Four Essential Phases of Law Firm Business Intelligence Before, During and After M&A
In a word, the market for law firm mergers and acquisitions (M&A) has been and remains vigorous. Our Business of Law consultants here at Aderant haven taken note of the M&A activity in the field and have shared their insights.
The last two years have broken consecutive records for the number of transactions. There were 102 mergers in 2017, which was a record-breaking year, and another 106 in 2018, according to data compiled by the consulting firm Altman Weil.
If we take a step back and look at longer snapshots of that data, the trendline shows continuous momentum. From 2014 to 2018 there were 466 law firm mergers compared with just 300 from the previous five-year period from 2009 to 2013.
The M&A activity among law firms shows no sign of slowing either. At the time of this writing, the Altman Weil MergerLine puts us on pace in 2019 to match the volume of transactions for the last two years.
In an analysis of the market at the end of 2018, Altman Weil principal Tom Clay summed things up this way:
“Law firms in every segment of the market are interested in merger right now. The largest firms are making aggressive national and international moves; mid-sized firms are bulking up regionally, and dozens of small firms are pairing up to fortify themselves in local markets. Almost everybody is a potential acquirer or an acquisition target in 2019 – we have never seen so many law firms in play.”
Law firm M&A is exciting. It dangles the promise of faster revenue growth and thicker margins. Law firms do it to acquire new practice areas, penetrate new geographies, and deepen the relationship with clients. It’s easy to get carried away by the upside – to fall in love with a deal as they say on Wall Street – and lose sight of the risks.
The risks of a failed merger are very real. A firm can announce an acquisition with fanfare today and five years later have nothing to show for it. The clients are gone, the lawyers have made lateral moves, and the opportunity cost proves to be much more expensive in hindsight.
Law firms can, however, lower that risk and improve the chances a merger or acquisition will be successful. That begins by embracing the following four phases of law firm business intelligence (BI) before, during, and after a transaction.
1) Develop a culture of business intelligence
Developing a culture means lawyers and staff across the firm are keyed into BI. It’s important because M&A will impact the entire firm, so leaders should want many different perspectives looking at the data for opportunities and pitfalls.
A culture of BI requires open access to data and fostering an analytics mindset among employees of all ranks. When your entire firm has an awareness of the metrics, they are in a better position to understand the strategy that’s driving M&A activity.
A culture extends BI beyond its traditional domain in finance and expands it to other departments such as human resources, IT, and business development. This will help firms in several ways.
First, a general awareness of BI allows a firm to better understand its strengths and weaknesses. That could be rendered in the form of a SWOT matrix or the metrics you already measure regularly.
Second, a firm-wide BI mindset better prepares your firm to be opportunistic. This means the speed, flexibility, and agility your firm has to react to external information, such as industry news or regulatory changes.
Third, many merger evaluation or advisory committees are heavily represented by law firm leaders and members of the finance team. Adding data-aware members from other functions will strengthen the decision-making process.
Keep in mind that culture is not a project. A culture supports a firm that is always looking for opportunities, rather than a one-time event, and as a result, find themselves in a better position to capitalize on those opportunities when it makes sense. This phase begins long before a transaction, and it never ends.
2) Exploration as a strategic initiative
The exploration phase begins when a firm has identified a strategic initiative, but not a specific target. This is where the measurements your firm has chosen – revenue growth, cost reduction, profitability, or realization – to support your strategy come into focus.
You are using BI to identify and understand the key indicators in potential targets that are aligned with your strategy. This helps you prioritize which opportunities are most applicable to the strategy. It invites pro forma scenario planning, predictive analysis about possible combinations, and develops a pipeline of potential merger and acquisition targets for the law firm.
3) Due diligence and fact checking
Due diligence is the traditional jurisdiction of BI or data analysis in M&A. It’s about the verification of material facts for a target or shortlist of targets.
This is a phase where the quality of the data matters the most. It’s not uncommon to have a trusted third-party broker involved in doing the data gathering for you. It’s crucial to have key indicators in mind before due diligence so that you are asking for the right information.
In a previous role, I was part of a team that used to spin up a proof-of-concept – a mini-BI platform – for a merger. We had a database script that would gather different data from the accounting systems and then rebuild it on a mini-platform that allowed us to do BI analysis.
In other words, you combine two datasets to see, what the metrics that support your law firm’s strategy would be as if the two firms were already combined. From a business intelligence perspective, you are pulling data into a format for an analysis that is useful for both parties to make a good “go” or “no-go” decision.
4) Integrating the two firms
The key indicators remain relevant post-integration because you’ll find there’s a gap between those who conceived of the merger – and those responsible for implementing it. Having metrics, and the ability to measure them across the combined firm, continuingly, is key to the success of the acquisition.
This is where that culture of BI pays dividends because the impact is felt in HR, and IT and business development. For example, business development metrics relevant to the acquisition-related to cross-selling or client satisfaction, while HR might look at employee retention or satisfaction.
Some of these metrics may be deal-specific operational objectives that the firm needs to hit to ensure a smooth integration. Examples might include how quickly users are set up on a combined technology platform for time and billing, client retention, or turnover rate.
The point of BI metrics post-integration is to monitor progress and adjust as needed. These measures should also fuel communications to clients and employees about the progress of the merged venture. After any M&A, there are still many unknowns, and firms have a lot riding on the integration so communications can help keep people grounded while also making sure you are executing on the strategy.
Making Law Firm M&A a Core Competency
The pace of acquisitions among law firms may or may not sustain the pace it’s on now, but the data over the last 12 years shows that it’s never really been slow. The volume reached its slowest pace in 2010 with 39 mergers before the effects of the Great Recession began to shift noticeably.
This goes to show the advantages of scale are enough to put M&A on the strategy whiteboard, both during the good times and the bad. The better firms will capture lessons learned from their ventures, operationalize the process, and template the contributing metrics so they can capitalize on their experience the next time around.
If making law firm M&A is a desirable core competency, it brings us back to building a culture of BI.
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