Recently in Cultural Considerations Category

Copious have been the articles about BigLaw partners decamping to start their own firms, but when the story migrates from the legal press (among which I count law.com (comprising The American Lawyer, the National Law Journal, etc.) The Lawyer, LegalWeek, the occasional non-salacious news from AboveTheLaw, and a few other sources) to Slate, of all places, attention must be paid.

Under the headline Leaving Big Law Behind, we read that:

Lawyers often enter the profession because it's a safe bet, and they're paid handsomely to be risk-averse. But increasingly, Big Law partners like Marc Zwillinger and Christian Genetski--who started their Internet-focused firm in March and have since doubled the client roster--reach the pinnacle of success only to leave it behind.

After a career of being coddled--and drained--by esteemed institutions, these high-achieving lawyers, hardly naturals for entrepreneurship, find themselves choked, financially and otherwise, at the top of the heap. As the Big Law model--in which the nation's largest law firms turn the top law students into billable-hour-crazed associates and, sometimes, partners--evolves to accommodate global entities, companies below the $100 million-revenue level that can't or don't want to pay Big Law rates are being squeezed. And this presents a window for partners, fed up with the Big Law model, to strike out on their own.

True enough, right?  Well, yes, but there's more to it than that, shall we say.

There have been many high-profile stories of lawyers leaving blue chip firms, notably Peter Chaffetz, global head of litigation for Clifford Chance, forming Chaffetz Lindsey in 2009, so this doesn't exactly qualify as new news.  (Disclosure:  I knew Peter when he was at Clifford Chance, although we haven't spoken recently.)  Indeed, that firm's website succinctly states the case for abandoning BigLaw:

Conflicts
Conflicts have always been a problem at large firms. That problem became dramatically worse following the economic downturn, as so many of the resulting disputes involved firm clients on both sides. We saw a need for a top-quality firm that did not have those conflicts.

Costs
Even before the downturn, the large firm cost and fee structures made it difficult for clients to hire us on small to medium sized cases. Today, our clients face relentless pressure to reduce legal expense, even on the largest cases. With low costs and no excess overhead, our new firm provides the value clients require.

In short, the Chaffetz Lindsey team delivers the same quality legal work as always, but with the freedom to serve a broader range of clients and the economics to help those clients with a broader range of their needs.

The Slate piece also cites, as motivations to decamp from BigLaw:

• The organizational overhead "tax" imposed on everyone (not just partners, although they're the only ones Slate mentions); big organizations require care and feeding.  This is inelucatable.
  
  
• Oddly, they also cite boutiques' relatively greater freedom to deviate from hourly billing, citing the example of an Sonnenschein spinoff that offers monthly "all you can eat" retainers covering everything except litigation.  "Oddly," I say, because there's nothing remotely unique to the boutique model about this pricing structure.
  
  
• Another strange argument that makes an appearance is that "partners are expected to cross-sell" in BigLaw.  This is criticized on the grounds that a client might be steered towards someone who "isn't necessarily best suited for the job," or, conversely, that the lawyers receiving the cross-sold client "may be so busy that they don't give the inherited client the attention he or she deserves."   If you can explain to me how either of these scenarios serves the interests of anyone at the hypothetical BigLaw firm being critiqued, I welcome your insights.
  
  Don't misunderstand me:  Could it happen?  Yes, of course.  Could cross-selling be a sustainable strategy if these scenarios were typical, and not exceptional?  You, and clients, be the judge.

But I don't want to dwell on deconstruction of any specific article, or firm.

For one thing, I have also had conversations with people at many of the BigLaw firms from whence folks have loudly decamped, who have said the alumni were about to be pushed.  Or that conflicts were a figment of their imagination.  Or that their new rates are not materially different from their old rates.

The last thing I have any interest in is refereeing those debates. Just to note that there are always two sides to every story.

Instead, I want to suggest that's what's going on here, while it makes for great content for the celebrity-centric aspects of coverage of our industry (oh, you hadn't noticed that there is such coverage?), is the natural evolution of an industry under economic stress.

A year or two ago, I began to receive, periodically, emails from various partners and former partners in BigLaw, all of them requesting anonymity, which I scrupulously honor, who had either left to set up their own boutiques, had just seen a colleague do it, or were thinking about it.  I can assure you that these emails were far "hotter," emotionally, than is typical for my inbox; these folks were passionate about whether this is what they ought to be doing, or, if they'd already done it, about why BigLaw was structurally broken and attending its wake would only be a matter of time.

I think it's fair to say that one way to encapsulate the feelings most of these people were expressing was the heartfelt, "This isn't the firm I joined!"

And you know what?  They were right.

I won't rehearse for you the staggering statistics on the growth of the AmLaw 50, the AmLaw 100, the AmLaw 200, or the NLJ 250, over the past 20 years, but we've been on one heck of a sleigh ride, friends.  Those aren't just statistics; those are living, breathing organizations.  Firms have changed, some unrecognizably so.

What we're witnessing now, I believe, accelerated but not caused by the Great Reset, is people sorting themselves out into the firms they belong to be in.   BigLaw is not for everyone. But its global reach, its wide and deep expertise across practices, its ability to handle the Big Deal at the drop of a hat, all serve clients' needs in ways for which there is no substitute.  Boutiques, likewise, will always be with us:  From Cartier to Ferrari to single malt scotches, every industry worth its salt welcomes, and is improved by the competition from, boutiques.  But query whether they will ever be the main event.

