Tag Archives: Law Firm Combinations

Strategic Thinking for Mid-Size Law Firms

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Last month we talked about mid-size law firms:  how best to define “mid-sized;” whether aggressive growth was the most logical strategy for mid-size firms; and alternatives to adopting an aggressive growth strategy.  We got quite a bit of feedback – including some asking whether we had any alternatives to rapid, merger fueled growth.  Part of the answer to that question was addressed in the second half of that article (a section entitled “winning strategies for mid-size law firms”).  This article advances that discussion further.

Last month we identified some important commonalities among successful mid-size law firms, including the following.

  •  Successful mid-size firms tend to be general service, business law firms (though not “full service” – that is unattainable even at 2,500+ lawyers).
  • A large number (perhaps a majority) of their clients are middle market companies – and that means that legal costs are essentially paid out of the owner/CEO’s pocket.
  • Successful mid-size firms have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.
  • They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.

There are important strategic implications associated with each of these traits, each suggesting potential sources of competitive advantage and vulnerabilities to competitive disadvantages.  Some generic strategic thinking can be applied to these common attributes – a few examples follow.

General Service, Business Firm

As a diversified law firm, a “general business firm” has an opportunity to build deep, multi-practice, multi-partner client relationships.

Potential Advantage – Partners at mid-size firms have a strong personal familiarity with (most of) their partners.  That should provide an advantage relative to introducing one another to clients as new needs arise (assuming partners have confidence in one another).

Potential Disadvantage – Every firm has practice capability gaps and those gaps can be pretty large at mid-sized firms (even in the strongest).  When competing against biglaw, mid-size firms need to avoid competing on the basis of scale or breadth.

Middle Market Clientele

Serving middle market companies has preconditioned many partners at mid-size firms to be value conscious.  The legal market has been moving decisively toward reduced costs and value, particularly since the great recession.  Many mid-size firms have been benefiting from that trend.

Potential Advantage – Generally speaking rates are lower in mid-size firms.  In addition, many mid-size firms are predisposed (temperamentally and practically) to staff matters with lean teams.

Potential Disadvantage – Biglaw firms are making substantial investments in knowledge management, project management, and financial management and that has the potential to close rate and efficiency advantages currently enjoyed by mid-size firms.  In addition, as Bruce MacEwen has noted here, some large firms are engaged in “suicide pricing” – it isn’t sustainable for a biglaw firm, but it is a real threat to competing mid-size firms.

Market Leadership

Strong mid-sized firms are often the best choice in their local or regional market for a number of legal issues.  Yet, they are rarely the largest or most visible firm in their own market.

Potential Advantage – Marketing and business development that supports market leading practices generally has the best return on investment.  That includes both investments intended to attract new clients and those intended to expand existing relationships across practice areas.  The key is being willing to make those investments.

Potential Disadvantage – Essentially, two can play that game (i.e., biglaw competitors will be pushing their own strengths forward in the marketplace) – and larger law firms have larger marketing and business development budgets.  In addition, that biglaw competitor may have a great option for the client sitting in an office 2,000 miles away (geography often isn’t a barrier for  work these days).

Merger Inquiries

Critically, you need to know what your firm’s general disposition is vis-à-vis merger.  Even if it is quickly dismissed by the partners, it is important to have that conversation from time to time at the Executive Committee or Board levels, as well as with the broader partnership.

Beyond that, as a general rule of thumb, mid-size firm managing partners should accept invitations to lunch from an out-of-town (merger seeking) peer.  At worst, you will learn a bit about a firm that is obviously interested in competing for clients and people in your market.  And, you will gain insights into what other people value in your market and in your firm.

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As always, we welcome your comments and insights below, via email at info@sterlingstrat.com, and via phone at (312) 543-6616.

 

 

Five Tips for Sustaining a Great Law Firm Culture

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Steven Harper wrote a terrific piece on law firm culture in response to the latest Citi Private Bank/Hildebrandt update on the legal market.  Harper is incredulous of Citi/Hildebrandt’s warning that “Law firms discount or ignore firm culture at their peril.”  He makes the point that “consultants have encouraged managing partners to focus myopically on business school-type metrics that maximize short-term profits…what has resulted from that focus: the unpleasant culture of most big firms.”

The reverse does not have to be (in fact often is not) true.  Namely, firms with a strong, collegial culture are not inherently doomed to poor economic performance.  They may not top $3mm a year in profits per equity partner, but everyone working in those firms earns a very good living, they have strong and enduring client relationships, and they enjoy a balanced and rewarding professional life.  Having that kind of positive firm culture requires work and discipline – and, especially, a commitment not to throw away long held values in the face of short term economic challenges.

