Adam Smith, Esq.: January 2005 Archives

The Market's Competitive. Which Market?

"Law firms are being forced to run themselves along more 'corporate' lines than ever before," reports the FT, summarizing a PwC report on the top 50 UK firms during 2004. This new "strategic approach" may represent a departure from how things were done, but if nothing else it also constitutes resounding confirmation of the fact that capitalism, and the competition it entails, have come to the elite end of the legal market. Consider:

Of the firms whose partnership agreements permit partners to be "de-equitised" or even dismissed, 80% invoked those powers.
Of the top 25 firms, 56% reported cutting "junior lawyers" as well.
And 61% cut support staff.

Promiscuous expansion abroad is also being dialled back. More than half the firms reported earning less than 10% of their profits abroad, and the consensus seemed to be that global expansion has not lived up to expectations.

Lastly, the UK's common "lockstep" model is becoming increasingly precarious, "as high-performing partners resent large payouts to their less effective colleagues," as the report puts it.

When I say capitalism has invaded the elite end, let me be precise about exactly which market I'm talking about: It is not, as one would instinctively have it, the marketplace for FTSE 100 firms buying high-end legal services; although that marketplace is surely evolving, with "beauty contests" and "panels" becoming more common, those trends are not driving the changes PwC reports. Rather, the market that matters here is the marketplace where partners (and associates) choose law firms. Take away that market—that is to say, take away lateral mobility—and none of this would be occurring.

So, draconian and inhumane as some of these developments may seem, consider the alternative: Do you really want a world where choosing a firm out of law school amounts to indentured servitude with a lifelong term? Because if lawyers can move between firms, firms have to compete to recruit and retain them. That is precisely what PwC reports is happening.

One-Stop Data Dump

One-stop data shopping about the size and composition of the legal services industry? It's here on one handy page put together by "Envision Agency," a new name to me, which describes itself as a "full service marketing agency specializing in the legal vertical."

Hot dots from the data:

In the US, there are about 900 firms with at least 50 lawyers;
Total revenue of the industry is $118-billion;
There are approximately 250,000 (they say 249,969, an exercise in dubious precision) firms;
Employing 1,464,737 people (see above).

Other information is not data, but opinion. For example:

Mergers and consolidations are here to stay, or, as one might put it, to accelerate;
The increasing professionalization of management on the business side is likewise;
As is global expansion.

Great insights? No. Handy "bookmarkable" reference? Sure.

Blogging = Changing the System?

Ernie Svenson, one of the "Savvy Blawgers" and host of Ernie the Attorney, was just interviewed on JD Bliss about how he came to be a blogger, and among other points was this exchange:

JDB: Has blogging been important to you as a means to address some of the frustration you feel with the legal system?

Svenson: There is a lot of hype now about blogs. My view is that blogs matter because they represent a new way of communicating that is in its infancy, but one that is clearly growing at a rapid pace. When I first got involved in blogging it was completely refreshing to me. It got me in touch with a lot of lawyers who felt as I did, and was like going to a specialized bar association meeting of like-minded colleagues. I have to admit that, after almost three years, there are times when keeping my blog fresh – which takes several hours each week – seems like more work than it should be. Overall it is completely rewarding and that’s why I continue doing it.

But the real strength of blogs is that they still aren’t mainstream, so the opinion of recognized bloggers carries real weight. For example I was recently among a group of “savvy blawgers” who were asked by Bruce MacEwen’s “Adam Smith, Esq.” blog to give opinions on how the most sophisticated law firms will be managed five or ten years in the future. That kind of opportunity really can help change the legal system to better serve clients, and it shows why blogging is very much worthwhile for me.

Thanks, Ernie! I just thought I was asking a thought-provoking question, but now I realize I was really helping change the legal system. Where do I sign up for my royalties?

Collaborate Or Die

Building a genuinely trusting, collaborative, integrated culture—where one does not exist—is among the tallest of orders that a firm can face. Since control over clients is such a key source of power, client-hogging and the individualistic behavior it encourages are temptations difficult to avoid. But this is, as we know, a short-term perspective, and not one aligned with the firm's best interests over time if it wishes to be a collegial environment sincerely welcoming of professional development and offering clients "best of breed" practitioners across all specialties.

The difficulty, of course, is getting from here to there.

One highly plausible response (which I borrow from the estimable Michael Mills of Davis-Polk) is: "Don't waste your time! If your firm's not collaborative, you cannot fix it. Go somewhere else."

