Recently in Cultural Considerations Category

Not every day do we get what appears to be good news on the much bruited-about topic of the US's global competitiveness.  But courtesy of today's FT we have just that, in New  York ties with London for finance crown. 

A consultancy with the New Age-y name of Z/Yen, commissioned by the City of London Corporation, prepares a semi-annual "Global Financial Centres Index" and this year's results put the Big Apple and Big Ben in a dead heat at 775 points apiece.  Although the methodology is something of a black box, it " combines a survey of financial professionals with factors such as office rental rates, airport satisfaction and transport."  A total of 75 global centers worldwide are ranked, with Hong Kong and Singapore (3rd and 4th, respectively) making sizable gains on the Atlantic Anglo pair.

New York fared better than London for business environment, availability of people and infrastructure, even though those participating in the survey agreed that New York had taken the bigger hit from the financial crisis.

Meanwhile, London hurt its own cause by raising the top personal income tax rate to 50%, along with a 50% payroll tax on all bonuses over £25,000.  (France and Germany pulled similar stunts; the US, of course, has at least so far not.)  Here are the top 10 cities:

Meanwhile, I was in front of about 100 managing partners, executive directors, and other senior law firm leaders here in New York last month and the sponsor of the event had kindly agreed with my suggestion that we arm attendees with wireless polling devices.

One of the questions I asked was "Five years from now, it will be clear that the greatest growth in demand for corporate/financial legal services is in:"

You can see that New York garnered a handsome 25% of the votes (multiple selections were not allowed).  In order, people voted for:

• China, including Hong Kong:  31%
• New York:  25%
• The rest of Asia, including Japan and India:  22%
• The EU, and Central & South America:  Tied at 8% apiece
• London:  6%
• The rest of the US:  0%

Another way of looking at this is that between them, New York and Asia-writ-large had 78% of total support, while the entire rest of the world had (obviously) only 22%.

If you've been to China lately, you know that as far as the Chinese are concerned, there are only two economies that matter:  Theirs and the US.

There may be life in this little old narrow island yet.

 whether (Theory A) something nefarious and troubling is going on here, or whether (Theory B) the macroeconomic environment was disproportionately harsh on associates in general and junior associates in particular--and whether the posited over-representation of minorities in those ranks simply, but innocently, took its toll.

When is a story not a story? (This is not a trick question.)

Well, when, for example, it reports on a development so small as to be trivial--but inflates its import and meaning greatly out of proportion.

Or when it is premised on statistical analysis but doesn't pursue where the data might lead in any analytically sophisticated or helpful way.

Or when the environment at large is changing in such profound and unprecedented ways that one would be craven or naive not to suspect that the "key finding" under discussion might not merely be an innocent and entirely unintended piece of collateral damage.

We now have a trifecta, in The American Lawyer's annual Diveristy Scorecard 2010

which counts attorneys of color in the U.S. offices of some 200 big firms. In each of the previous nine years that we've compiled the Scorecard, the percentage of minority attorneys at all participating firms increased, rising from less than 10 percent in 2000 to 13.9 percent in 2008. In 2009, for the first time, that proportion dipped, to 13.4 percent.

The drop in law firm diversity may be small, but it's important.

How significant can this be? If you compare 13.9% to 13.4%, the change is less than a 5% proportionate decrease. Yet according to the very same story, "overall, big firms shed 6% of their attorneys [and] 9% of their minority lawyers." This kind of statistical "what's going on here?" cries out for deeper analysis.

Unfortunately, we don't really get that.

We do, however, learn that there are other reasons for concern:

Diversity advocates call the drop a warning sign that shouldn't be ignored. "I think [that] when you're looking at any numbers of a population you're trying to increase, and you see a decrease, that's significant," says Venu Gupta, executive director of the Chicago Committee on Minorities in Large Law Firms. "I guess I hoped we wouldn't be going backward," echoes Fred Alvarez, chair of the American Bar Association Commission on Racial and Ethnic Diversity in the Profession and a Wilson Sonsini Goodrich & Rosati partner.

The decrease in minority head count confirms a concern voiced by many in the legal industry: that the massive law firm layoffs of 2008 and 2009 would hit minority lawyers especially hard. "There were fears when the recession began that these folks would be disproportionately impacted, and it appears to be the case," says Thomas Sager, general counsel of E.I. du Pont de Nemours and Company and a longtime diversity champion. Sager and other observers fear that this year's falloff could be the start of a new downward trend, given a climate of slower law firm hiring, fewer African American law school students, and so-called stealth layoffs. [...]

Consultant Arin Reeves of The Athens Group says minority associates suffer when work dries up: "Your ability to meet hours is reflective of whether or not you've been invested in."

Now, not to gainsay what's being reported here, or its potential import if the cited trend continues for the next several years. The biggest news (which is in the lead paragraph, as it should be) is that for the first time in the 10 years that TAL has been conducting the Diversity Scorecard, there's an overall drop in percentage of minority attorneys. When a trend goes on for as long as it's been measured and then reverses, that is indeed news.

My reservation is less with the headline and more with the rather alarmist tones of concern excerpted above,which give the story its punch and its juice.

The problem is that the deeper you dig, the less there there is there.

How so? In trying to analyze what might be behind the numbers, I found that that last remark (above) from Arin Reeves provided the beginning of a clue. The clue lies in the focus on associates. Here's another bit of evidence:

For a long time, the way that law firms beefed up their diversity numbers was really to have a lot of diverse associates in the first-and second-year classes," says Gupta from the Chicago Committee on Minorities. If a firm didn't hold on to its minority associates--and many didn't--it was relatively easy, Gupta says, to hire more in the next recruiting season.

But that was in a so-called normal economy. These days, firms can't quickly replace the minority attorneys they lose through voluntary or involuntary attrition. Reduced recruiting is another factor that is likely contributing to the decline in minority attorneys.

In other words, firms' diversity scores disproportionately rely on their associate ranks.

So let's take a look.

Here's the data:

As I look at this, I see a much more nuanced--and optimistic--story.

Overall, to state the obvious, serious cuts came in the ranks of associates and non-equity partners. (Caveat: The story doesn't specify whether "partners" as used by the author means equity or both equity and non-equity, but since industry-wide we've seen no meaningful growth in the ranks of non-equities in the past year, I'll assume it refers to equity only.)

But (second big caveat--given the data we are provided) minorities did better than average in growing their representation among the partnerships. How, pray tell, is this bad news on the diversity front? It's possible--not that it makes for an alarming story, of course, but it's possible--to interpret this data as implying that the long hoped-for ascension of minorities into the partnership ranks is actually taking place.

