Merging clients: How merging law firms can avoid losing clients

Whenever a law firm merger or acquisition is announced, there is often much speculation about who will be the managing partner, what the outcome of the partner vote is likely to be, what the newly-merged firm will be called and which offices will be closed. But, a business should not merge for merger's sake. A merger is a means to achieve your strategic objectives and, in a professional services firm, this should come back to serving clients.

"The clients' views are paramount," affirms Andrew Leaitherland, managing partner of DWF. "Often, it is alignment with the client's business that leads to the approach being made in the first place. Sometimes it is an opportunity to service particular clients in new locations, sometimes it is an opportunity to do different types of work for the client through the merger and sometimes it is adding more of what you do. In all cases, though, it is the client that shapes the discussion."

There is often so much involved in the practical and emotional rollercoaster of combining two firms that it is hard to keep clients at the centre of the merger process.

But, a genuinely client-centric approach means managing each stage of the merger process from the client's perspective. It involves managing client communications, due diligence, client conflicts and, last but not least, the client value proposition.

1. Client communication

There is no fixed rule about when to share merger plans with clients - after all, no two mergers are ever the same. Likewise, different clients will require different approaches. Nevertheless, earlier is likely to be more beneficial than later. According to research by Acritas, more than a fifth
of clients are less likely to use a law firm
if it merges.¹

"The reasons why a client will be less likely to use a firm vary according to the shape and size of the merger," commented CEO Lisa Hart Shepherd. "One thing is clear: unless a firm conducts a measured consultation process with clients at the outset of a merger, it will not be able to identify which 21 per cent are at risk. Without this understanding, law firms can't overcome this reaction and turn it into a positive, rather than a negative, outcome."

The size of the merging partners can be an important consideration when creating a merger communication plan.

"The cases where this tends to be more of a concern are where a smaller firm merges with a significantly larger one and the key clients of the smaller firm are told 'this is going to give you access to a broader range of services'," warns Grant Thornton's head of professional practices, Peter Gamson.

"It may well be, though, that they were with that small firm because they wanted to be 'the key client' or because they had previously found the service in a larger firm not to their liking."

For many large commercial law firms, obtaining their key clients' views on a proposed merger is important (if not essential). It can affect the firm's identity, culture and market position, as well as create potential conflicts of interest.

However, among mid-tier firms, good merger risk management tends to focus more on identifying and avoiding potential conflicts of interest. In addition, good PR in the relevant geographic and sector markets can be more important than consulting with specific clients. One such example is Withy King, which successfully executed and integrated three deals to increase its geographic spread and market share.

"In each case, steps were taken at the outset to consider, identify and avoid potential conflicts of interest in key practice areas, particularly in areas of commercial and private client litigation, commercial property and family work. In some cases this meant turning work away where we recognised our merger partners were already instructed - and that our taking on the work would inevitably create a conflict of interest somewhere down the line," comments managing partner Graham Street.

"So far as PR and communication are concerned, care was taken to ensure all internal and external communications were properly constructed to reflect the business case and properly timed so as
to gain and maintain the confidence of
our clients and referrers, staff and other key stakeholders."

There is no substitute to really understanding your clients and their needs. Firms with an effective and established
key account programme should be well placed to answer:

• Who are our key clients?

• Why are they key clients?

• What is the profitability of
  these clients?

• What is the potential to grow these client relationships?

• Who are our key contacts at these clients on a firmwide basis?

• What are the operating styles of our key contacts?

• What are their 'stay awake' issues?

• Where do our key clients do business?

• What professional services do
  they buy?

• Who are our competitors for
  these clients?

When communicating the possibility, probability or even certainty of a tie-up, these insights will facilitate the merger or acquisition being presented through the lens of benefits to the client's business, rather than your own. Some firms discuss a potential merger and its potential implications with key clients very early on, using them as a sounding board to establish whether the proposed merger appeals
to them.

"This can be incredibly valuable as it not only shows those clients how important they are and how much you trust them, but also gives you feedback on whether the clients think that the merger 'makes sense'," says Gamson.

2. Client due diligence

Law firms recognise the importance of independent, rigorous due diligence. Financial due diligence is well established in the merger process, as is an assessment of the compatibility or otherwise of IT systems and the firm's property portfolio. But, is the same independence and rigour applied to client due diligence by law firms?

