July 2005 Archives

The AmLaw 200 (technically, the AmLaw 101—200) is now out and the most important generalization to be offered is that this group is not susceptible to generalizations.

On a macro level, the news is good for these firms:  Revenue was up year-over-year by 7%, revenue per lawyer by 9%, and profits per partner by 11%.  On the other hand, to underscore a theme sounded often in these pages, "the reality is that the Second Hundred is still the poor cousin of The Am Law 100-firms 1-100 in our ranking-and getting poorer by comparison."  Average PPP of the group is $566,000, only 59% as high as the first 100 ($959,000).   And the gap is widening:  Increasing by 21.7% in the last three years, from $323,000 in 2001 to $393,000 for 2004.

A fair summary of the tenor of the The American Lawyer's coverage of this year's AmLaw 200 is as follows (emphasis supplied):

"While legal Brahmans dominate The Am Law 100's profits per partner rankings, in the Second Hundred it's not always the firms with the most sophisticated work and the fanciest pedigrees that haul in the big bucks. Nor does the avenue to riches for Second Hundred firms necessarily start and end on Wall Street, though the most profitable Second Hundred firms tend to be clustered in New York, Los Angeles, and Washington, D.C. In short, there is no typical million-dollar Second Hundred firm. The categorization encompasses elite and pedestrian practitioners, old guards and arrivistes."

Business models certainly include the contingency-fee shops, with radical volatility in earnings from year to year, but at the opposite end of the spectrum try a newcomer to the AmLaw 200 with PPP healthily in excess of $1-million.  Who?  An immigration boutique with an unheard-of 3:1 paralegal:lawyer ratio. Can you say "leverage?" Couple that with fixed fees per project, 90% of the clientele being corporations wanting to bring in high-end employees as opposed to individuals seeking entry, and welcome New York's Fragomen, Del Rey, Bernsen & Loewy.  Their model is, no surprise, built on volume, as they're now handling about 100,000 immigrants per year.

Immigration law a backwater?  That's so yesterday; Fragomen-Del Rey could be a case study for Clayton Christiansen's next "Innovator's Dilemma" book.

Fragomen-Del Rey may be a new name to you (it certainly was to me), but consider how "reinvention" is available even to the oldest of the old-line:

"The two old-line firms on the Second Hundred's most-profitable list—Hughes Hubbard and Patterson Belknap—were dismissed as dinosaurs less than a decade ago. But both firms have made successful turnarounds in recent years, without destroying their long-standing reputations for collegiality. Patterson Belknap has retained an all-equity-partner structure, while Hughes Hubbard has just six nonequity partners among its 76 partners."

(Almost) all-equity partnerships; what a concept!  Another idea that many would reflexively call "so yesterday."

So I propose a generalization about the AmLaw 200:  They may be seedbeds of innovation.  Calling all contrarians:  Find your home in the AmLaw Second 100.

Should law firms ever be in businesses other than practicing law?  And does the answer to that turn on legal ethics, or on microeconomics, or both?

The question is no longer academic.  In "All in One Law Firms," the Financial Times reports that:

Robert Glennie, the former chief executive of KLegal - KPMG's now disbanded tied legal network - and a legal business consultant, says: "Lawyers have not been at the forefront of diversification, but it is becoming increasingly common. I think it will be a trend among the more creative firms."

What type of "diversification" are we talking about?  For starters, some firms have begun offering services which are "next door neighbors" to hard-core, traditional legal work.  For example, DLA Piper has created "DLA Upstream" with offices in London, Brussels, and Edinburgh:  A team of 27 professionals who have extended DLA's traditional work in government affairs and lobbying to PR, "reputation management," and "pan-European alliance building."  According to DLA, clients see savvy communication with the media as fitting hand-in-glove with any high-profile piece of litigation or regulatory reform effort, and appreciate one-stop shopping.

Likewise, employment firms have begun to branch out into training—not much of a stretch past lectures plus whitepapers—and in what is arguably even closer to traditional corporate advisory work, Eversheds has compiled and offers an online database aggregating corporate governance and compliance law from across Europe:  An electronic version of your high-priced cross-border securities partner.

Uncontrovertibly farther afield is this plan by a firm with its roots in—where else?—California:

"Orrick Herrington & Sutcliffe, a US firm fast expanding internationally, is planning an outsourcing services company for other law firms.

"As part of its business strategy, the west coast-based firm has based its entire global "back office" functions, such as accounting, finance, technology, payroll and administration, at an operations centre in Wheeling, West Virginia. It is also considering moving much of its fundamental legal research there.

"Ralph Baxter, Orrick's chairman, says the firm has made huge savings by shifting the functions to one central location. But he wants to go further, and is convinced the firm can "commercialise its back office", offering its operations centre as an outsourcing service for other law firms, handling administration, IT and even basic legal research for them."

Have we now gone a bridge too far?   From the ethical perspective, I don't see any transgression in what Orrick is offering other firms —subject to all the usual safeguards and checks against conflicts, breaching confidentiality, maintaining Chinese walls, etc. But I would defer on this point to others more steeped in ethical nuance.

On the microeconomic front, however, I will weigh in.  The strongest argument against what Orrick proposes is that none of those back office functions is a "core competence" of a law firm, so what business do they think they have diving even deeper into that particular pool?  But the contrary view is that Orrick evidently set up the West Virginia operation (this is speculation on my part—I have no actual information on this point from within Orrick or elsewhere) precisely because Baxter & Co. recognized these functions did not need to take place on Fifth Avenue in New York or Market Street in San Francisco, and that a dedicated and unified staff would not only be more efficient but would actually become more adept and productive over time, premised on the reality that they are full-time Back Office Experts, and not partners' secretaries moonlighting with the time and billing system.

