April 2004 Archives

Is the Atlantic "pond" bridge-able by Wall Street and Magic Circle firms?  Or are the cultural and financial schisms simply too large?

This provocative Legal Week article argues that the difference in approach and attitude between US and UK firms is essentially insurmountable.  If a merger is your goal, the cultural schism will damn the combined entity to a dysfunctional conglomeration of practice group fiefdoms—at best in non-hostile coexistence, but scarcely with any synergistic advantages.

If merger is not the answer, then the question of interest becomes whether US firms are more successful landing business in the UK or UK firms in the US?  So far, the ex-pat Yanks are winning more than the ex-pat Brits because Americans are simply more willing to talk hard dollars about fees, alternative billing, risk-sharing, and even lateral partner acquisition, while the Brits remain "diffident" about getting in to numbers.  (Evidently "transparency" is a virtue in more contexts than one.)

The Brits have yet to effectively play their trump card in the US, however:  Magic Circle and City firms have a tradition of being truly global for decades, and it's inculcated in how they practice; they instinctively think in terms of continents and regions, not just money centers.  By contrast, as recently as the 1980's, Sullivan & Cromwell actively discouraged local-practice at its overseas outposts and positioned them simply as business-acquisition centers.

So:

• play to your strengths
• do not pretend to be all things to all people
• go high-end, "bet-the-company," or high-volume, compelling value.

Rumors of the death of the binary distribution trend have been exaggerated.  By "binary" we mean the increasing dominance of the multinational-or-boutique model, with less and less room for the mid-sized firm.*  Speculation about who's next is rampant after the Wilmer-Hale merger, with a focus on the DC market.  It's hard to argue with the logic that to be truly national, a firm needs a presence in the financial capital and in the political capital.

Even if mergers remain "daunting" and if pulling one off successfully is "an extreme long shot," people will continue to talk if approached by a firm that might be a fit.  "It's the responsible thing to do."  And consultants-speaking-anonymously love to add fuel to the fire.

*What is "mid-sized"? Like SUV's, mid-sized keeps getting bigger. I would posit 150—500 lawyers is about the range these days, with a true "boutique" under 100. Except for firms with a strong regional orientation (cf. Preston-Gates), it's an awkward size.

Does "Customer Relationship Management" (CRM) mean buying tables at the right benefit dinners?  At Winston & Strawn, it means adopting a CRM IT system.

How on earth to get lawyers to actually use it?  Install it, make its availability known, and let word of mouth do its magic.  At W&S, the CRM system was used by 10% of lawyers a year ago and by one-third of the firm today; "no one wants to be left behind."  Sounds to me like an effective motivator for Type A's.

Profits per partner?  Would that be equity-only or equity and non-equity?   How about revenue per lawyer?  And have you accounted for recourse and non-recourse debt?  Don't New York billing rates skew the numbers? And, most important, is the annual obsession with the AmLaw 100 financial bakeoff "corrosive and debilitating," "tyrannizing," with a "trail of carnage" in its wake? At the end of the day, not everyone can be Wachtel. 

Navel-gazing notwithstanding, the AmLaw 100 is here to stay.  My view is that the sophisticated audience for these numbers is more than equipped to separate signal from noise, to suss out trends, and to structure their own firm's incentives to align with their strategic and practice-group goals.  In this case, at least, "you get what you pay for" is vitally true.

Let the games begin.

Price Waterhouse Coopers has a thoughtful, and lengthy, whitepaper laying out their vision of a "Governance, Risk, and Compliance Operating Model" (it's consultant-speak; they can't help themselves) which actually embodies a belief I've held for awhile:  That we should take Sarbanes-Oxley and make lemonade. 

In other words, if a business has to re-evaluate its financial, accounting, and auditing plumbing from the ground up, why not take the opportunity to derive more business value from the exercise rather than succumb to the instinct that it's nothing but government-mandated pain?  I would wager that very few financial-reporting systems bear any resemblance to what one would create if starting with a clean sheet of paper.  SOX can be that clean sheet.

The UK publication Legal Week posits that mergers are becoming an endangered species because, among other things:

• cultural considerations are seen as increasingly central to differentiating a firm from its competitors, and cultures are inherently difficult to merge;
• it takes two years, optimistically, to integrate the "back end" of finance, IT, HR, document management, etc., as well as the "front end" of practice group leadership and office consolidation, which means two years with an unprofitable internal focus; and
• by analogy to the corporate world where an estimated 70% of mergers destroy rather than create shareholder value, managing partners have reason to be skeptical on general principles.

So how does one grow?  Pick up laterals!

But if this strategy becomes predominant, in short order laterals will recognize their market value and their price-tag will tend to approach the net present value of their earning stream—in other words, laterals will internally capture the value of their acquisition, with little left over for the new firm.  You'll recall we saw this in the '80's; but that was so, like, yesterday.

"Management all comes down to people." How often have we heard that, and how often is it honored in the breach?

CFO Magazine writes that the knee-jerk assumption that everyone in each department (in this case, surprise, finance) wants to be promoted to the top is erroneous.  Actually, they write that a little bit of insight into a team member's personality traits and characteristics might reveal that they're actually happiest where they are.  A tale of actually treating individuals as such.

