August 2004 Archives

Novelists questioned about how they write, and more specifically about how they come up with their plots, sometimes respond to the effect that, "The characters took on a life of their own; they told me what they were going to do next."

I occasionally have the same feeling, albeit on a far less exalted plane, analyzing a specific aspect of the mammoth landscape of "the economics of law firms."  This article, in particular, thinks it's about new "open plan" designs for law firm offices:  Architecture which, rather than stringing identical offices down long corridors, punctuated by conference rooms, secretarial pods, and perhaps a depressing and banal lunchroom, features more open work areas, coffee/espresso or snack stations designed to encourage mingling, "hot desks," ubiquitous WiFi availability, a wider array of large and small conference rooms and war rooms, and a generally non-traditional layout.

First, to the merits of the new design mentality:  Few propose depriving lawyers of conventional offices altogether, but rather to make them smaller (too small to hold a meeting) and to devote a relatively greater proportion of floor space to common areas.  Lawyers actually work collaboratively more than they may realize, and this only serves that reality.  Technology is also a driver:  Documents and files are—or should be!—stored on centralized servers, so they are equally available everywhere.  Cost, last but not least, is reduced with this type of "build-out." 

[On a personal note, I can report that my wife's ad agency recently moved from conventional offices in the Chrysler Building to new "loft-like," open-plan space in the garment district, and her office went from a spacious and prime corner to a 6' x 10' windowless cookie-cutter. She loved it, as did practically everyone else.]

The merits of this design philosophy, then, I leave to your judgment in light of the idiosyncrasies of your firm and the relevant egos.

By far the most interesting point, however, is how the very use of space by law firms is changing, in two key ways:

• When firms move, they almost invariably grossly under-estimate the amount of growth they will experience, and space they will need, over the life of the new lease. If the move was undertaken to consolidate scattered or inconveniently-contiguous departments, then, it will be a failure at least on that score.
• The ratio of support:professional personnel, now in the neighborhood of 1:1, will decline and perhaps will decline drastically if back-office functions are outsourced across the globe or across the river. This in turn implies that you cannot intelligently design your new space without asking what the nature of all of your practice-support and other "invisible" functions will look like by the end of the new lease term.

In other words, an article that started out being about glorified interior design ended up being about the most challenging "what next" analysis.

Your office space is, to be sure, the visual distillation of your brand, your identity, and your character; but none of those elements is entirely static.  So should your space not be.

What's the biggest challenge for a Washington, DC-based firm that wants to grow?  The lack of any meaningful transactional practice in their own backyard.  To be sure, regulatory, antitrust, and litigation work are strong, but a claim to national, much less international, status is an empty one without serious corporate throw-weight.

The options, then, for breaking out of the DC sandbox are few:

• merge with a national, or at least a New York or California, corporate power-house (this was the Wilmer-Cutler/Hale & Dorr strategy, slightly exceptional only because Hale & Dorr was a Boston-based tech heavyweight rather than a Bay Area tech heavyweight);
• grow a transactional practice organically from within, primarily by opening branch offices where such work can actually be found (the Hogan & Hartson model); or
• admit that governmental relations, regulatory and antitrust work, are your "core competence" and open up in Brussels, headquarters of the EU (Arnold & Porter).

Interestingly, while the Americans have had some success establishing beach-heads in Brussels, the Brits have by and large been forced to retreat after mounting forays into DC.  The article doesn't speculate on why that may be, but a possible reason, and one that stays away from invidious comparisons about entrepreneurial competence, is simply that Brussels is a new and relatively open playing field, whereas Washington is a mature and well-populated market with no self-evident need for new entrants.

The need, however, to break out of the one-company town of Washington, appears pressing to some firms:  Although DC-based firms' revenue was up 8% on average over last year, the AmLaw 100 as a whole were up 10%—with the inevitable arithmetic implication that non-DC-based firms' revenue rose even more.

Bar exam hypothetical:  A two-lawyer, one-secretary firm is handling a malpractice case against a bankrupt hospital.  In September a key deadline in the matter—when claims must be filed to be recognized as pre-bankruptcy and therefore entitled to preferential treatment—is set for December 31. 

