How client succession is driving law firm consolidation

Maybe, as the President of the United States believes, the world needs more Canada. What we do know is that the world evidently needs fewer Canadian law firms.

It’s been a busy month in the Canadian legal marketplace. On Sept. 12, Norton Rose Fulbright completed its six-year-long Canadian expansion by acquiring Vancouver’s 95-lawyer Bull, Housser & Tupper. On Sept. 20, DLA Piper picked up Toronto IP boutique Dimock Stratton and 16 of its 19 lawyers. And just yesterday, the largest firm in Manitoba (Aikins, MacAulay & Thorvaldson) and the largest firm in Saskatchewan (MacPherson Leslie & Tyerman) announced their merger and the creation of a 240-lawyer western Canadian firm, MLT Aikins. Market watchers might also recall that global labour and employment law giant Littler Mendelson came to Canada last year by swallowing Toronto L&E boutique Kuretzky Vassos, among other recent consolidations.

Canadian lawyers celebrating another law firm merger.

Canadian lawyers celebrating another law firm merger.

There’s something going on here, and it’s not just limited to Canada. I’ll run through some of the local implications first before looking at the big picture.

The Norton Rose, DLA Piper, and Littler expansions are qualitatively different from the MLT Aikins merger (although the fashionable thing these days is apparently to call all such deals “combinations”). These first three deals are acquisitions, pure and simple — and the easy way to differentiate an acquisition from a merger is that in the former, the name of the acquired entity disappears completely. Norton, DLA and Littler are international firms with worldwide brands, and a major element of their value proposition is sheer size and geographic reach. Each of these firms grows by absorbing smaller firms (or in the case of Ogletree Deakins, which also crossed the 49th parallel earlier this year, by raiding an established large firm). Norton Rose says its shopping spree is done; I’d be surprised if the same were true for DLA or Dentons, or for other global firms that are probably in serious acquisition talks with smaller Canadian firms right now.

MLT Aikins is a different beast — it’s a good old-fashioned blockbuster merger, of the kind we’ve not seen around here for awhile. The two originating firms were about equally matched in size and reputation in their neighbouring provinces (it’s a coincidence, but a nice one, that two of western Canada’s largest potash companies also announced their plans to merge this month, creating a $36 billion behemoth). A Prairie law firm (MLT Aikins will have a robust presence in Alberta and a smaller one in British Columbia, but it will probably be dominant mostly in its home provinces) is a sensible idea, and an overdue one: look at Atlantic Canada, where a fleet of small provincial firms merged into regional powerhouses back in the 1990s. And while many people outside the country (and more than a few inside) might dismiss what they think of as Canada’s “flyover provinces,” there’s a lot of resource development and business innovation happening there. If the two firms can successfully merge their cultures and operations — and that, of course, is always a colossal “if” — than MLT Aikins could be a powerhouse.

But this trend isn’t limited to Canada. Altman Weil told us back in January that 2015 was a record year for US law firm combinations (there’s that word again). Look closely at the list, however, and you’ll see that most of these “mergers” were the absorption of smaller firms in myriad jurisdictions by global giants (Dentons in particular seems like it won’t be satisfied until it has an office on the moon).

The advantages to the acquiring firms in deals of this type are obvious: new locations opened, top lawyers acquired, cash and PPP infused, brand extended, and so forth. Not everyone would choose to make size and reach their market differentiator, but if that’s what your firm has decided to do, then these are the tactics you adopt. Managing a firm that far-flung and with that many people — most of whom belong to a profession that’s not exactly renowned for collegiality and esprit de corps — is going to be, shall we say, a challenge. But if this is the life you’ve chosen, then I wish you godspeed.

What’s a little harder to perceive are the advantages to the acquired firm. Name deleted, history ended, autonomy lessened, reputation slowly fading away as new brand replaces old — that’s not what you’d normally consider a loot bag of treasures. If the new name, brand, and reputation are superior to your old one, then great. And if the new platform is stronger, more technologically advanced, more efficient and productive than what you had before, then all the better. But it seems to me that few law firms secure in their markets and happy with their current status and future prospects would be rushing to make that trade. One does not normally submit to another’s terms from a position of strength.

Shortly after Altman Weil released its 2015 merger report, Edwin Reeser, one of the most perceptive analysts of the current BigLaw market, published his own commentary, which included the following observations:

We can expect more “merger” activity as long as there are buyers in the marketplace who are interested in the acquisition of revenue streams. Who are the sellers of these revenue streams? In many instances, they are going to be lawyers, typically smaller groups of lawyers, who have something worth selling. But why would they sell voluntarily if they have a good thing going? Typically because they have one or two fundamental problems associated with their sustainability as an enterprise. One is succession to leadership. Two, and perhaps more fundamentally, to continue generation of the revenue stream when one key partner retires. 

