December 2004 Archives

I just finished reading Tombstone:  A Lawyer's Tales from the Takeover Decades (Farrar, Straus & Giroux:  1992) by Lawrence Lederman, former chairman of the corporate practice at Milbank-Tweed (and still a partner there), who started his career as an associate at Cravath in 1967 and joined Wachtell as lawyer #24 six years later, soon to become a partner. 

The book recalls his "present at the creation" moments of being in on, and watching unfold, the astonishing financial-engineering explosion that was the late '70's and early '80's:  Bob Bass, Ivan Boesky, Carl Icahn, KKR, Michael Milken, Boone Pickens, et al.  All the "barbarians" are present and accounted for, but so are the remarkably dedicated, sagacious, and creative lawyers who facilitated the "ordinary" deals, primarily by educating sometimes-naive clients over what the marketplace would inexorably cause to happen once a company was "in play," but who, more importantly, changed the rules in many deals by inventing such devices as the leveraged buyout, the recapitalization, and the poison pill.

Aside from the sheer rollicking pleasure of reading about high jinks by these masters of brinksmanship—and learning just how much of it was truly made up as they went along—Lederman provides a window into two topics near and dear, or so I hope, to the hearts of readers of this blog:  The first is simply a high-level series of examples of how real-world economic calculations are made by some truly gifted strategists; and the second is insight into the high-end practice of law.

A theme I want to develop, and which I've alluded to before, is the impact that "Practice Group Management" can have on a firm's strategy, cohesiveness, and profitability.  What is "practice group management," in a nutshell?  It's creating a dedicated position—which may be filled by a former lawyer or a non-lawyer—as a quasi-chief operating officer of each of the firm's primary practice groups, in a "matrix" reporting relationship both "vertically" to the senior partners who actually run the practice and "horizontally" to the firm's CFO, CIO, CMO, etc., in order to obtain the tactical resources the practice group needs.

Hildebrandt has a new article out about this, focusing on do's and don't's for generating and executing a practice group's business plan.  Why a business plan at all? Without one, how do you know:

• if your strategy is evolving rationally and effectively;
• if the proper resources are—and are not!—being devoted to the practice group; and
• if the group's overall performance is meeting plans and expectations.

How does one develop a business plan, and, equally importantly, where can one go wrong?  First, both the practice group itself and firm management must take the plan seriously.  This means, at the very least, making sure the firm's strategy and that of the practice group are in alignment.  How obvious is that?   Apocryphally or otherwise, they report that "in some firms, practice leaders tell us that they have even submitted the same plan year after year with a different cover page;" can you say, "out to lunch?"  (Actually, can you say, "get me the *&@*# out of this firm!")

Conversely, getting the practice group itself to take the plan seriously requires full engagement from the start.  The practice leader should not draft the plan and circulate it for comment, because the group will tacitly reject it as the foreign body it is.  Rather, the practice group as a whole—OK, make it the partners only if you must—should develop it as a body, ideally at the groups annual retreat (and now's the time to inaugurate that tradition if you haven't already).   Fine, but what, then, is the actual content of the plan?

Essentially, it's "where are we today, where do we want to be in one to three years, and what concrete steps do we need to take to get there?"   In other words:

• what core services do we offer?
• what economic, national, and global trends are affecting the value of those services?
• who are we competing with [be brutally honest on this one]; and
• what makes our group truly distinctive [as above: and the answer is not "the quality of our lawyers," which is merely the price of admission].

If you're starting to feel depressed, and thinking this will all amount to an inordinate waste of time, making already-cynical lawyers more so, you need to decide if you honestly prefer the alternative, which is letting your group drift rudderless into the future, following a "strategy" of spasmodic and opportunistic initiatives occasioned by circumstance and your competitors.  Or, ask yourself this:  What would you advise a client in a hotly competitive industry who was leaving its future in the hands of chance?

You may not be familiar with the name Michael Schrage, but as an early founder of MIT's path-breaking Media Lab, and as a gifted writer no matter the topic, he's someone I read whenever I come across him.   His latest piece is in the elastic and forgiving form of a hypothetical, anonymous, note from a Fortune 1000 CIO to a "trusted colleague" reciting the CIO's recent (perceived) mistreatment at the hands of the firm's CEO.