Also in September, Partner #1 receives word that his long-standing petition to adopt a child in China has been granted and he must fly over immediately.  He doesn't return until late November.  Meanwhile, Partner #2 is called up for active duty and departs for Iraq.  The secretary, alone in the office, goes into premature labor and is out on maternity leave from December through February.

The firm misses the deadline.  "Excusable neglect?"

No.

Will 8% of all lawyer jobs be "outsourced" by 2015?  So Forrester Research would have it.  GE's inhouse department claims to have already saved $2-million by putting eight lawyers and nine paralegals in Gurgaon, India.  So the (financial) handwriting is on the wall; is this occasion for hand-wringing about the coming impoverishment of the profession, or for celebration about another triumph of innovation?

Neither.  To begin with (unlike the ur-outsourcing example of call centers, for instance), the vast majority of what lawyers do fails both tests of a task susceptible to outsourcing.  Those two tests are:

• that the task be ultimately reducible to a set of rules, a grand flow-chart, if you will; and
• that it need not be performed face-to-face.

The second test will save all our waiters and hairdressers, police and firemen, doctors and nurses, teachers and hardhats; the first test will save all our "knowledge workers."  To be sure, as GE demonstrates, some "lawyerly" activities—massive document reviews, drafting boilerplate, low-risk agreements—can and should be outsourced.  Not only are they intellectually unsatisfying, they are not tremendously remunerative.  (This apes my instinctive comeback to politicians pandering to laid-off textile mill workers with promises of subsidies or trade barriers:  "So, let me understand, your dream for your children is that they can grow up and go to work in a textile mill?")

More intriguing than the question of low-on-the-foodchain inhouse work being farmed out is whether there's to be a role for outsourcing in law firms themselves.

A far more thoughtful, and comprehensive, piece is provided by a Hildebrandt partner writing in Legal Week.  He provides the requisite background and overview of the attractions and demerits of outsourcing, follows with a virtual checklist of what an Executive Director would want to analyze in reaching a go/no-go outsourcing decision, and points out that the benefits include not just cost-saving, but flexibility, quality-for-money, and 24/7 operational capability.

So outsourcing is here to stay, and here to grow.  We see yet another example of David Ricardo's (1772--1823) principle of comparative advantage, and the benefits of trade and specializing in what one does best.  Stanislaw Ulam once challenged Paul Samuelson to name a single principle in economics that was both true and non-trivial, and after some thought, Samuelson responded with Ricardo's theory: 

"That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

The good news is that outsourcing the mundane lets you focus on the exciting, intensive, high-value practice of law.  Or, as the Hildebrandt partner puts it, the greatest risk is in facing the outsourcing challenge and doing nothing.

Sexy it's not, unless where the $$ is bleeding off without much chance of controlling it gets your attention, but this McKinsey piece addresses controlling health-care benefit costs (albeit in the context of F500 companies). 

When I was a junior in college majoring in economics, I did one of my two requisite "junior papers" on the challenge of runaway healthcare costs, and the potential remedy embodied in a new form of healthcare service provider called an HMO, then pioneered only by Kaiser Permanente of California.  At that time, healthcare absorbed an unimaginable 8% of GDP.  Today it's nearing 15% with no visible ceiling in sight.  [The economic reasons are manifold, but two will do for now:  (1)  Realistically, demand is driven by individuals {as opposed to, say, the state} and given that premise, demand is insatiable, in that there is no such thing as an individual having "too much healthcare" or being "too healthy."  (2)  The economic perturbations caused by the third-party-payer healthcare insurance system are, perhaps, the single worst cause of healthcare economics' bizarre dysfunction.]

Be that as it may, McKinsey has no magic bullet (who does?), but suggests that one start from a very straightforward premise:  What do employees really value in terms of healthcare benefits, and what tradeoffs can be made?  In the end, of course, law firms may find all of what McKinsey has to say to an F500 firm irrelevant.  I'm reminded of a friend who, shortly after starting in a senior business-side position at an AmLaw 50 firm, said she'd floated an initiative to save money in a particular support area, and the response was, "Who cares about saving money?"

Hey, if you are in that position, you should have skipped this post.  But having read this far, we should talk; I want to do an (anonymous) piece or two about your firm's success.

