Law Practice Today

The U.S. market for legal services is big business, with total law firm annual revenues estimated at over $200 billion. As in any other big business, mergers and acquisitions have become a primary driver of and force for market growth. The Hildebrandt International consulting group, in its ongoing MergerWatch survey, reports well over 425 law firm mergers and acquisitions from the start of this decade through 2007. And in the first quarter of 2008 there were 17 law firm mergers announced, almost double the number of a year ago.

 

Are Bigger Firms Better?

The rising M&A trend plays a big role in the continued increase in the size of law firms. In 1960 fewer than 40 law firms in this country had 50 or more lawyers; in 2007 firms needed a minimum of 170 lawyers to make the list of the 250 largest firms. In a sense, large corporate law firms have been following their large corporate clients, which for many years seemed to live by the philosophy that bigger was better – until the phrase, “getting back to core competencies” became the watchword and large enterprises began breaking up into smaller units. 

One of the big reasons for such downsizing is that mergers lead to redundancies that can become inefficiencies if not addressed. Law firms are hardly immune to this problem. In fact, when a large 600-lawyer firm announced associate and staff layoffs earlier in 2008, the firm co-chair was quoted in the press that the layoffs were the result, not only of a downturn in business, but also of redundancies following the firm’s 2006 merger with a New York-based firm. Why did the firm wait two years to address such redundancies?

 

Are Bigger Firms More Expensive?

The truth is, big law and big business have come to share other inefficiencies as both have grown. Take the issue of compensation. Corporations are increasingly complaining about high lawyer billing rates and compensation at big law firms, especially for younger lawyers. CEOs are asking how can “average” big law firm partners, many of whom are relatively young, be earning $1,400,000 per year while producing ordinary, or worse, service and work product. CEOs also ask why a new associate who is untrained in both legal expertise and client relations is earning as much as a senior executive with 20 years of responsibility.

A good answer, of course, is that these are the same lawyers who, as outside counsel, are working to create eight- and nine-figure compensation and severance packages for the same CEOs who are criticizing them. Law firms are not trendsetters; they follow their clients. If law firm compensation from first-years to partners is too high, the same can be said many times over for their corporate clients. CEO pay at large companies used to be 10 to 15 times that of the lowest worker; today, with compensation in the tens of millions of dollars, the gap is astronomical. Lawyers must sit at the same table with these highly paid executives. It follows that if they want their advice accepted, they have to be taken seriously – and, in this instance, money speaks.

 

Can Smaller Firms Be Competitive?

There are many talented lawyers available to do the work that Corporate America wants done, at a far lower cost. Why aren’t they looking for these lawyers? Corporate counsel typically are better able to justify hiring megafirms to their senior management.. I believe that much of what in-house counsel want is someone who can do the work properly. If smaller firms show they belong, they can get a place at the table.

How can they get considered? The general counsel of a major technology company once spoke with me about his own expectations when interacting with outside counsel. He addressed the issue of convergence: corporations reducing their number of outside law firms by 70 percent or more. This general counsel talked about how the law firm needs to collaborate with the Corporate Law Department. Collaboration produces more effective representation at a lower cost to the company without discounting either the value or the per hour fee of the lawyer.

Outside firms recognize the cost and time constraints on GCs, and come up with unique ways to provide solutions to these typical GC concerns:

• Managing patent or case portfolios more cost-effectively without investing in expensive new software solutions.
• Gaining effective control of electronic discovery costs.
• Using decision tree analysis and budgeting as the basis for alternative billing.
• Paying close attention to the talent and billing rate mix used to staff matters.

Such considerations as these simply come down to providing personalized, value-added service rather than racking up billable hours. More professionalism, more communication and more efficiency are what clients of all sizes want from their law firms. Smaller firms typically thrive by offering these benefits, and there’s no reason why they shouldn’t be able to make life better for Corporate America’s general counsel in doing so.  

 

Can Mergers Work for the Client?

There’s also, of course, no reason why that shouldn’t apply to the megafirms that have grown by merger. Mergers and acquisitions involving law firms can and should produce efficiencies, but only if they are approached the right way. There ultimately are four key determinants on whether a law firm merger or acquisition produces such benefits.

Clients and Practices. The existence of a fit and compatibility among clients and practices is the starting point for combining two law firms. The lawyers of the combined entities should know in exact detail what each firm’s strengths are, what they do for their clients, how profitable that work is for the firm, and what opportunities exist to get more work by realizing synergies between the firms. The new firm management must make it a requirement of being a member of the firm that all members be involved in client service – that no client is the exclusive property of any lawyer or group of lawyers, but that instead a team-oriented client service structure exists.

Economics. In any combination of law firms, teamwork can only happen when compensation is consciously reviewed and compensation systems decided. A team-oriented compensation model, in which the firm’s overall success each year is averaged out to determine a standard rate of compensation increase for most lawyers, is ultimately better for clients than one in which each attorney is rewarded on how much business he or she personally brings in. Any newly merged firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. But a willingness to approach compensation as an institution makes for better client service and a more efficient firm.

Technology. Mergers require technology planning. There will be many tasks to accomplish, including the evaluation of both firms’ systems, determination of which approach more nearly will meet the needs of the combined firm, purchase of equipment necessary to bring both firms into parity in the use of technology to serve client needs, combining accounting systems, and many more. For example, Knowledge Management (KM) systems must be structured to combine the work product of all lawyers into a single unified database that can be accessed to the benefit of all clients. If the technology is not integrated systematically from the start, the result will be a haphazard, after-the-fact effort that dooms KM efforts to failure. One firm in a merger or acquisition will inevitably be more advanced and effective technologically; that firm’s IT personnel should be the drivers of the integration process.

Planning. Mergers and acquisitions cannot succeed without planning, and successful planning comes from the top. The primary rainmakers of the firm, the management and managing partner all must be in concert to shape and direct the business combination plan. There should be continuous open and candid communication about and acceptance and buy-in for the business plan by which the firms are combined, with an emphasis on client service. Take as an example a merger in which the firms plan to service major clients with teams (not just a single rainmaker). This allows them to identify and provide needed practice specialties that reflect a full range of client concerns. A billing attorney coordinates the service provision according to a strategic plan, and can give clients a complete and virtually seamless service package for “one-stop shopping” from a group of lawyers who are chosen from both original firms to address specific needs in terms of practice specialties and billing rates.

 

Who Determines Success?

Ultimately what these four merger success determinants are about is adding value – such that the sum of the two combined firms is greater than their individual parts. Corporate America’s acceptance of such a merger will be conditioned upon the combined firms’ performance. Performance is a factor of many different things: communication, satisfaction of client objectives, use of technology, the firm’s overall knowledge. In the end, it’s the clients and not the lawyers who determine whether a law firm merger is successful.

Several years ago I had the pleasure of hearing Fran Musselman, former chair of the ABA's Law Practice Management Section, as he accepted the LPM Section's highest honor, the Sam Smith Award and talked about the principles that guided him as chair of his large New York firm. There were five such principles, and they were all the same: “The client comes first.” Law firm mergers embodying that principle have the best odds of succeeding.