Once Orrick built that capability, then, the question becomes is it legitimate to attempt to maximize its value by offering its capacity at some price greater than marginal cost?  The answer to which, microeconomically speaking, is trivial:  Of course.

Yesterday Gerry Riskin, of Edge International, invited me to lunch at The Cornell Club while he was passing through town.  Suffice to say that if you have a chance to meet Gerry (I had not, previously), and if you've ever given a lick of thought to law firm management, you're in for an intellectual feast.   Just a small sampling from our conversation:

• How to persuade uptight, analytically over-endowed law firm partners to let it all hang out in a brainstorming session (and it's not free beer).
• What having a background as a lawyer will get you in the role of consultant (try:  not being thrown out in the first 30 seconds).
• The attitude of altogether too many marketing directors at law firms (it could be better, shall we say).
• What "killer apps" on the Internet have in common (they do not mimic what previous media can do).
• Why, in the Caribbean, you better be prepared to order as soon as you sit down in a restaurant (the waiter won't be back for an hour).
• Mandatory rotation of associates through different practice areas (just do it).
• Denying unhappy associates the chance to transfer to a different practice area, even if it would entail a demotion (you are out of your mind).
• Whether lawyers can articulate what makes their firm distinctive in the marketplace (no).
• Whether marketing directors can articulate what makes their firm distinctive (three guesses).
• The percentage of typical executive committee members who know what "blog" means (you get to guess on this one, sorry—and same exercise for "RSS" and "wiki").
• His idols David Maister and Tom Peters.
• The percentage of typical executive committee members who recognize those two names (both:  5%  one or the other [probably Maister]: 10%).

Then he was off to the Apple Store in Soho with his under-the-weather Macintosh—there are no Apple stores in the British West Indies, where he lives.

Among the AmLaw 200, mergers are in the air.  Like it or not, this seems to be the reality we are facing:  Consolidation.

I've addressed the "fact" of this trend before (I think it's safe to say at this point that it's a fact—Hildebrandt certainly thinks so).  This is what economists call the "positive" aspect.   What I have so far left unaddressed, at least explicitly, is the "normative" aspect.  [Jargon digression:  "Positive" in this usage has nothing whatsoever to do with "not negative;" all it means is descriptive, factual, "what is."  "Normative" has a more judgmental implication, and implies "what should be."]

To help frame this discussion, here are two pieces taking, essentially, opposite views of whether BigLaw will rule the earth (or the market for F500 legal services, anyway).  Greg Jordan, Managing Partner of Reed Smith (AmLaw 100 #31) has this to say in an interview: 

Although some legal observers think the law firm merger mania is about to cool off because many of the most attractive medium-sized firms have been snatched up, Jordan doesn't agree.  He believes law firms are "fairly early in the trend of consolidation, and while we won't end up like the accounting world with just three or four major firms, I do think over the next several years there will be 30 or 40 or 50 major law firms who are in the position to get most of the major international projects and have significant operations in key markets throughout the U.S. and Europe and Asia."

Need I add that he intends for Reed Smith to be one of them?

Contrarily, we have Brenda Sandburg of the SF Recorder reporting that "The Fortune 500 Think Small," and citing among others Chevron, Cisco, and GE picking firms that are anywhere but in the AmLaw 200.  Although a variety of reasons are cited, this encapsulates them: 

"It's really the attorney you're hiring, not the firm," said Gary Loeb, Genentech Inc.'s director of litigation. He said the greater responsiveness of smaller shops and the difficulty in finding big firms that aren't conflicted out of a case are also factors in looking beyond mega firms. At a large firm "an attorney brings you in and may not work with you again," Loeb said. Smaller firms "may be more responsive and have younger partners and associates eager to be full service."

A consultant friend of mine, himself an alum of an AmLaw 100 firm, anticipated when he went out on his own that clients would naturally gravitate to BigLaw for its perceived quality, safety, and full service.  But to his surprise he has found that small and midsize firms can hold their own, for these reasons:

• The "known quantity" factor:  As Loeb's observation implies, at a small or midsize firm, the lawyer you hire is the lawyer who works on your matter.  "People don't see the names of total strangers appearing on the month-end bill."
• "Top quality" lawyering: Again confirming Loeb's thoughts, the professionalism, judgement, and experience of the individual you hire is what really matters, and people of high caliber can be found outside the AmLaw 100.
• And finally, of course, good old value:  For a variety of reasons, smaller firms' billing rates tend to be lower—and they don't overstaff matters, to boot.

In the ecosystem that is the supply side of the market for legal services, there may be more than one survival strategy.

Here are three rankings of top firms, all published this month.  Any ideas on which is what?

I'll be merciful:  "A" is profits per partner, courtesy of the AmLaw 100; "B" is Vault's annual "prestige" rundown, as ranked by partners; and "C" is Vault's prestige tally as ranked by associates.   Now, the sizable overlap/identity between "B" and "C" is no surprise; if associates don't entirely get their opinions about things like this from partners, that is surely their primary source.

