Professional Services: Law firm mergers risk partnership value through lack of client focus

Professional Services: Law firm mergers risk partnership value through lack of client focus

A report from Gulland Padfield, management consultants to the Professional Services sectors, concludes that recent law firm mergers have significantly under-delivered on the anticipated benefits, both to the firms involved and their clients.

The Report analyses recent international and UK law firm mergers, looking behind their stated objectives to examine the reality of how these have played out. It identifies how an insufficiently robust approach to planning and a reluctance to confront difficult issues in the negotiation phase can result in missed opportunities to drive value from the merger.

And it emphasizes how important it is in the current climate, for a firm to have an established business strategy which is well communicated to their partnerships before merger talks as well as the need to put delivery of ‘value to the clients’ at the heart of the post-merger integration phase, if the merger is to be successful.

Speaking about the report, its co-author, Harriet Creamer of Gulland Padfield, said, “Many of the issues relating to client strategy, practice management, culture and people tend to be under-estimated in the negotiation stage meaning that they’re not adequately catered for in the integration process. The temptation is to focus on the tangible, operational issues. But the single most important learning from the very frank series of interviews we conducted with management teams, is the need to ‘bite the bullet’ earlier on the softer issues, even though the temptation may be wait in the hopes that they will resolve themselves over time.”

Co-author of the report, James Edsberg at Gulland Padfield said, “Post-merger integration for any business is challenging. This report unpicks why – and how law firms can prepare for merger better. It starts with the rationale for the merger in the first place. If firms are combining to build their industry sector capability, there’s a greater chance that the value of the joint offering to the client base will be top of mind for the merger and post-merger teams. By contrast, where a firm is merging for defensive reasons or under pressure, the priority tends to be operational integration and cost reduction through synergies – occasionally to the detriment to client relationships which bring in the revenue.”

The headline conclusions from the Report are as follows:

  • The lack of a plan to deliver value to client relationships is the single greatest reason mergers hit problems. With a few exceptions, (whatever the public and internal statements made about the merger) law firm merger negotiators see their firms falling into one of two categories. The first – which accounts for most recent mergers - are defensive. Firms in this category were under competitive pressure and struggling to find their place in the market. The second category – which accounts for a minority of mergers - comprises those mergers concluded for more proactive, strategic reasons. In either case, the extent to which the merged firm has agreed a plan to capitalize effectively on its enlarged client relationships – and how that translates into revenues - is the single most important factor driving realizing post-merger value – and its absence was the single greatest reason that the merger hit problems.
  • Operational aspects of the merger get most attention – but it’s other factors which determine whether mergers fail or under-deliver. Gulland Padfield identifies three separate streams in the integration process in three areas: Operational integration (e.g. technology platforms, billing systems), Client Strategy (account management, conflicts management, practice development, industry focus) and Culture & People (agreeing common working practices, getting teams and individuals to work together). Pre and post-merger, it’s the Operational aspects that receive most practical effort. Attention on the second and third is far less focused – both during the negotiation and subsequently. While addressing operational issues successfully is clearly an essential pre-requisite for integration, it is the latter two areas on which the ultimate success of the merger depends and where many stumble.
  • Without a compelling and shared long-term vision for the future, post-merger integration is made that much harder. A lack of clarity (and to internal audiences, frankness) from a firm’s management team about the true strategic reasons and need for the merger and its alignment to the firm’s business strategy, often means that there are challenges in bringing along the respective partnerships afterwards, according to those participants in the research interviews. A strong and detailed case for merger and what it will bring for both firms’ partnerships, is something our interviewees identified as a vital component for a successful process to integrate. Back-filling the strategic case for the merger after it has been announced lacks credibility among internal stakeholders.  “We have seen this on many occasions, particularly in the mid-market. A management team which finds its business under pressure chooses to ‘merge its way out of the problem’ – often at short notice. Unless this decision is seen to be part of delivering the long term strategy, some colleagues and teams feel ‘bounced’ into the deal. It can store up problems or even catalyze the avoidable loss of a team or a colleague.” says Harriet Creamer.
  • Lack of ‘cultural fit’ is a euphemism for poor alignment of two firms’ approach to ‘Client Strategy’. How each firm manages and develops its client relationships is the clearest way to assess the likely sustainability of the merger. And one of the reasons why viewing the merger through the prism of what value it brings to clients and through that, to partner revenues, is the most effective way to assess and structure the merger successfully.  “Where mergers fail, either before or after a deal is concluded, it is often because one firm has more of a transactional mindset while another is relationship focused. Both models can be financial successful but it’s rare that they can co-exist. In doing cultural due diligence on a firm, the attitudes of partners to how they work with clients in this regard is a litmus test for successful integration,” says James Edsberg.
  • Beyond avoiding ‘client conflicts’, client strategy is an afterthought. In the short term, most mergers fail to deliver all but the basic operational objectives. Other than checking and managing potential client conflicts and informing them, the drive to realizing revenue from a better focus on market and client-related opportunities comes much later – if at all. This should be made a priority earlier.  “The litmus test of any merger should be, “Does the newly-combined firm bring value to existing and new clients in a way that the old firms couldn’t on their own?” If the answer isn’t an unambiguous, ‘Yes’…it’s time to go back to the drawing board. Merger talks fail and post-merger integration is that much more difficult if this question isn’t placed at the heart of the process early on.”, says James Edsberg.
  • Key factors which deserve greater attention pre and post-merger Apart from the major areas of partner remuneration and client billing rates and policies and operational platform compatibility, the research identified a series of other qualitative indicators which, with the benefit of hindsight, the interviewees identified as strong leading indicators of whether the firms were a ‘good fit’, these include (i) quality of non-fee earning functions (including business development, finance, HR teams) (ii) attitudes to non-billable time i.e. where one firm values that more than another, it proves difficult to engage colleagues to develop relationships with new colleagues and other initiatives designed to bring the firms together beyond billable client work (iii) employee diversity – research participants felt that issues around diversity of the workforce tended to signal and correlate with attitudes to other aspects of integration and modernization including technology (iv) approach to pro bono and social capital (v) good communication between partnership and other staff. Where this is strong, integration tends to be smoother and with stronger engagement inside the firm at levels below equity partners as the two business combined.

Based on insights gathered during the research, the Report also offers:

- A model for protecting ‘Partnership Value’ during and after the merger and identifying the risks and opportunities to it. And also a framework for shaping how the merged firm can be institutionally client focused.
- Practical guidance about each key workstream, in particular the Client Strategy workstream in the post-merger integration process.

Are you considering a merger and want to discuss how you can prepare a successful integration plan?
Are you a firm looking to develop a plan to realise the synergies to emerge from your recent merger?
Are you looking to bring your people together after a merger to create a consistent approach to working together and a common culture and approach to clients and prospects?

The Report comprises an analysis of the business and strategic objectives of recent law firm mergers both internationally and in which a UK headquartered law firm is involved.

In addition, Gulland Padfield conducted a series of in-depth, off-the-record, 1-2-1 interviews with members of the management teams and former members of the management teams driving the negotiation and the post-merger integration of a law firm merger to gather insights and capture lessons learned from those closely involved.

Gulland Padfield is the award-winning management consultancy to the Banking and Professional Services sectors. The firm’s purpose is to help businesses become institutionally client and customer-focused and to transform their operational performance, culture, growth and profitability as a consequence. Our teams have worked with 33 of the Top 50 global law firms

For enquiries about the report, call James Edsberg or Harriet Creamer on +442030512295

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