January 2009 Archives

When The New York Times features it on the front page, it must be real, right?

I'm referring to Billable Hours Giving Ground at Law Firms, which features Evan Chesler flatly arguing that "This is the time to get rid of the billable hour." Unfortunately, if you're looking for real insight into the issues underlying the stress on the billable hour, this is not the article to read--unless, as I perhaps suspect, the article was pitched to an audience oblivious to the entire issue prior to picking up that day's Times.

Shall we review the bidding on this topic?

Pro the billable hour:

• It's familiar, both to lawyers in private practice and to their inhouse lawyer clients. It's been the dominant revenue model since the 1960's which, for all practical purposes, is the professional lifetime of anyone working today.
  
  
• It's measurable. David Wilkins of Harvard says:
  
  "Does this make any sense?" said David B. Wilkins, professor of legal ethics and director of the program on the legal profession at Harvard. "It makes as much sense as any other kind of effort to measure your value by some kind of objective, extrinsic measure. Which is not much."
  
  David (a friend) is of course right, but the alternative to an "objective, extrinsic measure" is some variant of subjective and judgmentally laden approximation, which requires trust.
  
  
• Clients--this is my theory, at least--have been largely bluffing this past decade or more when they've moaned and complained about the billable hour. After all, from their perspective, it has some indisputable virtues:
  • They can say to their financial green eye-shade types, "Well, look, they actually did the work. Says so right here."
  • And, for that matter, they can say that they negotiated the "most-favored nation" rate and, on top of that, got a 15% discount; so don't argue that we didn't get value for money.
    
    
• Again, clients might not be too comfortable with the alternatives. Why is $375,000 "for services rendered" the right number? How does one defend that internally against the purchasing agents and cost accountants? (And don't assume their instinct will be to ask why it's not a higher number.)

Con the billable hour:

• It provides, obviously and somewhat tendentiously, an incentive for firms to run the clock rather than solve problems. I say "tendentiously" because this assumes lawyers put their own very short-sighted self-interest ahead of professional responsibility, ahead of a satisfied client, and ahead of simple integrity in their professional dealings. In my experience, to the extent time-sheets did not reflect utter reality to the second decimal place, it was because lawyers engaged in self-administered haircuts on the time they'd actually spent, fearing they'd look inexperienced or simply making an on-the-spot judgment about what the activity they'd performed "was really worth."
  
  
• It starts from "cost of production" rather than "value to client." This, to me, is its core economic failing. To be sure, no firm can long sell its products or services at less than "cost of production," but unless you're in an absolutely commmoditized industry, that is the merest of starting points.
  
  
• It's dehumanizing, reducing talented and highly educated professionals to fungible units as factors of production. Worse, it contains no rewards for brilliance, insight, judgment, or even plain old efficiency. Lawyers have every incentive to work day and night, and no incentive to recharge their batteries, take in a performance of "Trovatore," read "The Merchant of Venice" or The Federalist Papers, or simply enjoy a moment outdoors in the sunshine. We can debate whether, in the long run, this will produce pale and narrow automatons or whether utter and uncompromised dedication to a profession, 24/7, is the only route to serious excellence, but the point is that decision should be made by each individual with free will unfettered by the hands of a stopwatch.
  
  
• Ultimately, it limits law firms' revenue. (Clients--you can skip this paragraph.) Each of the variables that goes into revenue under the billable hour model has intrinsic limits: Rates, hours, realization, and leverage. This is worth a separate column, or more, of its own, so I'll go no further here.
  
  

Are we, then, about to witness in some grandiose fashion the "death" of the billable hour, much less its dropping back into the shadows of small-beer practices or quaint and creaky backwaters?

As you can tell by how I phrased the question, I see no such incipient revolution. And the primary source of life-support I would cite is clients, not law firms. Indeed, if there's a single remark in the Times article that's wrong-headed at best and offensive at worst, this is it:

[There's a] risk to law firms experimenting with other payment arrangements: If lawyers set too low a price, they lose money. Many lawyers may not be good enough businessmen to pick the right price, said [Frederick] Krebs, [President] of the Association of Corporate Counsel.

"The difficulty is, we don't really know what it costs us to do something," he said.

Wrong on the count that we don't really know what things cost, and wrong on stilts that lawyers aren't good enough businessmen to set a fair price.

