May 2006 Archives

An "evergreen" topic here at "Adam Smith, Esq.," because one despairs to find a durable equilibrium solution for it, is the perennial debate over "eat what you kill" (EWYK) vs. lockstep compensation systems.

Each has its place in the life-cycle of a firm, and firms will want to position themselves at different points on the spectrum—never lose sight of the fact that it is a spectrum—as their internal and external competitive challenges evolve, but it's always a fascinating topic to recur to.

Today we have the results of a Legal Week poll, which they summarize as follows:

"Merit-based pay for partners is sweeping UK law firms, but still struggling to win hearts and minds, according to new research that shows so-called eat-what-you-kill systems of reward are often unpopular with senior lawyers."

Specifically, respondents ranked the desirability of the four alternatives presented in this order:

• "modified lockstep" emphasizing merit:  37%
• pure lockstep:  24%
• "modified lockstep" emphasizing seniority:  20%
• pure EWYK:  19%

Usually we draw lessons from other law firms, or (even more usually) from the massive managerial literature of corporate America, which, as regular readers know, I have always believed offers us a relatively untapped stock of wisdom (and cant, to be sure) on managing complex multi-national organizations.

But today we have a lesson from "I, Cringely," a PBS-sponsored weekly columnist who you should be following if you have an iota of interest in the tech industry.  Here's this week's lead:

"After 29 years of working in high-tech companies and writing about them, I have noticed how insular they tend to be, often not seeing either the world or themselves at all clearly. Whether intended or not, this cultural artifact comes to control how the world in turn sees them, which rarely works in their favor. The classic example is Microsoft, where hiring smart people fresh from school and working them 60 hours or more per week -- in an environment where they don't even leave the building to eat -- leads to a state of corporate delusion, where lying and cheating suddenly begin to make sense. But it isn't just Microsoft that does this. It is ANY high tech company that hires young people, isolates them through long hours at work, feeds them at work, and effectively determines their friends, who are their co-workers. This trend even extends to the anti-Microsoft, to Google, where the light of day is sorely needed.

"Google is secretive. ... Google folks don't understand why the rest of us have a problem with this, but then Google folks aren't like you and me.   The result of this secrecy and Google's "almighty algorithm" mentality is that the company makes changes -- and mistakes -- without informing its customers or even doing all that much to correct the problems. It's all just beta code, after all. But the business part is real, as is the money that some people have lost because of Google's poor communication skills combined, frankly, with poor follow-through."

Who recognizes a familiar industry?

My point is not to laud or lambast Google, or Cringely for that matter—and it is certainly anything but to suggest that "lying and cheating" can ever "begin to make sense"—but it is to shine a momentary spotlight—and momentary, I have a high degree of confidence, is all it will be—on the acculturation principles abroad in the land of sophisticated, large law firms.

When I began practicing in New York in the early 1980's there were still vestiges of the "white shoe"/Jewish law firm divide; indeed, Breed, Abbott & Morgan, where I started, and Shea & Gould, where I also worked, were almost caricatures of that divide.

Today, of course, this (properly) feels like ancient history, but Eli Wald, a law professor at the University of Denver College of Law, has undertaken a study revisiting the history of the divide and how it was eventually surmounted, with an eye to the question of whether there are lessons in that history for today's challenges of diversity in large law firms—both with respect to minorities and to women.

The professor is not hopeful: 

"Indeed, his research into the history of Jewish lawyers and firms in New York from the late 19th century to the present seems to leave him extremely pessimistic about the prospects for minorities and women today."

First, let's recap this history.

I'm pleased to report that I'll be attending Interwoven's annual "Legal IT Leadership Summit" this coming Monday through Thursday, May 22—25, at the Ritz Carlton/Bachelor Gulch, as Interwoven's guest, which is extremely gracious on their part.

The panel topics include:

• Redefining the Relationship between the Business and IT;
• Pragmatic Approaches to Knowledge Management;
• Architecting IT Governance and processes for the new business climate; and
• Information Management Strategies in Today’s Environment.

