It’s not a big surprise – but why are so many partners’ ambitions thwarted when negotiations fail; and how can partners focus and prepare better to tap into the right opportunities? Whilst some firms have genuinely become their own merger specialists and have learned how to set about it in the right way, most still leave far too much to chance.
The majority of law firms in the UK (74.2%) have approached or been approached by another firm with a view to a potential merger or acquisition of the business or a team in the last 12 months – according to our research with the UK’s top 200 law firms ranked by turnover during April 2011 to ascertain their views in relation to market consolidation and trends.
Our research suggests that nearly three quarters of UK law firms have had a potential merger in their sights over the last twelve months, even though only a small proportion of these discussions have resulted in a completed merger or acquisition. A huge amount of time is therefore being invested but often wasted due to lack of effective preparation by senior management in legal practices across the country.
However, if ever there was an indicator that the UK legal services marketplace is set for major consolidation, this is it – particularly as we approach a period where a late surge of interest in ABS opportunities will arise in the run up to October – so there is going to be a lot more activity going forwards.
The legal services landscape is changing. Being a successful law firm will increasingly be about creating ‘business agility’ where the ability to shift track and adopt new ideas quickly will enable the fittest to thrive.
Being able to scale up or down will impact on margins and there is a growing realisation, particularly amongst the mid-tier firms, that bigger can be better – although we are also working with firms on other options that already deliver scale with improved margins in other ways. Options to outsource management of IT services and legal processes should be explored now.
The findings are no surprise – or negative – for the UK legal sector. Law firms are now more open to change – that’s a positive. Top firms aren’t burying their heads in the sand trying to ignore the impending ‘Big Bang’, instead they are facing it head on and demonstrating greater commercial awareness.
The same cannot be said for all the smaller firms, where there is a dilemma with many partners struggling to see a future when they could be more pro-active in getting organized. Attractive options are available to most practices, it is just a case of unearthing them.
Our research also indicated that senior management at law firms believe that changes in regulation and bank pressure will be the two main drivers of merger activity during 2011.
There’s certainly no room for complacency with regards to financial management anymore. The real prospect of a merger or buy out is a great opportunity – if utilised rationally and early enough – to tackle inevitable gaps in financial information and quickly improve financial performance.
How should lawyers respond?
Law firms looking to merge or buy out another firm must ensure the best deal and agree exit routes, whilst setting realistic financial expectations for partners from the outset since finances can often scupper the deals. A bit of pre-emptive work here can work wonders – particularly when there is a clear financial incentive for partners to introduce meaningful improvements.
Banks no longer view law firms as a safe bet. The high profile demise of Halliwells has shown what can happen. I’m not sure anyone really expected such a major firm to fail – the shockwaves are still being felt. With the Legal Services Act coming into force in October this year, further attempts to consolidate are likely. Small and mid-sized legal firms are likely to join forces. More joint ventures and collaborations between small legal firms and large organisations are expected, allowing them firms to take advantage of the larger company’s enhanced marketing clout.
Inpractice UK is a full service consultancy for legal practices, working with law firms to increase margins and profits through critical review and a focus on KPIs. Comprising a team of specialist independent consultants, we advise clients on their strategy and development, marketing and business relationships, finance, technology provisions and improving productivity and risk management.
Our specialist merger team advises legal clients on all aspects of a merger; from a high level strategic approach to the practicalities of consolidating databases to facilitate mergers on any scale.