As you read this, I will ask you to substitute "AmLaw 200" for "Fortune 1000" and "managing partner" for CEO.  The counts of the indictment are as follows:

• As soon as a system or function is buttoned down and running robustly and smoothly, the CEO wonders why it can't be outsourced.
• If the CIO proposes an initiative (CRM in Schrage's example, substitute KM in our world) that actually comes in winningly on time and within budget, the biggest gorilla on the premises (Schrage: Sales, Us: Corporate Practice) gets envious and wants its own, incompatible with the "enterprise" system; to which the CEO responds, "let Sales have its system; just integrate them."
• The CIO realizes that he has been spending too much time trying to do the best job possible rather than trying to do the best possible job as the CEO would envision it, and that the CEO inadequately understands technology, which is partly the CIO's fault for failing to explain it.

Sound familiar?  The scary part is that Schrage leaves us hanging; this is the dilemma, rest in peace.  Businesspeople are at least "supposed" to understand the value of IT, whereas lawyers generally grew up ignorant of or allergic to it, and proud of it.  Too harsh?  Imagine putting these words into the mouth of a senior partner at a big firm, or a CFO of a Fortune 500: "My secretary screens my emails."  Which is more plausible?

And if it's bad in a (median) Fortune 1000, is it better in the AmLaw 200?  I invite those in the trenches to email me with both horror stories and enobling tales of redemption.

Back from four days in California (Laguna) for Christmas, seeing my wife Janet's parents.  No matter how many Christmas's I have spent in California or, earlier in my life, Florida (Sarasota, where my parents retired), I simply cannot get used to waking up the morning of Christmas Day to palm trees and balmy breezes.  But then again, the entire Sunbelt phenomenon escapes me—New York City is about as far south as I could comfortably live, and, to me, the comforting warmth of piling on layers of wool beats the hermetic recycled cool of airconditioning hands-down.  I will confess that my morning runs were lovely, with the sun barely rising over the Santa Ana mountains as I covered the rolling terrain of Orange County over its 8-lane boulevards with their meticulously graded and all-but-unused broad sidewalks.

Highlight of the trip by far, at least to me, was the opportunity for Janet and me to have breakfast Sunday morning with the world-renowned J. Craig Williams of "May It Please the Court," (Craig is one of the "Savvy Blawgers") and his engaging, outspoken, and thoroughly professional significant other, Lisa, who has no uncertain opinions about the need for lawyers to leave the management of their firms to adults (read:  businesspeople such as her).  I am relieved to report that Craig, who "hasn't balanced a checkbook since I was 18," agrees with her.  He must be doing something right, because his law firm, which is less than two years old, already has five lawyers—something their business plan envisioned for the fifth year of operations. 

I have always believed that the virtual blogosphere can create and subsequently help cement personal connections in the off-line world, and this happy meeting only confirms that.  A Christmas gift from cyberspace.

"Adam Smith, Esq." was born early last year, and, as the calendar inevitably rolls over, I want to wish each and every reader a Merry Christmas, and the most propitious of New Year's, reflecting whatever your hearts most desire and your dreams most aspire to. 

Much as I wish I could meet each and every one of you, time and distance conspire against us, so I leave you for Christmas with the hope that you have a true companion by your side, that you enjoy the miraculous blessings of dark black coffee, inky red wine, cheese with a non-negotiable point of view, and bread that fights back.

Signing off, then, from New York to spend a few days in California, I leave you with Rockefeller Center, a core, familiar, always-new, and indispensable node on the urban ecosystem that is New York City:

More from the redoubtable FT about what may transpire from marketplace forces released after (the widely expected) adoption of the Clementi Commission recommendations in the UK.  (If you don't know what the Clementi Commission is, as one of my law professors would have scolded with juicy delight, "you haven't been paying attention," but I choose to view life through a mellower lens, so take a look here.)

We start from the premise that the prospect of injecting public capital into a law firm—or even admitting non-lawyers to the ranks of equity ownership in a private firm—is anathema to a large swath of the profession.  Indeed, as Sir David himself puts it, "Certain lawyers dislike being described as part of an industry. They see a conflict between lawyers as professionals and lawyers as business people." 

