The Twitterati have been buzzing with new articles and blog posts lately regarding law firm mergers and acquisitions (M&A) in the legal sphere. Deep down, it’s not something I truly enjoy reading about. There’s a notion that M&A activity is a sign of growth and health in any given sector, but personally, I think it’s more of a sign of desperation, the slow decline of the legal sector’s market resilience and of course its maturity. I say this because the concept is usually only alluring to firms when times are tough, target firms often agreeing only when they feel they cannot survive alone.
But relatively decent sized firms, those least flexible to the new and unexpected conditions that are arising, are now suddenly finding themselves in positions of anxiety. Vulnerable to ‘black swans’ and systematic shocks, they must either combine with other firms, or die. Risk reduction. Efforts to stabilise earnings. Lowering cash flow volatility. It’s all accountants’ speak.
Management boards, and those with equity stakes in the law firm, are all aware that the rationale and theoretical thinking behind M&A is to create shareholder value; the perspective often touted vigorously by bankers, accountants and other industry consultants. An increased shareholder value that flights over and above the combined sum of the two collective firms. M&A is the attempt to make ‘one plus one equal three’. An elusive equation. An equation constructed with the hope that two combining firms can produce something more than the sum of their respective parts. To achieve strategic and financial objectives that neither could achieve on their own. We’re talking about synergy.
Synergy
Synergy is the invisible, mysterious and magical force that precipitates the enhanced cost efficiencies of the newly combined firm. Synergy can take the form of ‘cost saving’ or ‘revenue enhancement’. And it’s the ‘cost synergies’ that create the human toll. Reducing payroll and personnel costs. It’s the stuff of headlines. The post-merger redundancies and office closures. Take the Shakespeare’s and Harvey Ingram merger, effectively putting 50 odd staff onto the dole queue. When two law firms merge, combined revenue tends to decline as a result of the businesses overlapping in the same market or clients becoming alienated. For the law firm merger to benefit equity partners, opportunities to offset revenue decline by cost cutting must be capitalised upon.
But the reality is that once merged, the first move is to shed staff, to slash costs and increase running efficiencies. The finance and operations’ perspective prevails. I’ll concede this perspective is of course a necessary element of any law firm merger or acquisition; but nevertheless, my primary thought process, as a marketer, begins with how effectively the newly combined firm will be at leveraging its strategic assets in revenue increasing activities. I might be doing finance and operations an injustice. Natural bias aside, I just think the marketing perspective takes a more positive outlook. Interesting to note in PWC’s Law Firms Survey 2012 – that despite cost reduction being high on the agenda for law firms, the majority of firms surveyed reported savings of 5% or less.
It’s not all get rich quick. Most firms participating in M&A are looking to grow the scale of the firm, and quite often they have concluded that achieving organic growth is unlikely to yield the magnitude of growth in revenue and/or market share that they desire as quickly as a merger or acquisition would. And this rings true for me, I think firms mostly acquire because organic growth is generally slow and growth through ‘differentiation’ strategies is nigh impossible. Despite the economic environment and the substantial growth that many top firms enjoyed before the financial prang, law firm leaders remain under increasing pressure to continue delivering growth. And let’s face it, demand for legal services is waning. The market has reached its maturity level. The combination of sophisticated clients with more access to information than ever before, and the introduction of new entrants has led legal to endure a certain degree of commoditisation. Apart from the magic circle firms with brand strength justifying price premiums, there are no unique selling points, clients aren’t seeing the difference between legal providers, and neither do they care. Clients’ procurement strategies are forcing firms to compete on price, and firms see M&A as giving them the greater economy of scale to address the ever-increasing pressure on margins.
Personally for me as a marketer, there are a number of mouth-watering elements to using M&A to reach grander scales. Capitalising on the increased brand awareness. Driving the increased market acceptance of service lines. Maximising the benefits of expansion into new sectors and service lines. Expanding into additional geographical locations. Leveraging newly-gained intellectual property and new technologies. And of course the enhanced scope to cross-sell. M&A gives the combined firm not only the potential to increase revenue, but also to make it difficult for competing firms to produce adequate returns from the same market. As well as the cost synergies, it is these revenue enhancing synergies that on paper make M&A sound fantastic.