The newsworthy item to me is how PPP correlates with perceived prestige:  7 of the 10 firms with the highest PPP also figure in the top 15 most prestigious in the view of both partners and associates.  The three exceptions?  Well, I would argue they're truly exceptions:

• Cahill Gordon has always followed its own muse, and thumbed its nose at convention with the certainty and finality that their internal performance is all they need to care about.  (Their website, almost shockingly simple and quaint, caveats in a fashion both prissy and inarguable, that it "is primarily intended for use by law school students considering a career at our firm.")
• Milbank and Cadwalader, on the other hand, while Household Names in anyone's book, are strongly on the comeback from some years in the wilderness, and perception may not yet have caught up to reality.

Overall, a triumph of the marketplace.

How do you make decisions?  By that I mean, when facing a material strategic (a/k/a "big") decision, who do you involve and what is the process you use to decide?  (Don't pretend to blanche at the word "process"—lawyers are all about process, as you darned well know.)

Courtesy of Michael Roberto (Professor, Harvard Business School)'s Why Great Leaders Don't Take Yes for an Answer (Wharton School Publishing: 2005) [at p. 32], I present this quite remarkably enlightening table comparing the methodology behind JFK's disastrous Bay of Pigs decision with his universally-recognized-as-brilliant Cuba Missile Crisis decision.  Evidently, JFK learned something between 1961 and 1963:   You could too.

This is not to criticize or to laud JFK—as I will remind you for the 179th time, this blog is apolitical.  It is, rather, to contrast two nearly diametrically opposed decision-making processes, one with an outcome deeply embarrassing to the nation and costly in lives, the other potentially saving our planet from nuclear ruin, and to gently suggest you think about which model your actual decision-making process resembles. 

No people have been killed in preparing this post.

Why are law firms partnerships?

After all, across the rest of the economy, corporations are more than dominant; they own the landscape.  Ever seen a trucking company, a retail chain, or even your friendly local locksmith shop organized as a partnership? 

When economists ask such a question, it's with the deep-seated instinct that there must be a reason based on incentives and the peculiar structure of the marketplace in question; it can't possibly be chance, or tradition, or "because everyone else does it that way."   (These are all "reasons" with extremely short half-lives.)

Thanks to two professors at my alma mater, we now have a nuanced explanation of why "law firm" seems to equate to "partnership."

For the "executive summary" of their paper, check out this precis at SmartEconomist.com (a highly recommended site, by the way, although rumor has it they may soon put their stuff behind a pay-wall, which would be exceedingly antisocial of them and would negate my endorsement in a heartbeat).  

In a nutshell, partnerships prevail over corporations where:

• The key performance metric is not total profits (corporations blow away everyone on this score), but profits per partner.
• Quality of service delivered is highly dependent on human capital.
• Clients have a difficult time evaluating the actual quality of service, and therefore rely on reputation.  And, accordingly, where:
• Firms supplying the service have a rational motivation to "signal" the quality of their service by applying stringent internal standards for elevation to partnership, thus explaining the traditional up-or-out model.  In other words, the informational asymmetry between the law firm and the client about the quality of the work product motivates the firm to supply an "indicator of excellence" by ruthlessly—and at great cost—firing all but the most outstanding senior associates.

Here's the entire paper, which is both subtle and marginally dense, at least to those who don't slug down their daily dose of academic economic studies (I don't either—but I'm not too rusty).   If you do look at the full paper, Sections 2 and 3 develop the basic story-line, including the fascinating theme of all the implications that flow from the assumption that corporations strive to maximize total profits while partnerships strive to maximize profits per partner.

To begin with, partnerships will have a higher quality threshold for employment, since their interest is not to hire anyone who will not raise partners' average profit share, while corporations will theoretically hire anyone whose marginal contribution to profits is greater than zero.  Stated slightly differently, a partnership will always be striving to hire (or promote) people whose economic value is at least as great as that of the existing partners; whereas corporations feel at liberty to hire anyone who's not an absolute deadweight.

Section 4 gets more interesting yet.  While the earlier sections of the paper assumed equal per-partner division of profits, the professors now ask what happens if partner income is distributed based on a variety of performance measures—or, as we would put it here, if a firm moves from lockstep to eat-what-you-kill.   While a corporation in this situation would have an incentive to hire cheaper, albeit less talented, workers so long as the gap between their wages and their productivity is sufficiently high, partnerships will always aim to attract the most talented workers, period.  Now what  happens is that if relatively higher ability lawyers have higher "reservation wages" (what they won't take less than), an equal-sharing partnership can unravel if the most capable aren't willing to play that game—in other words, if their equal share seems less than their fair share.   As the professors put it somewhat drolly:

"This suggests that labor market competition may force partnerships to adopt more productivity-based compensation.

The basic story comes back to a theme we've sounded often:  Lateral mobility of partners changes everything.  The professors put this with slightly less pith:  "To the extent that [there has been a change] to a more active market for senior lawyers, our analysis suggests that top lawyers in firms with equal-sharing compensation might credibly threaten to leave if compensation practices were not altered."

And there's more:  The move towards "productivity-based" compensation is joined at the hip to the rise of a non-equity partnership tier.  How so?  The classic up or out model dismisses senior associates who might be of extremely high quality, and exceedingly profitable to the firm, if they are not of ne plus ultra quality.  By contrast, introducing a non-equity track permits the firm to retain them as positive contributors to total profitability, albeit at the expense of razor's-edge quality.  As the professors put it:  "The idea that an up-or-out system would become less attractive once the compensation scheme involved less strict re-distribution fits naturally with our theory."

