Most mergers fail. Not just law firm mergers, mind you, but most mergers period. Studies cited in the Harvard Business Review peg the failure rate between 70 and 90 percent, a staggering figure when one considers the amount of time, energy and capital that is invested in M&A. Failure in this context, of course, does not mean that the deal results in bankruptcy, but that the merger fails to realize the anticipated benefits, namely growth and improved efficiency.
An analysis of failures in law firm mergers can never be as empirical as it is for publicly traded companies, but these statistics ring true. Most law firm mergers fail to develop the anticipated synergies and efficiencies, and for many of the same reasons as in the corporate world. In corporate mergers, executives often fail to distinguish between mergers that improve growth prospects from those that increase efficiency. Similarly, in most law firm mergers, the overwhelming focus is on the alignment of practice groups, client expansion opportunities, attorney integration, business development and geographic overlay, often at the expense of harmonizing operations, renegotiating contracts and improving efficiency in key nonrevenue-generating areas.
This tunnel-vision focus can significantly impact the outcome of the deal. The simple reality is that every dollar saved in driving operational efficiency is equivalent to $2 to $4 in net new revenue. For a law firm operating at a 50 percent profit margin, $1 in operational savings is equal to new $2. At a 25 percent profit margin the equivalent jumps to $4, and so on.
Business development can be the most difficult and mysterious aspect of any professional services firm, particularly when it comes to measuring ROI (return on investment) — operations is perhaps the most tangible. So, plainly put, most law firm mergers fail to fully yield the anticipated results because merging firms typically overlook such areas. If efforts to streamline operations were prioritized, the new firm would be far more likely to realize anticipated benefits, and do so quicker.
Effective post-merger integration, or PMI, of business operations efforts requires a keen focus on assessing existing vendor relationships, back-office support functions and billing practices. But more than anything else, it requires commitment and leadership.
With law firm leaders often focused on top-line integration, this effort usually falls to already overtaxed functional directors. In many cases, operational efficiencies fail to emerge because no one is specifically tasked with, or has the appropriate skill set for the challenge. Whether the firm creates a new internal role, or hires outside experts, it’s essential that someone takes charge of this demanding and time-critical effort. For the merger to succeed, the firm needs a point person who has real authority, credibility and accountability.
The dominant focus on practice integration too often trumps leveraging the improved purchasing power that mergers present. Inevitably, when law firms merge, some vendors come away with bigger accounts, and others lose out altogether. Because vendors understand and have developed sophisticated sales and pricing teams focused on this, the PMI window presents a unique opportunity for the firm to both evaluate and renegotiate better terms and rates on everything from legal research to office supplies.
The PMI team must be able to identify the full roster of vendors, prioritizing those that present the greatest potential for cost savings. Working through that list quickly but methodically will result in considerable savings. Applying robust business intelligence analytics in this process helps ensure law firms have the insight to not only prioritize efforts but help drive toward getting the best deals possible from vendors while ensuring the long-term sustainability. Notable “wins” early in the PMI process are important, as they demonstrate to firm leaders and staff alike the integrity and value of a concerted integration effort.
WIN HEARTS AND MINDS
Every merger has a critical window of three to six months in which it is possible to assess doing things differently, from third-party contracts to client billing, but particularly internal staffing. Everyone knows a change has occurred, and is braced for how it will affect them personally. If they are not provided with a clear road map in this crucial timeframe, however, the new firm culture may simply evolve arbitrarily from the legacy practices and methods of the two firms.
Naturally, many staff members fear for their jobs. While some of this stems from people being change-averse, such fears are not totally groundless. Law firm back-office operations are already lean due to the recession, and many firms have a history of simply performing reductions in force to save money or maintain profits per partner without much thought to how these actions impact workflow or attorney efficiency. Although the review of support functions (secretarial, paralegal, records management, document production, knowledge management, technology support, etc.) is a key component of any PMI effort, it’s important to note that significant cost savings in support functions as a result of reorganizing usually take longer to realize than procurement-related initiatives.
Any changes to back-office staff should be strategic and data-driven, with a deep understanding and acceptance of necessary service levels. One common pitfall is to only focus on ratios or cost basis metrics and not the service implication of staff cuts. Ratio-driven cuts can severely damage service levels and morale. Support staff have deep relationships with attorneys and each other, so every cut can have unanticipated and lingering effects.
Moreover, firms can create a lot of new efficiencies without cutting heads, but that takes integration experience and a deft touch. Existing staff can often be realigned in ways that are not only more cost-effective, but can be more professionally gratifying for the individuals involved. That type of effort does not reap dividends overnight, but can save millions of dollars and builds a stronger, unified culture over the course of years.
OPTIMIZE TOOLS AND WORKFLOW
Effective integration also depends on firms getting on the same page technologically, and getting the most out of their existing tools while they assess what might be needed in the new firm. PMI leaders must be prepared and capable of reviewing and developing new policies and integrating functions.
The approach for such efforts may not be cookie-cutter. Knowledge and records management don’t just vary from firm to firm; disparate practice groups and even individual partners may have their own systems and preferences. Assessing and unifying, to the extent possible, such key support functions presents both cost savings and new efficiency opportunities. The transition window offers the chance to analyze not just how an attorney can best utilize tools such as legal research at the optimal cost, but also which sources provide the broadest or best content or how this support function should be set up, etc.
Firms should also evaluate the workflow and cost for things such as how client records are stored, retrieved and potentially destroyed to understand how it can be done not only cheaper but more efficiently. The results of such efforts allow attorneys and paralegals to focus their efforts more effectively, and be in full compliance with the latest document retention regulations.
Making support staff adjustments, changing processes or implementing new systems may not present savings overnight and could take more than a year just to implement, but experienced integration managers can provide a nuanced cost-benefit analysis and project the impact of improved workflow over time.
The same dynamic applies to billings. In recent years, many corporate clients have made the transition to electronic billing, and put pressure on their law firms to follow suit. There are a large number of vendors in this space, however, leaving law firms working across multiple systems, a problem only exacerbated by mergers. Many firms are not effective in their efforts to harmonize different e-billing systems, resulting in costly and time-consuming billing errors.
When a firm is not billing and collecting efficiently, there is a big bottom-line impact and a lost opportunity to maximize working capital. An experienced integration manager can consolidate best practices in the e-billing space, resulting in hard dollar savings and improved cash flow.
There is no single action that ensures a law firm merger will succeed, but placing a greater emphasis on operations integration will dramatically improve the odds. The strategic considerations of practice area relationships and geography may always be the catalyst for law firm mergers, but a relentless focus on operational efficiency may be the differentiator that contributes to their ultimate success.
This article first appeared in The Recorder, a Legal affiliate based in San Francisco. •
Christopher Ryan is a managing director at HBR Consulting and Matthew Sunderman is a senior director in HBR’s strategic sourcing and business operations practice. They help Am Law 250 law firms and large U.K.-based law and professional services firms drive enterprise value through reducing operating costs, improving efficiency and utilizing data more efficiently.