But is it truly?
The reality, however, is often woeful. It’s widely accepted that delivering the projected benefits of M&A is notoriously difficult, and the pursuit of doing so can end up producing higher than expected costs. Legal Week’s 2012 Big Question survey suggests fewer than 20% of respondents said that law firm mergers were effective. While financial commentators argue at length about the definition of success and the timescale over which it should be measured, the bottom line remains indisputable; too few M&A deliver the sought-after profitability, market share and increased momentum in a sustainable, long term way. Add to that senior partner time; operating cash flows being diverted from organic growth; the risk of morale, productivity and service quality plummeting; talented partners and associates jumping ship; and clients going elsewhere.
The answers to this are of course complex and always buried beneath a reluctance to openly admit to a failing and then providing the reasons for it. And of course not all M&A are the same in the legal sector. They vary; firm size, diversity, service overlaps, markets, clients and the performance strength of the firm’s concerned. But despite the variances I feel that the lack of success comes down to some common themes: a focus on cost cutting; deferring the human and cultural dimensions of blending two entities into one seamless, growth-orientated firm; and a lack of revenue enhancement planning.
I think there are too many critical factors for law firms to manage and I’m not sure they have the best support sometimes to ensure success. It’s difficult enough acquiring and getting the right deal at the right price, but then there are the realities: complex integration of two firms; dealing with different organisation cultures; difficulties in integrating IT and reporting systems; the ability of the firms to plan for success ‘pre-deal’; and obviously ensuring effective post-deal management and integration.
Similarly to the issues associated with cross selling, law firms have the added difficulties associated with the partnership structure, with decisions typically made by consensus, often meaning the issues around M&A become a topic of delayed decision making, abstention and of course the client hugging. Another issue is the ‘service line silo’ mentality with different parts of the firm engaging their respective markets separately, missing the opportunity to build a true picture of what clients’ wants and needs are at an organisation level. These issues, combined with the natural anxieties caused by an impending M&A, make the enormity of the challenge become apparent.
The problem for law firm management is that they need to juggle strategy, organisation, staffing, systems and culture on top of keeping the firm performing day to day (and hitting their own targets!). There is pressure to demonstrate the wisdom behind the decision to M&A by recovering the costs of the merger, by restructuring to realise the benefits of creating the economies of scale, streamlining the operation, capitalising on market synergies and getting shot of the deadwood. Essentially, most post-merger plans assume that if the financial priorities of the M&A are thoroughly addressed, everything will take care of itself. And therein lies the issue. Crossing bridges as they come to them.
Making law firm mergers work: a couple of considerations
By no means is this an exhaustive list, and of course I focus on the marketing perspective. But for me, making law firm mergers work is ultimately determined by the planning and implementation of revenue enhancement strategies for the ‘combined entity’ and the effective integration of the diverse organisation cultures. Firms need to move away from focusing solely on the cost cutting aims at the outset, and dedicate attention on revenue enhancement strategies which of course need to centre around the client. Firms need to be thinking about the client from before ‘the off’. The client needs to be at the centre of all strategic thoughts from the earliest of stages.
First things first. Firms must identify the specific revenue increasing objectives created by the deal and what strategies are needed to make them happen. As a pragmatist, I always get firms to consider whether the revenue enhancing opportunities are actually real. Because for whatever reason, not all are. Here is about the assessment and the analysis of the actual opportunities presented by the M&A. And as a combined firm, what is it that will make the firm different? A SWOT analysis is a useful exercise. An analysis that also helps identify not only new opportunities that exist as a result of the deal but also strategies that help the firm sustain any differentiated capabilities. Again, the firm needs to consider the deal from the client’s perspective. What will the respective sets of clients expect from the deal? How will the deal benefit them? How will prospective target markets react to the deal?
Existing clients will often be concerned about service levels. M&A can be an opportunity to improve the client service of the combined firm. Creating a broad client service strategy can be vital to retaining clients post-deal and preventing the deal from negatively affecting service. The combined firms may have widely varying service strategies and capabilities and every effort is required to understand the client service position of both firms. The goal is to achieve a consistent client care experience to support the revenue increase strategy and retain the client base. Short term, firms need to consider how they will maintain and enhance service levels post-deal. Longer term, the firm needs to consider whether the service model needs to be scaled to support the revenue increase and growth of the combined firm. M&A is an ideal time to harness the ideological energies of both firms in relation to client service. Firms can often develop common service models that support the vision of the combined capability.