Or, as Dick Tyler, managing partner of CMS Cameron McKenna, memorably put it:  "A tolerant lockstep system is disastrous."

And you thought partnerships were a matter of tradition?  As the central insight of the law and economics movement has it, the life of the law may not have been been logic, but it has been economically-informed experience.

It takes little discernment to conclude that "Adam Smith, Esq." could be more appropriately subtitled "...an inquiry into the economics of [Big] law firms."*  Not only would this conclusion be correct, but since I know for a fact that you, dear readers, are an exceptionally discerning lot, I am telling you nothing you don't know.

Still, the question arises as to how much of the total landscape of law-firm-land I am consciously overlooking.  Today we have an answer.

According to the US Census, in 2003 (most recent statistics available), the total revenue for "taxable" (i.e., not non-profit) law firms was $178.95-billion.   Meanwhile, over at the Bureau of Labor Statistics (the government is not known for its embrace of one-stop-shopping), we learn that about 521,000 lawyers were employed in for-profit law firms (i.e., not government or in-house corporate).**  

And thanks to The American Lawyer, we know that the total revenue of the AmLaw 100 for 2004 was $46.04-billion and that those firms employed a total of 68,186 lawyers.   Now you can see this coming, right?

You can thank Craig Williams for setting me loose on this trail.

What do I conclude?  First, that the focus of this blog is not about to change.  Second, that it would be interesting to see an historic time-series of this data.  My educated hunch?  The AmLaw 100's share of total legal-industry revenue is growing, as is their share of lawyer headcount:  But revenue is growing at a faster rate.

*The phrase "an inquiry into" is lifted from the full title of Adam Smith's 1776 masterpiece, which is An Inquiry Into the Nature and Causes of The Wealth of Nations.

**The 521,000 figure does not appear directly on the page I cite, but I derived it from their total full-time lawyer headcount (695,000) combined with their observation that "3 out of 4" lawyers are work in law firms of all sizes (including solo practitioners).

Can you say what an incremental dollar of revenue will contribute to profit at your firm?  Does it matter if that marginal dollar comes from an existing client or a new client, or which practice group generates it?  More pointedly, not all business is good business:  Does that new dollar come from a source aligned with your firm's strategic vision?  (For example, if it's a goal of your plan to grow your entertainment-industry intellectual property practice, what if that dollar comes from Grokster?)

Taking it another step, could any of your lawyers on the front lines do the same analysis?  In other words, do they have any clue—or any tools to help them determine—the profitability of matters they're working on or engagements they're contemplating accepting?  If the answer is no—which is probably true for north of 90% of AmLaw 200 firms—you are depriving your fee earners of any hope of making informed, economically sound and business savvy, decisions affecting the very fundamentals of what your firm does:  What matters it accepts or declines, how it staffs them and how it charges for them.

In corporate-land, Wal-Mart is an extreme case, to be sure, but the bedrock of their success is the remarkably powerful ability to deliver real-time performance measures into the hands of store managers, while they're actually in a position to do something to affect the numbers.  Let's "unpack" what that means:

• the store manager (the partner) has the information now;
• he/she is responsible for the performance measure (i.e., he/she has the both the authority and the duty to ensure the particular measure is moving in the right direction and aligned with the firm's overall strategy); and lastly and most important
• the measures themselves are germane and important.

John Alber, the Technology Partner at Bryan Cave (AmLaw 100 #55), calls this "actionable intelligence," and says the benefits of making it available to front-line lawyers are "extraordinary:"

"We find that there is a very high correlation between use of these tools and strong metrics. The more they use these tools, the smarter our lawyers get about economics and the more flexible they become about what pricing and staffing structures they consider."

Better yet, after having used these tools for a relatively brief time, lawyers can compare how staffing and structuring decisions on past matters did, or did not, support profitability and the firm's other strategic goals.  In other words, they can derive their very own set of "comparables."  In short order, their instinctive understanding of what worked best in the past will lead them to more optimal decisions on new matters.

 Why not get some yourself?

Wilmer Cutler, in conjunction with Harvard Business School, and Chicago's Seyfarth Show, with Northwestern's Kellogg School of Management, have now followed Reed Smith and DLA Piper in initiating formal long-term collaborative efforts to train their current and future leaders.

While the details of each program vary (for example, Reed Smith offers curricula for everyone from senior members of the management committee to staff, while Wilmer Cutler intends to focus on leadership and strategic planning), the goal of, the rationale for, all are simple:  To train lawyers to lead complex, multinational enterprises given that nothing in a traditional legal education remotely touches upon the skills needed.

It gets worse:  A Hildebrandt Director who is a psychologist with a law degree has catalogued the personality traits common to lawyers:

"They include: skepticism; high cognitive thinking; urgency or impatience; autonomy; sensitivity or defensiveness; and a lack of sociability."

Shall we engage in the thought experiment of constructing a similar catalogue of traits common to successful business leaders?  Here are my nominees:

Instinctive trust of others; intellectual smarts combined with "emotional intelligence;" decisiveness; collaborative by nature; welcoming of alternative viewpoints and sincerely open to constructive debate; and an inborn temperamental ability to get along with a wide variety of people.

So not only do these executive education initiatives have their emotional and behavioral work cut out for them, they cannot apply the MBA template to law firm leaders:  "What works for GE will not work for law firms," since the art of "managing" a group of high-performing, verbal and analytic overachievers whose career success may have been largely built on standing out from the crowd, bears no resemblance whatsoever to employer/employee relations.