Our recent survey on best practices in law firm strategic planning confirmed this point.  Namely, the firms experiencing the most successful results from strategic planning are much more likely to have articulated shared values or principles as part of that process.  At the same time, those highly successful firms are much more likely to adopt and track measurable objectives as part of the strategy process.  In other words, the most successful firms balance a strong commitment to long held cultural values with a pragmatic approach to setting objectives (i.e., financial, client relationship, and other measures).

Having had the pleasure and privilege of working with a number of firms over the years that have cultivated and sustained great cultures, here are five suggestions for how you can cultivate, embrace and sustain a set of shared values that define a great law firm culture.

  1. Honor the Founder(s) – When I started my consulting career at Arthur Young (that dates me), John Smock made sure everyone in the practice got a copy of a relatively short book entitled, Arthur Young and the Firm He Founded.  That little book encapsulated many of the core values of the firm – and traced them to the values of the hard working Scotsman who immigrated to America and started the firm.  Whether your firm was founded 20 or 200 years ago, you are likely to find some of the roots your firm’s values and culture in the character of your founder(s).  Honor those roots.
  2. Celebrate a Milestone Year – Round number anniversaries lend themselves to celebrations (10th, 50th, 100th).  So do record years, though they tend to arrive with more frequency and less fanfare.  Take the opportunity of a milestone year to reemphasize the shared values that brought the firm to that point.  Embrace and celebrate your culture and your shared values – not just the anniversary or the record.
  3. Document Your Stories, Your History and Your Culture – I have a number of books in my collection from clients – both law firm and corporate – in which the history of their organization (and its culture and values) is documented and described for posterity.  Sometimes those books are commissioned in conjunction with an anniversary, others mark the passing of great leaders, and still others were done simply to capture the stories before they were lost to memory.  Those stories may be the very best window into truly understanding the firm’s culture and the values – they are a way to connect our rational understanding of the values to our emotional understanding of values (see this brief slideshow for more).  Stories can even be used when you need to drive cultural change (see Peter Bregman’s HBR article on the topic).
  4. Ask Your People to Define the Culture – We have used a technique very successfully over the years to isolate core values and help organizations coalesce around them.  Ask a very simple question, “What three words best describe the values that endure over time in our firm?”  The resulting word-cloud is enlightening and it helps to define (or reinforce) the firm’s shared values.  It can be used in many settings to spark a discussion of shared values and the culture – keeping that culture front and center as other decisions are being made (e.g., employee reviews, partner compensation, lateral hiring, strategic planning, etc.).
  5. Put It In Your Plan – Finally, take a lesson from the firms having the most success with strategic planning and strategy implementation.  Articulate your values as part of your overall strategy.  Include a long term mission as part of your strategic plan and include a concise articulation of your core values in that mission.

While the embrace of firm culture and values may be belated for some, it is welcome nonetheless.  Whether your firm is large, mid-sized or small, sustaining a positive firm culture is a critically important element in a genuinely successful law firm strategy.  Who knows, it might even land your firm at the top of the Vault.com rankings for best firms to work for.

 

Top Insights from 2012 Strategy Questions of the Month

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Throughout the course of 2012, Sterling Strategies conducted monthly mini-surveys, each focused on a single strategy topic.  The intent was to develop some empirical data on what works and what does not work relative to a variety of strategic management challenges.

We certainly learned something every month.  Often the findings and insights were entirely new (if not entirely counter-intuitive).  Occasionally, the findings confirmed something we believed, but lacked the data to support.

Before setting our sights on advancing the state of strategic management in 2013, we thought readers might enjoy a highlight reel of sorts of the most significant findings from the 2012 strategy question of the month series.  The list is presented as a “top ten,” but the insights are ordered for readability and flow.

