September 2005 Archives

Most would agree that one of the most difficult things to get lawyers to do is to change, and that changing a law firm itself is an order of magnitude more difficult.  Many managing partners I know, some of whom arrived on the scene of "a burning platform," have recounted that the only time change meets relatively little resistance is when it's self-evident to all that drastic action has to be taken.  Even then, tragic examples such as Brobeck and Coudert instruct us that there are no guarantees.

But unless your firm is organized and performing optimally in all regards—in which case please call or email me because I want to nominate you for some kind of heroic award—change is often in order.   What can we say about how to make it happen?  What, in other words, is entailed in "leading change?"

An excellent example comes from McKinsey's analysis of the first five years of Alan G. Lafley's tenure as CEO of Procter & Gamble, the world's leading consumer products company.   Recall if you will that when he took the helm from Dirk Jager in 2000, P&G had issued three profit warnings in four months and its stock had just slid 30% on a single day.  Worse (from his perspective anyway), as a company insider with 25 years under his belt, Lafley wasn't viewed by Wall Street as the white knight riding in to save things, and the stock slide a few more points the day his selection was announced.

But fast-forward to five years later and Lafley's results speak for themselves:  Revenues up 30% and profits up 70% (to $51-billion and $9.8-billion, respectively).

How did he do it?  Perhaps surprisingly, he, famously in league with Lou Gerstner at IBM, refused to announce "a vision."  His focus was strictly on execution.  Well, great, but what does that mean?  For Lafley, the key ingredients were:

• Forcing managers to challenge their assumptions as a means of uprooting complacency and forcing them to make strategic decisions.  This also entailed setting some aspirational goals.  Too many of P&G's product lines and brand managers had fallen into a pattern of looking for another 1% incremental growth year over year, and had lost sight of the possibility of transforming markets.  "You can get used to being a player without being a winner.  There's a big difference between the two."  Does this sound like any practice groups you know?
• Again, forcing managers to make strategic choices:  In other words, you can't have, or do, everything.  As Lafley puts it:  "Most human beings and most companies don't like to make choices.  And they particularly don't like to make a few choices that they really have to live with.  They argue, 'It's much better to have lots of options, right?'"
• This in turn leads to creating "Not-Do" lists, as in "this is something we're not going to do."  And if somebody runs off the rails and starts doing it, they receive zero funding, which tends to make them reconsider.
• But tough love must be tempered with mercy, and during any transformation a genuine risk is that people will become either so overwhelmed by the task at hand or so frightened of making mistakes that they'll freeze, and all will grind to a halt.  To counter this a leader needs to draw attention to the positive, reward small gains, and reinforce morale.  So, by contrast to his predecessor, Lafley never criticized the P&G "culture."  Rather, he stood by the firm's core values and reaffirmed them:  "To improve the everyday lives of people around the world [with] products that deliver better performance, quality, and value.  That's not going to change."  What is your firm's comparable mission statement in a dozen words?

The focus on execution has another implication, one Lafley quite self-consciously realizes:  Contrary to Wall Street's initial skepticism, his 25 years in operations at P&G meant he had an intimate knowledge of the company, with this tremendous benefit:  "The more deeply you understand something, the more willing you are to take risks and the more intelligent those risks are....  I knew how and when we could take risks and stretch ourselves to go for peak performance—without breaking down."

P&G has 100,000 people in over 100 countries, and English is a second language for many employees.  Now tell me it's too hard for you to change an Anglo-American law firm where—face it—there is tremendous commonality of background, experience, and purpose among your people?

This being an equal opportunity blog in terms of eligibility for criticism or praise, today I offer a heartfelt endorsement of what Clifford Chance is doing right—and add that other firms aspiring to a truly sophisticated approach to their strategic decision-making could do worse than borrow from Clifford Chance's playbook.

Lest there be any misinterpretation of my previous post recounting Clifford Chance's travails following the unintentional release of information from its Paris office's CRM system, let me be clear:  The target of my ire at recounting that sorry story was Clifford Chance in third place.  In first place was the anti-intellectual, anti-nuance, anti-original-thinking scourge of Political Correctness; and in second place was the abject and jejune cowardice of Airbus/EADS, taking offense at purely imaginary slights.  Indeed, the clearest indicator of Clifford Chance's actual thinking in regard to the leaked data can be found simply through textual analysis of their spokeswoman's statement which, as I noted, used the phrase "highly inappropriate" in no fewer than three different formulations. 

"Highly inappropriate" is second only to "some concerns..." as the phrase people grasp for when they cannot figure out for the life of them what's actually wrong with something but they know to a fare-thee-well that deep moral opprobrium will attach unless they condemn it.  In other words, Clifford Chance was a victim of the toxic intersection of PC'ness with, evidently, one of the world's most thin-skinned clients.

But today we have reason to celebrate genuinely forward-looking, thoughtful leadership.  CC, in conjunction with Oxford Analytica, has developed and distributed to its partnership a geopolitical forecast for the next ten years laying out three scenarios:  (1)  That China invades Taiwan with economic embargoes against Beijing as the result; (2) that the US, licking its wounds from Iraq, retreates into isolationism; or (3) that the status quo more or less prevails.  [My money's on #3, just for the record.]

Carefully selected groups of partners within CC, organized primarily along geographic lines, have been asked to respond outlining the implications for their regions of each scenario, and estimating the likelihood of each.  Based on that, Peter Cornell & Co. will plan the firm's strategic asset allocation, with the expectation that it will commit far more resources to the US and triple headcount in China.  [Sounds like Peter's money is also on #3, no?]

