September 2004 Archives

Thanks to the estimable Michael Mills, Director of Professional Services and Systems at Davis-Polk, who's leading the event, and to the generous David Craig of Baker-Robbins, who's sponsoring it, I'll be blogging the Knowledge Counsel Forum here in New York on October 28th and 29th.

I look forward to meeting up again with old acquaintances and making new ones.

"Wanted:  Law Firm to Sue the UK's Big Five Banks" is the headline of this piece at The Lawyer.  They report that, per their "research," 26 of the top 30 UK firms in the "Lawyer 100" are conflicted out of acting against any of the big five banks (namely, Royal Bank of Scotland, Halifax Bank of Scotland, Lloyds TSB, Barclays, and Hong Kong Shanghai Bank [HSBC]).  Clearly, if you have a beef against one of these major players, this presents a problem.

Far more interesting to me is the window this article opens into clarifying issues surrounding conflicts.  From a strictly economic perspective, nothing should disable a firm from acting against a current or former client on a matter where the firm actually lacks any material information.  In other words, the reason we object to "conflicts" should be because we object to firms taking information shared with them for one purpose (a purpose intended to be for benefit of the client) and using that information for another purpose, one intended to be detrimental to the client.  If there is no "double-dealing" in information, there should be no legal conflict.

Of course, the story doesn't stop there.  I'd wager that all of the top 30 UK firms devoutly wish to have all of the big five banks as clients (the article actually appends a list of which firms work for which banks).  If your litigation department sues a client of your corporate department, you have, if not a legal conflict, a tremendous financial conflict and, depending on the circumstances, serious reputational risk.  Moreover, if your litigation department sues a potential client of your corporate department, you can kiss that potential goodbye.

So the situation is, thanks to market dynamics, probably even more bleak than the article posits—"bleak" from the perspective of the outraged and lawyer-less plaintiff, at least.

But we're still not done with market dynamics:  If there's a situation with £1.1-billion at stake (as the article notes with respect to a partial sale of Canary Wharf), an enterprising non-top-30 firm will eagerly raise its hand.  I don't know enough about the UK market to nominate a candidate, but in the U.S. I'll drop a name:  Boies-Schiller.

And, if this conflicts dynamic plays itself out regularly enough, the Boies-Schiller's of the world will rapidly move up the AmLaw 200, and the very composition of same will change.  Don't say we didn't warn you.

A contested election for managing partner?!  If your reaction is quelle horreur, perhaps you should think of taking a page from corporate-land and imagining not only that the race for the top spot might be competitive, but imagining that an outsider with a track record of performance might be a compelling candidate. 

Could we ever envision such a revolution coming to pass? 

On that, I will venture no prognostications, observing only that market forces can, in the long run, have tectonic power.  I will, however, leave you with this marvelous tale of resistance to change (for which I must credit the timeless volume, Tournament of Lawyers, Galanter & Paley, 1991, at pg. 12, fn. 39):

"Clarence Seward, senior partner of the predecessor of the Cravath firm, not only refused to answer the telephone for several years after it was installed, but refused to allow typewriters in the office on grounds that 'clients would resent the lack of personal attention to their business implied in sending them machine-made letters'."

Other revolutions may yet occur. 

"Mergers 101" prompted some reader response curious for more detail behind my concluding observation about how the composition of the AmLaw 200 as of 2004 differed from that as of 1999.  Here are the raw numbers:

• 11 firms were acquired
• 3 dissolved
• 8 fell out of the AmLaw 200
• 9 merged and survived as a different entity
• and there were 23 new entrants between 1999 and 2004 (totaling the "54" I cited).

Fleshing this out further, one can demonstrate that there was far more "turnover" among the AmLaw 101-200 than among the first 100 firms. 

• 23 firms on the list in 1999 did not reappear in the same form or at all in 2004
• Of these, 18 were AmLaw 101-200 firms
• Of the 5 AmLaw 100 firms that did not reappear, 2 dissolved, 2 were acquired by another AmLaw 100 firm, and one was acquired by a Global 100 (non-AmLaw) firm.

Also demonstrating more volatility in the ranks of the 101-200 firms is that all 23 new entrants as of 2004 stood in the 101-200 rankings.  The highest-ranked newcomer, at #108, is Kasowitz, Benson, Torres & Friedman, which does plaintiffs work. The second-highest newcomer, at #125, will be a surprise to few:  Boies-Schiller.