Remember when Knowledge Management was new and sexy, about ten years ago?  This professor of information management does; barely five years ago he wrote about 20 CKO's in the Sloan Business School magazine, and now few of those positions still exist.  What went wrong, if anything?

First, he posits that KM has gone through a few stages, from an initial exalted position as a strategic resource (a "source of innovation"), to an ill-defined middle period where a grab-bag of tools were employed (some amounting to old training wine in new KM bottles), to the last, perhaps current, era of intranets, portals, and search.  Yet to this day, defining what KM actually is—or even what "knowledge" actually is—remains elusive.

Given this chequered history, our professor adopts a pragmatic approach.  Rather than trying to distill the metaphysical essence of KM, he claims to have empirically categorized seven species of KM, each best-suited to its own ecological business niche:

• "Systems:"  Knowledge is codified in databases (Xerox uses this for its maintenance workers)
• "Cartogarphic:"  Directories and maps guide the inquisitive to experts (Bain's "People Finder")
• "Engineering:"  Exposing users to processes (HP's product and competitive information databases)
• "Commercial:"  Identifying a company's patents and other IP assets in an effort to maximize profitability (Dow Chemical, IBM)
• "Organizational:"  Attempting to put people with similar interests in touch through formal and informal knowledge networks (Shell, BP)
• "Spatial:"  Kind of like "organizational" only relying more on physical architecture of offices than IT (British Airways' new headquarters, any self-respecting ad agency), and
• "Strategic" (yes, again):  Where the organization conceives of itself as in the business of creating and selling knowledge (Johnson + Johnson, Unilever, any self-respecting law firm)

So where does this taxonomy leave us? 

The helpful part is that our good professor has provided a framework for thinking about which way(s) of deploying KM are best suited to the way lawyers already work.  Adapting KM to lawyers works far better than the converse.  The main part of the message, however, may be that the best KM deployments are the ones that become invisible.  If we conceive of KM as analogous to professional ethics or quality control, the lightbulb goes on:  Everyone, and no one, is responsible.  Maybe that's why those 20 CKO's are no longer around:  Not that they failed, but they succeeded.

Although this Hildebrandt article dates back to 2000, its premise that law firms of the future will migrate to the model of having full-fledged CEO's as business leaders strikes me as visionary then and almost palpably the direction in which the world is headed today.

This migration will be driven by the one irresistible outside force:  Clients.  How so?  I've repeatedly said that the biggest single complaint clients have is that lawyers don't really understand their business.  I'm beginning to believe this is a structural problem with the legal profession, and not merely a universally-repeated failure of training or diligence on behalf of lawyers.

By "structural" I mean that the qualities that make for the creme de la creme of the legal profession—extraordinary thoroughness, a focus on spotting all the issues, exhaustive research, a high degree of risk aversion, an utter inability to risk being wrong—are pretty much a short catalog of all the qualities a successful businessperson will not embody.  What then, would having a "CEO" at the head of a law firm do to fix this, or at least to paper it over attractively?

Primarily, it means that donning the mantel of CEO and living its mission permits, nay requires, one to learn business.  To stop "thinking like a lawyer" and to start thinking audaciously.  To truly be able to walk in your client's shoes.  And for those lawyers who reply, with marvelous internal inconsistency, that their firm will never have a CEO because: (a) they're not about to give up any control; and (b) having a CEO would make no difference anyway, the answer lies in the story of DEC and Ken Olsen, its CEO in 1977 who uttered the immortal words titling this post.  Where would DEC be today if he had envisioned a place for the computer in the home?  Two guys named Steve Jobs and Bill Gates were having precisely that thought.

When the latest edition of Corporate Counsel magazine landed in my mailbox last week, I had the perverse impulse to tear out and focus on the major law firm ads to see if there were any common threads.

Unfortunately, there were.

One was the pervasiveness of two metaphors:

• sports:  an Olympic sprinter, the Baseball Hall of Fame, more Olympic medals, a yacht race, a race-car steering wheel, and a dog show; and
• wilderness and the great outdoors: the open ocean, a lone mountaineer on a deserted peak, an ancient explorer's map of the world, a white owl in snowdrifts.

Now, understand:  Ads need strong visuals as much as they need strong copy, but the competitive challenges these firms implicitly promise to help their clients solve will be resolved in conference rooms, not behind the wheel of an ocean-going yacht.  Visuals, as copy, must speak to the reality of what firms offer.