First, if you believe that actuarial science has continued to survive and thrive for centuries for a reason, and that statistics, while subject to abuse for rhetorical or polemical means, are fundamentally a powerful tool, then you subscribe to the notion that we can tell "what things cost."

Second, if you believe lawyers can't set a price that both profits their firms and continues to win loyal clients, I would ask you to explain how the share of GDP going to lawyers, as well as the total percentage of lawyers as a component of the workforce, have continued to grow essentially unabated (well, until the last six months...) throughout our lifetimes.

So where, then, do I think the future of the billable hour lies?

As the old political joke has it, "You can't beat somebody with nobody," and part of the billable hour's durability to date has been a failure of imagination in nominating "somebody" to run against it.

But for the first time in awhile, "somebody," in various guises, are appearing. Here are just a few suggestions:

• Flat fees for a large portfolio of litigation over time and space.
  • Imagine you could handle all of Wal-Mart's employment litigation west of the Mississippi for three years (a made-up example). With the help of some of our good friends the actuaries, you could put a reasonable, albeit approximate, price on that.
  • But beyond that, imagine how landing that contract would change our firm's behavior the day after signing: All of a sudden, your incentive would not be to let Wal-Mart slide carelessly into court, ramping up your billable hours, but precisely the contrary--to keep them out of court, because going to court costs you dearly against your fixed-price contract.
  • Wouldn't you, then, embark on a campaign of employment-law compliance counseling at Wal-Mart?
  • And did you notice how this aligns the client's and the firm's interests? All of a sudden there's genuine risk-sharing: The more the client is sued (unpleasant and expensive), the harder the law firm has to work and the less profitable it is (unpleasant and expensive).
    
    
• An 80/120 deal.
  • With a willing and innovation-friendly client, agree that such and such a matter should cost, say, $1-million, but ask them to pay your firm as progress fees just 80% of that as the matter proceeds.
  • When it's done, the client gets--in its sole discretion--to evaluate how successful the outcome was for them. If they don't like it very much, they've paid your firm 80% and the matter is closed.
  • But if they like the result a lot, they pay you 120%.
  • And of course, 99% of the time, they pay you more than 80% but less than 120%.
  • What do you wager that the average recovery your firm would make on deals like that would exceed 100%? I would happily take that bet, as everyone working on the matter at our firm will know that this is a client they have to please.

There are surely other models inventive minds can think of.

The billable hour is dead. Long live the billable hour.

Robert Shiller, the Yale economics professor who has co-authored the forthcoming Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, has an important op-ed in The Wall Street Journal.

Shiller's op-ed itself is an argument that the Obama Administration's proposed stimulus package isn't big enough, and while I'll preview that here as a minor exercise in public service (I personally won't vouchsafe a view on this, since I don't have one, believing it's still too soon to tell), this is really a column about "animal spirits:" Where the phrase came from, what they mean, and what you can do about them.

But first, Shiller's argument, condensed:

President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen.

The term "animal spirits," popularized by John Maynard Keynes in his 1936 book "The General Theory of Employment, Interest and Money," is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

...But lost in the economics textbooks, and all but lost in the thousands of pages of the technical economics literature, is this other message of Keynes regarding why the economy fluctuates as much as it does. Animal spirits offer an explanation for why we get into recessions in the first place -- for why the economy fluctuates as it does. It also gives some hints regarding what we need to do now to get out of the current crisis.

A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey the message that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people's somewhat rash, impulsive decision-making is not discovered.

Unfortunately, we have just passed through a period in which confidence was blind. It was not based on rational evidence. The trust in our mortgage and housing markets that drove real-estate prices to unsustainable heights is one of the most dramatic examples of unbridled animal spirits we have ever seen.

"Animal spirits" appears on pp. 161 et. seq of Keynes' seminal book (as noted above). It's important to step back a moment and put it in its original context (emphasis supplied):

"...a large proportion of our positive activities depend on spontaneous optimistm rather than on a mathematical expectation, whether moral or hedonistic or eonomic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits--of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

[...]

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimat eloss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.

This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man."

The economy, in other words, is not a system of hydraulic pipes and valves, governed robotically by the laws of financial thermodynamics. It depends on confidence, trust, reciprocity, and the expectation of future rewards and growth. In other words, to some extent it's an exercise in faith.

