Tackling tech when law firms merge

According to recently published figures there are more than 160 UK law firms that have either merged or acquired since 2011.

The specific reasons are individual to each firm but broadly, when law firms ‘get hitched’ it’s due to expansion plans (whether global, national or local); to realise a strategy to enter new markets; a means of capitalising on particular service specialisms; or in response to financial pressures.

Whatever the reasons behind a merger or acquisition (M&A) and the financial and operational health of the firms involved, knowledge and consideration of the technology, its infrastructure perspectives and the practicalities of combining systems, are a critical element of the wider considerations.

Recent trends

The trend of business consolidation in the legal sector has been prevalent for years. A quick trawl of the legal press reveals dozens of examples.

Among the higher-profile examples in recent years is the three-way merger between CMS UK, Olswang and Nabarro in 2016.

The merger created the sixth largest law firm both in the UK and globally – a city powerhouse driven by technology.

Another headline merger was the creation of global law firm Womble Bond Dickinson in 2017.

At the other end of the scale are the top 100 to 200 smaller firms where several specialist firms have been absorbed into their slightly larger peers.

This has been largely to support these smaller firms’ individual sector teams and service specialisms, and departments’ expansion to enable capitalising on market opportunities and gain the best lawyers in their field.

Of course, an acquisition is quite different to a merger. One firm takes control of another firm and the acquired firm assumes the same name as the controlling firm. Several acquisitions have taken place in 2019, including that of Ablett & Stebbing by Lewis Silkin in July; and Dublin-based McDowell Purcell by Fieldfisher in April 2019.

I know of seven firms that were acquired between April 2019 to July 2019, predominantly by UK-based law firms. Only two firms had their main office in London and the remaining five were small international firms.

Geographical location seems to be another key reason why firms merge or acquire another. For instance, a London law firm having an international presence gives it kudos, gravitas and increased profile.

Due diligence

Traditionally, the level of due diligence applied specifically to IT when firms merge or acquire is inadequate.

This lack of planning often brings with it unexpected costs, commitments and low understanding of the true size of the project or time frames involved to combine the technical infrastructure and IT systems of two or more firms.

Too often, these issues – and the additional costs and work involved – are only discovered after the deal is struck, which can result in bad feelings at the start of the relationship.

From our own analysis of M&A activity in the UK’s legal sector, we know that the IT implications of an M&A for big firms are recognised as critical to the overall decision and are, therefore, considered early in the process.

This is an excellent blueprint to follow, not least as the cost of IT integration could make the difference between the viability or nonviability of a deal.

For smaller firms, the focus seems to be more on revenue, profit, clients and business; with the overheads and costs to integrate sometimes taking a back seat. But this can create some nasty surprises.

If a firm is strategically acquisitive and will be doing it regularly, it pays to have an acquisition and integration strategy; to create a pre-defined approach to absorbing businesses and integrating and implementing systems and IT infrastructure.

A checklist approach

There are important elements relating to infrastructure and IT which should be addressed before the contract has been signed, such as:

• Request and create an inventory of all the physical IT equipment, IT systems, software and licences within all parties of the merger or firm/s to be acquired.
• End of life information which must include the date of expiry for the equipment and the software.
• Analysis of each firm’s IT systems to determine whether there is an overlap in functionality. Multiple mergers and acquisitions can quickly build complexity and duplication in systems, costs and teams across all areas. Some of this can take time to mitigate, both contractually and technically, with much of the complexity often hidden in bespoke development and integrations.
• Discuss and analyse the merits of specific solutions if there is an overlap with similar products/solutions being used by the firms involved.
• Investigate the contracts of similar individual solutions to establish:

1. what the break clauses are.
2. the financial penalty of breaking a contract.
3. the cost of increasing the number of licences for an incumbent product; and
4. the cost of a new product to meet the needs of the newly formed firm.

• Understand and identify the expected growth plans for the new firm and its IT environment and architecture.
• Ask about how and where data is held, the customer relationship management (CRM) system, client approvals, and so on. Data liabilities are often underestimated, but compliance is especially important under the General Data Protection Regulation (GDPR).
• When exploring the location and headquarters of the newly created firm, consider the impact on the combined IT and infrastructure, and explore the value of cloud-based options which could also support the workforce’s remote and flexible working options.

Integration is vital

How should you then deal with the integration of the firm’s IT systems and infrastructure? I suggest creating a plan to support the integration which should include:

• What do we need on day one? This is likely to be email, telephony integration (at least for the reception desks), branding and templates, some network connectivity (though this may be tactical), access to human resources (HR) tools, website updates, intranet access, consolidation of financial ledgers for consolidated reporting and conflict checking while running multiple systems.
• What is required for full integration? Review and selection of preferred working practices, data conversions and migration of services onto the strategic practice management system (PMS); migration onto strategic tools to allow the duplication to be removed; onboarding and training and the budget to support their delivery.
• What about TUPE? Consider how IT services are provided in the target business and whether you need to bring IT people/ suppliers with the business.
• How do we deal with technical staff changes? Sometimes roles and responsibilities are doubled-up or profoundly changed, so legislate for losing key staff and consider the related intellectual property, and a strategy to minimise the impact and risk.
• How do we deal with security issues? Evaluate the cybersecurity and protection of the firms involved and ensure any accreditations from ISO or CE+ is unaffected.

Structure

It’s vital the combined firms can work on live or new matters from the outset to ensure a rapid return on investment. Researching, identifying, evaluating and planning for combining IT infrastructures ahead of completion of the deal is highly recommended. An oversight could be disastrous and expensive.

A formal M&A IT due diligence process utilising IT review processes is key for any firm considering a M&A to deliver on growth or survival strategies.

Taking a structured approach will ensure the specific needs and speed of M&A investigations are met, to ensure the smooth and efficient delivery of the newly hitched firm.

Stephen Brown is a consultant at Lights-On Consulting and IT adviser and consultant to Lodders lodders.co.uk