A “merger” into a larger firm with an established operating structure and breadth of talent can help preserve that revenue stream. The pricing for such a move to a larger firm usually involves: (1) a compensation cut for the acquired lawyers, a function of higher overhead and thus lower operating margins in many larger law firms; (2) the need for a profit for the acquiring firm to be derived from the work and revenue generated by the new addition; and sometimes (3), a deal feature that allows the acquired lawyers to monetize and harvest some of the built-up value in their firm that would otherwise be lost if they were to wind down.

I am not, emphatically not, applying the foregoing analysis to any of the firms mentioned in this piece. But the term “liquidating merger” has a lot of resonance to me in this current market, because it tracks with something else I’ve been noticing for awhile myself.

I’ve been saying to law firms over the last year that the “succession planning” train has just about left the station. The time to plan for succession in law firms, to begin transitioning client relationships from senior partners to younger ones, was five to seven years ago. Many of us in the commentariat tried to persuade law firms in this direction; not many firms tried, and few succeeded. Now, because succession planning didn’t occur, we’re entering a period of “succession management” — and you can read that in the same sense as “crisis management” or “disaster management.” This will prove to be a significant, and ultimately transformative, development.

All these matters will be lost in time ... like tears in rain ... Time to merge.

All these matters will be lost in time … like tears in rain … Time to merge.

Succession is going to happen in law firms, in the sense that when a client relationship partner retires, that relationship and the work that accompanies it will transition to another provider. But as we know, in most law firms, the partner has no interest in encouraging that transition. The last five years of his practice figure to be the most gloriously profitable of his career, the crown upon his decades of hard work, and he’s not going to let any other head wear that crown even part-time or on weekends. Pleas from the managing partner to “think of the firm’s future” and “leave a legacy” will melt some partner hearts, but not most. I’m not judging any lawyer who responds in this fashion, but that’s the reality in many firms, and it’s an enormous challenge.

But here’s the thing: that challenge is actually greater than most firms realize. Because while the firm’s leadership fumes and fulminates about “succession,” the client is over here waving its hand and saying, “Uh, I’m pretty sure I have some say in where my legal spend is going now.”

The problem with “succession planning” is the arrogance of the assumption that the firm will unilaterally decide who takes over the client’s work, perhaps by way of written notification: “Dear client, since Bill has retired, you will now be dealing with Bob, best regards.” Clients, as I’ve been saying for some time now, have options, and they are exercising them. They can choose the lawyers in this firm with whom they want to deal, or they can choose another firm, or an LPO, or a flex-time lawyer platform, or an employee doing insourced work, or a software program. I’m just guessing here, but I doubt that most clients enjoy being regarded as an asset to be passed on to the law firm’s next generation, like a sacred relic or a family heirloom. The days when the firm could simply assume the client’s continued patronage following a partner transition are done.

That’s why the real opportunity presented by “succession” is to open a dialogue between the firm and the client about how the client would like to be served following the partner’s retirement. I wouldn’t be surprised if many clients actually look forward to these retirements — not because they’re glad to see the partner go, but because it gives them an opportunity to reset and enhance the business relationship without the risk of compromising the personal relationship that had developed. But I don’t think most firms recognize this opportunity, or act on it if they do. They see only that a lawyer who “controls the client” is retiring, and they need to find another lawyer to “control the client” afterward. But they lack the cultural mechanisms and the leadership to pull that off, and even if they could, they’re missing the larger point about how the nature of client relationships has changed.

The upshot, in firms that are experiencing this phenomenon, is that the eventual or imminent departure of relationship partners will leave the firms with few prospects for their continued growth or even stabilization. Within the next five or ten years, most of their business generation and client relationship machinery is going to be sailing yachts around the Mediterranean. As Ed Reeser says, the firms are losing the means “to continue generation of their revenue streams,” and they lack ways to renew those streams or start new ones. The next generation of partners, seeing this unfold before them, starts eyeing the exits, and the junior lawyers get worried and restless. In those circumstances, why not pick up the phone when the big firm calls, so that the indignity and messiness of a gradual decline can be replaced by the savvy strategy of merging with a global giant?

The inability of many law firms to address the difficult issue of key partner retirements, or to take advantage of the opportunity they present to reset and strengthen their client relationships, has left the firms with few options for continued growth down the road. This has surely been increasingly clear to the leadership groups within these firms for some time. And now we’re seeing a marked rise in the dissolution of law firms through their acquisition by much larger firms, effectively pushing all the difficult conversations and decisions about the firm’s future onto the desks of strangers in another city or country. It might be a coincidence that these two developments are trending in parallel. But I’m not inclined to think so.



2 Comments

  1. Steve Ellwood

    I am glad you have returned to blogging Jordon. Yet another insightful (if painful) note for the profession to digest. Well done

  2. George Beaton

    Jordan I am inclined to think these mergers are more about the belief that in a turbulent world, bigger is better, than they are about succession. Sure, continuity of client care and increasing the range of services and coverage to clients are part of the mix, but in many firms I sense anxiety about being ‘left behind’ is the underlying driver.


Leave a reply