(Small digression: A few years ago I was asked to speak to an elementary school class about "money"--clearly the result of an over-exercised grade school teacher's brain--and I decided to do show and tell. I took out a $20 bill and a blank sheet of paper and threw them both on the floor to open the presentation. After the predictable flurry of excitement surrounding the $20 and the curious looks surrounding the blank paper [accusing me perhaps of littering], I asked the students to explain their reactions. This was all an exercise in reminding them that "cash" is worth what it's worth because we all believe in it, and for no other reason. Intrinsically, it's merely paper. And yes, I did get my $20 back; they were well-behaved kids and had push come to shove I was bigger than they were. But I would like to believe they learned a small lesson about the role of trust in the modern economy.)

Now, what does "animal spirits" mean for you?

Three things.

First, many of you, as I, are surely asking yourselves what went wrong? How could the economy have fallen off a cliff so fast? After all, housing was overvalued for years, subprime mortgages were being issued for years, securitization and structured finance had been on a tear for years, and easy money had been around since the dawn of Greenspan for years.

The answer is not that economic fundamentals changed overnight; it's that psychology changed overnight. It has a way of doing this, particularly at the end of bubbles. (You do remember, of course, when the dot-com bubble was at its peak and no business model was too stupid to get funding, and no law firm was too smart not to get into Northern California?)

Shiller (and Keynes) rightly talk about confidence and trust, and I have my own pedestrian analogy: In normal times, you buy a 24-bottle case of Poland Spring water and trust without questioning that it's OK, just as you'd buy a triple A bond with no doubts. But in today's environment, buying a triple A securitized asset (if they even exist any more) is like buying that case of water worried that while 23 bottles are surely fine, one might be rotten. The upshot is you don't buy the case.

When there's no trust, there are no transactions.

Second, the good news about "animal spirits" is that they can and will reverse. Seemingly on a dime. As they recently did around Q3 2008. And, as hard as it might be to imagine right around now, the day will dawn when M&A will be back--not financially engineered M&A, but strategically driven corporate M&A. At some point clients will start looking around and realizing that that company they always coveted is now really really cheap.

Third, look to your own firm, internally.

Who in your firm is rolling with this punch we've all taken? Who seems to be paralyzed?

Who, in other words, is prepared and eager to re-invent themselves? ("We're all restructuring lawyers now.") Who is a deer in the headlights?

Who are you counting on to constitute the core of the firm going forward? Who's on the periphery, perhaps a recent lateral or someone who's a summer soldier and a sunshine patriot?

These are the times to segregate those truly on board with your firm for the long run from those who may have come for a brief guarantee or a short expectation of self-interested gain.

You have, I devoutly hope, a vision for your firm going into the future and for how it will look on the other side of this brutal interregnum. This is the time to assemble, or reassemble, the team you want for that other side. I would ask you one key question about who's on which side.

Whose animal spirits are still in the ascendancy?

Back from a week in London. (Close readers may recall I was there six weeks ago, and while I may be imagining things slightly, I believe the tone in the City has changed perceptibly even in that short time.)

Herewith a concise report, albeit one consisting more of questions than answers: This period is like that.

One consensus is firm: That revenues and headcounts are going to shrink. That is to say, firms are going to get smaller before they again get larger. Here are some of the other topics that seemed to be widely on people's minds:

• Are clients finally going to get serious about reducing overall legal costs, no matter what?
  
  
  • Will that mean that alternative or "strategic" fee arrangements, at long last and after great, ineffective, and gassy fanfare, finally gain traction?
    
    
• How long is this recession going to last?
  
  
  • More importantly, will it be "V" shaped or "U" shaped?
    
    
  • If it's "V" shaped, we know how to deal with it: Cut back a bit, hunker down, and last it out.
    
    
  • If it's "U" shaped, on the other hand, we can't assume business as usual. Firms will have to shrink (see observation #1, above). How, then, precisely, does your firm shrink?
    
    
• What will the financial services industry look like on the other side of all this?
  
  
  • If large portions of the banking system are owned by either Her Royal Majesty or the United States Treasury, won't that imply a fundamentally different way of buying high-end legal services?
    
    
  • If Merrill Lynch is acquired by Bank of America (for example), won't it be BofA's and not Merrill's culture that prevails? (Note that this opinion was offered, or this speculation widely floated, before John Thain's abrupt eviction from his exquisite office [remodeled at a cost of $1-million+, it was conveniently revealed, on the occasion of his professional dismissal and embarrassment].)
    
