Opportunity Knocks in the Midst of Merger Madness

08
Dec
2013

Nicole Black

Have you heard? Large law firms are merging left and right, in large part because law firm leaders are focused on immediate financial gains in an attempt to maintain appearances of profitability in an increasingly competitive--and global--marketplace. In fact, according to a recent Philly.com article, “there's a mini merger-and-acquisition boom unfolding. Altman Weil says there were 58 law firm mergers through the end of the third quarter, up 41 percent for the same period the year before.”

The reason for the rash of law firm mergers? Sheer shortsightedness and selfishness.

In his recent book, “The Lawyer Bubble,” Steven J. Harper discusses this mentality and the motivations behind it at length, explaining that the current system is overrun by greed, first and foremost.  Purely selfish decisions are made by law firm decision makers based on short term monetary gains with little concern for the long term future of either their firms or the profession.

Similarly, in his most recent book “Tomorrow's Lawyers: An Introduction to Your Future”, Richard Susskind notes that “(M)ost senior lawyers...will tend to be cautious, protective, conservative, if not reactionary. They will resist change and will often want to hang on to their traditional ways of working, even if they are well past their sell-by date...Operating as managers rather than leaders, they are more focused on short-term profitability.”

Of course, the problem with this short term focus is that it can backfire in the long run since mergers often results in a whole new set of problems. This concept is discussed in a recent Wall Street Journal article, Big Law Mergers Fuel Skepticism: “(M)egamergers can bring unwelcome distractions that sometimes reduce efficiency, and increase legal bills...While technology does permit some economies of scale, bigger firms also have more offices to maintain and more people to coordinate.”  

This is especially true now that we're in the midst of a rapidly changing legal landscape--one that is constantly evolving and being shaped by new technologies which both level the playing field and arguably reduce the benefits of many BigLaw mergers. 

Mitch Kowalski touches upon this in his book, “Avoiding Extinction: Reimagining Legal Services for the 21st Century”. He explains why, in the current legal climate, most large firm mergers--which create even larger “mega-firms”--are a recipe for disaster: “Truly successful law firms will be those that can combine an ability to respond to a changing market with scale. Agility means moving to the “cloud” to take advantage of its scale and technology or it means achieving scale quickly through home-sourcing or off-shoring. Agility is simply not possible in a large partnership structure where partners can derail a proposal because it will reduce their draws.”

In other words, the future belongs to the nimble, the quick--and the small. Perhaps that's why, according to the New York City Bar Association's recent report on changes in the legal profession, an increasing number of recent law graduates are hanging their shingles or accepting employment with small firms: “Strikingly, far fewer graduates are working in firms larger than 500 lawyers (19.1% of law firm jobs in 2012 versus 43.2% in 2008)...The majority of private sector legal jobs are with small firms, mid-size firms, and solo practitioners, and the percentage of 2012 graduates taking positions in firms of 10 or fewer attorneys (43.0%) is the highest since 1982...Moreover, the percentage of graduates opening their own practice has more than doubled over the last decade to 6% of all law firm jobs for the class of 2011 from 2.8% in 2001.” 

Of course, the reduction in the number of new associate hires by large law firms has something to do with this trend. That being said, the reduced number of hires also has everything to do with BigLaw's collective failure to plan for the long term. The failed attempts to maintain the status quo by short-sighted mergers and massive lay offs of low level staff have resulted in a lack of growth, both in terms of profits and client base.

Meanwhile, solo and small firms are able to compete with large firms in ways never before seen through the use of new technologies and innovation in the delivery of legal services, resulting in growth and the corresponding ability to hire recent graduates. Also relevant is the younger generation's familiarity with technology, which certainly contributes to their willingness to strike out on their own right out of law school. This is especially so now that affordable technologies such as mobile and web-based software make it easier and more affordable to set up shop than ever before.

So keep your eyes on the solo and small firm practitioners, folks. They just might surprise you. BigLaw may be big--but bigger isn't always better. Sometimes agility can make all the difference.