Integrating Merged Law Firms: How to Create Truly Disruptive ValueMike White
The legal industry enjoys a long history of bolting together two newly combined law firms, or practice groups from two newly merged firms; best practices here are well established at least as it relates to the basics (e.g., identify redundant processes, mesh together technology platforms, create instances for intentional “mingling” to break down barriers, have leadership sell the benefits of the new normal loudly and often, get the marketing dept to come up with a coherent brand, define an existing client x-selling process, etc.). But what more can be done beyond the basics to really make a law firm combination “sing”? Is it possible to create a combined law firm experience from which lawyers simply do not want to leave . . . ever? Can a combined firm deliver disruptive value that clients would never expect to consume from law firms?
I encourage firms to use “signature experience” methods to create the secret sauce here. Derived from “client experience innovation” approaches, “signature experience” methods can transform a successfully integrated firm into a firm that delivers a special experience to its internal lawyers and team members, and as a result of such, confers unique and disruptive value on clients. In this regard, McKinsey is “different” from AT Kearney (not to pick on AT Kearney!), and Goldman Sachs is “different” from Credit Suisse (not to pick on Credit Suisse!).
In previous writings on “signature experience” I’ve exemplified what “signature experience” transformations can look like. However, I’ve purposely avoided walking through the structure of what a “signature experience” integration project would look like as those mechanics tend to be less intellectually interesting and less foundational. Merged firms that are successfully integrated have a rich portfolio of processes to support the “1+1=3” work streams, and the “signature experience” integration project structure below is a great example of such.
I break down a “signature experience” integration project into five phases:
Focus & Mobilize
- Review strategy, practice development, marketing materials, as well as any client research; conduct individual interviews with leaders
- Create a working team to dedicate 1/4+ time to the project (2-3 people) over about four months; create a steering team to participate in key workshops
- Deliverable(s): Document a project plan
- Conduct additional concentrated intake in areas of special focus (e.g., shoring up a flagging industry sector effort that represents substantial long term opportunity)
- Hold working sessions to clarify desired outcomes and prioritize client behaviors
- Translate the outcomes into specific revenue/profit growth objectives, and build alignment on the outcomes
- Deliverable(s): Description of business outcomes
Truth About Today
- Review client-facing processes, services, and other exposures; conduct client and employee interviews
- Identify gaps and opportunities associated with desired outcomes; identify “low hanging fruit” quick wins
- Deliverable(s): i) Truth About Today summary and implications; ii) Summary of top client interviews
Vision & Design
- Define end-to-end experience vision aligned with desired outcomes
- Develop description of initial experience enhancements and service improvements
- Describe process, structure, employee experience and technology implications
- Deliverable(s): Document the above
- Develop roadmap for acting on initial experience innovations, as well as the iterative design, refinement, testing, and creation of new experiences
- Deliverable(s): i) Roadmap of initial experience innovations, and process to support development of new experience innovations; ii) Playbook
The above framing does not reflect a lot of project detail, or descriptions of all of the working team sessions, steering team sessions, and other standing meetings along the way. What I hope the above does accomplish is provide you with a concrete sense of what a journey would look like to build a unitary firm using “signature experience” methods!
Building a Unitary Merged Firm: Dynamic Teaming & Abe Maslow!Mike White
What does it take to make an integration process of two law firms really “sing”? Why are many mergers so challenged at realizing synergies, building a unitary operating model and culture, and acting upon a single set of external priorities?
In fairness, all firms have problems with these issues: fulfilling their commitment to autonomy tends to trump their efforts to have everyone rowing in the same direction toward shared goals.
A few table-setting observations can be made about law-firm combinations:
- This stuff is hard
- Results have been “choppy”
- As between “human beings” and “operating systems & processes,” I’ll put my money any day on human beings to drive improved performance and integration in any flat, professional-services environment (e.g., law firms). Query: How do we activate those human beings?
- Integration teams of business, IT, and operations analysts are impressively professionalized nowadays. Internal teams do a pretty good job of bolting two firms together – functions and operational processes are rationalized and key-cost inefficiencies are wrung out. Nonetheless, these areas are not the powerful, revenue-driving growth levers that should be the poster children of a high-performing combination.