Finally, the missing statistical analysis: The only way to really tell whether the disproportionate layoffs of non-partners among minorities (see table above) has resulted from firms' using the economic downdraft to try to conceal what in their dark and secretive hearts is prejudice pure and simple--highly implausible, in my book--is to separately break out the demographics of lawyers laid off for economic reasons, which the article says is "a project beyond the scope of this survey."

More's the pity.

Because that's the only way to tell whether (Theory A) something nefarious and troubling is going on here, or whether (Theory B) the macroeconomic environment was disproportionately harsh on associates in general and junior associates in particular--and whether the posited over-representation of minorities in those ranks simply, but innocently, took its toll.

Care to vote?

The Law Society of England & Wales recently published Nick Jarrett-Kerr's Strategy for Law Firms: After the Legal Services Act, and Nick was kind enough to send me a copy for my perusal. (Disclosure: I've known Nick for years, although we have never formally worked together.)

The contents are wide-ranging, as you can see from these chapter titles:

1. The new world;
2. Understanding your assets;
3. Harnessing intellectual capital: strategies for optimal law firm infrastructures;
4. Understanding positioning and competitive advantage;
5.Developing a value-added strategy;
6. Alternative Business Structures as a tool to implement strategy;
7. Long term funding of law firms;
8. Mergers and acquisitions;
9. Law firm valuation (Michael Roch);
10. Remuneration revisited;
11. Governance, leadership and management in the changing law firm environment;
12. Summary and Prospects.

Although there's been less coverage of the Legal Services Act of late than when it was first being debated and then adopted in the UK (it actually only applies to firms based in England and Wales), I attribute that less to diminishing interest in the LSA than to the simpler reality that once the fireworks of the debate over adoption had concluded, there is little more to say until we see it kick into action (pending adoption of implementing regulations, probably in the next 12--18 months).

But if you feel the urge to prepare in advance, Nick's book will arm you better than anything published so far.

First, here's a bit more on the broad range of what it covers, and then we'll get to the heart of the matter: What Nick thinks that the "Alternative Business Structures" enabled by the Legal Services Act might look like. From the Law Society publications page:

Strategy for Law Firms guides firms through the strategic options available to them and suggests how they might position themselves to succeed in the market.

The book provides a practical approach that is underpinned by sound strategic and academic principles. The author offers insight, drawn from his vast experience of the legal market, on a range of topics including:

• harnessing a firm's intangible resources and capabilities
• competitive positioning
• the creation of a value added strategic plan
• Alternative Business Structures as a tool to implement strategy
• mergers
• law firm funding and valuations, including external funding
• governance
• profit sharing.

The author has created a new framework with which to analyse and assess your firm's position in the market, and identifies and explains 15 possible models of ABS under the new rules.

Although primarily aimed at law firms in the UK, the book is relevant to legal firms around the world.

Of greatest interest to those of us waiting with baited breath to see the fallout when the LSA takes effect is Nick's proposed taxonomy of "Alternative Business Structures:" What, in other words, he theorizes will arise in the next few years. It's fascinating (see Chapter 6 in general, pp. 89--103).

First, Nick posits three reasons a law firm might entertain launching an ABS:

• A strategy for growth and/or diversification may require more capital than the partners care to or could raise internally.
• They may perceive a need to protect or increase market share by becoming part of a bigger brand.
• They may hope that an ABS will give them a vehicle for recognizing the value of capital they implicitly own in the firm.

He then follows with his taxonomy, which is worth elucidating in some detail:

• Business forms mostly owned by lawyers:
  
  
  • Traditional law firms: There is little real doubt this model will continue, as the attraction of minimal non-lawyer involvement in firm governance is altogether real.
    
    
  • Marketing umbrellas: Here Nick envisions a sort of franchise model where operational decisions remain firmly in the hands of the extant partnership but marketing and branding support is provided by a centralized operation. It's hard to imagine this succeeding, however, without some quality standards being imposed so the hope of minimal operational involvement may have a vanishing half-life.
    
    
  • The full franchise: This builds upon #2 by adding centralized guidance and specifications for systems, processes, and standards that franchisees would be obligated to meet or face expulsion. The benefit to the firm joining the franchise is presumably increased exposure and being able to borrow from the halo of assured-quality granted by the franchise name; the cost is typically an initiation fee and a monthly management fee thereafter.
    
    
  • The roll-up. In this familiar technique, investors--who may be outsiders such as private equity or venture funds or who may be industry incumbents seeking growth--buy a series of firms and re-brand them as their own, potentially consolidating significant portions of an industry in the process. To some extent, we have already seen this. If you doubt me, simply look at the New York or London markets: You will have a hard time finding small, attractive, independent law firms still standing. Amost all have been swallowed by out of town firms or indigenous firms bent on growth. (Parentheticaly, this appears to be the primary motivation for Slater & Gordon, the Australian firm which launched its famous first-of-a-kind IPO two years ago.)
    
    
  • The virtual firm: We have already seen examples of this type of firm emerge and given the relentless march of technology--which excels at enabling collaboration at a distance--we will surely see more. One notable entrant that's up and running is Axiom Legal, which provides on-demand teams of lawyers with premium pedigrees to clients without heavy investment in office space or infrastructure.
    
    
  • Legal multi-disciplinary practices: These got an undeserved and unfair black eye about a decade ago when they were seriously proposed here in the US and strangled in their crib by a combination of the ABA's lobbying "FUD" (fear, uncertainty, and doubt) and the untimely implosion of Andersen Legal, which seemed to prove their inherent risks--although, of course, it proved no such thing.
    
    
• Business forms mainly owned externally:
  
  
  • Integrated MDP's: These would combine a division offering legal services with other divisions offering allied service, such as investment or tax advice, real estate brokering, accounting, and even garden-variety investment banking services. The putative rationale is that clients would appreciate one-stop shopping, but as we've seen over the past decade in the experience of financial "supermarkets," the best that can be said about that model is: Unproven. Indeed, Nick admits that it "could prove to be a regulatory and liensing nightmare as the various regulatory bodies for the different professions involved tussle for supremacy."
    
    
  • Externally financed growth: This is probably the classic vision of firms contemplating outside "sugar daddies" who would come in as minority owners, contribute substantial capital, and not demand a controlling or even important voice in management. The concept is that private equity investors (say) would be willing to take relatively passive roles. Don't count on it. In fact, assume that serious private equity investors will demand majority control, period.
    
