Managing and Growing a Law Firm: Part 2 of 3

In this series of three articles, I highlight the legal scene in Asia, the changes to the legal industry, and the different resources available to law firms for expansion. In my first article, I shared my thoughts about managing and growing a law firm. In Part 2 of this series, I share thoughts on the global legal industry and its challenges.

At a micro level, the estimated USD600 billion global legal industry is very much in transition, with many different disruptors entering the legal markets.

Major Challenges Faced by Law Firms

#1 Disruptors

In my view, the biggest challenge to the profession comes from disruptors offering quality alternative legal services, such as contract lawyers, at a reduced cost. To counter this, firms like Allen & Overy have set up alternative businesses such as Peerpoint, offering similar services to compete with these disruptors. There is also much evidence of this type of defensive strategy being adopted by other global firms to counter the threat of disruptors. To drive down costs and still provide quality services, some of the larger global firms are also moving some of their process-driven commoditised products to centres of excellence. Examples of firms taking this approach include Allen & Overy, Baker McKenzie and Herbert Smith Freehills, with significant paralegal bases in Belfast.

#2 Big Four accounting firms

The Big Four accounting firms also pose a major threat. Their core strategy is to complement their compliance and transactional businesses with a quality legal function. This multi-disciplinary offering creates a “one-stop shop” which is very attractive to clients. History tells us that when accountants attempted this strategy in the late 1990s, it failed. In my view, the reasons for that failure were that they were not fully committed to the strategy, and the world was less connected 20 years ago. I do believe that there is much more resolve now, and the accounting firms have much deeper pockets than they did in the 1990s. Furthermore, today – unlike the 1990s – we live in a global marketplace. With that said, I do not believe that the accountants’ core strategy in entering the legal space is to directly compete against quality global law firms. At least not yet! This initiative is being taken more to complement the existing core businesses of accountants, such as compliance (audit, tax, etc.) and transactional work (mergers and acquisitions, consulting tax structuring, etc.).

Banks and corporations are also repositioning themselves by creating sizeable in-house legal departments which focus on providing commoditised services internally at a lower cost. These services are the staple of many small- and medium-sized law firms, which are being slowly eroded. To put this threat in context, an internal legal department of 50 or 100 lawyers is, in effect, a medium-sized law firm.

Opportunities

While there are challenges, there are also opportunities. In a similar fashion to what the accounting industry went through in the 1980s, if and when regulations are relaxed over the next five to ten years I see more consolidation of law firms, more alliances, and continued global expansion – particularly into emerging markets, such as ASEAN, Africa, Latin America, and India. The traditional markets of USA, Europe, China, Japan will remain strong; however, I am of the view that these markets are over-lawyered and oversaturated and the competition for quality work and talent is fierce. Firms need to look at new markets to grow revenues. The one note of caution: Firms looking at a foray into emerging markets will require patience and deep pockets initially, as an acceptable return on investment from these markets will take time.

From a micro perspective, small and medium firms will have a part to play. Some firms may be experiencing a dip in revenues and profits, as much of the “commoditised” work that previously flowed to them from global firms or which clients found too expensive for large firms to discharge is now being captured by the disruptors in the industry – i.e., the alternative legal-services providers and, to an extent, in-house legal departments. The one sweet spot for firms in Asia and particularly south-east Asia would be to consider expansion into ASEAN markets and alliances with firms looking to enter these markets from the U.S., Europe and Australia. As a general rule, global firms are not as nimble and not always geared towards emerging markets; hence local firms are attractive to global firms looking to enter the ASEAN market.

Closing Thoughts on Countering The Challenges

It is my belief that many firms are still living in the past. They need to focus on the present and plan for the future. To survive and grow, these firms need to take a step back and take stock. In this fast-developing alternative-market environment, doing nothing is not an option, as profitability and even possibly survival is on the line for many firms. The first step is to perform a deep-dive review into their core businesses and determine if service lines are still profitable and if there still exists a decent pipeline of work. They should then strategically review what can be done internally and externally to capture more of the market, and consider an off-shore emerging markets strategy and / or a merger or alignment strategy with firms locally or internationally that is complementary to their core business.

The key to operating in today’s legal environment is to ensure a quality, value-based offering at all times, being nimble and innovative, and making an appropriate investment in experienced professionals to advise on, facilitate and drive this strategy.

Law Firm Marriages

I’m spending time with many firms these days that seem to be really interested in “combining,” partnering up, or at least acquiring groups of great lateral partners. Apart from the conventional observation that these efforts to juice up growth “inorganically” often mask failed efforts to grow “organically” (i.e., acquiring new clients!), aspirations typically reflect some pretty undeveloped thinking about why another firm would want to combine with their firm.