But wait, there's more:  CC is also in the midst of a stem-to-stern re-evaluation of its partnership compensation system (an issue which, as we know, perpetually evades a settled equilibrium), with the expectation here being a firmer, albeit broader, endorsement of lockstep.  For a firm at CC's point on the growth/maturity trajectory, this surely sounds correct.

In short:  A highly sophisticated, rigorous and yet flexible approach to strategic planning, together with a clear-eyed attack on probably the single most contentious issue for the firm over the past five years (lockstep)—a model of professional management at the highest level.

Actually, this post is less about hockey players and associates than it is about how the top firms are all able to mysteriously agree on the "going rate" ($125,000 for first year's) without colluding, and on the dynamics behind the scenes when that rate abruptly jump-shifts to a new equilibrium.

The wonderful Robert Frank has the hockey-player story.  (Frank has been a professor of economics at Cornell since 1972, and co-authored Principles of Microeconomics with our Fed Chief heir apparent, Ben Bernanke; if you ever see his byline, you owe it to yourself to read at least the first paragraph and see if he doesn't draw you in.)

Frank recounts the hockey-player mystery as analyzed by Thomas Schelling, just-announced Nobel Prize winner.  In 1978, Schelling asked why, since all hockey players left to their own devices will prefer to play without a helmet, in secret ballots they nevertheless vote strongly in favor of mandatory helmets.  In other words, if the rule is such a great idea, why don't the players just don the helmets on their own?

The answer takes us into territory where the Invisible Hand breaks down.  Any individual (rational, utility-maximizing) player believes he can play marginally better without a helmet—seeing and hearing more acutely.  The IH would therefore posit that all aggressive players would discard their helmets for the perceived competitive advantage:  A slightly higher chance of winning is valued more than the increased safety a helmet provides.  But of course, once no one is wearing a helmet, no one has a relative advantage in the game—and all that has been accomplished is to raise the risk level for all.  Thus secret ballots mandate helmets.

Similar "beyond the Invisible Hand" logic applies when it comes to associates' workloads.  If everyone else is leaving the office at 5:00 (i.e., wearing helmets), I can stand out from the crowd by working 'til 8:00.  Once everyone is working 'til 8:00 (doffing their helmets), my competitive advantage disappears and the only result is 2,200 hours/year minimum for all.  As Frank says pithily, "The invisible hand assumes that reward depends only on absolute performance. The fact is that life is graded on the curve."

Now turn to the flip-side of associate hours:  The "going rate."  Legal Week is covering the possible eruption of a salary war in the UK (more precisely, a one-time salary spike), where Allen & Overy recently fired a salvo by hiking starting salaries, and all are holding their collective breath to see whether others will follow suit.

"Haven't we been here before?!" you are asking:  Indeed we have; the profitability of many US firms took a lasting hit after the dot-com-driven spike from $100,000 for $125,000 in 2000.  So this time around, we know better, right?  Maybe not.  This is the dilemma:

• Law firms have very few controllable (variable) costs. 
• Of their fixed costs, compensation is far and away the largest piece of the pie; real estate is next, and essentially everything else is immaterial.
• But the war for talent is one that, on pain of resigning the firm to second-rate status, simply must be won at any cost.
• When associates are in short supply, as they evidently are now in the UK, guess who gains the upper hand at the imaginary bargaining table?

A brief digression on "in short supply:"  In a tautological way, demand and supply are always equal, in the sense that the number of associates who start at City firms (supply) is identical to the number who are hired (demand).  Observations about "tight" or "short" supply refer not to this static arithmetic truism but to the underlying changes in the marketplace:  Here, the fact that corporate, M&A, private equity, and funds work are all ramping up and four years ago in the downturn many UK associates were shown the door.

So is there any alternative but for City firms to follow A&O's lead?  Isn't the inevitable handwriting on the wall?

I invite you to participate in the following thought experiment:  Permit yourself to ask if there might not be something other than $$ (or ££ or €€) to entice associates to come, and then to stay, at your firm?  After all, in the Maslow hierarchy, money can satisfy physiological and safety needs, but not belonging, esteem, or self-actualization needs. 

Realistically, any City (or AmLaw 200) lawyer expects to work hard and concomitantly to be paid well.   But how many hold out any prayer, much less expectation, of enjoying a feeling of belonging, of, dare we say, loyalty to their firm?  (We're discussing associates, but experience with lateral partner moves confirms the indisputable value loyalty has in the marketplace:  No partner will move for, say, a 10% bump-up, in a stratosphere where 10% could be real money.   Loyalty is the counterweight.)

Absent any sense of belonging, we have highly paid but miserable people; with a sense of belonging, we might aspire to well-paid but happy people.  This would require a firm and consistent commitment to recruiting people not just with the right technical skills but those with the right cultural and behavioral profiles.  (Or, to paraphrase Legal Week, we would need to break the syndrome of "hire for the technical, fire for the behavioral.")  I stress "consistent:"  Creating a:

• palpable,
• meaningful,
• credible

firm identity that differentiates you from your peers takes both vision and hard work. 

The good news is that, when the tough times return, as they will, you will have a reputation (a marketplace asset every bit as real as its counterpart, loyalty) that will enable you to stand apart from the firms whose recruitment and retention policy amounts to "pay them now, shoot them later."

And you don't have to get partners in all the City firms to agree to this by secret ballot; you can do it starting in your executive committee.  Then you will be playing hockey without a helmet while all around you are encumbered with their gear.

The Times (UK) reports, probably for its juiciness quotient, that data from an internal Clifford Chance CRM system at the Paris office inadvertently came to light, and included—quelle surprise!—insights into some key executives at major clients including Airbus and EADS, its parent.  Last time I checked I thought that was part of the raison d'etre of a CRM system, but that would be to ignore the imperial spread of Political Correctness, which has now overtopped the levees, as it were, and threatens the ruination of informed and adult discourse.