Of course, that is precisely what all too many people do when they find themselves in a hostile, constricting environment of mutually independent partner "silo's;" they leave. This has predictable malignant effects on client service, as they experience turnover, new and unfamiliar faces who are newly unfamiliar with the client's history and issues, time-consuming, expensive, and resented learning curves, negative karma (yes, I believe it does exist—positive and negative both) from lawyers who feel marginalized at their own firm, and [complete the spiral of negativity here].

An intervention is called for.

But by hypothesis, those with power have gravitated towards this dysfunctional behavior; in practical, hard-headed terms, what can be done? This piece recommends what's effectively an end-run. Use the clients' perceptions of the firm, determined by surveys and openly discussed internally, to motivate change. I have said before, apropos such topics as moving beyond the billable hour, that firms will resist change until clients visit it upon them, and I believe the same observation is apt here.

One must still, of course:

share the clients' perceptions across all levels of the firm, not just partners or not just lawyers;
recruit powerful and credible evangelists to lead the charge;
believe, have faith, and persevere that change is possible;
follow up; and
reinforce the effort through publicizing small victories.

But the end result, as characterized by one who'd been through this, is as simple and powerful as can be: "satisfied clients and motivated lawyers." Sounds worth the journey to me.

Merger Fever? Do Your Homework

While skeptical of mergers (see below), I'm also of the view that "chance favors the prepared," and that:

having a clearly articulated and fundamentally sound strategy going in;
recognizing and confronting with clear-eyed vision the issues surrounding management, compensation, and client conflicts; and
having a road-map, if not a GPS system, towards integrating the totality of the two firms' systems (including financial, time-keeping, case-management, knowledge management, document management, CRM, etc.)

can take you a long way towards success if a merger is in the cards for you. This backgrounder about the Goodwin-Procter/Shea & Gardner merger amplifies these points. How specific should your plans be? Quite. For example, it's nice to say that because you're a Washington, DC powerhouse (Shea & Gardner) you want a firm that's not, but let's get down to the nitty-gritty: In this case, S&G was strong in litigation ("don't need that") but lacked an intellectual property practice ("expensive to build"), so Goodwin-Procter or its ilk already fit the "identi-kit" of a potential merger candidate. But beyond the strategic fit, personality issues and communication, as always, are key:

teams of lawyers from both firms must sit down with key clients and assure them that quality of service will remain unchanged, and explain the reasons for the merger;
everyone from both firms on a client assignment must know everything about that client from both sides of the pre-merger firm—the client assumes and expects no less;
on new assignments, staffing should self-consciously include attorneys from both firms from the beginning; and
don't overlook the staff—this is a merger not just of lawyers, but of paralegals, secretaries, the back office, etc. Send them on trips to meet their new compatriots at the counterpart firm.

And, with that advice, go into a merger with your eyes open. Consolidation is here to stay. Make it work for you.

Henry Kravitz on Line One?

Is there anything interesting to be said of the potential Pillsbury/Shaw-Pittman merger?

Regular readers will know that I approach mergers with a jaundiced eye, given their frankly embarrassing track record of destroying rather than creating value in corporate-land. And, as is also my wont, I ask why their record in law-firm-land should be any different. (If anything, the common wisdom would have it that their track record should be worse among law firms given (a) the gnarliness of melding two or more partnership cultures; and (b) the extreme portability of each firm's primary assets—its key lawyers.)

But I find myself viewing this proposed tie-up with a benign and charitable outlook. Why?

Shaw-Pittman is a fundamentally sound, albeit low-visibility, firm. True, its revenue has flat-lined since 2001 and it has suffered declines in headcount and profits per partner, but its outsourcing and Northern Virginia hi-tech practices are strong. As one of their partners nicely put it, "We're proud of our firm. But we're not as well-known as we should be." Certainly compared to the outside-the-Beltway profile of a Covington or a Hogan & Hartson, this is true. And the remedy, if Shaw-Pittman remains independent, is scarcely clear.
Pillsbury, conversely, is amply capable and strong in California and in New York, but it lacks the third leg of the requisite US-national presence: Washington. Problem solved.
According to an anonymous source, while talks are still underway, the truly difficult issues of management and compensation have been resolved, and the primary issue still on the table is the (relatively) innocuous one of client conflicts.

So the merger would achieve critical strategic goals for both firms: Pillsbury gains instant Washington credibility and becomes poised to pursue its (clearly stated) expansion goals internationally; and Shaw-Pittman elevates its lawyers and practice groups to a national presence which, as I said, it's unclear they could so quickly achieve single-handed.