Finally, real money is at stake.  Not only does week-long immersion in executive education supplant otherwise-billable time, but the cost of the curriculum itself can be tens of thousands of dollars for a handful of partners.  Nevertheless:

Michael Pollack, a partner and director of strategic planning at Reed Smith, says that the training is critical to the firm's future.  "It's not cheap, but we're growing a lot, and as we grow we need more help."

Pollack and his firm are smart enough to recognize that as much as this costs, the alternative could be even more costly—and to act decisively by placing a savvy bet on preparing the firm for its future.

"Equilibrium" is a term that has special meaning in economics, although its definition can seem somewhat tautological:  It's the state of affairs where there is no impetus or force for change.  The textbook example is where the price in a given market reaches the point where supply exactly matches demand.

The "tautological" aspect is that of course supply always exactly matches demand, insofar as every item sold is bought and vice versa.  But the subtler meaning depends on analyzing the situation dynamically, not statically, as it is only from the static perspective that the equilibrium appears tautological.  From a dynamic perspective—which simply means asking what, if anything, will happen next—it could be the case, for example, that a new and more productive factory is about to be opened, increasing supply and driving the price down; or that a new use was just discovered for the commodity in question, raising demand and thus price; or that a cheaper substitute has been perfected, decreasing demand and price although the market participants themselves have changed precisely nothing.

 The interesting cases arise when whether or not one has achieved equilibrium is unclear.  We now have such a case, in the form of the decision by the UK's Addleshaw Goddard to abandon the "London premium" traditionally paid its City partners above what it pays its equivalent partners in, say, Leeds or Manchester.  The rationale for the (now obsolete) premium was to recognize the higher cost of living and remain competitive in recruitment.  The rationale for the new "equal means equal" policy is:

"Closing the gap between partners in the North and South is a way of banging the drum internally that we're one firm," said managing partner Mark Jones. "We account as one firm, there's no office division in terms of the figures, so there's no need for two points figures for entering the equity.  [...] "It's more important to have one partnership than to squabble over London weighting."

Admirable, sane, clear-headed, laudable indeed—but sustainable?  In other words, a new "equilibrium" capable of enduring indefinitely, or a false equality destined to collapse as surely as price controls bring rationing and prohibition brings black markets? 

The answer to the question, as I implied, is not obvious.  One (un-named) lawyer at another firm predicted Addleshaw's City partners would ultimately object, if not rebel:  Compared to the northern partners, "they're effectively being paid less."  But Jones characterized precisely the same fact as white, not black:  If it means that "our partners in Leeds and Manchester are paid super-competitively we see [that] as an advantage, not a problem."

My own prediction?  It will endure.  Internal labor markets within firms are never constructed or maintained with Delphic precision, and no one realistically expects them to be.  Given that Addleshaws' motivation for this is "One Firm, One Partnership" (as opposed to, say, caving in to a naked power grab by the north), I think the battle for the hearts and minds of the City partners has likely been won. 

There's a larger point as well:  New York, London, and Hong Kong will always be more profitable places to be than Chicago, Manchester, or Sydney.  Firms that do not address that "disequilibrium" with clear-eyed principles are sowing the seeds of divsion and rebellion. 

In more evidence of what it's nice to have more evidence of, The Legal Intelligencer reports that the marketplace for lateral moves is twice as active in Philadelphia so far this year vs. last year. Various hypotheses are trotted out, from headhunters and firm partners willing to speak for attribution, which all have one thing in common although they sound as though they don't:

• Associates nearing the partnership moment of truth who seek a move in-house before they're either "damaged goods" (they're dinged), or, conversely, they win The Tournament and discover they have 40 more years of something they don't really like to look forward to. In terms of supplying recruits to the lateral market, this is as hardy a perennial as you're going to find.
• Partners with practices that have become marginalized in their firms as strategic directions shift, or who are being expected to bill more hours than they'd care to. The move here is to a firm more aligned with their expertise, or a smaller, quieter shop.
• Partners (primarily, although there's no reason astute associates shouldn't be part of this pool as well) who feel their firm has weak or indecisive management, or who disagree with the firm's direction or fear it's simply adrift. What distinguishes this group from the second one is that the lawyer, not the firm, is the primary motivator behind the move.

The common denominator of these seemingly disparate motivations? A more liquid and better-functioning market for talent.

Barrels of ink have been spilled counseling the wisdom of individuals—especially highly educated, expensive professionals—finding true "alignment" between their personal skills and aspirations and the culture and values of the firm they work for. (Start how-many-decades-ago? with What Color Is Your Parachute; it's a long and polyglot lineage.)

In practice, this is notoriously easier said than done, but the good news is that the Philadelphia story is evidence that people are trying. A 2,400 hour/year partnership slot is, to state the obvious, not for everyone. More pointedly, it is just the thing for a lot of ambitious, competitive, Type A people—and when someone who's only motivated to give 90% on a long-term basis is put down the hall from those pure Type A's, guess who loses? This is actually to be celebrated, not lamented.

Why? We'll give Adam Smith the last word:

"As it is this disposition which forms that difference of talents, so remarkable among men of different professions, so it is this same disposition which renders that difference useful. [...] Among men, the most dissimilar geniuses are of use to one another."*

---

*The Wealth of Nations,Book I, Chapter 2 ("Origin of Division of Labour"), at 17-18 (Modern Library Edition: New York 1994).