This particular annual IT conference surely ranks among the most valuable of the many offered by various firms and organizations throughout the year.  Here's a summary of what it's all about: 

"It is probably the one time in each year when I get the opportunity to have a real in depth debate with colleagues from either side of the Atlantic. The program, speakers and even timetable are set by the advisory board.” – Janet Day, CIO, Berwin Leighton Paisner

"The Legal IT Leadership Summit is an exclusive event that brings together 40-50 of the IT leaders (CIO's /Technology Partners) at the largest and most influential law-firms across the globe with the goal of discussing the most pressing challenges they face. The summit focuses on 3-4 issues that impact large global law firms in great depth. The format for each session includes keynotes by an expert on the subject followed by a moderated forum or panel discussion that drives questions and deeper discussions, sharing of success and failures and case studies.

"This year’s theme – Navigating New Frontiers, reflects that the business climate for law-firms is changing, and this shift is bringing new expectations of IT to provide simple solutions to increasingly complex challenges."

Unusually, the agenda is set entirely by the completely independent Advisory Board, and not by Interwoven.  The members of this year's Advisory Board are:

Name	Firm
Daniel Pollick	DLA Piper Rudnick Gray Cary
Eugene Stein	White & Case
Janet Day	Berwin Leighton Paisner
Jeff Schwarz	McDermott, Will & Emery
Jim Pfau	Faegre & Benson
Michael Fick	Jones Day
Nigel Blackwood	Wragge & Co
Robert Marburger	Alston & Bird
Santiago Gomez Sancha	Uria Menendez
Simon Kosminsky	SJ Berwin

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

Anticipate a complete report right here on "Adam Smith, Esq." in a week or so.

I recently had the chance to interview Chris Marston, founder and CEO of Exemplar Law Partners, LLC, based in Boston, which has been open for business for all of about 90 days.  To say that Chris is embarked on an ambitious attempt to rethink the practice of law, down to its very roots, would be an understatement.   Just start with this, from "Our Approach":

"Exemplar is the first corporate law firm in the country to completely abandon the billable hour and exclusively adopt a fixed price business model. This progressive step forward in the legal industry is designed to better align our interest with our customers while enabling businesses to manage their legal budgets, and their expectations."

Certainly abandonment of the billable hour is the most attention-grabbing aspect of Exemplar's business model, but it's far from the entire story, nor is it even the most important part. Still, let's start there: When I asked Chris point-blank why he decided the billable hour had to go, he guffawed and said, "Did you ever Google 'billable hour'!?"   Well, if you haven't done it yourself lately, here are some of the top results:

A loyal reader who has also become a friend writes that he has just re-read The American Lawyer's lead story on the AmLaw 100 for 2006 and he has some questions (emphasis supplied):

"Maybe I'm missing something, but the analysis seems flawed to me (though their conclusions may nonetheless be right). I know you've thought about this a lot more than I, so let me ask you. It seems to me that the comparsions the article draws between RPL [revenue per lawyer] and headcount growth are not all that helpful and may even be somewhat misleading.

"Classical micro theory would say add another lawyer as long as she contributes to profits. But the article seems to confuse - or at least be unclear about - the difference between diminishing marginal profitability per lawyer, absolute profits, and profit per partner. The profit maximizing partner would, it seems to me, keep adding associates until the last associate added provided no further profit. [...]

"Of course, getting your existing lawyers - fixed costs for purposes of this analysis since there is virtually no marginal cost if they work more hours - to do more work per head is more profitable than hiring additional lawyers.  But that does not mean adding more heads is necessarily bad, especially if heads are not fungible across work or if, in fact, the heads won't work more than 1850 billable hours."

The premise of the TAL piece, in turn, is, properly, in the lead:

"The historical data suggests that The Am Law 100, as a universe, is growing too fast in size to sustain its own long-term revenue expansion. All those additional lawyers are a drag on the growth of revenue per lawyer."