Rare is the expressive pith with which this captures much of what this blog aspires to be about.  Are the "profession" and the "business" strange bedfellows? I would answer with more than a resounding, "No;" I would answer that the virtues of each enhance the strengths of the other.

But let's clarify what engages our attention here:  Not that the UK equivalent of the American Automobile Association, or the supermarket chain Tesco, are making noises about starting up their own branded law firms to serve the consumer masses.  Rather, we're interested in the implications for the Magic Circle and blue-chip firms.

Far and away the most important, I believe, will be the pressure—indeed, the inevitability—of allowing and inviting professional managers in firms to become equity participants.  The implication is clear: Participating pari passu in ownership with a firm's senior lawyers "puts you in a different place mentally," as one such aspiring manager nicely puts it.

That running a major law firm today is largely like running any other big company can no longer be denied.  And senior management's expectations about the availability of the full arsenal of compensation tools, including equity, should be no different.  When this happens, it will have profound cascading effects analogous to the opening up of the market for lateral partners in the 1980's—which, it is not too much to say, changed everything.

The first day of winter and 13 degrees for my run in Central Park this morning.  This expresses it wonderfully:

 

 

The returns from the First "Savvy Blawgers Panel" Query are in, and it's time to report on what the aggregated intelligence of this rare and unusual combination of individuals has come up with.  The "Savvy Blawgers Panel" notion, as explained before, is for me to pose a question to a selected group of the more astute, savvy, articulate, thoughtful, and just plain opinionated members of the legal blogosphere, and to post their collected wisdom here on "Adam Smith, Esq."

The members of the Savvy Blawgers Panel are:

The Official "Adam Smith, Esq." Savvy Blawgers Panel
Blog	URL	Host
Adam Smith, Esq.	http://www.adamsmithesq.com/blog	Bruce MacEwen
Bag and Baggage	http://bgbg.blogspot.com/	Denise Howell
Common Scold	http://commonscold.typepad.com/	Monica Bay
Dennis Kennedy	http://www.denniskennedy.com/blog/	Dennis Kennedy
Ernie the Attorney	http://ernieattorney.typepad.com/	Ernie Svenson
Excited Utterances	http://www.excitedutterances.blogspot.com/	Joy London
Inter-Alia	http://inter-alia.net/	Tom Mighell
May It Please The Court	http://www.mayitpleasethecourt.net/journal.asp	J. Craig Williams
Notes from Legal Underground	http://www.legalunderground.com/	Evan Schaeffer
Professor Bainbridge	http://www.professorbainbridge.com/	Prof. Stephen Bainbridge
Real Lawyers :: Have Blogs	http://kevin.lexblog.com	Kevin O'Keefe
Strategic Legal Technology	http://www.prismlegal.com/wordpress/	Ron Friedman
The [Non]Billable Hour	http://thenonbillablehour.typepad.com/	Matt Homann

What are the rules for the panelists?  There are none.

They're not required to respond to every query (and the queries are intended to be infrequent and thought-provoking rather than ongoing and shallow), and the timing, length, and format of their response is entirely up to them.  All I promise to do is compile their responses, perhaps contribute a little color commentary about themes, similarities, differences, outright contradictions, etc., and post them for your (and my) edification.

So without further ado, the first ever Savvy Blawgers Panel query:

"Looking out five to ten years, what will the single most significant change be in terms of how sophisticated law firms (think AmLaw 200) are managed, on the 'business side'?"

Here's my "executive summary" of their responses: First of all, law firms will at last get religion about professional management: "these firms are realizing they must function like businesses if they are going to survive." Second is the omnipresent nature of technology, which "is the gasoline on this fire."

Exercising their right to abide by "no rules," other savvy blawgers commented upon the evolution of small (not AmLaw 200) firms, and upon how other firms currently "under the radar" may adopt new business models to mount attacks on the AmLaw 200 incumbents.

Finally, we had the magic and fabulously unexpected answer:  "Changes in management of big law firms over the next 10 years?  Hmmmmmm.  First, big law firms, simply by virtue of their size, are not generally trend-setters.  I'd have to say zero significant change." [Credit Ernie the Attorney for this wonderful and insightful outlier.]

For the full run-down on what this spectacularly talented group had to say, read on...