What we're seeing, I suggest, is greater diversity of business models than we had in, say, 2006.  This can only be healthy.  We'll even give Slate the last word:

Ultimately, while Big Law is definitely not dead, the increasingly diverse models ensure an end to the days when clocking time as a Big Law partner is the best measure of success in the legal profession. 

In other words, don't read Chaffetz Lindsey as a precursor of the demise of Clifford Chance.  No more than you should read the success of Boies Schiller as implying fissures at Cravath (David Boies' alma mater).

What all this "means" is far simpler:  May the games continue.

Wouldn't you suppose that inarguable goals are, well, inarguable?

Welcome to law-firm land.

This is a story about how we let our firms be knee-capped in fealty to principles of individual autonomy.

Consider a hypothetical firm:

• It might be a boutique and it might be a Global 50;
• It might be primarily lockstep or primarily eat-what-you-kill;
• It might be US or UK-based;
• And in governance it might tend more towards Athenian democracy or more towards centralized management power.

In response to the Great Reset, or perhaps out of a sense that it's time for a generalized reassessment of its business, the firm's management embarks on a sustained and disciplined exercise in re-examination of its position in the market: How its partners, associates, even paralegals and staff, as well as its clients, and the media, perceive it.

You might think of this as akin to an individual (you?) undertaking a serious assessment of where you are, what you've achieved so far, and how to capitalize on your strengths and underplay your weaknesses. If you did this seriously--lose weight, quit smoking, treat your colleagues with more professionalism and respect, be more loving to your spouse or significant other--you would consider it a serious failing if you didn't carry through, and would rightly berate yourself.

The results of the firm's reassessment are not alarming but not entirely comforting either (so, I suspect, would your own personal reassessment of yourself be or, I regrettably confess, mine of myself).

• Some things can be improved;
• People are not entirely living up to their potential;
• The firm has assets that it's not taking full advantage of;
• And, most tellingly, people seem a bit smug and complacent about all of this.

Proceeding rationally and logically, you present these findings to the firm as a whole. Perhaps even--quelle horreur--with suggestions for improvement. People need to move out of their comfort zones; place a bit more value on ambition and aspiration than on entitlement; let clients know how hard they will work for them, and proceed to demonstrate it. This is potentially a seminal moment, even (in Andy Grove's famous phrase), an "inflection point."

Now what?

Pushback is what. Instinctively. We (lawyers) can't seem to help ourselves.

"If we implement any of what you're implying we should do, we shall put our culture at risk."

"Other firms who have reformed themselves along the lines you're suggesting are soulless places committed to revenue and profit maximization at the expense of clients."

"I didn't go to business school, I went to law school. For a reason."

"I practice law because I believe in and care about client service; that's all there is to it."

And how predictable is all of this? Utterly. You can see it coming from a mile away.

At this point, you have two choices: You can reassure everyone that nothing really is going to change, certainly not radically, that we're not going to ask partners to do anything not of their own unbridled free will, and that it has all been an illuminating exercise but such it shall remain.

Or you can insist that this is a key moment in the aftermath of the Great Reset and that your firm has a very rare opportunity to capitalize on its process of self-examination and, potentially, steal a march on your more complacent or nervous competitors.

Your decision turns, I submit, on the degree to which you credit the legitimacy of your partners' desire for unfettered autonomy.

And doesn't so much of it come down to that? The long-run best interests of the firm versus the reflexive and intrinsic cry for autonomy and individual self-determination from the partners?

Among the things we are definitively not into here at Adam Smith, Esq., is the question of ethnic or cultural identity, relative ethnic or cultural advantage or disadvantage, and historical prejudice for or against same.� Frankly, we don't give a ____.

Nevertheless.

Every once in awhile a couple of stories come our way that deserve a bit of unpacking.� Today we have The New York Times' Op-Ed piece by Noah Feldman, Harvard Law Professor, "The Triumphant Decline of the WASP,"� and also The New Republic's review off The Enlightened Economy:� An Economic History of Britain 1700-1850.�The book review is by Edward Glaeser, Glimp Professor of Economics at Harvard.�

What these two pieces bring into the spotlight is the historically astonishing, and also over a period of time, self-erasing, power of Protestant-driven Enlightenment era thinking.� (Yes, Dear Reader, you should know that I am a WASP, and, if that be offensive to you, I will compound it by noting that the MacEwen's in my lineage came to the New World from Scotland nearly 250 years ago.� If one is going to write a piece such as this, full disclosure is not optional.)� But, to the facts.� Feldman's column opens with, and states its thesis, thus:

Five years ago, the Supreme Court, like the United States, had a plurality of white Protestants. If Elena Kagan -- whose confirmation hearings begin today [the column was published June 25, 2010]-- is confirmed, that number will be reduced to zero, and the court will consist of six Catholics and three Jews.

It is cause for celbration that no one much cares about the nominee's religion. We are fortunate to have left behind the days when there was a so-called "Catholic seat" on the court, or when prominent Jews (including the publisher of this newspaper) urged President Franklin D. Roosevelt in 1939 not to nominate Felix Frankfurter because they worried that having "too many" Jews on the court might fuel anti-Semitism.

But satisfaction with our national progress should not make us forget its authors: the very Protestant elite that founded and long dominated our nation's institutions of higher education and government, including the Supreme Court. Unlike almost every other dominant ethnic, racial or religious group in world history, white Protestants have ceded their socioeconomic power by hewing voluntarily to the values of merit and inclusion, values now shared broadly by Americans of different backgrounds. The decline of the Protestant elite is actually its greatest triumph.

