‘The Laws of Organic Growth’ – LexisNexis Report

A new report by LexisNexis, ‘The Laws of Organic Growth’, explores how law firms respond to the need for growth and considers several key aspects: law firm M&A, IPOs, lateral hires, and revenue expansion through other methods, such as deploying legal tech.

Law firms, the report states, ‘tend to favour mergers and acquisitions to achieve growth. Bringing in a pre-established team seems an obvious way to immediately realise the benefit. However, mergers and acquisitions come with risks and don’t always deliver as promised’.

The report adds that ‘one of the biggest concerns identified by the research was that the loss of law firm culture during a merger can devastatingly impact staff retention, recruitment and client acquisition’.

It also points out that ‘increasingly, law firms are driving growth by finding new ways to leverage and maximise their current client relationships. This includes everything from equipping lawyers to successfully nurture key client relationships, to encouraging secondments into important clients’.

And it concludes: ‘Successful firms are giving partners formal training in sales techniques and investing in demand generation activities such as publishing thought leadership, organising and/or attending trade events, joining industry bodies and creating bespoke content for clients. Another popular approach is to bundle additional business services, such as legal technology solutions together with traditional legal services, to create a personalised package with greater value.’

And, you can find the full report here.

M&A and Legal Tech

There’s plenty more in the report, but one area Artificial Lawyer wanted to comment on was the point about M&A, and also make an additional one about what mergers may mean to legal tech stacks, plus what then that all means for the merger deals.

Data from Jomati, the City-based law firm M&A advisory business (incidentally where Artificial Lawyer’s founder used to work as a strategy consultant), shows that most mergers led by UK firms are primarily larger businesses buying much smaller firms to gain improved access to new regional or international markets, and/or to boost certain practice areas.

Incidentally, the data also shows that there were only 5 law firm M&A deals in the UK in 2022 to June, with 17 in 2021 – i.e. there has been a big drop in deals this year so far.

Also, the data shows that many of the targets were very small, in 2022 none of the firms that were acquired had more than 80 lawyers in them, while the larger firms were between 270 and 600 lawyers in size – which is not that massive either compared to the top end of the UK 100 list, where firms have up to thousands of lawyers.

So, as you can see from the data, the pattern is not about mergers of equals, but rather a far larger firm targeting an area – geographical and/or practice mix – that meets a need. The new addition brings their own clients to the overall mix, as well as talent, but also allows the buyer’s clients to get additional services in that new area.

There is of course the additional revenue. (And of course, in many law firm deals there is no ‘purchase’ as such, it is simply one partnership of lawyers and their staff joining another much larger partnership and their employees, i.e. it’s more of an integration than anything else.)

Now, the next point is all about legal tech. If you are really going to integrate two firms and also benefit from economies of scale, then there is no point in having two totally different and conflicting practice management systems, or DMSs that don’t work together well, or licences at the smaller firm for a range of tech tools that the larger firm doesn’t want to use, or where it has decided to use quite different ones in the same field.

Also, a merger could be a great opportunity for a smaller firm not just to become part of a much larger legal platform, but also provides the chance to have a much better legal tech platform that will support improved production and delivery of work to clients and hopefully make the lawyers’ days less bogged down in process work.

I.e. legal tech benefits should these days be worked into the equation for the pros and cons of any proposed merger. It’s fair to say that although some economies of scale have always come into law firm M&A, e.g. rationalising of property costs and synergies gained across legal support teams, there should now more than ever before be a focus on taking into account the combination and/or rationalisation of the tech stacks of the two businesses and what benefits this brings.

While the costs involved remain small relative to some larger cost items in a law firm P&L account (although there are again some economies of scale to be had on paying for software licences in a larger business), the more important aspect is how tech will – as noted – improve the way the now larger and combined business will be able to operate and serve its clients.

Going back to the main report, there is plenty in there to consider and it asks many key questions about how law firms will expand in the years ahead. You can find the full report here.