  1. Grow your own – When developing a strategy for generational succession, it is best to develop people yourself (rather than seeking to hire future leaders laterally).  Our November 2012 survey found that “high lifer” firms (i.e., firms with higher percentages of people who were hired at the entry-level and stayed) have dramatically higher confidence that future leaders exist within every experience level of their firm.
  2. Confront the elephant under the rug – The August 2012 survey focused on what approaches to managing under performing partners actually work and which do not.  What we found was that under performance rarely improves without frank discussion and accountability.  More importantly, confronting under performance actually has a reasonable success rate.
  3. Show me (more than just) the money – What characteristics make up a “model partner?”  That was our question in July 2012 and what we found was that, while originations and billings are very important characteristics in a model partner, subjective factors (e.g., training associates, bringing legal acumen to the table, being a good corporate citizen) comprise nearly 50% of the mix of characteristics firms want from the hypothetical ideal partner.
  4. See no evil, hear no evil, speak no evil (at least when it comes to partner compensation) – Our inaugural survey in January 2012 examined the question of what approaches to setting partner compensation lead to the highest levels of satisfaction.  It turns out, objective (i.e., formula) systems correlate with the highest levels of satisfaction.  And, so-called “closed systems” in which compensation and other data are not published are also closely correlated with higher satisfaction.
  5. The “vision thing” is a key to effective strategic planning – We took an objective look at what tools and approaches lead to more effective strategic planning in law firms (beyond, obviously, hiring Sterling Strategies) in June 2012.  The firms with the most effective strategic planning processes are much more likely to have articulated a vision for the future, a set of shared values, and measurable objectives to track progress toward achieving major goals and strategies.
  6. Focus practice group leaders on things that make a real difference in group performance – Firms with the most effective practice group management experiences are much more likely to ask practice groups to focus on cross-marketing, on profit drivers for their respective group, and on aligning practice strategy with firm-level strategy.  Meanwhile, the least effective groups get bogged down in administrivia.
  7. Better budgeting practices – Firms with the most effective budgeting processes are more likely to plan for growth (in addition to looking for cost savings).  And, the more effective budgeting processes are considerably more likely to involve practice group leaders in the budget development process.
  8. 2012 profit growth was driven by production and realization improvements – The bloom was clearly off the rose relative to using rate increases to drive profit growth (unlike the decade before the financial crisis).  Bonus question – is leverage dead?  On the surface the answer would appear to be ‘yes,’ but the reality is that leverage is wearing new disguises (e.g., more income partners, larger top-to-bottom compensation differentials, growing use of contract attorneys, etc.).
  9. Data, data, data (if you hope to be successful with AFAs) – Alternative fee arrangements are growing across a number of categories.  Law firm leaders were emphatic in noting that the key to success with AFAs is well analyzed data (both cost data and historical work load data).
  10. Practice portfolios are driving domestic law firm mergers – Allowing for alignment of fundamentals (e.g., firm cultures and economic compatibility), the most important driver of mergers these days is finding a merger partner with complimentary practice area strengths.

As a bonus (since many may have missed it with the crush of year-end collections and the holidays), see our December 2012 findings regarding the use of objective measures and scorecards in law firms.  Short summary – firms are universally good or excellent at measuring financial objectives and results, but do a poor job measuring the strength of client relationships, people development, or much of anything else related to their operations.

We are immensely grateful to the many, many law firm leaders who completed the short (usually two-minute) strategy surveys throughout 2012.  That input enabled us to build a nice body of empirical data regarding a number of important strategic management topics.  It was helpful for law firm managers – and to us as strategy consultants.  We intend to take a slightly different approach in 2013 (shooting for five-minute surveys on a quarterly basis).  That will reduce the number of times we have to pester you all for input over the course of the year.  In place of some of the monthly surveys, we will share insights and proven approaches gained directly via other channels.

Best wishes for a very healthy and prosperous 2013.

Survey Results – Strategic Growth – April 2012 Strategy Question of the Month

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Our April 2012 strategy question of the month focuses on strategic growth. The latest Am Law 100 found that headcount growth has resumed across the largest firms in the U.S. Further, those tracking law firm mergers found that activity in 2011 (i.e., competed mergers) had returned to pre-recessionary levels.

We wanted to get a sense for how integral mergers and acquisitions are to law firms’ growth strategies. So, we asked a very direct question, “Does your firm plan (hope) to complete at least one merger and/or acquisition by the close of 2013 that would grow headcount more than five percent from a single combination?” Those answering ‘yes’ were asked to rate the relative importance of a range of factors they consider when evaluating potential merger candidates. Those answering ‘no’ were asked to share the considerations that led their firm to opt out of merger and acquisition activities.

MERGERS AND ACQUISITIONS AS A GROWTH STRATEGY

The survey split almost 50/50 relative to whether firms plan (hope) to complete a combination that will add more than five percent to their headcount. Slightly less than 50% said that strategic combinations (of at least the scale noted here) are definitely part of their strategy. Meanwhile, just over half the respondents noted that they do not expect to complete a combination of reasonable scale over the next 18 months.

FACTORS DRIVING THE EVALUATION OF STRATEGIC COMBINATIONS

Factors driving the evaluation of prospective merger and acquisition candidates break-down into a few categories. First, there are a couple of factors that appear to be foundation – that is, factors that are not so much a driver for seeking merger partners, but that a lack thereof will squelch discussions with prospective merger candidates. Second, are factors that are clearly strategic to an overwhelming majority of the firms actively evaluating merger candidates. Third, are factors that are strategic for many, but not for a significant minority of firms seeking a strategic combination.