    
  • Will the financial services industry, source of outsized revenues to BigLaw, itself become a smaller component of the economy?
    
    
• Associate attrition is now essentially zero. How do we maintain freshness in the talent pipeline with no room opening out in the mid-levels? Or do we create room by force, through layoffs and "redundancies?"
  
  
• Is there a similar demographic logjam developing at the other end of the age curve, as Baby Boomers postpone retirement based on the shocking and deplorable recent performance of their retirement portfolios?
  
  
• If your firm must engage in layoffs, the only questions that remain are whether to do it:
  
  
  • Quietly or publicly;
    
    
  • All at once or gradually.
    
    
• Are geographic areas outside the major global capital markets centers--to wit, the "BRIC" countries, the Middle East--going to be able to serve as counterweights to the First World?
  
  
• Are practice areas outside the mainstream--the mainstream being corporate, transactional, banking, and finance work, as well as litigation in the US--going to be able to serve as counterweights to the mainstream slowdown?
  
  
• Is this the time to take a perhaps overdue look, and a rigorous, even harsh look, at colleagues who may be failing to display the sense of urgency, energy, and resolute optimism this situation demands?

It is quite early to expect answers to these questions. But I for one am more determined than ever to ambitiously seek every indicator I can that may begin to give us the sketchiest shadow of answers.

I'll be leaving for London tonight and spending all week there—back next Saturday the 24th.  Among the firms I'll be visiting will be a number of the usual suspects including most of the Magic Circle.

Although I was just over there early last month, at the pace things seem to be changing I'm very interested to see whether the mood has perceptibly changed.  Look for a full report.

I recently wrote about the dearth of critical thinking abroad in the land.

Now I'd like to bookend that piece with a classic from The Harvard Business Review, "Why Don't Managers Think Deeply?"

The opening lines are priceless; I would ask you only to put yourself in the shoes of fellow HBS faculty members and try--honestly--to envision your reaction:

A since deceased, highly-regarded fellow faculty member, Anthony (Tony) Athos, occasionally sat on a bench on a nice day at the Harvard Business School, apparently staring off into space. When asked what he was doing, ever the iconoclast, he would say, "Nothing." His colleagues, trained to admire and teach action, would walk away shaking their heads and asking each other, "Is he alright?" It is perhaps no coincidence that Tony often came up with some of the most profound insights at faculty meetings and informal gatherings.

Another touch-point for this question comes from an announcement out of GE early last year:

Jeffrey Immelt, GE's CEO, has received a lot of publicity recently for fostering "imagination breakthroughs" by encouraging managers to think deeply about innovations that will ensure GE's longer-term success. He has vowed that he will protect those working on the breakthroughs from the "budget slashers" focused on short-term success. Questions that this effort raises include: (1) Why so much publicity? (2) Isn't "deep thinking" what leaders are paid to do? and (3) Why do these kinds of effort require so much protection?

Are you beginning to get the same creepy feeling I am, that large organizations discourage deep or creative thinking?

Well, in that case, shall we just pile on? Here are some HBS professors' comments on the initial piece:

"... what rises to the top levels are very productive and very diligent individuals who tend not to ... reflect and are extremely efficient at deploying other people's ideas," implying that this type of leader is not likely to understand, encourage, or recognize deep thinking in others.

"... managers are not trained for it."

"Time-for-thinking is a special moment which can be resource consuming and an unsafe activity ..."

"There's a name for managers who think deeply--entrepreneurs ... Big companies are no place for big thinkers."

Providing time to reflect, particularly in an era of multi-tasking and the tyranny of technology, was most frequently suggested as an antidote to the dearth of deep thinking. As Chris Shannon put it, "I think creatively better out of the office, say while out in the boat or at a conference, so that looks very much like not working!"

Also, we have the uncomfortable reality that deep thinking can produce uncomfortable collisions with accepted reality:

In the book, Marketing Metaphoria*, Gerald and Lindsay Zaltman suggest some answers to the question [why managers don't think deeply]. In decrying the lack of what they call "deep thinking" among managers and especially those responsible for marketing, they suggest some things that get in its way. Among them are: (1) reluctance to take risk, especially when short-term performance is at stake, (2) the fear of disruption resulting from "thinking differently and deeply," (3) the potential psychological cost of changing one's mind resulting from deep thinking, and (4) the lack of information providing deep insights on which to base deep thinking.