What "insights," exactly, are we talking about?  On the one hand, we have:  “A great guy”, “very straight” and “a rising star”.  But then we also have: “very powerful for five years: marginalised since then” and “very stressed when he is under pressure”, as well as such facts as that one executive was recently divorced and another had lost his house in a chemical plant explosion.

Shall we now stand back out of range of the flying fur?  An Airbus spokesman promptly condemned the remarks as "absolutely inappropriate" and added for effect that they "were amazed,...knew nothing about it,...totally disapprove,...[and lest you doubt] feel very strongly."  They added that they might reconsider using Clifford Chance at all.

Meanwhile, a Clifford Chance spokeswoman said in no fewer than three sentence constructions that the material was "absolutely inappropriate," apologized for being "unable to stay on the back" of all 220 lawyers in the Paris office, and said it was an isolated incident, "not intended to be nasty in any way."

Upshot:  The information has been purged and evidently some Solon's may make inquiry into whether the material offended French privacy law, which declares with near total opacity that databases must contain only what is “adequate, pertinent and not excessive”, upon pain of up to a €300,000 (US$380,000) fine.

Now let's review the bidding:  In a consummately professional and indeed forward-looking fashion, Clifford Chance maintained—and lawyers actually contributed to, which may be the real miracle here—a CRM system with, in my opinion, Truly Useful information.  If someone becomes a hothead under pressure, I'd like to know that it's him and not me.  Likewise, I'd prefer to avoid bone-headed attempts at small talk that reference the divorced fellow's wife or the chemical plant victim's country home.  Upon exposure of this "pertinent, and not excessive" information (I cannot opine on whether it was "adequate" as I have no insight into the extent of the data), Airbus/EADS decided to go ballistic, to the extent of threatening to re-examine the entire client relationship.  And Clifford Chance, inevitably, given that their sudden opponent had gone nuclear, completely caved. 

I don't know whether the cravenness of Airbus/EADS or the unconditional and unilateral surrender of Clifford Chance to the P.C. gods is more depressing, but for all involved, ladies and gentlemen, I have three words:  Spine.  Backbone.  Courage.

Occasionally it's a worthy endeavor to pay a moment's tribute to the eminent Scot for whom this site is named, and in the on-line world there are few better starting points than The Adam Smith Institute (London).  There you can find a highly abbreviated list of Adam Smith quotes, search the text of The Wealth of Nations, browse their very own blog, and even read a fascinating timeline of his life. 

For example, did you know that among his contemporaries—many of them acquaintances if not friends—were: 

• Sir Christopher Wren, Sir Isaac Newton, Edmund Burke, John Wesley, David Hume, Voltaire, Jonathan Swift, Jethro Tull, Alexander Pope, Benjamin Franklin (and all the American Founding Fathers, for that matter), Charles Louis de Montesquieu, William Pitt, Joseph Priestley, William Blake, Captain Cook, Sir William Blackstone, Peter the Great and Catherine the Great, James Watt, Jane Austen, Edward Gibbon, and Dr. Samuel Johnson; and noteworthy events during his lifetime included:
• The invention and subsequent refinement of the steam engine; the discovery of New South Wales; the American and French Revolutions; the founding of the British Museum, Covent Garden Opera, and the Royal Academy of Sciences; and publication of Blackstone's Commentaries and the first edition of The Encyclopedia Britannica. 

Of more intellectual substance is a review by Leo Rosten of The Wealth of Nations, which begins as follows:

"It is a clumsy, sprawling, elephantine book. The facts are suffocating, the digressions interminable, the pace as maddening as the title is uninviting: An Inquiry into the Nature and Causes of the Wealth of Nations. But it is one of the towering achievements of the human mind: a masterwork of observation and analysis, of ingenious correlations, inspired theorizings, and the most persistent and powerful cerebration."

Alternatively, try a delightful 1994 "interview" with the master himself.

For the last word, see this.

Now get back to work.

Our text this morning is the two-part cover story of this weekend's Barron's, on the creation, rise, and dominance of Lexus in the luxury auto market.

And I select it not because Lexus ownership surely over-indexes among readers of "Adam Smith, Esq.," but for its powerful and focused message about how to enter and conquer a difficult, competitive, high-end marketplace, in the teeth of nay-sayers and doubters.  Consider the situation facing Toyota in 1986 as it began the launch of what would be Lexus:  It was viewed as a chronic lightweight in the industry, amply capable of churning out underpowered econoboxes, but with all the brand cachet among the well-heeled crowd of, say, professional wrestling—or, as one wag put it, as probable as introducing "Beef Wellington at McDonald's." 

Toyota's genius?  Not to take on Cadillac and Lincoln—not to mention BMW and Mercedes—squarely on the turf of luxury and performance, but to stake out a new, essentially unoccupied, position:

"In its rise to the top, Lexus has forced competing auto makers around the world to rethink their own models, especially by the key measure of reliability. Lexus, which largely eschews bold styling and tire-searing acceleration, has demonstrated that legions of luxury-car buyers value reliability above all else. In survey after survey, Lexuses have been shown to have fewer mechanical breakdowns than all other cars in all price ranges. [emphasis supplied]"

While some analysts note that Lexus had a window of opportunity in the late 1980's opened to them by the inattentive and complacent attitudes of their competition, the relentless focus on reliability comes through as the what drove their success:

"'With a Lexus in your driveway, you knew that your friends knew that you had bought wisely,' recalls Csaba Csere, editor of Car and Driver magazine. Indeed, Lexus has always placed high in long-term quality ranking. This year, for the 11th straight year, the brand was ranked No. 1 by J.D. Power and Associates."