The truth is, integration can be a head-scratcher. Law firms deliver system/process/product-enabled “artistry” rather than “artistry”-enabled systems/processes/products (i.e., the “human being” query above). People are your revenue; people are your products; people are your assets. While integration tends to focus on “process,” if your integration plan gets the “people” equation right, you’re accomplishing a lot.
Core “people-related” key-performance indicators (KPIs) for integration might focus on these goals:
- Retaining your best people
- Helping your best people perform better and contribute even more in the future
- Hiring both proven and high-potential contributors from other firms
How can we support the above three KPIs? One way to look at the “people issue” is through the lens of that legal industry sage . . . human psychologist Abe Maslow!
Maslow’s Hierarchy of Needs
Maslow defined a hierarchy of needs that explained each person’s path to fulfillment and happiness – i.e., self-actualization. He came up with three general levels of motivation:
- Basic – physiological (food, water, safety)
- Psychological – belongingness, relationships, esteem & accomplishment
- Self-fulfillment – self-actualization (achieving full potential)
He concluded that all humans have higher-level, less mercenary, less self-oriented paths to fulfillment that become important once the most basic and self-centered individual needs are met. Our needs become different in kind, not just in degree. Moreover, meeting our higher-order, self-actualized needs is more fulfilling than meeting our first-level, most basic needs.
“Level 1 needs” represent the most self-focused, and can be closely tied to more individual – dare I say hedonistic – desires. For our analytical purposes with law firms, Level 1 needs point us in a single direction: $. Already well-compensated “over contributors” generally support combinations because leadership will make sure to do everything it can to retain these “people assets” – they are simply too critical to the combined firm’s success to treat differently. But what about the other highly valued, high-potential partners who today place only a modest imprint on firm revenue? These latter partners are a flight risk because they likely won’t be happy with their new compensation. Firms don’t want to lose these people.
An Optimal Approach
Question: What should firms do to retain these valuable partners? Answer: Focus on Level 2 and Level 3 needs!
Translating Maslow’s hierarchy into practical integration strategies can help a combined firm create a differentiated, non-mercenary, culturally cohesive professional platform to which highly valued assets (human beings) can commit over an entire career.
At Edge, we help integrating firms put together a potent portfolio of adaptable teams to achieve important “one-firm” integration priorities. By borrowing from the really great work of organizational behaviorist Aaron Dignan as well as from Maslow, your integrating teams should be able to support certain concepts and have good answers to the questions implied in these bullets:
- Inclusion – Can I choose to support the integration process by collaborating with my peers through a teaming structure with which I can engage voluntarily?
- Purpose – Is my team’s mission objectively important to the health of the firm?
- Alignment – Will I benefit individually from what I’m building through my team?
- Self-Determination – Is my involvement elective, and is our team’s mission something we crafted from the ground up, rather than succeeded at from the top down?
- Contribution/Impact – Will our team’s impact, if achieved, be valued by firm leadership (for example, generating near- and mid-term revenue)?
- Agency – Do I have the freedom to determine how and when I will spend time with my team, and to experiment with new approaches that will help fulfill me and/or enhance the health of our firm?
- Creativity – Can our team create new objectives, and new means of meeting those new objectives, if in good faith we feel we can support our overarching mission?
- Transparency – Do I have ready access to all the information I’ll need to help our team be informed and be more effective?
- Contextual – Will the teaming structure and mission be mindful of my core responsibilities, which I need to support outside of my contribution to the integration effort?
- Support – Does my firm provide our team with the tools we believe will help us be successful?
- Service Scaling: Conferring Collective Benefit – I want to see my team’s impact radiate across the firm and benefit many others. Is my team capable of helping many people, and are those benefits perceptible to my team members?
- Recognition/Validation – I want to be validated and experience recognition through my team experience. Will the firm celebrate our successes?
I don’t mean to suggest that integration efforts activated through adaptable small teams are rudderless, “Woodstockian,” feel-good exercises. Participating partners and team members will need to benefit from the strategic vision and goals of leadership, and know about the priorities being acted upon by firm leadership in a more structured way.