Feldman clarifies that, while the white Protestant cohort is quite internally diverse, he's actually "talking about a subgroup, mostly of English or Scots-Irish origin, whose ancestors came to this land in the 17th and 18th centuries. Their forebears fought the American Revolution and wrote the Constitution, embedding in it a distinctive set of beliefs of Protestant origin, including inalienable rights and the separation of church and state."

He offers a specific example of the meritocracy triumphing, drawn from the history of my own alma mater:

Take Princeton University, a longtime bastion of the Southern Protestant elite in particular. The Princeton of F. Scott Fitzgerald was segregated and exclusive. When Hemingway described Robert Cohn in the opening of "The Sun Also Rises" as a Jew who had been "the middleweight boxing champion of Princeton," he was using shorthand for a character at once isolated, insecure and pugnacious. As late as 1958, the year of the "dirty bicker" in which Jews were conspicuously excluded from its eating clubs, Princeton could fairly have been seen as a redoubt of all-male Protestant privilege.

In the 1960s, however, Princeton made a conscious decision to change, eventually opening its admissions to urban ethnic minorities and women. That decision has now borne fruit. Astonishingly, the last three Supreme Court nominees -- Samuel Alito, Sonia Sotomayor and Elena Kagan -- are Princeton graduates, from the Classes of 1972, '76, and '81, respectively. The appointments of these three justices to replace Protestant predecessors turned the demographic balance of the court.

Before this seems altogether too triumphalist, let me offer a personal note:� I attended Princeton in the wake of the changes he describes, but, perhaps as first-generation Ivy League, in retrospect I was obtusely oblivious to the magnitude of what had changed.� Coming from New York, "urban ethnic minorities and women" were not exactly strangers on my landscape.� Nor was the principle of a meritocracy. I took these as intrinsic to a vibrant culture.

But it was not always thus. Let's step back historically and see what else might lay behind the notion that the best ideas and the best thinkers should come to the fore.

In The Enlightened Economy (see above), the premise is that the Industrial Revolution is "the inflection point of economic history." Before, incomes were static and people were poor (even the rich were impoverished by today's standards). Yet somehow, in the 250 years since mass production entered the scene, everyday life has been revolutionized: "A modern Wal-Mart would have been a place of incalculable riches to Charlemagne."

What happened to make the Industrial Revolution possible? What weird confluence of forces, that had (by hypothesis) never quite come together in the same way before, aligned in Britain during those years?

Why not medieval China? Why not France? Perhaps to the disappointment of those seeking sound-bites, Mokyr doesn't a single explanation, but a panoply. Here are a few:

• As an island nation, Britain was difficiult to invade.
• It had a nice supply of coal and iron in reasonably vicinity of each other.
• The economy was relatively open to trade.
• Property rights, for the time, were strong.
• Human capital, at least in the areas of practical experience in such trades as blacksmithing, mining, clock-making (read: fine mechanical work), and shipbuilding were strong and widespread. Universal education could wait.
• And perhaps most important? The Enlightenment.

"What is new here," he writes, "is not an argument that the Enlightenment changed history for better and/or worse, but that its economic effects on the wealth-creating capabilities of the affected societies have been overlooked." Mokyr has long emphasized the economic value of new ideas and he thus emphasizes that "Britain's intellectual sphere had turned into a competitive market for ideas, in which logic and evidence were becoming more important and 'authority' as such was on the defensive."

Intriguingly, Mokyr notes that James Watt, of steam engine fame, was at the University of Glasgow at the same time as Adam Smith, but there's no evidence they ever met. (The probability of their meeting in such close quarters, if you ask me, asymptotically approaches certitude.)

Ultimately, of course, the jury must remain perpetually out on the causes of such a sui generis event. One cannot, as has oft been observed, re-run history in a double-blind experiment. We shall therefore give the last word to our reviewer:

It is easy to envision the massive mills of Manchester and think that the Industrial Revolution was all about scale and machines. But there was more. At its core, this economic and technological revolution was created by connected groups of smart people who stole each others' ideas and implemented them. I tend to think that the chain of interrelated insights that brought us industrialization could have happened in other countries and at other times, but there is every reason to think that the Enlightenment had readied England's intellectual soil for industrial innovation. Not least because it persuades readers of the plausibility of such an unlikely and colorful causation, Mokyr's book is a splendid achievement.

And the tie, then, back to the Protestants' ceding their power to the call of the meritocracy?

Ideas have power.

If you truly believe them, they can not only fine-tune the course of your own individual life, they can, over time, alter societies and cultures. And count me naive or optimistic enough to believe that, as history marches on, the best ideas triumph. Ingrained elites and primogeniture were not powerful ideas, it turns out, when faced with competition from the concept of a meritocracy and no-holds-barred openness. The custom of doing things as our father, and our father's father, and our father's father's father, had always done them, was finished when "connected groups of smart people stole each others' ideas," creating the Industrial Revolution, child of the Enlightenment.

Not only do ideas have power, but certain cultures (warning; your author is about to venture into the politically incorrect) �experience periods when they seem to have a comparative advantage in generating enduring ideas.

And we Americans, on this Independence Day Weekend, celebrating our separation from Britain 234 years ago, should look back, for a moment, with thanks for our intellectual inheritance from that culture.

In Thomas Jefferson's original draft of the Declaration of Independence, he enumerated the depredations of King George III in nearly vitriolic terms (many of these clauses were prudently edited out in Philadelphia in early July 1776), but even those surviving help give color to his outrage: "He has plundered our seas, ravaged our coasts, burnt our towns. . . . He is at this time transporting large Armies of foreign Mercenaries to compete the work of death, desolation and tyranny . . ."