Lawyers – that is to say, law firms – tend to be pretty narcissistic in their everyday thinking anyway. It’s not surprising that firms embarking on a “combination-quest” think only about what they are looking for in a target firm, and not the converse. Now that the commercial legal services market has changed more in the past ten years than it had in the previous 100 years, law firms in search of target firms or lateral groups need to re-think and freshen up their answer to the question, “Why should a law firm seriously consider combining with us?”

Firms capable of being a good fit have to see something in your firm they want and know they need. Don’t make it hard for them. Out of the gates, PLEASE express a genuine interest in their view of how they would like to – and, in fact, would – benefit from combining with the right firm. Conventional criteria still apply (geographic footprint, practice group mix, economics, etc.), but should be consulted within the “necessary but not sufficient” context. In today’s legal environment, other emerging screening criteria are starting to matter a lot more and inform the best decisions about courtship and ultimate marriage.

It’s the Music You’ll Make Tomorrow That Matters, Not the Music You’re Making Today

It is more important now than ever for serious firms to paint a detailed picture of where a combined enterprise is trying to go and how it is going to get there. The best “renderings” do a great job of isolating all of the gaps in the two firms today – both as independent firms and as combined firms. Bolting together two firms usually doesn’t instantaneously address these gaps. In short, it’s just as important to realize how far the combined firm will be from full potential as it is to realize what the ultimate potential looks like. You’ll be better positioned to sell a desirable firm on the opportunity you represent if you’re honest about the admitted difference between “desired state” and “present state.” Additionally, have a detailed plan – articulated with conviction – for addressing that gap over the next five to seven years.

They’re Buying Vision and Innovation as Much as Anything

You should put together a clear, detailed, and ambitious multi-year innovation agenda. The economy is active, and most law firms are chugging along at a solid economic clip; it’s very easy for firms to get complacent about their day-to-day operating performance and their future. However, if there’s one area in which many firms are exhibiting great self-awareness (and humility), it is relative to innovation. “Innovation-phobic” firms know when they’re not doing anything to help their clients experiment with new ways to consume, manage, and measure legal work. These firms feel exposed, and often can be very attracted to another combination firm that has come up with a thoughtful multi-year innovation agenda, and a roadmap to become that firm of tomorrow.

That Culture Thing

Everybody talks about culture and it connotes such a fuzzy measure of a firm’s composition – it’s easy to be cynical about whether culture matters at all. The truth is that for firms that are built for success today, culture is everything. Peter Drucker famously said that “culture eats strategy for breakfast!” The challenge of course is that culture means nothing if you can’t touch it, feel it, and define it. Law firms that are serious about finding the right combination partner firm should define all of the cultural attributes and features of their firm in objective, describable elements that can be measured.

Additionally, such firms must be able to identify what processes, structural incentives, managerial methods, and training regimes support and produce the objective elements that make up their firm’s culture. It’s one thing to say that we are collaborative, team-oriented, and care about the success of other partners; it’s quite another thing to point to a specific bonus structure and monitoring process that activates partners to, in fact, behave this way. At Edge, we use a tool called the Edge Cultural Assessment to develop an understanding of all objective elements of firm culture; with this tool, our understanding of culture is removed from the abstract and subjective and is translated into the measurable and concrete.

Write It Down

If you’re a true believer about why a target firm should be interested in combining with your firm, then you’ll need to articulate all of those reasons, linkages, and benefits with conviction. It’s hard to express conviction about your own combination criteria and process if you haven’t taken the time to write them down on paper for prospect firms to digest. Remember, both firms are potentially placing a very big bet on an unknowable future. The only insurance policy target firms have is your intentionality about the summit, and the mountain you’ll need to climb together. Bring them along – and, in so doing, seduce them – by expressing as much of your thinking on paper as possible.

“Law firm combinations” and “lateral partner recruitment” sound like easy ways to drive growth. However, seasoned law firm leaders know that it’s easy to make bad decisions, and very difficult to mature and execute good decisions in this realm. My advice is to know who you are well, do your homework, and sell the plans you’ve authored for future success so you can get credit for being intentional and ambitious. Don’t let your appreciation for the summit distract you from your respect for the mountain!

Mergers & Strategic Alliances – What Should Law Firms Expect out of Synergies in India? 