But all that deals with the merger qua the competitive positions of two law firms. I have another, more fundamental, reason I think it's promising: It reminds me of the 1980's LBO and recapitalization financial re-engineerings. Huh, you're asking?

It should not surprise you to learn that I view that era as one of the recent golden ages of creative destruction, where under-utilized and misallocated assets were liberated, albeit at times violently, into more productive uses. (Cf. the European and Japanese experiences, where an insane proportion of companies are the walking dead, propped up by governmental and regulatory arteriosclerosis; and more pointedly compare the relative performance of the US and European/Japanese economies since then.)

And the Pillsbury/Shaw-Pittman deal bodes well to achieve some of the same efficiencies and economies. Pillsbury has a reputation for having centralized, bottom-line-oriented management that can be decisive and quick. As Ward Bower of Altman-Weil puts it, "Pillsbury is a much more intense place." KKR they're not, but all things are relative.

Bonne chance.

Eat Your Spinach

Natural Born Pitch-Men?

You would think lawyers should be natural-born pitch-men. Trained to present their case orally and on the page, taught to analytically arrive at the heart of the matter, peeling away dross and marginalia, understanding the appeal of a simple story with a strong moral and a well-defined beginning, middle, and end, lawyers should be first-class marketers.

Sorry, lost my head. The reality is of course that most lawyers break out in hives talking (or thinking) in terms of "pitching," sales, and marketing. But as my wife the advertising executive would remind you, and as Econ. 101 teaches, the objective of marketing is purely informational: If one has never heard about Apple's new iPod Shuffle, or (say) the expertise of a firm's structured finance group, the choice to purchase or not is foreclosed. So once lawyers overcome their aversion and embrace the reality of a competitive marketplace with scores of perfectly competent firms for clients to choose among, how do they do?

Again, the reality is not as pretty as it should be in theory. The temptation is to be over-inclusive, to include not just the bullet-points but the footnotes, and to spend more time and emphasis on nuance than on the headline.

That's why this Forbes piece by Guy Kawasaki, the Silicon Valley venture capitalist, is so worthwhile. Excerpted from his book, "The Art of Pitching," he magically avoids bromides and explains in pithy English what to do and not to do:

Explain why you're there in the first minute.
Imagine there's a little man on your right shoulder who whispers in your ear after every point: "So what?"
"I've never heard a pitch that was too short."
When the client talks, listen hard, take notes, regurgitate what they've said to make sure you're clear about it, and follow up.
Recognize that after you've made the same presentation ten or so times, you probably need to rewrite it from scratch. Why? Because by that point it will have begun to resemble a car in the Phillipines.

And if that's not teaser enough to get you to read the article, I've obviously delivered a poor pitch.

Debating Affirmative Action: Ideology or Data?

The current issue of the Stanford Law Review has an empirical analysis of the impact of affirmative action in law school admissions on black students, written by UCLA Law Professor Richard Sander, which concludes that the "costs of preferential admissions appear to substantially outweigh the benefits." Sander's thrust is that black law students would perform better, achieve higher class ranking, and pass the bar at greater rates, were they to attend less prestigious schools.

Can you say "incendiary?" That's why the debate hosted by Legal Affairs between Sander and my good friend and colleague Associate Professor William Henderson of Indiana University Law School/Bloomington is such an important one, and why Bill's opening point (in what is a remarkably civilized discussion) is essential to approaching the issue:

I don't think the legal academy will reach any constructive conclusions on your study until we are capable of having exchanges that are driven primarily by data rather than ideology.

Wouldn't a "data-driven" debate of this issue of consummate public importance be fascinating? I personally don't have much optimism it can be pulled off, but all of you who care about this issue deserve to take a look and understand the contours of the evidence.

I'll Drink to That. On Second Thought,...

Which profession is most likely to suffer from stress, depression, and alcohol or substance abuse? That's right—here's lookin' at you, kid. According to the FT, alcohol-related deaths in the UK among lawyers are double the rate of the general population, and in the US the ABA puts alcohol abuse among lawyers at 18% vs. 10% nationwide.

Assuming these statistics are roughly accurate (and one of my motto's is "never debate the facts"), the two obvious questions are: Why?, and, What's to be done about it?

