Adam Smith, Esq.

If you'll be attending LegalTech here in New York at the end of this month, this is your chance to stop by and introduce yourself—and even to spend a couple of hours learning all about e-discovery.

I'll be moderating three hour-long panels:

• the afternoon of Tuesday 31 January
• from 1:00 pm to about 4:30 pm
• on
  • ethical duties
  • technical issues, and
  • predictive coding.

More information on the agenda is available here, and you can register (it's free) here.

See you then!

This is not a piece about "unknown unknowns."

No, it's a piece about something that most of us in any position of authority secretly fear we're doing. 

Actually, there are two groups of senior people who probably do n't secretly fear they're doing this:  Those who are so consummately superb at what they do that they know they're not at risk, and those who are so unself-aware and intrinsically godawful as managers that the thought would never cross their minds.

Now then, "it" is "killing meaning at work," or snuffing out "the ongoing engagement and everyday progress of the people in the trenches of your organization," as McKinsey puts it. 

How important is it to avoid snuffing out that engagement?  Far more than you'd think. The same McKinsey authors surveyed nearly 700 managers at all levels, from dozens of companies and from industries around the world, asking them to rank the importance of five employee motivators:

• incentives
• recognition
• clear goals
• interpersonal support, and
• progress in the work.

Only 8% chose the last option--as they note, a random selection would have given it 20% of votes. 

Why is "progress in work" so i mportant?  The more positive people's inner work lives, the more creative, productive, committed, and collegial they are in their jobs.  And the one indispensable prerequisite to a postiive inner work life is that people feel their work is meaningful.  Now, this is easy to pay lip service to, but it turns out to be much harder to do in practice.

The authors dug into a trove of daily electronic diaries they had gathered from dozens of professionals working at seven North American companies--12,000 diary entries in all, of which nearly 900 reflected an interaction with upper or top-level managers.  And with shocking consistency across  the different organizations, they found senior managers falling into four traps.

Signaling mediocrity

You would never do this on purpose, right?!  Isn't your firm exclusively and proudly all about excellence and high purpose?  Of course it is.  But what if you're unintentionally signaling the opposite?  People are acutely attuned to hypocrisy and actions speak volumes over words.

They use the example of a consumer products company singing the mantra of "innovation," promising  teams autonomy and espousing a cross-functional and entrepreneurial approach to business.  But in reality senior management was so firmly focused on cost reduction that new product development was strangled and product engineers began to feel they were doing mediocre work for a mediocre company--whereas before they had had "a sense of fierce pride."   Some of the very best, predictably, departed.

Consider these words from one researcher there:

A proposal for liquid/medical filtration using our new technology was tabled for the second time by the Gate 1 committee (five directors that screen new ideas). Although we had plenty of info for this stage of the game, the committee is uncomfortable with the risk and liability. The team, and myself, are frustrated about hurdles that we don't know how to answer.

This company's leaders also inadvertently signaled that, despite their rhetoric about being innovative and cutting edge, they were really more comfortable being ordinary.

Sound familiar?  The committee was "uncomfortable with risk and liability," which are concerns it's virtually impossible to address since they're free-floating, undefined, and open-ended.

Strategic "attention deficit disorder"

While it's great to pay attention to the macroeconomic environment, the competitive environment, and young upstart threats, you  need to be able to stand back, take a considered view, and articulate (and follow through on) a consistent, coherent, focused strategic outlook.  Here's what it can look like from the inside if you're incapable of this:

A quarterly product review was held with members of the [top team] and the general manager and president. Primary outcome from the meeting was a change in direction away from spray jet mops to revitalization of existing window squeegees. Four priorities were defined for product development, none of which were identified as priorities at our last quarterly update. The needle still points north, but we've turned the compass again.

Are you "turning the compass" all the time while claiming that, "well, the needle still points north"? Precisely no one will be fooled.

Keystone Kops

The fictional Keystone Kops were silent film characters so famously maladroit that they grossly fumbled case after case, ran around madly in pointless circles, and spent far more energy bopping each other than pursuing anyone else; today they're a symbol of misdirection and lack of coordination.  In corporate land, the analog is senior managers who are oblivious to the organization under them churning in inconsistent and self-defeating ways.  Without coordinated action--worse, with departments or groups at odds with each other--regress, not progress, will be the order of the day.

Misbegotten "BHAGs"

In a famous 1996 Harvard Business Review article (James C. Collins and Jerry I. Porras, "Building your company's vision," Harvard Business Review, September/October 1996, Volume 74, Number 5, pp. 65-77),  the self-identified management guru Jim Collins introduced the notion that corporations should pursue "big, hairy, audacious goals."

Maybe if you're Google you can get away with something grandiose ("organizing the world's information"), but let's face facts, folks: For most organizations it's a snare and a delusion, which breeds cynicism and resignation instead of drive and ambition.   Here's an example (italics original, bold emphasis supplied):

A chemicals firm set a BHAG that all projects had to be innovative blockbusters that would yield a minimum of $100 million in revenue annually, within five years of a project's initiation. This goal did not infuse the work with meaning, because it had little to do with the day-to-day activities of people in the organization. It did not articulate milestones toward the goal; it did not provide for a range of experiments and outcomes to meet it; worst of all, it did not connect with anything the employees valued. Most of them wanted to provide something of value to their customers; an aggressive revenue target told them only about the value to the organization, not to the customer. Far from what Collins and Porras intended, this misbegotten BHAG was helping to destroy the employees' sense of purpose.

Beware articulating a "BHAG" that only has meaning to the executive suite.  (This is probably a symbolic cousin to the famous curse of having your CEO appear on the cover of Forbes or Fortune; woe betide the organization going forward.)

This may indeed serve as our coda to the varieties of going astray by destroying morale:  Keep sight of the front line worker's perspective. Stay in touch with reality on the ground.  Consider a (bad) example from outside the corporate or law land context: To what do many political observers ascribe the beginning President Obama's long slide in the polls from gilded pre-Inaugural demigod to ineffective partisan scrambler?  To his early focus on his own chosen goal of healthcare reform, oblivious to the plummeting economy and the parlous job market. You can agree or disagree with Obama's agenda and admire or decry his priorities, but there's no question he lost sight of what most of America cared about and certainly appeared more tuned in to the inside-the-Beltway and think tank crowd.

Should you then despair of articulating a higher purpose? Far from it.  But if you do--and I hope you do--do not neglect the essential next step, which is to connect the vision to what people on the front lines are doing every day. 

• State the vision
• Explain clearly and concisely
  • why it matters
  • why it's best for the firm
  • what's in it for everyone
  • and why it's something your firm and your partners are uniquely capable of achieving
• Repeat ##1 & 2
• Support the vision with an organizational form, a compensation structure, and financial reporting and personal review structures that all point towards achieving the vision
• Be consistent in word and deed
• Repeat ##1 & 2
• Repeat #4
• etc.

The always-informative, occasionally juicy New York Times DealBook, written by the tireless and uber-connected Andrew Ross Sorkin, had a year-end wrapup yesterday of 2011 global M&A activity, including a table listing the top 15 law firms (more below), but here are the highlights.

By dollar volume, the first half of the year approached its highest levels since the onset of the financial crisis, but the second half fell 19% year on year.

People think 2012 will be more promising, with unprecedented levels of cash on corporate balance sheets and--a huge if--providing Europe "doesn't go off the rails," a long-term positive outlook.  Indeed, while the outlook in the Americas remains generally positive, "Europe is still a mess," said David A. DeNunzio, vice chairman of Credit Suisse's mergers and acquisitions group. "People thought there would be more divestiture activity as companies try to get more liquid, but that hasn't happened yet."

Meanwhile, in a historic reversal of capital flows, Brazilian and Chinese companies are looking to acquire established brands in developed markets.

Overall?  My favorite quote capturing the zeitgeist is from James Woolery, JPMorgan Chase's co-head of North America M&A:  "We have fragile momentum."

Now, to that law firm table.   Here's what the NYT presents, the breakdown by value of deals:

And this isn't terribly surprising, is it?  The usual suspects are in the top ranks, and if you're a law student intent on plunging into deal work (or a lateral partner, for that matter), you now have your roadmap of places to go calling on.

But I thought two other slices of the data would be interesting.  Let's sort it by number of deals, for starters:

Quite a different picture, say what?  Instead of the Murderers' Row of S&C et al., we now have Jones Day at the top and Wachtell and Cravath bringing up the absolute rear.  When was the last time you saw a ranking putting those firms in that order?

So the last change we have to ring on this is, of course, to sort by average value of the deals:

Now that's more like it--more of a return to reality as we know it (or as we conventionally think of it, anyway).

Who's King of the Hill on this measure?  Who else?  Wouldn't you be shocked were it otherwise?  Cravath also comes out very nicely, as do the remaining New York Elite.  The big surprise to me?  The Magic Circle firms bringing up the rear.

I find this totally unexpected:  Freshfields, Linklaters, and Allen & Overy all rank below Latham in calendar year 2011 average deal size, none of them breaking the billion-dollar club.

So I ask you, dear readers, what's going on here?  Let your voice be heard!

Every once in awhile--and the calendar's odometric rollover from one year to the next is as good an occasion as any--it's wise to stand back and try to gain a little perspective.

So it is with Brian Arthur's October 2011 piece in The McKinsey Quarterly, "The second economy."  If you don't recognize the author's name, he published the eye-opening 1994 book, Increasing Returns and Path Dependence in the Economy (University of Michigan Press, December 1994), and he's now a visiting researcher at PARC and an external professor at the Santa Fe Institute.

He argues, in a nutshell, that digitization is creating a vast, autonomous, and largely invisible "second economy," and that it constitutes the single biggest change to economic organization since the Industrial Revolution.

Bold claims?  Sure, but not outlandish, especially when you put them in historic perspective.  Bill Gates isn't (and shouldn't be) recognized as a philosopher of technology, but he can take credit for saying that "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten." You can quibble about what he considers short- and long-run, but he's certainly directionally right.

Arthur lengthens the time-frame even more:

In 1850, a decade before the Civil War, the United States' economy was small--it wasn't much bigger than Italy's. Forty years later, it was the largest economy in the world. What happened in-between was the railroads. They linked the east of the country to the west, and the interior to both. They gave access to the east's industrial goods; they made possible economies of scale; they stimulated steel and manufacturing--and the economy was never the same.

Deep changes like this are not unusual. Every so often--every 60 years or so--a body of technology comes along and over several decades, quietly, almost unnoticeably, transforms the economy: it brings new social classes to the fore and creates a different world for business. Can such a transformation--deep and slow and silent--be happening today?

His core point is that transactions and processes that used to take place with human, manual intervention are now occurring invisibly as computers talk to computers:  This is what he christens "the second economy."  Here's an example we can all identify with:

Twenty years ago, if you went into an airport you would walk up to a counter and present paper tickets to a human being. That person would register you on a computer, notify the flight you'd arrived, and check your luggage in. All this was done by humans. Today, you walk into an airport and look for a machine. You put in a frequent-flier card or credit card, and it takes just three or four seconds to get back a boarding pass, receipt, and luggage tag.

