Successful Merger Integration for Law Firms. jeff Gillingham

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1 Successful Merger Integration for Law Firms jeff Gillingham Published by In association with

2 Successful Merger Integration for Law Firms is published by Ark Group UK/EUROPE OFFICE Ark Conferences Ltd Paulton House 8 Shepherdess Walk London N1 7LB United Kingdom Tel +44 (0) Fax +44 (0) publishing@ark-group.com NORTH AMERICA OFFICE Ark Group Inc 4408 N. Rockwood Drive Suite 150 Peoria IL United States Tel Fax publishingna@ark-group.com ASIA/PACIFIC OFFICE Ark Group Australia Pty Ltd Main Level 83 Walker Street North Sydney NSW 2060 Australia Tel Fax aga@arkgroupasia.com Editor Stephanie Ramasamy sramasamy@ark-group.com Head of content Anna Shaw ashaw@ark-group.com Managing director Jennifer Guy jguy@ark-group.com UK/Europe marketing enquiries Robyn Macé rmace@ark-group.com US marketing enquiries Daniel Smallwood dsmallwood@ark-group.com Asia/Pacific marketing enquiries Steve Oesterreich aga@arkgroupasia.com ISBN: (hard copy) (PDF) Copyright The copyright of all material appearing within this publication is reserved by the author and Ark Conferences It may not be reproduced, duplicated or copied by any means without the prior written consent of the publisher. ARK1642

3 Chapter 1: Back to basics Why did you merge? There are a number of reasons why law firms merge. Rationalisation is probably the underlying market driver. Certainly there are too many law firms in geographies like the US and the UK, with the numbers being inflated by thousands of sole practitioner practices. In recent years, the difficulty and expense of running small practices has taken its toll. For instance in the UK, many firms have been driven out of the market by the cost of professional indemnity insurance or, even worse, the inability to secure cover. In some cases, these small firms have been forced to close or join forces with other, larger firms. Hence mergers are happening because of market factors that do not include the desire or intent to produce a better firm or a better service. It is probably true that most law firms which have merged have some element of defence built into their original thought process. Certainly part of the thought process would have been the old view that bigger is better. Whatever the original catalysts or drivers, there is a real need to examine and analyse the reasons why the legacy firms decided to merge. The reason for going back to the original drivers of the merger is the ongoing need to track the outcomes. To be more precise, the merger initiative should have a business plan and you should track the progress of your plan (see Appendix 1 for a business plan template). If you are not tracking the outcomes of your plan, then you probably won t meet it. If we research what legal sector consultants consider the reasons why law firms merge, we come up with a whole list of reasons which don t seem solid. Consultants around the world are united in the opinion that there will be many mergers in coming years, but that most will be done for the wrong reasons. Overall, this group of involved observers are not being complimentary about past mergers and are not particularly optimistic about future mergers either. They consistently cite two significant issues that serve to trip unwary merger leaders. Firstly, the amount of effort and cash involved in actually achieving the merger is quite daunting. Secondly, there is a lack of resolve in effecting change. Most leaders starting out on merger integration would not agree that these problems are pertinent to their firms. They will soon realise how wrong they are unless they focus on planning the merger and managing the integration process. Let s examine a list of why your firm might have decided to merge in the first place. This list is not exhaustive but gives the general grouping of motivations that might have been applied at the time the initiative was instigated. The reasons are outlined in the following. Reason one Economies of scale This is certainly a valid reason to consider merging and it is a reason that applies to all firms, large or small. The economies of scale are usually found in the infrastructure 1

