the tactic of merger.  Some firms look to merger to provide a rescue, others need additional capabilities or have identified another geographic market with promise.  The adding of market share in a single boost may be needed because organic growth is too slow.  Merger also can be succession tool as existing leadership or business generators are reaching the end of the road.  Making an informed decision on whether to pursue merger must be premised on a thorough analysis about a firm’s business objectives.  If that rationale is missing, merger is not a tactic to pursue.

Identifying the Important Criteria.  Once merger is accepted as a possible tactic to implement the firm’s business imperative, the criteria for a potential merger partner must be identified.  Pursuit of a merger candidate should not begin until the criteria are settled.  Moreover, once the important features of a potential merger target are established, any search for a merger candidate must be strictly faithful to the criteria selected.  Discipline in searching for the merger partner meeting these characteristics also means being willing to walk away from a potential deal if the criteria don’t match up.  By staying true to its criteria, the firm will avoid making emotional and irrational decisions.

Testing Every Prospect for Compatibility.  Even a prospect that meets a firm’s search criteria might be a poor fit if the two firms are not compatible.  Here, firms should test in a disciplined way whether compatibility exists on matters of culture, finances, compensation systems, clients and operations.  Compatibility in leadership styles, succession planning and vision should also be tested.  If compatibility is wanting in too many of these important areas, the merger should be avoided.

Blending the Two Firms Together.  While the firms are still talking and before the deal is sealed, it is essential that both firms get together and develop conceptual plans for the assimilation and integration of the two firms.   If preliminary talks reveal that integration will be difficult, it is a warning sign that more work needs to be done.  And once the deal has closed, the unified firm must take the conceptual plans and develop them further with sufficient detail to bring together disparate groups to make the firm one.  Included in this process is the need to build a single culture, create processes and procedures to gauge, motivate and reward the performance that leadership expects from the firm’s personnel, and look to the future.

Merger is a lot more than just finding a firm that is interested in joining yours.  To make a merger work, exercising the discipline to implement these four steps is critical.  Can you think of other similarly important steps?

The measure of intelligence is the ability to change – Einstein

 

 

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.

I found this short and insightful post by Eric Fletcher to provide a great example.

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?

“A discord of personalities” sometimes describes the genesis for marital divorce.  It also can be an apt way to explain law firm break-ups when partners decide to go their separate ways.  Although law firm break-ups happen regularly, the low level of publicity surrounding most can be due to partners acting rationally even though they can’t continue together any longer.  Quiet separations and wind-downs occur when the splitting of the sheets is unemotional and professionally executed.  Publicized break-ups, with all their ugliness, arise when emotion and shortsightedness mix together to fuel what becomes an explosive process.

Successful break-ups (perhaps an oxymoron) universally share common strains.  They come about because tenets that auger in favor of conciliation and dispatch are followed.  Although the disappointment that leads to the break-up may make following these principles unnatural, adherence to them keeps unproductive behavior and tendencies to a minimum.

Historically, smoothly executed law firm wind-downs have five things in common.  These common traits are instructive to law firm leaders facing a law firm divorce.  In learning from what others have done, any law firm leader staring at law firm divorce would be wise to encourage the firm’s owners to act in the five following ways:

Agree on a Neutral Expert to Navigate the Course.  Winding down a firm is neither intuitive nor easy.  It is best accomplished if it is managed by an independent professional that has wound down law firms before.  An independent and dispassionate professional that has no agenda other than efficiently wrapping up the firm’s affairs serves all owners well. While some owners may argue for cost savings from a “Do it Yourself” approach, in-house people tasked with the DIY effort frequently have non-neutral agendas, are perceived to be non-neutral, and otherwise lack the trust of all owners.  A neutral expert can move the firm to a fruitful conclusion even while disputes between partners’ percolate and need to be resolved.

Retain Experienced Advisors.  Many law firm divorces involve anger, distrust or disappointment.  Diffusing that volatile mix is critical. Step one is to tamp down the emotions by getting the owners off the front lines.  Each identifiably different owner interest should retain an experienced representative that understands the vagaries of law firm liquidations and that has a track record of being solution oriented and collaborative.  While there is nothing to prevent the disparate interests from retaining as their representatives’ litigators quick to drop the cudgel, going that direction is neither smart nor cheap.  And as experience has shown, it seldom is quick.

