October 2004 Archives

My Princeton classmate, outstanding friend, strategic thinker par excellence, and all-around consigliere Malcolm Ryder, now with Pilot Software in Mountain View, schemed without my knowledge to get the following into the Princeton Alumni Weekly's class notes:

MALCOLM RYDER wrote to let us know that BRUCE MacEWEN, formerly CEO of legal marketing automation startup Pro/Se, has launched the online journal Adam Smith, Esquire investigating the economics of law firms, and has almost immediately caught the attention of the top industry trade magazine, The American Lawyer. See www.AdamSmithEsq.com/blog. Malcolm suggests that if you think you know about the business of law, you need to know Bruce.

Malcolm's reward is in the mail. 

In the meantime, I expect a spike in email and phone calls from lawyerly Tigers worldwide.

The Global 100 for 2004 is out, courtesy of our friends at The American Lawyer.  First, the chart of revenue by rank:

This has what statisticians call "a long tail"—and this is only the top 100 firms, recall; imagine what it would look like for the top 200 or the top 1,000.

The moral is that while it's easy (all things being relative) to be big ($200 million/year seems big to me, anyway), it's much more difficult to be enormous.  Consider:

• Firm #100 is Duane-Morris, with $229-million in 2003 revenue.
• Doubling that revenue number (to $458-million) takes you to firm #34, Winston & Strawn.
• Doubling that revenue (to $916-million) takes you to firm #9, Sidley & Austin.
• And all of the top 8 firms are over $1-billion in revenue.

Other ways of dimensionalizing this skew:

• The total revenue of the top 10 firms ($11,349-million) is essentially equal to the total revenue of the last 30 firms ($11,688-million)
• To move from rank #100 to rank #50 requires a 74% increase in revenue; to move from rank #50 to rank #1 requires a 289% increase in revenue.

In more qualitative terms, UK firms dominate the top ten, taking 4 of the top 10 and 3 of the top 5:  Clifford Chance #1, Freshfields #3, Linklaters #4, Allen & Overy #6.  But they proceed to make only 4 further appearances between 10 and 50:  Lovells #20, Eversheds #33, DLA #35, and Slaughter & May #49.

And, of the top 100 as a whole, 84 are US-based, and only 16 from elsewhere:  One German, one French, one Canadian, three Australian, and 10 UK.

I have no pat hypotheses why the US dominates, although surely our very large domestic economy with its concomitant "big back yard" for firms to grow in is a key factor.  But it cannot be the only factor.   (A somewhat cute explanation for US dominance, at least vis-a-vis UK firms, is that UK partners retire too young.)   Taking a very simplistic approach to demonstrating why something else must be afoot is this argument:  US law firms occupy 5.25 times as many places on the Global 100 as do firms from the countries listed above.  If the US GDP were 5.25 times as large, we might have an explanation.  But it is nowhere near so much larger.  Using the most recent figures available, with comparisons based on PPP (purchasing power parity), GDP totals are:

• US:  $9.612 trillion
• Germany:  $2.062
• France:  $1.427
• UK:  $1.404
• Canada: $856-billion
• Australia:  $493-billion

The sum of the GDP's of (Germany through Australia) is $6.210-trillion, or just about exactly 60% of US GDP.  But of course firms from those countries do not represent anywhere near 60% of the Global 100.  QE(simplistically)D.

What those other factors might be will be the subject of many additional posts, I have every confidence.

If you're not familiar with "secondment," a British-derived military term for temporarily transferring someone from one regiment to another, the time is nigh.  In law-land, the context in which it matters is firms "loaning" partners or associates to clients for interim tours of duty.  Why?  Well, for example:

• a public-company client just spun off a division which all of a sudden finds itself without a legal department;
• an established client finds its legal department abruptly, but temporarily, short-handed (think maternity leave or short-term disability);
• either the client or (less likely, OK) the firm wants to establish a closer relationship.

Financial arrangements vary, and the article discussing this is next to opaque on the topic (for starters, it's unclear whether the client's payments cover the direct costs of the firm's lawyer), but secondments appear to have revived in the 21st Century after being commonplace in the 1960's and '70's (before in-house corporate departments bulked up) and after having essentially died out in the 1980's and '90's.

Two observations:

• Essentially every firm cited in the piece is California-based (UK firms aside, that is); and
• A commonly cited fear is that sending an associate to a client is an invitation to poach the associate.

Observations:  (1)  With this as with so many trends, California initiates, the country follows (I lived in Palo Alto for three years while at law school, so I can claim personal knowledge); and (2) Why on earth would a firm not be delighted if a client "poaches" an associate?  Won't they then be a client for as long as that alum has influence?

Reminder:  I'll be blogger-in-residence covering the Knowledge Counsel Forum here in New York this Thursday and Friday, so don't expect any posts during the day—but expect one lengthy one at the end of each day.

I look forward to seeing old friends and making new ones.

An interlude, and a paean to Movable Type, on which this blog is supported.  Last night, with no small amount of trepidation, I upgraded the Movable Type platform I'm running from 3.0 to 3.12—sounds like a small thing, right?  That would be, in the famous phrase, "easy for you to say." 