What interests me is what happens in those three or four seconds. The moment the card goes in, you are starting a huge conversation conducted entirely among machines. Once your name is recognized, computers are checking your flight status with the airlines, your past travel history, your name with the TSA (and possibly also with the National Security Agency). They are checking your seat choice, your frequent-flier status, and your access to lounges.

This unseen, underground conversation is happening among multiple servers talking to other servers, talking to satellites that are talking to computers (possibly in London, where you're going), and checking with passport control, with foreign immigration, with ongoing connecting flights. And to make sure the aircraft's weight distribution is fine, the machines are also starting to adjust the passenger count and seating according to whether the fuselage is loaded more heavily at the front or back.

These large and fairly complicated conversations that you've triggered occur entirely among things remotely talking to other things: servers, switches, routers, and other Internet and telecommunications devices, updating and shuttling information back and forth. All of this occurs in the few seconds it takes to get your boarding pass back.

And even after that happens, if you could see these conversations as flashing lights, they'd still be flashing all over the country for some time, perhaps talking to the flight controllers--starting to say that the flight's getting ready for departure and to prepare for that.

Perhaps the signal characteristic of this vast, unseen and unheard economy is that it operates autonomously.  Yes, human beings designed it and can reconfigure it, but much of its normal reconfiguration occurs on-the-fly as it responds to new data inputs and internally generated results of processes it alone is conducting.

Some of you know that I and my partner in Adam Smith, Esq. are building another company, JD Match, which launched this past May.  It has no physical presence whatsoever and is entirely online.  I mention it because what members of JD Match see on the website is dynamically generated and instantly updated and reconfigured depending on information they contribute and selections they make.  It's safe to say that the system generates screens never previously displayed and which may never be displayed again in a precisely identical fashion--much as speakers and writers of English, or any modern language, can generate perfectly sensible and understandable sentences never before spoken or written.

The JD Match site, of course, is far from unusual these days: That's the point.  These systems are becoming ubiquitous.

How ubiquitous? Arthur makes a back of the envelope calculation as follows (don't quibble with the precise numbers; but if you can take issue with the overall thrust you're seeing something I'm not):

• Since 1995 when digitization began to get serious traction, US labor productivity has grown at 2.5--3%/year, smoothed out.
• Although debatable, sound studies attribute two-thirds to all of this growth to the uses of IT.  Call it 2.4%.
• An economy that grows at 2.4%/year doubles in 30 years (we hold the labor force constant), which  means that:
• By about 2025 the "second economy" will have achieved the same size as the "first," readily perceptible economy.

Of note is that while the second economy may not produce anything you can kick, like a rock (Arthur notes it doesn't make your hotel bed or serve you orange juice), it's doing a lot of things that make the fresh linens and orange juice available at the right time and place.  (And the literary-minded among you will note the oblique reference to James Boswell's Life of Johnson and the hard-headed response of Johnson to Reverend Berkeley's airy assertions that there might be no physical reality:  "I refute Berkeley thus," and kicked a rock.)

If not a physical presence, then, what is the second economy?

Neatly, Arthur notes that from about the 1760's (the appearance of James Watt's steam engine) through the 1860's and beyond--I would argue, through the universal adoption of electricity--the Industrial Revolution provided a muscular system to the economy.  The digitization economy is now supplementing that with a neural system.   

You will quickly note that a key distinction between muscular and neural systems is that the former are ultimately constrained in their growth, by the limits of flesh and bone or, with machines, ultimately by the second law of thermodynamics, but that neural systems face no such limits.  How intelligent is "too" intelligent?  It's a preposterous question.

What's not preposterous is to imagine how it can begin to change the ways we conventionally live and work. 

But wait, isn't there a downside to 2.4%/year productivity growth with no increase in the workforce? Here lies the explanation for (pick your euphemistic description), the "jobless recovery."  It's not India and China; it's the second economy.  Arthur explicitly notes that:

Now business processes--many in the service sector--are becoming "mechanized" and fewer people are needed, and this is exerting systematic downward pressure on jobs. We don't have paralegals in the numbers we used to. Or draftsmen, telephone operators, typists, or bookkeeping people. A lot of that work is now done digitally. We do have police and teachers and doctors; where there's a need for human judgment and human interaction, we still have that. But the primary cause of all of the downsizing we've had since the mid-1990s is that a lot of human jobs are disappearing into the second economy. Not to reappear.

We may think we've seen this movie before--as farm jobs disappeared, manufacturing jobs more than took their place, and when they disappeared, service jobs filled the gap--but this time is qualitatively different.  Neither Arthur nor yours truly has a glib or convincing comeback:

The system will adjust of course, though I can't yet say exactly how. Perhaps some new part of the economy will come forward and generate a whole new set of jobs. Perhaps we will have short workweeks and long vacations so there will be more jobs to go around. Perhaps we will have to subsidize job creation. Perhaps the very idea of a job and of being productive will change over the next two or three decades. The problem is by no means insoluble. The good news is that if we do solve it we may at last have the freedom to invest our energies in creative acts. [Query how many people would or could take advantage of this--Bruce.]

[...]

This second economy that is silently forming--vast, interconnected, and extraordinarily productive--is creating for us a new economic world. How we will fare in this world, how we will adapt to it, how we will profit from it and share its benefits, is very much up to us.

You can take an apocalyptic view, of course, and see this, as Occupy Wall Street perhaps sees it, as the road to complete polarization of society, or you can take a more sanguine view and see it as placing a premium on the very characteristics that make us human.  Education is surely part of the answer--which invites its own separate debate on whether we have cause for optimism or pessimism--but clearly leadership among nations could be up for grabs yet again (as it was in the early  and mid 1800's).

I plant myself firmly in the agnostic camp, but with a definite tilt towards the optimistic side of the gauge. 

Why?  For one thing, never in the history of the world has increased productivity been a bad thing and it's hard to imagine how it could be that now.  But more importantly, If the first and second economies together can satisfy Maslow's basic hierarchy of needs, perhaps more than a tiny minority of mankind will be able to focus their attention slightly higher up the pyramid.

Wouldn't that be the most improbable payoff of all, from the triumph of the nerds?

The BBC evidently does an annual review of the economic year as part of "BBC Newsnight," and they've posted the top economists graphs of 2011, "sharing insights into the year's extraordinary financial developments, particularly in the eurozone, by choosing a graph whih helps explain events so far and what lies ahead."

If these don't have you reaching for the aspirin--or a single malt--you're made of stern stuff.

My selective take on it follows. (Images will open in a larger popup window if clicked.)

So interest rates on 10-year governments ran in lockstep from the introduction of the euro to the fall of Lehman--a period of magical thinking that sovereign risk was effectively the same across all countries.  Guess again.  But what's really fascinating is that the pre and post divergence among countries is very similar, suggesting nothing changed during that seemingly long ago and far away decade of 1999-2009.

Lots of data here, but what's going on borders on the historically bizarre.  The horizontal line at 0 is financial surplus (+) or deficit (-); the green dotted line is government and the blue solid line is private sector (corporate plus household).  The purple line is the "rest of the world."

Here's the story:  Private sector and government spending run in wonderfully symmetrical opposite directions in general, but the UK and US private sectors are furiously paying down debt now and have been since just before the collapse of Lehman, even though interest rates are at historically low, near-zero rates.  This should be, according to Econ 101 textbooks, a time to borrow money.

Since formation of the eurozone, German labor costs per unit of output have barely budged, but in southern Europe and Ireland have grown by around 40%.  Guess who's losing competitiveness?  This structural imbalance in the single currency cannot be solved through bailing out debtors or even writing off their debt.

Courtesy of the nonpareil Ken Rogoff.  

"The blue line is global average of public debt relative to GDP. The yellow bars denote the percent of countries in a state of default or restructuring on external debt. The dark pink bars that sometimes rise above the percent of countries in default or restructuring denotes countries with inflation over 20%. The chart suggests that if the historical pattern is followed, there will be soon a wave of sovereign defaults. Needless to say, we appear to be on the cusp of such an event in the eurozone and central Europe, and possibly some countries elsewhere."

If you can't read it, this chart spans 1826--2010.

Finally, we have this from Sir Howard Davies, former director of the LSE:

This charts the change in each country's exchange rate relative to the euro currency countries as a whole, on the vertical axis, and each country's growth in exports over the average of those same countries, on the horizontal.

The story is simple:  When the euro was established, its architects assumed that once future devaluations were off the table, every country would realize it had to match Germany's performance.  Guess again:  Southern European nations permitted their competitiveness to decline drastically, with dire consequences for trade imbalances.

I didn't intend to depress you all in the midst of the holiday season, but the cumulative impact of these charts is, to my mind, nothing short of dazzling, in the same sense that Alfred Hitchcock's Psycho could be called dazzling in the annals of terror films.

I not only see no quick way out of this mess, I'm not sure I see any way, short of a whole or partial breakup of the Eurozone.

Imagine an industry finding itself characterized as follows:

• "The good old days of the industry are gone forever."
• "Even an improved global economic climate is unlikely to halt efforts to contain spending."
• "These factors suggest that the industry is heading toward a world where its profit margins will be substantially lower than they are today."
• "Over the years real price increases have been among the most significant drivers of the industry's growth.  Less attention has been paid to  managing the cost base.  The industry may have recently begun to focus on that, but its heart doesn't seem to be in the effort, and it has little to show for these efforts."

Three guesses as to what industry is under scrutiny here, and no it's not BigLaw:  It's McKinsey in A Wake-Up Call for Big Pharma. 

And wait, there's more:  Just as with BigLaw, so with Big Pharma:

Big Pharma must compete for parts of the value chain with focused players--for example, generics companies that excel at manufacturing; life-science service providers that offer flexible, specialized services (such as managing clinical trials) at scale; and biotechnology companies that generate innovative ideas and products.

If you doubt BigLaw is subject to the same vicissitudes, I beg to differ.  Revenue we once captured is now going to Legal Process Outsourcers, focused boutiques, and perhaps soon (in the UK) brand-new legal service and quasi-legal service providers operating on brand-new business models entirely--some of which will fail or struggle along, to be sure:  But not all of them.

For another analogy, McKinsey suggests the automotive industry, farther down this path than either Pharma or us. 

For many years, it was vertically integrated and dominated by large, primarily Western corporations. But the value chain has been disaggregated into companies specializing in narrow parts of the process. Today, component manufacturers, design houses, and basic-materials companies share much of the industry's revenues: the automakers are responsible primarily for the design of major components (such as engines), assembly, sales, and marketing.

What do comfortable incumbents do to respond to such tectonic changes?

First, let it be said:  It ain't easy, because it necessarily entails blowing up some of what you have--assets which have been very profitable in the past but which have outlived their usefulness.