This would be an opportune moment for me to post an editorial/housekeeping note about data from the Law Firm Research Project:  Although Prof. William Henderson of Indiana University Law School/Bloomington and I have worked collaboratively and jointly to assemble and develop the raw data, "Adam Smith, Esq." is my responsibility and mine alone.  As they say up-front in books, "I humbly acknowledge the gracious and essential assistance of many of my betters, but any errors or omissions that follow are strictly my own."

Thanks to all who helped motivate this supplemental info!

If you read only one article this quarter about mergers, this should be it.  Not only is the author the former managing partner of Andersen Legal (until it imploded), before that he was managing partner of Clifford Chance.  Sure, he comes from a UK-centric perspective, but economic laws know no borders, and the once-removed context helps abstract from micro-reactions one might otherwise have along the lines of, "He thinks such-and-such a firm ought to merge, but I know them  better than that."

A theme you may have picked up on—if you haven't picked up on it, I need to work harder here—is that I believe that, for richer or poorer, merger activity is on the increase.  The jury is still out, at least in my mind, on the "richer or poorer" angle, but the trend is clear.   Let's take a quick tour of the obstacles to, and then the incentives for, mergers.

Obstacles:

• In law-firm land, there are no economies of scale.  Altman-Weil certainly seems to believe this:

• Client conflicts and client demand:  These are two sides of the same coin.  Conflicts are obviously believed to militate against large scale, although I've argued elsewhere that the common wisdom about conflicts is deeply confused, indeed incoherent.  Client demand, on the other hand, is a genuine issue:  To the extent that F1000 GC's hire individual lawyers with whom they have relationships, the size and scope of the firm behind that individual is not a compelling driver.
• Partnership agreements:  Essentially all partnership agreements have super-majority requirements for approving such hugely material changes as a merger; depending on the super-ness of the majority required, a relative handful of status quo'ers could block a merger.
• Short-term earnings dilution: The immediate post-merger period (for at least a couple of years, depending primarily on lease obligations) will be expensive as redundancies in office space need to be ironed out and technology needs to be integrated.  Since firms will almost surely expense these costs as incurred (as they should!), profits-per-partner may take a short-term hit.
• Profitability disparities:  As hard as it is to achieve equilibrium in a partnership across offices and across differential partner performance, the difficulty is squared when another firm with disparate earnings patterns needs to be folded in.
• Cultural issues:  As much alike as firms may appear to the unaided eye, I guarantee that every one believes its culture is "unique" and valuable and therefore a proper subject for historic preservation.   And post-merger, whatever else the culture may be, it will be different.

Why, then, would any firms ever merge?

• To paraphrase Dr. Johnson, the imminence of one's demise concentrates the mind wonderfully.  (The verbatim quote is: "Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.")  In other words, if market conditions are becoming such that your firm's survival in its current form is untenable in the medium to long run, drastic measures may be adopted.
• Most at risk are medium-sized firms without a clearly distinctive service offering:  These are firms that my wife, the marketing executive, would say lack a "unique selling proposition"—a benefit to their clients that is (a) distinctive; (b) credible; and (c) ownable.
• Finally, there is the importance of the market for lateral's, both individuals and practice groups.  Firms perceived as lacking a critical mass will not be attractive to laterals and, adding insult to injury, desirable partners will be all the more tempted themselves to leave.

Adam Smith would have been among the first to observe that no firm has a pre-ordained right to survive.  Indeed, according to our data from the Law Firm Research Project, no fewer than 54 firms out of the AmLaw 200 in 1999 are no longer in the AmLaw 200 as of 2004 in the same form—a 27% change in just five years.  What happened to them?  Basically, they were acquired, they merged into a different form, they dissolved, or they simply dropped off the AmLaw 200.   This can happen to you.

"Finance is the language of business decisions."  True, or merely the imperialistic mindset of the MBA at work?  Agree or disagree, without some common language, decisions will not be made, and finance is at least a language tied to relatively objective facts.

A common language, as I've noted, often seems to be lacking between IT and lawyers, and I suggested that a joint IT/lawyer advisory council could help ameliorate that problem.  Now let's dimensionalize how that might work a little more clearly.

In corporate-land, the primary antagonist of IT is usually the CFO.  IT overspends, underdelivers, can't present credible ROI numbers for any of its projects, wants to grow its headcount and budget faster than the rest of the company, is (kiss of death!) a "cost center," and you can add further counts to the indictment as you wish.  So what are companies doing about it?  According to McKinsey, they're forcing dialogue:  The number of CIO's reporting to the CFO doubled in 2003, and McKinsey expects the trend to continue.