Technically, the upgrade was only moderately challenging—a question of FTP'ing up the right new files to the right new directories (otherwise known as installing some Perl modules), and running some cgi scripts.  Emotionally, as far as I was concerned, it was putting at risk the entire history of "Adam Smith, Esq." if I screwed it up.

But evidently I didn't, and Movable Type performed yet again as advertised.  The upgrade went seamlessly and it reported, laconically, when done:  "All went well."  Indeed.

If anyone in the audience is considering starting a blog, or has a blog on any platform other than Movable Type, switch to MT.  I'm Bruce MacEwen and I endorse this message.

Just in over the email transom is the following prognostication about the general health of law firms courtesy of Hildebrandt International:

In our annual report for 2004, we forecasted a strong year for the legal profession. As we enter the fourth quarter, we reaffirm that projection as a sampling of our clients indicates that many firms were well ahead of their budgets at the end of the third quarter.

In that sampling of clients, however, it is also clear that the first quarter upturn in corporate transactions did not continue past early summer. There was a clear slowdown in demand for M&A transactions and in IPO volume and the market remains choppy.

There is no indication that there will be a change in the decline of corporate transactions for the remainder of the year. But because of the strong performance, especially in litigation and financial services work, this downturn should not have too much of an effect on this year's overall performance.

Next year might, on the other hand, be a different story especially considering an increase in demand by clients for discounts and controls on fees. It is beginning to appear to us that 2004 may be a "spike" year requiring careful management of partner expectations for 2005.

Lastly, we have seen sporadic associate salary increases and rumors persist of a starting salary increase in New York City.  With escalating demands for discounts and client pressure on legal fees we wonder about the wisdom of more salary escalation.  On the other hand, associate attrition rates have risen sharply this year sparking concern of associates looking for alternative careers. 

We will have more on this in our 2005 forecasts.

Brad Hildebrandt

Astute readers will have observed that I refrain from "micro-" forecasts such as this.  While I'm altogether happy to opine on long-term market trends and pressures, I believe that in the short term the impact of exogenous events will almost always trump even reasoned and informed predictions such as Brad's. 

I report it, therefore, for two reasons:  To the extent it summarizes the landscape of the year to date, it is plainly informative.  And to the extent it foresees a material increase in associate salaries, I can only view with alarm:  Am I the only one to have figured out that it is only now, five painful years later, that we have absorbed the 1999 "Gunderson Spike" of associate salaries?

Why am I a hawk against associate salary spikes, having been an associate myself?  I believe them pernicious because of their unintended consequences:

• They raise the pressure for ever-higher billable hours to maintain profit margins.
• They alienate clients, particularly those whose own salaries are barely or not commensurate, and who do not perceive adequate value received from first through about third-year's.
• Perhaps most damningly for a firm's future (can you say, "eating our seed corn?"), they make it economically onerous to rotate associates through departments, to give them serious training or mentoring, and to take professional development seriously.

Were I King, mid-level and senior associates, the most economically productive to the firm, would receive the outsize salary boosts evidently being contemplated, while juniors would receive something along the lines of inflation-adjusted "plus." 

Finally, let's not forget the power of targeted bonuses to reward exceptional performance—which have, as well, the virtue of being variable not fixed costs.

So, if firms are about to inflict on themselves another across-the-board associate-salary wound, we can only ask, as they do on Saturday Night Live, "What were you thinking?"

I haven't incorporated supply/demand curves into the blog before simply because they didn't seem highly germane to any particular past posting. But this time they did.

I realize I perhaps should have done so with a caveat, so belatedly here it is: My goal in introducing supply/demand curves was because of their explanatory power; I was attempting to elucidate with concision concepts that otherwise would require paragraphs and paragraphs of narrative. But I also realize they can be off-putting to the uninitiated. (I will promise never to introduce any equations!)

So, for the record: If at any time any economic, financial, statistical, or other business or legal concepts that I discuss seem unclear or arcane, email me! I will be more than happy to try to clarify, simplify, or even (and this is where reader feedback is truly amazing) rethink what I originally said. The "Email Me" link is there for a reason; use it.

Elaborating on the immediately previous post, the curve on the graphic is...[drum-roll, please]—a demand curve, our Econ. 101 friend.  (High $$$ price means little demand ["bet the company"], low price means high demand ["generic"].) 

Every demand curve calls for a supply curve.  Here's the demand/supply situation as envisioned by our purchasing agents:

In other words, you either meet their RFP-specified cost parameter or you don't.  The RFP embodies zero flexibility or judgment as to the value of the services to be rendered, and essentially eliminates all high-value work from consideration.

Now let's envision another supply curve, created by imagining how a law firm might evolve to survive and prosper in this cruel new world:

What exactly does this represent?  The (imaginary) firm of the future that has the technology, the professional mindset, the financial discipline, and the competitive drive to be able to deliver appropriately targeted advice and counsel across the spectrum of its clients' demands for same.

At the top left, we surely still have the Wachtel's and Cravath's of the world.  At the bottom right and across the curve, we could have the emerging global behemoths (Clifford Chance, assuming they make it; Jones-Day; Latham & Watkins; Piper-Rudnick [see Clifford Chance]; Mayer-Brown; Sidley) tailoring their services to each market micro-sector, fluidly adapting the way they deliver services to the client's willingness to pay, and to the complexity or lack thereof of the issue posed.

