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A recent article in the National Law Journal piqued
my attention. It hit on a point that many middle market
firms must consider. The article in the Jan. 10, 2005
issue is titled "Mergers? Not Here Thanks."
Many firms not listed as mega-firms are asking the same
questions — should we take an offer to merge with
a larger firm? Here are some questions every partner
and firm should ask before considering combining with
any other firm.
What typically raises the question of possibly merging
from inside the firm? Partners see larger firms encroaching
on their clients or the firm loses out on new work to
a larger firm. The big lease comes up for signature
and there doesn't seem to be anything to hold the firm
together other than money. A great team player and profitable
lawyer leaves for a larger firm. The brightest and best
lawyers are beginning to ask how their career will be
advanced with the current client mix of the firm. Partners
are beginning to ask questions about leadership and
the direction of the firm.
Does avoiding a merger buck the trend? It depends upon
to whom you are listening. Are you listening to the
lemmings who believe in the myth of market share - the
bigger you are the more profitable the firm will be?
Are you listening to partners who want to be part of
a bigger firm even though they know that many of their
current partners will not be moving? Are you listening
to the headhunters who are building corals of potential
candidates they can market to bigger firms for a fee?
Or are you looking at the true trends that will drive
your practice and your future viability? Here are the
true trends and their implications that came from an
in-depth assessment of the legal profession at two international
conferences on the future of the profession.
Clients are moving toward being Consumers.
They are no longer captives. The Internet and the marketing
activities of other firms are making clients more sophisticated
in choosing lawyers that will best meet their needs.
Cases & Matters are moving to Relationships.
Clients are more focused on the relationship
with their lawyer based on trust and past performance.
The name of the firm only applies to past work and where
the client did not feel they had other choices.
Production of Product is moving to the Creation
of Solutions. Clients are looking for solutions,
not products. Many lawyers think that their primary
benefit is in providing products like a contract, but
clients want a solution. That will mean that a lawyer
must have a multi-disciplinary support team to solve
a problem. Lawyers who have the trust of a client are
perceived to be their outside "general counsel"
and perform that way.
Specialty groups are turning into Teams to
Support Client Needs. Clients are no longer
satisfied at being represented by a single section,
like the tax section and then being referred to some
unknown in another section. They expect their lawyer
to be the leader of a team to solve their problem, regardless
of what the problem.
Costs Plus Fee Setting is moving to Value Based
Fee Setting. The larger firms and their partners
are so entrenched in hourly billing that they cannot
respond to client needs for predictability fees relative
to the value of the transaction or litigation. Only
in strongly lead firms can lawyers be convinced to take
the risk of setting fees based upon client expectations.
Personal Profit Centers are moving to Collaborative
Teams. In many larger firms, compensation is
set based upon the size the lawyer's personal portfolio.
But the market is moving to a demand for collaborative
support teams that require a lawyer to share work with
a team and provide team members with the compensation
that will keep them interested in continuing the service
to the client.
Avoiding Risks are moving to Building Partnerships.
In the past, lawyers have used the argument to trust
them in their hourly billing. But clients are asking
the lawyers to have a "horse in the race"
and are asking for more contingency-related fees. Who
knows more about the risk than a lawyer that is dealing
with the client on a continuing basis, and is able to
estimate those risks?
Capacity-Driven to Client-Driven. Capacity-driven
firms create problems by accepting marginal business
and seeking volume over profitability, which drives
irrelevant growth and investment. Client-driven firms
are more interested in the success of their clients
than in their own profits. That turns the financial
planning for many large firms upside down because instead
of focusing on the firm profits and hours, the firm
must focus on efficiency in delivering services.
So, Is There A Merger In Your Future?
There are three key models that will help you determine
whether merger is in your future.
In the first, divide your clients into four quadrants
based upon a "y" axis of high and low loyalty
to the firm and an "x" axis of high and low
profitability to the firm. Those clients that fall in
the high-high category are core clients. Those clients
that fall in the high profitability and low loyalty
are those that the firm must make concerted marketing
investments. Those that fall in the other two categories
are either question marks (should they be long-term
clients) or dogs that need to be managed carefully or
moved to other law firms.
The second model is called the Service Investment Model.
In this model, you are dividing the services the firm
delivers into four quadrants again. The quadrants are
high versus low depth in the ability to deliver services,
including people and systems on the "y" axis.
And high versus low return on time on the "x"
axis. The high and high indicates those services that
are core to the firm. The high return on time but low
depth are those areas that the firm must invest in and
build. When considering a merger, this is a key factor
in choosing the possible candidate. The other two areas
fall into the "move people" or "abandon."
If the firm has good leadership and a plan for bringing
in new leaders, then there is a plan for the future
and a vision for the future, then there is a focus.
Is there a vision for the future? Are there core values
that hold the firm together? Is the leadership focused
on that?
Finding Your Merger Score
There is a scorecard by which any potential merger
should be judged.
In the paragraphs below, I have outlined the levels
that a firm must progress through to understand what
a merger may mean to the future. A firm must start at
Level 1 in order to achieve Level 4. Starting at Level
4, focusing on "the numbers," and will produce
a long-term disaster. For example, an "eat-what-you-kill"
compensation system produces financial results but destroys
the focus on the foundational building blocks of Levels
1 through 3. Levels 1 through 3 are what make a combination
successful.