"It's fair to say that the routine due diligence of client views by independent partners is insufficient and rare," observes Hamish Munro, director of business development and marketing at
Hill Dickinson.

"The financial analysis of a merger is always rigorous and thorough, as are reviews of issues like the integration of the back office and location of teams. The routine assessment of client opinions regarding the merits of a merger is, however, sometimes, a little patchy."

The client due diligence we are referring to here is not identifying and verifying your clients or customers in the regulatory sense. Rather, it is really understanding the profile of the firm's client base. In a corporate transaction, client due diligence might include the following.

• Who are the key clients and what revenues and profits are generated from each of them?

• Analysis of clients through the lenses
  of geography, sector and product/service, including identifying any concentration risks.

• Understanding of client satisfaction levels (including engaging directly with clients to assess this).

• Assessment of client retention issues post transaction.

• Analysis of client contractual terms.

• What seasonality in revenue and working capital requirements does
  the company typically experience?

"Inevitably, client due diligence is a complex affair," comments Andrew Leaitherland, managing partner of DWF. "You have to balance both legal and commercial conflict quite often and, the bigger the deal, the bigger the issue. Having a cross-party team looking at this is paramount. Early engagement with the client explaining what is the benefit to
them of the merger is also vital."

He continues: "All too often, firms forget that, from a client's perspective, having two suppliers merge quite often gives them short-term problems, particularly around procurement. You have to show the client that the merger is
in their best interests in the medium to long term and this requires proper proactive engagement."

At Eversheds, the risks to clients are evaluated throughout merger discussions.

"Confidential client due diligence checks are undertaken between risk teams (overseen often by the key management team; COO, CEO; chairman and client account partner/director), client strategies are discussed and, for both firms, at the forefront is the need to ensure that the merger is in the best interest of their clients," says risk director Claire Larbey.

"After consultation, client views are taken into account and solutions drawn up to any concerns or queries which are voiced."

3. Client conflicts

Managing client conflicts is complex enough in a 'business as usual' environment, particularly for firms with multiple international locations. At Dentons, these are managed as proactively as possible.

"Wherever permitted by professional rules or contractual duties of confidence, and with the consent of the other client, we endeavour to notify all of our clients of potential conflict issues," comments Andrew Cheung, general counsel of the UKMEA region.

"Where we can't notify them because of a duty of confidence, we take the most conservative view on whether a conflict may arise and will often decline to act."

When it comes to a merger or acquisition situation, analysis of potential client conflicts can surface some difficult decisions and necessitate some difficult conversations.

"There's a risk of having an ostrich moment on this - you have to listen to the client and properly evaluate their concerns both in terms of your ability to deal with the concerns but also the impact on the deal if you can't," says Leaitherland.

"All too often, people have paid the ultimate price by driving through a merger which has momentum but not listened to the client in the process."

Clearly, early identification of any potential client conflicts is key to managing the merger process.

"It is very unlikely that a significant client will dissent or express fundamental concerns about a potential merger, as client considerations would have been taken into account before and during the merger and solutions drawn up to any potential issues or, the merger would not have continued if it was felt that client concerns would go to the heart of the merger," says Claire Larbey at Eversheds.

"However, where clients express concerns, the law firm related to that
client will, of course, work closely with them to find a solution which meets their needs and expectations."

One issue some firms face is resolving client conflicts with reference to the correct financial metrics.

"Given that most firms struggle to accurately determine their profit margins by client, I wonder if these conflicts are assessed with sufficient focus on the financial merits of which of two conflicting clients would be retained? Often, the headline revenue-generating clients or contracts are the big ones focused on
but, increasingly, these are also the
more challenging profit margin clients
so there is a danger that the focus could be on the wrong metric," says Grant Thornton's Gamson.

4. Client value

Getting the merger completed is often the easy part. The post-merger integration programme can be the deciding factor in whether the merging parties realise the efficiency gains and cost savings promised by the consolidation, not to mention the benefits promised to clients.

A key part of this should involve asking clients how the merger process was from their side, what benefits they realised and what more they would like the firm to do. Having asked the questions, the hard bit
is to listen to the client responses with
an open mind and to then act on the feedback received.

Louise Fleming and Steve Lee are partners at Aretai Consulting (www.aretai.net)

Reference

1. The global elite average from Acritas' Sharplegal 2015 study.