Will this happen?  When it comes to predicting innovation on the part of law firm management, we are skeptics.  When it comes to identifying an unoccupied, and potentially extremely profitable, market segment, we feel confident saying it will come to pass.

If "three anecdotes constitute a trend," as the possibly apocryphal credo of journalists has it, then I am here to announce a trend:  Corporations are beginning to apply professional purchase-manager techniques and metrics to selecting and overseeing outside counsel relationships. 

In this world, you can forget long-standing relationships, forget alumni networks, and even forget deep experience with and intimate knowledge of a client's business:  What matters is cost and cost alone.  The shock this can inflict on senior partners is a painful thing to watch, but it is evidently real, according to this fly-on-the-wall account from Legal Week.  Think you can sidestep the "RFP" (request for proposal) process through outflanking the purchase manager and going directly to the pertinent GC?  In the more rigid RFP procedures, contacting anyone outside the bounds of the RFP's written strictures is grounds for immediate disqualification.  In a particularly aggressive RFP, the corporation had already filled in (in an "example" response) hourly billing rates for various levels which drastically undercut a responding firm's customary rates.  Thinking they could win the business by splitting the difference, they took a deep breath and agreed to cut their margins.  They thought wrong:  No deal.

Meanwhile, Philip Morris International has installed a non-lawyer in a new position ("director of legal services") designed expressly to control both its internal and external legal expenses.  His brief?  To analyze procurement, planning, training, and technology support for the 100-lawyer in-house team, as well as to critique proposals and engagements by outside counsel including Arnold & Porter, Clifford-Chance, Covington & Burling, and Winston & Strawn.

Finally, some firms, including MoFo, Pillsbury, and Gray-Cary, are hiring consultants to have conversations with their clients that the firms evidently cannot, will not, or are too abashed to have themselves:  This starts by asking what is the top-most concern for the client, and "increasingly, that concern comes down to one thing—controlling costs."

By way of evidentiary "piling on" in support of the emphasis clients place on cost control is a separate Altman-Weil survey conducted of chief legal officers last year where "new ways to control costs" was cited as the single most important innovation outside counsel could implement.  And, the news gets worse:  Only 22% of CLO's could cite any innnovation by outside counsel.   What explains what might be called this radical conservatism on the part of firms?  As my friend Dan DiLucchio of Altman-Weil puts it:  "Firms feel pressure but they don't feel pain," and it will take pain to cause change.

Now, is this a situation where railing at "the dismal science" seems particularly apt?   In a static, zero-sum world, that would indeed be justified and understandable; the client's gain is your loss.  But more flexible and dynamic responses are also available, which start from the breathtakingly obvious realization that not all legal questions require the same sophistication to answer.  Consider:

We hope you can already compete effectively in the top left sector (the subject of an entirely different post if not).  The message our new breed of legal-service purchase managers are delivering is that to compete in the bottom right sector the name of the game is cost-effectiveness.

So you really do have a choice:

• essentially concede defeat, refuse to cut margins, and lose every RFP bake-off that comes your way;
• drastically cut margins and win the occasional RFP but, absent fundamental changes in your delivery model, hurt profitability; or
• re-imagine how you provide "bottom right" services:  For example, how much can be automated?  How much can (that word again) be outsourced?   How much investment, in other words, are you willing to make to simultaneously (a) respond to what is, economically speaking, a highly justified request by your clients; and (b) reconfigure your delivery method to maintain your margins?

Inflamed election-year rhetoric aside, outsourcing has arrived.  According to Forrester Research, just over 40,000 lawyer jobs will be sourced abroad by 2015 (about 8% of total projected lawyer employment).  Financial services and IT shops recognized the benefits of overseas staff in the 1990's, and with their track record, corporate legal departments and law firms—including the blue chip Milbank-Tweed, as reported by my friend Jim Lantonio—are following in their footsteps with increasing confidence. 

What exactly gets outsourced?  As with all other sectors of the economy, first the most-rote, least-value-added work, and then matters proceed to move up the food chain.  In Milbank's case, they have started with basic wordprocessing and document production, but other firms have contracted out elementary drafting tasks and legal research.

Why now?  Several reasons:

• as noted, other industries have paved the way, defanging the general objection that it's too radical a way to operate;
• security, both from a technological and a trust standpoint, is now up to snuff (often this is aided by mirroring sites located domestically);
• increasing quality of the overseas services means they can compete head-to-head with US-based equivalents (indeed, Jim Lantonio, the CIO of Milbank, reports that an anonymous "satisfaction-reporting" system gave overseas services higher marks than US-based).

Pockets of resistance of course remain:  And the adoption rate is farther along among F500 legal departments than AmLaw 100 firms.  But so long as clients' experience with the Milbank's of the world is superior (based on cost, 24/7 availability, or both), the pressure to adopt similar strategies will grow.

Despite the inarguable logic behind this trend, does that "8% of all lawyers" figure strike you as a prediction more brutal than enlightened, more threatening than inspiring?  Then consider this:  Do you think you are in the top 92% of all lawyers? 

Put differently, do you aspire to spending your career doing work that by hypothesis: (a) never involves client contact; (b) never really involves interaction with colleagues; and (c) is suitable for the least-skilled 8% of all lawyers?  I wonder how John Edwards would answer.