    
  • Branded conglomerates: This model starts from the reality that the boundaries of what constitutes "legal advice" are porous. What about tax advice from accountants? M&A advice from investment bankers? For that matter, mortgage or real estate investment advice from real estate brokers? The structure envisioned here is a panoply of more or less related services of which classic legal advice is only one, all operating under a single roof and brand name. A logical place to acquire the legal services component of such a conglomerate would, of course, be to buy an existing law firm.
    
    
  • Law Firm, Inc.: The classic law firm IPO, floating itself on the market. Nick, and I, see very few firms going for this option, and probably almost no firms employing people who might be reading this piece right now. But it remains a sexy option, and doubtless some of the undaunted or (if you prefer) the naive and self-aggrandizing, will try it. All I can say is, hold on to your seats.
    
    
  • The integrated legal network: A hub and spoke model where a centralized provider of back office operations and administrative services would feed subsidiaries (the spokes) with cost-effective services benefiting from economies of scale, while allowing each "independent" firm to operate on its own. Of course, independence is here in the eye of the beholder, and without doubt standardized quality control and other relatively intrusive measures would be imposed. It's hard to envision how any non-commodity law firm would find this feudal kingdom an attractive prospect, but for smaller firms honestly recognizing a shortage of pure managerial talent, it could serve a valuable role.
    
    
• Fringe and other models:
  
  
  • Online firms: My friend Richard Susskind has recently outlined what this creature might look like in his The End of Lawyers? In his vision, the future (I should say, and Richard would say, a future) sees a confluence of disruptive technologies providing automated legal services including document assembly, baseline advice, audits, or simple updates on topics of interest to subscribers.
    
    
  • Not-for-profits: Not a "business" model, at all, in the eyes of born-in-the-bone capitalists, but possibly viable for firms that are willing to pay clients enough to cover out of pocket expenses and able to recruit professionals enlisted in the vision of providing services to their worthy target market.
    
    
  • In-house options: Who's to say that in-house departments couldn't decide to offer their industry-specific expertise outside the walls of their corporation? Although the corporation might not see it as a "core competence" (it's not), if it were viewed as free incremental revenue for a resource that had to be maintained in any event, who's to object? Whether they'd be viewed as serious competitors to dedicated private law firms is another question. The more important question, in my mind, is why a corporation would provide top-notch, or even adequate, industry-specific legal advice to other firms that almost by hypothesis are direct competitors? Nick suggests this idea, but I don't know how serious he is. I wouldn't be.

Nick concludes with four predictions, only one of which I will share with you. For the rest, you need to buy the book. The one? "Pressures on margins will intensify.'

If you want to have intelligent plans for dealing with that prediction, not to mention the other three, perhaps your law firm needs a strategy.

Fourteen years ago, Greenberg Traurig wasn't in the AmLaw 100, and today it's  #10. Their CEO during this entire period--until he stepped down lastweek--was Cesar Alvarez, now age 62. When he became CEO of the firm, it was a "small but prestigious Miami law firm known for corporate and real estate," according to this interview with the Miami Herald, and now is 1,750 lawyers in 30 offices with annual revenue of $1.2-billion.

But you know this. That's not why I'm writing.

When someone with Cesar's perspective and accomplishments steps down, it's worth listening. (Naysayers in the audience--and I know you're out there, admit it!--who think that the Greenberg Traurig model is intrinsically flawed, or that it's a flash in the pan, or that it's unsustainable, or that it's [insert miscellaneous pejorative here], just stay with me. We all know GT is a "polarizing" firm, in that people tend to love it or hate it. That's a topic for another day.)

So let's listen for a moment.

He said two things that struck me:

• "Without our blind compensation system [only Cesar knows what each partner earns], we never would have been able to build this firm;" and
  
  
• "Q: What do you know now that you wish you knew years ago?
  
  "A: How important the culture of a firm is. Sometimes people tell you how critical culture is. When I started, I said culture is a nice thing, but unless you drive success, culture won't mean anything. In fact, I know now that it is the opposite. You need to drive the culture, and culture will drive success."

How could a "blind" compensation system ever work? Isn't more disclosure, more "transparency," today's Holy Grail? Well, not so fast.  As Warren Buffett has famously said:

Our experience is that envy, rather than greed, is the key driver. If you give someone a $2 million bonus but their co-worker got $2.1 million, they're miserable. Of the seven deadly sins, envy is the most useless - it makes you miserable and you lose a lot of sleep.

I couldn't agree more (with Warren, if I'm not yet entirely convinced by Cesar). Few things are more corrosive than the envy of small differences, and we all know that the most visceral rivalries are local.

Does that mean the "blind," cone of silence, system is necessarily right for your firm? Not at all. The answer to that depends on the historic path your firm has taken. For sure, if it's always had an open and "transparent" system, now, and perhaps not ever, is the time to change. But if there's needless neck-biting and back-stabbing thanks to minimal differences in compensation, you might start thinking about migrating in that direction.

But enough on that.

The truly fascinating comment of Cesar's was his about culture, and its primacy over financial performance.

In this environment, people are who are considering lateral moves are not considering them because of, or certainly not only because of, financial performance, but almost exclusively because of culture--the compelling lack thereof.

But "culture" is too often confused with such bland bromides as "collegiality," "support," and "team spirit."

Evidently, that's not what culture means to Cesar, although he doesn't explicitly make the connection. Culture, to Cesar, is a culture of high performance.

First, as to internal expectations (and forgive the extended quote, but it's required to deliver the context and import) (emphasis supplied):

Q: If a young associate comes to talk to you about work life balance, what do you say to him?

A: When I was an associate I wanted to do as many deals as I could as a corporate securities lawyer. I worked a lot of hours: Monday though Sunday. Ultimately you have to sell two things -- for the client to trust you as human being and as a lawyer. If you haven't been at these deals you won't be able to sell yourself to the client. My point to young associates is you have to invest in yourself. What you get paid in the first few years is insignificant.

Today associates want the outside life. You have to remember they have to choose to lead the life of a lawyer, not be here to have the lifestyle of a lawyer. If they want lifestyle without being a real lawyer it will not work long term. It's a business that requires a lot of experience.

Q: Does it require major personal sacrifice to be good lawyer today?

A: Absolutely. Nothing has changed from that perspective. This is difficult profession, period. It requires a lot of time and effort. There are wonderful rewards, but you cannot substitute time and effort, not when someone else is putting in the time and effort.

Many associates still don't believe it. Now they are feeling the recession, the uncertainty. They have never felt the uncertainty. They have always been in a system that rewarded them again and again even when their hours were going down.

Q: Have you seen a change in attitude?