Yes, then there's the copy:  Tag-lines and promises such as:

• "Legal insight.  Business instinct."
• "The Advantage of Focus"
• "The Mark of a Legend"
• "Business Needs Champions"
• "[We] Know the Territory"
• etc.

I do not cite these happily or with a knowing smirk in mind—to the contrary.  I cite them for the same reason this Booz-Allen partner critiques the Bush and Kerry presidential-campaign ads:  They are "propaganda," and not authentic.  His advice to the two candidates:  "Just tell us what you're going to do.  Then we'll vote."

Law firm marketing cannot exactly be based on "tell[ing] us what you're going to do," but it can be based on telling us what you have done—with case studies, client "success stories," or simple statistics and awards.  And, it can be based on what you know, which is, after all, what you have to sell.

So should slogans and sports or wilderness visuals never be employed?  I won't say never, but I will say never if they're the beginning, middle, and end of the pitch.

Everyone has had the, "If only I knew then what I know now..." thought, so here's an article I commend highly to any junior associates who may be out there in the audience.

What do senior partners want from you?

• ask questions; don't assume
• have the courage to say, "I don't know; I'll get back to you on that"
• just as the first draft of a client letter or a brief will not be perfect, don't imagine you can walk into a partner's office to make an oral presentation without rehearsing
• bullet-proof your work in terms of typos, solecisms, and incomplete research
• take on as much as you can handle, but if something is going to be late, let the partner know as far in advance as possible
• find a mentor
• and last, be creative and be a contributor; just doing what you're asked is not enough.

I would add:  If you discover early on that you're not cut out either for the law in general or for the practice area you're in (I, for one, was an unhappy litigator but a delighted securities/corporate guy), don't be afraid to face up to it, cut your losses, and re-boot your career.  This takes more courage than nearly any other professional challenge you'll face (it's tantamount to admitting failure, or at least poor judgment), but if you're not passionate about what you're doing others will leave you far far in their wake.  Do it, the earlier the better.

And another thing:  Bone up on debt vs. equity.

Disaster management and crisis recovery are ugly topics, but in the post-9/11 world, not-dealing with them is not an option. 

[Full disclosure, as they say in journalism circles, before they typically disclose something utterly trivial and profoundly beside the point:  I was a securities lawyer with a large investment bank/broker-dealer for nearly 10 years whose offices were primarily in the South Tower of the WTC; although I had left the firm before 9/11, on that day I lost one abnormally courageous and far-sighted friend, who had predicted another attack (I was there for the first one in 1993), the firm's head of security, an Aussie and a Vietnam Vet, and a "bloody-hell" down to earth fellow.  His fatal mistake?  He stayed behind to make sure everyone was getting out.  For the record, the firm lost only two other people.]

On to the topic at hand, then:  We have moved from the era of "disaster recovery" to the era of "business continuity."  In other words, it's not whether your critical files are backed up, it's whether your firm can continue to function and serve its clients.  This is a more complex endeavor.  Why is this important?  The obvious reasons are:

• Moral:  You have a duty to your partners, employees, and clients;
• Physical:  Your firm is entrusted not just with data but with confidences, with plans, with, if you're good, dreams--safeguard these; and
• Conceptual:  Senior management has, as part of their mandate, an obligation to undertake a serious examination of "risk management," and today that includes, alas, terrorism.

Perhaps the most astute insight from this article about these issues is this question:  How will senior management think on their feet in the face of a huge, and by hypothesis unforeseen, disruption to the business?  If the instinct is to adopt "business as usual" mind-sets, patterns of behavior, and methods of communication, the disaster will be amplified.  The more unfamiliar and threatening the reality, the more our instincts drive us to take comfort in the familiar.

Resist the impulse.

Continuing the debate about the strategic value of IT, The McKinsey Quarterly weighs in with a piece surveying research conducted with the London School of Economics that chalks up improved productivity to better management, period, end of story—without regard to IT investment.  The methodology was to rank 100 companies on a scale of 0 to 5 on three criteria:  (a) lean manufacturing [not relevant to law firms, but a proxy for lean operations]; (b) performance management, which sets clear goals and rewards people who advance them [extremely relevant]; and (c) talent management, which "attracts and develops high-caliber people" [need I say, extremely relevant].