What's going on here?  The goal is to give CIO's the proverbial "seat at the table," and to bring them into strategic planning for the firm while they can still have an impact.  In practice, the CFO usually doesn't really grok IT—and he's not about to learn.  That means that if the CIO is to have a voice, he better be able to speak financial-ease.  Some companies, like Saucony (the athletic shoe-maker) have solved the problem by hiring a CIO and a head of MIS with pure finance backgrounds, according to this CFO article.  Less radically, other companies simply ensure that business line-managers are involved in deciding what IT initiatives to undertake so that they perforce reflect the firm's strategic direction (and have "buy-in" before they're even born). 

Strategy is the key word.  If your CIO not only can think strategically, but has a mandate to do so, "alignment" with the CFO is, barring personal-chemistry malfunctions, guaranteed.  Uniting finance, IT, and strategy can bring about what could be called "budget-conscious strategic advantage:"  A competitive distinction supported by IT infrastructure developed under rigorous financial scrutiny.

And, in case you were wondering, I thoroughly endorse the opening quote.  For business decisions, finance is the first and last word. 

(For personnel, community- or family-related, ethical, and many other decisions, finance should barely be allowed to look over your shoulder—just for the record, and so you don't think me an unreconstructed capitalist; but those decisions are beyond the scope of this blog.)

That IT professionals can't "speak" to business professionals and vice versa is a universally recognized truism.  (To paraphrase Mae West, "Men and women have nothing in common; all men think about is women, but all women think about is men.")  If anything, the language/culture gap is even greater between IT professionals and lawyers. 

If I had a magic bullet to solve this problem, you'd be reading a blog about IT and business alignment instead of about the economics of law firms, but the chronic difficulty in coming up with a common language—where words like "cost," "process," "function," and "risk" actually mean the same thing to people on opposite sides of the table—can and often does have a serious detrimental impact on a firm's finances both through wasteful and failed projects and through less-than-optimally-productive "solutions."

Neither side, let me hastily say for the record, is right or wrong.  Both, understandably, proceed from their own comfort zone.  IT professionals may think that their focus on a coherent overall IT "architecture" for the firm and delivering specified functionality to the "desktop" is enlightened and strategically correct.   But lawyers may think that short or nonexistent learning curves, always-on availability, and seamless integration of digital and hard-copy documents is the name of the game.

I have a suggestion.  Or rather, both McKinsey and CIO magazine have a suggestion:  Create a joint IT/lawyer advisory council or steering committee to ensure alignment of IT initiatives with lawyers' actual needs.  The goal is to move conversations past crisis management and budgeting, and on to the plane of securing managing committee buy-in for IT's work.

The CIO piece discusses this straightforwardly and with great competence. 

The McKinsey piece, characteristically, adds a back-flip and a spin, but one of tremendous value:  It points out that a chronic "failure mode" of IT spending is the perpetual motion spent on trying to scotch-tape and baling-wire together an endless array of disparate systems (client information, conflicts, financial reporting, time-keeping, practice group metrics, e.g.) and that a newer and more enlightened approach is to substitute small stand-alone software "modules" (think LEGO blocks) for today's "spaghetti."  These discrete, stable modules can then be assembled into full-dress systems.  An example clarifies the concept:  How many ways does your firm have for users to log in and authenticate themselves?  If the answer is > 1, you can start there.

"You ain't seen nothing yet?"  That's our instinctive reaction to the news over the weekend that Boston's Ropes & Gray may be about to acquire the venerable New York IP shop, Fish & Neave.  Fish & Neave would be only the most recent of a string of IP-specialist shops (Pennie & Edmonds, Lyon & Lyon, Skjerven-Morrill) to fold.   I would resist the temptation to generalize about the viability of IP firms, however:  Fish & Neave's difficulties—shedding partners, rumored office closings, etc.—are its alone, albeit compounded by a self-inflicted bastard cash/accrual accounting system that recorded expenses when incurred but only recognized income when received.  Fish & Neave was on the verge of facing a run-on-the-bank syndrome of cascading partner defections, so this merger looks less strategic than opportunistic.

This rumored deal pales, of course, next to the Baker & McKenzie/Clifford-Chance size whopper that would be created if Piper-Rudnick mergers with Gray-Cary and if Piper's simultaneous merger talks with London-based DLA achieve fruition.  The rationale for this?