Think About the Future as You Settle the Past.  If a law firm’s past was so great, there wouldn’t be any sentiment to shutter the firm.  Indeed, the decision to break up a law firm is driven by a view that a different future is better than the status quo.  If the past is not worth continuing, the future should be the focus on virtually all levels.  While every law firm wind-down necessarily involves a settling of accounts, the objective should be to settle quickly.  Rather than dwelling on past misdeeds and transgressions, the owners should wrap up the old firm expeditiously and economically.  In a world in which the maxim “time is money” encourages people to move smartly to the next goal, moving to the new day of a new firm allows the future to be realized.

Think About the Children.  Like matrimonial divorce, in law firm divorce peoples’ lives are impacted.  Taking care of the associates, contract attorneys and staff not only is the right thing to do but because non-owner cooperation is needed in wind-down, it also tends to make the process smoother.  An honorable end to the firm which fairly addresses severance, benefits, and outplacement tends to pay dividends over a long period of time.  In contrast, harsh or uncaring treatment to the non-owners is not only unfair, but can interminably impact owner reputations and pocket books.

Communicate (Talk it Out).  Like so many aspects of law firm transition, a clear and constant flow of communication serves a divorcing law firm well.  Advisors need to communicate with owners, owners need to communicate with each other, and non-owners need to be kept apprised until their interests are addressed.  In addition, as the wind-down progresses, clients, third-party vendors, banks and contract counter-parties (including landlords) must hear about and be engaged in the wind-down.  In law firm wind-down, silence is not golden.  Rather, it can become the spark that ignites an explosion.

When the thrill is gone, and a law firm calls it a day, risk to the firm’s owners can depend on their approach to winding-down their firm.  Would your firm and its owners be willing to do these five things that reduce their risk and make dissolution smooth?

One ought never to turn one’s back on a threatened danger and try to run away from it. If you do that, you will double the danger. But if you meet it promptly and without flinching, you will reduce the danger by half. Never run away from anything. Never!    Winston Churchill

Law Firms, like all businesses, are in a constant state of change. Similar to an annual check-up on your health, law firm leaders should periodically take the time to evaluate the condition of their firm in order to catch looming challenges before they become a threat to the institution. Regular “check-ups“ increase the likelihood that you‘ll be in a position to take action in time to prevent a down stream crisis.

All of this begs the question — What are the most common signs that a firm’s relative market position is beginning to slip? 

  1. A sudden unanticipated loss of lawyers– We’re not talking about normal “comings-and-goings” the propensity for frequent movement of individuals is the topic for another post.  This is about a greater-than-normal degree of movement.  During a measured period, the greater the percentage of lawyers lost, or the more prominent those departures, the more this should be taken as a warning sign.
  2. The loss of key clients(or increased difficulty in winning new business).  Continuity of critical relationships is one of the greatest assets of any firm.  Savvy management works hard to avoid the too-many-eggs-in-one-basket syndrome, and insuring a portfolio of clients central to success.  But in any firm, the loss of one or two key clients, or the departure of a large number of clients from any group should set off an alarm.
  3. The absence of strategic organic growth.  If you are increasingly unable to win the new business targeted in your firm’s strategic plan, take heed.  Either the competitive landscape is shifting in a way that directly impacts your position, or the market is sending you a message. In either case, your firm is likely in some stage of transition. It is time to manage appropriately.
  4. Increasingturnover in key positionsin the firm. I often refer to Jim Collins principle of having the right people on the bus.  If you begin to lose significant non-attorney personnel, this can be much more than an inconvenient (and costly) loss of continuity. In a competitive marketplace, viewing key staff positions as fungible can serve to mask a troubling organizational issue.  (see short Collins video on the topic here)
  5. Flattening or declining profits. On one hand, this seems simplistic, but so often a continuing trend of economic performance falling below expectations is ignored and shouldn’t be.  If profits are flat or declining, it is almost always time for action.
  6. Falling revenues. Often declining profit is preceded by shrinking revenue…but not always.  Whether profits decline or not, falling revenue is a reason for concern.
  7. A worsening relative debt position. Debt, in and of itself, does not spell trouble.  Most law firms rely on debt to some extent to finance growth and manage short-term fluctuations in cash flow.  That said, an increase in a firm’s relative debt position should be closely monitored.  Absent alignment with strategic moves, this is often a sign of impending decline in market position.
  8. Negative external visibility. Many firms receive some degree of bad press; loss of a case, a high-profile departure, or litigation filed against the firm are typical causes. But leadership must resist the temptation to ignore what can be viewed as uninformed voices.  An increase in negative visibility via local, regional or internet distribution channels is an early indicator, and cause for concern.
  9. Difficulty in attracting talent. When your firm finds it increasingly difficult to attract lawyers, it is either the sign of a declining market position or an increase in the perceptionthat the firm is in decline.  This perception is, itself, an indicator of decline.  If strategic talent believes your firm may be in decline, each day brings increased danger that the perception will become reality.