4 Chapter 1 rather than in the legal resources. Providing infrastructure for lawyers is becoming more expensive. If we include in infrastructure such items as IT and telecoms (IT & T), finance and accounting, HR, facilities management, library, document management, secretarial support, insurance, marketing and so on all being provided in expensive offices that require renting, cleaning, heating, lighting and maintenance you can see that the scope is wide. Following a merger, there are often redundant offices. The problem lies in the exit costs from existing infrastructure, which is a drain on cash. Take, for instance, the cost of closing an office. Most lawyers seem to have taken long leases on their offices. Often, this is because the partners own the premises through a separate vehicle, usually connected with exit plans and pensions. Hence an exit from such situations is either costly or nearly impossible. Hopefully, this scenario was considered when the merger deal was being discussed. If not, this could be a disaster waiting to happen. Either way, if economies of scale were the driver for the merger, the rationalisation of legacy offices should be on the agenda and part of the integration plan. Imagine the recent big merger that occurred between a US firm and a UK firm (which, for confidential reasons, cannot be named here). The firm had representations in 21 common locations. Obviously economies of scale would be a key merger driver here, but the difficulties would be enormous. This subject would not be complete if the discussion on redundancies is not broached. If two firms merge, they do not need as many people resources. They do not need two practice managers, two finance managers, two IT managers and so on. Further to the office-closing discussion, they do not need two sets of receptionists, two post rooms and so on. These job redundancies must be faced and resolved as soon as possible. If left too late, staff will become demoralised and the whole firm will suffer. Reason two Cross selling Again in researching this subject, the pundits indicate that cross selling is not nearly as successful as it should be after a merger deal. One reason is because lawyers are reluctant to relinquish control of the relationship they have with their clients, and the reasons for this are: Not regarding their colleagues skills as being good enough; Having no financial motivation; and Losing control of the relationship. This is most interesting as most client surveys show that clients don t rate these relationships as highly as the lawyer involved. It is important here to remind yourself that cross selling is only a valid reason if your client is seeking more service and that your new merger partner is able to satisfy such demand. In the BTI Consulting Group s 2007 report Benchmarking Law Firm Marketing and Business Development Strategies, 1 the section on cross selling was entitled, Achilles Heel for Law Firms. When BTI Consulting Group interviewed 120 chief marketing officers and directors of business development at leading law firms, they found that only four per cent of law firms rated themselves as highly effective in cross selling (nine or ten on a ten-point scale), and 77 per cent thought they were ineffective (rating themselves six or lower on the same scale). Nevertheless, cross selling is an avenue that must be explored and the new firm must itemise services that it can offer beyond those offered by the legacy firms. 2

5 Successful Merger Integration for Law Firms Reason three Entering into new markets When two firms merge, one will often be represented in a geographical location that the other is not. This helps the new firm to find different clients for the extra services offered by the legacy firm that was not in that geography. Of course, this is cross selling, so the previous comments apply. It can also have the effect of providing market dominance in a particular location. Examples of this can be seen in the way certain firms have started to dominate certain sectors in Eastern Europe. Reason four Increasing capacity This has the beneficial effect of meeting the resource demands created by changes in client work. There is simple mathematical logic that dictates the effect on resources of an increase or decrease in work is more noticeable when you have 25 lawyers compared to 100. Naturally, client demand does vary and many firms find this difficult to manage. This improvement is like economies of scale but applied to resources rather than synergy savings. Reason five Partner ambitions Some lawyers want to be partners in the biggest, most visible firm on the block. Usually this ambition goes together with their desire to be earning huge profits. This is an understandable and valid motivation, but the exercise of this ambition is not a reason, in its own right, for a merger. Clearly a new firm created by such ambition must also be able to deliver the extra business and profits. Being bigger with smaller partner returns is an invalid outcome. During the next decade there will be more mergers driven by partner and equity-holder ambition. The corporatisation of law firms, the effect of the Legal Services Act 2007 in the UK and the creation of Alternative Business Structures (ABSs) will see partnership equity converting into shares that can be bought and sold. In Australia, Slater & Gordon raised Aus$35m ( 14.6m) by floating 35 million shares at Aus$1 each. The shares opened trading at a significant premium. The firm has tracked the Australian stock exchange since listing. This is not a big firm; it has revenues of about Aus$125m ( 80m). Current market cap is Aus$310m. Market cap is about twice the turnover. There are now tens of thousands of equity partners around the globe doing their sums. The performance measurement exercise The reasons you undertook your merger are very important. Before starting on your merger integration plan, you must document the reasons for your merger. If possible, put some key performance indicators (KPIs) to test include them in your plan, so that you can measure your performance. For example, it seems quite reasonable to aim for a 15 per cent increase in new firm revenue compared to the sum of the legacy revenue. Allow the first six months to be roughly the same but increase your targets by 15 per cent for the subsequent 12 months. Similarly with costs, it seems quite reasonable to aim for a 7.5 per cent reduction in the sum of the legacy costs. Again, allow the first six months to be roughly the same, but decrease your budgets by 7.5 per cent for the subsequent 12 months. Of course, don t forget to budget for the transaction and integration costs. When you have done this exercise, cascade these figures down to the various departments so that they too have a budget for their new responsibilities. Make sure these figures are included in their business plans. 3

6 Chapter 1 Now cascade the departmental figures down to the fee earners, so that they too know what is expected of them. This exercise must also be done for the back office departments. This exercise is the link between your actions and your end result. If you do not create this link, you will not know how you are performing against expectations. This means that you will not be taking corrective action if things go off track. You might find that my suggested figures do not fit with your model. That is fine but make sure that you have some figures and that there is a sound logic behind them. Reference 1. Can be found at: com/pdfs/btis_benchmarking_law_firm_ Marketing_2007_EXECSUMM.pdf 4