Scratching our heads for the time being, we'll take Piper's statement at face value, that they want to get bigger on the West Coast and internationally.  Does this sound to you like, "We want to get bigger because we want to get bigger?"  Yeah, me too.  At least in corporate-land (think the notorious HP/Compaq deal, or Bank of America/Fleet, or JP Morgan/Chase), CEO's say it's all about synergies and cost-savings.  And sometimes, as in the Wilmer-Cutler/Hale & Dorr deal, law firm managing partners and executive directors make similar noises with at least a passing acquaintance with plausibility.  But what could be driving Piper's remarkable two-front-war ambitions?

• Clients clamoring for it?  None that have been mentioned.
• Profits-per-partner needing a boost?  Not admitted, not claimed.
• Cultural similarities causing them to fall in love?  Only if you believe the melting pot is at full rolling boil.

So I'll tell you my pet theory:  Merging is popular because it's popular.  According to Hildebrandt, there were 30 notable law firm mergers in all of 2003, and so far in 2004 36 have been announced. 

"The train is leaving the station," however, begs the question whether it's headed for a destination you've selected with more than a moment's thought.

This pithy article is about leadership in the context of General Counsels, but leadership is leadership and the same observations would apply to practice group managers, Executive Directors, and for that matter CFO's and CIO's.  Why then do I fear its insights go against the grain of many lawyers' professional training?  Because it urges you to:

• make decisions and take stands;
• accept responsibility for bad news but share credit for good news; and
• don't isolate yourself on the executive floor.

In other words, risk-averse doesn't cut it.  "Thinking like a lawyer" has its place (particularly on finals in law school and bar exams), but the leader of an enterprise has to, instead, "think different."

Starting this past summer, Associate Professor of Law William Henderson, of the Indiana University School of Law—Bloomington and I have been working behind the scenes on the "Law Firm Research Project."  Prof. Henderson teaches a course called "The Law Firm as a Business Organization," whose title alone gives away that he and I share no small array of common professional interests. (I'll be a guest lecturer for the course in November.)

What the project entails, why we started it, and what we hope that both you and we can get out of it, I can now share with you.

Most simply stated, the project is an endeavor to create a wide-ranging (I hesitate to say "thorough," much less "exhaustive") database capturing key characteristics of the AmLaw 200 firms.  Moreover, we are using every effort to capture the same data as of 2004 and back in 1999—in case any time-longitudinal trends emerge.

What kind of data?  Lots of it, to begin with:  The current version lives in an Excel spreadsheet that runs from cell A1 to cell BX224 (on the primary tab alone), and includes items ranging from the breathtakingly obvious to the more obscure:

• total firm revenue, 1999 and 2004;
• profits per partner (same);
• number of non-equity and equity partners and total lawyers;
• associate satisfaction, diversity, and pro bono measures (ranked 1—200);
• etc.

In turn, we've subdivided the firms by market league, as follows:

• International (3 firms)
• National (25 firms)
• New York City (34)
• "Major" markets (54:  essentially firms with between 1,000 and 3,000 lawyers, headquartered in Chicago, DC, LA, or SF)
• "Middle" markets (50:  with fewer than 1,000 lawyers, headquartered in Atlanta, Boston, Dallas, Houston, Philadelphia, Pittsburgh, Richmond, and Seattle)
• "Regional" markets (35:  all other smaller AmLaw 200 firms, headquartered in cities like Cincinnati, Cleveland, and Tampa).

So what?  Well, one obvious thing to do when confronted with data is to seek out correlations.  Here's one that tells a story about geographical location vs. diversity (the higher your score, the more diverse is your firm: mean scores for each segment):

• International:  158
• New York City:  138
• National:  118
• Major market:  117
• Middle market:  66
• Regional:  45

You would have surmised that based on instinct?  Good for you:  But now we've proven it.

This is the first of what will be many, many postings about the empirical gems lurking in the data.

But before I go, a word to any managing partners toying with a switch from single-tier all-equity partners to two-tier with non-equity as well:  Don't do it!

At the very least, invite me in for a long chat first.

The UK-based "Managing Partners Forum" (MPF), chaired by the managing partner of DLA, describes itself as the association for leaders and management teams in professional service firms.  In other words, the group for Executive Directors, CEO's/COO's, and all their reports including finance, marketing, IT, facilities, and HR professionals. 