And no one wants to rock the boat and risk spoiling the party for everyone.  But that see--no-evil approach, reliant on inertial momentum slowly being scrubbed away by the friction of the marketplace, is a wasting asset.  Almost inevitably, someone who is either less burdened by legacy investments and assets or else just plain more desperate will act pre-emptively to strip out fixed costs and rely on contracting for all but the truly core services.  As McKinsey drily notes, "The residual organization would be much lighter--perhaps less than half of the starting point."

"Lighter:"  I have to start using that.

The question is how real the risk is.

To judge from the just-released ALM Client Survey, no one has exactly taken away the punch-bowl yet.  For example, 75% of those responding said that alternative fees accounted for less than 15% of their total legal spending--and nearly half said AFAs were zero to 5% of their spend.  Then there's this:  Only 3% of law firm leaders said they planned to keep rates flat in 2012 (and zero, just for the record, said they planned to drop them).  And although firms appear to be outsourcing work in different contexts, only 13% said they "currently" are doing so.

Judging from what people are actually doing, then, the revolution is far from imminent.

The sneaky thing about systemic change is that it almost always appears avoidable, if not impossible or improbable, until it's too late.  And when that happens, avoidance and denial, as demonstrated from time immemorial in contexts ranging from business to the military to empire itself, are not coping strategies.

"Rather than debate what seems inevitable," the counsel is, incumbents must "develop responses that focus on how quickly the change will take place....  Strategy is firmly back on the agenda.  Companies that don't have one or stumble into something by accident will be picked apart, broken up, or taken out."

Happy holidays.

I doubt many of you, gentle readers, follow David Carr, who writes the Media Equation column for the Monday Business section of The New York Times, but I commend him to you as an enlightened, thoughtful, and experienced observer at the intersection of media, business, and culture.  (I do not know David personally.)

But his current column, "Print Empire Embraces a New Order," even though it's about the arrival of Laura Lang to run Time, Inc., has, I believe, lessons for Law Land.

Who's Laura Lang?

She comes to Time Inc. from being chief executive of the digital ad agency Digitas and Carr describes her as having "an excellent reputation," but:

As recently as, well, the day before Ms. Lang was hired, it would have been unthinkable that a large consumer magazine group would be run by someone with plenty of experience buying ads for clients, but with no experience selling them. But Ms. Lang knows other things that could come in handy, including how to use multimedia and social media to increase reader engagement in a way magazines rarely achieve.

As the head of Digitas, a unit of the Publicis Groupe, she was at the vanguard of a movement to direct advertising dollars toward specific audiences and away from big advertising buys adjacent to articles -- in other words, away from businesses like Time Inc.

As far back as five years ago she articulated the shift.

"We're seeing clients shift dollars into channels that can get a direct engagement, that can get a direct, accountable experience" she said in an interview with Direct, a marketing industry publication.

That doesn't sound like a two-page ad spread in Fortune to me.

The powers that be at Time Inc. are working the phones and their outboxes to try to minimize the import of the shift, which mostly has the result of reinforcing one's view that it's a big deal indeed.

Jeffrey Bewkes, chief executive of Time Warner, played down any talk of a revolution, in part because the last chief executive he installed at Time Inc., Jack Griffin, lasted all of six months after he came under fire for his management approach. Clearly, Mr. Bewkes doesn't want to spook the troops.

The businesses at Time Inc. may be in retreat -- revenue is down 20 percent in the last few years, to $3.7 billion in 2010 from $4.6 billion in 2008 -- but the people there think what they have built has value, no matter how many paradigms have shifted.

"We're proud of our magazines and Time Inc.'s 80-year history," Mr. Bewkes told me in a phone conversation last Thursday. "I wanted somebody who could inspire and lead that group, support the journalism and help the businesses evolve over time."

[...]  "The reason that I hired Laura is that she is a good business person who has run companies with multiple entities with a number of creative people," he said. "The digital part is good and helpful, but definitely not the number one consideration."

Clearly, spin it as they may, Lang is going to be taking on some powerful and entrenched constituencies:

Michael Nathanson, a media analyst at Nomura Capital who used to work at Time Inc., said, "It's going to be a very big challenge at a place like Time Inc. with so many different, powerful constituencies."

But James McQuivey, senior analyst at Forrester Research, sees significant implications in the choice of leadership.

"In the magazine world, they have been allowed to live with the illusion that it is the printed word that creates value," he said. "But the value actually comes from the attention of the reader. She is exactly what they need. The question is whether they are willing to follow where she is ready to lead."

Back to Law Land.

Carr nicely summarizes the way magazine advertising (all print advertising, for that matter) used to be bought:  "Traditional media has historically done well by selling inefficiency. In order to reach those among People magazine's 3.5 million readers who were interested in buying a car or a coffeepot, you had to buy an ad that everyone else flipped past. As a serious practitioner of the science of audience-and-data-driven buys, Ms. Lang helped clients erase those inefficiencies through targeted buys, allowing them to get the milk without having to buy the whole cow."

Isn't that one thing (not the only thing, of course) that law firms have relied on doing:  "Selling inefficiency?"  I dare you to find an indictment of the billable hour that doesn't start from that premise, or an indictment of the high associate:partner leverage ratio that doesn't do the same.

Now, I hasten to add that I'm not pretending there's a solid analogy between what law firms do and having to buy exposure to 3.5-million people in order to put yourself in front of the (say) 10,000 who might actually be interested in what you have on offer.  No, but what I'm saying is that clients are increasingly moving to ways of paying for legal services that provide some more direct, accountable measure of what is being done at what price, when and by whom:  Getting the milk without the cow.

That's far from the whole story, however, and in Media Land Carr acknowledges as much:  "A good magazine will do many things for a brand, including bestowing luster and creating awareness by osmosis."   In the same way, hiring Skadden or Sullivan & Cromwell or Davis Polk or Quinn Emmanuel or [Name Brand Firm] adds "luster" and, if it doesn't create "awareness" of the client's position--that's rarely a problem--it delivers the client's message with high impact.

Carr then lets the other shoe drop:  "[But] what magazines have not been able to do is to provide reliable measures of effectiveness."  Touche.

Who knows if hiring an AmLaw 25 firm or a Magic Circle firm or a gilded boutique is more "effective" than any number of alternatives?  We don't really know, do we?  (Trust me, I've been in this industry which I both hopelessly love and find endlessly perverse my entire adult career, and I've never seen anyone even pose that question, much less attempt to answer it.)

Now, Laura Lang and her quant brain trust at Time Inc.--presumably with the help of Digitas--will be delivering metrics to clients that no one is demanding of us and which have not even a remote parallel in our world:  Costs per thousand impressions, click-through rates, conversions, A/B campaigns' relative effectiveness, etc. 

But that doesn't let us off the hook entirely.  Or, in other words, there are metrics and there are metrics.  It may be the stuff of 2025 or 2050 technology to be able to measure the "effectiveness" of a law firm, but we know some things we can measure today, and clients are increasingly asking for it.  Simple stuff:  If you quoted a fixed fee of $100,000 for discovery and you're  halfway through, how much of the $100K have you already spent? 

• What does a motion for summary judgment cost?
  • In a business process patent infringement defense?
    • In the Southern District of New York?
      • Involving the online world?
• What does it cost to prepare an expert witness?
  • To address the statistical methodology of a double-blind study?
    • In the biotech world?
      • In front of a judge who's a stickler?

You get the idea.  And you may be protesting that all these things are still too subject to chance, events outside your control, and the reliable perversity of opposing counsel and the bench, to be able to provide meaningful measures.

The point is not that metrics need to be bulletproof, but that you need to start.  To paraphrase the hoary but deeply true joke, "You don't need to outrun the bear; you just need to outrun the other firm you're up against."

If even Time Inc. has gotten on this train--Time Inc., for heaven's sake, which in its heyday under Henry Luce sent uniformed maids through the offices at 4:30 with trolleys dispensing cocktails--how far behind dare we be?

Ever wish you could commission a quick poll of economic experts to opine on issues of current interest?

Well,  you can't, but we have the next best thing:  The University of Chicago's Booth School of Business's   Initiative on Global Markets forum.

What is the "IGM?"

It's a newly launched online panel that poses serious questions to leading economists in the form of positive assertions on which the economists can vote:  Strongly agree, agree, uncertain (meaning I know quite a bit about it and think the evidence is ambiguous), disagree, strongly disagree, or no opinion (as opposed to uncertain, means it's not an area on which I feel qualified to opine).

In their own words:

This panel explores the extent to which economists agree or disagree on major public policy issues.  To assess such beliefs we assembled this panel of expert economists.  Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population. 

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States.  The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession.  This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

The full list of participants is here, and it's uber-distinguished:

• Berkeley: 5
• Chicago: 6
• Harvard: 6
• Institute for Advanced Study: 1
• MIT: 5
• Princeton: 5 (go, team!)
• Stanford: 7
• Yale: 4

What kinds of questions?  Here's the most recent, on healthcare:  "There are no consequential distortions created by the tax preference that favors obtaining health insurance through employers." 

As you can see, our experts violently disagree with the assertion, to the tune of 95%.

Other recent questions:

• Unless they have inside information, very few investors, if any, can consistently make accurate predictions about whether the price of an individual stock will rise or fall on a given day.
  • 95% agree or strongly agree
    
    
• The Chinese government pursues policies that keep the renminbi's exchange rate vis à vis the dollar lower than it would be if the currency floated without those policies.
  • 73% agree or strongly agree, 10% uncertain, 7% no opinion
    
    
• Eliminating tax deductions for non-investment personal interest expenses (e.g., on mortgages), with reductions in personal tax rates that are both budget neutral and keep the burden of taxes by income group the same, would lead to more efficient financing decisions by individuals.
  • 85% agree or strongly agree, 5% uncertain, 5% disagree

You get the picture.

Enjoy!

Today we're talking about books.

Specifically, Robert Frank's The Darwin Economy and David Rose's The Moral Foundation of Economic Behavior.  I believe the first--far better known--is a failure and the second--while too drily academic to gain a wide popular audience--is a success.

Frank is a widely published and well-know economics professor at Cornell's Johnson Graduate School of Management, and definitely hails from the liberal side of the fence.  The book's claim to fame is that Frank's thesis that a hundred years hence Charles Darwin and not Adam Smith will be seen as the greater economist.  From the Amazon description:

Who was the greater economist--Adam Smith or Charles Darwin? The question seems absurd. Darwin, after all, was a naturalist, not an economist. But Robert Frank, New York Timeseconomics columnist and best-selling author of The Economic Naturalist, predicts that within the next century Darwin will unseat Smith as the intellectual founder of economics. The reason, Frank argues, is that Darwin's understanding of competition describes economic reality far more accurately than Smith's. And the consequences of this fact are profound. Indeed, the failure to recognize that we live in Darwin's world rather than Smith's is putting us all at risk by preventing us from seeing that competition alone will not solve our problems.