A: Definitely. They realize they are lucky to have a job and are more focused on what they need to do to have their career.

And second, in terms of client expectations:

Q: Do you think the legal profession as a whole will address client expectations brought about because of technology?

A: I think you have to be connected to the client all the time. We're in the business of solving problems. Problems aren't just legal issues. The great lawyers know how to handle problems. You want to be an advisor, not just a technical lawyer. You have to spend time understanding the business of client. You have to invest time and stay connected.

Finally, he has some shockingly clear-eyed observations, firmly grounded in economics, on what's going to happen to the next few years of law graduates and young associates. Specifically, when asked what's going to happen with the "tremendous number of unemployed lawyers," he responds with a clarity worthy of Adam Smith:

The economy deals with supply and demand. The adjusting mechanism is price -- what they will be willing to be employed at and what we can charge a client for them. Once that comes into balance again, you will have a different issue. [...]

If I were a young lawyer and displaced from a large firm, I would be going into one of new areas and be at the ground floor. I'd be learning energy policy and how it works. A few years from now you will become very valuable to law firms. You could come back at a high level if you focus on areas that are new. Firms will always be buying expertise.

So:

• Consider the corrosive effects of envy.
• Economics matter, but a high-performance culture matters more.
• And this profession demands hard work: Always has, always will.

And one last consummately clear-eyed Cesar-ism (from a personal conversation, not this article): When asked about the PPP arms' race, he cogently observed: "The only thing that matters is profits per me."

Thanks, Cesar.

In the 1980's and 1990's, one often heard the only semi-facetious phrase that "investment bankers are short-term greedy, but lawyers are long-term greedy."  One of the few exceptions to "short term greedy" on the I-Bank side of the Street was always Goldman Sachs, which, under the leadership of people like John Weinberg, was the epitome of long-term greedy.

I was put in mind of this by a front page piece in today's New York Times, "As Goldman Thrives, Some Say an Ethos Has Faded."  Here's the gist.

Lloyd Blankfein has led Goldman Sachs since 2006, and "has surrounded himself with a tight circle of executives drawn from Goldman's trading operation."  The business model of Mega I-Banks has traditionally had two components, trading for the firm's own account, and counseling corporate clients on strategy, M&A, and so forth.  But if you believe the article (I do, fundamentally), this balance has shifted at Goldman:

Interviews with nearly 20 current and former Goldman partners paint a portrait of a bank driven by hard-charging traders like Mr. Blankfein, who wager vast sums in world markets in hopes of quick profits. Discreet bankers who give advice to corporate clients and help them raise capital -- once a major source of earnings for Goldman -- have been eclipsed, these people said.

To my way of thinking, the smoking gun is a 2006 change in compensation for measuring investment bankers' value to the firm.  That year, Goldman instituted banker "profiles," which are daily (yes, daily!) P&L's showing how much business its employees and clients are doing. As the article writes, this change--quelle surprise--had two effects.  First, Goldmanites focused on clients who might generate the most revenue in the very near term, and second, it "prompted bankers to fight more aggressively for credit for their deals." (Sound familiar?)

Regular readers know that I place great stock in compensation:  Read, incentives.  Econ 101, and Econ X01 through Y01, relentlessly teach the importance of incentives in molding behavior.  And the i-bankers at Goldman are surely smart enough that they don't need to be told twice how to bring home more of what they surely feel entitled to.

Here's another window on the change the firm may have undergone:

"Would John Weinberg ever be in this situation?" [offering vague apologies for "mistakes" leading up to the financial crisis], asked one former partner, referring to the legendary senior partner who ran Goldman for many years. "No way. He would have thought about the firm over 50, 100 years, not what people will get paid this year."

Since the modern Goldman emerged during the Depression, its executives have cultivated a ruthless professionalism tempered by what might best be described as Goldman Sachs Exceptionalism: a sense that Goldman stands apart from, if not above, Wall Street rivals.

This sense, strengthened by a tradition of government service among senior executives, runs deep inside the bank's headquarters at 85 Broad Street in Lower Manhattan. Indeed, from the day they arrive, employees are steeped in the firm's 14 principles. No. 1 is: "Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow."

If you perceive an analogy to Law Firm Land, the line forms to the left.

Surely, surely, your firm has stated core principles akin to Goldman's:  Put the interest of your clients first, and the firm will take care of itself.

But do you also have long-lasting origination credits?  And how important are they?

To what extent does your compensation model reflect a zero-sum game where one partner's hoarding gain is another's failure to collaborate loss?  Do you measure performance daily, weekly, monthly, quarterly, annually, or over three to five-year rolling cycles?

In other words, how short-term greedy are you and how long-term greedy are you?

I fear that too many firms became too short-term greedy in the past decade.

Were there reasons for this?

In hindsight, of course, we know that the reasons espoused at the time look more like pretexts or thoughtless obeisance to the common wisdom than they actually look like hard-boiled, unblinkingly analytical Reasons.  

• Why lend promiscuously to subprime borrowers?  Because housing prices only go up, never down.
• Why pinch clients for more immediate revenue with less regard to cultivating a long-term relationship?  (a) Because we're Goldman Sachs and we can; and (b) because we have eaten the fruit of the poisonous quarterly- and annual-results tree of knowledge.
• Why resort to financial acrobatics and structural contortions to boost your profits-per-partner figures for benefit of The American Lawyer?  Because no one wants to finish last in a beauty contest and because everyone else is doing it (and everyone else knows everyone else is doing it, so wink-wink).

Those that became short-term greedy are now faced with the consummate challenge of rebuilding their business model at the same time they need to re-educate their partners and their associates and re-invigorate a lost culture of client service first.  All while the "Great Reset" threatens to derail the entire train.

But if the design of your compensation system, evidently like that of Goldman's, encouraged short-term-itis, do not blame your partners.  Blame yourself.

Lloyd Blankfein

Update from a reader in the UK (December 22):

Fascinating and provocative as usual, Bruce. The question, though, is of course: is it possible for law firm management to be "long-term greedy" in the age of the lateral partner? Even public companies have institutional long-term shareholders who may exert some pressure to not throw the future out in the quest for quick returns. Law firms strike me as almost unique, in that the firm's talent are also the shareholders and can exert enormous pressure on management to do things their way; and, once you add a febrile talent market to the mix, you end up with partners able to effectively hold their firms to ransom: "short-term profit or I'm out of here". Of course, the Wall St law firms (ironically enough given what's happened to their clientèle) cling on to lockstep, relatively low levels of lateraling, etc. But any economist presumably knows "culture" is an inadequate bulwark against misaligned incentives

For the second installment in our series on Law Firm Business Models, we turn to boutiques.

