As the leaves changed and Colorado welcomed fall, it seems like another season arrived in the legal environment: merger season. In the past few months, five firms with a presence in Colorado have merged with others.
Lathrop GPM merged with the Silicon Valley firm Hopkins Carley, Ballard Spahr combined with Pacific Northwest firm Lane Powell, Womble Bond Dickinson and Lewis Roca joined forces, Sherman & Howard went national by combining with Taft and the Grand Junction-based firm Rider & Quesenberry partnered with Hall Estill.
Roxanne Jensen, founder of EvolveLaw, a legal consulting firm, told Law Week that there are a number of factors in the legal and broader markets driving these moves. Jensen worked on the Sherman & Howard combination with Taft.
She noted that generally, mergers and acquisitions between law firms tend to line up with broader economic growth cycles. But there are several factors in the legal market that are also impacting firms, particularly those situated in the mid-market space.
“One thing that obviously has increased over the years is the sophistication of clients and law departments,” Jensen said. “They know what they need and they know what it should cost and how to ask for it in ways that will bring them the best return on investment.”
This knowledge growth has created more competition for top-tier and mid-market clients, and with law firms increasingly focusing on profits to attract and retain talent, Jensen said that firms are now focusing more on secondary markets and the mid-market space.
“There’s a higher expectation that a firm can cover a wide variety of needs, and you see that from these national firms with a growing presence in secondary markets,” Jensen said. “Mid-market firms have to respond to that, because the national firms come in, and they do have these incredibly broad practices that serve not only a lot of different geographic locations, but critically, almost anything you could ask for. And if the [return on investment] is there, that’s what clients prefer, is to have more of a one-stop-shop.”
That comes in the form of broader client-firm relationships, deeper industry knowledge and the efficiencies that come from larger firms.
What makes secondary markets like Colorado attractive to firms comes from a few different factors, according to Jensen.
“They’re not tapped out in terms of client access, there’s a lot of great industry growth,” Jensen said. “I think there’s higher legal spend as a result, and there’s really good talent availability.”
She thinks the effects of the COVID-19 pandemic also accelerated some of the movement into secondary markets.
The growing sophistication is also coupled with growth in certain practice areas, including intellectual property, private equity, venture capital, cybersecurity, renewables and artificial intelligence.
The state’s economic data and reports show the growth. According to the Colorado Secretary of State’s office, job growth in the state has been in the top 20 across the country for 13 years straight.
In addition, the Colorado Office of Economic Development and International Trade boasts Colorado’s strength in a number of areas, including aerospace, bioscience, creative industries, electronics, energy and natural resources and financial services.
“Adding in practice areas where there’s industry growth is obviously very important for a lot of different clients,” Jensen said.
For smaller and mid-sized firms looking to retain and build their client base, Jensen said that there are two primary ways to compete. The first is to hone in on their expertise differentiators and what their firm does best, and the second is to expand to try and compete with the breadth and depth of the large national firms.
If a firm chooses the latter option, she noted that there were many pain points that she commonly sees in the merger process. These pain points often come in stages, and include a lack of strategic direction, risk aversion and resistance to change, due diligence and poor integration.
Jensen said one question she often helps firms answer when she comes in is: “Who are we, and what do we want to be when we grow up?”
She noted that lawyers are often focused on the horizontal scope of their practice and less aware of how that intersects with the rest of the firm’s work and what that means for the firm’s broader goals or strategic vision.
Once firms get past that hurdle, she noted the next step is often getting over the resistance to change that she finds common in the legal profession.
“Law is a backwards-looking profession,” Jensen said. “We’re taught from the minute we walk into law school that you ought to be reading precedent and looking at previous examples to help make your decisions, and that certainly fosters more risk aversion in a population that’s probably already risk-averse.”
Ironically, once the firms get past their hesitancy, Jensen often sees them ready to move quickly. “Once you overcome the barrier to resistance to change, sometimes there’s a lot of impatience,” Jensen said.
But due diligence is still important, and that includes examining financial match and fit, industry fit, practice demographics and the respective cultures of the firms.
“The culture, in my view, in law firms is primarily reflected in two operating systems, governance and compensation. How do you run a business, and how do you compensate your owners?” Jensen said. “And that should tell you a lot about culture.”
Once the ink has dried on the agreement and firms are ready to come together, the full integration process begins. It comes in two areas, operational integration and strategic integration. Jensen said that strategic integration is often overlooked by firms.
“It’s incredible to me that people meet each other to assess culture and to understand where there’s overlap in clients and complements in clients, but they don’t sit down and make a business plan for how to leverage that,” Jensen said.