Or, consider this:

"Average billable hour statistics provide convincing evidence that last year The Am Law 100 had too many lawyers. Even at the 30 most profitable firms included in Citigroup's 2005 survey, partners and associates averaged only 1,850 billable hours."

Last time I asked people how they felt about 1,850 billable hours, it wasn't viewed as shirking, but it's certainly under the 2,000 hours taken as a benchmark these days.  Finally, we have this:

"Of the 28 firms with head count declines in 2005, 16 achieved increases in RPL that beat the Am Law 100 average of 7.5 percent."

And, did you now that 40% of absenteeism occurs on Mondays and Fridays (those two days being 40% of the workweek).  Of any 28 firms selected at random, you could expect 14 to "beat the average," by definition.  Is 16 a statistically significant deviation?

I'll have more of my own thoughts at the end.

Anyone reading this is surely aware that one of the most popular and enduring business/management books of the past decade was James C. Collins and Jerry I. Porras' 1994 book, Built to Last: Successful Habits of Visionary Companies.

Now they've got a sequel, as it were, up their sleeves:  Success Built to Last:  Creating a Life That Matters, which Wharton School Publishing will be bringing out in August.   In this interview with "Knowledge @ Wharton," they describe their motivation for the sequel and their findings.  I use the word "findings" advisedly, because "Success" is the fruit of deep research and interviews with hundreds and hundreds of successful people.

Intriguingly, the idea for "Success" came not from Collins and Porras, but from their readers.  Since virtually no one any more has a career at a single firm, people were trying to apply the lessons of Built to Last to their own careers, and as Collins and Porras began to pursue the metaphor of applying that book's lessons to an individual's career, they realized they were attempting nothing other than defining success.

"Success," then, would be?

Across the pond, anti-age discrimination regulations are going to go into effect in October, and firms are already bracing for their impact.  This is what they require, in a nutshell:

"The Regulations apply to employment and vocational training. They prohibit unjustified direct and indirect age discrimination, and all harassment and victimisation on grounds of age, of people of any age, young or old."

In other words, not just the old, but also the young, may allege discrimination. And the regulations apply to all private sector activities, regardless of how remote their connection with government or public sources of funding.   Finally, note the somewhat oblique reference to "vocational training," which is elsewhere clarified to make clear that any age-related favoritism in providing professional development must be strictly justified.

So much for blithely assuming that 3rd-year associates need different types of instruction and coaching than do senior partners.

In the world of technology, we've had the IBM mainframe era, the Microsoft PC era, and now we have...the Google web era?

I'm not being facetious; well, CIO magazine is not being facetious, anyway, when it features this as its cover story. Add in McKinsey's just-released "Two new tools that CIOs want," and we have a potential "technology architecture transformation beginning to take shape."

If past is prologue, astute and adaptable firms will foresee this wave coming and will gain, if not a permanent, a sure-fire cyclical, competitive advantage. 

McKinsey first, on what "two new tools" you want:

"The dismal science?"  You won't be surprised to hear that that's about the last way I'd describe the art and discipline of economics, and a new book, Knowledge and the Wealth of Nations, reviewed by Paul Krugman in yesterday's Sunday Times Book Review sounds like a wonderfully exciting intellectual exploration of why I believe economics retains its ability to fascinate as it attempts to explain how people, ideas, and things interact to try to produce value.

 The author, David Warsh, a former economics correspondent at the Boston Globe, Forbes, and The Wall Street Journal, writes the online weekly, "Economic Principals."  The book tells the story of how academic understanding of increasing returns to scale, and indeed of growth itself, was revolutionized in the past few decades by introducing the concept of knowledge itself as a factor of production, at long last joining the classical triumvirate of land (a/k/a tangible resources), capital, and labor.

When a book gets advance praise like this, the reason I continue to adore economics should be clear:

“Romer’s understated but earth shattering work deserves our attention and a Nobel prize in economics.”
— John Doerr, partner, Kleiner Perkins Caufield & Byers

As loyal readers know, I had a nasty brush with copyright law and the ALM Media inhouse law department this past Monday. 