Yours eyes don't lie; we have changed the color palette, and sharpened up the top-line banner while we were at it.   Although, I personally am fond of the "believing is seeing" formulation—an ironic trope on the surpassing ability of human beings to see what they want to see.

We're going to stay with this new color palette for awhile (a week?  two weeks?) and see if it generates any strongly positive or negative feedback.  In the meantime, never accuse me of not doing my best to listen to you all, dear readers.  Feedback is, as they say, a gift. 

Reader participation alert!

The question du jour which I'm posing to all of you, dear readers, is:  Should I change the white-text-on-black-background look of the site?

Here's the story:  When I first launched "Adam Smith, Esq.," I was seeking a distinctive "look and feel" to the site, and settled on this color palette because I felt it communicated a strong, bold, confident tone.  From time to time, however, people have commented that it's just plain hard to read—including not incidentally my wife, who knows her fair share of art directors.  Now, understand that I want to do everything in my power to invite greater readership, so if the design is off-putting, it should be changed.

On the other hand, the reason I have not changed it until now is my fear that the existing look and feel is part of the "brand equity" of Adam Smith, Esq., and not something I'd toy with lightly.

So there you have it:  The polls are open (although "comments" are not).  Please shoot me a quick email (as brief as "keep" or "change" is all I need) using the cunningly named "Email Me" link just to your right.

Say "Clementi Commission" on this side of the Atlantic and draw blank stares; say it on the other side and it is safe to say you will launch an immediate fray.

The Commission has proposed, and the government has pledged to support, legislation that will permit non-lawyers to own law firms, and even for law firms to go public.  Before you start bouncing off the walls and ceiling, consider the rationale in a nutshell: “I do not believe that many of the restrictive practices under which lawyers work can still be justified as being in the public interest.”  And who among us, once we've caught our breath, can truly argue with that?  (For the record, some "consumer-protection" style regulation will remain in place.)

But as I've warned you before, this is not a blog about ethics, it's a blog about economics, so what might one foresee on that front?

First off, to state the obvious, the Linklater's, Freshfields', and Lovells' of the world have zero need or desire to go public, and I'm sure a plethora of small- and mid-sized firms below the UK 100 radar feel precisely the same.  As with technological innovation, just because you can do something does not imply you should.

Second, going public is the extreme end of the bell curve, and will probably end up being at least two standard deviations beyond the mean.  But at the mean, I would predict firms will offer, or sell, equity to senior non-legal business managers including those who would here have titles like Executive Director, CFO, CIO, and CMO.  This could be the genuine beginning of the end of the caste system where only fee-earning partners really count.

Third, and of surpassing fascination to me, will be to watch how market forces begin to shape this brave new landscape, applying their disinterested Darwinian pressure over time.  Thus I predict:

• An emerging class of supermarket commodity services firms, providing relatively generic wills, tax and real estate services, matrimonial and garden-variety litigation practices, small business "corporate" work, etc.  Some of these could become reasonably large entities, and consolidation in pursuit of market share and economies of scale will be the governing principle.
• At the other extreme, a small group of highly sophisticated boutiques may offer equity to raise capital in order to reinvest in their premium practices.  If Goldman-Sachs and Christie's can be public, why not Boies-Schiller?
• In the vast middle, increasing focus on developing and publicizing distinctive, credible, and "ownable" marketing statements about why XYZ firm is different, and why you should invest in it.  Where does this notion come from?  From the competitive drive to lower a (public) law firm's cost of capital.  To take a step back, the only compelling reason to go public is to raise capital—otherwise who in their right mind needs to put up with the regulatory and disclosure obligations involved?  But if you're doing it to raise capital, you want to pay as little as possible for those funds:  That means you want as high a P/E as you can obtain, and surely one above the new Law Firm Equity Index median P/E.  How, in turn, do you achieve that?  Well, presumably you're already doing all you can to increase "E[arnings]," so you have to persuade the marketplace that one $ (or one £) of future earnings from your firm is more valuable than it would be from other firms.  In other words, you have to state a distinct value proposition.

Will the Clementi Commission achieve its goal and will this actually happen?  Beats me, but it is devoutly to be wished.

Bring it on!