*Gerald Zaltman and Lindsay H. Zaltman, Marketing Metaphoria: What Deep Metaphors Reveal About the Minds of Consumers (Boston: Harvard Business Press, 2008)

Are there "deep thinkers" within your firm? Would you count yourself one?

If there's a shortfall on this score, why do you think that's the case?:

• People are task-oriented rather than business oriented?
  
  
• Reactive rather than patrolling the perimeter?
  
  
• Excessively focused on the short term?
  
  
• Allergic to change, in whatever form, so reluctant to engage in any mental activity that might suggest a need for it?
  
  
• So successful that "if it ain't broke,..."?
  
  
• Invested in the existing hierarchy, erego unwilling to even think of doing anything that could upset the apple cart?
  
  
• Simply and innocently in the dark, so they don't even have the base-level wherewithal to take the first step in any meaningful direction?
  
  
• Flat broke out of time?
  
  
• Prisoners of human nature (at some level aren't we all?) who are invested in going along to get along?

What do you think stands in the way of your firm deploying its immense intellectual assets better to understand your own capabilities and try to move in a purposeful, conscientious, and disciplined way towards a brighter future in these times of surpassing challenges?

Every day, these days, and more than once, I ask myself, what all this means for our profession and our industry.

By "all this" I refer, of course, to the economic environment. Here are some of the hypotheses I'm putting in front of people I talk with:

• Will this period embody a "flight to quality" whereby clients decide that if something needs legal attention it needs to be done absolutely positively right, whereas if something is marginally deserving of legal attention it can wait or the client can wing it?
  • Implication: The Magic Circle and the NYC Bulge Bracket firms win.
    
    
• Alternatively, if the overall demand for legal services remains essentially unchanged (admitting that the practice mix emphasis may change), will clients' demand for savings on legal costs drive them away from Super Tier firms?
  • Implication: Second tier firms, with lower rates to start with and perhaps greater "flexibility" on rates, will win.
    
    
• Corporate transactions, M&A, private equity, securitization, structured finance, and even garden-variety asset sales and purchases are, by and large, without a pulse at the moment. Yet we all know (and the original Adam Smith, not to mention John Maynard Keynes and Milton Friedman, would agree) that they will come back. Not, initially, we may surmise, driven by financial engineering, but certainly driven by stategic corporate decisions. At some point in the future, say, 18 months from now, people in corporate-land will begin looking around and saying, "Wow, that company that we've always had our eye on is really cheap."
  • Implication: Everybody hunkers down for the duration and re-emerges in positions essentially unchanged from where we are today.
    
    
• Clients finally get really, truly, serious about alternative and strategically-driven billing in lieu of the billable hour. (I know, obligatory caveat to follow, that we've been talking about this for 20 years, but I think the dirty little secret of that era is that the clients--not the law firms--were always bluffing. They were perfectly satisfied with the billable hour or it never would have maintained the market share it has.)
  • Implication: Any firm that's willing to be creative, agile, and--not least--self-protective in terms of maintaining revenue for services rendered, will thrive. Firms that still think clients are bluffing, that think "alternative fees" is a synonym for "reduced revenue," or that simply lack financial imagination, will suffer.
    
    
• Some firms will bet right and other firms will bet wrong on when demand will resume, in terms of maintaining or cutting staffing.
  • Implication: Firms with the financial wherewithal to carry under-utilized partners and associates for the (unknown) duration of the downturn will be in a stronger position to service demand when it returns. Firms forced by financial exigency or choosing as a strategic option to make deeper cuts will have to hope their bet on the timing of the recovery is right or else that the market for lateral talent will be open and forgiving when the time comes.
    
    
• Although this recession seems to be disproving the tiresome nostrum that law firms are a-cyclical, there's no question that some practice areas are doing better than others, and some types of clients (read: some client industries) are doing better than others. Firms that were already disproportionately engaged with and exposed to those relatively healthy industries and practices will, rather tautologically, perform better.
  • Implication #1, for those who are true agnostics: You can never know or anticipate on which clients or practice areas the sun will shine tomorrow, so a reasonable (not utterly promiscuous, or you lose your reason for being) diversification of practice areas may be a shield against adversity.
  • Implication #2, for those more willing to trust their judgment: Place astute and selective bets on (a) industries, and/or (b) geographies, and/or (c) practice areas, that you think may be up and coming. While this may seem intuitively more appealing and more rational, markets have a way of surprising us all.