In a clarion call overdue by, say, a decade, they have identified these people as the "unsung heroes" of their firms and, in what is so far as I know a worldwide first, has produced the first statistical tables sizing the phenomenon of non-practicing managers finding, among other things, that the UK's 100 largest firms comprise 37,022 lawyers serving clients and 32,564 practice management professionals (1.0 lawyer to 0.88).  And my how you've grown:  15 years ago there were only five non-lawyers in marketing functions in the top 100 UK firms; today there are over 1,300.

Why do all these people, per the MPF [and per yours truly], deserve recognition?

• Outdated language disparaging "non-fee-earners," and the caste-schism thinking it exposes, undermines the enormous contribution practice management professionals bring to a firm.
• Complex businesses employing thousands of people globally can no longer be run by "enthusiastic amateurs" (read:  lawyers in their non-chargeable moments).  Hiring experienced finance, marketing, IT, and HR professionals "ceased being a luxury and has become a necessity"—for survival low on the food chain and for distinctive and sustainable competitive advantage higher up on the chain.
• Professional management exists to "let lawyers be lawyers:"  To let them focus on what they do best, serving their clients (and earning those $650 hours).

The MPF recommends three concrete steps to begin giving these people the recognition they have earned:  (1)  Publicize their hiring and promotion, just as you publicize hiring and promotion of partners.  (You might even reveal on your website that these people actually exist as do your partners—but let's not get ahead of ourselves.)   (2)  Send a message of respect and high expectations to potential recruits.  (3)  Praise and reward success.

A corporation hiring a CEO or a CFO would not denigrate her contribution upon arrival if she did not man the production line or take customer-service calls.   Why should the Executive Director of a law firm be viewed differently?

A last word (at least for now) on MPF's:  What exactly do they do?  Most are in IT and knowledge management, with an increasing number in marketing.

"Marketing" remaining a fighting word to some, however, the commitment to marketing varies greatly firm by firm.  Slaughter and May, for example, a famously conservative firm, has barely one-third the marketing personnel as does CMS Cameron McKenna (a firm of similar size), and one-fifth that of Allen & Overy.  And, despite a recognition that marketing is here to stay, even on the part of "antediluvian" partners, the firms themselves admit their marketing efforts are unsophisticated. 

Wouldn't it be fascinating to see a similar study in the US?  Would firms cooperate in revealing meaningful data?  What if they were promised the full, detailed results if they did?  I think an enterprising editor—or author of a blog—might well take up this challenge.

IT security, like Mom and apple pie, is something everyone's in favor of.  That's why it's interesting to see what an authoritative publication like CIO magazine finds out when it does a survey of the global state of the art (in this case, involving over 8,000 respondents in 62 countries across six continents).  The survey also yielded six "secrets" (yes, journalists will be journalists) of effective IT security:

• spend more; you do get what you pay for;
• separate information security from IT, and in fact merge information security with physical security;
• conduct penetration tests; better you should discover your vulnerabilities than a Sasser worm code jockey;
• perform a comprehensive risk assessment; this is jargon for the common-sensical approach of fixing the big, dangerous vulnerabilities first and saving the trivial, harmless ones for last;
• define your overall security architecture; this is jargon for making sure that all your "local" solutions can work and play well with others; and lastly
• establish a regular (they suggest quarterly) review.

Counterintuitively, the study also found that companies with a higher degree of confidence in their security measures were in fact more secure:  Of the "best practices" group, nearly 80% of CEO's were "very confident" about security, while in the rest of world only 30% were.  Why do I label this counterintuitive?  Because in many contexts the best defense stems from a healthy paranoia.

But the numbers speak for themselves.  Even though many of the "best practices" firms were targeted more often in 2004 than in 2003, they suffered less down-time and lower financial losses.  So maybe they do have reason to be confident.

Regular readers may have noted, even if subliminally, that I almost never post about an article appearing in The Wall Street Journal, The New York Times, or similar ubiquitous publications.  Why not?  Because I assume you've already seen it.

But rules are made to be broken (I seriously believe that; which is a good thing to know about me), and today's Journal has two related must-read's about negotiating for a better deal on the expenses of running your firm's 401(k) plan.  The first thing you need to know is that you may not know how much your 401(k) is costing.  This is because most fees are simply deducted from the 401(k)'s net asset value, meaning their practical effect is to reduce investment performance, and that number can require an expert to pin down.

Schulte-Roth saved $200,000 by, essentially, just asking.  I don't know about you, but to me that's real money.  And it obviously benefits the plan participants, too.