The estimable Ron Friedman, who's been covering legal technology since 1989, has done a nice recap of the past 25 years of legal technology for The American Lawyer.  Two messages here:

• No matter how much you may bitch and moan at technology today, it's useful to be reminded how far we've come. I personally recall when Davis-Polk used vi for word-processing.  (Count yourself fortunate if you've never heard of "vi"; it's a UNIX text editing program [with apologies to the Slashdot crowd].)
• Predictions of where technology will go are utterly useless; the only meaningful rule is to be ever-vigilant, flexible, and to adapt.

Sometimes in reading articles like Ron's I am momentarily seized by the desire to be 10 years old again, just so I could live to see another generation of technological innovation.  But then I remember the purgatory that was adolescence and come to my senses.

In case you don't see Law Technology News regularly, their year-end issue features, at pg. 24 in the "real" issue, my article on "How I Came to (Love) Blogging," thanks to the capable and gentle stewardship of that editorial ball of energy, Monica Bay.

The background story on how "Adam Smith, Esq." came to be.  And the key, you will learn, is simply picking your topic:  Providing a cogent answer to the question, "What can I write about that I'm passionate about, that no one else has totally and competently covered, and that is not so narrow or so broad as to be impossible?"—well, answer that and you're on your way to your own blog. 

You have been warned.

Half full or half empty?   That's my somewhat non-plussed reaction to the National Law Journal's release of its annual hourly billing rates update.  Of the 110 firms responding to the questionaire, 88 reported increases in partners' billing rates and 81 in associates' billing rates.  But here's the key take-away demonstrating the schizophrenia of this survey:

Akin Gump Chairman R. Bruce McLean said that even with this increase, the firm did not raise rates as high as the economy would have allowed this year. "We misjudged where the market was," McLean said. He explained that in most of the firm's practices, deciding where to set rates is often based on "vague and historic" information.
The firm's strategy, McLean said, is not to be a "market leader" in rates but to stay in the middle range of fees competitors are charging.
But determining where the high and low margins lie can be difficult.
"Most of the high-end firms still have problems with partners in increasing their rates to [match] the market," said Joel Henning, vice president and general counsel for Hildebrandt International, a law firm consultancy. As a result, he said, law firms sometimes shortchange themselves.
"Lawyers tend to be terrified of losing clients because of increased rates," he said.

Choose your poison: Rates rose, that's a fact, but not as much as "the economy" [read: the market] would bear, according to the supremely astute Bruce McLean of Akin-Gump, or else lawyers are "terrified" clients will desert if they keep this up.

I have a third theory:  Firms will raise rates at the high end where price is, essentially, no object; this is rational behavior and should be expected to continue in the teeth of economic upturns or downturns.  But the quoted rate, as all of us who live in New York and have been to the Lower East Side know, is not always the actual or realized rate. 

Revenue = [Billed Rate] - [Discounts + Writeoffs]

The survey, recall, asked for Billed Rate.  Caveat lector.

Just how "corporate" is the management model at sophisticated firms?  While there may be superficial similarities of structure in an increasing number of firms, Legal Week posits that if lawyers simply mimic a corporate form of management without actually possessing the—horrors!—skills of businesspeople, it is an empty exercise.

Permit me to state the obvious, but top management in a corporation has traditionally come up through the ranks of finance, operations, marketing, and IT, learning the ropes as they go.  Top management in a law firm has traditionally come up through the practice of this that or the other arcane legal specialty.  Fortunately, human beings are adaptable and their plasticity can (within limits) be enlisted in support of filling the various roles in management with the best-suited candidates.  Any law firm worth discussing will, for example, have within its senior ranks a tough negotiator, an acute and effective listener and consigliere, someone with at least half a knack for IT, another who survived Accounting 101, etc.  The question, then, is simply that of mapping the right individuals to the right tasks.

Of course nothing is so simple:

For a modern law firm to flourish, it must have highly motivated and well-equipped senior non-lawyer managers. Recognition of the importance of these non-lawyer roles is crucial if their contribution is to be as effective as it would be in a corporate structure. However, this is still a tall order in an environment where success is often measured by fee earning and billing ability alone.

There's the rub in a nutshell.  Law firms often remain caste systems where those with the billable hours and books of business are deemed the only ones worthy of the executive suite (well, the executive committee, anyway).

So ask yourself:  How many hours has Jeff Immelt billed for GE or Carly Fiorina for HP?  Which clients are they personally responsible for bringing in?  In law-firm land, they'd never be where they are.