Yet after all that, there's one line the Philadelphia conventioneers took out, which I have always thought should have stayed in, for its simple human truth--and its expression of our connection to what remains in many respects a proud tradition:

"We might have been a free and great people together."

For all the ink that's been spilled on the evergreen topic of "leadership," very little of it has issued from the academy: Almost all is the product of management gurus, self-appointed and otherwise. Recent work from Harvard Business School and McKinsey research, however, may promise to bring a bit more intellectual rigor to what has largely been an armchair pursuit.

"If we look at the leading research universities and at the business schools within them, the topic of leadership has been actually given fairly short shrift," says Harvard Business School professor Rakesh Khurana.

The Handbook of Leadership Theory and Practice, recently published by Harvard Business Press, aims to give the topic its intellectual due. Edited by Khurana and Nitin Nohria, who will become the new Dean of Harvard Business School on July 1, 2010, the Handbook brings together critical writings by some of the world's foremost scholars in fields ranging from psychology to economics, sociology, and history.

In a coincidence that signifies nothing other than the close alignment of Harvard Business School and McKinsey, Khurana is the Marvin Bower Professor of Leadership Development at HBS--Marvin Bower, of course, being the creator of modern-day McKinsey as we know it. Bower was a Harvard JD/MBA and early in his career practiced at Jones Day in Cleveland. He lived to a few months short of his 100th birthday.

In any event, the reasons for the academy's neglect of leadership are not hard to fathom: It's hard. As Khurana puts it:

It's a phenomenon partly rooted in psychology with respect to the sense of identity that leaders have. It is rooted in sociology in the sense that leadership is a social construct. It's also a negotiated relationship that individuals have with other individuals or that individuals have with society. In addition, there is a cultural quality about what constitutes a leader that changes across social situations, whether we are discussing gender or issues in different countries where some styles would be regarded as leader-like and other styles would not being regarded as leader-like.

Leadership is also complex from an economic perspective because the consequences of leadership can't always be measured by financial measures. Some people we most honor as leaders sometimes have to deal with significant failure. So leadership can't be simply evaluated on its utilitarian outcomes.

Given the complexity of the phenomenon and its multidisciplinary nature, including its inability to answer basic questions such as whether leadership can be taught or developed, leadership research was neglected. This trend was exacerbated as research inside the academy moved more toward large computerized databases. Leadership largely dropped off the agenda in mainstream academic institutions.

Of all these reasons, I think the last is the most telling. Before data-intensive empirical number crunching came to be seen as the holy grail of academic inquiry, writers such as Max Weber and even Joseph Schumpeter were unabashed to write about what they perceived as the essential characteristics of leadership, especially as it expressed itself in individualistic or iconoclastic behavior (Schumpeter was convinced, correctly I believe, that "creative destruction" was driven by contrarians and noncomformists).

Somewhat amusingly, the declared mission of Harvard Business School is "We educate leaders who make a difference in the world," so neglect of this topic might have become an embarrassment.

And what is the early learning at this stage of the leadership-studies renascence?

News flash: (1) Leadership matters; and (2) it's complicated.

Given the profound challenges we face as a global society and the challenges we confront as an institution, it's not just that we don't have solutions: We increasingly see that these problems are not solved because of failure in leadership, be it leadership in business or politics. This changing context may have spurred an interest in, and help legitimate, the study of leadership.

and

Leadership is based on complex phenomena. The Handbook of Leadership Theory and Practice does not offer a set of simple prescriptions such as "here's the leadership style of Genghis Khan; it works in all situations under all conditions." Our chapters look at which elements of leadership are contingent on a situation versus those that may tend to be universal. There is no single "best" style of leadership nor one set of attributes in all situations. 

Lest I come across as sounding too harsh on these fledgling initiatives, leadership surely is not only an indisputably worthy topic of study, but one that has characteristics of what I've heard described as a "wicked" problem--meaning one that is difficult to solve or even understand until one sees the answer in a flash of insight. I suspect that HBS's efforts to systematically study leadership will actually bear fruit: But not as the result of any programmatic efforts. Rather, the stroke(s) of genius that illuminate the problem will only come after the groundwork has been laid through years of studious immersion.

Highly related to issues of leadership are those of decision-making.

Fortunately, a bit more concrete learning can be assayed about decision-making than about leadership. One of the most fascinating questions is the extent to which you can "trust your gut." McKinsey has recently written about just this question, as well as its close cousin, how to test your decision-making instincts.

Trusting Your Gut

Or, phrased differently, when should you rely on your intuition? Let's set aside situations (not often found in the practice of law, save perhaps in the totemic stressful contexts of, say, cross-examination of a recalcitrant witness or best & final offer negotiations) where time pressures obviate anything other than relying on your intuition--say, firefighting or ICU's.

Daniel Kahneman, 2002 Nobel laureate in economics (although he's a psychologist) and Gary Klein, a senior scientist at MacroCognition, were interviewed by McKinsey on just this topic, and the answer may surprise, but hopefully not disappoint, you. The bottom line is:

If you mean, "My gut feeling is telling me this; therefore I can act on it and I don't have to worry," we say you should never trust your gut. You need to take your gut feeling as an important data point, but then you have to consciously and deliberately evaluate it, to see if it makes sense in this context. You need strategies that help rule things out. That's the opposite of saying, "This is what my gut is telling me; let me gather information to confirm it."