I am happy to report that I will have an opportunity to write for the "Management" column that appears monthly in The American Lawyer.  The column's target audience is managing partners/managing committees, executive directors, practice group leaders, and to some extent all "C"-level executives. 

Thus the question I pose to you all:  What keeps you awake at night?  What topics should I make an effort to address?  For example (and please tell me I'm off-base, if so):

1. Partner personnel issues:  Laterals, underperformers, special problems?
2. Associate personnel issues:  Recruiting, training, professional development?
3. Conflicts?
4. Short-term profitability issues:  Collections, receivables, alternative billing (project or value-based)?
5. Long-term profitability issues, a/k/a strategy:  Open/close offices, grow/shrink practice groups, etc.?
6. Business development issues:  Beauty contests, cultivating client-development skills in junior partners, etc.?

Feedback is great!  (A technical note, however:  Since upgrading my Movable Type platform recently, the "comments" feature has been buggy; although I'm working on it, the good old low-tech email route always works.  See link top right, cunningly titled "Email Me.")

Thanks in advance for your thoughts and counsel.

In response to reader inquiries, here is the "other" course that addresses law firms as businesses:  Taught at Michigan Law School by adjunct professor Karl Lutz, who was a senior partner at Kirkland & Ellis in Chicago and served on the firm's senior management committee for a number of years.

Introducing William Henderson, Associate Professor of Law at the University of Indiana Law School/Bloomington.  Bill will be an occasional guest blogger on "Adam Smith, Esq.," as he and I are collaborating on the "Law Firm Research Project" investigating and analyzing the characteristics of large, sophisticated (primarily AmLaw 200) firms.

Bill also teaches the course "Law Firm as a Business Organization," one of only two courses in the country that address the subject.  For reasons obvious to even the most casual reader of "Adam Smith, Esq.," Bill and I share a great deal of professional interests, and he has generously invited me to guest-lecture in his course in early November.

That said, Bill's interest in the economics of the law firm landscape are slightly broader than my own:  Whereas I focus exclusively on AmLaw 200-league firms, Bill ranges farther afield to ask provocative questions about the plaintiff's bar and solo practitioners.  Without further ado, Bill's first guest post follows.

"Business intelligence" software?   Who could argue with that?  Actually, it would help to be able to define it first, so particularly if this is a new jargon-bite to you, the always-insightful and articulate Monica Bay is a must-read. 

It's easier to describe what BI software seeks to achieve than it is to tie it up with a pretty definitional ribbon:  Properly implemented (a huge caveat), BI software can bring together data from every important system in the firm (from time and billing to matter management to your knowledge management and HR systems) to enable the CFO and the managing committee to see the profitability of actual or proposed:

• matters
• client relationships
• practice groups
• offices
• associates, and
• partners.

Moreover, BI can tell you how going about things differently might work—for example, if a client has requested alternative billing, you can create a scenario that both meets that request and maintains your profit margins.   If you're already saying this is more than you want to know (in particular, that last nasty bullet point above), you have just realized the primary cultural impediment to installing BI.

[A note on technical impediments, which are, by and large, beyond the scope of this blog and best left in the capable hands of others such as Dennis Kennedy or Ron Friedmann:  Because a BI installation, a fortiori, requires different systems and databases to connect and talk with each other, it is not for the faint of heart, and indeed one AmLaw 100 CIO is quoted as saying flatly that it's a "wonderful idea that doesn't work in the legal world."  You have been warned.]

Technical and cultural impediments to one side, the economist in me will venture a prediction:  As more firms adopt and really use BI analytics, they will gain a competitive advantage over those who resist.  Small example:  BI enabled one firm to assess and approve or deny client credit-limit increases in a matter of minutes rather than days or weeks. 

In other words, BI is not just for the benefit of the firm; it's for the benefit of the clients.  We've observed before that firms change when clients demand it.  Clients who've come to appreciate a BI-enabled firm are unlikely to settle for less.  In other words, the BI handwriting is on the wall.  "First-mover advantage" may yet be obtained, but the window is closing.

Here's a thought experiment:  What if law firms could become publicly traded companies?

In the UK, it's not going to be a thought experiment much longer.  Under a proposal approved by The Law Society (more or less their ABA), non-lawyers will soon be able to invest in, and own, law firms.   Suppress the impulse to repulse this alien notion at our shoreline, and let's play out for a moment what it might mean.

In the UK, there are two (articulated) fears.  I am not in a position to say how many unarticulated fears there are.

The worriers say:  First, that it will lead to "Tesco law" (here:  "Wal-Mart law"); and second, that external investors will interfere with the practice of law either directly by closely supervising attorneys, or indirectly through "inappropriate cross-selling of legal services."

"Wal-Mart law" first.  Elaborated, the fear is that through a sort of Gresham's Law, deep-pocketed investors will be able to build massively efficient and productive commodity-service delivery providers, driving the quaint High Street firms out of business.  Ain't gonna happen.  Wal-Mart coexists with Cartier, and Bank of America coexists with Goldman Sachs Private Client Group.  Tesco may indeed start doing wills, but Freshfields will continue to do cross-border M&A.