Think of that!  Eleven years in a row—this is, to say the least, no accident.  And emulating it is harder than it looks.  How many PC manufacturers have tried to clone Dell's hyper-efficient supply chain?  How many entertainment companies Apple's bullseye after bullseye in design?  How many airlines Southwest's no-frills-plus-fun business model?

It takes obsession to make this happen: Care to bet how many of 1,500 original applicants for Lexus dealerships were accepted?   72 (that's less than 5%, to spare you the calculation).

Swell, you're saying to yourself, but haven't we entirely departed the realm of law firms?

Not really:  The Lexus story is the story of an outsider challenging entrenched incumbents by providing something customers would respond to even though the incumbents thought it vaguely beneath them:

• a reliable,
• quality,
• "perfect" customer experience
• without exotic styling, over-the-top luxury touches (the new Rolls Royce has an umbrella holder built into each rear door; need I say more?), or blistering performance.

Now, imagine an AmLaw 50 firm deciding to emulate Lexus.  The mantra switches from things like "best of breed," "biggest deals," and "your most arcane problems solved" to "quality," "reliability," and the "perfect" client experience.  Not "the exotic, the ne plus ultra, head-turning guaranteed," but "here for you, solid, always dependable."

Do you think clients would flock to this largely unoccupied positioning?  Wouldn't it be fascinating to watch someone try?

A radical repudiation of a time-tested model or a long overdue dose of sanity?

One imagines those are the reactions to Allen & Overy's revealing that it's considering a third career path for associates, neither "up" nor "out," but "director."

A bit of context:  A&O's head of leveraged finance, Tony Keal, a partner there for 23 years and "widely regarded" as one of the top LBO lawyers in Europe, recently jumped ship to Simpson-Thacher.  Not known for his reticence, last June Keal had sent an email to the entire A&O banking group grumbling that associates' salaries were lagging the market and that the "carrot" of partnership was no longer what it used to be given pressures to keep the ranks of those with full equity small.  The result, predictably, was neither to increase the likelihood of associates' being promoted to full partner nor to inspire across-the-board raises, but rather to raise the issue of dissatisfied associates in a rather public way.

Coincidentally, A&O just happened to have recently concluded its triennial survey of all staff, and has also received feedback from an "Associates Forum" citing opaque career prospects, lack of guidance and feedback, and worries that their pay is, indeed, lagging peers.

All this has led to A&O "actively considering" setting up a director role as a third way for associates—a sort of long-term super-senior associate position with, presumably, little or no prospect of partnership but also little or no prospect of being invited to leave assuming the requisite level of performance is sustained.

Only in our industry do we take trained professionals who are highly productive, profitable, and conscientious, and rudely show them the door just as their careers are poised to take off.  Imagine an alternative.

I'm heading to San Francisco this afternoon for four days (back Wednesday night on the red-eye):  Mostly business, but a bit of pleasure as well in my second-favorite City, and I'll be staying with friends in the East Bay. 

If the business part goes as hoped and planned, you'll be reading about it here in the near future (and if not, kindly forget I mentioned it).

Blogging will be sporadic if extant at all, and largely dependent on the whims of the WiFi connectivity gods.

The Lawyer (UK) is one of those publications you ignore to your impoverishment:  Somewhat like the role the Financial Times has vis-a-vis The Wall Street Journal, or The Economist vis-a-vis Business Week, The Lawyer provides a refreshing, candid, often cheeky, Brit view of BigLaw. 

A few weeks ago I noted their release of The UK 100, roughly coincident with The American Lawyer's release of the AmLaw 100, but today I want you to attend to an accompanying story prompted by this problem:

"Every year, when we put together The Lawyer UK 100 Annual Report, we get the same refrain: how can you compare [PPP, or profits per partner, among] firms that have completely different equity structures? Partners from firms with all, or mostly all, equity partners complain that they are not being judged fairly. These firms are constantly frustrated at what they see as manipulation of the figures."

Game the numbers?!  (Did I say that?)  Heaven forfend.  But of course the annual PPP bakeoff has become one of the more celebrated steeplechases of the year, and high stakes bring, understandably, strenuous efforts to perform.

Welcome, then, to salutary antidote:  Average Earnings Per Partner (EPP), or, roughly, total firm income divided by all partners, equity and non-equity alike.  Actually, it's a bit more complex or subtle than that.  Since what non-equity partners take home is, by definition, not a strict function of a firm's profits, The Lawyer takes (a) the total net profits distributed to equity partners, and adds to that (b) the figure arrived at by multiplying the total number of non-equity partners by those "partners'" average annual take-home (which the firms were evidently willing to provide); and finally (c) divide by the global number of all partners, equity and non-equity alike.

Just what do non-equity partners earn?  Typically, a salary plus a small percentage of the firm's profits, and often a bonus on top of that—which may reflect, for example, a cost-of-living allowance that in London is higher than it would be in, say, the Midlands.

The resulting table of selected results is, to my mind, utterly fascinating, and worthy of many minutes of scrutiny.  Not only do they calculate the new EPP figures for many firms, but they also calculate a "new" profit margin which adds back to total reported income the earnings of all non-equity partners.  Not surprisingly, this boosts the margin almost across the board, often to Google-like territory.  Just for example, DLA Piper's margin jumps from 22% to 41.4%, and Clifford Chance's from 27% to nearly 34%.

Is EPP, then, ever going to supplant PPP as the Holy Grail?  Of course not.  Nor should it—after all, the equity partners put up the capital, take the risk, and at the end of the day hold the keys to the kingdom.  But for insight into how firms leverage themselves and distribute the spoils, it can't be beat.