Boutiques, as a player on the landscape of industrial structure, are a familiar character. Boutiques, in fact, exist in countless industries, and seem capable of thriving in a variety of competitive environments. Consider:

• In retail, perhaps the most familiar environment for boutiques and whence the word "boutique" itself was historically derived, we have the familiar local clothing, shoe, or stationery store co-existing alongside department stores, Zappos.com, Staples, and Office Depot.
• In jewelry, it's Zales and all the other big boxes vs. Cartier, Tiffany.
• In beer, it's Budweiser and Miller vs. Sam Adams and all the other micro-breweries.
• The same for wine and hard liquor: The Gallo Empire and the Diageo's of the world vs. mailing-list-only Napa cabernets and single malt Scotches.
• The same for apparel (Gap, Lands End, J. Crew, Brooks Brothers--you name it, vs. designers--you name it)
• Even in autos, we have "boutiques" in the incarnation of Ferrari, Lamborghini, Tesla, and Maybach, among others.

The point is simply that boutiques can coexist with supposedly dominant players in many industries for a long long time, with no apparent mortal threat to their existence or profitability.

So is the same true for our industry?

I believe it is.

What, then, exactly, is a "boutique" in our industry?

As I define it, it's a firm that specializes in a single practice area virtually to the exclusion of all else, and that also has only one office (maybe a headquarters and an inconsequential branch or two).

The key characteristic is the focus on a single practice area, but the concentration in one office also part of the definitional package. Littler Mendelsohn focuses on employment law (a practice area), but because it's nationwide I wouldn't classify it as a boutique.

And just to clarify things: Wachtell, Cravath, Slaughters are all firms that have only one office that counts, but that doesn't make them boutiques. (So, for example, do the hundreds of thousands of solo and small law firms across the country: Same point.)

So what are examples of what I have in mind? Just to name a few, Bartlit Beck, Boies Schiller, Quinn Emanuel.

All of those are litigation boutiques, and I named them not by accident. That seems to be the dominant form of boutique, and IP boutiques, which used to be a classic category of boutique, have seen the sun set on them. Why did the IP boutiques fade? Because, I suspect--this is only my theory--IP used to be a valuable expertise, and it migrated in the past decade or so to a commodity. Erego firms could not sustain the high price margins they needed to continue on that one leg of the stool. Game over.

(Before I receive an avalanche of email from proud IP practitioners, let me hasten to clarify that there's IP work and then there's IP work.  Run of the mill patent and trademark applications are the commodity side of things, but certainly high-stakes litigation against patent trolls and other wannabe bloodsuckers is anything but a commodity.  Perhaps the real flaw in the IP-boutique business model's concentration was that clients failed to see the need to procure their high-stakes work from the same firm that did their routine filings.)

Litigators are facing no such risks.

At the top end of the litigation market--white colllar defense, securities and corporate governance investigations, other major regulatory inquiries (often involving "piling on" with multiple state and federal proceedings moving forward on parallel or at least tangentially approximate paths), money is no object. As far as the eye can see, it will always be thus.

So is there a fundamental threat to the boutique model?

If you're a non-litigation boutique, there could always be.

• Some practice areas (cf. IP) may move downstream.
• By hypothesis, if you're a practice-area boutique you've concentrated all your chips on one expertise. If demand for that expertise is cyclical, be prepared for the downturns. As in, really prepared. See:  Thacher Proffitt.  Be ready to cut back to lifeboat size in very short order. That's actually easier than when the curve bends up again and all of a sudden you need to recruit people who are suddenly, fashionably, in demand. Live by the sword,....
• For all boutiques, what happens when the charistmatic founder (show me a boutique that doesn't have one) retires? That's usually the inflection point at which a boutique survives as an institution or reveals itself as the court attendants at Versailles to the Sun King.

Thomas Hobbes famously described life in "the state of nature" (that is to say, without government) as "solitary, poor, nasty, brutish, and short," the only remedy for which was to accede to a social contract and establish a civil society.

Boutiques may all face a similar transition point upon the fading of the founder, although hopefully it's not from a plane that is "solitary, poor, nasty, and brutish"--but it probably is "short."

The challenge for boutiques, then, may not be becoming one; it may be remaining one.

What's going on at Reed Smith?

Less than a week ago, they announced a roughly 20% cut in first-year associate salaries and hourly billing rates for the 50-odd lawyers joining the firm in January 2010. Here's what they had to say about it (emphasis supplied):

"In response to our clients' feedback and concerns about driving down the cost of legal services, we wanted to send a clear message that we are listening.  So, we have therefore reduced both the rates and the salaries of our incoming first year associates" said Gregory  B. Jordan, Reed Smith's Global Managing Partner.  "We have also launched a new competency based development program to better prepare our new lawyers to meet the needs of our clients."

Annual starting salaries for the new associates beginning in January 2010 will range from $130,000 in major markets such as New York City, Chicago, California, and Washington, D.C. (down from a high of $160,000 in 2008), to $110,000 in Pittsburgh, PA.  These actions solely involve the new associates entering the firm's U.S. offices.  Salary levels for 2010 newly qualifying lawyers in the firm's European, Middle Eastern and Asian offices will be determined in the normal course of business during 2010. 

"Our new U.S. starting salaries represent a reasonable and appropriate reset based on today's economic environment," said Eugene Tillman, the firm's Global Head of Legal Personnel. "We believe this will put Reed Smith in a stronger business position in a changing marketplace while still providing fair compensation to our new associates."

Billable hour expectations were also cut for 1st-years from 1,900 to 1,700/year (just over 10%), with the shaved time being devoted to training.

But the remarks I've highlighted go virtually all the way to explaining what's going on, I believe: The firm wants to try to get out in front of client expectations (and demands) for economies in legal expense, and they're targeting a hot button--the high salaries and low/nonexistent competency levels of junior associates. Will it work? Silly question: This is a buyer's market for junior associate talent the likes of which most of us still alive and breathing have never seen. Young associates have zero bargaining power (OK, Rhodes Scholars/Supreme Court clerks/NFL wide receivers excepted, as always).

Will it become universal? Don't hold your breath. As Jordan astutely notes elsewhere (at least I think it's astute since I happen to agree with him emphatically),

In the wake of the downturn, Jordan said law firms in general are making decisions independently and apart of industry trends.

"Law firms aren't copying each other," he said. "Everybody is trying to figure out how to run their business and how to get it as rightly-positioned as they can. We're seeing it every day. We're going to see sharper decision making by all the law firms, not mimicking each other on every little thing."