Aren't you relieved that you don't have wolfpacks of Wall Street analysts and the multimedia, 24/7 business press breathing down your neck to deliver "the numbers" every quarter?  Isn't it great living in private-firm land and having the luxury of focusing on the long run?

The problem is:  Are you really?  I would argue that the pressures of your partner-colleagues, who have this irrational belief that every year should bring another new Mercedes and two weeks in the south of France, are at least as relentless in motivating short-term thinking as the most acid-penned analyst.  So when McKinsey does a piece counseling public companies on how to balance "performance" (read: this quarter) with "health" (sustainable, profitable growth), I say it's germane to us. Here's the trap:

"One major European financial-services company recently discovered how easy it is for performance and health to get out of balance. After the company had achieved an impressive turnaround in its short-term financial performance in the three years to 2004, it found to its dismay that this success had been accompanied by falling customer service levels, a huge increase in staff turnover, and a fall in its share price. Management complained that the financial markets didn't understand what the company had achieved. But in reality they understood, all too well, that its short-term success had been purchased at the expense of its underlying health."

This firm is not the exception.  Shockingly, more than 80% of executives surveyed said they would cut R&D and marketing costs to make the quarterly numbers—even if they believed it would hurt long-term health. 

I'm now going to assume you're convinced longer-term thinking is a healthy habit to have.  Let's try to dimensionalize what that means.

Strategy, as always, comes first.

The trouble with the future is that it's unpredictable, so deus ex machina strategies delivered from on high are unlikely to survive an encounter with reality.  The sane and effective alternative is to develop a portfolio of initiatives, spanning different practice areas, geographic regions, and most importantly different time-frames, that will give your firm options down the road.  Only you can identify what those might be, but some examples would be:  Putting a few litigators in an office opened for another reason to test the local waters; making a bet on a region's economic growth engine and preparing to serve it (wouldn't it have been nice to have a high-tech practice capability in northern Virginia ca. 1993?); or deciding that it's too expensive to cherry-pick laterals for practice group X and start a concerted effort to groom associates for that field.

Metrics are next.  To be of any use, they must be:

• focused;
• relevant; and
• few.

By "few" I mean three to five, and you probably know subconsciously what some of them are:   Client satisfaction; retention of key people; depth of your management pool.  If "collection rate on past-due receivables" popped into your mind, go to the back of the class.

Communication. This means both internal and external.  Haven't yet done a client survey?  Do you think P&G would change the type font on the end-flap of a tube of Crest without multiple focus groups?   You care about your clients; it wouldn't hurt to tell them.  Ask them what they're worried about.  Even spend a "free day" with each of your best clients and let them set the agenda; if that doesn't generate many multiples of the "sacrificed" time, drinks are on me.  You should also care what the trade press and even professors at law schools you like to draw from think about your firm; don't leave them to figure it out for themselves.

Internal communication, in a business comprised of "elevator assets," is even more important.   And for the record, include associates; you were once one yourself and, with any luck, they are your firm's future.

Leadership is indispensable; nor is it a "soft" value.  Anyone bright and verbal enough to be a professional in your firm will be highly attuned to the overall message senior management is delivering.  And don't think that message doesn't come through loud and clear, thanks to what Niall FitzGerald, former Unilever Chairman and CEO, called the "extraordinary amplification system" boosting the gain on all pronouncements from the top.  Perhaps above all, in a law firm a leader's goal should be to nurture the future by cultivating talent:  This means making sure the right incentives are in place to promote collaboration, effort devoted to the greater interest of the firm and not one partner's individual clientele, sharing, and tying compensation to more than this year's results.  

In a memorable metaphor, McKinsey recommends thinking of the role of every manager as that of a "prince" rather than a "baron"—someone responsible for the commonweal as a whole rather than a limited jurisdiction.

Lastly, remember this from Econ 101:  Pay people for what you want them to do. 

Incentives will always out in the end.

Dick Tyler, managing partner of CMS Cameron McKenna (with the coolest law-firm URL I've yet encountered), sounds a defense of the firm's reversion from its foray into merit-based partnership compensation to its lockstep roots, combined with an all-equity partnership system, in terms both spirited and remarkably sane.

Starting from first principles, Tyler reminds us " that what is important in creating the best firm we can is not our reward system per se, but whether or not we have an effective and functioning system that addresses partner performance issues on behalf of our clients."  What does this mean in practice?

• Lockstep enforces a high and consistent level of quality across the board; or, as Tyler puts it conversely, "A tolerant lockstep system is disastrous."
• Because the contribution of the entire firm working together is always guaranteed to be superior to that of individuals working alone, "lockstep achieves fantastic alignment between the interests of our clients and of our partners."

Most importantly, Tyler believes--and I resoundingly second--the notion that lockstep re-focuses the debate away from the frankly selfish issue of compensation for individual partners and squarely back where the founders of your firm would have insisted it belongs:  On what's best for clients.

A few weeks ago, I posited that Coudert had every appearance of primping itself for a merger.   But as the news becomes increasingly grim, disintegration seems ever more likely.  What's left of value?  Basically, New York.

Poignant that The Firm that showed the way to a global presence can evidently no longer compete on the stage it did so much to create. 

