What’s behind the breakneck pace of law firm mergers?

Even on the heels of a record-setting year for mergers and acquisitions, the dizzying rate at which law firms are being dissolved and swallowed has continued to accelerate. In the first two months of 2016, 18 firms have already folded into others, according to Altman Weil’s Merger Line. And that figure doesn’t account for perhaps the most powerful recent tremor  — Polsinelli’s gutting of the one-time IP powerhouse Novak Druce, whose remaining members said they “will wind down actively practicing law.”

While the turmoil has caught some off guard, others say the seeds of upheaval were sewn long ago. Among those is Jordan Furlong, an Ottawa-based attorney, change management consultant and close watcher of industry tumult he’s documented for years at Law21. In most acquisitions, he says, there are common threads: failure to plan for the future and a “bailout” mentality.

In this, the first of a three-part interview with Furlong, he addresses the factors underlying the brisk pace of law firm M&A and who is responsible.

Logikcull: There appears to be a lot of upheaval in the legal services market. How would you describe what you’re seeing in regard to the dissolution of law firms?

Jordan Furlong: We’re seeing a lot of dissolution and consolidation among law firms — certainly in the American market, but here in Canada to a lesser extent and in Britain as well. These are often billed as mergers — “X firm merges with Y firm” — but they look to me less like mergers than the acquisition of distressed assets.

“They look to me less like mergers than the acquisition of distressed assets.”

There is a real sense in a lot of these cases that the law firm that is being acquired, or at least less strongly positioned in the market, is being “stripped for parts.” That may be stating it too bluntly, but there’s something to be said for that line of inquiry.

But this is what passes for succession planning in the legal market these days. Everybody’s been saying for at least the last five or 10 years that law firms have to pay very close attention to succession planning, and figure out how they’re going to move their most senior, powerful, influential and important partners into the latter stages of their careers to try to transition to the next generation — and ensure the ongoing competitiveness and maintenance of the firm in the future.

But this kept getting put off and put off. It’s almost like they decided, “We’re just going to keep waiting. We’re going to keep not moving on like this until it’s too late. And then we’ll just deal with whatever happens to us at that point.”

It’s almost easier for some firms to face the prospect of being acquired and/or quote-unquote “stripped for parts” than it is to half tough, difficult conversations with some of their most powerful and important lawyers about how the future is going to be arranged.

“It’s almost easier for some firms to face the prospect of being ‘stripped for parts’ than it is to half tough conversations about the future with some of their most powerful lawyers.”

That strikes me in a lot of cases as what may be happening under the appearance of consolidation.

Logikcull: So you’re saying that, at some firms, often it’s the case that high-level partners avoid succession planning because they know that there’s always a lateral move to be made?   

JF: Yes, and my guess would be — not based on any direct experience, but my survey of the market — that none of these mergers/consolidations are taking place without the blessing, if not in fact the leadership, of some of these significant partners. They really don’t like the situation at their firm and there are more than enough places for them to lateral into.

Lateral partner hiring is still this obsession that any number of law firms seem to have. It’s not so much a strategy as a replacement for strategy. There’s always a home for lawyers who have substantial books of business and/or substantial reputations who are able to bring their client followings with them. My sense is that nothing is happening without their permission and their active involvement. And in a lot of ways, I imagine, they’re the ones pointing the firms in a particular direction.

“Lateral partner hiring is still this obsession that any number of law firms seem to have. It’s not so much a strategy as a replacement for strategy.”

In most law firms, there is a minority of individual partners who exercise a great deal of influence within the firm strategically, financially and tactically. The reality is that whatever is going to happen with the firm is going to happen because of and/or through these particular partners. That can be good or it can be bad. It depends entirely on the culture of the firm and on the dispositions of the partners in question.

Logikcull: You say growth through lateral hiring is a core strategy — or strategy replacement — for a lot of these firms. How much do you think that’s a product of the firms’ inability to “develop their draft picks” so to speak — to bring in young lawyers and put them on a path to becoming partners and leaders of the business?

JF: There’s a lot of that at play here. I remember seeing a survey a couple years ago of a number of managing partners and people in leadership positions that asked a couple of questions. First, “do you think lateral partner acquisition is a sensible, sustainable growth strategy for your firm?” About 25% said “yes.” The next question was, “Do you intend to pursue such a strategy in the next year?” And 93% said, “yes, we intend to do that!”

It’s almost the exemplification of the old line about the definition of insanity: We know it’s not going to work, but we’re going to do it anyway. To get to your question — is it the result of a failure to develop your draft picks? — I think that’s a great analogy. You have these draft picks, but you should also have, if you will, a minor league system by which you develop the talent you require and you give it the skills and the training and the knowledge it requires in order to be a top performer.

“It’s almost the exemplification of the old line about insanity: We know it’s not going to work, but we’re going to do it anyway.”

I suspect you could go back to a point in the history of law firms — probably less than 20 years ago — where that system did in fact exist. There was a lot of interest in wanting to make that kind of investment. The interest in that kind of investment, to me, seems much less apparent now. The primary reason is, for a long time, first and second year associates — and everyone would agree with this, even the associates themselves — arrive in law firms with not much more than the ability to turn on their computers.

Clients, especially after the financial crisis, increasingly said, “We’re not paying for you to train these people on the job anymore, especially because, frankly, we think you’re over-charging for what they’re actually doing. And number two, it’s not like you’re actually training them anyway! It’s not like they’re actually doing anything of value for us!”

“First and second-year associates arrive in law firms with not much more than the ability to turn on their computers.”

A sensible law firm has to look at its most junior employees as an investment. They’re not going to make money for us. They’re probably going to lose money for a couple of years, but that’s okay because we are investing in them for the future.

But that’s not happening anymore. One of the reasons is client demand and the other, and you can’t really argue with it, is that the kind of work that these junior lawyers have done in the past is starting to go away anyway — at least for human lawyers and large law firms. It’s being outsourced to legal process outsourcers, managed service providers and specialists who have figured out this is essentially commodity work that can be done in a commoditized fashion.  

It’s a chicken and egg problem. Firms aren’t having much success in training and developing new partners, partly because they’re not creating the best environment for them. A lot of them leave. And so firms say, we have to get partners from somewhere and look to the free agent market. And because they’re making an investment in that, they’re again continuing not to invest in their new people. It’s a vicious circle. That’s one dimension I think of what’s going on and what’s driving this weird, obsessive behavior toward lateral partners.

As told to Robert Hilson, a director at Logikcull. He can be reached at robert.hilson@logikcull.com. Jordan can be reached at jordan@law21.ca.

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