And now they have announced an even more radical move--well, at least one affecting about six times as many people, at a far more senior level--with the news that their 300 or so non-equity partners will be asked to contribute up to 15% of their compensation to the firm as capital. And if you would "prefer not to?" Then you can either forfeit your "partner" status, presumably achieving instant self-inflicted demotion to "associate," or leg into the contribution over a few years. What you cannot do is stay a non-equity partner and decline to make the contribution.

Whereas the first announcement was greeted, so far as I can discern, largely with silence if not a collective yawn, the latter has generated predictable second-guessing and skepticism about the firm's professed motives, most of it centered around what it does or does not imply about the firm's financial fortunes. Jordan (disclosure: I consider him a friend and one of the more innovative managing partners in the business) was at pains to head off this speculation:

Jordan stressed that the move is not simply meant to provide a quick-fix cash injection or as a way of culling the firm's non-equity partnership. "People could say, 'Oh, Reed Smith must need the money,' but the reality is we are having a very strong year," he says. "And if you wanted to just trim non-equity partners, there are much easier ways to do that."

Performing a very back of the envelope calculation, the move could bring Reed Smith $18-million or so (say somewhere between $15 and $20-million, to be safe), which is certainly a not-immaterial contribution to capital, and it's manifestly easier to raise it from your non-equity cohort than going back to the well with your equity partners or your even less forgiving bankers.

Alas, the coverage so far raises more questions than it answers:

• What type of animal exactly is the "contribution?"
  • A one-time payment, a sort of toll extracted for the privilege of continuing to carry the word "partner" on your business card?
  • An interest-free loan, repayable (presumably) upon your departure from the firm (and what if the departure is "for cause" as far as the firm is concerned?)
  • Is it secured or unsecured?
  • Oh, and again, does it earn interest?
  • Assuming it's not characterized as an equity investment--and both the language of the stories and the premise of "non-equity" partner strongly imply it's not--in what sense, then, are you a "partner?"
• The firm explains that part of the rationale is that some (but apparently not all) non-equity partners in European offices, primarily those in legacy merged offices, already have been required to contribute capital, so on that view it's only a way to level the famous playing field between the US and the rest of the world. (there are two ways to achieve that, of course, this being only one of them).
• How does the 15% number compare with the capital contributions expected/required of equity partners?
  • Are the other "terms" of the contribution identical or materially different?
  • When a non-equity's compensation goes up, or down, does their contribution rise or is a rebate expected?

One could go on, and I invite you to do so with your friends at home, but I have a larger issue to close with.

Assuming the Holy Grail of our world is the "one-firm firm," the institutionalized firm in which everyone, from Managing Partner to non-equity partner to paralegal to administrative assistant, feels invested, a firm with a vision they can buy into, what here is not to like?

This has to be what Jordan is driving at when he says "[Non-equity partners will] have a stake in the business and meaningful profit participation, not just carrying the title [of partner]. [and] "It's about not just saying you're a partner, but actually being one. It means something. It revolves around risk-sharing in the business."

We can take potshots from the sidelines to our heart's content (here's a sample), but who would seriously argue with the goals Jordan here articulates?

Or we may simply be overthinking this.

Econ101 teaches that if you want people to demand less of something, make it more expensive. Reed Smith has just made non-equity partner status more expensive.

Put that together with my belief that as an industry we let the entire non-equity tier grow out of control during the boom years, and you may be seeing the beginning of one approach to the problem. It's certainly easier than having all those awkward one-on-one conversations with underperformers.

One of the more thoughtful and, frankly, creative responses to my two recent columns on lateral partners asked a simple question:  What should a firm recruiting a potential lateral be obligated to tell the putative future partner?

This is the kind of question that gets the juices of us securities lawyers flowing.  (No, I don't practice actively anymore, but I would like to think I remain a student of securities law in general and its perpetual evolution.)

The first reaction I had was that we already have a template for what ought to be disclosed, and how:  The Private Placement Memorandum.

A PPM, for the record, is a sort of species of prospectus typically used in conjunction with a "non-public offering" under §4(2) of the '33 Act and/or Reg. D, which was promulgated in 1982 as a non-exclusive "safe harbor" describing a roadmap for complying with §4(2).  Basically, Reg. D introduces the concept of an "accredited investor," which is defined as institutional investors, insiders of the issuer, rich folks (with a net worth of >$1-million or net income >$200,000 for a few years), and, more or less, combinations of the preceding.

Of course, as with all matters securities-law related, the antifraud provisions always and everywhere apply.

So what's the analogy to a lateral partner?

Roughly speaking, I see it this way:  A prospective lateral is pretty much by hypothesis a sophisticated investor when it comes to evaluating a commitment to a new law firm, at least if he/she has been paying any attention to the business operations of their current law firm.  So consider them analogous to an "accredited" (Reg. D sense) investor.

The interesting question is then what this hypothetical PPM ought to disclose.  Here's what the template of a prototypical PPM's table of contents, adapted to Law Land, might look like:

• Summary of the Offering
• Investor [Lateral Partner] Suitability
• Risk Factors
  • Conflicts of Interest
  • Management of the Firm
  • Legal Proceedings
• Purpose of the Offering [Becoming a Partner]
• Capital Structure; Dilution
• Financial Statements
  • Financial Model, Projections
  • Income Statement
  • Balance Sheet
  • Statement of Cash Flows
• Business Plan
• Competition
• Client Base
• Growth Strategies
• Practice Areas
• Geographic Footprint
• Industry Focus
• Client Conflicts, Current and Projected
• Recruitment and Retention Strategies
• Fees and Billing Methodologies
• Partner Capital Obligations
  • Amounts:  When Due
  • Uses of Partner Capital
  • Conditions for Return of Partner Capital
  • Risk Factors
• Appendices
  • Partnership Agreement
  • Compensation Model (to the extent reduced to writing)

Now, your reaction is probably either that this is fascinating or that it's preposterous.  I doubt many of you fall inbetween..

If that's the case, join the club.

My reaction is precisely the same.

Yet we are, among other primary and salient virtues, a profession dedicated to disclosure, transparency, and precision.  And of course you know that to we securities lawyers, Disclosure Is God.

How many lateral partner acquisitions fail because of mis-communication, unarticulated expectations, "surprising" capital demands, unforeseen conflicts, unexpressed cultural assumptions?  Wouldn't it be marginally logical to try to lay out some of those expectations beforehand, in a PPM?.