All well-run firms recognize benchmarks and maintain performance data. The best routinely evaluate performance in critical areas – carefully looking for any sign or signal that the landscape is shifting.

The more comprehensive our list of early warning signs, the more accurate our assessment of existing and future market position.  What would you add (or remove) from our list?  Does your firm monitor the early warning signs?

 

Read addition posts related to restructuring and repositioning here.

Despite today’s times being better for many law firms, the positive trends do not signal a return to the gilded pre-2008 days; unfortunately, those days are gone for good.  Law firms are fighting for market share in 2017 in an arena vastly more competitive than the one that existed a short decade ago.

Competition is not just from other law firms.  Clients are turning to alternative legal service providers for routine and commoditized legal needs.  Because these providers deliver services faster and cheaper for some tasks, many clients pass on using law firms.  Other non-law firm competition is at play.  Institutions that formerly relied almost exclusively on outside law firms have been building up in-house legal staffs https://www.youtube.com/watch?v=E3v3x9E4pW0 to address their business’ legal requirements.  In this revolutionized legal services landscape law firms no longer control the legal markets, clients do.

To adjust many firms will try to hustle more, hire more lateral attorneys or otherwise grow, or seek out improved efficiencies. Unfortunately, many of these strategies will fail to make a lasting difference.

While working harder and smarter is never a bad thing, as a response to the revolution it is inadequate.  In far too many instances, firms try to solve today’s problems with yesterday’s solutions and fail.  They miss finding a transformative answer.

To thrive in today’s world where clients look beyond law firms for their legal needs, a more thoughtful response is needed.  Five important thoughts law firms should consider:

Value is not only about Money.  High quality legal service is the expectation.  Beyond that, the value of legal services to a client is not just measured by the size of a bill.  Creating savings through reduced rates, fixed fees and detailed budgets, while valuable, is just one factor in achieving client satisfaction.  Clients that build in-house legal departments do so for more than monetary reasons.  In-house resources provide timely services that are enterprise focused and further the business’ mission.  A law firm that is not enterprise focused in a client centric way will not compete well with the client’s in-house lawyers.  There is great value in an enterprise orientation.  Clients with in-house departments already have it-law firms would be wise to follow.

Understand Your Clients(s).  In-house lawyers treat their company counterparts as their clients.  They seek to understand the business needs of their “clients” so that the overall purpose of the business is advanced and their client contact achieves unit and career objectives.  Done well, the “client” will serve as a good internal reference.  A law firm lawyer that thinks that client satisfaction ends at the legal department door misses the opportunity to truly serve his client, the company.  An outside lawyer must understand that he or she has two clients, the legal and business departments.  Law firms must enhance client satisfaction for both clients or they will not compare favorably.

Nurture and Invest in the Relationship.  Nurturing and investing in your client relationship requires an investment of time that goes beyond doing good legal work or entertaining.  It demands a commitment to understanding the needs and objectives of both the legal department and the business department.  Investing time and research into understanding the client’s business is an absolute necessity and will lead to greater attorney effectiveness.  The investment may not generate fees on every occasion, but in the long run the outside attorney’ indispensability to the client’s success will position the law firm for matters of significance that require outside counsel.

The Potential for Success is Measured by Touches.  An attorney that understands the client’s business and has invested to nurture the relationship will become a frequent resource to client contacts that need help.  The more times a client calls the more it is telling you that you are integral to its success.  As calls come in (many handled without the meter turning on) client capital is created. In due time, trust becomes implicit and the likelihood that key pieces of outside legal work being directed your way improves.  The potential for success is not measured in billable hours but is measured in client contact on things that matter.

Reconstruct Your Financial Model for the Reconstructed World.  A law firm reorienting its approach to clients that have in-house staffs cannot count on its attorneys always filling their day with billable hours.  While investing in the client will detract from the level of billable hours a firm may generate, the attorneys are not working any less.  Their non-billable work is an investment in the future.  A reorientation of a firm’s business model to allow for client nurturing may be required.  Without it motivation for attorneys to make the required investment in the client will be lacking.  And without the investment, law firms may not compare well with in-house staffs.