Over at Exari, it's a different Adam Smith.  OK, I couldn't resist, but this gives me an opportunity to briefly flag the importance of automating routine tasks which corporate counsel will increasingly resist paying for.   Document assembly, whether through Exari or a more familiar name-brand, Thomson-Elite, is clearly a baseline example.

The ABA Journal discusses a far more strenuous example:  Cisco System's insistence on cost-savings from its law firms.  According to Cisco's general counsel Mark Chandler, 75% of the $70-million/year they spend on outside counsel is now billed on a fixed-fee basis, and he wants that only to increase.  Like it or not, automation will be a large part of any firm's answer to the question Cisco continually poses, which is along the lines of "If you could do it for $10,000 last year, can you do it for $8,500 this year?"  Two firms that have risen to the occasion are McGuire Woods with its "ContractBuilder" database of templates, and Reed Smith with its online HIPAA compliance tool.  (It cost Reed Smith a fixed amount to build the tool, and clients can rent it for a fixed amount.)

Nor is Cisco exactly passive when it comes to driving technology-based cost savings internally:

• Through its "Click Accept" digital signature technology, it has enabled 6-million online signatures to date at a savings of $10-million.
• Partnering with Eversheds, it developed an online training and "e-learning" suite of applications on how to comply with employment laws in a host of countries.
• By migrating all its internal emails and documents to a new database—one specifically designed in contemplation of the burdens of e-discovery—it was able to dodge an estimated $9-million expense (the lowest bid by an outside EDD firm) for discovery in an unspecified piece of litigation, and cut its internal costs of compliance to $900,000.  Admittedly it cost $1.5-million to build the database, but as Chandler correctly points out, "this is the gift that keeps on giving."

Technology is not the answer to everything, of course; sometimes it pays just to look outside Silicon Valley for legal resources.  Laura Owen, director of legal services, says Cisco approached some Midwest firms for their lower overheads and billing rates and while several were receptive, others reacted to Cisco's expectations with "Very interesting...but no thanks."

Understand that what Cisco is doing today the rest of the Fortune 500 will be doing tomorrow.  Cause for alarm?  Not for a moment; do you really want to take highly competitive, verbal, analytic, expensive professionals and set them to the task of explaining for the umpteenth time the worker compensation system in the UK?  There's a reason they call it commodity work, and it's not what you really want to do, is it?  Cisco happens to agree with you.

With all the attention we pay to strategy, globalization, M&A and consolidation, practice group and knowledge management, and other issues in firm management on the more or less empyrean plane, it's time for a word about associates.

For starters, associates constitute the future of your firm—and preposterous as it may seem, we almost all have been or will be associates, hopefully for several productive years.  So it's time for a little mercy, blended with tough love, for associates.

What's wrong with associates and what do they need most?  What's "wrong" is simply everything they don't know—which time alone will cure eventually, but which a nourishing diet of professional development can accelerate greatly.  And it's in all our selfish interests to boost associates up the learning curve as fast as intellectually and humanly possible. 

I will take to my grave the memory of an assignment to draft a set of interrogatories the first dewy-eyed week I reported to work at a large New York law firm, since merged out of existence but utterly representative of the breed at the time:  When I delivered them with great trepidation, bordering on cold sweat, to the assigning partner, he spent no more than 15 seconds perusing them before blurting out, "These read like you'd never written an interrogatory before in your life!"  "Well, yes sir, that would be true."  And it continued to be sink or swim on those same non-negotiable terms.  The enduring conviction that this eminent and prestigious firm seemed about to embrace, with relish, the project of reducing a highly trained and expensive professional to a quivering recluse remains with me today—and strongly motivates this small essay on the economic insanity of that archaic behavior.

As Exhibit 1 we have a National Law Journal piece on career-building 101, which reminds us that however effectively law school teaches the skills of researching, writing, and advocacy, it teaches nothing of the soft skills of business development or managing one's own time, caseload, and practice.  The first few years of associate-hood, of course, necessarily and correctly focus on developing the purely professional skills (being able to draft interrogatories, e.g.).  But for associates who end up being more valuable to their firms and more satisfied professionally, it's none too soon to start thinking about, and training for, future life as a partner—with all of the project management and client development skills that will need to kick in.

On this score, the advice of the piece is inarguable, if elementary:

• find the practice area you're at home in;
• have a plan; where do you want to be in 3 years or 5?;
• if at all possible, find a mentor;
• understand the firm's expectations; and
• get feedback.

Far meatier and insightful is an article I stumbled across from July 2002 pointing out the existence, and the consequences, of a deplorable gap in law school education:  The all but complete absence of courses on law firms as businesses.*  This leaves associates starting out utterly in the dark about the fundamental dynamics that drive what they cost and what they're worth to their firms.  Note that we're not talking about weighty strategic choices, the long-term impact of market positioning, the dilemmas facing mid-tier full-service firms, or any other advanced management issues:  We're talking about billing, realization rates, the relative profitability of different practice areas, and other "low-hanging fruit."

To recur to my own experience, I had no clue at what point the firm might "break even" on me (and the firm, as you might expect, would have been the last to tell me).

Ignorance can lead associates into an attitude of entitlement—always an endearing trait to partners!—because they are simply clueless about how the money behind their salary check is generated.  Associates with at least a modicum of savvy about the business realities of a firm are far less likely to fall into that trap.

Why are there virtually no such courses?  This is an example of microeconomics trumping macroeconomics, as it were.  (I'm somewhat contorting these terms, but bear with me.)  From the "macro" perspective, the profession would be far better off, immediately and at very little cost, if law school graduates had been exposed to Firm Economics 101.  On this I hope all readers of "Adam Smith, Esq." can agree.