Getting partner compensation "right" is an issue I have, and will continue to, recur to.  Why?  Essentially because I believe that the two extreme models (the strict lockstep and the strict "eat what you kill") each works in only the rarest of firm environments, and that, simple and straightforward as they may be to implement and understand (with the concomitant benefit that partners know what they're signing on for), they will create a "disequilibrium condition" in the vast run of firms.

Let's pause a moment to review the bidding:

• In favor of lockstep models are that they:  Promote collegiality; encourage sharing of clients and assigning work to the lawyer or practice group most suitable regardless of origin of the "relationship;" and, by eliminating subjectivity, eliminate second-guessing and much of the opportunity for perceived grievances about pay.
• In favor of eat-what-you-kill is that they:  Strikingly encourage entrepreneurship and business development; have an appealing meritocratic aspect; strictly penalize slackers and "free-riders;" and, arguably, spur overall growth of the firm faster than any alternative model.

The demerits of lockstep and of eat-what-you-kill are essentially the inverse of the other's virtues:  For example, if lockstep promotes collegiality, eat-what-you-kill promotes Lone Rangers whose professional focus is (understandably!) on their book of business—often a portable asset.  Lockstep will work in firms with exceptionally strong traditions (think Davis-Polk, with the remarkable, and so far as I know unique, record of never having suffered a partner defection to another firm).  Likewise, eat-what-you-kill probably works in young and hungry plaintiffs' law firms (a market segment you have never heard mentioned here before and, I'll lay odds, will never hear mentioned again).

So then, what is the alternative model for the vast run of firms?

It is, I suggest, a benevolent and enlightened form of somewhat-secret paternalism.  What?!  Am I dissing the new governance god of "transparency?!"  Indeed I am.

The model I'm suggesting has these characteristics:

• the managing committee, or, if that's too unwieldy, a subset thereof, sets each individual partner's compensation annually, and does so on a subjective non-numeric basis ;
• this is based on a full review of the entire spectrum of each partner's contribution to the firm during the previous year (aided by each partner's own "annual report" on herself);
• critical areas of contribution include, of course, billing and business development, but also associate development, pro bono or community activities, participation in practice group or firm management, publications and presentations;
• no partner knows the exact compensation of any other partner (save, of course, those within the managing committee), but the partnership as a whole is presented with a thorough overview and discussion of the range of compensation, the factors included and their relative importance given the past year's business climate and the firm's strategic objectives.

It is a truism that, in the long run, you get the behavior you encourage.  To encourage both business-building (an outward-looking metric) and cross-firm collegiality (an inward-looking virtue), one has no choice but to provide incentives for both. 

Got a better idea? 

OK, let me be blunt:  AmLaw 200 firms are simply too large and too complex enterprises to be managed with any less professionalism and strategic and financial acuity than equivalent-sized corporations.  (These days, "equivalent-sized" means about $200-million in revenue, at the mean.)

So when considering overseas expansion, say, to London, would one not scrutinize:

• the hard-headed business case for going there;
• client-centric or practice-group opportunities;
• the break-even calculation;
• the legal status of the London office (four choices:  UK partnership, UK LLP, US partnership, US LLP, each with different tax and regulatory/disclosure consequences); and, not least;
• cultural considerations.

The article I linked to is worth a read for the these considerations:  Alas, its tone is supercilious towards US firms' establishing London outposts and it claims, with breathtaking ignorance of or obtuseness towards the actual track record, that "US firms setting up in London eventually fail."   Its managerial recommendations, then, I endorse; its weirdly xenophobic attitude, I do not.

Speaking of disaster recovery (the preferred term, with a nuanced difference, is "business continuity"), how would you stress-test  your plans?  Some months ago, I wrote about how the Department of Homeland Security should learn "best practices" about how to detect potentially fraudulent/illegitimate activities through studying the data mining and surveillance techniques of the most sophisticated industry in the world engaged in that very pursuit as an essential core competence—Las Vegas casinos.

Here's a similar analogue:  The firm that suffered the greatest per capita losses on 9/11 was Cantor-Fitzgerald, tragically (in retrospect) housed primarily on the 100th and 101st floors of the North Tower.  Now, nearly three years to the day later, you might imagine they have gotten religion about data recovery and business continuity.

Indeed they have:  They practice "pop quizzes" of their recovery procedures, including such practices as:

• never ever "schedule" a drill; when it happens for real, it will be a surprise
• pick your targets carefully:  to wit, whomever you think is least prepared
• wait until nights or weekends:  the formal work-week makes up less than 25% of the hours in seven days
• assume the worst, namely that systems have to be rebuilt from scratch.

