Risk Update

Legal Industry Merger Musings — Conflicts, Consolidation and Other Considerations

Posted Dan Bressler

I enjoy a good thought exercise and this one was definitely worth the read: “Law Firm Consolidation — Perpetually Out Of Reach?” —

  • “The notion that consolidation could be the panacea for challenges facing less profitable firms has always been questionable. But whether you buy into that particular narrative or not, it is incontrovertible that the legal industry remains remarkably fragmented in comparison to other professional services sectors. So what are the barriers to a wave of mergers? And if the barriers were removed, would significant consolidation actually happen?”
  • “How can it be that the legal industry remains so fragmented in relation to peers in fields like accounting and management consulting? Ethics rules are a big part of the story.”
  • “When clients engage a law firm, they engage not just the firm as an entity but the individual lawyers leading the matter. If the lead lawyer on a case decides the grass is greener at a new firm, there is little the old firm can do to prevent the client from following the lawyer. And indeed, lawyers are very mobile. Over the past 12 months alone, Am Law 200 law firms have made 7,385 lateral hires: 4,635 associates, 1,685 partners, and 1,065 counsel. Almost all of these lateral moves involved a departure from another Am Law 200 firm. A carousel of attorneys move from Am Law firm to Am Law firm, churning winners and losers on a quarterly basis.”
  • “Even if partner departures were not a concern, potential law firm mergers can also be disrupted by client conflicts. For some comparative perspective on conflicts, consider the management consulting firm McKinsey & Company. McKinsey, as a firm, routinely serves competing clients in the same industry. It navigates conflicts by ensuring that individual consultants do not serve competitors and by safeguarding confidential information internally, such that McKinsey teams serving competitors do not share with each other the details of their work. In this way, the firm manages to sell its services to multiple competitors in a given sector.”
  • “Legal ethics constraints make it impossible to apply the McKinsey model in a law firm context. For conflicts purposes, a client of an individual lawyer is a client of every lawyer in the firm, albeit there are ways to wall off attorneys and use client waivers to navigate conflicts.”
  • “Let’s imagine that these ethical barriers were suddenly removed, making consolidation more viable. What would happen? The basic logic undergirding consolidation in any industry is economies of scale: if two companies can operate more efficiently as a combined entity, a merger will create value. Does law practice exhibit economies of scale? Hugh A. Simons and Nicholas Bruch believe it does not:”
    • ‘Markets, where rivals focus on specific segments or seek to compete through differentiation rather than on cost, tend to remain fragmented. Haute couture is an example of such a market. Law is less like commodity chemicals and more like haute couture. It’s an amalgam of distinct services offered by very different providers in settings that have widely varying balances of power between buyers and sellers. Law exhibits no economies of scale. The notion that law must consolidate is simplistic and misleading.’
  • “Others commentators take a different view, arguing that law practice is suboptimally fragmented, and that the industry’s fragmentation prevents it from matching the innovation seen in other sectors. As Dan Packel recently put it:”
    • ‘That fragmentation matters when we get to the question of why law firms are behind the curve on innovation. No one has market share anywhere comparable to the Big Four accounting firms, who collectively audit more than 80% of U.S. publicly traded companies. And it’s no coincidence that these businesses are far ahead of law firms when it comes to improvements in process management. Their revenues give them the capacities to invest, and the lack of fragmentation makes it easier to discern what works and what doesn’t.’
  • “Let’s end by putting aside the inevitable conflicts and other obstacles and imagining a hyper-consolidated legal market with a closer resemblance to accounting’s Big 4. In this world, the current Am Law 100 would have merged into four megafirms based on broadly similar profits per equity partner. What would the combinations look like?”
  • “Will this happen anytime soon? Definitely not. But it’s a fun thought exercise.”