Note: Team goals can be informed by objectives associated with increasing revenue and acquiring more clients, and they can also be informed by the “inputs” that lead to those objectives – e.g., “If our team establishes a relationship with two executive recruiting firms, our bankruptcy group could become the law firm of choice for the ‘change agent’ CFOs they place during a search engagement.”
Once the table is set properly and larger goals and related inputs are understood, get out of the way and let your teams run!
Bonus Bullets on Merger Integration and “Teaming”
- Partnerships! Partnerships!: High-performing business-services companies put in place a dizzying array of external partnerships with other complementary firms and product companies: venture partners (to enter new markets); product partners (to extend offering capabilities); revenue partners; innovation partners (to create whole new capabilities); technology partners; etc.
- Focus Teams on “Hybridization”: Law firms whose offerings bleed into other disciplines gain differentiation, gain relevance, and gain standing to have more diagnostic discussions with prospects. Examples are law-firm M&A shops that get their hands very dirty with post-acquisition business-integration issues (normally the province of Big Four firms, IT consultants, internal business analysts, etc.), or law-firm commercial litigators who sit down with risk-management consultants (think Marsh, Aon) and the client CFO to map out risk-mitigation strategies during an enterprise risk-assessment process.
- Insinuate Your Firm into Thought Leadership Discussions: Assign one of your teams to hang out with McKinsey, Bain, BCG or other disruptive-innovation consultants like Innosight. These consulting firms will tell you what innovation is taking place and how it will create new revenue categories. These new growth categories create new legal needs, and – more importantly for today – give law firms great content to serve as conversation-starting subject-matter currency.
The Swiss Verein – Time for a Closer LookSean Larkan
The Swiss Verein structure, so commonly used between firms that align within countries, or between countries, has recently received some searching analysis.
This arose through the problems experienced by King & Wood Mallesons (KWM), a Swiss Verein (SV), and its relatively young European operation, also a SV, which resulted in KWM EUME being dissolved and going into formal administration. This was covered quite extensively in a recent Lexpert article to which three Edge principals contributed comment: http://www.lexpert.ca/article/swiss-miss/
There are a number of different possible causes for the collapse of KWM EUME: Was it due to the verein structure? Or poor choice of target firm in Europe? Inadequate leadership and management of the new expanded structure? Insufficient time and effort put into building trusted and respected relationships and collaboration between the old and new merger partners? It was probably a combination of all of them.
A sad end to a potentially powerful merger, the KWM EUME collapse has provided a timely wake-up call to all other SVs to review and stress-test their own structures. More importantly, they should carefully consider the leadership and management of their SV, as well as the cultural and other factors that provide the necessary glue between member firms.
It is also timely to revisit some of the attractions but also some of the potential downsides of this popular structure.
The Swiss Verein: an attractive alternative?
- Firms in different jurisdictions, often with different structures, can present themselves internationally as a single entity without complying with all the regulations and tax codes of each country in which the SV functions. For instance, an SV can help firms to avoid the need to deal with differing regulations around the legal qualifications of law-firm owners, and the necessity of member firms or their members to file multiple tax returns;
- Arguably the greatest attraction for merging firms is that financial matters (unless agreed otherwise) largely stay within each jurisdiction, including liabilities for financial debt, contributions to capital, sharing profits and the like. This is obviously attractive to sceptical partners in a larger, more dominant and successful firm tying up with a smaller firm that earns lower profits per partner. It also avoids issues around exchange rates, differences or fluctuations in profitability, charge-out rates and partner-compensation schemes. So, the SV can be attractive where the parties do not feel that financial merger is an unnecessary step too far;
- SVs work well for firms in different jurisdictions that feel they want something more than an alliance (which are notoriously challenging to ‘make work’), so that they can exert some measure of control – e.g., around branding and other agreed standards – but are nervous about a full financial merger (with all the attendant challenges and concerns a merger brings with it);
- Vereins have proven to be flexible structures, with each verein reflecting its own distinctive characteristics and personalities. Some successful vereins give the appearance of financially integrated entities, while others look no different from looser alliances or networks;
- Indicative of this flexibility, an SV can function between firms within a country (e.g., in major centres) or between firms in multiple countries;
- Structurally, legally and procedurally, the SV structure can be somewhat easier to unravel than a full financial merger, should this unfortunate need arise;
- The SV is also ‘tried and tested’ in various international jurisdictions, both in the accounting world (e.g., the ‘big four’, albeit they have moved on to other structures) and legal services, where it has been the structure of choice for many mergers. This will often be enough to put querying partners’ minds at rest. The Lexpert article points out that over 30% of the top revenue-producing firms are vereins;