Concerning why, the FT lines up the usual suspects: Law is an inherently stressful profession where the expectation is of invariant perfection, requiring long hours, a scrupulous eye for detail, and possibly a tendency towards pessimism, or at least a congenital absence of spontaneity and exuberance. I would add that the business- and marketing-driven nature of large firm practice may be at odds with the academically or intellectually inclined "do-gooder" self-image that many law students start out with, causing cognitive dissonance at the least and utter professional flameout at worst. Finally, virtually all associates and a substantial proportion of partners are convinced that their lives are not their own, and study upon study has confirmed that the perception of lacking control over one's situation—or even basic information about one's firm, as exemplified by the headhunter who remarks that "we now have partners asking us what is going on at their own firms"—magnify stress.

But similar observations could be made about other high-profile and high-stakes professions, not least among them medicine. What makes lawyers different?

I will venture two hypotheses, neither, I hasten to add, supported by a scintilla of data: They are merely my suppositions based upon a career in the profession:

First, lawyers are typically agents rather than principals. By this I mean that they are seeking the attainment of goals largely dictated by others, and commonly with a set of facts and circumstances largely if not completely pre-determined. This is archetypal of litigation, but also largely of corporate and transactional work. Most high-achievement Type A professionals that I know, including myself, instinctively prefer the role of client to broker, talent to agent, and executive to employee.
Second, the lawyer's role as classically conceived is to be risk-averse, cautionary, even negative. Theirs is to foresee the future debacles and, by astute draftsmanship or trusted counsel, avert ruin or risk. This is a far less inherently jolly approach to life than that of the innovator or deal-maker.

Which brings us to: What to do about it?

If you are among the legion contributing to these statistics, I have serious and heartfelt advice: Quit. Do something else. Start now.

Both positive and negative reasons compel me to say this. The negative reasons are to escape whatever pressures are driving self-destructive behavior, and one's doctor, priest, and spouse would presumably second that notion entirely on its own and independent of any other motivation.

But the positive reason is, to me, far more compelling: You aren't going to be as good as your unconflicted colleagues. If you love what you're doing 110%, you will excel without ever looking at the clock. But if you're only 85% committed, there's someone down the hall who is 110%. They win, you lose.

Whither IT?

Is the US the "spiritual home" of legal technology? So Legal IT would have it. What, then, are current and future trends? (And I promise this is as close as I'll come to the "tennis without a net" custom of New Year prognostications never to be revisited again.)

Outsourcing, for starters, is the crazy aunt in the attic that nobody wants to talk about—with the brave exception of my friend Jim Lantonio, Executive Director of Milbank, who conspicuously off-shored technical and administrative support last year, so far with evident success. Why so mum? On top of the general sensitivity surrounding the politically charged issue, law firms have the added controversial layers of confidentiality and stratospheric client expectations about work product quality. Legal IT posits that small and mid-sized firms may be the early adopters here, but I have a different theory: Given the steep learning and adoption curve, and the sheer transactional scale needed to justify the upfront investment, I think the only firms in a position to recognize a meaningful return on outsourcing are the large firms. My prediction? The serious discussion pro and con on outsourcing will only begin when one or more large firms is discovered to be already doing it.

The always-sane Brad Robbins, co-founder of Baker Robbins & Co., identifies (a) centralization of data in firm-wide operations centers; and (b) record retention and email storage as the primary front-burner issues. Partly this simply reflects law-land's catching up with the rest of the professional service sector, and financial services, in "back office" robustness in general, but the explosion of electronic data discovery has surely accelerated the trend. Harris Tilevitz, CIO of Skadden, confirms that precisely those initiatives have been top of his agenda this year, and when asked what new or innovative technology he foresees coming, he comes up empty-handed. Certainly in the post-9/11 world, business continuity and disaster recovery plans have moved up the priority list, and one way to deal with them effectively is by centralizing data (in more than one place, to be sure).

While the second half of the article devotes itself to the wireless world—Blackberry or Treo? Laptop or smart phone? On a "need to have" basis or just for the asking?—I find far greater interest in Brad's (and others') observations about how the nature of IT within large firms is changing. To wit:

Five Years Ago	Now
Focus on HR, finance, basic wordprocessing, functional email	Focus on KM, CRM, collaborative tools
Key "end user" for IT was primarily staff	Key end users are lawyers
Investing in creating a hitherto non-existent infrastructure was order of the day	Getting the most bang for the buck out of existing systems is Job 1

Does this sound like your firm?

I Hope You're Reading This in English

OK, so this has nothing to do with law firms per se; it's still fascinating (and we're allowed to have recess even while school is in session). The FT has an analytic/speculative piece comparing the economic performance in the post-WWII period of (a) the US, the UK, Canada, and Australia [a/k/a the "English-speaking" world] with that of (b) Germany, France, Italy, and Japan [non-English speaking, duh].

