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Consolidation - should we all be doing it?
Wednesday 25 July 2012 by Vicky Brackett
Merger activity within the UK legal profession is significant. Every week the legal press brings new stories of mergers, team defection and acquisition and firms being rescued as the cashflow requirements of the business prove to be overwhelming.
The economy and "new" - more onerous - regulation for the legal profession are two reasons often cited publicly as to why smaller and medium-sized firms are joining together; a bigger, stronger beast can beat the ravages of the economic maelstrom and the regulatory regime. But are these the real and/or justifiable reasons or just a believable and convenient reason for doing something because we don't want to be left behind?
The regulatory environment
It cannot be denied that regulation of the legal profession requires a sensible and coherent infrastructure to be in place. Outcomes-focused regulation requires firms to self report which allegedly is more onerous than before. We should question, however, whether the changes to the regulatory framework really are so different that firms need to merge simply to cope with that demand. It is in reality perhaps one more factor that leads the smaller firms to believe that their overheads for dealing with the new requirements of the Solicitors Regulation Authority will increase beyond an acceptable level for a business of its size. For the larger firms in the market place however, the new regulatory requirements are unlikely to be a reason in themselves to push firms to consider merger.
The economy is perhaps a more likely reason why larger firms for engaging in strategic debate around whether bigger is better. There are economies of scale - an established infrastructure can often support more revenue generation without an equivalent addition of cost which in pure formulaic terms can mean better profitability. Better profitability means more investment capacity and allows firms to keep ahead of the competition either because they can invest in making their work processes more efficient or investing in specialisms which their clients are demanding. Bigger teams may also mean that it is easier to structure a team to ensure work is done as efficiently as possible enabling firms to be confident and competitive in pricing. Clients are price-sensitive we hear. Of course they are. They always have been. Law firms are however possibly a bit less complacent about pricing sensitivities than they have historically been.
So what other reasons might there be for merger? A good reason would be client demand. Are larger more efficient firms something that clients are in fact demanding?
Feedback from our own clients suggests that they want value for money, good quality service, to deal with personable and talented people who solve their problems. They don't really mind how big the firm is - boutique firms are often very small but very valued by clients. Clients don't buy services from the magic circle because the firms are big. They buy from them because they offer extremely high-quality services and meet their clients' needs.
From a client's perspective in fact merger brings some risks: loss of personnel, loss of identity, conflict issues, the need to spend time on integration - i.e. a potential risk of introspection by the firm whilst it adjusts to its new journey and challenges. A merger also results inevitably in less choice for the client.
There are numerous different reasons why law firms might look to merge. It is very likely to be a combination of reasons. Unfortunately it is sometimes a necessity to halt decline within a firm and those are the firms who can legitimately say that merger was necessary because of the economic conditions. Mergers done well should be for other reasons: to increase profitability and/or turnover, to add to specialisms; to develop service lines demanded by clients more quickly than organic growth will allow; to cover a new geographic region; or to operate within a new industry.
What it should certainly not be is a reaction to reports and speculation in the marketplace that everyone is doing it. That fear of being left behind and not on trend can be overwhelming, however, and a distraction for those responsible for developing and leading strategy within a law firm.
The mergers which happen for sound, well-thought-through strategic reasons are the mergers which have the best chances of success. They will cost money and require significant investment of management time to be effective. The effect of the recent merger activity within the profession is not yet determined but for those who have looked for a quick solution to increased overhead and falling profitability it is unlikely to pay off quickly if at all.
For any firm considering merger it is important to start with a clear understanding of the needs and requirements of the business. The current market means that management teams in small and medium-sized firms are approached regularly with opportunities. It is flattering to be approached but the key is to stay true to a vision, belief and the strategic reasons for growth. It is easy to become distracted if firms lose their nerve and believe the rumours that everyone is merging and we would be unfashionable not to do the same.
Vicky Brackett is managing partner of national law firm Thomas Eggar LLP. Prior to her appointment, she was head of the Commercial Dispute Resolution Practice Group and specialises in resolving complex High Court disputes. Vicky also leads the insurance team at Thomas Eggar
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