Smith's theory of the invisible hand, which says that competition channels self-interest for the common good, is probably the most widely cited argument today in favor of unbridled competition--and against regulation, taxation, and even government itself. But what if Smith's idea was almost an exception to the general rule of competition? That's what Frank argues, resting his case on Darwin's insight that individual and group interests often diverge sharply. Far from creating a perfect world, economic competition often leads to "arms races," encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting.

Frank's argument moves along these lines:

• While admitting that self-interest can be channeled through competition to advance the common good, Frank thinks the more important phenomenon is its ability to diminish the overall welfare by elevating individual benefits above societal.  To make the Darwinian analogy stick, he points to the outsized antlers bull elk have developed, which help each individual male compete against others for the favors of females but which decrease the overall fitness of the species by being so unwieldy--imagine trying to escape some pursuing wolves in a dense forest with 40 pounds of wide, bony foliage on top of your  head.  Frankly, if you accept that analogy, you can thank me now; you don't really need to read the book.
• The bull elk antler phenomenon is emblematic of a larger and systemic economic failing, to wit that relative not absolute position matters in many areas:  Think McMansions, fast cars, impossibly complex wristwatches, CEO compensation, and trophy wives. 
• As with any arms race, it's extremely difficult for individuals, households, or companies for that matter, to unilaterally drop out.  The transaction costs (Coasean sense) of negotiating a collective-action solution to the spiraling demand for expenditures (which, much like everyone in a stadium standing up to get a "better" view, leave no one better off) are insurmountable.
• The solution government intervention in the form of regulation and in come redistribution.  And the "proof" of this is anecdotal as, for example, in Frank's observation that while one individual hockey player might gain an advantage by doffing his helmet (presumably to see and hear more acutely), the NHL has rightly decreed that helmets are universally required.

So far so good, you might be thinking, and you will be relieved to know that if you are on Frank's side to this point you are not--one of his unfortunate but favorite ad hominem phrases--a "libertarian evangelist."  My problem is that I fear Frank is a "government evangelist."  Consider:

• If the private sector is subject to Darwinian failures, why is the government immune?  Of course it's not, and rather than omniscient and benevolent politicians and regulators we have "regulatory capture," unprecedentedly intense lobbying efforts, and the decided (and yes, rationally defensible in the precise sense of Darwinian failure) preference for altogether too many economic actors to seek politically-bestowed "rents" rather than competing openly and fairly.
• About a third of the book is devoted to Frank's view that the government "beast" has been "starved," and is being forced to manage on fewer resources than ever.  This is demonstrable nonsense.  Government spending as a share of GDP has remained steady or risen throughout the western world virtually throughout the post-World War II period; if our infrastructure, say (as Frank says) is decaying, or if our public schools are doing a deplorable job, it's not for lack of resources.  (New York spends about 170% of the national average per public school student per year, so I find it hard to believe the handwringing over schools here can be laid at the door of "starving the beast.")
• Most importantly for me is another question altogether:  Did the people "overspending" on their McMansions and their Rolexes come by their wherewithal in a fair and just fashion?   If they did, I'm extremely skeptical of governmental efforts to second-guess what they spend their money on.

And this is the real problem with Frank's book:  He's talking about fringe or "edge" phenomena in modern economies.  Can competitive consumption fail to advance the common good?  Sure.  Are people who engage in those games doing so voluntarily and with their eyes open.  Same answer:  Sure.   No one is conscripted into these gladiator jousts.  Sam Walton, one of the richest people on the planet, famously drove a rattletrap pickup truck everywhere, and Warren Buffett has lived in the same unprepossessing house in Omaha for decades--not was Steve Jobs' Palo Alto home anything grander than a once-upon-a-time California tract home in a nice enough neighborhood--but no gated community.

On reflection, the real problem with The Darwin Economy is that it smells suspicioiusly like an extended argument written in support of a pre-ordained and thinly veiled ideological conclusion and not a case of following where the data leads you.   This smacks of tendentiousness and creates an aura of pandering to, or attempting to lead by the nose, the reader.

[Trivia fact, extra points:  Charles Darwin and Abraham Lincoln were both born on February 12, 1809:  The most important single day in the 19th Century?   History "what-if" buffs, have at it.]

Book #2 is, in contrast to Frank, clearly a product of deep thought, nuanced, insightful, and one strongly suspects the result an author who started out by asking deep questions because he genuinely wanted to see if he could figure out the answers--blessedly without presuppositions.

Here's the question Rose opens the book with:

If a society's sole objective is to maximize general prosperity, and it can choose its own moral beliefs, what kind of moral beliefs would it choose?

This is reminiscent, of course, of John Rawls' "veil of ignorance" (although Rawls is squarely a topic for another day, if ever).

Rose's basic answer?

• Opportunism is the fundamental impediment to development and maximizing general prosperity;
• But humans' natural reluctance to indulge in opportunistic behavior weakens the larger the group we interact with (the famous "Dunbar number" positing that the maximum group size we can effectively keep in our consciousness is about 150 people), yet maximizing economic growth and complexity depends on vastly increasing the scale of the economy;
• Trustworthiness thus becomes the value most antithetical to opportunism;
• Trust can ultimately be based only on moral beliefs;
• Since these moral beliefs, if they're to be embraced on a large scale, cannot depend on membership in a specific religion or group, they have to emerge across a society based on a combined embrace of abstract ideas that are learned;
• Thus becoming matters of culture--which truly matters.

Now, before I tell you more about this book, a caveat: It's over 220 pages of fine print with 30 pages of notes and bibliography, and it's full of sentences such as: "Batterjee, Bowie and Pavone (2006, p. 303) summarize much of the theoretical literature nicely: A growing literature of trust underscores its importance to economic life (e.g., Gambetta, 1988; Misztal, 1996; Rousseau et al. 1998; Smith et al. 1995)."

You get the picture.

But all that said, Rose comes across as sincere and questing, pretty much the opposite of Frank, who comes across as sanctimonious and incurious.

Better yet, speaking here for the home team, Rose affirms that "Adam Smith was a moral philosopher" (p. 7).

If you're interested in Rose's basic argument, here it is:

• The key to prosperity is specialization;
• But this requires large groups;
• Which invite opportunism;
• Opportunism in itself can be perfectly rational to each individual actor;
• The only antidote to which is moral constraints enforced through feelings of guilt;
• But guilt only gets its "teeth" if people can sympathize with others and, more importantly, empathize with them by envisioning the consequences of the harm that indulging in opportunistic behavior would visit upon others;
• Which is enough of a deterrent to eschew opportunistic behavior.

Whew. That's a cook's tour of the first five chapters of the book, but Rose is one of the most thoughtful and truly innovative thinkers I've come across in quite some time.

Rose explicitly stipulates that the "moral constraints" and feelings of guilt he's advocating do not arise from and aren't tied to any religion, creed, or historic legacy; they are imbued in the culture of the few fortunate "high trust" societies.  (This implies to me that they can also be lost.)  All in all, it's a fascinating take on the preconditions for high growth, high prosperity economic performance.  No wonder we haven't been able to force-graft it onto places like Iraq or Afghanistan.   

You don't need to read either book.

You don't need to read Frank because it's disappointingly tendentious, and based on a few catchy anecdotes (the bull elk antlers) that don't age well. I can only predict it will have little staying power.

You don't need to read Rose because it's hard going and written in fundamentally academic prose. But you will read and read and read about the fallout from his thoughts.

We have a quick update on our earlier survey about the future of the Eurozone:

In sum:

• 36% of you think we'll muddle through, but followed very closely by
• 32% of you who think the entire benighted structured, flying in the face of 1,000 years of history, will collapse of its own internal contradictions.
• 16% think Greece will exit, while
• 12% think all the "peripheral" countries will exit, and a very bemused
• 4% think Germany will beat everyone to the punch by getting out while the getting's good.

The betting window line forms to the left.

Back to the Eurozone.  (Yes, we have to, depressing as it is.)

For starters (courtesy of the indomitable Martin Wolf in the FT)

There's nothing to like about any of these four charts.  The only point I would add to what you can all too plainly see for yourself is that (with the exception of the bottom-right labor cost spreads chart), each of these comprises one line from January 2009 to about late spring 2011, and another line after that.  There was a market-investor-perceptual break midway through this year.

A little bit more background, particularly for my comrades on this side of the pond:  The Eurozone consists of essentially Europe as we think of it except for Britain, Sweden, Poland, Hungary, Romania, and the Czech Republic.

Courtesy of The Economist, here's an invaluable interactive graphic which I invite you to play with as long as your stomach can bear it to your heart's content.

Some of the more revealing changes you can ring on this are Debt-->Public Debt, Debt-->Budget Balance, and the shocking Economy-->Youth Unemployment Rate.

Beyond the numbers--critical as they are to grasping the dimensions of the challenge--is putting the Eurozone crisis in context.

I submit that it's nothing less than Europe having to grapple with the end of the West's monopoly over the technologies and the institutions that have made it rich.  Add in a social welfare system that might be supportable in a world of 3 children per family, but is headed for the rocks in a world of shrinking population--and these demographics are "baked in," as statisticians like to say--and the need for answering some fundamental questions could not be clearer.

Angela Merkel's approach has been described aptly as "just enough, just in time," but the time for fiddling has run out.  It's time for "vast overkill, right now."  As Martin Wolf puts it: 

Power brings responsibility.  Germany alone has the power.  It is up to it to exercise the responsibility.

If you're not familiar with Will Meyerhofer, a Harvard BA/NYU JD, former Sullivan & Cromwell associate, and now a psychotherapist in private practice in Battery Park City, I'm here to tell you you should be.  Will writes at The People's Therapist, and his pieces are often cross-posted on Above the Law.  Most of his patients are law students, lawyers, or ex-lawyers, and  his insights into the underbelly of the profession are without peer.

He's just come out with Way Worse than Being a Dentist:  The Lawyer's Quest for Meaning, which I have in my hands (thanks, Will!).

Although mostly a compendium of his published online pieces--"fully updated and expanded with exciting new filler," as he cheekily notes on the back cover--even loyal readers, myself included, will be nearly undone by the cumulative power of reading about his patients' dilemmas (strict confidentiality duly observed) and his reflections on how polite, studious, ambitious, and very smart people seem to consistently get themselves into dark nights of the soul in pursuing our profession.

I could go on and on about Will's insights,  his patients' extreme array of dilemmas, joined together at the hip by the pressures of practicing, but I think this review from Amazon (reprinted in its entirety) tells you what you need to know:

I read this book in one sitting. It is a must-read for anyone thinking about working at a big law firm in New York, anyone currently working at a big law firm in New York, anyone who has ever worked at a big law firm in New York, and anyone close to someone in one of the above three scenarios. It is so powerful to know that I am not alone in my experiences. I feel incredibly validated. My only wish with regard to the book is that Will would discuss the feelings that many people have after they leave big law and how those people figure out what they really want to do - a possible next book? Thank you for writing about these issues, Will. So many people are too afraid to speak out.

And one more quote, from a brilliant piece in the book called "A Little Chat:"

My client recently received a lesson in partner communication.