McKinsey found that a one-point improvement on this 0-5 scale measuring "total factor productivity" (an unfortunate term from microeconomics meaning, essentially, the efficiency of capital and labor inputs) was worth a 25% increase in headcount:  In other words, raising your score by 20% on these criteria gives you a productivity boost equal to being 25% larger--without the overhead, training, headaches, etc., involved in an expansion of that scale.

By contrast, the total factor productivity of companies in the top quartile of IT deployment, vs. those in the bottom quartiler, was 4%, with zero impact on profitability.

Bottom Line:  Manage, manage, manage; and deploy IT while you're at it, of course.

Can IT no longer confer a competitive advantage?

According to the well-publicized writings of Nicholas Carr, it no longer can.  Whereas American Airlines' famous SABRE reservation system provided a true, and enduring, competitive advantage decades ago (and is still the subject of business school case-studies, as I can personally attest), Professor Carr argues that today's technology—Cisco routers, Dell PC's, even IBM services—are standardized commodities for sale to all comers.  In such an environment, it no longer pays to be cutting edge; indeed, the very concept of "cutting edge" becomes questionable.

Rather, CEO's and CIO's need to be realistic about the changed nature of the IT beast, and specifically:

1. Focus on "good enough."
2. Drive hard bargains (a commodity industry is often one with excess capacity, and excess capacity typically implies tremendous flexibility in pricing at the margin).
3. Don't be creative; shun proprietary systems.
4. Challenge ROI numbers.

This last point deserves elaboration:  One should, of course, always challenge ROI numbers, but I think Prof. Carr's point is slightly more nuanced—at least mine would be.  To wit, one can no longer assume when investing in a "commodity" that cost savings will flow through unimpeded to the bottom line.  That may be true for a day or a week or a month, but your competitors will soon adopt the same commodity cost-savings strategy, and you will no longer enjoy the "savings"—your customers will, through lower prices.

Which is, after all, exactly what Adam Smith would have predicted.

Lockstep, modified-lockstep, lockstep with pay for performance, or pure "eat what you kill?"

This is an issue which has not, to say the least, achieved equilibrium.  "Equilibrium" in economics means something akin to what "climax phase" means in ecology:  The status towards which all disequilibrium states or transitional phases will evolve, assuming no external shocks.  For example, the "climax phase" of the ecology of the Adirondacks is old-growth mixed deciduous and evergreen forest.  A forest fire would drastically alter that ecology, but again, assuming no further external shocks (development, acid rain), it would eventually return to old-growth forest.

That digression aside, my hypothesis for what the equilibrium state of the partnership compensation model will be, is:

• Modified Lockstep

This is a very large topic, and a wonderfully dispassionate, broad, and distinctly smart piece about it is from Asian Legal Business.  Among its points:

• UK-based firms have been relatively slow to embrace any non-lockstep models, and their profitability per partner has suffered as a result.  Indeed, ALB chalks up the withdrawal of the noteworthy firm Denton Wilde Saptes from Asia to this syndrome.
• The UK/US philosophical-remuneration divide also, per ALB (and several other equally or better-informed sources) scotched Ashurst's merger discussions first with Latham & Watkins and later, more notoriously, with Fried-Frank.
• Lockstep, when it works, can be a beautiful thing, eliminating internal discord and focusing a firm outwards.
• But/And, Lockstep, when it does not work, can be stifling to innovation, can permit deadwood to survive, and can motivate high-performers to jump ship.

So why do I predict "Modified Lockstep" will inherit the earth?  Although none of the extant partner-remuneration models is perfect (otherwise every firm would have glommed on to that model), I think this is, all things equal, the optimal model:

• Reasonable, but not distorting (a la CEO stock options) incentives are maintained;
• Firm-wide unity is essentially maintained;
• For international firms, flexibility across regions and profit-centers is maintained;
• Slackers are discouraged, and ultimately eliminated; and last, and my favorite:
• Firms that have adopted it seem to be increasing their global market share at a convincing rate.

Q.E.D.?  Not quite yet, but I hope to put together some empirical evidence on this.