- Subject to the caveats mentioned elsewhere, SVs are somewhat less complex to manage. For instance, one or other member firm is not subjected to the upheaval of changing all systems and processes to comply with a centralised one, although of course not changing can also create challenges;
- In large measure, the SV can accommodate different cultural, political and economic issues in each jurisdiction without them impacting other member firms;
- Still on the question of management, provided ‘other firms’ in the arrangement are well led and managed, other firms in the SV do not have to put as much time and investment into detailed management of others in other jurisdictions. However, this also can be a danger and can result in issues not surfacing in time (see below);
- Depending on what they may choose to do from the point of view of effectiveness and consistency, firms can largely leave current management structures in place in each jurisdiction;
- Members of SVs do not share commercial or professional liability for the debts or actions of other members (however, pre-merger due diligence on this is advised);
- SVs can reap real benefits from well-managed and led business, and brand integration – which can prove a profitable alternative to full financial integration;
- The verein structure can be a safe, speedy and less complex stepping stone to later financial or alternative types of closer integration;
- Typically one or other of the merging entities does certain things really well or has implemented leading-edge systems in certain areas – clever leadership, flexible attitudes, good management and sharing can result in the benefits being moved around for the benefit of all;
- SVs can give comfort to partners (who ultimately vote on such matters) and get them ‘across the line’ in regard to issues which typically worry them:
- What if they don’t perform to our level?’;
- ‘Will we ever have to bail them out?’;
- ‘We won’t have to do multiple tax returns’;
- ‘It doe ‘ sn’t look like it will be much hassle for me – I can get on with my work and servicing my clients but there may in fact be some upsides with referrals to me’;
- ‘There will be a limit on inter-firm liability’;
- ‘We won’t get bogged down in their regulatory issues’;
- ‘So, in light of the above, Why not?.’
Swiss Vereins: a cautionary note
- The relatively less tortuous path to merger provided via the SV structure, and the structure’s characteristics, sometimes causes member firms to overlook some fundamental pre-merger steps, like undertaking stringent due diligence. We advocate that such due diligence should be no different to a traditional merger;
- The passion and excitement with which firms enter into merger discussions and negotiations, coupled with the flexibility and other advantages of the verein structure, can paper over the complexities and uncertainties of international legal practice. This can be exacerbated by different styles and cultures brought to bear to consider them;
- The verein structure can mean that issues that arise in one member firm, which may even have the potential to damage the overall firm, can sometimes, at least initially, be ‘left to the troubled firm to sort out’. This is assuming the other member firms are even aware of them. This can prove disastrous, as we have seen recently;
- Depending on how they are structured and run, SVs can be fairly loose affiliations, not far removed from law firm networks, and such networks are notoriously difficult vehicles through which to extract full potential. This is mainly due to a lack of buy-in from key partners who want any upside, but don’t want the ‘hassle’ or time investment in getting to know or working with the other entity;
- SV advantages (e.g., the independence of member firms) can also be disadvantageous, causing difficulties in achieving consistency in standards, systems, cultures, structures, contributions and brand understanding and support;
- The so-called cultural glue and loyalty that sometimes keeps mobile partners in an integrated firm is not usually present to the same extent in a SV, particularly where financial and other structural issues arise;
- Vereins don’t necessarily bring about shared culture, the sharing of clients or knowledge, nor standardised practices. Because of the lack of financial integration and the type of focus and ‘glue’ this brings with it, the SV requires exceptional leadership, management that includes the time and commitment to provide active and ongoing involvement from both sides, coupled with some alignment of cultures. This can be hard to come by;
- Vereins can hide real issues in member firms. A startling fact that emerged out of the KWM EUME fall-out was that the London office had expended $47m on refurbishing its office, something partners in neither member firm seemed aware of;
- Unless they are exceptionally well managed, vereins will struggle to match financially integrated entities in regard to seamless service and technical standards, which are important to international clients;
- Bearing in mind that strategy should determine the correct structure for any firm, firms can find that they outgrow the SV structure (but this can be an advantage, in that it can be a transitional step to full financial integration);
- Problems can arise in less powerful member firms where, despite the verein structure, more powerful members exert cultural and strategic pressures (e.g., on particular industry sectors or practice areas) on the weaker members;
- Because of the lack of profit-sharing, there is not always as strong an incentive for member firms to collaborate and share expertise or clients. This seemed to be a factor at the heart of the KWM EUME break-down;
- An oft-overlooked underpinning for strong international brands is seamless operational and business integration between branded entities in different jurisdictions. This is particularly difficult to bring about in law firm vereins, where locally entrenched views around such matters can get in the way, and indeed member firms are sometimes encouraged to continue to do things ‘their way’. Instead of addressing differences and building seamless services, these issues can harden differences. As a result brands suffer.