Second, grabby, intrusive, incompetent, and ham-handed investors (mis-)supervising lawyers?  What on earth would be their incentive to do so?  Actually, there are two scenarios here:  We have the possibility of individual, "atomized" shareholders who each hold an infinitesimally small position, and who are clearly in no position to influence anything or anybody.  No problem here.  Alternatively, we have significant, active investors (a la Warren Buffett, or Kohlberg Kravis), who see an underperforming firm and acquire a sufficient stake to gain genuine leverage and turn things around for the better.  Now, they may fail at their quest, but why should they not be permitted to make the attempt?  They're big sophisticated boys playing with their own money (or that of equally sophisticated investors).

"Inappropriate cross-selling?"  Frankly I'm hard-pressed to decode what this slur means.  "Cross-selling" is at least as old as the General Store, and the adjective "inappropriate" is devoid of intrinsic meaning—something may be illegal, like a kickback, or unethical, like a material undisclosed relationship, but we know how to deal with those problems already.  We indict people for paying kickbacks and we sue people for fraudulent misrepresentation.

So we are left with the pending reality of public law firms.  How might this play out?  By analogy to the financial service industry, I think it could play out by producing a landscape including some very large and sophisticated multi-service providers (Skadden the Citibank of the legal world?), some niche and sophisticated boutiques (Wachtel the JP Morgan Private Bank), and the overwhelming majority of firms remaining as private partnerships with nothing to fear from this brave new world.  I for one think it could be the Cambrian Explosion in the legal industry.  Many models may be tried and fail, but the survivors will be far more diverse, exotic, and competitive.  Bring it on.

"Marketing" a law firm, to many partners (and some burned marketing directors, I can only imagine), remains in too many circles a dirty word.  Why is this, and what, if anything, can be done about it?

As someone married to a senior marketing and advertising executive, this parlous state of affairs troubles me.  Yet, undeniably, it is current reality.  Just check out this commentary on the situation in the UK, where the commentator finds the situation deeply distressing.   Example:  "Why should we do a brochure?  We're not a trade union!"   (The commentator is a marketing consultant, so doubtless eager to diagnose many nails, herself being a hammer.)

My reaction to the syndrome of marketing-in-the-doghouse in law firms is, as Cher famously said in "Moonlight," "Snap out of it!"  In other words, treat marketing as an organizational asset and competence as essential as finance, IT, or HR. 

Again I will remind you that a theme of this blog is that law firms should not, as a default condition of analysis, view themselves as intrinsically distinct from similarly sized service businesses.  So, if the question is, "Where does marketing belong [sub rosa:  if at all] in our firm?," the answer is to look at "best practices" in corporate-land.  Therefore, I commend to all managing partners and committees, and beleaguered marketing directors, this article from CMO Magazine about how to demonstrate ROI on marketing investments.  Or, guerrilla-warfare style, how to change the focus from ROI to one marketers can demonstrably win on mutually indisputable territory.

If you're still skeptical of marketing, remember this:

• "marketing" is simply information; if a potential client is unaware of your firm, its capabilities, or its relevance, they are not a potential client after all; and
• if you think marketing is only for the feeble or the otherwise challenged firms, remember the first rule of advertising:  "The worst thing you can do for a bad product is to advertise it."

This article by Patrick McKenna summarizes the "anecdotal research" undertaken by his consulting firm about the profile of managing partners.

Normally, we subscribe to Jack Welch's famous, strict, and certifiablly correct dictum that "anecdotes aren't data," but we're cutting Mr. McKenna a break this time because he at least dimensionalizes how anecdotal his (non-)data is:  The survey went to more than 100 managing partners randomly chosen from firms of from 150 to 600 lawyers in size, and had a response rate of 43%, supplemented by one-on-one interviews with some of those who responded.  This doesn't meet the test of statistically reliable quantitative research, but it's a heap better than your typical focus group, erego worth reporting.

Some of the key findings:

• only 24% are "full-time" as managing partner
• a surprising 15% say they're "50/50" between managing and serving clients, and this is not correlated with size of firm or size of market (in other words, it's equally likely to be a big firm in a big city as otherwise)
• 93% are white males (surprise!  but/and is this the 21st Century yet??)
• only 26% have a "job description"
• a vanishingly small 6% said they were subject to a formal annual review process (are these people really less strategically important to the firm than a typical associate?)
• a coincidentally vanishingly small 6% of firms have or are exploring establishing a formal succession plan (I served as an associate at the late, and in its time great, Shea & Gould, which imploded on the rocks of "no-succession-planning")

So here we have it:  Organizations with annual revenues from $50—$250-million with part-time CEO's lacking a job description, formal training, serious-minded evaluations, and realistic succession plans.  The devastating question this invites is:  What would you advise a client with this managerial structure to do?

Can a UK firm crack the New York market without bending its lockstep partner compensation model?

No, at least not if you're Clifford Chance. CC has a global lockstep for its equity partners except some "super-pointers" in New York.  This anomaly dates to the late '90's merger with Rogers and Wells and represented an expedient, if unstable, response to the high profitability (and high pay) of the New York office.  But when the "New York exception" came up for review by the global partnership recently, New York partners being in the numerical minority, its continuation was rejected.   What to do?  Hem and haw and try to change the subject, essentially.  No, forgive me; the actual plan is to "secure a dramatic increase in profitability this year." Gosh! Why didn't I think of that?