The story in a nutshell? Starting in 1950 with average GDP per capita at about 35% of the US level, the non-English speaking group grew to about 80% of the US level by 1990, but has since fallen back to 70%; and the UK/Canada/Australia combo has been comfortably ensconced in a narrow band of 70-80% of the US level for the entire time. (The article's charts are truly well done; be sure to take a look, as they virtually tell the entire story without text.) So those are the facts. The interesting question is, "What's going on here?"

Starting with the obvious, at the end of WWII Germany, Italy, Japan, and even France were economic basket cases; they had nowhere to go but up. The late Mancur Olson contributed the best formulation of an additional consideration: As economies become more prosperous (and as people become more complacent), "distributional coalitions" seeking their own advantage arise and gain strength, calcifying the economy. WWII busted the Axis' pre-war coalitions asunder, and it took them 40 years to re-establish themselves.

Meanwhile, the converse was going on in the US, UK, Canada, and Australia. When the conspicuous pain of stagnant productivity, high inflation, a crummy manufacturing sector and a crummier stock market all combined to assault those economies in the 1970's, everyone from policy-makers to business executives decided to actually do something: And the result was an unprecedented wave of deregulation from the public side and massive financial re-engineering (spinoffs, LBO's, hostile takeovers, recapitalizations, de-conglomaterizations, etc.) from the private side. Over time, these trends had the predictable beneficent impact.

It gets better. (At least it gets better if you're reading this in the original English and not as translated into German, French, Italian, or Japanese). The late 20th-Century and (so far) early 21st-Century acceleration of globalization has had a disparate impact on the manufacturing sector vs. the service sector. Manufacturing is the quintessential activity capable of being relocated abroad.

But services are tougher. (A haircut, a dinner, or even an opera performance, might be cheaper in Mexico, but there are, shall we say, other considerations.) With relatively greater labor market mobility in the English-speaking countries, and with relatively less reliance on a robust manufacturing sector to begin with, service sector growth and innovation has found fertile soil here.

If you're a lawyer, this is very good news (see, you knew I'd connect it somehow).

As to whether it will continue, the FT ventures no opinion. But then, the global economy is not and never has been a zero-sum game. The happy circumstances we English speakers find ourselves in are not remotely tied to the misfortune of sclerotic economies elsehwere. We might, however, be well advised to take a lesson and not drive into that same snake-pit of indulging distributional coalitions.

"Worldly" Philosophers? Yes.

The world has just learned that Robert Heilbroner, author of the justly famous and best-selling The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers, first published in 1953 and still in print, died here in Manhattan last week at age 85. "Worldly Philosophers," which I read as a teenager and which cemented my fascination with economics, profiles, among others, Adam Smith, Karl Marx, David Ricardo, and Joseph Schumpeter, but the operative word here is "worldly"—what Heilbroner cares about is the impact these men's thoughts have on our everyday lives. Those he profiles thought large thoughts on a large stage, whereas, to me, far too many of today's economists think crabbed and impoverished thoughts on an intensely mathematically-driven stage:

"The worldly philosophers," Dr. Heilbroner said in a 1999 interview, "thought their task was to model all the complexities of an economic system - the political, the sociological, the psychological, the moral, the historical. And modern economists, au contraire, do not want so complex a vision."

If you haven't read it, a word of advice: Do.

Get Big or Else?

If you believe Hildebrandt, there were 47 law firm mergers of significance last year. (The editorial insertion "of significance" is my own, because while Hildebrandt says they limit their sample to law firms of five or more attorneys, the private nature of the profession forces me to believe many mergers went unreported or unnoticed.) That represents a 34% increase over Hildebrandt's 2003 merger count, and it's safe to say the received wisdom, with which I concur in this case, is that the merger trend is nowhere near exhaustion.

My own belief is that the AmLaw 100 are "pulling away" from the second 100 (the AmLaw 101-200, that is) just as the AmLaw 50 are pulling away from the AmLaw second 50 (##51-100). That begs the question, "What is happening to the firms that cannot or choose not to get big?" In particular, and not to be oblique about it, are the firms that are not getting big strategic failures?

The short answer, as both lawyers and economists are wont to say, is "It depends." (Economist joke time-out: "If you laid all the economists in the world end-to-end, they wouldn't reach a conclusion.") It depends on whether our hypothetical AmLaw Second 100 firm wants to compete in the big leagues. If they do, but they lack the financial firepower or unusual practice expertise to buy and build their way in, then their strategic intent is at odds with their tactical capability and they are, by that measure, a "failure."