Indeed, permit me to read ahead for you and tell you that the theme of this exploration of the validity of intuition is going to be that you should do everything in your power to disprove what intuition tells you--and only if you fail after exhaustive efforts should you proceed with your gut.

Still, it's important to understand and differentiate contexts in which intuition is more from contexts in which intuition is less reliable. Indicia of reliability are structured situations with a certain predictability to them. For example, a highly experienced knee surgeon has probably seen most of the complications that can arise with ACL surgery; but a hedge fund manager has surely not seen all the curve balls markets can throw at us. A second index of reliability is whether you have a chance to get feedback on your judgment before proceeding, in order to strengthen it, tune it, and add a dose of additional expertise.

These situations are called "high validity."

In contrast are relatively unique problems, where the risk is overconfidence. A particularly malevolent--but shockingly widespread--source of overconfidence is failing to anticipate that "the market gets a vote." In other words, competitors, and clients, will react to what you're thinking of doing. Beware the fallacy of static analysis! The world isn't static, it's dynamic.

But there's an insidious component of overconfidence, which goes well beyond how we as individual professionals may feel about our own judgment: It's the overconfidence we project: "[B]y the time executives get to high levels, they are good at making others feel confident in their judgment, even if there's no strong basis for the judgment."

Indeed, leaders are often selected precisely for their perceived confidence. So, assuming judgment is more or less normally distributed along a bell curve, organizations often select not for actual quality of judgment, but for decisiveness. We select, in other words, for John Waynes, not for the dithering.

Of course, there's often a cost associated with dithering, particularly in fast-moving situations, where the opportunity window can slam shut while your chief is mulling things over. (I won't offer any gratuitous generalizations about whether lawyers are more or less susceptible to "analysis paralysis" than your average bear, but you should feel free to form your own opinions at home.)

Here Klein and Kahneman introduce a fabulously useful and creative tool: The "premortem." (One CEO of a large corporation who heard of this technique at Davos told Kahneman it alone justified the cost of admission.)

A premortem is exactly what it sounds like: You gather your senior advisers and tell them that the project or initiative under consideration has failed, and you want them to take two minutes to write down all the reasons you think it failed.

Then stand back.

Premortems can change organizational culture, by encouraging people to show off their smarts not by imagining all the wondrous ways a project could succeed but by demonstrating imaginative and insightful ways it could fail:

"I want to come up with some possible problem that other people haven't even thought of." The whole dynamic changes from trying to avoid anything that might disrupt harmony to trying to surface potential problems.

Are there standard things you should be on the alert to watch out for?

Actually, there are:

• Limited sources, or even one source, of information, which are regurgitated, rather than multiple perspectives.
• "Correlated errors," which is academic-speak for the psychological reality that the first person to express an opinion inevitably affects what the second and third and so on people say. We see this in a classic experiment where the more people who are asked to guess at the number of marbles in a fishbowl--without being told what anyone else has guessed--the more accurate the average guess becomes. But if you tell people what previous guesses were, the first influences the second which influences the third and so on.
  • One neat way to avoid this is to ask everyone to write their initial judgment down on a slip of paper first, before vocalizing anything.
• We also see correlated errors arise, both tragically and comically, in jury deliberations where a foreman or other perceived leader's opinion often sways fellow jurors without regard to the analytic rigor of the first-expressed view: a steamroller effect.
• Try to postpone seizing upon your intuition as long as possible. For example, don't early on focus on what a proposed acquisition might cost--getting to specific numbers too early will serve only to "anchor" you on those numbers, almost assuredly beyond the weight they actually deserve.

Is there reason for optimism, then? According to Kahneman, "not really."

We are simply too tempted to find confirming rather than refuting information, and to overlook how much we may have assumptively explained away on the path to seeking confidence. Here, particularly beware the Power of Story: Those who can construct a simple and coherent story often feel confident regardless of whether the story has any basis in reality. (Trial lawyers know this to a fare-thee-well.)

But the real reason for Kahneman's skepticism that any of this will make a difference?

We shall give them the last words (emphasis supplied):

Daniel Kahneman: That's easy. Leaders know that any procedure they put in place is going to cause their judgment to be questioned. And whether they're fully aware of it or not, they're really not in the market to have their decisions and choices questioned.

The Quarterly: Yet senior executives want to make good decisions. Do you have any final words of wisdom for them in that quest?

Daniel Kahneman: My single piece of advice would be to improve the quality of meetings--that seems pretty strategic to improving the quality of decision making. People spend a lot of time in meetings. You want meetings to be short. People should have a lot of information, and you want to decorrelate errors.

Gary Klein: What concerns me is the tendency to marginalize people who disagree with you at meetings. There's too much intolerance for challenge. As a leader, you can say the right things--for instance, everybody should share their opinions. But people are too smart to do that, because it's risky. So when people raise an idea that doesn't make sense to you as a leader, rather than ask what's wrong with them, you should be curious about why they're taking the position. Curiosity is a counterforce for contempt when people are making unpopular statements.

Or, in the inimitable words of Dorothy Parker: "The cure for boredom is curiosity. There is no cure for curiosity."

Dear Reader, please stay "uncured."

Avoiding "Gut Bias"

Our second reading from McKinsey, closely related, talks about how to identify situations where your gut instinct is likely to be biased and strengthen the decision process to reduce the resulting risk.

Relying on findings in "decision neuroscience" (yes, there really is such a field), the goal is to escape from the trap posed by our habit of starting to feel a reaction even before we have rationally begun to think anything: Our feelings are triggered by whatever emotional tags the situation triggers--tags arising from memory, of course, but memories not necessarily rationally related to the situation we're about to explore. Nevertheless, those memories help "frame" our approach.

