Legal Business Blogs

Comment: The fundamental things – SJ Berwin and the problem with legal conglomerates

At the time that SJ Berwin combined with King & Wood Mallesons there were plenty of reasons to be optimistic. The firm had eyed a global merger for years, KWM was a much-fêted Asia-Pacific giant with a commanding position in China’s fast-growing legal market and the deal was in general welcomed by its partnership (in contrast to the smoke and mirrors surrounding the abortive discussions with Proskauer Rose).

And yet, as we report this month, the firm has suffered a challenging few years since the deal went live, marked by significant departures.

Part of the problem is the inevitable consequence of the legacy UK firm’s reputation in private equity and funds, areas under siege from US law firms. That is a known quantity and the firm has been proactive in addressing that challenge.

The real issue – the one without an obvious solution – is what to do about its structure. Because the biggest concern talking to current and former partners at the firm is clear: the levels of referrals across the group have undershot expectations, particularly in transactional work from Asia to Europe. If KWM can’t generate a head of steam given the huge expansion of China’s economy over the last two years, when can it?

It comes back to the familiar old critique about multi-profit-centre unions – in the absence of aligned interests the constituent parts operate like separate businesses. Put another way: without the clear incentive to push work around, or perhaps even the social bonds and trust that grows over years, such teamwork falls too far down the priority list to enable an organisation to compete against more integrated rivals.

The fundamental challenge for KWM and its multi-profit-centre peers is that ten years in the industry of experimenting with legal conglomerates strongly suggests such organisational issues do indeed make a material difference. Certainly the data in recent years would indicate that such firms are consistently under-performing traditional peers for reasons that are hard to explain other than their patchwork structure.

The suspicion is that much of the professional debate has proceeded under a false prospectus – that law firm structure was irrelevant or that clients didn’t care. To the former point, it isn’t irrelevant and the latter, even if true, is cold comfort if the model doesn’t get the best out of the professionals working under the same brand.

Deploying multi-profit-centre structures is a tool to achieve a goal – usually a means for rapid expansion or consolidation. Like all tools it has utility and limitations. Had such firms genuinely addressed these inherent weaknesses upfront they would have had a better chance of mitigating or overcoming them.

There are other factors, of course. It is obvious that large, globally-disparate mergers are very tough to make work, thanks to complexity and organisational challenges, but the correlation between the two issues is not a coincidence. Until leaders at these firms address the fact that it is a lot harder to direct a global law firm than one you didn’t build organically, they will trail their traditional rivals.

Read more on King & Wood Mallesons in this month’s feature ‘Sum of its parts: can King & Wood Mallesons match the hype? here