- While there are clear differences between mergers based on Swiss Vereins and those involving financial integration, there are important areas of commonality that centre, for instance, around brand and people, key assets of all firms.
- In both structures organisational, employment and individual brands are influential on and directly impacted by the outcomes, good or bad, of the outflow of these arrangements. The KWM EUME meltdown in Europe and Slater & Gordon’s problems are two recent examples.
- Similar challenges arise in relation to people in both structures – it matters not that a structure is a SV as it is still possible, in fact it may be more likely, to lose good people if those people ‘don’t like what they see or experience’, financial instability is in question, extraordinary capital contributions are sought, colleagues get head-hunted away, the firm is ‘re-structured’ and colleagues are let go, the style of leadership or management is inappropriate or is being imposed by the ‘global entity’;
- A Swiss Verein can be a good stepping-stone to a full financial merger, and this may even be contemplated in early strategy documentation. Having practiced under the same brand for a couple of years with committed and effective management and leadership, the firms could transition to a more fully integrated model with a deeper understanding of the relative strengths and weaknesses of each business and a clearer understanding of legal and regulatory issues;
- Because a merger is based on a verein structure, it does not mean it cannot and will not result in integrated business functions, systems and procedures, nor encourage collaboration. There are many successful vereins where these have been achieved;
- Each firm involved in a Swiss Verein will need to contribute equitably to the international management of the merged entity. This is a big, significant investment as it should involve high calibre personnel. This could involve the appointment in each office of an international managing partner, or designated partners of each entity tasked to achieve cultural alignment, collaboration and communication. The choice of personnel is important, as is providing them with enough budget relief to get the job done. In our experience, this is a key area where such arrangements can stumble. Wherever possible, early integration of practice management systems, partner structural matters and expectations and client management protocols will be an advantage, and should be prioritised;
- We recommend to clients that a brand strategy be developed for the merged entity and that all merger partners and their staff understand this. This ensures understanding of the brand implications of the merger and how each entity can contribute to strengthening and using the brand. It is also important that parties to the SV have an appreciation of the risk to brand value and strength of a failed merger. Even a supposedly bullet-proof brand like KWM can suffer;
- There is invariably a lot of passion and excitement about putting such merger deals together, but firms often do not take proper account of the hard work and time commitment required after the honeymoon period is over. This is particularly so in the case of a SV where each entity is more or less expected to run its own operation;
- It’s sensible for each firm to develop a short-form business strategy outlining its strategic key business objectives in further developing its international presence, and how these verein arrangements and the designated strategies will assist them to achieve these objectives. This usually focuses the collective minds of the firms and helps identify key issues at an early stage;
- Notwithstanding the presumed protections provided by the Swiss Verein structure, we counsel clients to obtain legal advice to ensure the structure is tax effective to ensure partners are only taxed in their own jurisdictions;
- The wheels can quickly come off the merger cart if things do not go as planned. Exits of key partners and key practice groups impact organisational brand and employment brands and the underlying trust that should support them. Firms can find themselves with a remaining stock of lower performers which in turn makes it harder to attract top performers – a classic vicious circle quickly develops and the sharks circle to pick up the choicest morsels;
- Advice should be sought to ensure the structure provides for regulatory clarity; e.g., the common issue that arises in some jurisdictions that only practitioners from that jurisdiction can be partners in local firms. It is also worthwhile considering limiting cross-border liability of partners to ensure legal problems in one country do not impact the merged group;
- Some jurisdictions have particular requirements which may be peculiar to them, such as diversity requirements – these need to be unearthed in a due diligence;
- The merged entity must not be allowed to become simply a loose association of independently run law firms operating under an umbrella brand. This depends to a great extent on the calibre and style of leadership and management of each party to the merger, and this determines success or failure.
