When law firm leaders ask for recommendations on how to grow their firm we start the discussion at a high level. Most firms adopt one or more of the same growth strategies: Markets, clients, services, location, economics and/or competitors. In many cases, you can apply well-known checklists to evaluate the strengths and weaknesses of each strategy.
If you want to grow by hiring laterals, partners or associates, understand that you are bringing in people with their own values and behaviors, their culture. They may mesh well with yours or be so disruptive that you go your separate ways within a year or two. But seldom do firms do any formal assessment of the culture of the potential new people. One common reason is many firms have not done a culture assessment of their own.
Today more firms are looking at merging to grow. Through September of 2024 there have been 41 completed mergers according to Fairfax Associates. To put this in context from 2000 to 2020 there were 30 mergers between Am Law 200 firms.
If you decide that your best growth strategy is by a merger, the culture issue is magnified. It is an event that can change everything. How important is understanding the cultures of both firms? Let’s look at some of the recent research on why law firm mergers fail.
Barry Genkin, a Partner at Blank Rome, has written several articles on law firm mergers. His first is: How to Make Law Firm Mergers Work: It Starts with Culture. Here’s his view:
Culture matters in every industry, of course, but in deals between law firms, it’s paramount. When law firms merge, no money changes hands, typically, and no propriety assets are transferred. The power of a law-firm merger lies in human capital.
If the lawyers of one firm aren’t compatible with the lawyers of the other, then combining the two, no matter the business case, makes little sense.
The first question firms should ask before entering into any merger deal, therefore, should be something like this: Will the combined firm result in a cohesive and unified organization, or simply a larger confederation of lawyers? Getting an answer is easier said than done, of course.
The Association of Law Firm Merger Advisers (ALFMA) published an article last year on point: Unravelling the Reasons Behind Failed Law Firm Merger Discussions. They gave a list of reasons, but culture conflict was #1:
Cultural Misalignment: One of the primary reasons behind failed law firm merger discussions is the inability to reconcile differing firm cultures. Each law firm has its own distinct values, work ethic, management style, and client approach. When these cultures clash, it can result in a significant hurdle to successful integration. Incompatibilities may arise in terms of decision-making processes, compensation structures, practice area
focuses, or geographical footprint. Without a shared cultural foundation, collaboration and synergy may be impeded, leading to a breakdown in merger talks.
According to a study by Altman Weil, MergerLine, 2020:
Cultural clashes were cited as a significant factor in 83% of failed law firm mergers.
In 2020 LawVision studied law firm mergers: Why So Many Law Firm Merger Attempts Fail
Among the top reasons:
“Cultures don’t match” – This can be a conclusion based on a misalignment between important philosophies (e.g., partner compensation, bank borrowing, data transparency) or a sincere gut feeling that is not focused on any particular factor.
One of the first steps in your firms search for the right merger partner is to establish a base understanding of the values and corresponding behaviors of your firm by conducting a values and behaviors assessment.
There are lots of tools out there, very detailed and not really focused on professional services firms. Assessments borrowed from the business world generally take too long, too expensive and too detailed for your purpose. We use our own Law Firm Values and Behaviors Online Assessment to help clarify firm culture, the everyday behaviors that are exhibited by the firm leadership and partners reflecting their values. Our tool is a short, simple online values survey which produces an understanding of the values and corresponding behaviors (the culture) of the partners. You should consider surveying the associates and staff as they impact the firm’s culture too.
Once two firms agree to start their merger due diligence, we recommend that the target firm compete our Law Firm Values and Behaviors Online Assessment and share the results with all parties. We present possible issues including significant values gaps between the firm’s management committees, partners, associates and staffs. If the values and behaviors are significantly different you need to understand the impact now and the impact on the merged firms going forward.
For example, In our Law Firm Values and Behaviors Online Assessment we ask what the partners value more: “Annual profits per partner or long-term financial stability.” If 80% of your partners answers “annual profits” but 80% of the other firm partners answers “long-term financial stability” you have to decide if this value gap between the firms is too great to overcome.
Can the merger succeed if the partners have conflicting values? Based on the history of failed mergers, probably not. Know thyself . . . and know them.
Steve Daitch
Steve is an expert in law firm businesses, and his customized surveys and analysis of Law Firm Culture and Law Firm Values are an incredible value-add in EvolveLaw’s strategy and growth projects. Click here to learn more about Steve.
To learn more on how we can help you understand your Firm’s culture visit www.evolve-law.com.