Which leads me to this observation:  If you think the notion of a PPM for potential laterals is preposterous, I strongly doubt that yours is a rational objection: I suspect that instead it's a cultural, "not done here" objection.  That doesn't make your objection remotely less substantive; but I submit that it puts the burden of proof on you to explain why your firm should not make those parameters I summarily laid about above somewhat clear to prospective laterals.  Labeling an objection "non-rational" is by no means tantamount to labeling it vacuous or empty; but it at least requires the proponent of the non-rational objection to explain its substance and its historic or cultural context.

Then again, there's a very realistic objection to developing a PPM for your firm.  It's hard work.

Not only hard work, but consensus work.  Can't you just imagine being in on the conversations defining the terms in the sections of the PPM dealing with "Competition," "Client Base," and "Growth Strategies?"  You can hear the gears clashing from here.

So is the real objection to the concept of a PPM not that it's untoward, that it's unprofessional, that it's "not done," but that in reality it's un-do-able, because the firm could never achieve consensus on what should go into it and how to describe the firm, its prospects, its competition, and its risk factors?  That, in other words, the strategic business path ahead for your firm is in some profound sense ineffable?

Try telling that to your next startup client.

My recent column, What Makes Laterals Run?, has generated a most rewarding level of reader feedback, worthy of an update to the original column.

Reactions have literally come from around the world, and, with the permission of my correspondents (all of whom expect anonymity, an expectation I most willingly grant), I wanted to share a sampling with you and then elaborate on what further thoughts of mine they prompt. 

First, from a former partner in a couple of name-brand firms, with 30+years of experience under his belt in roles such as executive committee member, founding partner of various offices, and co-chair of his firm:

"Bruce, you definitely have this right. When I set up our new London office in 1999, I was able to recruit top laterals not based on our money offer (strong and fair but not the ridiculous offers of firms like [name removed to protect the firm so charged--Bruce]) but rather based on our business plan and specific suggestions as to how they could cross sell to our existing client base and strong practices in new emerging markets. You are seeing the same thing here."

So what I'm suggesting has been going on for more than a decade--at least among the more discerning firms and lateral partner candidates.

Second, from another globe-trotting and astute observer of our wondrous profession:

Long time since I've emailed, but I was struck by something amusing, maybe even ironic, in your post today on lateral partner moves.  Basically, it seems like lateral partner moves have now "caught up" with lateral associate moves. 

Clearly, there were associates who used to move upstream (think bankruptcy associates during the last wave), who used to move downstream (the classic, maybe now defunct, "work/life" balance move), and who "serially divorced" (as in an associate I knew who was at 3 or 4 different firms in five years).  But for a long time, there were also strategic associate moves -- the associates who could not fully "read" how the firm planned for their future and moved to a firm where they believed their odds for making partner would be clearer and more transparent.  If a 40-50 year old partner moves because they cannot discern their firms' plans for the future and, indirectly, their future chances for increased fame, glory and compensation, is it really that different from those associates who used to move due to uncertainty over their own future?

Regards,
[xxxxxx]

P.S.  Yes, my use of the past tense for lateral associate moves was intentional.  Depending on how long this Great Reset lasts (great name for it, by the way), I wonder when discussion of lateral partner moves will also move in to the past tense?

Interesting perspective comparing lateral partners' strategies with lateral associates' strategies.  All I can add is that, yes, "work/life balance" is "so last August," and that the insight that one thing both associates and partners may be seeking in a lateral move is greater clarity vis-a-vis where they stand with their firm.  In my original column, I stressed partners motivated to look around because they perceived a lack of clarity in their firm's strategic vision, but an equally strong motivation could certainly be lack of clarity from the firm about the partner's own long-run prospects.

And as for using the past tense?  Given that voluntary associate attrition has fallen to barely above 0%, I agree that the past tense is justified, at least until a technical-but-jobless recovery from the Great Reset becomes robust enough to reach the stage of actually creating net new jobs.  (Don't hold your breath on this one, folks; my own armchair guess is 2012.)

Third, a partner with a Magic Circle firm in Asia writes:

Great piece on laterals - and, I think your hypothesis is spot on !!! [...]  It is also very relevant to a major shift going on in the [local] market at the moment.

Finally, a periodic correspondent offers extensive, and very thoughtful, observations:

Bruce --

        In response to your recent post on lateral recruiting, I drafted below a couple thoughts.    My general view is that extensive lateral recruiting is the sign of real trouble at a firm.  It typically is a sign that a firm has been unable to develop talent internally, and/or that a firm is trying to build a practice in an area that is not a core strength of the firm.  Only where firms use lateral hiring very selectively -- where they are able to specify the precise characteristics of the ideal candidate, and have targeted that person based on a unique firm strategy (rather than blind desire to replicate more profitable, NY-based firms), can lateral hiring have success.

I agree with your basic premise -- that strategy matters in attracting and keeping talent.  I also agree that we are seeing like firms and like partners starting to come together (e.g., securities specialists going to firms with substantial NY practices that earn higher PPP). 

I have two questions:

(1) When will firms stop chasing laterals and start building talent from within.  Most successful organizations develop talent internally, rather than through lateral acquisitions.  For example, GE historically grew all its management talent within GE.  Good professional football teams obtain most of their best talent from the draft, rather than frequent trades. In the legal world, certain firms (such as Latham) develop most of their talent internally, and rarely look for lateral acquisitions.  Conversely, growth through acquisitions is often the sign of a weak company without any compelling strategy or vision (e.g., WorldCom).  Talent grown from within is more loyal, and is often cheaper and less trouble than the lateral who is frequently bought and sold (think Terrell Owens).   Today's managing partners appear to believe either that there is some "silver bullet" to be had through lateral hiring, or that they do not have time to develop sufficient talent internally to meet their profit goals. 

(2) When will firms start matching their lateral recruiting strategy to a firm strategy that is based on the firm's (and the market's) reality, rather than a desire to replicate the successful strategies of the top-20 AmLaw firms (who are mostly all in NY).  If your hypothesis is  true(that there is a migration of partners to firms that better "fit" their practice), one would expect to see a fairly quick rationalization of the law firm industry structure.  Instead, that conversion is happening fairly slowly (though I agree it is happening).  It seems to me that this is because firms refuse to accept their position in the market, and believe (as all firms do) that they are a "premier firm" able to attract top rates and to generate the most sophisticated legal work. 

