Some reasons for the merger trend are pretty easy to identify. The arc of the legal industry over the last two decades has slowly moved towards improved efficiency. Clients expect more to be delivered for their legal dollar. Large firms use a lot of resources and vendors, and this creates considerable overhead cost. If these costs can be trimmed by purchasing services and software in bulk, via consolidated firms, the client’s invoice should ultimately reflect greater value.
Acquiring firms can also add expertise to the acquirer much faster than expanding organically. More practice areas are becoming ‘niche’ and maintaining competence in these areas is difficult without constant engagements. If a firm cannot find a client to offer such an engagement, one solution is to purchase another firm that has existing engagements.
Expanding a firm’s geographic footprint is also a motivating factor. Prestige is still a card to be played by large firms competing for global clients. Having offices in more locations just looks good. A firm can always add locations on its own, but this requires substantial costs with no immediate revenue. Expansion by acquisition comes with revenue and the bonus of being able to say ‘we’ve been in _______ for many years now’.
Conversely, one of the downsides to growing is the increased complexity of conflicts checking and clearance. The more attorneys, clients, and matters under one roof, the greater the spread of a ‘conflict’ that prevents or limits client servicing. Growth by acquisition presents an additional layer to this challenge: sometimes a conflict exists within the post merger firm that simply cannot be resolved without terminating one or more client relationships. If both firms maintain detailed conflicts records, these problems are usually identified and ‘priced’ in pre-merger due diligence, but not always.
Other benefits and burdens of firm mergers are less clear. Firms are privately owned enterprises in the U.S. and the merger deals are always confidential between the parties. The impact of a merger on partner versus associate compensation, fee structure, profitability, etc. are all unknowns to the outside world. Around the globe, some larger firms are publicly traded and must disclose certain information to shareholders. This further complicates growth by acquisition, as is demonstrated by the troubles facing Slater and Gordon in Australia.
Growing too fast is a common cause when venerable firms suddenly collapse. Dewey & LeBoeuf comes to mind of course. Finley Kumble before that. These were firms that faced money problems that outpaced growth. Culture conflict can also unravel an ambitious growth strategy. Coudert Brothers LLP blew up in 2006 and was partly attributed to their French offices underperforming. The money line with which this post shall end: “The lawyers in France don’t work that hard. That just don’t.”
Trendspotting: Law firm consolidation
The last two or three years have witnessed considerable consolidation activity among large law firms. The trend is expected to continue into 2016. What are the implications of this for clients and the consuming public? Is bigger better?
Some reasons for the merger trend are pretty easy to identify. The arc of the legal industry over the last two decades has slowly moved towards improved efficiency. Clients expect more to be delivered for their legal dollar. Large firms use a lot of resources and vendors, and this creates considerable overhead cost. If these costs can be trimmed by purchasing services and software in bulk, via consolidated firms, the client’s invoice should ultimately reflect greater value.
Acquiring firms can also add expertise to the acquirer much faster than expanding organically. More practice areas are becoming ‘niche’ and maintaining competence in these areas is difficult without constant engagements. If a firm cannot find a client to offer such an engagement, one solution is to purchase another firm that has existing engagements.
Expanding a firm’s geographic footprint is also a motivating factor. Prestige is still a card to be played by large firms competing for global clients. Having offices in more locations just looks good. A firm can always add locations on its own, but this requires substantial costs with no immediate revenue. Expansion by acquisition comes with revenue and the bonus of being able to say ‘we’ve been in _______ for many years now’.
Conversely, one of the downsides to growing is the increased complexity of conflicts checking and clearance. The more attorneys, clients, and matters under one roof, the greater the spread of a ‘conflict’ that prevents or limits client servicing. Growth by acquisition presents an additional layer to this challenge: sometimes a conflict exists within the post merger firm that simply cannot be resolved without terminating one or more client relationships. If both firms maintain detailed conflicts records, these problems are usually identified and ‘priced’ in pre-merger due diligence, but not always.
Other benefits and burdens of firm mergers are less clear. Firms are privately owned enterprises in the U.S. and the merger deals are always confidential between the parties. The impact of a merger on partner versus associate compensation, fee structure, profitability, etc. are all unknowns to the outside world. Around the globe, some larger firms are publicly traded and must disclose certain information to shareholders. This further complicates growth by acquisition, as is demonstrated by the troubles facing Slater and Gordon in Australia.
Growing too fast is a common cause when venerable firms suddenly collapse. Dewey & LeBoeuf comes to mind of course. Finley Kumble before that. These were firms that faced money problems that outpaced growth. Culture conflict can also unravel an ambitious growth strategy. Coudert Brothers LLP blew up in 2006 and was partly attributed to their French offices underperforming. The money line with which this post shall end: “The lawyers in France don’t work that hard. That just don’t.”