But what if they have no such intent? What if they are content, nay determined, to assiduously tend their own garden with no aspirations or delusions of a global manifest destiny? Then the question becomes, "Is this a sustainable positioning?" More specifically, what are they offering that clients cannot or prefer not to obtain from one of the Global 25 or from a boutique? Fundamentally, there are only two possible answers: (1) an unusual practice expertise (say, entertainment, sports, or lobbying) or (2) unequalled regional depth. Without one of those distinctive characteristics, being mid-sized is awkward indeed, with no compelling value proposition for your clients, a limited and finite capital base to build from, and a relatively dull tale to tell to recruits.

The National Law Journal cites these problems and others, but also sees a silver lining: What if you don't want to practice in a firm where "partners don't know each other," and where none but executive committee members have a meaningful say in the firm's plans? Associates, too, can be enticed by the promise of more responsibility early on, freedom from meat-grinder billable hour expectations, and perhaps a more eclectic client mix than that found at Cravath or Milbank.

I hesitate to say it's all a matter of perspective, but it is: Not only is it true that not every firm can grow up to become a Latham or a White & Case, but it should be true that, given the right temperament and environment, lawyers can take pride and fulfillment from being part of (say) the best damned firm for public finance in New England.

You Can Never Be Too Thin, Too Rich, or Too Well-Educated

If you believe that the merger wave is far from cresting and that the future promises a landscape of perhaps two or three dozen truly international mega-firms with revenues north of $1-billion/year—but you're currently at less than half that level—how might you get there from here?

Reed-Smith's answer is "Reed Smith University," a collaborative effort with the Wharton School at the University of Pennsylvania. Patterned on executive-education programs commonplace in corporate America, the plan calls for five different schools: leadership, business development, technology, professional support and law. Interestingly, only the "leadership" division will primarily be taught by Wharton professors; faculty for the other four schools will be Reed-Smith partners themselves, albeit under the tutelage of Wharton. Fine, say you, but no big deal? Haven't law firms been doing professional development since the days of apprenticeship?

Not remotely like this, say I. "RSU" is not an ad hoc response to junior partners behaving awkwardly when it comes to client development, far less to technophobic lawyers confronted with the mandate to get seriously on board with everything from KM to CRM to Blackberry's. Instead, I read it as a thoughtful, long-term, and serious ($500,000/year in baseline operating expenses) commitment to change the firm's managerial culture. Over time, the focus will shift to the truly strategic questions management is entrusted and empowered to address:

are we investing in the right practice areas?
are we investing in the right industries?
is our geographic footprint rational given macroeconomic trends? (Reed-Smith, recall, hails from Pittsburgh: Not the most often mentioned home base for hyper-growth and innovation in the 21st Century.)
are we focused on developing the optimal client base?
by the time they're up for partner, have our associates developed the panoply of skills they will need?
etc.

According to Reed-Smith partners Michael Pollack ("dean" of the leadership school) and John Smith III ("chancellor" of RSU):

"One of the most immediate things I think that we'll be able to see and feel, even if it's not completely subject to scientific measurement, is how much less time senior management is needed for some of the day-to-day business decisions that get made in the firm," he says. "As people gain confidence and improve their skills and their ability to take ownership of problems and make decisions, that will allow the senior management to focus on bigger problems and bigger issues and bigger opportunities."

Smith and Pollack both suggest that RSU's value will be recognized as they see improvement in the way the firm's practice groups are managed.

Note that last prediction closely: Improvement in the way the firm's practice groups are managed. I am becoming an increasingly vocal proponent of the position that the proper "scale" for analysis of a firm's strategic and financial performance is the scale of the practice group. "The firm" is too large a scale, and "the partner" is too small a scale, and both are subject to exogenous vicissitudes not under their control.

But the astute management of a practice group, over time, will show its true colors. Now, how long before competitors adopt Reed-Smith's forward thinking?

The Billable Hour is Dead: Long Live the Billable Hour

“I can’t think of a more important problem facing the profession,” Justice Breyer told Washington Lawyer, “than how to maintain a life for a young lawyer that will lead to satisfaction in his or her career, that will produce time for a family, and will produce time for some form of community and public service, whether it’s the school board, whether it’s the trustee of a museum, whether it’s going to work in Washington, or whether it’s any one of 10,000 different kinds of community activities.

“The reason I got into this [issue] is, it seems to me, that older people in the legal profession [have] a strong obligation . . . to create a decent life for younger lawyers going into the firms. More and more I hear from friends of mine who are in firms that the pressures are such [that] there is no time.” Lawyers tell him, “We don’t have time for anything.”