I could go on. You get the gist.

Never in my career--or the careers of those I speak with continually--has there been a time of greater uncertainty. The future is as hard to visualize as it is to see the East Side of Manhattan from Central Park West on a deeply foggy morning, or New Jersey from Riverside Park. You know it's there, with definite shape, but you can't see it or draw it or write about it with clarity and conviction.

So let's try to step back and get a bit of perspective.

On that score, the reflections of Ian Davis, the Managing Director of McKinsey, are worth reading:

These are no ordinary times. The venerable independent investment banks Lehman Brothers and Bear Stearns no longer exist. Central bankers and finance ministers are working in concert but struggling to keep up with events. China's government is pumping hundreds of billions of dollars into the country's economy. Chief executives in the US financial-services and automotive sectors have gone to Washington hats in hand.

Along the way, many core assumptions about the merits of globalization, markets, risk, and debt, long taken for granted in business, government, and academia, have come into question. One big shift already under way involves a far larger role for government in the economy, whether through outright ownership of former private-sector assets or tighter regulation. Also inevitable: massive changes in industry structures. Consolidation, effected either by bankruptcies or mergers, is already transforming financial services and seems bound to take place elsewhere as the impact of the credit crisis ripples through the real economy.

[...]

Inspired leadership is urgently needed to renew the global financial system and avert a protectionist backlash or excessive regulation that could derail economic progress--especially in countries and regions emerging from poverty--or dampen the entrepreneurial spirit. Strong leadership is equally critical within organizations. Anxious employees, customers, suppliers, and shareholders are looking for a steady hand and clear, candid messages from corporate leaders, not for unrealistic pronouncements that may be overtaken by next week's events. The world is watching.

I would emphasize Mr. Davis' final point: This is a time for leadership. Leadership within your firms, to be sure, but also leadership on the public stage. If any group of managing executives is in a better position than law firm leaders to contribute to the debate on issues such as financial regulation; banking safety and soundness; the integration or severance of investment banking, brokerage, and classical-banking functions; the role of ratings agencies; the utility of global capital flows (just to suggest a few issues), I don't know who they are.

Are you prepared to speak out? If not, why not? If so, shall we try to enlist a leadership council of your peers to do so? If you're interested, "Adam Smith, Esq." is ready, willing, and able to help provide a platform and clearinghouse for ideas, position papers, and fora for discussion.

But back to the economic crisis.

We can also try to suss out some more concrete advice about what we should do now, for example in the popular parlor game of trying to take lessons from the Great Depression. But when it comes from McKinsey, I think there may actually be meat on the bones.

Recent turmoil in global financial markets and its spillover into the real economy have generated considerable interest in the Great Depression. There's much to be fascinated with, both in the parallels (banking failures, a large spike in real-estate foreclosures, and global uncertainty, for example) and the points of contrast (such as the speed and coordination of the response of central banks and finance ministries in 2008).

Can the business practices of the 1930s yield useful lessons for executives setting priorities in today's uncertain and evolving environment? For investments to promote innovation, the answer may be yes.

Using patents as a proxy for investment in the future, McKinsey found a fascinating pattern during the Great Depression: This chart shows change in GDP (green bars) and change in patent applications (yellow bars), lagged by one year, for the Depression era. Note the almost spooky correlation, as if companies could turn innovation on and off depending on which way the economic winds were blowing:

It couldn't be much more dramatically displayed how companies tied their investments in R&D to an almost yearly correlation with GDP growth.

Yet there were some companies that did not. Among them were:

• DuPont, which invented neoprene (synthetic rubber) in 1931 and nylon in 1934;
• Polaroid;
• Hewlett Packard; and
• RCA, which turned its research from radio to the new market, television, returning to profitability in 1934.

If these names sound like leaders in the WWII era and its aftermath, there's a reason. They leaned against the conventional wisdom and turned against the prevailing economic winds. A lesson for us?

Not only may your competitors be battening down the hatches, but investment assets (talent, primarily) may be cheaper than they have been for a long time.

As I've said before, perhaps a time for us all to read fewer newspapers and more history.