As a highly cerebral academic colleague recently commented, "I can't see a logical flaw in what you are saying, but it gives me a queasy feeling in my stomach."

Given the powerful influence of positive and negative emotions on our unconscious, it is tempting to argue that leaders should never trust their gut: they should make decisions based solely on objective, logical analysis. But this advice overlooks the fact that we can't get away from the influence of our gut instincts. They influence the way we frame a situation. They influence the options we choose to analyze. They cause us to consult some people and pay less attention to others. They encourage us to collect more data in one area but not in another. They influence the amount of time and effort we put into decisions. In other words, they infiltrate our decision making even when we are trying to be analytical and rational.

Four tests are suggested to determine the reliability of our gut feelings.

First, how familiar is this situation? Have we frequently experienced identical or similar situations?

The more familiar, the better for our gut instincts. Chess masters can select an appropriate move in as little as 5--10 seconds because they're good at pattern recognition. If we lack a reservoir of patterns or choose the wrong patterns, we go astray.

Second, did we get reliable feedback in the past?

This is another way of saying that past experience is a useful guide only if we learned the right lessons. Without candid and realistic feedback, we default to the assumption that all our decisions are universally brilliant. This is what makes "yes men" so corrosive.

Third, are the emotions we recall from similar situations "measured?"

Stated conversely, memories that come with highly charged tags tend to unbalance our judgment. Learning stoves can be hot is certainly valuable information, but suffering a disfiguring injury from an encounter with a hot stove may cause you to act irrationally in the kitchen.

Fourth, are we independent (personally) from the situation? Or, again stated conversely, do we have a conflict of interest--either in favor of or opposed to a particular course of action. This may seem obvious, but it's only obvious when it's obvious. It's far more important to try to suss out subconscious self-interest.

Now, what if one or more of these indicators points in the direction of our relying on our gut being risky?

All is not lost.

Three relatively straightforward techniques to enhance the odds of our exercising better judgment are available:

• Stronger governance. But this can have its own downsides: Just think of the US Senate.
• Better is more experience and data: And not just confirmatory data.
• And more dialogue--challenging dialogue. There's a reason the Catholic Church has "devil's advocates" involved in the sainthood-nomination process. And Warren Buffett systematically employs an "adviser against the deal" when he's thinking about a potential acquisition, who is compensated only if the deal does not go through.

Of course, there are in life no guarantees; but you can improve the odds. Failure to take some of these steps may be tantamount to managerial negligence.

But then, that could just be my gut speaking.

So what's on everyone's mind here?

Actually, the same things that are on everyone's minds in the US, although the Brits express it in their own unmistakable and uniquely articulate ways.

Here are the key topics:

• The Hogan/Lovells, Sonnenschein/Dentons, and putative Proskauer/SJ Berwin mergers are still viewed-I generalize here-as anecdotes and not as the start of a trend. People see them as one-off's, each done for sui generis reasons unique to the goals of the firms involved in each transaction, and not as kicking off a US/UK combination rush.
  • Although this sounds entirely plausible on its face, I wonder.
  • Why do I wonder?  Consider the landscape facing the "Silver Circle," or, perhaps a bit more broadly, UK firms #6-20 or so.  The Magic Circle, if anything, have put more "clear blue water"  than ever between themselves and the chasing pack during the Great Reset?  This makes moving up-market beyond implausible and into the realm of the quixotic, at least within the timeframe of a typical managing partner's tenure.  Yet remaining mid-market and largely within the UK--granted, many have meaningful foreign networks but they can't make a strong claim to being "global"--seems increasingly a recipe for stagnation if not irrelevance.  On the other hand, US firms tend to have powerful domestic-US networks but, by and large, lack critical mass in London and lack a mature EU network.  Perhaps adding the two together is beginning to make more sense, despite the eurozone's current conniptions.
    
    
• Legal process outsourcing is here to stay. Opinions vary on whether it will occur quickly or slowly, whether it will be done internally by firms creating their own lower-cost-center operations or primarily by new players, and whether it will occur primarily in emerging economies such as India, Malaysia, and the Phillipines, or whether it will occur in places like the US Midwest, the north of England, and Eastern Europe.
  
  
• Firms everywhere are radically taking costs out of their structures. This can include personnel (read: RIF's or "redundancy consultations"), slimming locations, rationalizing other sorts of operations including staff and administrative overhead, and even taking closer account of office expenses such as copying, catering, and so forth. Can you say "purchasing agents?"
  
  
• Pricing pressure is everywhere. Depending on the firm, the sector, industry, the practice area, and the client base, prices are off anywhere from 0% to 25%. Some firms are engaging in what I call idiotic pricing, training their clients to enjoy steep discounts. This will not stand. It will not stand for the firms that engage in it, that is; clients are only too happy to oblige our islands and pockets of insanity. And firms that do this are training clients in the worst sort of possible behavior.
  
  
• Finally, and most importantly, everyone is re-examining their fundamental assumptions and strategies.
  • Firms who used to be able to straddle two or more different markets or business models can no longer do so and must now choose.
  • Firms with different--materially different--levels of professional talent within their ranks must now choose.
  • Firms with alternative pricing models for their various services don't necessarily have to choose, but they have to clearly and conspicuously articulate to their clients why one model suits one market and the other the other.
    

Bottom line?

The "Great Reset" has thrown down the gauntlet. Firms that were "sleepy" (a phrase I suddenly hear often, in different contexts) are wide awake and even startled. Our familiar world is going to look markedly different in five to ten years.