Since part of the technique of achieving this "dramatic increase" involves knee-capping the incentives for the New York office, which should be the firm's first or second most profitable world-wide, I predict we have not seen the end of this exercise in fleeing the inevitable.

As a certain Presidential candidate has suddenly become fond of saying, this is a problem from which "you can run, but you cannot hide."

I believe the choice is increasingly stark:  Hew to your lockstep tradition and abandon any serious hopes of cracking the New York market, or—vice versa.

"As with most significant changes in a law firm, change is driven by clients."  So says the estimable Doug Caddell, CIO of Foley & Lardner.  The specific change he has in mind—and which he forecasts with confidence will come about—is partners' adoption of CRM. 

What is the state of CRM in the US?  "In the starting blocks," although the starter's pistol has unquestionably gone off.  The reasons are cultural and not technological, but the forces of change are mounting.  Clients demand teamwork from their management, from their employees, and soon they shall demand it from their law firms:   Teamwork there shall be. 

But let's step back a moment:  We (meaning I and regular readers) all assume lawyers prefer to operate as lone eagles and business people prefer to operate in teams.  Why do we think this?  Where does this come from?

As someone with a JD and 98% of an MBA, I have an idea:  From the experience of law school vs. the experience of business school.  Law school is competitive from (before the) start to (after the) finish.  You compete to get into a "name" law school, to interview with an AmLaw 50 firm, to get an offer, to make partner, to be a big rainmaker, to get on the managing committee, etc.  At business school, while the academic competition is no less real, the experience and the course structure demand teamwork:  Not a single significant project in my experience at business school was an individual event; all put me in teams.

So lawyers will be dragged, miserable and clawing to retain their lone-eagle identity, into teams?  Is there no more humane, not to mention effective and good-for-business, alternative?  Simply taking a page from the business-school experience would go a long way.  

Not that managing partners want or need MBA's:  But what's wrong with a two-week retreat for a "mini-executive-MBA?"  A win for the law firm, a win for the client, and a win for your friendly local business school dean.

Today's Wall Street Journal features an article by the engaging reporter Erin White about the perils and the promise of online background information in the context of hiring.  The headline could be, "Googling Isn't Just for Dates Any More."

Prominent in the article—and a genuinely rewarding story it is—are Bruce MacEwen and "Adam Smith, Esq.," along with my colleague on the Law Firm Research Project, Prof. William Henderson of Indiana Law School.

At my wife's ad agency, clients seeking p.r. were always asked where they ideally would like their story to run, and the standing joke was that regardless of the client, the service, the product, or the subject of the story, the answer was invariably the same: 

"The Wall Street Journal." 

Client relationship management (CRM) systems have achieved ubiquity in F1000 firms, but their usefulness, and even their feasibility, in law firms has been, shall we say, less certain. 

[Jargon time-out:  "CRM" systems are designed to capture, in one central and widely available database, all contact information about a client and their interaction with the firm:  Think of a sort of super-Microsoft Outlook "contact" entry which is updated in real time with information about who has spoken to the client about what, who's working on what, the client's particular areas of interest, what email distribution lists they're on, etc.  If, like everyone else in the country, you've phoned your credit card (800) number and dutifully punched in your sixteen-digit account number after the automated prompts, only to end up speaking with a human being who does not have your account information in front of them, you have been party to a dysfunctional CRM system.]

Now, Legal Week has surveyed adoption of and attitudes toward CRM in leading UK firms, with both predictable and somewhat surprising results.  But before assessing the value of a CRM deployment, what are the obstacles to installing or maintaining it in the first place.  They are, to state the obvious, both technical and cultural:

• Data entered into the system must be "clean;" it is not a matter of aggregating everybody's Contacts list and dumping it on to a server.
• Data must be maintained; if it takes associates (never mind partners, who are truly key to the system's success) more than a few minutes a day to tend to the care and feeding of the system, it will atrophy.
• "Confidentiality" of client data is a critical obstacle in many cases:  "You want me to share what with the entire firm about my key clients?!"  There is a technological response to this (levels of permissions for sensitive data) and a cultural response—once the benefits of a robust system are apparent, reluctance to contribute to the system's power will diminish.

Sharing information—and a CRM system is, at bottom, just a species of knowledge management, so it is all about sharing information—is the ur-obstacle.  Sharing what you know about, say, structuring project finance deals may seem to pose a risk of diluting your expertise by spreading it across the firm, but sharing what you know about your key client may seem to pose a risk to your livelihood.

Surprisingly, the survey found that a stunning 59% of respondents were "not at all concerned" that information about client contacts would be abused.  Yet more telling is that a vanishingly small 3% of clients complained of an unwanted contact from a firm.

This last statistic is, to my mind, the ball-game.  97% of clients, in other words, welcomed (or did not have reason to object to) every "touch-point" from their law firm.  What other industry could match that number?

We know from survey after survey after survey that clients' biggest single gripe about their law firms is that the firms do not truly understand the client's business.  If CRM gives you a fighting chance of knowing what's top-of-mind for your client, knowing who down the hall (or around the globe) has spoken to them about that lately, and can lay out the opportunity for you to reach out to them, why on earth would your firm not do it?