Then ask yourself this:  In a world of global competition, which of these two models, the corporate-land one or the law-firm land one, is dysfunctional?

Adam Smith's thought (the real Adam Smith, that is) has been famously characterized by the economist George Stigler as a "stupendous palace erected upon the granite of self-interest."  I have long labeled this a "mischaracterization," and I am now pleased to report that I am in good company. 

To be sure, "self-interest" is a real phenomenon, albeit a rather humdrum one. Of far greater significance to Smith's thought, and his intellectual legacy, was his bedrock—and spectacularly uncommon at the time—belief that individuals, even the impoverished and unschooled, knew and understood their own best interests far more keenly than the wise and virtuous classes that were then readily perceived as their betters. 

This core faith in the judgment of every individual is the foundation upon which Smith rests his aversion to heavy-handed governmental intervention in the economy:  It is not (just) a "positive" argument Smith is making against excessive government involvement (i.e., the argument that the government tends to get it wrong, and that its interventions have pernicious unintended consequences); rather, it is primarily a "normative" argument (namely that the intelligence and autonomy of each individual should be minimally interfered with, and then only for the most compelling reasons and where there are no meaningful "less intrusive" alternatives).

In his crystal-clear but inimitable prose:

"It is the highest impertinence and presumption... in kings and ministers, to pretend to watch over the oeconomy of private people, and to restrain their expence either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs."

Need I add that these observations are of wide applicability today?   (Can anyone say, "school vouchers," where the wise and virtuous classes would deny poor parents the educational choice they themselves enjoy for their privileged children?)

But enough editorializing for this quarter; in case you hadn't picked up on it, I am a profound and enthusiastic admirer of the original AS.

And yes, I do believe he'd have his own blog today.

Perhaps the single most challenging question to answer cogently—from both the economic and intellectual perspectives—is what can law firm managers actually do to increase profitability?   You imagine rightly, dear reader, that I have sacrificed more grey cells to attempting to wrestle this thorny issue to the ground than have many people, but it is a large topic.  This will be the first of what could well be many posts on this Ur-Question.

Let's begin with the basics.

Most people—certainly including executives with significant ownership of a private corporation or equity partners in law firms—would probably view a high level of sustainable financial performance as the metric of all metrics, but my view is that that observation is: (a) tautological; (b) remarkably unoriginal; and most important, (c) quite unenlightening as a guide to action in that no one has yet figured out how to directly improve financial performance in a world of global competition.  I view “strong financial performance” as akin to happiness in one’s personal life: It cannot be pursued in and of itself (with apologies to the Founding Fathers), but rather it’s the distilled end result or expression of everything else one has been doing.

For anyone who aspires to being an astute and effective manager, this poses a problem. The most important unitary measure of one’s success cannot be directly controlled.

Of course I’m not saying law firm managers can’t or shouldn’t do things like:

• prudently control costs,
• try to make smart hires,
• quickly correct bad hires,
• invest in professional development for associates and partners alike,
• launch targeted, credible, distinctive marketing campaigns,
• invest in or retrench from practice areas or even cities as conditions evolve,
• employ robust and appropriate information technology,
• astutely analyze M&A opportunities,
• and so forth.

The point is that these toolkits are available to everyone and we still have a long history of impressively profitable firms alongside the Brobeck's and Finley-Kumble's.

So what are the winners doing right and the losers doing wrong—specifically, what drives sustainable performance for a very high-end professional service firm?

I’ve adapted this diagram from David Maister*.  It’s intended to address the question of what managers can have an impact on that will in turn affect profitability.

*David Maister, Practice What You Preach (The Free Press, New York: 2001), Figure 7.1, p. 79 (correlation and causation coefficients omitted, diagram inverted).

This diagram strikes me as both intellectually and emotionally astute. Intellectually correct because Maister derived it from real-world empirical data and structural equation modeling, and emotionally correct simply because it has the indisputable ring of truth.  Of course a long-term orientation, respect, professional development, and (perceived to be) fair compensation are the foundation on which all else rests, and of course lawyer and employee satisfaction drives quality delivered to clients which determines profitability.