Often emotional and highly considered during M&A, branding must not only be considered at the corporate level but also at practice group and service line levels. Branding is important as it’s the first visible indicator of a combined firm’s direction, sending powerful signals to both existing and prospective clients and also of course to employees. Branding decisions require a deep understanding of what clients and employees value. Based on the deal strategy, firms will be faced with the decision to pick one brand or the other or to develop something new. The decision on brand is often the clearest embodiment of the integration strategy – keeping one brand over another signals control. Effective choices hinge on an understanding of how much clients care about the brand. What the combined firm’s employees think about the brand will send a strong signal as to the firm’s direction. Again, firms need to be client-centric and consider the associations that clients have with both firms’ service and corporate brands, and which will resonate more strongly. Firms must develop not only a new brand strategy but also plans for transition to the new brand. How they will improve the power and strength of the new brand and of course the specific marketing campaigns that will be required to make this all happen.
Not only do firms need to consider strategic priorities, they also need to consider market tactics. In order to enhance revenues, it needs to be determined which service lines the combined firm will take to market. Which service lines can be bundled together for the short term. Do any newly-acquired technologies or IP highlight any new opportunities? How will the combined firm align services longer term? How will the combined firm organise and pool resources to drive collaboration? The firm needs to consider whether there is the ability to integrate service lines with each other and whether any combined services be marketed as solutions differently as a result of the deal.
Many firms tend to track cost synergies more closely than the revenue impact. Mainly because savings are shorter term, specific and measurable. Firms need to assess the revenue and margin goals for the deal. Who will be accountable for the results? How will the revenue increasing initiatives be tracked?
It is also essential to understand which target segments are most important across the combined firms and then decide how to dedicate the business development effort to match the highest priority clients. Ask the questions: How should our firm be structured in terms of territories and coverage? How do we reach clients? What are the key short term client acquisition opportunities? How will we communicate deal value drivers to clients? What are the specific client risks? What are the rules of client engagement to govern potential conflict and confusion?
In order to enhance revenues the combined firm needs to develop go-to-market strategies to achieve growth objectives of the deal. If combining both sets of firms’ service lines makes the go-to-market proposition more complex, does the client understand the new combined proposition? How well will the combined firms penetrate the market? Will the routes to market change? All this while also being mindful of maintaining business continuity and deploying the talent and resources of both firms most effectively.
Conclusion – the law firm merger
Deriving value from M&A will always be a challenge, but never more so than today, given the extent of change in the marketplace. Revenue synergies are seen as challenging, with areas such as cross-selling notoriously difficult to deliver. So firms prioritise cost synergies at the expense of revenue strategies. But a successful M&A is not about adding or bolting on a firm to the side of the acquiring firm; it’s about transforming the whole into something greater than the sum of its parts. It should be seen as creating a new, combined organisation.
As many motivations as there may be behind M&A activity, as the economic situation continues to drive profits downwards, firms will need to plan well in advance how to extrapolate the value. Effective integration and post-merger management remain critical. But the reality is, very few firms ultimately succeed in delivering the value and benefits that were either anticipated or envisioned. M&A offer viable opportunities to achieve cost synergies and drive efficiency but if a firm truly wants growth, they should not become trapped by short-termism and simply try and save their way to the deal success target.
Maximising revenue enhancement strategies requires leadership capable of galvanising the firm’s capacity for innovation, change and growth. It also requires pre-merger and post-merger implementation processes that are attuned to the revenue enhancement and the human and cultural dimensions of the newly combined firm.It’s about taking a disciplined approach based on a real understanding of the actions and initiatives required to drive short term and long term value. By asking questions early in the deal process and throughout the integration, firms can emerge as high performers that capture the expected value of their growth opportunities.
It goes without saying, if you are thinking of a law firm merger or acquisition and need some ideas as to how to increase revenues, get in touch 😉