Unfortunately, I have my own theory:  Far too many lawyers, even now, are allergic to the reality that they have to fundamentally compete on service, client focus, and demonstrating pointed and astute, distinctive, business-centric expertise.  To those of this mindset, a "CRM system" sounds like a pox created by demented MBA's clueless about the noble profession of the law. 

If serving your clients with perspicacity, timeliness, and total-firm awareness is a noble goal (and it is), CRM's time has come.

"The few, the proud, the Marines?"  I would make that, "The few, the proud, the lockstep-compensation firms." 

I've opined before that partnership compensation at many firms is in disequilibrium:  While lockstep has its merits in encouraging collegiality and the firm's long-run best interests over short-term profits, and while it promotes client-sharing, and assigning the best people regardless of "originating" partner, it can also stifle entrepreneurial instincts and invite superstars to look for the exits.  "Eat what you kill," meanwhile, creates the problems that lockstep solves, encouraging client-hoarding and an egregiously short-term outlook.

[I recently heard of one particular horror story, out of Australia:  A firm that had "owned" as a client the leader in a particular industry got twisted up in its knickers when the client's CFO was fired in a high-profile and enormously acrimonious accounting scandal.  One of the firm's star litigation partners decided to represent the CFO in a wrongful-termination case against the big client.  Nine years later, the firm is still trying to win back at least a smidgin of business from the former client.  I'm not saying a lockstep system would guarantee this would never happen—"I cannot prevent him from being a &#*$-head" comes to mind—but surely it would be rare.]

Now Clifford Chance is re-examining its lockstep.  In many ways, Clifford Chance is sui generis, but their efforts to confront the tension between keeping, or making, partners in less-profitable offices, while rewarding the heavy hitters in London and New York, is scarcely unique. 

If I had a magic bullet for this disequilibrium, I would be selling it to you for very handsome fee.  Since I don't, I can only advise highly-circumstantial sensitivity, a long-run perspective, and a not insignificant dose of opacity as to the results of the compensation determination, if not its process.

Stories that provide real-world confirmation of our core beliefs are all but irresistible—even if fundamentally intellectually unchallenging.  Two of my core beliefs about analyzing policies at the intersection of law and economics are:

• a "static" analysis that assumes people and market forces will not react to the new policy loses to a "dynamic" analysis that assumes they will, every time; and
• beware the long arm of the law of  unintended consequences.

So this piece by the admirable Virginia Postrel (a fellow Princetonian, but don't hold that against her) is a must-read.  It discusses the "catastrophic failure" of Texas' school finance reform initiative nicknamed the "Robin Hood" project, which was designed to shift property tax receipts from wealthy districts to poorer ones by "confiscating" all property taxes above a certain "threshold" value level.  For example, when the threshold was initially set at $340,000, 50% of the property tax collected on a $680,000 house (double the threshold value) would be redirected by the state elsewhere and would not be available to fund local services in the $680,000 house's district. 

Now, how long do you think it will be before buyers decide that (relatively) service-deprived $680,000 house isn't such a great deal?  But you have to read the article to the end to learn who the geniuses behind this well-intentioned scheme were.

Is the role of a CIO "strategic?"  According to the CIO of Kirkpatrick & Lockhart, not a chance if "the trains aren't running on time," for starters.  Beyond that, what does it take for a CIO to truly gain credibility as more than a blocker and tackler?

Understand what's important to your CEO (a/k/a managing partner or executive committee).  For example, at Kirkpatrick & Lockhart, CIO Steve Agnoli grabbed on to the fact that the future of a law firm lies in the quality of its professionals, and developed an on-line associate evaluation system—indisputably an IT initiative joined at the hip with something a law firm needs to be superior at to prosper in the long run.

A second "best practice" is to put the firm's imperatives ahead of the IT department's.  So, for example, if a customer relationship management rollout (inward-focused, need we remind you) needs to be postponed in order to deliver a key client extranet, should there be any question which gets priority?

And last, human nature being what it is, promote your own IT agenda by talking about the elements of your IT plan that directly undergird the firm's strategic plans.  It's all about credibility.

To my extreme and heartfelt dismay, I discovered about 24 hours ago that this site wasn't rendering the way I intended it to in Internet Explorer (my browser of choice is Netscape, second choice Mozilla Firefox).   Love Microsoft or loathe them (answer B for yours truly), their market share is commanding, and for this site not to reflect my design architecture correctly on their platform was inexcusable.

Be that as it may, a quick trip to the truly fabulous (extremely knowledgeable, good-humored, responsive) support forums at Movable Type has now parted the clouds and "Adam Smith, Esq." is ready to greet the world as I intended him to do through your browser of choice.  (For the geeks in the crowd, my CSS stylesheet picked a fight with IE.)

And to one and all:  My apologies for this technical demerit.  Next time the site looks weird to you, let me know!  It's like having ketchup on your tie; friends' silence is not doing you a favor.

CIO's of law firms (and CFO's, and CMO's, and C[X]O's) face a job not conceptually distinct from that of their peers at similarly-sized corporations.  That's why this 2004 "State of the CIO" survey is valuable reading.  Sure, law firms as private organizations aren't subject to the rigorous (and depressing) strictures of Sarbanes-Oxley, but aside from that the challenges to a good CIO remain:

• effective communication;
• strategic thinking and planning capabilities; and
• understanding of, and alignment of IT with, business processes and operations.