The firm was dead slow, and she was dedicating her time to a big pro bono case. An email suddenly arrived announcing a new policy: you now needed special permission to bill over 250 pro bono hours annually. In two months, she'd billed 220, and the case was coming to trial.

She called the pro bono partner.

"You're close to the limit," he noted.

Last week, there was no limit, she explained. This is an important case, coming to trial.

"You've nearly exceeded the cap on hours," he helpfully re-noted.

She inhaled deeply, and re-explained the situation.

He ingeniously pointed out that the 250 hours cap was the firm's new policy...

...at which point she snapped, and did the unthinkable: she said what she really thought.

"I didn't know there was a new policy. No one communicates at this place. And what is the point of this crap? Look at my hours - it's not like I have anything else to do!"

There was a lengthy pause.

"I'm sorry to hear that," said the partner.

He hung up - and she began to harbor second thoughts.

I'm sorry to hear that.

And there you have it.  When you hear, "I'm sorry to hear that," it's not the partner, of course, who's sorry at all.

Last week I had the privilege of attending the unveiling of the Financial Times US Innovative Lawyers 2011 awards here in town.

This is an award they've been doing in the UK for many years, and I was glad to see it imported across the pond; this was Year 2 of the US awards.

The research methodology is designed and conducted by RSG Consulting, a specialist legal research group (disclosure:  Reena SenGupta, the founder, is a friend).   Here's how it works:

Each law firm was permitted to submit up to three entries in each category, which were subjected to client and third-party review. Each entry was scored against three criteria:

• The originality of the legal work or business situation

• The rationale behind the work, encompassing strategic input, levels of proactivity, commitment and leadership

• The impact of the work on the client's business, on the industry or on business more broadly, or how it transformed a legal field.

In her introduction, Reena explains a bit more about the methodology and announces the winner.  The methodology is actually more rigorous than Reena lets on below, as it includes in-depth interviews with hundreds of clients about law firms' submissions, oftentimes revealing that such-and-such a transaction that a firm submitted as "innovative" is viewed by the client as garden-variety good counsel.  

More importantly, it reveals different emphases in the way clients view firms.  You cannot win any points in the following parlor game, but you might enjoy guessing which AmLaw 25 firms have their names attached to consensus characteriziations such as:

• superb implementers
• gentlemanly; very empathetic
• cookie-cutter
• quirky, but exceptional
• high initiative, unorthodox, total commitment
• nobody loves them; no warmth
• bland
• elegant
• hold their own against surprising competition
• did what we paid them for 

Here's Reena's summary (emphasis mine):

The recent death of Steve Jobs was front of mind for several of the law firm managing partners interviewed for this year's US Innovative Lawyers report. In the context of a conversation about how their firms were innovating, their own endeavours did not appear to bear comparison the efforts of Apple's founder.

But innovation in law firms is different from that in corporations. Compared with a company chief executive, law firm managing partners are rarely inventors or even entrepreneurs. Their managerial functions are different and their roles tend to be more that of leaders or figureheads.

In the US, law firm management is particularly light touch. As the business of law section in this report reveals, few top US firms are seriously experimenting with operational or management innovation.

Most US managing partners see their role as enablers of their lawyers' innovations. The two main challenges cited were in the recruitment and retention of top legal talent and allowing individual lawyers the space to solve clients' problems.

Michael Blair, presiding partner of Debevoise & Plimpton, says: "We have many small teams of lawyers working on many different projects, so the creativity has to come out of those teams and be directed into those projects. What you have to do is create an environment that attracts and motivates people who like to think about things in rooms with other smart people."

As the FT report shows, this smart thinking is crucial. Whether it is helping companies survive or helping the banks create liquidity, legal innovation and the efforts of lawyers to be creative plays a central role in the success of US business.

This year's US Innovative Lawyers report received submissions from 53 law firms in the Am Law 200 [including] most of the largest 50 US law firms. The research team reviewed 272 submissions and interviewed more than 300 clients and lawyers in the hunt for outstanding innovation.

...

The FT's Innovative Lawyers project was conceived as an alternative way to measure law firm success. It breaks with the ­traditional method of looking at fees and profits as the measure of success. As the category rankings are based primarily on client reviews, the awards show firms that were consistently found to be creating transformative solutions for clients.

Heading the 2011 ranking is Davis Polk & Wardwell. It was a consistent performer across the legal expertise and operational categories of the report. Tom Reid, the firm's managing partner, says: "Every innovative business has to be focused on how to deliver yesterday's solution for less today. Today, clients can enforce the truism of 'more for less'. When the advice you deliver is truly unique you can charge premium prices, but it is not all unique ­- our business model is about driving a higher percentage of the inventive, unique work."

In second and third place, respectively, were Skadden, Arps, Slate, Meagher & Flom and Cleary Gottlieb Steen & Hamilton. Both firms were responsible for significant innovations for clients from Burger King, the hamburger chain, to AIG, the insurance group.

Both firms talk about the importance of culture and human capital to their ability to innovate. Eric Friedman, chairman at Skadden, says: "We recognised from day one that our culture was our advantage."

The firm has a history of diversity in terms of background, approach and personality, which Mr Friedman believes directly benefits clients. He says new associates are "Skaddenised" and taught the values of the firm, which combine business orientated, client-centric problem solving and a strong public interest focus.

At Cleary Gottlieb, Mark Leddy, managing partner, says the firm's compensation model facilitates and encourages collaboration among partners on a global basis. "The model sweeps away internal competition and tension, and drives internal collegiality so that we can concentrate on being outward-facing to clients."

He adds that Cleary Gottlieb does not perceive itself primarily as a US firm but rather one that operates globally.

For all the firms, culture is of the utmost importance to the promotion of innovative lawyering. However, this culture does not have to be homogenous.

The ranking's top 10 contains three firms that originate from the west coast: Orrick, Herrington & Sutcliffe; Latham & Watkins; and Paul Hastings. All three have cultures that are different from the east coast firms, but are strong innovators in their own right with a growing international footprint. Also notable are the Chicago firms of Seyfarth Shaw, Kirkland & Ellis and Mayer Brown, which bring a different but powerful style to their innovations.

Since you're reading Adam Smith, Esq., of course, you'll surmise that I turned immediately to the section on innovations in the "Business of law," which, tellingly, was subtitled:  "Forced to innovate."  'Nuff said.

Actually, there may be signs of change on the horizon.

It is an idiosyncrasy of the US legal market that while American ­attorneys may be on the cutting edge of advice to clients, their firms are among the most traditional in the world. As a general rule, management style has not changed much in 30 years. But the worst financial crisis in a generation has changed things.

Cited among the pressures to change and the results of those pressures are:

• AFAs
• Outsourcing
• Including non-lawyers in client pitches and client work
• Giving clients financial "dashboards" to enable them to track the progress of matters in real time from their own desktop
  

Yet overall, I was reminded of nothing more strongly than the results of a separate survey we did here at Adam Smith, Esq. asking clients what they thought was "innovative" about their primary law firms' business models, and the most common answer by far--amounting to about 4 out of 5 respondents--was "nothing I can think of."

I highly commend to your attention the entire report, which is available here. 

My fervent hope is that serious-minded and creative journalistic efforts such as the FT's Innovative Lawyer awards will actually begin to help move the market, as it were, towards greater, and genuine, innovation.  We have all had our fill of numerically-driven rankings, which are fundamentally unimaginative, albeit necessary.  But the promise of efforts such as this by the FT and RSG is to inspire behavior to change.   Future years should get more and more interesting.  

Then again, it's not really up to the FT, is it?  It's up to us.

We're in a global economic mess of the first order, and nobody seems to know what to do about it.

Reluctantly I have come to that conclusion after a spasm of reading about the Eurozone crisis, how the aftermath of financial recessions (as opposed to Econ 101 recessions) is so very toxic for so long, and how broken efforts at real financial sector regulatory reform are.

I don't need to rehearse for you all that's so obviously gone wrong in the Eurozone in the past, say, three years (lots of things were going wrong before that--but people honestly didn't notice or pretended not to).  And with one crisis du jour superseding another, one would have to be a Twitter junkie to stay on top of every twist and turn (and in case you had any doubt, I'm anything but a Twitter junkie).  Suffice to say politicians have persistently been a day late and a dollar short in all their plans to take care of matters, with the result that what would have been an adequate and effective solution, say, a year ago would today fall hopelessly short of constituting a cure--and the taste for taking drastic measures lags the severity of reality by a consistent 3-9 months. 

This is really all I know about the Eurozone:  It's in a profound disequilibrium.  It simply cannot go on as currently constituted, and it needs to either become a lot more integrated from fiscal and policy perspectives, or begin to shed its east productive and most challenged peripheral states.  I don't have a clue which way the path ahead lies, but straight ahead is not an option.

Now, as for the aftermath of financial-crisis-driven recessions being so much more dire than the aftermath of garden-variety recessions, I can do no better than to point you to a current interview with Ken Rogoff in the McKinsey Quarterly.  You recall that Rogoff and his co-author Carmen Reinhart published the epic This Time is Different:  Eight Centuries of Financial Follyin September 2009, canvassing 800 years of empirical data from financial crises.  (I read it; you don't have to.)

Rogoff, by the way, has superb credentials for doing this sort of thing:  A 1975 econ BA from Y ale, 1980 PhD from MIT, and professor at Berkeley, Princeton, and now Harvard.  Did I mention he's also a life international grandmaster in chess?

Let's set the scene:

The historical experience gives a very clear view that the aftermath of a financial crisis brings slow and halting growth, sustained high unemployment, and surging public debt--with the overhang of public and private debt being the most important impediment to a normal recovery from recession.

It has been utterly remarkable how the United States has been tracking the averages of postwar deep financial crises across a broad range of indicators. On average, it takes four and a half years to get back to the same per capita GDP where you started out and about the same amount of time for unemployment to stop rising.

Indeed, we haven't yet gotten back to the same per capita GDP where we started. Our perspective is that we have never left the recession; we're still very much in it.

And asked what it would take to get us out of this, he offers no silver bullets (emphasis mine):

It's not easy, because a postfinancial-crisis recession is characterized by an overhang of private and public debt that is much more severe than it is after a normal recession. There are many mortgages still under water--perhaps 25 percent--and people are more cautious about extending their borrowing than they were before 2007. That leads to slower consumption growth. Businesses in turn invest more slowly.

In 2008, policy makers placed too much confidence in the Keynesian idea that you can jump-start the economy with a big temporary stimulus and then step back and watch the private sector take over. Of course, Reinhart and I argued otherwise, based on the results of a seven-year research project, and our results certainly were acknowledged by practitioners, academics, and policy makers. Nevertheless, most policy makers and markets still insisted, "Well, yes, maybe that is how things always were in the past, but this time it's different because the policy response was so aggressive." In fact, the policy response is always very aggressive. Every country does everything it can to claw its way back from a deep financial crisis.

