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Evaluate Your  Firm to Prevent Merger Failure
by Barbara Lewis MBA and Dan Otto MBA

Today’s news is filled with articles about law firms that are merging either with other law firms or departments that have defected from other law firms. This merger activity is driven, in part, by the quest for economies of scale, which may lead to higher profits. Yet research indicates that many mergers fail and dissolve, while others have partners yearning for the old days prior to the merger.

It’s not uncommon to hear partners grousing about the new partner’s style ("He’s a screamer.") or business methodology ("Her past due account is over 120 days."). Less common to attorneys, but sometimes obvious to outsiders is why two firms merge when their culture and philosophy are miles apart. Take, for example, the boutique law firm with a high-end practice. They service large corporate clients and their billing rates are high. You wouldn’t expect them to merge with an insurance defense firm where rates are low and volume is high. The disparity between hourly billing rates may cause problems. Yet, this type of merger occurs; however, it will probably be doomed for failure down the road.

If a merger can provide your law firm with a competitive advantage and yet statistics reflect a high percentage of failures, how can you ensure that your merger will be successful? The answer is careful due diligence in a number of areas so that an optimum "fit" will occur.

There are several dimensions to analyze when selecting a merger candidate. These include strategy which is the long-range goals and strategic intent of the law firm; target market including growth rate of that market; types and depths of services offered; the value chain which includes every process and operation from client intake through delivery of services; the infrastructure – support functions such as organizational structure, human resource management, finances and control; and partners which includes backgrounds, style, reputation and culture.

However, prior to analyzing a potential merger candidate, you need to examine the above dimensions in your law firm to determine weaknesses where a merger can add value. The best way is to have several members from various service groups, such as litigation and employment law, and functions, such as finance and HR, rank each of the areas for strengths on a scale of 1 to 5, for example.

The results of the self-evaluation are computed. While some people average the scores of all the participants’ values, others use a more sophisticated calculation of standard deviations. (In simplistic terms, the standard deviation measures the relative amount of disagreement between the participants – or the "deviation" from the average score.) The advantage of using the standard deviation calculation is that opinions don’t just become averages. Extreme viewpoints that are far from the average are calculated and identified.

These areas of large disagreement (largest standard deviation) become the basis for a facilitated discussion on the rankings. Carefully structured conversations allow firm partners, who are expert in the area, to voice their rationale in the rankings. Critical in this process is that vocal partners don’t dominate the discussions and overly influence the decisions.

After agreement on all of the areas’ strength and weakness ranks, the next step is to weight each of the areas in importance. Not all areas have the same importance. After weighting each area, you can quickly see the weaknesses where a merger candidate needs to have strength. (For example, if you rank recruitment as a weakness, yet it is weighted high, then it’s an important area that a merger candidate needs as a strength.) The weighting can be done in a verbal conversation or written with standard deviations calculated for the discussion.

Using the powerful tool of a computer model, you can develop a matrix of rows and columns on the strengths and weaknesses of your law firm’s dimensions and the values upon which you have decided. With a little extra work, you can assign colors to the values (green for strength, yellow for neutral and red for weakness). Then you can easily visualize the areas where a merger is needed to improve your business (the red areas).

Once the internal evaluation is completed, you are ready to begin analyzing your merger candidates. The same procedure is conducted with the potential candidates. You rank and weight the law firms’ dimensions. Then you compare all potential law firm mergers with each other to determine which one adds the most value to your law firm. You can then generate a composite score of each candidate based on the weightings. By quantifying the selection process, you reduce the risk of the future failure.

Whatever your reason for merging, the first step is to perform a self-evaluation prior to analyzing your potential partners. And by quantifying the results, you increase your probability for a successful fit.

 

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