It's official – getting hitched is as popular as ever, with 86 per cent of law firms expecting merger activity to continue, according to a survey.
But mergers, like marriages, have to survive the honeymoon.
The survey, carried out by Willott Kingston Smith & Associates for The Lawyer, found that more law firms were willing to consider becoming the junior partner in a merger than to reward their partners for individual performance.
And with law firms contemplating mergers, the increased competition from accountants, and whether to incorporate, the profession is heavily committed to updating its business management practices.
One overriding impression is that, having expanded, whether through a merger or organically, law firms have to manage themselves better to obtain the benefit of that growth and achieve critical mass.
In relation to management structure, only 5 per cent delegate overall management responsibility to a 'chief executive' or equivalent who is not a partner, while 48 per cent delegate management to one partner. This leaves a significant 47 per cent who do not appoint an individual to manage the firm alone. The cultural differences between professional partnerships and other business entities apparently makes it difficult for law firms to divorce ownership of the business from its management. An intimate understanding of the clients' needs is required at all levels.
National firm Pinsent Curtis' executive group consists of national managing partner Malcolm Lloyd and senior partner Julian Tonks. There is also a larger management group of the executive group and the managing partners of the firm's three offices. Whatever the size of the firm, Lloyd said it is important to have the ability to make decisions fast and react quickly to changing situations and market forces. “There seems to be more awareness of the need to bring in managers and to delegate certain management decisions,” he said.
But it seems that streamlining the decision-making process may be a problem for some firms, with 36 per cent still requiring a unanimous partnership vote for the appointment of management, even where individuals have executive responsibility in areas such as marketing, personnel and finance. Over a third – 36 per cent – still require partnership approval for matters other than policy decisions.
Another perceived problem is that law firms, in common with other professional firms, have a limited supply of suitably qualified (or willing) individuals among their partners.
This may be one of the reasons why the normal length of service of the managing partner – or members of the committee – is at least three years, especially since some management actions often take time to come to fruition.
Although delegation skills and training are generally considered essential for partners in modern professional firms, the survey reveals that these methods are not embraced completely. A reluctance to delegate is also borne out by the finding that, for 40 per cent of firms, a partner or other legal professional is in charge of the firm's computer systems, though some firms are too small to afford a dedicated computer expert.
Most firms – 70 per cent – predetermine the profit shares in the partnership deed and elsewhere such as lockstep. For 22 per cent, profit shares are appraised by a committee or individual, subject to approval by partnership vote, and the remaining 8 per cent use the same system but without a partnership vote. This seems to distinguish law firms from other professional management practices, which are subjected to a more rigorous appraisal of partners' performance in determining rewards.
But issues other than internal management are also taxing law firms. Concerns over partners' personal liabilities in the event of litigation are increasing. And although a number of firms have incorporated their practices, with more set to follow, only 47 per cent said they believed they were allowed to, even though it is permitted by the Law Society under certain conditions. But a substantial majority of these intend to consider incorporation for all or part of the practice within the next five years.
All the firms intending to consider a merger cite critical mass and growth to meet strategic objectives as a part of their rationale. The main factor behind a merger, for 57 per cent, is rationalisation of costs, and, for 48 per cent, it is diversification into other specialist areas. Injection of management expertise and geographical coverage are considered to be relatively unimportant as part of the rationale for a merger.
All the firms intending to consider a merger within the next two years would consider a smaller firm as a partner, but only half would consider a merger with a larger firm, highlighting their reluctance to be seen as being taken over and swallowed up.
The three most important factors when considering a potential merger partner are the partner's ongoing profitability, its culture and the specialisation and skills it can offer.
Pinsent Curtis's Lloyd said: “What is of concern is the reason why a merger takes place. If it is for defensive reasons because profits or deals are down, or just to cut overheads, there can be problems. If it is for positive reasons, as with our two former firms Simpson Curtis and Pinsent & Co, the result will enhance the business and benefit the existing clients and it will succeed. Both firms should be strong and profitable and take enough time to put the merger together properly.”
Whether a firm expands through merger or organic growth, the issue of financing that growth also needs to be addressed. Nearly 75 per cent use bank borrowings to finance their practices and 66 per cent of firms retain some of the partners' profit shares. Where profits are retained to finance growth, in almost 90 per cent of cases the amounts are decided without a set time scale, rather than by a predetermined formula. This could be seen to expose a management that reacts to conditions rather than being forward-thinking.
And in the wake of the introduction of the new tax regime, tax reserves of the larger firms were most likely to be based on full provision of profits earned to date, while, for small and medium-sized firms, making no provision for amounts payable in the next year only was a more popular method.
What may be of concern is that 10 per cent of the firms did not know how their tax reserves were calculated, suggesting a lack of understanding of the impact of using varying bases, or a blind reliance on their accountants.
Eversheds national managing partner Peter Cole said: “I believe growth can be managed without abandoning partnership culture. However, it is, necessary to entrust individual partners – not outsiders – with overall responsibility for managing the firm.
“The key to doing that successfully is to put in place the appropriate checks and balances to ensure that partners' individual interests are protected. Subject to those checks and balances, authority has to be delegated to those charged with running the firm – responsibility without authority is self-defeating.”
The survey was conducted during March and April among law firms in the South East of England. Copies are available, priced £50, from Willott Kingston Smith Associates. Contact tel: 0171 377 8888).