Monday, September 24, 2007

Hey…. Let’s get together sometime soon….

No matter whom you are or acting on behalf of, that phrase brings on some type of relationship. It is the basic human need to fill a void that drives people into a relationship; we are simply not whole on our own. Relationships are multi-faceted beyond the human mind’s comprehension. Relationships can be as simple as helping the neighbor move furniture or as deep as it brings about another life. Relationships also have their place in the business world. Depending on your location, they can be the life blood of who you are, as is the case of the Japanese Keiretsu, while some corporate relationships are simply meant to achieve a small task.

In today’s legal market place we are seeing a remake of the late 1980’s where firms are in ‘merger’ talks. Hardly a day goes by that I don’t read about firms are in ‘talks’. I often wonder if the mergers of today results in the boutiques we saw form and flourish of the 1990’s. The corporate world as flourished on M&A activity. I recall some of my readings a decade ago about the rampant failures associated with M&A activities. As it turns out, what seems great on paper fails because cultures simply cannot meld together.

In the last year the M&A activity with law firms has really picked up momentum. As the talks continue, some groups disband while some actually gel into a new practice. With all of this activity in the marketplace I don’t feel that the basis for these talks is reasonable. I believe that often these firms who are talking M&A are really setting themselves up for failure. The best situation is where each side recognizes they need the other to become better. However, from I have been made privy to, this often isn’t the case. My favorite basis for a merger came out when two firms were in ‘talk’ the basis for the merger, one firm’s profit per partner was $10,000 higher than the other firm. It was felt that together, they could have a larger market presence and thereby get their profit per partner up for the ailing firm.

Anyone sporting an MBA shingle will immediately attest to that fact that M&As have a very high probability of failure. Some immediate ones that come to mind, which were all over the news: Daimler Benz and BMW. In 1994, BMW bought the Rover Group on the basis of entering the SUV and off-road vehicle market. Then after 6 years and millions of dollars, MG Rover was spun off. BMW made the public state “we’re going it alone”. Then in 1998, Daimler Benz got the idea to enter the low end market through their purchase of Chrysler. Now less than 10 years later, Chrysler becomes the Benz Frisbee – spun off to a venture capital firm. I could spend a huge amount of time looking at all of these deals that become curve balls into space. But the result is clear, the basis for M&As often don’t take into account the most critical factor – the human element. Oh it is easy to merge any company, move some PCs, get a few new servers, hook up a new network and done. Profits should flow! However, what companies don’t realize, is that it isn’t the hardware that makes a company, it is the culture. It is the attempt to meld cultures that end with internal tensions and a disbanding of the venture.

I feel that today’s firm should take a serious look at themselves and determine how best to grow their practice. For the most part, M&As is not the route to go. I sometimes wonder why firms don’t opt for organic growth. Could it be that they simply don’t have the culture that lends itself to organic growth or there isn’t a zealot who can envision what ‘what ifs’? If we can’t grow organically, what is the next step…..M& A.? In last week’s edition of Legal Week, Helen Mooney discussed how US firms are ‘merger-minded’ with Western European firms. Sadly, some of these firms are bullish in that regard. Sad in the sense that they have not looked at the human side of mergers.

In my career, I have seen M&As come and go. Mergers are severe cultural shocks even when it happens with an organization in the same geographical region; it is millions of times worst when it happens over time zones and oceans. I have seen these firms form and suffer tremendous internal turmoil, so much so that the sum of the firms is less than they were separately. Then there are those occasions where, partner groups spin off into boutique practices or the firm becomes a train wreck.

Well given the fact that M&As have a high probability of failure and most firms hit the glass ceiling on attempting organic growth. What’s left? The thing that is left is a new mind set, an external motivation. The corporate world knows this all to well. The growth by way of capital markets; selling stock in your legal practice! The concept of legal practices going public has been bantered around internationally for as long as I can remember. This approach, I feel, has the greatest probability for success in a growth oriented law firm. However, to achieve this, the firm must undertake a radical shift in how they operate. Law firms need to begin to run like a real business!

In addition to running like a real business on the financial management side, firms would need to have a vision of what they are trying to achieve and where they want to go. That means that all partners must see the vision and their role in achieving the vision. Often in a legal practice there aren’t any visionaries, as partners we are in it for ourselves. Sadly enough so many firms are run like a collection of small firms (partners) each running in their own direction; somewhat like herding cats. It completely baffles me how these organizations continue, when they could achieve so much more. Without the foundation of vision, these firms will be in their current holding pattern forever.

For firms who can articulate their vision and are willing to relinquish their ego driven control, the capital markets hold tremendous potential. With the capital injection, the firm vision can come to its fruition, without the disruption of cultures and the like. Hard to believe? No! Chris Mondics of Philly News wrote Buy Stock in a law Firm? As it turns out, the Australian firm of Slater & Gordon decided that going public was the only way it could grow with its vision while keeping its culture in tact. The firm went public in April 2007 and the stock is currently trading at 70% above its initial offering price! Here is a firm that had a vision, and recognized the pitfalls in different methods of its achievement.

History is filled with the spin-offs of M&A failures, why become a statistic. If it is your vision to grow, you cannot annihilate the people who grew the practice. There are more than one way to achieve your goals, but first you must have a vision, then an evangelist to emblazon the vision in the minds of everyone. After that, all that is needed is capital… and that is easy to find. Your firm’s destiny is only a vision away. Are you working towards it, or simply herding cats?

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