The last is surely the hardest, especially since in an AmLaw 200 firm the gulf between the background of IT personnel and the drivers of "business processes and operations"—Type A partners—is markedly more difficult to bridge than between the IT department of a typical Fortune 1000 and its executive suite.  Even in the CIO article, reporting on corporations, fewer CIO's this year than last report to the CEO and more to the CFO, a trend they believe will only accelerate.  CIO's and CFO's speak different native languages, and guess which one of the two is not going to become bilingual?

Add to that the relentless pressure to pursue two conflicting goals at once:  Cost-cutting and innovation; and you have a full plate.  [I have long believed that cost-cutting and innovation go hand-in-hand, but maybe that's just me.]

The bright spot in this?  Not a single CEO polled characterized IT as a "cost center."  I wonder if a poll of AmLaw 200 managing partners would score the same result.  Maybe that's not such a bright spot after all.

The American Lawyer's annual associates satisfaction survey is here (full version) and here (summary ranking), and I'll have some deeper analysis coming up.  But for now, my initial reaction as an armchair statistician and amateur student of market research methodology at the feet of my wife, the marketing executive, is that the viewing this ranking as "quantitative" research—statistically reliable, reproducible, verifiable, etc.—may be the wrong view.  Because of the enormous variation year to year (a striking 15 of the top 25 this year weren't in the top 25 last year), I'm inclined to view it more as "qualitative" research—meaning that it's a genuinely valuable exercise in exploring associates' attitudes, gaining insight into what matters for morale and associate development, and similar issues, but not a definitive exercise in ranking.  A focus group, in other words, not a Gallup poll.

That said, I know enough about the good folks at The American Lawyer to applaud their diligence and their ingenuity at undertaking this ambitious and important project.  I'd be curious to hear if any readers have a similar initial take to mine.

Rare is the law firm that goes through the hard, nay soul-searching, work of developing a strategic plan.  The good news is that for the huge majority of firms none is needed:  They're small, local shops; or they pursue the specialties and interests of their founding partners (e.g., they're plaintiffs' shops or real estate specialists or tax wonks); or they're simply fortunate enough to enjoy highly circumstantial barriers to entry (a local family pedigree, political connections, having a reputation for being the "go-to" firm in a micro-market such as that for representing residential co-operative apartment buildings in Manhattan) and the intrinsically rich profit margins that come with that unusual territory.

Then there are the other firms that need such a plan.

This blog, in case you hadn't noticed, focuses on the AmLaw 200—so within that universe, who needs a strategic plan and who doesn't?  My MBA genes are screaming, "Everyone needs a plan!," but they don't always win the debate.  So let's segregate the landscape:

• Super-star firms know who they are; "to thine own self be true" is the full text of their strategic plan.  These are, as a jaded (or realistic) industry consultant once remarked to me, "the only 50 of the AmLaw 100 that matter."  They are, as Skadden's marvelous slogan has it,  the "leader[s] among law firms."
• Others own specific practice specialties:  IPO's, bankruptcy, patents and trademarks, project finance, macha-league antitrust defense.  Membership in this group overlaps with membership in the first group but the groups are not coterminous.
• Which leaves us with a lot of other firms belonging to neither group.

Who are these firms?  By and large, they're AmLaw "second 100" firms.  Realistically, they will never achieve the gold-plated name-brand status of the "bet your company" firms, nor, given human nature and what I'll call transition costs, will they ever morph into an equally economically viable, but opposite, model:  The exceedingly efficient, maximally-automated, high-volume, low-cost specialist.  (I'll have more about this alternative model in a later post; for now, think Wal-Mart, not Cartier—the key take-away being that both are extremely profitable and both compete in the same space called "retail.")

Most vulnerable in this mid-market second-100 space are firms that lack a competitive distinction or "unique selling proposition."  These firms typically offer the usual panoply of corporate, litigation, tax, and real estate services across a region, with little or nothing to differentiate them from their peers in the eyes of clients.  Business is inherited, or comes from the usual labor-intensive connections (joining, speaking, writing, presenting) with no conspicuous marquee attraction.

These are the firms that need a strategic plan.  Some figure that out and do it with, so it seems so far, conviction and grace—as reported about Ropes & Gray of Boston.

Others have no plan and are at the whim of "bad luck."

I suggested in "The Dynamics of Conflicts" that the "second 100" may increasingly be populated by the likes of Boies-Schiller and firms with business models based on utterly different assumptions than required to ape the "50 that matter."  But for more mainstream firms that want to survive and even to thrive, tomorrow's more savvy clients and more competitive landscape mean, at the very least, a commitment to:

• a surpassing level of understanding your clients' businesses, not just providing technical expertise;
• a willingness to engage in billing for value received (whether this helps or hurts you this month);
• being flexible, and anticipating issues for your clients;
• an extraordinary dedication to service (not to be confused with technical expertise);
• innovative and cost-effective technology investments; and, may I say it again;
• a surpassing understanding of your clients' business.

This Hildebrandt/Legal Week piece contains a few of the same thoughts.

Memo to the AmLaw "second 100:"  Engage a strategically astute MBA.  The ranking you save could be your own.