In a nutshell, after spending part of the weekend generating four pieces on the 2006 AmLaw 100 (released last Friday)—here, here, here, and here—first thing Monday I returned a phone call from an assistant general counsel at ALM Media who proceeded to tell me that everything I'd written violated their copyright in the AmLaw 100 and that I must take it all down forthwith.

I did not, and I did what any lawyer with himself for a client would advise:  Call in the experts.

The good news is I learned a lot about copyright and fair use thanks to the superb counsel and advice I was able to draw upon, ranging from nearly a dozen readers, many of whom I'd never heard from, who offered their thoughts in personal emails (which were without exception generous and supportive) to a few friends who happen to be IP lawyers, to another friend who's the heaviest hitter of all in this area, as General Counsel of a major publicly-traded media organization.  (You know who you are.)

Consider what follows, then, a small effort to repay the collective efforts of the blogosphere, and an attempt to memorialize what I learned in hopes it might be useful in future to someone finding themselves in a similar situation.

One motivation for doing this is the remark of an IP practitioner and friend who, unsolicited, volunteered the opinion that "There are entire in-house law departments devoted to sending out legally unjustified cease and desist letters." And the truly bad news is not that dismaying commentary on the paucity of ethics, but his additional observation that far more than half the time, threats work.

A great deal of interest has been expressed in seeing a chart I created earlier but unfortunately at low resolution to enable it to fit in a browser window. 

The bar chart I'm referring to shows, for each and every firm, the extent to which its share of total AmLaw 100 revenue exceeds or falls short of its share of total AmLaw 100 lawyers (headcount).  For example, if your firm has 2.00% of total AmLaw 100 revenue and 2.00% of total AmLaw 100 lawyers, your score on this chart is 0—you're right on the X axis. 

On the other hand, if you have 3% of revenue and only 1.5% of lawyers (cf. Skadden, more or less), your score will be +100%; 1% of revenue and 2% of lawyers, -100%, and so forth. 

Click here to open a larger version of the chart in a new pop-up window.

Questions and comments are always welcome.

Update to the AmLaw 100:

An astute reader inquires, "Where is Schulte Roth?" 

All I can say is he has better eyesight than I.  The webmaster at ALM Media inadvertently dropped them from the initial publication (Seyfarth Shaw appears twice, as ##66 and 67).  It's now been corrected, and Schulte appears at #67, up two slots from #69 last year, with revenue of $321,000,000.

CFO magazine (along with the usual sources) reports that at Raytheon's annual meeting yesterday the  company announced that it would freeze CEO William Swanson's salary at its 2005 level and reduce his restricted stock eligibility by 20%.  Not that he's suffering:

"In 2005, Swanson’s salary was $1,120,934, up 15 percent from the prior year. His restricted stock awards were worth nearly $3 million, up more than 25 percent from the prior year. Altogether, Swanson earned more than $7 million last year."

You will recall that The New York Times broke the story last month that Swanson's claim to fame in CEO-dom, "Swanson's Unwritten Rules of Management," was plagiarized nearly wholesale from a 1944 book, "The Unwritten Rules of Engineering," by W.J. King, an engineering professor at UCLA. The similarities were discovered by Carl Durrenberger, a chemical engineer and—surprise—blogger, in San Diego.

It is with pleasure and relief that I can report that I plan to leave all of my analyses of the raw AmLaw 100 statistics (here, here, and here) up on "Adam Smith, Esq." despite ALM Media's request that I take them down as violative of their copyright.

The blogosphere is justly famous for constituting an on-demand network of "collective intelligence," and it has confirmed that reality in spades for me over the past 24 hours.  I've had the benefit of the counsel of nearly a dozen IP and non-IP lawyers, including the general counsel of a major media outlet, and have concluded that my reinterpretation and manipulation of the AmLaw figures is well within my rights to publish.