Now, does anyone else have such a demanding protocol?  Hardly anyone.  No schedule, full re-starts, and a never-ending sequence of pop quizzes.  Another benefit:  By definition, your business continuity plans will always be current and you won't find yourself, at the worst possible moment, fighting the last war.

No matter how diligent and scrupulous your "disaster recovery" plans may be from the perspective of IT business-continuity and "hot" off-site locations, have you ever considered another type of disaster and the recovery that is required?  That is, a disaster not to a major downtown, but to your firm's reputation?  As Arthur Andersen taught us—lest there was doubt before—the reputation of a sophisticated professional service firm can be destroyed overnight, with fatal consequences.

Surely, you protest, nothing of like magnitude could befall a firm that trades on its reputation every day, and knows it.  Beware, however, that what we illustrious cognoscenti of the bar view as sophisticated or aggressive advocacy can be seen in an utterly different light by the public—including those in a position to apply pressure to your clients.  Perhaps the most shocking aspect of the depressing, despicable, and dishonorable Abu Ghraib prisoner-abuse scandal, after all, was not that some soldiers went haywire, but that Justice Department lawyers argued torture was legal. 

Should you, then, have a contingency plan in place should the equivalent of Tylenol or Bhopal hit your firm?  Yes:  But make it more of a contingency "structure."  That is, know in advance:

• who speaks for the firm;
• ensure that it's the right combination of astute and media-savvy lawyers, and communications experts;
• who can deliver a pithy and, above all, believable message ("we did nothing wrong" rang a bit hollow for Andersen as clients such as Delta Airlines were deserting);
• like a political candidate, stay "on message"—more strongly, take any challenge as an invitation to reiterate the message.

Sound anti-intellectual?  Sound manipulative?  Sound superficial and transparent?  Welcome to 21st-Century media:  They're not going to play by decorous rules. 

Here's more on the topic.  The bottom line is that the hardest part is that lawyers in a personal business crisis will instinctively clam up when it feels as though there's nothing good to say. But you must play against type: A charge unrebutted is a charge deemed admitted.

The British publication The Lawyer has published the UK equivalent of the AmLaw 100 called, inventively, the UK 100.

While many of the firms will be unfamiliar to a US audience, there are several interesting lessons to be drawn, particularly since The Lawyer has been doing this for five years now and they venture some five-year "trend" comparisons:

• Overseas expansion is anything but a guarantee of increased profitability:  In fact, of the four "Magic Circle" firms with the most aggressive overseas-growth plans, only one—Freshfields—has managed to pull off its investment with a profit-neutral impact.  (It didn't hurt that Freshfields' profit margin is in Microsoft-land at 45%.)  If this is sowing the seeds of future accelerating profitability (as the strategy's defenders claim), we are still awaiting proof.
• At the mid-range level (meaning, in the case of UK firms, annual revenues from, say, US$40--$140-million), specialization can pay off.  Even if that means,  harrumph, litigation.
• Finally, mergers seem a viable route to higher profits/partner, although the devil is in the execution.

Here's the full table, with one column I added converting the revenue numbers from £(000) to US$(000).

As a completely unexpected, and delightful, bonus, The Lawyer provides an additional article delving into the accounting practices and even financial-collection metrics of a sampling of firms.  [To the help with the jargon, work-in-progress, a/k/a WIP, is the value of completed but unbilled work, and "lockup" is the median period from delivering a bill to receiving payment.]

The main article ends on a speculative note, wondering whether US/UK mergers are slated to return.  If so, you'll hear about it here.

To me, Labor Day Weekend is the symbolic New Year:  The start of the academic year, the return of everybody from the beach and the Hamptons (a deeply uninteresting scene to me, FYI), the new fashion/TV/car/serious-movie/serious-book season, and the time when everyone in the business world gets back in gear.  Time for your opera or theatre subscription to start, time to bring out the Shetland sweaters, time to open the windows at night instead of closing them to the hermetic airconditioning, time to bring back blazers, blue jeans, and to look forward to F. Scott Fitzgerald's timeless observation of "football weather," time, finally, to watch the dogs frisk in the swirling leaves.

Time, that is, to renew.

Happy New Year, dear reader.