The root cause of the "problem" to which Justice Breyer alludes? The billable hour.

In a cover story that spends 90% of its ink excoriating the "tyranny" of the billable hour, and then concludes by throwing up its hands at how improbable it would be for any alternative to be seriously adopted, Washington Lawyer seems to encapsulate the received wisdom on this topic. "Can't live with it, can't live without it." Is that really the best we can do?

The economist in me has always been perplexed at the durability of the billable hour model. After all, it:

begins life based on "cost of production" rather than "value to client;"
rewards quantity over quality;
is premised on "tonnage," not innovation or creativity; and
creates an essentially undeniable conflict between efficiency and productivity (which clients are always in favor of) and revenue generation (which firms are always in favor of).

Then, of course, there's the merely human toll. The article notes an associate who never even had time to get her home phone hooked up, but my favorite (from real life) is of the first woman associate to make partner at a firm where I used to work. Nine months pregnant, she worked a full Friday, delivered her child on Saturday, took Monday off, and was back full-time on Tuesday. Yes, a maternity leave consisting of one day. But she made partner. However, this blog, I will remind you again, is not about ethics, it's about economics; so the emotional and spiritual consequences of "targets" (express or implied) of 2,000 hours/year and above are beyond my remit.

Why, if it's such a perverse creature, does the billable hour endure?

Lawyers are risk-averse (did I say that?!—alert the media!) and the billable hour model guarantees work done will be compensated.
Looking at the same issue from the flip-side, quoting a fixed fee or a flat rate in advance risks ending up with uncompensated, unprofitable work—not to mention the blow to a partner's self-esteem as a savvy businessman.
I personally believe there's a certain Marine Corps Parris Island effect in play, although it may be hotly denied: "We [partners] all billed outlandish hours to make it; now it's your turn."
Finally, it has simply become the de facto standard, and frankly it's a good gig for law firms.

To me, these reasons add up to one conclusion: Firms aren't going to be the ones to change. Clients are going to have to make it happen. (The article posits that law students will also be a "pressure point," but I'm not buying that; who wants to come off in an interview sounding like a wuss?)

The article ends with a whimper:

As the ABA Commission on Billable Hours concluded, “There are no easy or clear-cut answers to developing successful alternatives to the billable hour."

As they say, I respectfully dissent: The answer—fixed fees, or value billing—is staring us in the face. We in the profession are too smart not to do better. As the article drolly notes, even "plumbers and accountants" quote fixed fees. (And may I point out that firms that have the traction to pursue value billing, a la Wachtell, are not exactly hurting.) Are we that insecure not to attempt the same?

But, you object, the value of legal counsel is ineffable: Who can put a firm price on it in advance?

The short answer is that, everywhere else in our roiling economy, reasonable people readily agree on "price" vs. "value." And I'm not just talking about haircuts and taxi rides: Is deciding what's a fair price for a home (or, in my case a co-op apartment) simple? Rationally, there are almost too many factors to consider: Location, layout, neighborhood, condition, size, design, school district, property tax rates, outdoor space, geographical orientation, "amenities," etc. But we quickly arrive at a gut feel, and the home market is highly liquid.

The market for legal services does not exist in its own sui generis bubble exempt from all the familiar economic considerations that govern other markets. It is not a counsel of exceptionalism to think it does, it is a counsel of despair.

But I Don't Want to Change!

In a happy confluence, two articles which are far stronger together than is either alone were pointed out to me today by two loyal readers. The first is The American Lawyer's current "Management" column, about Customer Relationship Management systems and the human and cultural pitfalls of attempting to implement them at law firms. The second comes from the weekly UK publication, Solicitors' Journal (no online presence, and yes it would have to be renamed were it US-based) and addresses the propensity for failure inherent in "in and out" consultancy arrangements when the goal is to manage change.

It should surprise no one that the last thing that CRM in a law firm is about is technology: It's about culture. In particular, it's about the relationships among the client, the firm, and the key partners.

The Client/Firm Relationship: This must be first and foremost about the client and their legal and strategic business needs. Do not start with the substantive expertise the firm has to sell. Emphasize "softer" but client-centric priorities such as assigning suitable (in the holistic sense) lawyers to the team.
The Partner/Client Relationship: A potentially fraught area. Partners can derive the greatest share of their professional satisfaction from key client relationships, and, as the healthy lateral market vocally proves, can value the client relationship above their relationship with the firm. The best counsel is probably to the effect of "tread lightly," and encourage incremental change (delegating more to senior associates, e.g.). Strive to make the firm as a whole closer to the client but don't expect to pry the partners' fingers away from the client's elbow.
The Firm/Partner Relationship: Strengthening this bond, by reinforcing all the ways the firm's resources can bind the client more tightly to the firm, is an essential goal. Concretely, this means building last client-service teams, and rewarding (this means $$) contributions to team leadership aside from regular billable hours.