In Built to Last (HarperBusiness, New York: 1997), James Collins and Jerry Porras make a similar, in some ways stronger point (p. 8, emphasis supplied): “Contrary to business school doctrine, ‘maximizing shareholder wealth’ or ‘profit maximization’ has not been the dominant driving force or primary objective through the history of the visionary companies. Visionary companies pursue a cluster of objectives, of which making money is only one—and not necessarily the primary one. Yes, they seek profits, but they’re equally guided by a core ideology—core values and sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the more purely profit-driven comparison companies.”

So what, precisely, am I saying here?  Merely this:  "Profitability," Holy Grail though it be, is not something even the world's most gifted management team can control.  (If we could directly control it, we could repeal Chapter 11 forthwith.)  In sophisticated, global, high-performance professional service firms, getting a direct grasp on it is even more elusive.  However, we can control the most important conditions and prerequisites conducive to profitability.

How do we control those prerequisites?  My candidate is:

Practice Group Management

Stay tuned.

More on the Piper Rudnick/DLA deal again courtesy of The Financial Times.  Nigel Knowles, managing partner of DLA, tosses out the unnecessary comment that "Piper Rudnick's reasons [for the deal] may be slightly more defensive, while ours may be slightly more opportunistic," premised on, well premised on, OK I got it, premised on the assumption that Piper Rudnick needs to be in Europe and Asia but DLA doesn't really need to be in the US.  If this is an early exercise in neck-biting, it augurs poorly.

The plain fact remains, as even Mr. Knowles acknowledges, that if you want to do the highest-value work, you need a "solution" that includes the US.  I stick by my guns that this merger bodes well to be one of the fairest in the land, but would somebody get Knowles re-write?

Update:  Law.com's coverage is here. 

Update update:  You thought I was snarky about Knowles?  Check out The Lawyer:  "DLA Goes Galactic."

So it's official:  DLA is merging with Piper Rudnick (which has already, more or less, merged with Gray-Cary).  The resulting firm, whose name will not long remain "DLA Piper Rudnick Gray Cary," will be the second largest globally by revenue, and third largest by lawyer headcount, with over 1,000 lawyers on each side of the Atlantic.  Weirdly, neither The New York Times nor The Wall Street Journal has anything remotely interesting to say about this, but The Washington Post and The Financial Times nail the story.

Predictably, it's being compared to the Clifford-Chance/Rogers & Wells deal, but I'd say the comparison is uninformed and unhelpful to analyzing the odds of success of this deal.  Faithful readers know that I approach any big-deal merger with a jaundiced view, knowing that (a) most fail to deliver the promised benefits in the long run; (b) simply pulling them off—integrating the plethora of essential systems from finance to email to matter and knowledge management, closing duplicative offices, reassuring clients and staff alike—can plunge the firms into a year or two of unproductive navel-gazing; and that (c) with cultural issues uniquely pivotal to success in law firm land, true "integration" can be excruciating to attain.

But surprise!  I give high marks to this deal, and wish them well with my heart and my head:

• the firms have duplicative offices in precisely zero cities;
• it's a merger of pretty-much equals, which starts relations off on the right foot (remember the Daimler takeover of Chrysler which was disastrously labeled inaccurately?);
• without of course being privy to the inner councils, it sounds as though the make-or-break issue of partner compensation has been addressed rationally and sanely, with the ultimate determination combining ingredients ranging from seniority to billable hours to intangible contributions to cost-of-living.

Also promising is that both DLA and Piper Rudnick have credible track records of entrepreneurial expanion through mergers heretofore.  Nor are they swinging for the fences and trying to become a super high-end Skadden displacer; they declare their focus to be the "upper middle market" or multinationals.

"Stay tuned," as they always say, but this definitely sounds promising.  Next, anyone?

The American Lawyer is out with its annual survey of AmLaw 200 leaders and they are, as Aric Press succinctly puts it, "a confident bunch."  And why shouldn't they be?  The heck with 9/11 and the heck with the 2000 bubble melt-down:  88% are optimistic about next year.  Revenues are up more than 6% for the fourth year in a row—and since fully 89% of firms plan to raise rates again next year (the median hike being about 5%), and 73% foresee profits per partner rising more than 5%, what's not to like?