Level 1: The Vision Perspective — the
soul of the firm. There must be a vision for
the combined firm supported by a set of core values
that will support the vision. The key success factor
for the combination will be a collaborative firm where
every person is accountable to one another for the accomplishment
of the vision and will operate within the core values.
With a strong vision for the direction for the firm,
there will be a constant effort to seek new ways of
delivering legal services and organizational learning
to achieve the vision. Elements include but are not
limited the following:
- Innovations in service to clients and to client
relationship lawyers in the firm. Constant development
of new ideas from diversified interest in the firm
who feel tied into the vision by the firm's leadership;
- Continuous improvement in service quality to understand
and meet the needs of the clients;
- Continuous improvement in the ways services are
delivered to cut cycle time of matters and costs for
the clients of the firm; and
- Continuous improvement in the effective and efficient
use of the intellectual assets and the accumulated
experience of the firm.
Level 1 leads to Level 2.
Level 2: The Internal Perspective.
These are the benefits perceived by the owners and employees
of the firm and includes:
- Increases in the return on the time of professionals
and the utilization of talent;
- Improved depth in the core competencies of the firm;
- Continually improving standards of performance for
both technical and service quality; and
- Investment capital (emotional and dollar) for emerging
needs of clients and those areas where the firm must
invest to sustain its relationship with core clients
and enable the professionals who will be providing
the core services.
Level 2 leads to Level 3.
Level 3: The Client Perspective. This
level includes:
- Improved cycle time on effort;
- Reduction in the number of issues moving into the
legal pipeline;
- Efficiency in the use of client and firm resources;
- Improved technical quality;
- Improved service quality; and
- Fees are decreasing while service quality improves.
Level 3 leads to level 4.
Level 4: The Financial Perspective.
This level includes:
- Profits per partner go up;
- Growth in market share of desired matters; and
- Financial and emotional equity value in the firm
on a per partner basis including:
- Return on the time invested in the firm's efforts
to serve clients;
- Improvement of the franchise of the firm and
the probability of a continued flow of high quality
business to the firm; and
- Improvement in the probability of a stable revenue
stream.
Many lawyers have some pre-conceived notions of
what makes a merger successful or unsuccessful.
Here are some of the discussion points.
- Mergers tend to work best when there is a strong
assimilation process that brings the best core values
from each.
- Mergers are too often based upon some faulted assumptions
including:
- Size equals quality and a strong competitive
position;
- Billable hours times billing rate equals value
added;
- Leverage equals profitability (even though the
capacity of a law firm may have outpaced the demand
for legal services);
- Portfolio control is what drives firm profitability;
- Any work is better than no work; and
- Pushing legal product (as opposed to client
service) is what drives firm profitability. This
leads to assumption that the firm can acquire
hot practices and that they will naturally assimilate
into the firm's mix.
- These assumptions create the impression that:
- A firm can provide any practice and make money.
- All work is the same and can be serviced the
same.
- All clients have the same needs.
A successful merger of practices will require a strong
vision of what the combination is supposed to accomplish.
The combined firm must make choices about where it will
invest to sustain and build core clients and core competencies
(the core bundles of services). Those choices will drive
the allocation of resources in:
- Marketing and client development;
- Developing services for clients;
- Building the depth of experience to serve the clients
by staffing and training; and
- Building substantive and expert systems manage the
knowledge of the firm.
The firms must develop and experience mix based upon
the substantive areas of experience and the skills necessary
to serve the core clients in the in the core competencies
of the firm. Those additional skills should include:
- The ability to understand the needs of clients and
provide/sell the services that will meet their needs.
The firm is not selling legal product but a bundle
of services that specifically respond to the goals
and objectives of the client. Typical, but not inclusive,
bundles of services may include:
- Reduction in legal fees through more effective
planning of projects and more efficient delegation
of work;
- Reduction in the cycle time for work performed
when the client wants the issue resolved quickly;
and
- Reduction in business risk of clients.
- The ability to effectively define, organize and
efficiently direct the projects for clients.
- The ability to communicate the scope of work with
the client and explain the costs and benefits of the
work.
- The ability to build a strong and loyal relationship
with core clients and capture a large percentage of
their work.
- The ability to effectively negotiate the legal work
with the client to insure the client understands the
value added by the firm and understands and conforms
to the financial obligations to the firm.
- The ability to build a strong client support team
within the firm and delegate effectively.
- The ability to recognize the changes affecting core
clients and structure a response that will put the
firm in a stronger competitive position with the core
clients.
The needs of the clients and the core services and
values of the law firm should rule decisions on the
direction of the law firm. If the considerations do
not meet the criteria above, the firm should not consider
a merger. Remember, if the core values do not fit, there
is no merger. If the needs of the clients are not met,
there is no merger. Be careful and vigilant —
market share is not the key and sacrificing values for
volume and compensation will be destructive.
William
C. Cobb is the managing partner of Cobb Consulting
(WCCI, Inc.) based in Houston, TX. He is a member of
LFP&B's Board of Editors and has been a consultant
in strategic issues affecting law firms and general
counsel and helps them improve their competitive positions
since 1978. The counsel includes the impact of trends
on the legal profession; pricing services and alternative
billing; practice management; firm governance and structure;
partner review, evaluation, and compensation; and other
subjects of critical importance to law firm and legal
department leadership. E-mail: Cobbwc@msn.com;
Web site: http://www.cobb-consulting.com/.
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