"As a profession, if we are to be taken seriously, we need to move to a sensible reporting regime that is based on real figures, and not on those stage statistics that appear."  The words of an impractical academic?  A frustrated journalist rattling the cage of law firms' secrecy?  Try Guy Beringer, Allen & Overy's senior partner, announcing the public release of fully transparent, GAAP-compliant, detailed financials for the firm, including individual partner-by-partner compensation—a potentially revolutionary development. 

It gets better:  Beringer insists the rest of the Magic Circle do likewise, if they want "to be viewed as competent international businesses."

Lest we get ahead of ourselves, A&O's admirable move comes on the heels of their conversion to LLP status last year which, in the UK, entails mandatory disclosure of these figures:  But they're not whining.  To the contrary:

David Morley, managing partner of A&O, said: "There is a trade-off between the limited liability wrapper and disclosure and we think it's a fair trade-off. We hope we are setting the standard for the profession."

Additional coverage from The Lawyer is here and here; I've also requested a copy from A&O directly.

When other firms remove their cloaks, will we see untoward changes in the profits-per-partner rankings? Does the Sun rise in the East?

Update as of 5:15 pm:  Here's the press release announcing A&O's results, which contains a severely condensed income statement and balance sheet if you scroll down a bit.   Highlights:

• The firm is focusing on productivity.  While the total number of lawyers was down slightly, productivity rose, permitting revenue to grow by 2%.  Combined with driving costs down by 1%, total profit was up 8% and PPP was up 5%.
• North America and China are viewed as the "key growth markets."
• Pro bono receives genuine resources:  50,000 lawyer hours, or £12-million of billable time.
• The largest single expense is "staff costs" at 41.2% of revenue-no surprise whatsoever.
• Second is "other operating charges," which (although they don't say so) is office rent and associated costs such as telecom and utilities.
• No other expenses are material.
• Leaving a gross profit margin (before taxes) of 36.7%, which is handsomer than even Microsoft territory.

Outsourcing may currently be at the stage of "mostly talk, little action"—or, what is my theory, those who are doing it aren't talking—and in the absence of more real-world empirical experience, sometimes the best alternative while we're in something of a holding pattern is a solid, comprehensive overview of the plusses and minuses, the benefits and costs, and a realistic discussion of what may and may not work going forward.

Serendipitously, AsiaLaw has just provided such a well-researched piece. 

Consonant with my impression that outsourcing has yet to gain serious traction is a survey conducted by Washington's American Corporate Counsel Association last year which found that only 1.8% of GC's surveyed were actually doing it, although 8% expressed some level of interest.  Even Ram Vasudevan, CEO of Mumbai-based QuisLex (a firm which very much wants to be on the providing end of outsourcing) admits that "it's very much in the early stages."  Why so?  A variety of reasons:

• Neil Hirshman, a Kirkland & Ellis partner in Chicago who specializes in advises clients contemplating outsourcing, says that uncertainty surrounding issues such as maintaining attorney-client privilege are still unresolved, and that lack of clarity can scare people off.  Similarly, my friend Ron Friedman just pointed out that the DC Bar has enacted an antediluvian rule requiring temp and contract attorneys to be members of the DC Bar—which certainly knocks Mumbai into a cocked hat.
• Firms such as HSBC and Intel remain to be convinced that the overseas attorneys can truly understand the client's business.  Likewise for Qantas, whose GC observes that aviation law tends to be highly specialized and that effective counseling requires a profound understanding of the airline's strategic vision, something that's neither desirable nor practical to school a distant, part-time lawyer in.
• If one assumes that offshoring must start at the bottom end of the food chain, that raises the question whether there's all that much money to be saved.  Another friend, Rob Hyndman, sees it "largely as an issue of substituting offshore for domestic clerical work"—implicitly questioning whether the startup costs of launching an offshore operation would be recovered quickly, or at all.
• Finally, there's the perspective from the other end of the fiber-optic line:  Highly qualified Indian lawyers might not want to do work suitable for paralegals or junior associates.  Why wouldn't they prefer to work on more complex domestic (Indian) matters?

I of course have my own take on "where the ceiling is placed for Indian lawyers working with corporate America," but you'll have to read to the end of the article to find out what I had to say.

A fellow who does internal blogging for a Magic Circle firm (I'm not at liberty to say which one), and who is working on a Ph.D. in knowledge management, just asked me these questions via email, and I thought the subject matter would actually be of interest to many of you.  His Q's and my A's:

Q:  Do you believe there is a direct relationship between KM and firm profitability?

Yes.

Q:  If yes, what would be top three reasons why?

1. KM can provide a credible and "ownable" distinction for a firm vis-a-vis its competition if the firm is thus enabled (by KM, that is) to provide more rapid, thorough, and focused responses to client issues.
2. From the perspective of professional development, one of the biggest drags on firm profitability is having to write off or discount associates' billable hours when the client perceives (often rightly) that little value was provided.  To the extent associates can be brought up to speed more quickly--through "continuous learning" made possible by KM--the realization rate on their billable hours will increase, which provides a direct bottom-line gain for the firm (i.e., overhead/expenses increase zero, revenue increases > 0).
3. IF a firm is able to do "value billing" rather than hourly, a robust KM platform can help make creation of deal documents, etc., extremely efficient and productive, yielding very high margins.

Q:  If no, what are the top three things why firms "do" KM anyways?