So, unfortunately, there is no easy out. Perhaps the best chance would be to find a way to get ahead of the mortgage defaults--that is, to have restructurings and debt forgiveness, albeit with some kind of quid pro quo. That is very hard to do. But if there were a way to write down and forgive some of the mortgage debt, that would be money well spent. In ten years, we will probably end up forgiving a big chunk of it. As Carmen has noted, this is a little like Third World debt that was carried on the books forever, even though it was a joke.

But then he jumps in with an idea I've not heard expressed so powerfully anywhere else:  We need to severly limit the market share of nonindexed debt:

Most financial crises have at their root very, very high leverage. To hit the nail on the head, I think we have to do something about the prevalence of nonindexed debt instruments. I would start with changing our corporate-tax law and any overt incentives that favor debt. Obviously, the US home mortgage tax deduction makes no sense, given the risk that debt entails. I understand the political imperative, but let's not subsidize debt in an overt way. I think public-finance experts need to methodically go through the system and strip debt subsidies out.

Refreshingly, he also has a contrarian view of Too Big to Fail:

I believe that size is overrated as the issue. There is this view that if we can just break up the big banks into smaller ones, we won't have a problem. But if you look at systemic crises, usually a lot of banks are doing the same thing. So if we take one big bank and break it up into ten smaller banks that act similarly, I'm not sure how much we really would have bought ourselves. The incentives that would make a big bank go whole hog in one direction would probably make ten smaller banks do the same thing.

Now, what are the odds of any of these serious structural reforms atually happening?

Paul Volcker seems to think:  Between slim and nil.

Financial Reform:  Unfinished Business is his lengthy but penetrating piece.  He lays much of the blame in the growth of the shadow banking system--nondepository banks, hedge funds, insurers, money market funds, and so on--and their enormous growth from 2000 to 2008, at which point it was roughly the same size as the conventional banking system.  He's skeptical that imposing heightened capital standards on shadow players, as well as traditional players, will get us too much, but he believes it's a start. 

He also suggests these changes:

• greater integration and harmonization of financial regulatory standards around the world;
• agreement on international accounting standards;
• truly independent auditors, perhap enforced  by  mandatory periodic rotation; and
• an end to the oligpoly of rating agencies.

Volcker, pace Rogoff, does think Too Big to Fail is a problem--indeed, it is The Key Issue.

He would address it in three parts:

• First and simplest, the risk of the TBTF's failing has to be cut, by one or a combination of three ways:  Making them smaller, curtailing their interconnectedness, or fencing in their permitted activities.
• Second, an orderly way to wind down and dissolve firms that nevertheless do fail has to be laid out.
• And last, these arrangements need to be harmonized and synchronized across borders.

He also thinks (the famous "Volcker Rule") that banks' trading for their own accounts needs to be limited, particularly since it has grown to so grossly exceed what is needed for simple market liquidity.  He quotes an un-named "astute observer" as calling it "trying to extract pennies from a roller coaster."

Ultimately, he favors a return to what I'll call "Glass Steagall Lite," although he does not invoke the old law by name:  The separation of retail from investment banking activities.  This would presumably be in the form of firewalls and other prohibitions on transactions between a bank's affiliates.  He immediately notes, drily, that " , the philosophy of US regulators has been to satisfy themselves that a financial holding company and its nonbank affiliates should be a "source of strength" to the commercial bank...has not been highly effective in practice."

But he concludes by making it clear he believes we are by no means done:

One thing is sure: we have passed beyond the stage in which we can expect the officials of central banks, regulatory authorities, and treasuries to rely on ad hoc responses in dealing with what have become increasingly frequent, complex, and dangerous financial breakdowns. Structural change is necessary. As it stands, the reform effort is incomplete. It needs fresh impetus. I challenge governments and central banks to take up the unfinished agenda.

Still, I recur to conviction that nobody knows what we really need to do:  Contradicting Richard Nixon's famous confession that "we're all Keynesians now," I think nobody is a Keynesian now--at least not with any degree of conviction.  Nor is anyone a Friedmanite or a Hayekian.  Still, we need thinkers on that scale and we don't have them.  We have lost the grand thinkers in what might be called "comparative macroeconoimcs"--what really works, and why, for which societies with what historic path determinants?

Many economists say that what matters are questions like whether markets are  competitive or monopolistic, or how monetary policy works. Using broad, ill-defined notions like capitalism invites ideological grandstanding and distracts from the hard technical problems.

There is a lot in that argument. Economists do much better when they tackle small, well-defined problems. As John Maynard Keynes put it, economists should become more like dentists: modest people who look at a small part of the body but remove a lot of pain.

However, there are also downsides to approaching economics as a dentist would: above all, the loss of any vision about what the economic system should look like.

This is from Roger Backhouse and Bradley Bateman's piece in The New York Times, "Wanted:  Worldly Philosophers."

The "dentist's" approach to economics overlooks everything that matters.  One does cut, after all, "government spending," one cuts Medicare or defense spending or unemployment compensation or the EPA.  One does not raise "taxes," one raises taxes on the rich or on the poor or on the mythical middle class, and one does it through payroll withholding or the income tax itself, or a VAT or excise taxes or taxes on sugary soda or whatever the politically correct target of the day is.

We need to be having these kinds of conversations, and we're not. 

And why not?

Because, I suspect, dentists lead safe and conventional lives.  We are choosing comfort over hard analysis, punting over going for it on 4th and long, postponing the day of reckoning until (hopefully!) we're out of office or out of the executive suite or off the Managing Committee.  You can't play this game forever.

And if you're wondering what all this has to do with the economics of law firms, it's syllogistic:  Our clients cannot, in aggregate, evade the consequences of a sputtering economy.  Which means we can't either.

I don't ordinarily write about ethical transgressions or semi-sordid tales of malfeasance among people more often found on the New York Post's Page 6 than in the Times or the Journal, but here we have a cautionary tale that, I fear, may hold a slightly larger lesson for us all.

I refer to the cover story in the current edition of The American Lawyer, "StarrStruck," which details the downfall of Jonathan Bristol, a corporate partner at Winston & Strawn in New York when our story opens.  Bristol's key client was the (now) notorious Ken Starr, accountant and financial adviser to the stars, convicted of running a Ponzi scheme that ended up costing his clients about $59-million in total.  (Starr's clients included Bunny Mellon, Barbara Walters, Al Pacino, Caroline Kennedy, Matt Lauer, Uma Thurman, Neil Simon, Paul Simon and Carly Simon, Donald Marron and Howard Stringer, and you get the picture.)  Starr also displayed superlative telling judgment in choosing, for his fourth wife, a former Scores stripper over three decades his junior.  These things add up.

But we're not here to talk about Ken Starr, but Jonathan Bristol.

Bristol's unraveling started in April 2010 when Uma Thurman discovered (after a friend with a background in finance took a look at her statements) that $1-million was missing from her investment account with Starr.    Eventually, this would lead to Bristol pleading guilty in May 2011 to conspiracy to commit money laundering; he had allowed Starr to transfer  nearly $19 million in stolen funds through his personal attorney escrow accounts (which, I hasten to add, none of his colleagues at Winston had any idea existed).  

And specifically, he pled guilty to transferring $1 million into Thurman's acount after receiving $1 million that Starr stole from James Wiatt (former head of the William Morris Agency) that same day.  He has not yet been sentenced.  (Starr is serving 7-1/2 years upstate.)

On the surface, you would think Bristol was the most improbable of fellows to pull such a stunt.  He graduated magna cum laude from Amherst in 1978, went straight to UVa law school, and started as an associate in real estate finance at the then prestigious real estate boutique Dreyer & Traub.  He made partner, but by 1996 three of his clients had sued the firm for malpractice (all three were settled for undisclosed amounts).  Bristol decamped,

going to the corporate and bankruptcy boutique Eichler, Forgosh, Gottilla & Rudnick in New Jersey. When Eichler, Forgosh split in 1995, Bristol was in the group that landed at Pitney Hardin Kipp & Szuch. Early in his stay at Pitney, Bristol worked on a deal that ultimately spawned litigation against the firm that would drag on for more than a decade (ultimately being dismissed for lack of standing by the plaintiff).

Bristol's next stop was the Morristown, NJ office of Brown Raysman Millstein Felder & Steiner, which merged with Thelen Reid & Priest in December 2006.  Thelen proceeded to suffer a string of lateral partner departurers and voted to dissolve in November 2008.  That was when Bristol landed at Winston & Strawn.

Initially, Bristol was promised annual compensation of $1.35-million, but with the financial meltdown he agreed to have that reduced to $500,000 as his transactional practice withered--leaving him with only one meaningful client, Ken Starr.  Bristol was able to bill Starr at the rate of about $1-million/year, but Starr wasn't paying.  Humiliatingly, Bristol later testified that he was reporting to Winston management on his efforts to collect "daily."

Now, it would be safe to say that Bristol was feeling intense pressure to keep his billables up. 

That, of course, is anything but an excuse for what he did:  It's safe to say that in the environment of the past few years, hundreds if not thousands of partners, and associates, have found themselves under enormous pressure to remain "productive" (somewhat Orwellian legal industry jargon for "billing lots of hours," as we all know, which from a societal standpoint may have a positive, a negative, or a random correlation with being a productive citizen).  To attempt to minimize what Bristol did because he was in a tight spot is to insult and demean the probity of those thousands of others in similar spots who refuse to cut corners, much less to resort to naked criminality.

But I want to point out something else about Bristol's trajectory which--with the exception of his self-inflicted career-ending defalcation, and how it all ended--is altogether too common these days, and it worries me.

Just reflect on this enumeration for a moment:

• Dreyer & Traub
• Eichler Forgosh
• Pitney Hardin
• Brown Raysman
• Thelen
• Winston & Strawn

And the last five in the space of barely a dozen years.

Now my question to you is:  Where is the institutional loyalty in such a hop-skip-and-a-jump resume?

That's a bilateral question, mind you: From lawyer to firm and from firm to lawyer.

Granted, Bristol was an extreme outlier in that he seemed to scatter malpractice suits in his wake as Johnny Appleseed scattered--well, you know.  (See "How Many Malpractice Suits is Too  Many?")  Firms are not required to exercise perpetual forbearance with those who cause them to be hauled into court. 

Still, I see a cautionary tale here. 

The more resumes that end up looking like Bristol's--for whatever reasons--the more exposed I believe we are to rot from within.

The problem is easier to state than to solve. 

Firms cannot commit the equivalent of unilateral disarmament by glossing over the cost, in dollars and morale of everyone else, of "unproductive" lawyers--certainly not in today's environment.  Yet there are lawyers, as there are athletes, who have an off year or two through no fault of their own, and jettisoning someone at the first sign of a break in the ever-upward momentum, sends a corrosive message of its own.

So that's why the tale of Jonathan Bristol, sorry and star-laden as it is, is not really Page 6 material. 

