We Can Do Better

Thursday, February 21, 2013

As a securities lawyer, I’ve read my share of financial disclosure documents, but I’ve never seen one in our industry-until today, when K&L Gates released its 2012 results (the figures were unaudited on the release date, but they will be audited shortly).

When you think about it, this is a preposterous state of affairs.

  • We are the profession that excels at disclosure, but we don’t apply that liberating discipline to ourselves.
  • We are, actually, more transparent in terms of our internal compensation practices (whose business is that?), to our clients, prospective recruits (partners and associates alike) and in a weird way to ourselves, than any industry I can think of not subject to the Freedom of Information Act, yet we have no control over the message or the medium it’s delivered in.
  • We have allowed this parlous state of affair to develop while standing mutely by, assuming we had no power over what the world knows about us.
  • Meanwhile, the publishers of all this disclosure and the associated ratings, unintentionally I’m willing to grant them at first but with exhaustive knowledge of the power of their decades-long work at this point, say essentially that they’re on the path history set them on and they’re only the messenger, after all. (And did I mention they note they didn’t invent invidious envy?)

We’ve been limited to the AmLaw rankings for 25 years, a quarter of a century. Now, the trouble with ratings systems has long been known, and even popularized two years ago by Malcolm Gladwell in the pages of The New Yorker (“The Order of Things“).

Reliable sources tell me that several months ago K&L told The American Lawyer that they won’t be responding to the annual survey capturing financial information for purposes of compiling the AmLaw 200. (Obviously much of what they’ve released provides the raw data, but that’s not the point.)

I will be holding my breath to see if any other firms follow this bracing lead. Why “bracing?” Why didn’t I fall into the camp-you know who you are-who will consider it feckless or just plain perverse?

Let’s back up.

Rankings mislead, and one-dimensional rankings intrinsically mislead. (See: Gladwell, supra.)

Isn’t a list of firms by gross revenue (the venerable Fortune 500) kind of fascinating? Undoubtedly, but beyond the mere impression of one sort of relative size, what do we really learn? Nothing. For example, Wal-Mart’s gross revenue according to the 2012 Fortune 500 was $447-billion, making it #2 on the list. Exxon was #1 at $453-billion.

Think for just a second.

How different could these businesses possibly be? Wal-Mart sells at a very small retail markup stuff that somebody else made. Exxon has to find, produce, transport, refine, and transport again everything it sells, creating and maintaining in the process one of the most complex supply chains ever created, traversing some of the world’s nastiest neighborhoods, and requiring sophisticated and temperamental technology.

Calling one #1 and the other #2 is beginning to look a bit nonsensical, is it not?

But a law firm is a law firm is a law firm, right?

Not in my book. What’s endlessly fascinating about Law Land is how different firms are, in their histories, strategies, footprints, goals, clientele, and sources and caliber of talent. As any economist or business analyst would tell you, “averages lie,” and to compare firms with utterly different market positionings and strategic plans on averages like PPP or RPL is to assert a point which vanishes upon a moment’s reflection. As Paul Campos has written in a rather different context:

Stanford and Thomas Jefferson are both law schools in the same sense that France and Sierra Leone are independent sovereign states.

The real genius behind K&L’s disclosure document is that if follows no one-size-fits-all template. Just as no corporation follows a rigid template in its financial disclosure, K&L enunciates its strategy, and provides all the pertinent (“material”) information you need to form your own opinion of how they’re doing on execution.

Here’s an example. I know a key part of K&L’s strategy is to build the proportion of client work that touches more than one office. So they report :

The percentage of the firm’s work attributable to matters generated in one office and performed in one or more other firm offices increased from 26.3% in 2011 to 27.5% in 2012, continuing a more than decade-long trend of increasing levels of interoffice work. In 2012, 467 of the firm’s 500 largest clients used lawyers from two or more firm offices, and 15 of the firm’s 20 largest clients used lawyers in 10 or more firm offices. The average number of offices engaged on projects by the firm’s 20 largest clients in 2012 was 15.3. For the firm’s 100 largest clients in 2012, which generated 34.4% of 2012 revenues, the average number of offices engaged was 10.3.

Should Cravath report on this same metric? Don’t think so. (For Wal-Mart, a key metric would be sales per square foot; for Exxon, millions of barrels in proven reserves. Try comparing those head to head, and let me know how you come out on that.)

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5 Comments


  1. Mark J Logsdon, 1 year ago Reply

    Re: Adamsmithesq: > Cynics may smirk, but I viewed this as an unforgivable transgression against decent behavior and fundamental honor, one committed against at least some of its own partners but also against the public trust.

    Dear Bruce,

    We have discussed this issue previously here. Adam Smith Esq. is explicitly “an inquiry into the economics of law firms.” In the spirit of empirical inquiry, were we able to research such matters, would we likely find that the partners in your target audience consider “decent behavior and fundamental honor” core issues in the economics of their law firms? Are they drawn that way in the curricula of our law schools? Do the partners inculcate these as part of professional development of their associates?

    Mark


  2. Bruce, 1 year ago Reply

    Mark:

    Pointed (should I say barbed?) questions all.

    Some friends have said to me that Adam Smith, Esq. is actually about “the economics [and psychology and ethics] of law firms,” and I don’t contradict them. You have raised a marvelous point which for now I shall have to let lie with two caveats: First, I promise to deal with it more explicitly in future columns; and second, I should remind our readers that over a decade before Adam Smith himself published The Wealth of Nations he published The Theory of Moral Sentiments, which is at least as profound and which should be read as very much of a piece with “Wealth.”

    His thinking did not change, in my eyes; “Wealth” simply added to “Moral Sentiments.”


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