But dig, or read, a bit deeper and I see a protracted collision with reality in the offing.  Consider:

• 52% of these senior leaders report meeting with five or fewer of their firm's top 20 clients to discuss performance, and a truly shocking 6% report meeting with none.  In other words, these firms are collaborative and collegial in name only, with zealous turf guardians still de facto in charge.
• For help on management issues, firm leaders turn almost exclusively to "C"-level professional staff rather than their partners—91% of firms report five or fewer lawyers spend more than half their time on management.  (Stated differently, only a handfull of lawyers are seriously engaged in firm management.)
• But for all their reliance on COO's, CFO's, etc., those professionals are second among equals.

	% of firms who have:	% of firms where they belong to executive committee*
COO	84%	43%
CFO	93	14
CMO	80	4
GC	55	13

*"None" serve on the executive committee at 46% of firms. 

So what we have resembles the Cold War era Soviet Politburo, where an elite class with a somewhat arcane selection process are the titular rulers, but where the actual factories and trains are run by a subservient group of professional managers.  Am I being too harsh?  Consider that to crack the AmLaw 100 requires revenue north of $180-million/year.   That's a sizable enterprise by any measure.  How long will the increasingly indispensable C-level class stay down?

To be sure, there are some signs of ferment in this model:  While nine out of ten firms, as noted, plan to raise rates, two-thirds also report clients complaining about fees and demanding discounts.  And an astonishing 26% of firms report they're on the prowl for a merger partner.  Both of these results portend deeper changes ahead.

My read?  First of all, that there are in the economic sense no "substitutes" for the counsel of an AmLaw 200 firm; this is the primary explanation for the relative price-inelasticity of demand (despite the bitching).  Second, the AmLaw 100 have more pricing power than the AmLaw 101--200; but/and at this point in the profession's evolution the barriers to entry into the AmLaw 100 are steep and daunting.  So mergers are a logical response to the desire for ever-greater pricing power.

Do we live in fascinating times, or what? 

The always-inspiring Joy London of "excited utterances" has penned a Blogging 101 article for Legal IT.  Although much of what Joy has to say is targeted at what might charitably be described as the extreme novitiates in the audience (what a blog is, for starters), she has some insightful observations on why the blog medium and legal practice are a match made in heaven:

• people are a firm's true intellectual capital, just as the individuals constituting the legal blogosphere are the source of its true power;
• the mindset behind successful and effective blogs—an impulse to share reliable analysis and observation—is precisely the instinct that animates successful knowledge management in a firm; and
• at least in the legal blogging community, bloggers "exuberantly share links and observations."

Joy kindly concludes with a list of about a dozen of her favorite US- and UK-based blawgs, and—the envelope, please—"Adam Smith, Esq." is right there.  Yo, Joy:  Would you prefer a bottle of champagne, or Scotch?

I've said it before, but it appears to be a source of chronic pain, so I will re-state my firm belief that, like pregnancy, you cannot be "half" lockstep and half not.  The logical universe of choices is:

• Pure Lockstep:  Fabulous if you can pull it off, but it's the increasingly rare firm with the history, the culture, and the relative freedom from exogenous shocks (e.g., lateral defections) that can stay so true.
• Eat What You Kill:  Generally dismal places to work, but unquestionably an example of capitalism at its most raw.  In my experience, such firms can be unstable for the long run, and major dislocations like the retirement of a big rainmaker can bring down the house.
• Modified Lockstep:  Not an oxymoron, but rather the practice of starting out with the presumption that compensation is lockstep, then modifying it in individual cases to reward/punish over/underachievers.  Permits the greatest flexiblity, as well as the chance to provide incentives for non-billable, firm-building efforts (serious pro bono efforts, associate development, bar leadership, etc.)

Clifford Chance has famously not achieved equilibrium on this issue, and the ongoing failure to bite the bullet continues to threaten their foray into the U.S. in general and New York in particular.  The most recent famous defector, Jim Benedict (to Milbank), summed it up with pith:

"I looked at the vote last fall [veto'ing "superpoints" for some New York partners] as saying that the purity of lockstep was more important than success in the U.S."

As any veteran of corporate-land mergers could have predicted, merging compensation systems at the most senior level simply cannot be avoided, elided, postponed, or finessed. And as any veteran of launching forays into New York could have predicted, superstars will demand their rewards.