And it won't necessarily be populated only by law firms. We face enduring competition from legal process outsourcing frims and perhaps, although who they might be have yet to be identified, other nontraditional providers altogether.

In the meantime, the watchword is: Agility.

For those of you who might be in New York Thursday May 6th and who would be interested in the topic, I would like to draw your attention to a 90-minute program from 5:30--7:00 that evening at the Vanderbilt Suites in the MetLife Building where I will be a panelist.

Co-sponsored by Axiom and Practical Law Company, the event is Replacing Tension with Trust:  Better Aligning the Incentives of Corporate Legal Departments with their Legal Service Providers.  Other panelists are:

• Joe Armbrust, Partner, Sidley Austin
• Trevor Faure, Global General Counsel, Ernst & Young
• Andrew Felner, former Deputy General Counsel, Citigroup, and
• Mark Harris, Chief Executive Officer, Axiom

Cocktails will follow, and 1.5  hours of CLE credit will be given for NY and NJ.

You can find more information, including how to register (it's free) here.

If you do sign up, please make a point of introducing yourself to me at the event.  Hope to see you there.

The life of the law has not been logic; it has been experience.

Oliver Wendell Holmes, Jr., The Common Law at p. 1 (1881)

Of all the pithy and enduring observations that have been made about our profession (and, yes, our industry), this may be my all-time favorite.  It is, if nothing else, King of the Hill until something else comes along that I find more insightful and of broader applicability.

What brings this text for the day to mind is an article in today's WSJ, "Conflicts Force Big Law Firms to Lose Clients." The thrust is straightforward, and well-trod ground to anyone with a scintilla of sophistication about our industry:

Big blue-chip law firms are losing potentially lucrative assignments to smaller firms even as the industry sees a spike in lawsuits against banks stemming from the financial crisis.

The reason for the change: ethics rules that govern conflicts of interest for lawyers and their firms.

Law firms usually can't sue or investigate banks that they have represented, unless the clients take the unusual step of waiving the conflict. Thus, many small to midsize firms, which count fewer banks as defense clients, are filling a growing demand for conflict-free lawyers able to file lawsuits against banks.

The article goes on to recount a few tales of partners at name-brand firms (Shearman & Sterling, notably) decamping to smaller firms (Houston-based McKool Smith, New York's MoloLamken LLP) in order to be able to pursue claims against large banks and other financial institutions in today's target-rich environment.   This phenomenon, of course, has been widely reported, as has the allied phenomenon of BigLaw partners moving to smaller, boutique, or regional firms in order to be able to offer their clients more modest rates.  I have no doubt whatsoever that both are genuine trends--exacerbated by the Great Reset and unprecedented client pressure on rates--but I would also counsel you not to take every single such reported story 100% at face value. 'Nuff said.

The conflicts issue, however, ranks so large in the context of pursuing claims against financial institutions that Michael Carlinsky, a partner at Quinn Emanuel, is quoted by the Journal as saying that the freedom to sue financial firms "is one the single biggest ingredients to the success of our firm."   Mr. Carlinsky deserves a commendation for candor, if nothing else.  I always worry about business models predicated on regulatory arbitrage, but I would be the last to gainsay that firm's astonishing ascendance over the past several years.

But this isn't about Quinn Emanuel.  It's about our conflicts rules.

What about them?  I have long believed them to be--and the Journal piece confirms them as:

• Provincial;
• Of an antique era;
• Utterly at odds with the common sense of "expertise markets" at work everywhere else in the economy; and
• Long since overtaken by events.

May I elaborate?

The conflicts rules are of course creatures of the ABA and the state bar associations which, by and large, are creatures of and responsive to solo and very small firms, and which have no interest in, or representation in their ranks by, BigLaw or global firms.  Thus my charge of "provincial."

And "antique" because the notion that you can't represent Client A at one point and Client B, a competitor of A, at another, is simply quaint.

Which brings me to the third and most important economic point, which is that, when the going gets tough, corporations and individuals seek out experts.  And how do you define "expertise"?   Without being technical, I would say it's a function primarily of having great skill or knowledge in a particular area or domain by virtue of having practiced there at a high level for a significant period of time.  In other words--and here's where the conflicts rules proclaim themselves profoundly at odds with economic common sense--experts are most likely to be found at firms that specialize in representing the industry you're interested in.

We saw this, famously, of course, during the height of the financial crisis (say, from the 3rd quarter of 2008 through early 2009) when the indomitable Rog Cohen of Sullivan & Cromwell represented nearly every major player in sight, and not only every player, but often two players at the same time who were nominally on different sides of a single issue or transaction.

Why?

Because, in extremis, we go to experts, and conflicts rules go out the window.  In other words, they have been overtaken by events.

Finally (and this may be the most powerful objection to them), aren't the rules just flat-out irrelevant?

My point is not the technical and persnickety one that clients can always waive conflicts, or law firms can seek waivers-in-advance.  My point is that commercial and business reality is always going to carry infinitely more weight than Model Rules of Professional Responsibility. 

If every Wall Street bank thinks Rog Cohen is their guy, why shouldn't he be?

Conversely--and this has even more force--conflicts have always and everywhere been in the eye of the beholder. And the beholder is invariably the client, not the law firm and not the ABA or the New York State Bar Association.