Ten years after publishing The Future of Law, Richard Susskind is back with what in many ways is an extended sequel, The End of Lawyers?

If you don't know Richard (disclosure: I do, and consider him a friend), it's high time. From the dust jacket:

"Richard Susskind is Honorary Professor of Law at Gresham College, London, IT adviser to the Lord Chief Justice, and an independent consultant to professional firms and national governments. He is Chair of the Advisory Panel on Public Sector Information, a law columnist at The Times, and a Fellow of the Royal Society of Edinburgh and of the British Computer Society. He studied law at Glasgow University and has a doctorate in law and computers from Balliol College, Oxford. His views on the future of the legal profession have influenced a generation of lawyers around the world. He has written several books, including Expert Systems in Law (OUP, 1987), The Future of Law (OUP, 1996), and Transforming the Law (OUP, 2000), and has been invited to speak in over 40 countries.
He was awarded an OBE in the Millennium New Year's Honours List for services to IT in the Law and to the Administration of Justice."

Parts of the book were serialized last fall in The Times (UK), and by benefit of that Richard was able to pen a self-deprecating Preface to the print edition of his work, starting, "I already know what many people think of this book...." and going on to note that he found "the feedback posted at Times Online to be quite polarized--there were the skeptics (mainly lawyers) who did not seem to think they should read what I had to say before rejecting it; and there were the enthusiasts, often every bit as biased, who were immediately fond of anyone they thought might be taking a pot-shot at lawyers."

Were I a lazy reviewer, I would stop right here. Richard has indeed summarized the polarized reactions this book is likely to induce. But since you, and Richard, deserve a bit more, as the famous pop phrase has it, "But what do you really think?"

Actually, I'm an unfair--or at least unrepresentative--person to ask. For those of us who toil daily in the trenches of analyzing the economics of the legal ecosystem, and who try diligently to stay attuned to threats and opportunities surrounding that ecosystem, much of what Richard writes about has been on our radar for awhile--ranging from the wantonly speculative and hypothetical to the clear and present. Add to that that I find polarized debates singularly uninteresting--I live for the nuance and the grey areas.

So I'm probably a poor person to ask.

That said, The End of Lawyers? is a fascinating and timely book: Probably more timely, indeed, than Richard had any hope or clue when he commenced work on it.

We are, to state the obvious, in the midst of once-in-a-career challenges to the our familiar business models, where yesterday's conventional wisdom may not suffice for tomorrow.

This is where I believe The End of Lawyers? has its greatest virtue: It challenges many things you've assumed. This is a propitious time to invite your brain down that lane for a thought experiment writ large.

Here are a few examples.

The book opens with "four thoughts:"

• Sitting in the "dark wood panelled main hall of the Mercers' Company, in Ironmongers Lane in London, founded in 1394, [...] I thought about other ancient trades and craftsmen, now remembered in London largely because of the livery companies that bear their names--for example, tallow chandlers, cordwainers, and wheelwrights." The reflection was "whether lawyers might fade from society as other craftsmen have done over the centuries." (italics original).
  
  
• Second, Richard wondered why many lawyers seem to deny that they're lawyers--that is, to "downplay the legal content of their jobs." His hypothesis is that they do so because they recognize the need to change and diversify in response to shifts in the market. "Lawyers in denial" (my phrase) may be because they realize they need to widen their range of skills to remain relevant.
  
  
• Thought #3, the one "that urged me to write this book," came upon reflection when asked to talk to friends' teenage children about pursuing a career in law. He realized he couldn't predict the profession's future: "When honest lawyers are really pushed, most confess to being clueless about how their profession is likely to unfold in the long run."
  
  
• And finally: In the fall of 2006 Susskind attended a seminar on the implications of the Legal Services Act, where (evidently for the first time, at least in polite company) he heard a discussion of legal services "as though they were subject to the normal laws of the marketplace and not some kind of special case, sacred cow, or no-go zone."

Here is how Susskind himself summarizes the thesis of the book:

If I may give away the ending, [I] will point to a future in which conventional legal advisers will be much less prominent in society than today and, in some walks of life, will have no visibility at all. This, I believe, is where we will be taken by two forces: by a market pull towards commoditisation and by pervasive development and uptake of information technology. Commoditisation and IT will shape and characterise 21st century legal service.