Foundational Factors
Cultural fit appears to be an unquestioned foundational factor – over 96% considering it to be an important or critically important factor (and over 60% rating it critically important). Similarly, the ability of a combination to deliver long term financial improvement appears to be a foundational factor – again, over 96% consider long term financial contributions to be important on some level (though only 46% rate it critically important).

Practice Portfolio Considerations – Most Strategically Important Factor
Over 90% of the firms actively seeking strategic combinations are looking (at least in part) for a merger partner that can close gaps in their own firm’s practice portfolio or capabilities (i.e., rate it important or critically important). In fact, as an evaluation factor for prospective merger partners, it rates nearly as highly as the foundational factors. We have written extensively on strategies related to managing practice portfolios – most recently in our book for the Managing Partner magazine bookstore. We will likely provide an abridged discussion here on the blog in early May 2012.

Geographic Considerations – a Mixed Bag
Adding size and scale to existing offices is an important strategic consideration – a geographic factor that figures into the strategy of roughly three-quarters of responding law firms. By contrast, adding a presence in a new city is important to many firms seeking a strategic combination, but not on the level of ensuring “critical mass” in existing offices.

Client Considerations – Clearly Important, But Not Universal
A very strong majority (over three-quarters) of firms do expect a strategic combination to add important client relationships that their firm currently lacks. Likewise, a large majority of firms noted that their evaluation of prospective merger candidates in part “responds directly to the stated needs of existing clients.” Stated client needs are not as universal a driver as closing portfolio gaps – or even as adding important new relationships – yet, it is clearly an important consideration.

High Profile People – Important, But Not Critical
Firms clearly want a strategic combination to add high profile people to their firm. However, it is not a critically important factor (only eight percent of firms consider the addition of high profile people to be “critically important”).

Growing Maturity
Finally, we were pleased to see an indication of growing maturity among those looking for strategic combinations. Specifically, a large majority of firms are not looking for a near term positive financial impact from mergers and acquisitions – over two-thirds of respondents consider near term finances to be either not a factor or only a minor factor. Had that question been asked 10 years ago, the responses may have been quite different.

OPTING OUT OF STRATEGIC COMBINATIONS

Most of those responding that they were not planning (or hoping) to make a substantial strategic combination of the next 18 months were kind enough to share their reasoning and rationale for opting out of merger activity. We have grouped those open-ended responses into the following points.

  • Nearly half of those not actively seeking a strategic combination noted that they are actively growing via smaller scale initiatives such as lateral hiring, smaller acquisitions (that would not meet the “five percent headcount growth” cut-off in the initial question), or via “strategic organic growth.”
  • Many noted – often in thoughtful and thought-provoking terms – that growth via mergers and acquisitions runs counter to their well-considered strategies (e.g., commitment to a “boutique” strategy, a “focused model,” or a solid existing market position).
  • Several respondents (roughly a quarter of those not actively pursuing a strategic combination) said that they remain open to discussing combinations when approached, but are not actively seeking a merger partner.
  • A couple of respondents recently completed major mergers and do not anticipate doing another significant combination over the next 18 months.
  • A couple of respondents noted that they are currently reevaluating their overall strategy and have not determined yet if they are in the hunt for a combination.
  • Finally, one respondent noted that they have looked in the past and do not believe there is an appropriate merger partner for their firm.

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As always, we thank the many firms that responded to this month’s strategy question. The response rates continue to grow, the insights are very helpful to us as strategy consultants, and we hope they are useful to you as leaders of your respective organizations.

The comments section is open and we welcome dialog – online here or off-line via phone and email.

 

Strategic Growth – Strategy Question of the Month – April 2012

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When the National Law Journal published the new NLJ250 (now expanded to the NLJ 350) in late March 2012, the headline was “For Large Firms, Time to Grow Again.”  We certainly see an uptick in merger and acquisition activity among our clients, but that is not representative of the industry as a whole.  Both the Hildebrandt Institute and Alman Weil actively track merger activity – and their reports on mergers in 2011 suggests that law firm combinations have indeed returned (and even surpassed) pre-recession levels (see the links to their respective blogs).

This month we want to get a broader sense for what law firms’ future plans are regarding mergers and acquisitions.  In that context, we want to examine the factors strongly influencing the search for (and evaluation of) merger and acquisition candidates.  And, for those firms that are not pursing strategic combinations, to get a sense for the strategic considerations that went into the decision to forego mergers for the time being.

The survey embedded below (click here if you do not see the survey in the box) is entirely confidential and should take no more than two minutes to complete.  Deadline to respond is midnight, Saturday, April 28, 2012.  Thank you for your continuing help with these monthly strategy surveys.