This morning brought the release of Hildebrandt's quarterly "Peer Monitor" index for 3Q2011, showing a drop of 6 points to 56 (anything below 65 is deemed a negative operating environment).    In a nutshell, the problem was that demand growth was "lethargic" while expense growth accelerated strongly, and net realized collections hit 85.4%, a very weak showing indeed.   To unpack that a bit:  Stated rates were up 3.5%, which is certainly deilghtful in a world of ~2% inflation, but "realized rates" continued their three-year downward trend and reached an all-time low.  Collections on those rates (the 85.4% figure, which is cash in the door and all that really matters) was also at an all-time low. 

It's safe to say this is not the hallmark of an industry whose clients think they're getting terrific value for money.

On the other hand:  The front  page of the NYT's business section featured Selling Pieces of Law Firms to Investors, which would give you reason to believe we're the latest growth industry and investors are hankering to own a piece of us.  If you haven't heard about this coming to our shores, or thought it was limited to those wacky Commonwealth countries under Her Majesty, the picturesque, remote, and fundamentally irrelevant Australia and the royal and ancient but equally quaint UK, guess what:

An ethics commission of the American Bar Association is expected to circulate by early November a draft proposal recommending that ethics rules be amended to allow other professional service providers -- like accountants, economists and social workers -- to partner with lawyers and own up to 25 percent of a law firm.

Let's quickly rehearse the pros and the cons and then I'll tell you what we are not hearing in this debate.

Con:  "Nonlawyers might not have the same code of ethics; they  might not be bound by the same sense of professional responsibility," said Andrew Perlman, legal ethics professor at Suffolk University Law School.  (Is the general public laughing at us yet?)

Con:  Lawyer-client privilege could be compromised as shareholders pressed to learn details about clients and matters.

Con:  "Big firms may have cultural obstacles as well: lawyers are trained to avoid risk, and partners are unwilling to cede control or equity to outsiders."  This was sniffily confirmed by Chris Perrin, general counsel of Clifford Chance:  "It's a nonstarter for us," adding that the debt markets were completely available to his firm but "smaller or midsized firms may not be able to so readily borrow."

But Ralph Baxter (disclosure: a friend) evidently thinks it will happen:  Accepting capital to invest in technology, streamline processes, and so forth, will increase the market value of the firm, so why wouldn't outside investors want in?  "They can sell their investment because it's worth more," he put it pithily.

Also pro:  If you think outside shareholders would bring undue pressure for profitability,

such thinking derives from the naïve assumption that the lawyers "who currently own law firms are not motivated by profit," said Ken Fowlie, the executive director of Slater & Gordon, an Australian law firm that was the first in the world to become a publicly traded company.   If anything, going public has increased transparency, Mr. Fowlie said, and has separated the ownership from the lawyers, giving the lawyers more distance from business side pressures than in traditional partnerships.

As a securities lawyer by training, I can't help but think that more disclosure is prima facie good.  And what's "material" for shareholders to know certainly does not include specifics of any single matter or even generalities about the matters of any single client; that's a transparent red herring.

No, the "con" that has sticking power, to me, are the twin stars orbiting each other of risk-aversion and control.

But here's what we're not hearing:  That law firms are a diseased business that outsiders would be fools to invest in.

What prompts that heresy?

Back to the fine print of the PeerMonitor report.  Consider that strong evidence of segmentation in the industry is continuing to emerge.  Demand growth for AmLaw 100 firms was +0.6%, for second hundred firms +1.9%, and for midsize firms -1.1%.  And: 

However, in discussing rates, the PMI averages do not tell the whole story. Rate performance continues to vary widely. Many firms are achieving better‐than‐average rate growth this year, while other firms are not faring as well in the face of client pressures, and are seeing flat or even slightly negative rate growth.

The wheat is beginning to separate from the chaff.  Indeed, a sidebar reports that managing partners report vastly different experiences of how 2011 is going, ranging from "great--the best year in the last several" to "we're somehow not generating much traction in the marketplace."  Do tell.  And this is occurring in that most perilous of environments for the halt, the one-eyed, and the lame:  An industry with slack demand which some time ago (2007?) entered into an extended period of a battle for market share.

The emerging winners are distinguishing themselves by behaving like businesses (I hate to say, like public companies, but feel free to read that into it at home).  They are:

• Investing partner time in firm-building activities;
• Actually having, and executing, strategic plans;
• Treating client relationship management as if it mattered;
• Coming up with novel, and sustainable, ways to generate genuine value for their clients;
• Altering compensation models to align with the long-term vision and client service delivery; and
• Being unafraid to re-examine core assumptions including conventional career paths, billing practices, and business development customs, practices, and techniques.

I have taken the liberty of graffiti'ing the PeerMonitor index with my own editorial comment in the form of two diverging red arrows.

Get your firm on the correct arrow.

Jerry Kowalski writes:

Another typically brilliant piece.

I also  don't see that the ABS/Tesco model works or even makes any sense for large commercial law firms in the United States.  But, non lawyer investment in the delivery of some legal services has the potential for bringing on the next revolution in the profession, with ripple effects in every direction. For more, see this earlier comment of mine.   

Jerry

"I'd make the observation that another profession - consulting engineers - have been publicly traded for a number of years. And there are still other consulting engineering firms who have remained privately held - some with wide employee share ownership and others tightly held as partnerships (although usually smaller firms).

 

I can discern no relationship between ownership structure and management competence, profitability or growth.

 

I suspect that the firms that have competent management will flourish whatever structure they choose, so long as that choice is competently made and is supportive of their strategy."

Here are two things we know:

First, the rise of the Legal Process Outsourcers--and other nontraditional ways of accomplishing legal work--has not only arrived for keeps, but is accelerating.   Consider that all of the conceivable possibilities for ways to do things are being explored:  Buy or build, at home or abroad.

[* indicates both foreign and domestic operations]

Not only are traditional legal functions such as document review and e-discovery being conducted in novel locations under the control of new players, but entirely new types of service providers are arising, such as Clearspire. 

Some of these players are not just trying to deprive your associates of jobs, they're trying to come directly between you and your clients.  They are smart, stocked with top talent, well-funded, strategically astute, and not the least bit afraid to break some china.

Clients certainly appear to get it:  Whether it's involving purchasing departments in selection of outside counsel, abjuring junior associates billing time on their matters, or requiring firms to provide many services for free, this time their determination to fundamentally restructure the "value for services rendered" equation strikes me as real and enduring.

Second, never before in memory has there been such a wide-ranging, vocal, and, frankly, convincing chorus ganging up to assault the value of a law degree--and it's coming from all corners.  Just a few data points; you are more than capable of adding many others of your own:

• The New York Times has been running what constitutes a series, starting in January of this year, on whether "law school is a losing game."
• Seventeen--and counting--law schools have been sued for fraudulently misrepresenting post-graduate employment statistics; class action status is being requested.
• NALP has reported that the Class of 2010 faced the worst job market since at least the 1990's, if not earlier.  Among other things:
  • The overall employment rate was 87.6%.
  • However, 27% of these jobs were temporary and an additional 11% were part-time, meaning that the permanent, full-time employment rate was closer to 53%.
  • And to pile on the bad news, only 68.4% had a job "for which bar passage is required"--in other words, 1 in 3 need not have bothered with law school at all.
  • If you assume the requirement of bar passage is equally distributed across all reported jobs, you arrive at the dismal statistic that barely 36% of all graduates held a (a) permanent (b) full-time job (c) requiring bar passage.
  • Make that 2 out of 3 who wasted three years of their lives and $100,000-$200,000.
• New online outlets such as the Law School Transparency Project and Inside the Law School Scam have arisen, constituting sustained, serious-minded critiques of how our law schools have gone so far astray.
• And of course, the US Senate is questioning the veracity and good faith of the ABA's Section of Legal Education when it comes to gathering and publishing employment information on ABA-accredited law schools.  So far the ABA has stoutly shirked responsibility at every turn, which can only cause reasonable people to wonder what they're hiding.

Now, what do these two phenomena have in common?

This:   They create and reinforce the impression among the public--most importantly, the sophisticated segment of the business community that buys or pays for legal services--that lawyers are overcharging for commodity services. This is not a leap:  This is 2 + 2.   

LPOs are introducing smarter ways of doing things (implying that law firms have been bloated and inefficient all along) at the same time that an enormous excess capacity in the supply of lawyers has been laid bare.  What more potent combination of forces to invite clients to conclude that our services are not worth nearly what we claim or wish them to be?

One more emotionally potent point:  Clients know that hundreds of people in any major metropolitan area would respond to a simple Craigslist ad offering $25/hour, or $40/hour, to highly credentialed, bar-admitted lawyers.   Sure, they won't all be equally qualified, but I guarantee you if hundreds respond and you only need a handful, you'll have zero problem finding talent--in fact I'll wager you'll get a surfeit of amply overqualified applicants.   And clients are being asked to pay north of $300/hour to their friendly AmLaw firm for people who look an awful lot like the Craigslist responders?   

This is what economists call a disequilibrium situation.

The market dynamics that got us here are inarguable, and as market dynamics tend to do, they've been operating in sublime indifference to the consequences for BigLaw specifically, or the public's perception of the profession generally.  But clearly, the implications are negative.  If you want to be alarmist about it, suddenly we face a very real threat of a systemic discrediting of law schools and legal education, tarnishing the profession as a whole.

So the question this poses is:  What if anything can we do about all this?

Clearly, it's too late to turn back the clock and knock retroactive sense into law schools who were evidently determined to misrepresent their graduate employment numbers.  Likewise, it's too late to absorb all the excess capacity of recent law school graduates--many, as noted, from elite schools and with experience at elite firms--who are available for contract work at contract wages.  The best we can do is try to take what steps we can to keep matters from getting worse, or even to try to build mechanisms to absorb some of the excess capacity that law schools are continuing to churn out. 

Now, if you believe demand for new associates among the AmLaw 200 is going to rebound smartly and swiftly, I would like to know what's in your pharmacopeia.  (Indeed the Bureau of Labor Statistics  just reported that the legal sector as a whole has shed 3,500 jobs in the past year.)  And it's very hard--just ask President Obama or Secretary Geithner--to dramatically affect overall job creation in the short run.  The best that can be hoped is to minimize friction in the employment marketplace and try to make sure that willing employers and willing job-seekers can find each other.

If you're thinking right about now about the insanity dance that is OCI, and despairing of anything that looks like a market-based solution, you're pretty much where I was about two years ago, watching the train wreck of two classes of law graduates piling up on top of each other as firms "deferred" offers and start dates.

And that's when we at Adam Smith, Esq. decided to try to do something about it, in the form of what is today JD Match.

JD Match is an online membership service developed to address the flawed law firm/law student recruitment process. Membership is open to all law firms and corporations, law students, and law schools in the U.S., and is free to students and schools.

JD Match provides several features:

• A proprietary preference-based matching algorithm which examines and compares students' ranked preferences for firms with firms' ranked preferences for students.
• Employers can search for students by specified structured criteria, or through keywords.
• Employers can learn which students have ranked their firm highly, or have ranked their firm in any position at all.
• JD Match includes a "recommendation engine," analogous to Amazon or Netflix, which suggests students to firms based on the characteristics of students those firms have identified as desirable.

