Merge? Determining Elements for the Integration of Law Firms

Law firm mergers are usually motivated by different factors, but not all of them guarantee success. Analyzing these factors is crucial to determine if the integration is on the right track, or if it is destined to fail.

On the side of failure, the most important are attempts to solve internal problems; to accelerate and smooth succession processes; to solve financial problems or to satisfy dreams that are far removed from reality.

On the success side, the most common motives for these operations include, firstly, the needs of the clients. In order to centralize costs or to facilitate dynamics and communication between areas, more and more companies prefer to have their legal services provided by a single firm. However, from the supply side, this trend should be evaluated from a real and actual perspective, and not merely potential. When discussing a merger, it is key for lawyers to inquire whether their respective clients would welcome, for example, their corporate and litigation matters being handled under one roof. The client’s opinion should be the final decider in a merger approach. Lawyers can be very surprised by what the client has to say and their new needs.

Secondly, due to the integration of markets, a merger may arise as an adaptive need of the firms. For some years now, Latin America has been no stranger to the phenomenon of regionalization and globalization of firms. The arrival of foreign competitors means that they must constantly ask themselves whether they want to remain local players or whether they must rethink themselves in order to survive. Thus, three alternatives arise: 1) stay local, which, in the best case scenario, can lead to turning the firm into a well-known legal boutique, 2) join one of these large global projects, or 3) create a new firm more adapted and competitive for that environment by merging with other similar firms.

The third reason to merge is to have the right partner. In choosing a partner, firms should cross-reference their strengths and weaknesses. In this way, the strengths of one should serve to cure the weaknesses of the other and vice versa. Sometimes the advantages of this crossover will seem more obvious, such as in cases where different practice areas are combined. At other times they will not be so obvious, such as in mergers where the firms are very different but complementary. For example, one firm has an excellent reputation and very high positioning but needs the appropriate leverage and young professionals from the other. Or those firms with a great sales and client acquisition capacity, but with organizational and internal management shortcomings.

But beyond synergies, there is a very important element to take into account when choosing a travel partner: its culture. Culture could be described in this field as “the way we do things here” or “the uniform and repeated behavior around certain principles”.

In particular, when it comes to professional services, culture is the way clients and lawyers are treated. With respect to lawyers, culture is how they are selected, how they are recruited, how they are trained, and how they are created. There are complementary, adaptable and similar cultures, but if the cultures are very opposite, merging will be impossible.

On the other hand, beware of the fact that in the medium term one culture will displace the other, absorb it and, on a day-to-day basis, make it disappear. This, which may seem convenient if one is more successful than the other, may generate other problems and probably the loss and departure of lawyers adapted to the displaced culture.

Finally, and given that culture is the set of repeated behaviors performed by the members of an organization, this culture is rooted in people and, at the same time, it is born from them and guides their way of acting. Therefore, if cultures do not fit together, people will not fit together either and the merger of these organizations will not be as expected. In fact, it can be said that firms do not merge, but people do.

The three key elements to a law firm merger are: the name, the compensation system and the decision making.

1) The issue of the name of the merged firm is critical. Whether because of the reputation generated over the years, commercial issues or the concerns and wishes of the original partners, negotiations and agreements on the name are more relevant than in other types of business mergers. The professional service nature of legal services, personal reputation and the concept of these firms as “people-intensive rather than capital-intensive” firms make this issue one of the most relevant.

2) The partner compensation system resulting from the merger is the main economic element to be resolved and agreed upon.

Depending on the original cultural and social models and the different compensation systems -from Eat What You Kill to Lockstep-, through the infinite number of possible variables, the future compensation system will be a key element of the merger and one of the filters through which the partners of each firm will make their decision. Ultimately, the economic issue in a merger centers on how a particular partner can best capitalize on its development and turnover. If in the resulting firm each individual partner can, depending on the system chosen, capitalize more – obtain more profitability than he obtains today with the same turnover – his situation will improve and he will be in favor of the merger. On the other hand, it will also be possible to obtain greater capitalization with other markets and customers and with an increase in turnover, but the initial analysis will be focused on “better capitalization of current resources”.

In any case, the compensation system must be one more element to achieve the objectives, to execute the firm’s strategy and not only a system to distribute profits.

3) Finally, and as a social or personal issue, there is the way in which the merged firm makes decisions, which can be reduced to the question of “power sharing”. Power, the way in which it is used in the future, the balance that is generated in terms of the original firms and the loss or maintenance of “command” in relation to the previous situation is key in this process. How decisions are made and the weight or relevance that the partners of the originating firms have in the short term will be decisive for the merger to move forward.

From the above, we can see how there are economic and personal issues that must be part of the agreements, and which must have the necessary weight in the negotiation. A negotiation that leads to a merger process without an adequate balance of social (personal) and economic issues will be erroneous. We can graphically include here four types of problems depending on whether the merger agreements have been more or less worked out, and their ties have remained strong or weak at both the economic and personal levels, giving rise to four different merger futures.

Of course, there are many other elements to take into account and that will have to be concretely managed, however, all of them are related to or derive from some of those mentioned above. This note is not the place to discuss them all and to describe the various committees, competencies, structures and issues that need to be addressed throughout the process and with regard to the finances, operations and people management of the future firm.