Are Law Firms Really Different?

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Lawyers are special – principles of economics do not apply to us.

Mantras like this come and go decade by decade. Small is beautiful, big is better. Big is bad, unless you're too big to fail.

If you have lived through more than one business cycle, you have heard variations on these mantras many times. The Wall Street Journal recently wrote, "Big Law Mergers Questioned." The article is simply a rehash of the same arguments Corporate America puts forth both pro and con about mergers and acquisitions. In other words, "Big Law" is reflecting and following the paths of its clients.

We saw this in the 1930s and 1940s and later when unions became larger in order to do battle with management. Today law firms are combining in order to be more respected, better received and perceived as a player in the world again. A small vendor (yes, even a law firm) has a great deal of difficulty being respected in the same ballpark as a very large customer (corporate America). However, the managing partner of a big law firm very easily can sit at the same table as the chairman of the board of a major corporation.

The arguments put forth in the article for favoring a merger include: increased geographic reach; increased revenue; new clients; increased ability to cross sell services; enhanced depth of skill within a particular subject area such as technology or energy; savings of expenses and consolidating duplicate offices; trimming of staff and elimination of unproductive partners; increased opportunity to be the law firm selected in an environment where corporate America is reducing the number of legal suppliers.

But there are cons, too. A larger firm may face more serious conflicts of interest. It is likely that a new prospective client will be in an industry in which the law firm currently operates. Law firms have must have more sophisticated conflicts of interest techniques to make sure they do not represent two opposing views at the same time.

"Global behemoths occupy most of the top-20 slots" among law firms, according to the WSJ, and "most on that list grew through mergers."

Do mergers make bigger firms better for clients? Typically the answer is "yes" only when the parties have thought through what they want to accomplish and what synergies exist between them.

Do mergers benefit lawyers? Most surveys demonstrate that the attorneys in larger law firms take-home a larger paycheck. It is also true that few mergers are accomplished where the compensation levels are significantly different between the lawyers of the two firms. As in the industrial world, two issues seem to stand out. One, the compensation methodologies and amounts of the firms need to be reasonably consistent or the individuals involved will not be willing to move forward. This is the same as the price per share of stock and price-earnings ratio of any corporate enterprise. Another factor involves firm cultures. A "feel-good," laid-back enterprise is unlikely to mesh with an "eat what you kill," aggressive enterprise, it is unlikely that the two cultures will mesh.

Compensation and culture are standard merger concerns. Unfortunately, the Wall Street Journal article believes that they are something new with law firms. In fact, they constitute the "same old, same old" experienced in industrial America many times over.

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