The first principle towards mergers of law firms is that it must be
considered as a means to an end. Merger is a scheme which allows certain aims
to be fulfilled. These aims can be linked to growth strategy, gaining markets’
shares, approaching other types of clientele, strengthening the firm, ensuring
economic stability, attracting new lawyers with a specific profile, pursuing competition…
We set out below the economic advantages and disadvantages linked to a
merger:
Advantages of merging
· Revenues created by
firm A’s benefits compared with firm B’s clients
· Revenues created by
firm B’s benefits compared with firm A’s clients
· Revenues created by new
clients interested by a firm created by the merger
· Strengthening of firm A
and B’s profitable clients
· Economies of scale with
efficient IT systems, marketing and communication libraries, savings,...
· Communication
opportunities created by the merger
Disadvantages
· Loss of revenues linked
to conflicts of interest between clients A and B
· Collateral damage in
human resources (loss of certain associates)
· Loss of referrals of
files by other colleagues
· Time needed to create a
new culture and working methods between two groups of people
· Direct costs of
merging- consultants, update of logos, communication tools, website, stationery,
client info…
Those who have taken part or experienced merging know that managing
economic aspects is a key element in an alliance but it is not enough to ensure
success. The notion of ‘risk management’ has to be applied to creating a merger
because failure often leads to structure break down or a fall in partner and
associate numbers.
The Red Thread
There is a way of evaluating likelihood of accepting the merging principle
between two law firms. In a law firm, this falls under four categories:
· Capital
· Culture
· Added Value
· Profitability
Each merger taking part will have to go through an audit taking these
factors into account. At the end of the day, both firms will be able to
negotiate, amend, correct, discuss various aspects and in conclusion, accept or
refuse merging. It would be better for the candidate firm to assess such a
scheme about merging in order to make a final important decision. A. Capital
Capital of a law firm is made up of:
1. Quality of lawyers
2. Quality of clients’ portfolio
3. The firm’s financial gain
A1. Quality of Lawyers
One could say that judging the value of lawyers is subjective.
Nevertheless, there are objective elements which should be considered: number
of publications, lecturing charges, inhouse seminars held, ...- these are all
key elements which allow academic worth to be taken into account.
Academic value must be fulfilled by quality, with development of issues
which affect reputation, leadership, media presence, atmosphere created in
specialized press and if necessary, position of certain directories. Some
lawyers are excellent academics but possess poor management skills with
clients, and vice versa. In addition, some excessive individual personalities
can jeopardise the firm’s internal network. The know-it-alls normally think
they are the crème de la crème, whilst being totally out of sync with other
co-workers. This threatens unity within the firm. Merging with a big name is
not the exception to the rule because lawyers’ quality affects the clients’
quality, and if it is negative, it is unfavourable.
A2. Quality of Clients’
Portfolio
Lawyers often convey “clients ownership”. But this clients’ portfolio is
rarely managed as a real capital. However, type and quality of clientele are
studied. It is clear that certain types of firms specialise in transactions and
others more predominantly on accompanying the client on a daily basis. The
relationship with the client therefore is different with a lawyer making ‘oneshot’
transactions and a lawyer making a daily follow-up for his/her clients. One can
evaluate a clients’ database on the basis of objective factors such as listing
on the stock exchange or listing in the top 500 for clients’ businesses. In
some firms, the clientele is based on individuality and social harmony within a
firm. It can be useful studying not only the value of a client but also the
value of contacts within their firm. With regard to this analysis, possible conflicts
between firm A and firm B are viewed with greater care. It is a difficult issue
which some firms avoid.
A3. Financial capital
of the firm
Financial management of different firms can vary considerably. Some
firms own their premises and IT network, others prefer to rent or lease. Some
professionals have saved money, whilst others have fallen into debt. Without a
balance of minimum capitalisation between two firms, a firm with a high debt
has to compensate its partner firm by getting into more debt to pay off what is
owed to the capital of the new firm. Like all merging-acquisition, at first it
is essential to sift through the costs of both firms to see if the partners can
fund themselves in an efficient way.
B. Culture
Each lawyer and each firm impart their own culture and values. The
initial difficulty found in law firms is that this culture is slow and hardly
known by partners. In fact, this phenomenon of ‘masked business culture’ imply
that partners are not so committed to invest or implement the business plan. Commonly,
after financial issues, the problem with ‘culture’ is the second determining
factor in success or failure of merging. Do the prospective candidates speak
the same language; have the same work visions, the same approach to clients and
the same ideas ethically?