(Realizing this is a counter-factual so far as I view things)

1. Because everybody else does it (don't discount this as a motivator for lawyers!).
2. Because they have a vague notion that it will help them with professional development--but may not have made the precise connection outlined above.
3. Because they paid some consultant a lot of money for advice and KM was one of the recommendations (the fallacy of sunk costs,* but how many lawyers have had meaningful training in economics?).

Q:  How would you rank the following means to get lawyers to share knowledge by efficiency? (and would you rank them differently for partners and associates?)

[Note that I rank them 1—5, from most effective to least effective.]

We shall see what he makes of this (he's polling other people as well, I am greatly relieved to report), and to the extent any of his work becomes publicly available, look for it here.

*The "fallacy of sunk costs" is a tempting psychological trap of the general form, "We've spent so much already, we can't back out now."  The fallacy is in letting your past expenditures, which are unrecoverable no matter what you elect to do, influence your future course of action.

I want to show you another view of the AmLaw 100, this ranked by "Revenue/Lawyer," a trivially simple calculation to perform, but which reveals a wealth of insight. 

Some of the results are obvious—our friends at 52nd and Sixth have almost lapped the field—but others are surprising.  What I've done below, besides adding the totals and average, is to give you a way of identifying firms that are "punching above their weight," inasmuch as their revenue/lawyer rank is materially higher than their AmLaw rank, by highlighting them in red.  And, in the other corner, shall we say, are firms whose AmLaw rank is substantially above their revenue/lawyer standing.  

You can read this many more ways than one, and for starters it's obligatory to note that high-end deal work will always be more lucrative "per capita" by its nature.  That does not mean, to my mind, that the firms ranked 1 through 7 deserve any less credit for being at the top of this brutally competitive food chain.

Conversely, firms that are below par on the revenue/lawyer metric may be where they are as a conscious choice of strategy—possibly including the biggest outlier of them all, Baker & McKenzie (hint:  you're going to have to scroll way way down to even find them).   Others may be in that position as they digest recent acquisitions, or they may be serving an industry niche in the doldrums.  Finally, there's the possibility that they've opted for "lifestyle!"  (Did I say that?  Aren't there Bar disciplinary rules about using that word!?)

 In any event, enjoy.  We can be sure that this will look different (OK, not at the top) next year.

According to The Wall Street Journal, the popularity of economics as an undergrad major is rising:  Up 40% in the US in the past 5 years, and the #1 major at Harvard, Columbia, and NYU.  Even in Russia and Poland—or, when you think about it, especially in Russia and Poland—its popularity is surging.   It comes at the expense of history (not a good thing), political science (a very good thing), and sociology (a spectacularly good thing).

With plausible, if not slam-dunk, justification, the reporter attributes the shift to a perception by undergrads that economics will be perceived as a smart choice for the job market after graduation.

Be that as it may—and I cede pride of place to no one in my belief in the intrinsic value of a classic, well-rounded "liberal arts" education—the good news here is that anything under the sun we can do to increase the economic literacy of the American populace is a per se good.  Until the majority of people, and politicians, understand such rock-bottom principles as opportunity cost, unintended consequences, dynamic vs. static analysis, and even good old supply and demand, we will continue to make bone-headed public policy decisions such as requiring the last 0.01% of asbestos removal, at a price per life saved of about half a billion dollars, instead of installing more highway guardrails, at a price per life saved of about $25,000.

Will not be covered in these pages.

In case you were worried.

Belated Happy 4th of July to one and all.   Around here we tried to keep the celebration very traditional and low-key:  Took in a Mets game at Shea (the Yankees were in Detroit losing to the Tigers), had Central Park virtually to ourselves, and made sure Venus was flying the colors.

The UK's The Lawyer has a weekly poll, which as typically befits such "reader candy" items is usually trivial or gossipy, but this one got my attention:

"Last week we asked: The Lawyer revealed this week the resignation of White & Case's London head on the basis that "a significant fee-earning role and managing the London office were incompatible". Should managing roles be left to non-lawyers?

"Yes 64%

"No 36%"

Unscientific, of course, but if roughly two of three already endorse the notion of a professional layer of management, mightn't an enlightened campaign to persuade the rest be in order?  Starting from the premise that rainmakers are best left to doing what they do best?   

Moreover, the qualities that make for the crème de la crème of the legal profession – extraordinary thoroughness, a focus on spotting all the issues, exhaustive research, a high degree of risk aversion, an utter inability to risk being wrong – are pretty much a short catalog of all the qualities a successful businessperson will not embody.

Alternatively, one can take the DLA Piper route and recognize that if lawyers are to manage, they could benefit from immersion in some Harvard Business School executive education.   A current article discussing just this initiative—for which DLA is sincerely to be commended—repeats the erroneous assertion that this is a first.   Actually, Reed Smith struck a similar deal with the Wharton School nearly a year ago.  While noting that law firm management is increasingly professionalized, the writer makes this odd observation:

"Management skills are not just about analysing spreadsheets. As with any business, running a law firm is about people skills first and foremost. Which means getting the best out of a highly talented workforce. That is the biggest challenge for any law firm leader, and some business schools with regular intakes of relatively aggressive, egocentric investment banker types forget that."

Pardon me?  Since when are the leaders of the AmLaw 100 shrinking violets, and since when do investment bankers have a lock on the "aggressive, egocentric" personality type?  

All in all, a confirmation of what I've been writing about now for more than awhile: 

Driven by the size and complexity of today's multinational firms, management at a senior level is more than a full-time job, and we can use all the help we can get.