To support this thesis, he discusses the "path to commoditization," including "decomposing and multi-sourcing," where he envisions sources of legal services evolving along a trajectory such as this:

• in-sourcing
• de-lawyering
• relocating
• off-shoring
• outsourcing
• subcontracting
• co-sourcing
• leasing
• home-sourcing
• open-sourcing
• computerizing
• no-sourcing

Don't be put off by the seeming jargon: Susskind nicely describes each of these alternatives and their costs, advantages, and benefits.

Above all, the theme is how technology will change our profession. Although Susskind purports to be an agnostic on "whether the future for lawyers could be prosperous or disastrous," and says that "the arguments and findings of this book can support either end game," it's clear where his heart lies:

"I predict that lawyers who are unwilling to change their working prcatices and extend their range of services will, in the coming decade, struggle to survive. Meanwhile, those who embrace new technologies and novel ways of sourcing legal work are likely to trade successfully for many years yet, even if they are not occupied with the law jobs that most law schools currently anticipate for their graduates."

As much as I admire Susskind's call to arms--and his thorough and accessible canvassing of the new technologies available not just to your teenagers but to you--he can occasionally launch fusillades which you may view as more incendiary than illuminating. For example?

I do not believe lawyers are self-evidently entitled to profit from the law. As I have said before, the law is not there to provide a livelihood for lawyers any more than ill-health exists to offer a living for doctors. Successful legal business may be a bi-product of law in society, but it is not the purpose of law. And, just as numerous other industries and sectors are having to adapt to broader change, so too should lawyers.

Economists, and MBA's, and yours truly, might have different views on whether profesionals are entitled to profit from their services, but that is far afield from the concerns of The End of Lawyers? Susskind is one of the small handful of genuine thought leaders writing about our profession and our industry (not self-promotingly noisy, spurious, shallow, mercenary, or craven). Agree or disagree with Richard, you need to know what's on his mind.

This is actually a new-for-2009 Waterford crystal ball, approximately 10 feet in diameter, weighing over 12,000 pounds, covered with 2,668 crystal triangles, and illuminated by more than 32,000 LEDs.  Happy big bad bright New Year.

Actually, Dear Reader, I imagine many of you, as I, will be just as pleased to kiss 2008 goodbye:

• The Dow ended the year down 33.8%, its worst annual showing since 1931--and 28 of the 30 stocks (all but Wal-Mart and McDonalds) were down by more than 10%;
• The more representative S&P 500 was down 38.5%;
• The famously tech-centric NASDAQ was down 40.5%;
• The small-stock Russell 2000 was down 34.8%;
• The FTSE 100 declined 30.9% on the year, its worst annual drop since it was created nearly 25 years ago;
• Nearly $7-trillion in US wealth has been wiped out, erasing all the stock market gains of the past six years;
• There was no place to hide abroad either, with the "BRIC" stock markets down from 55% to 72%;
• Commodities such as oil and copper have crashed, and the Reuters-Jefferies CRB index, which first began tracking a basket of commodity prices in 1956, will be down nearly 40%, an all-time record annual decline, while the S&P FSCI index, another benchmark for commodity investors, was down over 50%;
• And of course the US housing market is in a famous and now nearly theatrical swoon, with median prices (there is of course no such thing as a "median" housing market) down by about 14%, by all accounts the largest decline nationwide since the Great Depression;
• Wall Street as we knew it (Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley and Goldman Sachs in their own ways) went away;
• Not to mention Heller Ehrman, Thacher Proffitt, and Thelen Reid, plus countless layoffs and pay and bonus freezes in our little corner of the world.

What, then, are my wishes for you for 2009?

As I've written fairly consistently this year, try to put these events all in perspective.  You are not your net worth or your income, and if both have returned to 2002 or 2003 levels, the world has not, actually, come to an end.

Nevertheless, an array of forces that have heretofore seemed rather randomly aligned, disconnected from one another, and more imaginary than real, may—emphasis on may—be assembling for the first time into something recognizable and coherent, although still, at the moment, of little real impact.  I don't know if this is, or will be, true, and I don't know of any way of thinking about it harder or looking for more data to tell if it will be true.

I can promise to you, however, Dear Reader, that in 2009 my fervent hope and commitment will be to continuing to make "Adam Smith, Esq." a place where everyone who cares so deeply about our industry and our profession can assemble to help figure these things out—and change them for the better.

Happy Big Bad Bright 2009.