In what it would be convenient to characterize as more evidence in favor of the consolidation trend mentioned in the Wilmer-Cutler/Hale & Dorr posting, this article discusses New York firms' successful invasion of Silicon Valley.  They have opened new offices in the Valley and in San Francisco proper, and high-tech companies that previously used Wilson-Sonsini, [the late]  Venture Law Group, et. al, are now turning to the likes of Skadden, Davis-Polk, and Simpson-Thacher.

While I would be as happy as the next New Yorker to gloat over the belated recognition of the superiority of our heavy-weight firms, I actually think the high-tech companies are simply being rational economic decision-makers.  When the deal on the table (ca. 1995—1999) is a simple IPO, go with the local talent that has a proven record in that field.  And, when the deal on the table (ca. 2001—2004) is a $1.8-billion acquisition, with complex antitrust, securities, tax, and financing issues built-in, go with the one-stop-shop that provides that array of expertise.

One of the last things I intend to do with this blog is to report on breaking news, but the Wilmer-Cutler/Hale & Dorr merger is worth a few words. The merger is being commonly described as "offensive," to differentiate it from the more common opportunistic acquisition of a weakened player.  Neither firm had to do it, and the odds of its success appear at first blush better than average:  Cultures at the two firms seem a good match, profits per partner are within 5% of each other, and practice area and geographic overlaps appear synergistic.

But there's another aspect that, to my mind, is the real news. "This will catch attention at every law firm in the country," said John Coates, a professor at Harvard Law School, quoted in The Wall Street Journal.  I agree.  I think this deal announces that the trend towards consolidation of firms was only taking a breather the last couple of years, and is by no means over.  Common wisdom has been that firms need to be quite large, indeed multinational, or else boutiques (the "dumb-bell" distribution curve).  This deal says that even firms of 500—600 lawyers may be an endangered species.

And no, that mouthful of a name won't last. [My prediction for the final name: Wilmer Hale.]

Next?

The McKinsey Quarterly has a feature asking why poor countries, to a depressing degree, remain poor:  Their answer is the "Power of Productivity."

But wait, don't we already know how to help poor countries?  Let's look at the record.  After World War II, the IMF, the World Bank, et al., spent 50 years and untold billions investing in infrastructure, capital assets, educational and health reforms, etc.—but to negligible effect.  Then, following collapse of the Soviet Union, reformers focused on macroeconomic factors such as minimal government deficits, low interest rates, free trade, price decontrol, and privatization.  These nostrums were applied to, among others, Argentina, Brazil, India, Mexico, and Russia itself.  Yet none of those countries is threatening to become the next Germany or Japan.

How about education?  Didn't the superior Japanese educational system get credit for Japan's accelerating productivity in the 1980's (especially against the painful comparison with the US' relatively insipid performance)?  While a high-quality education is devoutly to be desired for many reasons, the evidence is of little linear correlation with higher productivity as a worker.  If the product US high schools turn out is so inferior to its Japanese counterpart, why do Japanese-owned car factories in the US Sunbelt achieve 95% of the productivity of factories in Japan?  For that matter, how can illiterate Mexicans be world-beaters in productivity at construction sites in Texas?

So what does this have to do with law firm management, already?  McKinsey concludes that the only effective spur to higher productivity in the long run is truly unfettered competition.  So the moral is:  Don't bemoan the fact that your competitors are getting better, smarter, faster, and more global all the time.  In the long run, it will make you and your partners richer.

What five questions does the managing partner of Arnold & Porter think his corporate clients should ask about the firm—but none ever has? 

How are associates and partners compensated, for starters.  And if associate bonuses are a function of billable hours, you will not want to hear that "linking associate compensation directly and predictably to hours billed exacerbates the misalignment with client interests inherent in all billing by the hour."

The good news is that your investment in knowledge management is something your clients truly ought to appreciate (assuming lawyers actually use it).

Turn these observations into a thought experiment about pricing your services. If KM represents "value to client," and the billable hour represents "cost of production," wouldn't you prefer to base your fees on value-received rather than tonnage of inputs?

But we've had this debate before

"Leadership" is as elusive a concept as there is in business—not that that has prevented scores of writers spilling torrents of ink on it.  (The general form of the tautology in this management literature is:  It requires a great leader to build a great organization, but/and the most important characteristic of a great organization is developing great leaders.  Res ipsa.)

CIO Magazine has a perceptive column that actually has something to say about what it takes to lead:  Start with character, teamwork, passion, and persuasiveness.

A new study by two professors at the University of Washington forces one to conclude that the short-term fixation on quarterly earnings among CEO's and CFO's of public companies is perhaps worse than imagined.  They interviewed 400+ such people and learned, among other things, that over 40% would drop a project that would add to long-term profit growth if investing in it meant they'd miss analyst estimates for the current quarter.  Be grateful your firm is not NASDAQ-listed.

Law Technology News has published its first annual technology awards (for both products and people) and the IT Director of the Year trophy goes to Craig Courter of Baker & McKenzie.