Introducing CRM—and having it take effective hold—is a subspecies of "change management." That's why the Solicitors' Journal article fits so beautifully here. After rehearsing the various failure modes of consultancy engagements (including the wide range of quality among consultants themselves, ranging from the "highly competent to those with less obvious capabilities"), the author suggests substituting a "mentor" relationship instead. Why? Mentors can: Act as a sounding board, refining analysis in the process; Facilitate continuous and incremental changes rather than (as with a consultant) expecting to orchestrate one decisive course correction; and move from the (merely) intellectual satisfaction of accurately diagnosing the problem to the hard work of achieving a solution.

And that's what it's all about, is it not? Any partner who's paying half attention can tell you what needs fixing in a firm; identifying the problem is the least of your problems. But it's what consultants spend most of their energy, and billable time, doing—elaborately documenting what you really already knew. The issue is not diagnosis, it's treatment. Execute. Act. Move. Get a mentor.

"If You Can Make it Here, You Can Make it Anywhere"

The Lawyer (UK) is out with its Global 100 for 2004 and their gloss on the raw statistics, understandable given their perspective, highlights the different approaches to globalization taken by UK and US firms.

One strategy to adopt vis-a-vis globalization is: Just say no. If you are exceptionally strong in New York, where "the business eco-climate is such that firms can bill in a way unheard of elsewhere on the planet," this can make sense. Just ask Wachtell, Cravath, Davis-Polk, Paul-Weiss, or Simpson-Thacher.

If you do embrace having global reach, however, you still need to know why you're doing it; as one amusingly dyspeptic New York partner puts it, "Sticking flags in the ground is not a strategy." This remark reveals to me why the leading UK firms' penetration of the US has been either very small-scale (Lovells, Allen & Overy, Freshfields) or still, shall we say, a work in progress (Clifford Chance). Simply put, it seems unclear why they're here. Conversely, when US firms launch in London or, more currently, on the Continent, they typically do so in pursuit of specifically identified practice specialties such as project finance or—if one has strong ties to an international investment bank, as, say, Sullivan & Cromwell has with Goldman-Sachs—branching out in service to that client. With a strong New York profit base and a targeted reason for being "on the ground" in Europe, opening up there can make sense.

However, international expansion comes at a cost: This may not be revelatory or even surprising, but the article quantifies just how expensive it has been, at least for the elite UK firms. It details how Allen & Overy, Clifford Chance, Freshfields, and Linklaters have each invested in globalization since 1999-2000 (primarily through mergers) and shows starkly that while bigger certainly means more revenue and more lawyers, in no case did those firms raise profits per partner over the last five years, and indeed only Freshfields managed to keep it level.

Finally, the article displays a chart whose beauty is entirely in the eye of the beholder—and not, I hasten to add, in the interpretive gloss the author of the article puts on it:

According to the author, this chart "is an endorsement of the UK model." Huh? If the yardstick is PEP—which they chose (note it's in ££ not $$)—then all five UK firms reporting for duty here are in the shallow end of the pool vis-a-vis their peers. Rather, the interesting message this delivers for me is two-fold: First, if you have a strong New York (or London--cf. Slaughter & May) base with a sophisticated financial practice, you are in the chips. And second, don't much that up: If you expand globally, don't do so promiscuously, opening offices helter-skelter, but concentrate on where the high-value work is: London, Frankfurt, Paris, Hong Kong.

As a native Manhattanite, I've long believed in New York exceptionalism: That it truly is different here. Graphic proof, above.

Happy 2005

Happy New Year to all my readers, from New York. I'll be watching the Times Square ball drop, as I hope you will as well, in whatever time zone you're in (and no, I haven't been foolish or drunken enough to watch it in person for many years). Of course, times have changed since this early 1950's version.

This is to wish each and every one of you the true, warm, and loving companionship of the one important person in your life, that 2005 will enable you to find that person if they're not here right now; the miraculous taste of strong dark coffee or old vines Zin; the astonishing and utterly irrational blessing that is the gaze of a child or the greeting of a dog; and the soul-clearing moments before dawn and after midnight when you think, if ever so briefly, you have figured out it all.

Search

January 2005 Archives