To Merge or Not to Merge: Is that really the question?

The trend towards a more global and regional Latin American legal market in the last few years has created higher levels of anxiety in local firms. Questions like the following are being heard all the time: should we change our status and become part of a larger platform? If we don´t, do we face the risk of losing market and clients? And if we do, will we lose our identity, culture and “modus operandi” as a firm?

One interesting thing is that all this fuss is taking place without the international firms having yet achieved a leading position in the local markets. The few exceptions come from the fact that they were leaders before this process started (members of PPU or Baker McKenzie, for example). So is this stress exaggerated and ill-founded? Yes and no.

On the one hand, with limited exceptions, it is hard to see international firms becoming leading firms in the local markets in the near future. These markets will continue to be dominated by leading local firms in the next half-decade. Latin America presents significant challenges to international firms to establish themselves locally and compete with local firms. Relatively low rates and a strong local culture are among some of the reasons why international firms are not eager to commit strongly in our markets. Moves tend to be slow and cautious. Still, it is obvious that these endeavors, with a variety of models and structures, have been increasing in the last few years and they will continue.

It is important to look more deeply to understand what is driving these changes and what are the underlying forces. The markets are becoming more global and sophisticated. Client´s issues and concerns are more VUCA (volatile, uncertain, complex and ambiguous). And technology and generation culture shifts are changing the face of the earth as we once knew it. Under these demanding conditions, the once stable and conservative legal profession is being challenged and shaken. The real question here is not whether firms should merge or not with other global, regional or local firms but, how do they remain competitive in these new demanding conditions?

A large number of important firms in the Latam market have not yet faced the necessary leadership transition of going beyond successful and strong founding partners. Tied to that fact, many still use unfavorable and inefficient compensation and governance systems that take away energy and focus from the market and the clients. The fast pace of changes is finding many firms in an uncomfortable position to deal effectively with the new market demands. Culture resistance blind many partners in understanding these changes, specially some of those that have been -and partially continue to be- successful from a professional and economic perspective. The first strategy for some of these firms is: we will do nothing since. We have done quite well and will stay basically the same. I will call this the “Denial Strategy”.

Others might head in another direction which is: let´s merge with somebody else and they will solve our problems and limitations. By merging with a larger platform we shall become automatically more efficient and competitive, which will avoid the pain of having to face necessary changes. I will call this the “Escape Strategy”. This strategy is similar to the previous one, except that instead of denying the truth, you solve it by escaping from it.

A third group will, more intelligently, understand that success lie within the basic conditions of their firm: their clients, reputation, talent, culture. If they have basic problems that need to be solved, like a leadership transition, they will face them with determination. This group understands that in order to compete in this market you should become a better firm on your own stance. A larger platform might help, but only if you have the fierce determination of becoming a better firm. I would call this the “Competitive Strategy”, and it is the only that can provide creative and solid guidelines to navigate these turbulent waters.

So becoming part of an international or regional firm would not be a good idea? It could certainly be a good idea, but as part of a “Competitive Strategy” where the partners know what is it that they want to be, and they have made the internal homework to put the firm in good shape with that vision firmly in their minds.

David Maister, the prestigious expert in professional service firms, indicated in his article “Why Merge?” that all merges should put the client´s interest and service as the main driving force for deciding to merge. If you cannot improve your market access and service capabilities in a concrete way, you might as well do nothing.

Merging can be a scary scenario, but also an idealistic project. A “Competitive Strategy” will provide a safe balance between those two extremes, with a higher dose of common sense and reality. As George Bernard Shaw expressed “Love is a gross exaggeration of the difference between one person and everybody else”. Whatever strategy you fall in love with, make sure you don´t exaggerate it´s benefits and diminish it´s real limitations.

We will continue discussing this topic in the panel “To merge or not to merge: that is the question” that will take place in the next LARF IBA in Mexico City next March 14-16. I look forward to seeing you there.