JD Match launched in May 2011 and has seven charter member law firms (Skadden, K&L Gates, WilmerHale, Morrison & Foerster, Proskauer, Wilson Sonsini, and McKenna Long), fifteen member schools, and over 1,700 student members, who have collectively created over 40,000 individual firm rankings. Over the first (fall 2011) recruiting season, 21% of firms' ranked preferences for students generated a match.

We consider this extremely strong proof of concept, and more.  But we have high ambitions for JD Match and, to be frank about it, we want more member firms, member students, and member schools, and we want them now.  The wider the JD Match membership community, the more valuable it will be to all involved--and, we believe, to our industry.

Yes, JD Match is our brainchild and you could interpret this as a pitch.  But it's something we believe in profoundly and we remain idealistic enough to think it provides a valuable service that's for the betterment of all involved. 

The question you should be asking is:  Can we increase the overall demand in the economy by law firms for law students?

On first impression, the answer is no:  The demand is what it is. 

But we disagree.  Supply and demand within a given marketplace are not static, they are dynamic, subject to change when new circumstances and new players within the marketplace appear.  To illustrate this vividly:  What was the "demand" for iPads in 2009?   Or this:  Does anyone seriously believe that Amazon hasn't increased the market for hitherto obscure books, or dramatically increased the reach of tiny retail players for niche objects? 

We think such is the case with the student/firm marketplace.

The market fundamentally under-serves both the elite segment of the market and the non-elite segment.

The elite firms, despite all the resources they command to throw at student recruitment, simply cannot get to all the law schools they'd like to get to, during the wildly compressed OCI calendar.  And while they may reassure themselves, and not incidentally their clients, that they can find all the talent they need at the Top Tier schools they do get to, the actual makeup of these firms reflects a slightly different reality, with even the bluest of the blue chips having lawyers from schools such as Brooklyn Law or Fordham. 

The current system does an even greater disserve to small, medium-sized, one-city, and regional firms who would like to look at students from a cross-section of the nation's schools but who can't realistically participate in OCI outside their local metropolitan area.  They are simply not served at all, and are effectively excluded from the market by dual constraints of cost and time.

In economics, this is called the problem of "search," which means that people will search for a bargain they're willing to strike, even big-ticket items such as a car or a house they're willing to buy (say), only within limits. After all, the costs of "search" become, at some point, uneconomic and even insuperable.

JD Match provides a solution to that problem in the law student/law firm recruiting space.

But we haven't answered the question of whether JD Match could increase overall demand for law students.

We believe that giving firms access to the nationwide pool of law students, online and from your screen, goes so far to decrease the costs of search that it actually changes the demand equation.  If firms can now find students from law schools they could never afford to visit--based on structured or unstrucured search criteria which didn't previously exist--it's safe to say at the very least that more firms and students will be exposed to each other than is possible using conventional means.

Does that mean  more students will be hired?  Now we get down to how firms' hiring decisions are made.  Today, we seem to have a relatively bifurcated market:  Students get a job at $145-160K  with BigLaw, or they "suffer" with local firms paying on the order of $45-70K.

We believe there's room in the middle, only the marketplace for those students and those firms to be matched currently doesn't function very well. 

If you want to put this more formally, we believe in non-zero price elasticity of demand for law students by law firms.  In other words, we believe that if the under-served segment of the law firm market could find students meeting their criteria, and if students knew they could be discovered by those firms, an entirely new segment of the market would "clear," and firms would find productive young lawyers they could hire at salaries less than the BigLaw going rate but still very attractive.

We believe that in the 21st Century this is the most sensible way for the market to work, and we have built the platform to make it happen.  The repute and the economics of our profession are under threat.   

I'd be happy to walk you through JD Match; just let me know.  We would warmly welcome your joining us--and the students you find will thank you.

The annual award of the Nobel Prize in Economics (technically, since it's not one of the original Nobel's, the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel") is always an occasion for a toast here at Adam Smith, Esq., even if a particular year's winner is someone we disagree with.

This year, fortunately, we can offer warm congratulations to the co-winners, Thomas Sargent of NYU and Christopher Sims of Princeton. 

Although they hadn't worked together on the work the award was given for, they both contributed greatly to the field of "rational expectations" theory, a branch of economics they largely created in the 1970's.  Sims also created a new way of analyzing economic data using a model called vector-autoregression; when asked what help it would be in resolving today's global economic morass, he responded modestly:   "If I had a simple answer to that I would have been spreading it around the world ... It requires a lot of slow work looking at data, unfortunately." Sargent added:  "We're just bookish types that look at numbers and try to figure out what's going on.  We try to experiment in our models before we wreck the world."

"Rational expectations" may not sound earth-shattering to the laiety, but it stands for the proposition that people (consumers, businesses, and investors) base their behavior on what they expect governmental policymakers to do, particularly in light of the constraints facing those policymakers.  

For example, short-term tax cuts or cuts in interest rates--which people expect will expire in due course--scarcely alter long-term behavior at all.   More generally, any policy that has an explicit or implicit expiration date (say, price controls, which will collapse of their own intrinsic instability) will fail to secure the intended results, because people see through it.  Sargent summed up the theory in an interview with the Minneapolis Fed in August 2010:  "Policymakers can't manipulate the economy by systematically 'tricking' people with policy surprises."

This has more than tangential resonance today, as it argues that short-term spikes in government spending to bounce an economy out of a slump will have limited impact since people rationally expect it to run out.

 Christopher Sims

Results from our "Future of the Eurozone" poll are in:

Limited to one answer, here's how you responded to "What is the future of the Eurozone?":

• Muddle through: 41%
• The entire thing will fly apart: 32%
• Greece will exit: 14%
• All the peripheral countries, including Italy and Spain, will exit: 9%
• Germany will beat them to the punch: 4%

And we asked what the consequences would be for the global economy overall if the Eurozone fractures (multiple answers allowed):

A gloomy group we have here, indeed:

• Doesn't matter a lot: 25%
• The death of dreams of regional economic unions: 33%
• Signals that globalization has limits:  40%
• Would precipitate a global financial crisis the likes of which we've never seen: 60%

We report; you decide.

Enough with the bad news.

Let's turn to the US. (No, this is not the introduction to a stand-up comedy routine.)

US Trust publishes a regular Investment Advisory Overview, and in the current issue (August 2011), after the obligatory macroeconomic analysis, they have Revisiting What's Right With America, and it doesn't hurt to look at what they have to say.

Yes, the S&P downgrade of Treasuries was bad news, but it was explicitly assignable to politics, not economics. It reflected weakened "effectiveness, stability, and predictability" of federal government policy-making, as S&P said.

Here's the good news.

1. The US is still the largest and most productive economy in the world.
   
   We have 4.6% of the world's population but 25%of global GDP and as much ($14.6-trillion) as the next three economies combined (Japan, China, and Germany).
   
   
2. We're still a leader in manufacturing.
   
   Yep, believe it or not. Second only to China, which took the top spot from us only three years ago in 2008. Here's our rank in global manufacturing (UN dsta, 2009 latest available): 2009: 18.4% of global output, 1990: 23%, 1980: 20%. So we've basically stayed at a 20% share of world manufacturing over the past 30 years, and for that entire period have exceeded the output of Japan and Germany combined. Moreover, China's manufacturing "output" requires a big fat bold red footnote: Their numbers include output for mining and utilities as well as pure manufacturing, and have to be tremendously overstated, although to an unknowable degree.
   
   
3. We're the largest exporter of goods and services in the world.
   
   The bad news is that the US has posted a trade deficit in goods every year since 1975. But when you combine goods and services, we export more in one month ($175-billion in May 2011) than what over 170 countries export in a full year.
   
   
4. The US is the top destination for foreign direct investment (FDI).
   
   From 2000 to 2010, FDI into the US totaled roughly $2-trillion (source: United Nations Conference on Trade and Development) while the total for China during the same time span was $792-billion (40% of our total).  Globally, our total share of FDI received was 16%, China's 6%.
   
   Why our relative pre-eminence? A highly educated workforce (all things are relative, folks); a clear and transparent rule of law (let's hear it for our profession), and an enormous domestic market.
   
   
5. We're home to many of the top global brands in the world.
   
   Nearly half of the 100 most valuable global brands are American, including nine of the top 10 (source: BrandZ). This gives us international recognition.
   
   
6. We're still the world's leader in technology.
   
   And we're the most innovative economy in the world. In terms of spending on IT hardware, software, and services, we're the largest market in the world (Economic Intelligence Unit estimates) and of course totemic firms such as Google, Facebook, and Twitter are US born and bred.
   
   
7. The top universities in the world are here.
   
   In terms of higher education--setting aside for a moment the parlous state of public schooling--many of the leading universities in the world are here.  According to the Institute of International Education, in 2010 690,923 foreign students were attending US universities, making us the top destination for international scholars, and teh Quacquarelli Symonds World Rankings locates 6 of the top 10 and 31 of the top 100 universities in the world in the US.
   
   
8. The dollar is still the world's reserve currency.
   
   61% of global central bank reserves in the first quarter of 2011 were in US$ (IMF). The euro is second, at 27.8%. And the dollar remained strong, relatively speaking, throughout the heart of the financial crisis. Between the March 2008 collapse of Bear Stearns and the March 2009 market lows, the US dollar was the fourth best-performing currency in the world, trailing on ly the Argentine peso, Chinese renminbi, and Japanese yen.
   
   
9. The Pentagon is a leading source of technological innovation.
   
   Even if private firms in the US back off R&D, the military is extremely unlikely to follow suit. Many an argument has and will focus on the appropriate level of our overall military spending, but the reality is that it's unlikely to substantially diminish any time soon, and advanced R&D remains at its core.
   
   
10. We're fourth in global competitiveness.
    
    According to the World Economic Forum, we've been at or next to the top spot in world competitiveness almost every year since the WEF first released its annual report on this score in 2001. And while we fell two nothces in the 2010--2011 rankings thanks to macroeconomic weakness, we continue to stack up extremely well against our highly conspicuous competitors.   In the same report, China ranked #27, India #51, and Brazil #58.

And to wrap up this particular column, here's a stark contrast between US banks and those of leading countries in the Eurozone:

This shows tangible assets as a multiple of tangible common equity for domestic banks (Source:  IMF, data as of August 2011).  In other words, it shows leverage for the banking system, by country.

At the top, with a ratio of 32:1 is Germany, followed by Belgium (30:1), France (26:1), the Eurozone as a whole (26:1), the UK (24:1), Italy (18:1), and in last place the US at 13:1.

Does Germany's 32:1 ratio ring a bell?  It should, and it did for me.  Lehman Brothers' leverage shortly before it collapsed was 31:1.  Granted, Lehman was funding its cash needs in the overnight market and presumably the German banks are not.  Nevertheless, we're just sayin'....

So all may not be so terrible here in the good old USA.  Of course, we shall all see, shan't we?