Among other things, Courter set up IT support and development centers in Manila and Jakarta, Indonesia, on behalf of the >3,000-lawyer firm.  Corporate America has been doing this for ineluctable competitive reasons ("do it or someone will do it to you").  Welcome to the 21st Century.

Also noteworthy is the "Champion of Technology" title going to John Alber of Bryan Cave.  Alber won not for pushing a geeky agenda but for the far more powerful and subtle (or should that read, "really really difficult"?) role of being a champion of changed behavior in support of superior client service:  In his case, being willing to "step forward...and bridge different staff and practice interests."

Is your firm facing a gnarly IT issue?  Such as securing client extranets, authenticating (virtual and real) visitors to privileged document repositories or firm financial and competitive information?

Chances are that ways of dealing with the challenge you're facing is a question that has been "asked and answered" in circumstances at least as demanding as you face.  Question:  What is The Single Most Demanding "Security" challenge today?  Homeland security, of course.  This fascinating Baseline Magazine article, taking off from the premise of what Tom Ridge could learn from Las Vegas casinos, teaches, if nothing else, that the not-invented-here syndrome should be permanently laid to rest.

And that somebody else has probably solved the functional equivalent of your problem on a scale at least as daunting. 

Moral of the story?  Stretch your imagination to envision industries or markets where the same problem you're facing is a threat to their existence, and explore how they have engineered their own survival in the face of it.

The American Lawyer has published its "Corporate Scorecard 2003" ranking the top firms in a broad range of transactional categories from IPO's (you guessed it—dead) to bankruptcy (also counter-intuitively quiet) to municipal bond issuance ("who are these guys?").  They provide a narrative summary as well as the full rankings.

Common wisdom has it that the small uptick of M&A deals at the end of the year is precursor to far more robust activity in 2004.  While I'm generally averse to forecasting major trends from minor data points, I actually am optimistic that this is the correct point of view.  Why?

Primarily because most of corporate America will have cleared out its Sarbanes-Oxley underbrush and will be able to look outward and ahead rather than inward and back.

This blog is apolitical (and there is zero likelihood of that changing if for no other reason than that the competition in that "blog-space" is murderous), but this Op-Ed about "category errors" in the way the 9/11 commission is proceeding holds lessons for how law firm managers think about risk (e.g., disaster recovery).

In particular, our African-savannah-evolved brains tend to fall for the traps of "excessive and naive specificity," "hindsight distortion," and the siren song of "infinite vigilance."

Monica Bay, the incomparable editor of my favorite new publication, Law Firm Inc., leads off this month with a call for firms to start identifying their senior business-side managers (Executive Directors, COO's, et al.) on the firms' websites.  One may well ask, Does this really matter?  But in what can still feel like a cultural caste system separating lawyers from everybody-else, she rightly points out that "it's the little things that matter," and from which these highly talented Type A's take their cues.

Human nature tells us what happens when one treats someone as a second-class citizen....

The Wall Street Journal picks up the story of the EDS/Navy outsourced-IT contract that has gone so horribly wrong. From a business perspective, it's even worse than my original post on this (March 18) indicated.  Just as an example, if a serviceman requested a desktop PC and later decided he'd prefer a laptop, EDS had to buy and configure both machines—at no extra charge.

I may enlist.

In yet another triumph for the Law of Unintended Consequences, a group of European companies, led by the Confederation of British Industry, is calling on the SEC to relax its "de-listing" requirements for US stock exchanges so that they can do so and escape the tender mercies of Sarbanes-Oxley.

According to this article, about 200 European companies are listed on the NYSE or the Nasdaq, either directly or through having acquired a U.S. firm, and as things stand the SEC requires firms to remain registered with it—even if they de-list from a U.S. exchange—so long as they have more than 300 U.S. shareholders. 

Now I understand:  We criticize the EU (rightly, IMHO) because rules making it extremely costly to fire a worker make it unattractive to hire new ones, leading to chronically high unemployment.  And now we have created our own wonderful disincentive to listing and registration here, with its attendant benefits for U.S. investors.

When it comes to high-end strategic advice, McKinsey is the gold standard.  But opining on what good strategy looks like is not sufficient to explain the remarkable, and enduring, ubiquity of bad strategy—even, it must be said, among McKinsey clients.

What, then, explains why the Best & Brightest, with an inexhaustible supply of MBA's at their disposal, so often bollix it up?  To begin with, "the basic assumption of modern economics—rationality—does not stack up against the evidence."

It's a long article, but if your firm is contemplating any strategic departures, read it and read it again.

Econ. 101 would tell us that a law firm's demand side is its clientele and its supply side is its partner and associate ranks.  Unfortunately, when your supply chain consists of professionally trained human beings, there is no such thing as just-in-time inventory or production.  Which can lead to transient mis-matches when a spike in client demand meets down-sized associate ranks, as evidently may be the case with these Silicon Valley firms.

The next question is whether this supply shortage will lead in the short run to higher prices, higher associate salaries, both, or neither.  On this Econ. 101 provides no guidance; all it can teach is that equilibrium will reassert itself in the long run.