In the recent WSJ article “Stark choice for lawyers – firms must merge or die  author Jennifer Smith reasons that due to client and competitive pressures law firms have a ‘stark choice:  to ‘merge or die’. As a result, she says, there has been a ‘flurry’ of merger deals.

A decision by a law firm to merge or not should ideally be the result of a carefully thought through strategy, and implementation of that strategy and the firm's vision, not a knee-jerk reaction to competitive and client pressures. It should certainly also not be because other law firms are doing it. (Illustration adapted from FT image, graphic artist unknown)

The author’s conclusions are hard to reconcile with the actual numbers relied on; only sixty deals world-wide last year (2011) which is understood to be based on the Altman Weil Mergerline. While it is hard to get accurate numbers of law firms per country, based on a rough guesstimate of close to 60,000 for the USA and say 30,000 for the rest of the world, this number represents a minuscule fraction. It leaves one to wonder what is happening to the other 99.9% of law firms?

Unfortunately headlines and statements like this appearing in a respected publication like the WSJ, when repeated, re-tweeted and commented on, can over time lead to unintended and unwanted trends in the legal profession. As I have written elsewhere, while lawyers are sometimes referred to as cats (the oft-repeated being hard to herd/manage etc.) law firms can be like sheep – if one respected firm does something (especially when the pressure is on) others are more likely to follow suit (remember the ‘wait and see’ attitude about staff cuts during the GFC?). It seems some firms will not do anything different until others have tested the water. We have all heard the question around the partners table “what are Able Bodied and Bloggs doing about this?”
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Despite a period of patchy M&A work, scratchy demanding clients and less ‘sticky’ partners, Australia’s ten largest law firms (Big Law Australia: BLA) have recently reported record gross fees, high equity partner profits coupled with a bullish view of their future world (Alex Boxsell and Samantha Bowers reporting in AFR 16 September 2011). However, they are facing real challenges from abroad and locally; a few thoughts on all these below.

 

On the back of excellent reported results, top Australian law firms are being challenged by foreign firms entering the Australian market, as well as local mid-tier innovators – graphic by Sharon Larkan on iPad (adapted from online image – artist unknown)

Good news for a majority of the top ten Australian law firms:

  • improved gross fee income over the past year with partner teams (equity and fixed share) generating annual fee revenues above $2m
  • tightly managed expenses
  • profit margins averaging 41%
  • average top equity partner earnings in the range $1.8m to $2m

These are outstanding results by any world standards, from some of Australia’s best-run businesses. However, a more in-depth consideration of developments over the past year or two, and the published AFR performance results for Big Law Australia (BLA), seem to indicate they have been (or should be) feeling the heat from both internal and external forces – some obvious and some not so obvious:

  • After (in some cases) years of discussions or negotiations, foreign firms have bypassed BLA firms and entered the market in numbers:
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Employees own shares in this dynamic 105 year old Australian law firm M+K Lawyers, headed up by National Managing Director Damian Paul. M+K has embarked on a remarkable growth strategy around a unique business model and culture. Damian agreed to answer some questions:

Sean: Your business model is unique and was the first of its kind in Australasia – how has the firm grown since this model was introduced?

Damian: Somewhat late in our over 100 year history, the new model took effect in July 2008! Since then, over the past 3 years, the firm has grown in revenue by 150% to A$50m, in staff by over 100% to just over 300 and from one office to locations in all key east coast centres; New South Wales, Queensland, Victoria and Tasmania.

Sean: How would you describe M+K Lawyers?

Damian: A national commercial law firm, operated in a corporate, businesslike structure.

Sean: How does it work?

Damian: An incorporated legal practice (ILP) in each of the 4 states in which we currently operate (News South Wales, Queensland, Tasmania and Victoria), each 100% owned by a parent company which, in turn, is owned by M+K directors and employees.

Sean: Why did you choose this model?

Damian: We saw it as the model most suited to helping us acheive our growth ambition to become the leading law firm in Australia for middle market clients.

Sean: What take up has there been – from other firms and from staff ?

Damian: In a relatively short time since July 2008, seven law firms have joined us (including the foundation firm, Macpherson+Kelley). Senior employees have the opportunity to invest in the firm by buying shares in our parent company, thereby acquiring a stake in the national firm.
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