One of the themes I recur to here is the indispensable role of leadership, and the ineffability of what makes a great leader.  Occasionally a leader will simply "emerge" as the breathtakingly obvious choice, a sort of leader by acclamation (although this is often so only in hindsight:  Lincoln, for example, thought he would lose the election of 1864), but in more ordinary times with more evenly matched contenders, there is no universally recognized standout.

One of the more important questions thus becomes, "How does a firm select a leader?  What is the actual process?"  For the Fortune 1000, CEO succession planning can be raised to a high art—or not—with the involvement of consultants, recruiters, etc.  Assuming that such a self-conscious and open process is not in most law firms' futures any time soon, is the traditional and seemingly straightforward election of a managing partner the optimum procedure?

Not at all, argues this consultant.  We know from conventional elections that hard truths are rarely the road to office, but a managing partner may need to make hard choices.  One who "runs" on a platform of more or less drastic change may be absolutely right, but he reminds me of Adlai Stevenson's famous quip when a supporter told him "you have the support of every intelligent American."  Stevenson:  "Fine, but the problem is, I need to win."  Being smart about the firm's situation does not automatically translate to electability.

What, then, is a superior alternative?  Imagine a consultative process where the firm's thought leaders are probed about what the firm needs done and who among their ranks might best be able to do it.  It is not difficult to imagine that such a procedure, undertaken of course with the most scrupulous integrity and discretion, could produce one, or at most a handful, of strong candidates.  Asking each of those candidates more directly, then, about their vision for the firm might narrow the field further.

Or, you could challenge them (as apparently happened with our consultant) and see what mettle they're made of.

The moral is that managing partners should not be afraid to lead:  Most partners want to practice law and serve their clients, and what they mostly need to know about the firm is that it has a vision of where it's going and is determined to get there.  They need, that is, a leader.

I wasn't going to post at all about The American Lawyer's second annual 20-firm long "A List," but I've had a change of heart, if only because it does create a bit of a stir.

My resistance to giving it even a smidgin more publicity stems directly from my reaction—dyspeptic, I'll admit—to the selection criteria, which are at once utterly subjective and snarkily self-congratulatory:  "We take seriously the work and stated values of our audience...we sought a list of core professional values-values that lawyers proclaim as their own."  Spare me.  For the record, the criteria are:

• revenue per lawyer, a relatively hard-to-fudge metric;
• "pro bono," a complete black box whose methodology is not explained;
• associate satisfaction, based on a survey given to 3rd and 4th-years, also a complete black box; and
• "diversity," the third black box.

Revenue and pro bono are given double weighting, the firms are awarded 1 to 200 points on each metric (from last to first), and the four are summed.  Firms that do not "participate" in the pro bono, associate, or diversity bake-offs receives zero's for that category (a score of 100 by fiat would seem to be more fair, but I told you I don't like their premises to begin with).

So what does this prove?  To me, merely that the opportunities for gaming the tournament are especially rich.  But to our good editors, it's definitive:  They have measured "firms as firms" and identified "the true leaders," "the profession's elite."  And for the losers, there's always next year:  "we mean this to be a challenge."  Caveat lector.

For those of us who've spent some time in MBA school, the investment-evaluation metrics called "IRR" (Internal Rate of Return) and "NPV" (Net Present Value) are extremely familiar.  Your HP 12C calculates them faithfully.

Leave it to McKinsey to lay out in pellucid terms all the myriad failings of IRR vs. NPV.  The bottom line:  Avoid using IRR entirely.

What are its fallacies?  Primarily, it implicitly assumes that interim cash flows from the investment (if any) can and will be reinvested at the pre-defined IRR rate, whereas NPV only assumes that interim cash flows will be reinvested at a rate needed to recover the firm's cost of capital.  Arcane this may sound, but IRR ends up making investment projects look attractive on the false premise that there is an endless supply of equally attractive interim projects.  How serious can this flaw be?

According to McKinsey, they recently reviewed 23 major capital projects approved over five years at a large industrial company with an average IRR of 77%.  With the return on capital adjusted to the company's average rate, the average return fell to 16%.  More important for financial decision-makers, the most-highly rated project by IRR fell to 10th place on the revised analysis.

Law firms, consciously or otherwise, are "investing" all the time:

• in real estate commitments;
• in associate training programs;
• in lateral acquisitions;
• in IT initiatives;
• in business development.

These investment decisions deserve serious professional scrutiny; it is, need we remind you, the partners' money.  If the analysis is based on IRR, come back to this post and take another look at what McKinsey has to say.