Hidden costs involved in mergers and takeovers

Market consolidation is a fact of life for many sectors of the legal profession. The rate of mergers and takeovers of firms continues to accelerate as firms seek costs savings to make life viable, particularly on the high street. But if you want to take advantage of these savings, then you must also be mindful of those hidden costs that may make the merger of two firms much more costly.

Property costs are usually the second biggest overhead (after wages) that a firm has. Better use of space could mean being able to get rid of an unnecessary rent. But what are you leaving behind?

The cost of dilapidations may take you aback – your landlord demands the return of a pristine building. It is funny how that schedule of condition you signed without thinking suddenly appears to be a frighteningly one-sided recollection of what the building was like when you moved in. Even if you have been operating out of serviced office accommodation, the penalties for leaving can be high, particularly where a charge ‘per workstation‘ is applied to cleaning and redecorating, or where they seek to charge ‘as new‘ for a £100 office chair which needs the armrest screws tightened.

But even these costs can pale into insignificance compared with the brutally expensive surprise of seeking to terminate the leasing agreements on photocopiers, printers and franking machines that never really seemed to work well anyway. It is worth having details of all the agreements to hand before deciding which ones to terminate. The quality of the photocopiers may have to be sacrificed in the short term to avoid the capital cost of returning a leased machine that has a significant proportion of the rental period to run.

Talking of printing letterheads, what’s in a name? Well, usually several thousands of pounds of stationery and signage. Often firms will want to take advantage of a stronger brand image as a result of a merger. Does this mean that you need to pay a designer to prepare your new branding? Are you going to have to throw away thousands of unused letterheads, business cards, attendance sheets and compliments slips?

Archiving material
Clearing a building that has accumulated many years of random detritus means getting your hands dirty and getting your wallet out. The cost of skips will soon run into four figures, particularly if you don’t want to give up your weekends to be the person loading them as well.

But the basement or attic, where only the office junior has been to retrieve a file from the archive in the last few years, is probably more valuable than you realise. As you try to merge the archived file catalogue of two firms, the issue of storage space takes on greater significance – and you should probably not cram it into an office. There is no point in having boxes of files, which have no ostensible profit-generating capacity, taking up space that could be used by fee-earners who, properly managed, would (hopefully) do so.

The sensible thing to do is to store the files off-site, albeit at an extra cost. In addition, you would probably have to rebox (if not recatalogue) the archive, which takes time and costs money. You would also have to tell the office junior that it is now a five-mile bus journey to retrieve an archived file.

Making IT work
If you are going to operate as one firm, it makes sense to get on the same IT platform. This applies to the operating system and the version of Microsoft Office that you run, and to your practice and/or case management system.

Supporting the IT infrastructure of a business is expensive enough without having to deal with avoidable problems that arise from different pieces of software running across the same network. The solution is to fund the up-front cost of licences to migrate everyone on to the same platform.

For practice management systems, the big issue concerns the migration of data from one platform to another. This can be a costly business. Data transfer is something your IT software supplier would be happy to do. But it may not be at a cost which you are willing to pay or within a timescale that suits the pace at which you want to move. The alternative, however, is not particularly attractive either. Asking fee-earners to open their own files on a new system may help train them on unfamiliar software, but it is wasteful in terms of fee-earner time. The burden cannot much better be borne by administration support alone, particularly if you want the files to be opened within a reasonable time.

Human factor
Managing an HR function is not a great strength of many smaller law firms. Payroll, for example, may be outsourced entirely to a third party. So there is a cost saving to be made if you are able to consolidate the cost of running the payroll. But this is not straightforward if payroll was previously run within the merging firms on different dates.

The hidden costs of getting these things straight also applies to holiday years and holiday pay, sickness pay and other contractual provisions relating to bonus payments which are not the same in both firms.

It is usually relatively easy to migrate employees’ terms to the more generous terms available within a merged firm (and to bear the cost of doing so). But there is usually relatively little prospect of amending terms to the detriment of a group of employees in the short term – even for the purposes of harmonisation. If you do not achieve harmonisation of terms, you will have to bear additional administration costs.

If the business reasons for takeover or merger are correct, then the above are inconvenient truths rather than reasons not to proceed. Ultimately, the infrastructure costs of a larger firm should be proportionately less than for a smaller firm, which should assist the long-term viability of the new firm.

It is inevitable that the initial costs of merging two firms are higher than most people envisage. If these are not budgeted for, there can be an embarrassing failure of the merged entity – which does not serve the needs of firm owners, employees or clients.

Adam Makepeace is the practice manager at Duncan Lewis & Co.