Swiss Vereins are very attractive alternative structures to financial mergers in some circumstances, but they require exceptionally good leadership and management from each entity, and the building of a strong merged entity culture of trust and collaboration to ensure they work well. This should be coupled with a genuine interest and committed effort by these key players to ensure the success, well-being and strengthening of their fellow merger partners. In essence, firms must look beyond structure when weighing up and implementing such mergers.
 A spokesperson from KWM’s Australian office in Sydney reiterated that “There is no direct impact to the firm here”.
Bigger vs Better: Should your firm merge?Jordan Furlong
First, see if it can answer “yes” to one essential question.
So law firm mergers are back in the news again, to the continued fascination of the legal press. For every combination that’s completed and announced, you can count on several others bubbling under in conversations within executive committees and at luncheon gatherings of senior partners, so there likely will be more such deals announced throughout the balance of the year.
It’s not clear that “mergers” are the best word to describe many of these transactions. Some of them involve global behemoths swallowing up comparatively modest firms in desired regions, resembling not so much a business deal as the annexation of territory. Others are billed as marriages of equals, but with so many of these merged firms maintaining their own profit pools, they seem like marriages where the spouses have no joint bank account and keep separate residences.
The common thread among all these deals, however, is that the merging firms go to great lengths to publicize the impressive size of the new entity, the huge number of lawyers, offices, and jurisdictions it will boast. It’s the kind of tactic you could understand if, say, two ice-cream dealers merged and could now deliver 70 flavours in one location, rather than 30 and 40 in separate stores as before. More volume and greater selection are obvious customer benefits in that kind of market.
It’s more difficult to make out clear customer benefits from law firm mergers. There’s an unspoken assumption that more lawyers in more offices in more locations is self-evidently a good thing, a competitive advantage and a client service. And maybe there are tactical benefits to be gained, especially around marketing strength, talent acquisition, and the like.
Yet I can count on the fingers of no hands the number of corporate clients I’ve overheard wishing their law firms were bigger and farther-flung. To the contrary, many clients greet news of a merger with a certain exasperation, having to turn their minds to identifying and resolving potential conflicts, or to awaiting the inevitable rate increases from the new entity.
Any law firm that’s considering a merger or acquisition should ask itself one question — the same question, really, that it should raise whenever any foundational or strategic decision is in play: “Would this make our firm more effective?” It’s a powerful question, because it forces the firm to focus its attention on its fundamental business purpose.
The point of any business is to serve its customers. For a law firm, that translates into helping clients in its chosen markets achieve their goals by addressing their legal challenges and opportunities. A law firm should be considered successful only to the extent it helps clients achieve their law-related objectives. Would a merger allow the firm to accomplish this mission more effectively? And if so, how?
Effectiveness, remember, is defined from the perspective of the client, not the firm. Clients consider a firm effective if it anticipates and meets their legal needs in the context of their business realities, demonstrates real commitment to procedural improvements that increase quality while reducing cost, provides reliability and competitiveness around pricing, and keeps lines of communication buzzing and productive. Mergers, by themselves, aren’t going to move the needle very far on any of those criteria.
Mergers might very well deliver competitive advantages, although I’d love to see a study that contrasted those advantages with the costs of merger, which are manifold and substantial. But potential mergers ought to be scrutinized primarily with specific reference to how they will enhance the firm’s effectiveness in its chosen markets, rather than with vague assurances that “global clients want one-stop shopping.”
Size alone is no longer a significant differentiator for law firms. Increased profitability does not correlate strongly with increased size, nor does talent retention, realization rates, client satisfaction, or a host of other measurable criteria with which firms should be closely concerned. There is little evidence that becoming bigger means your firm becomes better. If you’re unsure about this, feel free to call up a few key clients and ask them what they think about your merger plans. Their responses should be illuminating.