But from the "micro" perspective of law school faculty or deans designing curricula, firm economics is an orphan:  It isn't "academic," in the conventional sense; it doesn't have anything to do with training one to "think like a lawyer," it bears no connection to either substantive or procedural law; and it's a safe generalization to say that personality types attracted to the career of law professor don't think like businesspeople or economists. 

If such a course would benefit, in very concrete terms, the buyers of law schools' output—read:  law firms—couldn't a mutually beneficial deal be struck to get such courses up and running?  Both Adam Smith and Ronald Coase know the answer:  Of course; it would be trivial.

---

*I'm only aware of two in the country:  One I've heard of at the University of North Carolina but know little about, and one at Indiana University School of Law/Bloomington, where I had the privilege of guest-lecturing last fall.

Update:  (4:30 pm)  I have only my own traitorous memory to blame for omitting this course since I know Prof. Karl Lutz who teaches it, but the University of Michigan Law School (Ann Arbor) offers "Law Firms & Legal Careers."

Separately, I learned from a 3L at the University of Washington School of Law of "Practical & Professional Responsibility in the Small or Solo Law Practice," which includes the novel requirement that students finish the semester by presenting a business plan.  And, to the anonymous 3L who tipped me off to this:  Many many thanks both for the heads-up and for your kind words about "Adam Smith, Esq." ("your site continues to be a voice in the darkness").

Lastly, Matt Homann has also picked up the thread.

Any other courses out there?  Let me know!

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Update 2:  (15 Sept., 11:15 am)

"Van L." writes from Brigham Young University (emphasis supplied):

"Just FYI: I am currently taking a course called "Law Practice Management" at BYU. The course description is as follows: 'This course is designed to introduce law students to issues that arise in the private practice of law. The underlying thesis is that a law office is a business, and that success in private practice is as much a function of effective management as it is a function of mastering substantive legal knowledge....'"

Couldn't have said it better myself.

"N.O. Stockmeyer" writes from the Thomas M. Cooley Law School (Lansing, MI):

"Our school offers this course:  'LAW OFFICE MANAGEMENT:  Analyzes problems related to the management of private law firms. Emphasizes legal economics, organization, billing, business systems, client counseling, and opening a new practice.'"

Thanks, Prof. Stockmeyer.

Can we tempt any more examples out of the woodwork?

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Update 3:  (15 Sept., 5:05 pm)

Professor William Henderson of Indiana University School of Law/Bloomington, who teaches the course I cited above, writes:

"David Wilkins at Harvard, Karl Lutz at Michigan, Rick Abel at UCLA, and John Steele at Boalt/Stanford/Santa Clara address some of these issues in the context of Professional Responsibility, often forgoing discussions of the Rules in favor of current realities of the profession. Jack Heinz at Northwestern also recently added a course called the Transformation of the Legal Profession, which focuses on empirical trends in the legal profession (especially the rise of the large law firm) since the 1970s. Michael Trotter of Kilpatrick Stockton in Atlanta used to teach a course at Emory entitled the Transformation of the Legal Profession, which was based on this excellent 1997 book, Profit & the Practice of Law: What's Happened to the Legal Profession. Also, Elizabeth Chambliss, who formerly served as research director of the Program on the Legal Profession at Harvard Law School, teaches a course called Law Firms at New York Law School. It is noteworthy that these courses emanate from two perspectives: Trotter, Steele, and Lutz are all adjuncts who are current or former partners at Am Law 200 law firms. In other words, they can speak from experience. Abel, Conley (at UNC), Wilkins, Heinz, Chambliss and I are all empiricists committed to studying the legal profession. That said, I am glad for the opportunity to teach a course that focuses purely on the economic and business issues. There is more than enough material to fill a course, and it is highly relevant to the 70+% of our students who will be employed by law firms."

Thank you, Bill.  The observation I find particularly trenchant is Bill's implied explanation of what motivated these people to launch the courses they have:  They are either current or former AmLaw 200 partners, or "empiricists."  Not, in other words, archetypal law professors.  Duly noted.

David Boies, the Adelphia bankruptcy, and "Amici LLC," Chapter 2:

The Wall Street Journal reports this morning that Max Shulman, a senior partner at Cravath, representing Deloitte & Touche LLP, has written to the judge presiding over the Adelphia bankruptcy (Southern District of New York, #02-41729) protesting both the "fees and tactics" of Amici, the document-management company partially founded and owned by colleagues and relatives of David Boies.

According to Shulman's letter, the requirement to use Amici was "foisted" on his client and Amici had an "economic lock-up" on the document database by making it too costly to migrate to any competitor.  Furthermore, the database was populated with patently irrelevant documents including menus, cookbooks, travel brochures, and shoe catalogs.  (We all know people waste time at work, but this puts the indirect imprimatur of a federal court on exactly how they waste time—with food and fashion fantasies, and vacation planning.)   In sum, Shulman writes:  "Using Amici has been a disaster."

Philip Korologos, the lead Adelphia lawyer at Boies-Schiller, retorts that his firm "didn't select" the documents, and that Amici's pricing and performance have been "competitive."

Entertainment value aside, I return to this unfolding saga for the hard steel of the business and economic issue being vaulted to prominence:  No matter how long and hard one may work at establishing a reputation—in this case, that of Boies-Schiller for league-leading counsel on good corporate governance—one can put that reputation at risk in a heartbeat through mis-steps. 

Clients' memories for value lists and mission statements are short, and for discordant behavior at odds with those declarations are long.

I have communicated with both Messrs. Shulman and Korologos in hopes of obtaining more "primary source" material.  Why do I think we have not heard the last of this?

