In days gone by, many law firms operated on the leverage-driven profit model. They would feed the bottom of the pyramid with young lawyers, knowing more profits were likely to trickle up to the partners at the top. That model included an assumption, now also gone, that clients would pay for research by first- and second-year associates. In the post 2008-09 recession era, most law firms now look like inverted diamonds rather than pyramids, and so many clients are refusing to pay for work by young associates that in some areas the starting salaries for associates are actually declining.
So as we head into the latter half of 2015, what firms are growing and what is driving the growth? Firms doing well and expanding usually have a clearly defined strategic plan that the partners embrace and support. Management executes, and amends where necessary, the plan instead of merely staying in a reaction mode to the ever-changing business and legal market. Believe it or not, however, many law firms still have no written strategic plan and their managing partner has no job description, both of which are recipes for disaster. These firms are usually at best standing still, but often shrinking, because valuable associates and partners see the lack of direction and jump to better positioned and more profitable firms.
Firms that have engaged in the planning process usually agree that “smart growth” is always desired. What is smart growth? Number one on the smart growth list is client-driven growth. If a firm needs to add attorneys or additional practice groups, or open an office in a new location to better serve valuable clients and attract new ones, it’s a no brainer. But with law firms, the “if we build it they will come” approach rarely works. The growth must be accompanied by commitments of proven partners or trusted clients to assure the additional attorneys will be fully engaged.
Also on the smart growth list includes hiring partners and associates who are team players and do not damage the culture or reputation of the firm. Our advice when guiding firms through acquiring new practice groups or opening offices in new geographic regions is to assess the culture fit before beginning to dig through the dollars. Of course there is no need to talk at all if there are insurmountable client conflicts or significant rate/compensation differences, but where those are not issues, the courtship and synergy discussions need to move at a deliberate rather than breakneck pace.
When should a merger be considered? The mantra formerly preached by large consulting firms to law firms was “merge or die.” Without naming the firms, however, we all know of many national and international law firm mergers that have failed just as miserably as the Daimler-Chrysler experiment. And we all know of many law firm boutiques around the country that have their own unique “niche,” and are doing just fine financially. Their growth may be less dramatic, but they are profitable and stable. Their main challenge for long-term sustainability, however, is usually when one or a very few senior partners are counted on to bring in all the work, and less-senior partners have not been groomed or are incapable of filling their shoes and the plates of the associates. Competition from regional or national firms also may threaten their long-term viability. Many small firms choose to merge in these situations.
A merger should only be considered when “one and one clearly equals more than two.” If firms discussing a combination are merely increasing their administrative headaches, conflicts and year-end compensation issues, they should pull the plug immediately and go back to servicing their clients. But where two firms combine and bring new expertise to the table that can be used by their respective clients, as opposed to the clients having to use a third firm, great result. Or where a smaller firm is located in a geographic region desperately needed by a larger firm to serve valuable clients, and both groups will use each other for legal work they previously would not have received, also a great result. These are the “all boats in the harbor rise” situations, as opposed to when a merger really only benefits one of the firms.
Poor merger results include when the smaller firm is not properly assimilated and integrated into the governance and structure of the larger firm, or when the larger firm imposes increased rates and a more difficult path to advancement and compensation increases for younger attorneys. Proper due diligence during the courtship usually stops merger discussions where these situations are likely to occur. The best mergers, conversely, occur when both firms are transparent and candid during their discussions as to what life in the merged firm will look like, and both walk the talk in the months and years subsequent to the merger.
Our firm has, on more than one occasion, advised a client to discontinue growth plans or merger discussions where the underlying premise was misguided or we see an annulment looming on the horizon. “Bigger is always better” and “merge or die” are, to say the least, not concepts that we endorse and advance.