What happens in a rapidly consolidating legal tech industry? More to the point, is it good for the end-users of legal tech when big fish eat little ones?
Not long ago, a friend of mine sent out an email announcing that his legal technology company had acquired a similar, smaller, legal desktop software provider. The email read in part: “People across the industry have noted for years that it was challenging to rely on many, disparate, small vendors for mission-critical tools.”
This got me thinking. In my experience in the legal technology world, which began in the first days of the personal computer, how many times have mergers (smaller software companies bought by larger ones) resulted in the combined entity continuing to provide the same high-quality product? Has consolidating similar software companies been good for consumers? Is the sum of rolling up of a number of entities that are focused on a particular market and product segment greater than its prior, independent, and individual parts? Has the level of innovation stayed the same, or improved? Have the supposed economies of scale been realized?
Put differently, is it good for users in the legal technology world when big fish eat little ones? More on this in a moment.
Regardless of the answers to these questions, mergers and rollups in the legal technology market have been happening for years. Not ignoring the basic reasons for this — and having been fortunate enough to be part of a startup in the mid-1980s that I successfully exited — I have personally witnessed the benefits of a sale that accrued more to the founders than the users. Boiled down to basic capitalism and perhaps stating the obvious, many startups come into existence with a primary goal of being acquired in one way or another. Yes, there are other benefits beyond the founders getting to cash out. In many cases, the company and its product couldn’t continue to exist without the new influx of capital. In some cases, there are obvious product synergies that provide benefits to the consumers. Sometimes the goal of the acquirer is simply to reduce competition in its market. And yes, as noted in my friend’s email above, some law firms are leery of purchasing products from small, often under-capitalized companies, no matter how good the technology may be.
Is it good for users in the legal technology world when big fish eat little ones?
So, an acquisition by a larger entity can provide purchasers an additional level of confidence. But what does history teach us?
I reached out to friends and colleagues who have more than 200 combined years of experience in the legal technology market as users, consultants, providers of technology, and entrepreneurs who successfully exited their startup ventures. I asked their opinions on how well the many mergers they have witnessed had succeeded. We concluded that, with very few exceptions, although big fish eating smaller ones yielded enviable economic results for those selling their companies, typically consumers wound up being much less satisfied with the product; and in many cases, they sought a replacement after the merger. In fairness, in a very few cases, the merged companies provided financial stability and technological advancement that couldn’t have been achieved without a merger. All too often, however, that hasn’t been the case.
Supreme Court Justice Louis Brandeis’ famous description of the mergers and acquisitions world as the “curse of bigness” related more to the potential monopolistic tendencies of consolidating companies in single markets. Perhaps, however, the phrase also could be applied to describe the impact of merger and consolidation of software companies on users.
Making Consolidation Successful
Given that these mergers aren’t going away, and in times of economic strength the presence of already substantial available capital may increase, here are some hopefully helpful pieces of advice to acquirers that might make these consolidations more successful for sellers, acquirers, and consumers:
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- Consider the customers. What did they like about the product you just acquired? If your intent is to replace the existing product with one of your own, consult with your users and do a gap analysis. What features may be missing that users loved? On the contrary, what do you do better? Make sure the new user base understands the gaps between your strengths and where the previous product excelled.
- Talk to your customers. Spend time not just meeting with your inherited customers but also asking questions and listening to answers. What are your inherited user base’s fears about the merger? Respond generously — if you don’t have an answer, make sure the people on your team follow up. It is scary to think how many times this obvious exercise isn’t done properly. Consider creating a user group of inherited users that can meet with your existing user group, if you have one. Rely on your existing customers more than on your sales and account team to bring along your inherited user base.
- Reevaluate your sales goals. Realize that your salespeople have a vested interest in selling product — pushing out the old and selling the new. No one wants to feel forced to give up a product they have been happy with just because the success of your merger depends on it. Getting your inherited user base to want to make the shift, and helping them understand why it will be to their benefit to do so, will win enormous quantities of goodwill during a difficult time.
- Overload on user support — not salespeople. Keep support in the old product robust. All too often, acquiring means consolidating, e., achieving economies of scale by combining (and reducing) organizations. Maybe this works eventually, but in the meantime, your inherited customers still need to conduct business.
- Make sure your existing development group has an incentive to stay. Your development professionals understand the product. They can fix bugs, both known and unexpected. And ultimately, if your user base isn’t happy with the product, the customer relationship has only one direction to go.
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Will every one of your inherited customers feel great after all this work? Probably not. But everyone will feel better and more open to dealing with a vendor they haven’t chosen. It’s up to the acquirer to make people feel that bigger really is better.