Business culture between ‘them’ and ‘us’ has to be handled on a partner
level to create a melting pot. Associates and secretaries should also be taken
into account in the evaluation.
Questions to ask:
· Are we dealing with an
autocratic or democratic firm?
· How are the decisions
made within the firm: managing partner, executive committee, partners’ general
assembly?
· What autonomy are
partners left with?
· What information is
available and how do we communicate with partners ?
· Should we invest in
partners or are they just owners of the firm?
· How are they chosen?
· What is the
partnership’ and individual partners’ turnover?
· Has the firm which we
are approaching or which is approaching us defined a clear strategy? Aren’t
they just trying to escape structural difficulties?
· Do we have the same
view market?
· Is the vision of the
future deciphered unanimously by partners or exclusively by individuals?
Firms which have avoided the culture issue are likely to face a boomerang
effect a couple of years later. A multinational merger
works in a different way to a national one.
The internal image of a firm can be vastly different to the external
one. Beyond important points of view between merger partners, each firm
will have a difficult job in tracking down
key elements on which to judge the values and culture of the firm. Furthermore when
each firm expresses their intentions, supporting action plans based on the past
will be vital.
The people factor is so delicate in a merging process between lawyers
that only a ‘partners’ retreat’ or a weekend off to exchange views and ideas
are often recommended. If need be, the task can be ‘mediated’ by an outside
impartial observer who will redesign the vision and strategies of firm A and B.
In this case, the objective is not creating a hierarchy of values but
perception of compatibility.
Added value
1+1=3 Mathematical formula reached by merging. This chapter is about perception
of added value which will offer mergers to clients for each of their firms, to
prospective or potential clients, partners and associates. Individuals
initiating the merging process evidently have to question the market view with
regard to merging. Merging within two niche structures will not be seen in the
same way between a full-service international firm and a niche structure. In
some cases, merging has almost no outside impact vis-à-vis the market
structure.
Does merging have a limited impact in cities, regions and on a national
or international level? The link between a firm in a capital city and a firm in
a province will usually go through an acquisition instead of merging. A
specific type of communication can be envisaged in a capital city and a
metropolitan one.
Perception of ‘users’ in merging, i.e. clients, give the task at hand a
purpose.
Undoubtedly, a process of merging has to link with an adequate
communication policy.
Profitability
Generally, profitability of a task plays a dominant role in merging but
this is not always the case. If revenues are the foundation of an argument
between negotiators, it is definitive not only because lawyers have an equal
importance but also because it is an issue backed by figures and therefore
easier to compare.
4 Key figures to study in the merging sector are:
1. Hours worked by partners
2. Timetabled hours
3. Margin calculations
4. Partner/associate ratio (leverage)
D1 The lawyer sells his/her time. The majority of firms therefore have a
clear idea of hours worked by putting it on a ‘time sheet’. Some firms have
clear billing aims imposed by partners and associates. This does not happen in
all firms. Furthermore, invoicing is a practice in certain establishments
whilst others record less ‘officially’ worked hours. It is important to define
a working method of billed and billable hours and the number of billed hours if
so at the end of the day, disappointment is avoided.
D2 The hourly rate and fee calculation are two other important factors.
Whether the merger is national or international, fees charged in a capital vary
considerably to fees charged in a metropolitan area, according to the local
market. Also, some firms have different price policies according to a
well-established scheme and using alternative methods such as subscription,
fixed rates and discounts.
D3 Calculation of margins displays the total amount available, which is
distributed between partners after business costs are covered. Partners often
have a tendency to focus on billed hours and fees.
D4 Finally, the leverage (the ratio of partners to associates) creates a
most interesting comparison. Some firms have a 1/1 ratio (one partner to one
associate), others have 1/5 (one partner to five associates). The distinction
here lies in ‘equity partners’ and ‘non-equity associates’ who do not profit
from shared benefits. It goes without saying that an increase of partners
results in a reduction of shared benefits. Some firms which have severely
restricted their partnership will be reluctant to merge with firms which have
broadly opened the doors of the partnership to numerous individuals. Sometimes,
lawyers advise clients on legal aspects of merging or acquisition. They are
often less capable of merging with other firms due to managing issues, legal
matters, finance and psychological- elements which govern the success of a
business plan.
The assessment set out is not infallible. However it is highly advisable
to collect as many objective data as possible in order to avoid working on the
basis of an emotional process. An assessment of this nature constitutes a
useful way of getting candidates to. At a time when everyone is watching each
other’s moves, it is important to embark with a compass on board.