The Lawyer is out with their annual "UK 100" (for 2005), and it shows that while the Magic Circle is pulling away ("going galactic," as they gaily put it), the interesting action is in what they newly dub the "Silver Circle," or the just-trailing firms.  First, this being a blog about economics, to the numbers:

"Average PEP for the big four of Allen & Overy (A&O), Clifford Chance, Freshfields and Linklaters was up a healthy 13.5 per cent from £630,000 to £713,000. Average magic circle revenue per lawyer was up 1.4 per cent from £353,000 to £358,000."

The divergence between revenue increases and profit increases is explained (but you knew this) by cost decreases, as well as by a near lockdown on equity partner headcount growth. (To translate £ into $, multiply by 1.8:  So the average PEP of £713,000 equates to US$1,283,000.)

And recapping the performance of the entire group (where "RPL" stands for revenue per lawyer and "CPL" stands for costs per lawyer):

• Average PEP for magic circle was up 13.1 per cent to £713,000 from £630,000 in 2004
• Average PEP for top 50 was up 10.6 per cent to £431,000 from £390,000 in 2004
• Average PEP for top 100 was up 10.5 per cent to £343,000 from £311,000 in 2004
• Average RPL for magic circle was up only 1.3 per cent to £358,000 compared to £353,000 in 2004
• Average RPL for top 50 was up 2 per cent to £270,000 compared to £263,000 in 2004
• Average RPL for top 100 was up 0.4 per cent to £233,000 compared to £232,000 in 2004
• Average CPL for magic circle was down 1.7 per cent to £230,600 compared to £234,600 in 2004
• Average CPL for top 50 was down 1.2 per cent to 184,300 compared to £186,500 in 2004
• Average CPL for top 100 was up 0.3 per cent to £168,100 compared to £167,600 in 2004

The full table of PEP results is here, and the full table of revenue-by-lawyer (one of my favorites, because it never tracks the PEP table very well) is here.

If this were a study in biodiversity instead of in law firms, one would say the Magic Circle had all adopted the same evolutionary survival strategy:  Go global, and get bigger than everybody else in the room.  The Silver Circle, by contrast, has no monolithic approach.  What has happened?

"Ten years ago the dominant firms outside the magic circle (which then firmly included Slaughter and May, of which more later) were the chasing pack of Ashurst, Herbert Smith, Lovells, Norton Rose and Simmons & Simmons. Of that five, only Herbert Smith still appears in the top 10 in the PEP table."

In other words, the "chasing pack"'s erstwhile strategy of following the Magic Circle into international-land has come a cropper, and the variety of "Plan B's" being launched is fascinating to behold. It's being driven primarily by "focus and sheer ambition." Emblematic of the niche's being pursued:

• Ashurst has now embraced "small is beautiful," following two failed attempts at US mergers.
• Macfarlanes, "Law Firm of the Year" in 2000 for its rigorous management, has "not faltered" and its PEP remains in the UK's top 5.
• SJ Berwin is on a cost-containment tear, with its CPL down 17% this past year alone.
• Herbert Smith caters to global, multinational clients not through its own offices abroad but through a thick network of alliances and affiliations.
• Berwin Leighton Paisner has the strongest managerial culture of all, with "an entrepreneurial, unbureaucratic" culture, and the greatest proportion of lateral partners of any Silver Circle firm; accordingly, it has also enjoyed the fastest recent growth, and now the danger may be more one of expectations (how high is up?).

For us on this side of the pond, the lessons are clear:  You can be part of law-firm-land's equivalent of the New York-based "bulge bracket" of investment banks (roughly, that would probably include Cleary-Gottlieb, Cravath, Davis-Polk, Milbank, Shearman & Sterling, Simpson-Thacher, and Sullivan & Cromwell), or you can be a newly bulked-up global player (Jones-Day, Latham & Watkins, Orrick, many emulators) or you can find your own niche. 

The problem is that membership in the bulge bracket is, except over glacial time-frames from the perspective of any individual's career, closed, and that the ranks of the global powerhouses also has some intrinsic economic ceiling on it—which we will only discover when some unlucky firm (and it wasn't Coudert, by the way) powers up right out of the atmosphere and dies of oxygen starvation.  In other words, those strategies are, respectively, unavailable and all-but-unobtainable.

Which leaves finding your niche:  A tall order.  Volunteers are now being recruited nationwide.

Can you ever think too much about leadership?  Not in my book. 

But then, I'm firmly in the camp of "people make history" rather than "history makes people."  Or, as The New York Times put it this morning apropos the 10th anniversary of eBay (and an uncharacteristic admission of theirs it was, that we're not all just flotsam on the sea of magisterial government policy):  "EBay also did one thing Mr. Omidyar was not thinking about 10 years ago: it proved that even in these daunting times, one person with a good idea can still change the world."

In law-firm-land, think of what Marty Lipton built at Wachtel, the development of the Socratic/case method of instruction by Christopher Columbus Langdell at Harvard Law in the 1800's, or even the invention of the "Cravath model" here in the early 1900's.  Do individuals make a difference?  You bet.

That's why I think this Harvard Business School piece has the best encapsulated definition of leadership I've yet to find:  Leaders are "people who leave their footprints in their areas of passion."

To me (and to the HBS author), the far-more-important piece of that construction is not footprints, but passion.  If you're not passionate about what you do, I can promise there's somebody down the hall doing pretty much the same thing who is passionate —and not to be oblique about it, but you lose.

Worse, you go through life that way, until you do (or don't) find your passion.