Since the revolution of 2008 client behavior has changed.  Turning away from law firms is now a routine option.  If non-law firm competitors have fueled this revolution, shouldn’t your law firm think about learning from their lead?

Merger mania continues in the legal sector. According to Altman Weil’s MergerLine, there have been more than 50 law firm mergers in the US so far this year; 2017 could well be a record year for law firm combinations.

The odds are high, whether your firm has been engaged in merger discussions in the past, it is likely to consider such discussions in the future. The purpose of this post is to increase the likelihood of success, should you decide to move forward with such discussions.

Most Mergers Fail

This is a harsh reality that rarely garners any attention once two firms embark on discussions of some type of combination.

Accept for a moment that corporate America is at least as competent as law firms in evaluating and structuring mergers. According to a McKinsey study, 70% of mergers fail to achieve intended synergies. Furthermore, numerous studies and reports indicate that far fewer than half of all law firm mergers deliver the expected value.

Why is this the case? The simple answer is incompatibility.

In this respect, a law firm merger is much like a marriage. The greater the degree of compatibility, the higher the probability the relationship will work for the long term.

While the “dating” process may be enjoyable enough — wining, dining with all parties putting their best foot forward — when you begin talking merger, you’re talking about hitching your professional well-being to the productivity, stability, and commitment of another law firm. All courting pleasantries aside, it’s time to take real stock of the potential relationship.

 

Three Compatibility Tests

When assessing the likelihood of a merger’s long-term success, it’s wise to consider compatibility (or incompatibility) in the following three areas.

Practice

Every firm has (or should have) a clear perspective on the type of practice the partnership is striving to build. When considering the firm you are about to create via merger, this conversation might include:

  • Types of clients
    • By industry (technology, health care, manufacturing, etc.)
    • By size (small business, individuals, national or global)
  • By location (local to anywhere)
  • Which side of the fence your firm will focus on
    • Plaintiff/defense
    • Employer/employee
    • Acquirer/acquired
  • Practice area(s)
    • General or specialized
    • One area of focus or full service
  • Sophistication of practice
    • Bet the company
    • Essential, but not life or death disputes or deals
    • High demand, but commoditized practices

Financial

A lack of harmony on financial issues is at the root of many failed mergers (and marriages). Areas that often are the basis for conflict include:

  • Debt – philosophies range from “our firm doesn’t borrow any money from outside sources for any purpose” to “we don’t invest any of our own money in the firm if we can borrow it.”
  • Capital levels – the amount of money contributed by the firm’s owners to decrease dependency on outside sources for cash flow.
  • Draws and distributions – like debt, approaches vary from fixed draws with periodic distributions regardless of profits, to irregular distributions when profits are sufficient to pay all current and prospective bills.
  • Spending levels — from “we must spend to grow” to “We spend as little as possible.”

Cultural

Culture is often hard to define but it may be the most critical of the three issues. Some have defined culture as the “way” a firm does things. Regardless of how you define it, typical cultural issues that lead to disagreement include:

  • Work expectations – successful firms clearly communicate what is expected of lawyers, ranging from “We just expect everyone to do their best”to “We have a specifically defined performance expectation applicable to each class of attorney.”
  • Commitment to client service – some firms have a deep and visible commitment to client service. It is talked about and measured. Other firms have a general understanding that doing good work is essential, but benchmarks and conversations on the subject are not material to the business of a law firm.
  • Compensation systems – Systems range from purely formulaic to ones in which all partners make exactly the same amount. Any system can be made to work if all partners embrace it.
  • Treatment of people – Some law firms have such a strong commitment to how people in the organization are treated that they are regularly recognized as a “best place to work” in national publications. Other firms leave the issue of how others are treated to the discretion of individual lawyers.

We’ve touched on a few of the issues that should be considered. The time to evaluate your firm’s own position on these issues is before sitting down with a prospective merger partner. Considerations of this type that are put off until actual merger discussions simply do not receive appropriate attention while energy is directed to (and attention distracted by) the potential of the deal itself.

Mergers are not easy. The track record is not great. Meanwhile, a combination could well be the most important business deal you will ever be party to. As such, discussions of combining forces deserve the diligence, resources and attention you would bring to the most significant matter you’ll handle.

What is your firm’s position on practice, financial and cultural standards?

 

For additional reading related law firm mergers click here.