There is no doubt that law firm mergers are trending like never before. One may examine the reasons why. Is it a strategy to grow numbers in terms of turnover? Is it sending a message of larger technical expertise and bandwidth? Is it a part of strategy to outsmart competition? In this article, we talk about the driving force behind exploring options of mergers and strategic alliance by firms in India, and what law firms should expect out of synergizing.

Alliances have, historically, been one of the ways in which countries used to bond and come together to form a stouter force against other, rival countries. Following a somewhat similar approach, law firm mergers are being considered as a move that would make them stronger vis-à-vis other firms. The expectations are very simple – enhanced bandwidth, more partners contributing to the top line, addition to the array of practice areas offered to clients and advantages of established brands. We will examine these factors one by one.

One of the primary factors that encourage law firms to merge is the addition to practice areas that the firm would be able to offer to its clients as a result of merging with another firm of diverse practice areas. Also, between firms of similar practice areas, mergers are a prudent strategy to let the merged firm become known as a ‘stalwart’ in a boutique practice area. This is an especially growing trend in recent times owing to increased interest by clients in specialized or boutique law firms.

Another major factor drawing law firms to look for mergers is the advantages associated with an established brand. This is largely applicable for law firms with a smaller practice, looking to merge with a law firm with a larger practice. Subject to working out modalities with respect to name change (most likely, smaller firms drop their name or get their name in the subsequent order in a joint name), smaller firms tend to gain advantages from the robust client base and well-known brand of the larger law firm.

In larger countries like India, especially the ones that are diverse in terms of geographical expanse and language, customs, religions and local practices, law firm mergers are a popular way to make inroads to far-off locations. In order to be the ‘Go-To’ firm for their clients across all locations, law firms try to open offices in different cities, covering the entire landscape of the country. Now it may not always be possible for a firm to establish an office from scratch and invest capital in building an infrastructure and office. In such cases, law firms explore the options of entering into synergy with a firm/lawyer based out of particular location by various means – say by way of merger, brand merger or referral relationships. The aim is to enhance the service offerings from a particular geographical location with least investment in terms of time and capital to set up a practice.

Another trend that has been noticed in the recent past is the ‘Panic Button Merger’. There are times when the key stakeholders, say managing or founding partners, either lose interest in running the firm, or understand the limitation in their capability to take the firm to the next level of growth. In such a state, the merger comes to them as an option to overcome the panic-struck state and reform the firm under the expert hand of a firm that has been running more efficiently or under a more efficient leadership.

What to Expect from A Merger

Now that we have examined some of the factors that drive law firms to synergize and form alliances, we should also understand what the firms should truly expect from a synergy. The factors driving the need for synergies are like swimming on the surface. One needs to dive deeper and understand what lies beneath the synergy. Are the firms merging only to create a statement within the fraternity? Or is there a better offering to the clients? Is there a true acceptance of best practices from the synergy? Are the firms being one-up in terms of technical competency? These are some of the questions both of the synergizing entities should consider.

By merely opening an office in another city, the clients are not obliged to direct their mandates to the firm. They will obviously need to be convinced that there is a technically sound lawyer to advise them on the most correct legal course of action. Hence, the firm must look to merge with another firm or lawyers after being convinced of their technical expertise, talent, experience, legal acumen and quality of work done in the past. Due weightage must be given to the benefit in terms of talent that will be on-boarded with a synergy.

Considering that synergies are once-in-a-lifetime kind of events in the life of a law firm, the approach to exploring a synergy cannot be treated like a formality or ticking off a bucket list of desired advantages. It is definitely a serious exercise that calls for all the parties to contribute to the planning and examine all the strengths that can be synergized to raise the service offerings to the client. It calls for imbibing best practices followed by the other party without any ego and hitch of dilution of power. One cannot be driven by short-term advantages like gaining from a better brand or larger share of profits, etc. There are deeper concerns that should not be overlooked by the merging firms. Activities like culture test, practice planning, financial budgeting, marketing strategy etc. are too often ignored. After the merger, their effects are far-reaching, and sometimes irreversible.

To sum up, a truly synergized entity is one that is integrated in its aim, and its approach to achieve that aim to serve nothing but the best to the clients. Law firms should look for synergies with a view to creating better service avenues for clients and to get on board a team of quality professionals. The merging parties should be like-minded in their vision to build an entity that is managed efficiently, that swears by best professional and managerial practices, that offers its services at competitive prices, and that aspires to be a ‘one-stop shop’ for all legal requirements of their clients, serviced by a team of best legal professionals.

Bigger vs Better: Should your firm merge?

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.