Back to leadership:  True leadership, as distinct from (the very respectable!) management, requires, as the author puts it, that you be "ambidextrous."  That is to say, you need to continue to manage the day-to-day, but you also need to take another step, one enabled by a different perspective than the executional and the operational.  The other step, coming from the reflective, creative, probing side of your brain, is to ask "if we're so good, how come we're not better?"  

Managing is the "what is;" leadership is the "what if." 

Sometimes the combination is only found by pairing two fundamentally different people, one who relentlessly pushes for change with one who ensures the place doesn't blow up in the process.  But experience teaches that dual chiefs is a situation of inherent disequilibrium (Phil Purcell and John Mack at Morgan Stanley; Mel Karmazin and Sumner Redstone at Viacom).  Better to incorporate both capabilities between your own ears.

Going from theory to practice?   Recognize that re-molding an organization in the direction inspired by your answer to "what if?" will take:

• Persistence:  Your vision cannot be a flash in the pan.
• Organization:  Without giving people a roadmap for getting from here to there, they will cling fast to the tried and true.
• Teamwork:  You can inspire, but you can't do it yourself.
• Open-mindedness:  Be prepared for mid-course corrections, and don't just solicit advice, listen to it. 
• Communication:  As Hewitt Associates reminds us, "Everything communicates."  And as I will remind you, the human antennae-cum-shields system for hypocrisy detection combines exquisite sensitivity with a repellent force whose default setting is "stun."  So our last ingredient is:
• Integrity.

 

You are probably as unfamiliar with the UK insurance-defense firm Ricksons as was I before I read this piece, but this case study, written by the Ricksons managing partner, Tony Hughes, is a useful tool to explore lessons in change management. 

And, the beauty of it is that almost none of us can say under our breath things that distract from the general learning.   In other words, no inside-baseball gossip such as "Well, Fried-Frank would never have merged because so-and-so can't stand so-and-so," or "Of course Reed-Smith needs to be in Chicago, so that explains their talking to [X]."  Think of it as an abstraction from what would otherwise claim our attention:  A clean palate, if you will.

As our story opens, Ricksons is a regional UK firm with 90% of its business coming from personal injury insurance-defense work.  The founding/name partner, Peter Rickson, is about to retire and a new managing partner is selected—the youngest partner in the firm.  Recognizing the firm's over-reliance on insurance defense, he did the following:

• Recognized that while the partnership was traditional, it was open to new ideas and acknowledged that the firm had to change to survive.
• Introduced rigorous financial-management controls, combined with "transparency"—monthly results for all departments were published firm-wide, with the goal being "simply to make people feel part of the business."
• Next came something more audacious:  Purposely and publicly announcing the goal of making Ricksons a top-100 UK firm, which would mean increasing their revenue from £5.6M (2001) to £15M.  What did this entail?  For starters, revising the entire structure.  For example, the Birmingham office was profitable but didn't fit within the profile of a firm specializing in insurance litigation.  Bye-Bye!
• Paying attention to the human factor:  From a base when Hughes assumed leadership in May 2001 of 80 staff and 13 partners the firm is now 220 staff and 37 partners, and he says without reservation, "The human element is without doubt the most important aspect ...Withholding information leads to wild speculation and resentment."

"Lawyers do not always make the best managers," he confesses, but at the same time Hughes realizes that "if we, as law firms, are going to compete in the business world," you have to nurture your home-grown talent. 

So how did he bring everyone along?

• Communication
• Transparency
• Presence (for example, try, as did Tony Hughes, spending half a day every day at a merger candidate's offices to inform, inspire, and reassure)
• Consistency

And last, nurture talent for purposes of leading within the firm, not just rainmaking.  You might find yourself surprised how much it can contribute to rainmaking in the long run.  Think any F500 company thought worse of signing a contract with GE because Jack Welch was in charge?

The American Lawyer's "A-List" is out, and I'll have something to say about it in the next day or two.  (The A-List, I probably needn't remind you, ranks firms not by revenue, size, or profitability, but by a combination of (a) revenue per lawyer; (b) commitment to pro bono work; (c) associate satisfaction; and (d) diversity.)

Last year I gave it a hard time, primarily for what I perceived to be its opaque methodology, but I promise to be kinder this time around. 

Meanwhile the big news across the pond is today's release of Legal Week's "Top 50"—the top 50 UK firms by fee income.  Here's the chart, but here's the real news:

• The firms are finally coming out of their post-2001 swoon, with revenue up 8.2% and profits doing even better at +11.4%.
• Combined, the firms employ 70,000 people and have £8.3-billion (US$14.94-billion) in revenue.
• Total equity partner profits reached £2.23-billion (US$4.01-billion).
• To maintain or raise profits per partner, the firms are becoming increasingly selective about partnership promotions and have increased their leverage—with, now, about six fee earners for every partner.  Nice, but as my New Jersey born-and-raised physics professor used to remind us, "You can't play dat game fuh-evuh."

All in all, the Magic Circle did well, as did mid-tier and national UK firms; the only laggards were what Legal Week characterized as "chasing pack" firms—not in the Magic Circle but not mid-tier either.  And being in that awkward spot may be increasingly difficult to escape from, at least if you believe the always-thoughtful Tony Williams of the Jomati consultancy: 

"The changing stratification of the legal market is not yet fixed but, in two to three years, it will be," he said. "At that stage, firms that find themselves stuck in the wrong place will find it very hard to move."

A lesson for those of us on this side of the Atlantic?

What the blogosphere is doing (the FT—superb as always).

Places to send help.

Eyewitness reports from the blogosphere (The Telegraph, UK)

The Times-Picayune front page.

Ernie on the front lines.

Law.com bloggers on the case.

Craigslist/New Orleans Katrina-related.