As a result, most firms still shop for the same, or similar, lateral candidates (such as high-end securities, white collar, IP, and M&A practices).  Even if mid-tier  firms are successful at attracting the lateral candidate, those firms often cannot create any "synergies" with that lateral candidate, because they don't have the clients that might need the service, or because the firm's reputation does not support such a high-end practice.  And, the mid-tier firm will often pay at least as much in compensation as the lateral generates in profits.  Thus, there is no net benefit to the firm of bringing in the lateral partner.  Eventually, either the firm becomes disillusioned with the partner, or the lateral partner becomes disillusioned with the firm and concludes that he can be more successful at a different platform.  The upshot for the firm is that it invested in talent that did not stay with the firm -- a lost investment to the firm.  Now, if the firm's lateral recruiting were targeted to those areas where the firm was distinctive, and different from others in the market, the firm might be better able to hold onto the talent, and create potential "synergies." 

In other words, firms need to stop recruiting just for the sake of "growth," or to increase profitability, and instead invest in lateral growth only in those areas that the firm has identified as being necessary for its unique strategy (and only when that strategy is rationally tied to the market reality of who the firm is, and not who the firm would like to become).  Now, if firms were sufficiently well-run that they identified their strategy several years in advance, and identified the areas in which they needed expertise, they might even be able to help senior associates and partners gain the experience and develop the skills needed, and thereby avoid lateral recruiting in the first place.  But, most firms do not appear to have reached that point. 

So, what more have we learned?

I'm tempted to reiterate where I began the original column, by pointing out (confessing?) that "perhaps I don't write as much as I should about lateral partners."  Certainly this piece seems to have unleashed some extremely thoughtful reaction.

The reason you rarely see me writing about laterals is blisteringly simple:  I have long believed that the vast majority of activity on the lateral-pursuit-seduction-&-wooing front is fundamentally misbegotten.  Yet, every day of the week you encounter firms and their managing partners (well, at least you did....) who act as if the single most valuable activity they can engage in to lift their firm's fortunes is to pound the pavement for desirable laterals.  And Lord knows the headhunting industry has made a living off it; never let me be the first to assume that entire sectors of the economy are premised on systemic, enduring, and irrational market failures.  Yet I continue to believe that all but the most assiduously and astutely targeted lateral recruitment is a fool's game.  (Here I invoke the widely recognized folk philosopher Bob Dylan to explain my reticence to write about this topic:  "And don't criticize what you can't understand....")

But now that the genie is out of the bottle, I'm compelled to offer, or elaborate upon, a few observations:

• I continue to believe that on an industry-wide, macro basis, we are seeing a systematic sorting-out of talent as lawyers seek to match their skills to the most appropriate firm platforms.  $1,000/hour rates are not for everyone, or for every firm, but they most assuredly are for some chosen elect and a similarly selective handful of firms.  Economically speaking, the logic is compelling that those blessed souls and those firms on whom fate has showered its beneficence should get together.
  
  
• Conversely, as I wrote in the original piece, there's room in this world for lower-margin, more routine work:  This is a respectable, indeed admirable, sector of any rationally organized marketplace, and firms and individuals who know themselves should rush to satisfy this demand.  And no, I'm not being condescending; au contraire. 
  
  I would tell you in all honesty that I think two of the finest cars for sale today are the Toyota Camry and the Honda Accord.  Neither one remotely breaks the bank and while, admittedly, neither will pin your ears back with acceleration or stun your date into a state of befuddled worship, they are very gentle on the wallet, they start, stop, and go as promised, and you can ignore and abuse them for tens of thousands of miles without complaint.  Try that with a BMW and see how long it takes you to cry uncle tow truck.  Toyota and Honda have achieved something truly outstanding here.
  
  
• There are other reasons to cast a jaundiced eye on excessive reliance on lateral recruitment as a core "strategy," some of which I alluded to in my first piece and some of which our enlightened commenters have pointed out:
  
  
  • There will never be a substitute for home-grown talent:  Not at GE, not for the Yankees, and not for your firm.  To cite a home-town (NYC) firm that has a long but not rigid tradition of emphasizing up-from-the-ranks talent, Paul Weiss seems to be thriving even in these currently challenging times.  Pure coincidence?
    
    
  • In MBA Land, professors delight in teaching about and management gurus delight in writing about "KPI's," or "key performance indicators."  What is a KPI?  Well, it depends on what your company does, but if you're a retailer (think Amazon, or Dell), a KPI might be the number of inventory "turns" you can generate annually.  Another might be how fast you can collect cash from your customers before you have to pay your suppliers (both those firms, amazingly, have that metric in negative territory, meaning they collect their customers' revenues well before they pay their suppliers--you might want to think of that trick next time you're tempted to indulge a client who's 90 days late and wants to be 150 days late).
    
    But my secret suspicion is that, for every KPI, there has to be an evil twin:  Call them "KRI's," or key risk indicators, which are dials on the dashboard indicating you might be headed for the guardrail, or over it.  For law firms, one big KRI, in my book, is excessive and promiscuous lateral recruitment.  Yes, "excessive" and "promiscuous" are both fudge phrases, but I think you know where I'm going and I think you know it when you see it.  As I said originally, the best predictor of getting divorced is having been divorced.  This is nothing, really, other than the flip side of home-grown talent's loyalty.
    
    
  • Finally, vast is the economic literature demonstrating and recounting the phenomenon of the "winner's curse," a/k/a "buyer's remorse."  It's quite simple:  The winner of an auction (a bidding war for lateral partner talent, for Alex Rodriguez, or for Madonna) will be the firm that is closest to paying The Talent every last red cent The Talent can expect to marginally contribute to the firm.  Which leaves the firm with....you guessed it:  Nothing.

Do I suspect our fascination with lateral hiring and recruitment will go away any time soon?  No, no more than corporate America's fascination with the search for CEO-as-Saviour will end and no more, for that matter, than the all too well-chronicled proclivity of the ambitious and the striving for seeking out mates other than those individuals to whom they're married.

But as a long-term strategy, I can't really bring myself to endorse either tactic.

Now, what exactly is your firm going to do about it?

Permit me to suggest you start with the intellectually challenging and culturally slippery project of defining precisely your strategic advantages and what distinguishes your firm from your competitive set in the eyes of clients.

And a last word.  If you intend to go about defining the Unique Value Proposition your firm offers clients, it has to meet each of these criteria:

• It must be credible.  We are not all Skadden, Wachtell, or Slaughters.
• It must be ownable.  It must connect, in other words, to a visceral understanding of who your firm is and where you fit in the great Value Chain of Law Land.
• And finally, it must offer a benefit to the client.  Without this final component, I invite you to beat your breastplates all you'd like; it will matter not.

Then again, if all this sounds too hard, why don't you just make a reservation at an elegant restaurant for dinner with a potential lateral?