Breaking up is not so bad

Philip Hoult looks at the continuing trend of law firm demergers and says they can offer a viable escape route for divided firms.

Last week Vizards, a profitable 29-partner firm with a history stretching back more than 200 years, became the sixth small to medium-sized practice to split up in the past three months.

On 1 May 1999, it will follow Frere Cholmeley Bischoff, Stones Porter, Slater Heelis, Forsyte Saunders Kerman, and Franks Charlesly, in closing its doors.

Meanwhile, the City of London rumour mill is suggesting that a firm just outside the top 20 is considering demerging.

Managers at these firms, often riven with disagreements over their future, are realising that forcing through a break-up is the best, if not the only, way forward.

They know that their firms, taken as a whole, are unattractive merger candidates to the larger or more profitable firms.

After all, why would the better-run firms want to deal with the logistical headaches of a merger and the messy task of cutting off the dead wood?

Why bother when they can poach a team of good lawyers who are then much easier to assimilate?

Forcing through a break-up has a number of benefits for firms in crisis.

Top-performing partners – frustrated that their efforts are being hampered by others – would be free to join a firm where their billings are more the rule than the exception.

Partners whose areas of practice need the support of greater resources can go to a firm that will more readily provide them.

Those whose work is outside the current firms' core areas – often, in relative terms, the areas that are under-performing – would be happier at a firm where they would not feel like cogs in a much larger machine or where the environment was less pressurised.

A classic example of where this has worked has been the decision by many City firms in the 1990s to divest themselves of their private client departments.

Also, the client bases of the partners, if there is not much overlap, could be far better exploited at a new firm where there was more opportunity to "cross-sell" successfully.

This would offset the inevitable loss of some clients, who might use the opportunity to change allegiance to another firm.

Breaking up is obviously neither a cheap nor an easy option – in fact, the costs may be prohibitive, particularly if there are significant property liabilities.

Administrative costs of breaking up may also be high, including redundancies of support staff and even some fee-earners.

But partners who do not relish the prospect of facing up to the firm's existing borrowings will find that the problem is only likely to get worse in the current economic climate.

And, in the meantime, there will be a steady stream of the best staff leaving for other firms.

Breaking up may be hard to do, but struggling firms should look long and hard at whether it is the right move for them.