If you doubt me, I leave you with this now-legendary tale of conflicts drawn from the annals of the advertising industry.  In AdLand, it's long been widely recognized that no agency can represent, say, Coke and Pepsi at the same time.  That may be simple enough, but the legendary tale dates to the days before smoking was banned on airplanes.  An ad agency happened to represent Northwest Airlines and Philip Morris.  Northwest stole a march on the industry (or perhaps simply saw the handwriting on the wall) by being the first major carrier to voluntarily ban smoking on all its flights.  Philip Morris's response?  They fired the ad agency for a "conflict."

Perhaps the life of the advertising industry has not been logic, either.

Did you ever consider that a society's level of "market integration" (more in a moment) might be strongly and positively correlated with the society's overall level of fairness?

If you haven't thought about that, time to catch up with the scientific literature. Among other things, it's beginning to answer questions like why New Yorkers are (by and large-but I'm unreconstructedly one) happy to help tourists navigate the city when they know they'll never see that person again, or why Americans tip fairly in restaurants they'll probably never return to.

One of the time-tested tools behavioral economists like to use to measure the strength of norms of fairness is the familiar-to-the-point-of-hackneyed zero-sum sharing game where Subject A is given an arbitrary amount of money ($1.00, $10.00, $50.00, whatever) and told that the assignment is to share whatever portion of that amount A feels like with Subject B, who is sitting there in front of A and sees and hears everything that's going on. A is also told that if A wants to keep it all and give B nothing, he can do that, but that B has the right to reject any deal A offers, in which case no one gets anything.

Now, you would think (homo economicus rationalis, at any rate) that anything A offers B which is nonzero is a windfall gain to B and he should accept it.

That's not the way it turns out.

Roughly speaking, when this experiment is conducted multiple times across time and geography-but within the US-the B's of our world generally refuse any offer by A that is less than about 25%, universally decline anything under 10%, and some decline anything under 40%.

What's going on?

We're enforcing our norms of fairness, in a nutshell.

But here's an even more powerful experiment, as reported in The New York Times. Here, researchers changed the game and tried it in very different societies. Here are the societies they visited:

a) a village in the Amazon, foraging with the indigenous Tsimane people.

b) a Dolgan and Nganasan settlement on the Siberian tundra, where they herd reindeer and belong to the Russian Orthodox Church.

c) a Himalayan monastery where you are instructed to "gaze within" and "follow your bliss."

d) a camp of nomadic Hadza hunter-gatherers sharing giraffe meat and honey on the Serengeti savanna.

e) a throng of Wal-Mart shoppers buying groceries on the Missouri prairie.

And they changed the game to make it far less transparent:

One player, the dictator, was given the authority to keep the entire prize or share part of it with the other, unseen player, whose identity remained secret. Along with this power came the assurance that the dictator's identity would also remain secret, so that no one except the researcher would ever know how selfish the dictator had been.

The most lucrative option, of course, was to keep the whole prize and stiff the anonymous partner. But the Missourians on average shared more than 45 percent of the prize, and some other societies were nearly as generous, like the Ghanians living in the city of Accra and the Sanquianga fishermen on the coast of Colombia.

But most of the hunter-gatherers, foragers and subsistence farmers were less inclined to share. The Hadza nomads in the Serengeti and the Tsimane Indians in the Amazon gave away only a quarter of the prize. They also reacted differently when given a chance, in variations of the game, to punish another player for hogging the prize.

Selfishness offended the Missourians so much that they would punish the player even though it cost them money. But the members of traditional societies showed little inclination to punish others at their own expense. "There are lots of norms in these small-scale societies for how to treat one another and share food," says Dr. Henrich. "But these rules don't apply in unusual situations when you don't know anything about the kinship or status of the other person. You don't feel the same sense of responsibility, and you act more out of self-interest."

What's going on here?

Nothing that would have surprised Coase.

The more complex the society (think the US, or, even more so, the global agora), the more reliance people have to place on the trustworthiness of total strangers in a market economy. In fact, and amusingly, the researchers defined the very "market integration" quotient as the extent to which people in the various societies relied on the marketplace to acquire their food--as opposed to being direct hunter-fisher-gatherers.

In other words, it comes down to minimizing transaction costs.

Last weekend, my wife and I decided that, since we no longer own a turntable, keeping a cabinet full of LP records was probably poor space planning in a Manhattan apartment. About 20 blocks down Broadway from where we live is a quaint, chock-a-block, basement-first-floor-second-floor (books piled on the staircases, the floors, everywhere) used bookstore that also sells LPs. 

So we loaded up shopping bag upon shopping bag and marched down to the store, dog in tow (or, actually, most of the time, dog way out in front leading the way), to discover that the owner, who would tell us what our LPs were worth, had stepped out to lunch. We said we'd leave the bags and bags there and come back in an hour or so.

Stop there.

Why am I telling you this story? Because, of course, we had entrusted our records (not worth a lot, to be sure, but surely worth something) to a total stranger, sight unseen, at a store we had admired far more than we had patronized.

An hour later we returned, the owner was there, he evaluted our collection in a professional, done-this-before fashion, made us a cash offer, and we accepted. And have a small empty cabinet to show for it.

Next time you're drafting a legal settlement or crafting deal terms, pause for at least one brief moment to reflect upon how powerfully rooted in our gestalt is not just the rule of law but trust in strangers in the marketplace. It makes everything we do possible.

Thanks for the reminder and research-based confirmations.  I'm thinking this is again what Adam Smith saw and explained in Theory of Moral Sentiments and Wealth of Nations. 

We innately struggle at the internal tipping point which leads us out of selfishness and toward fairness in regard to "others."  The pivot seems to turn on the warrant of our expectations and perceptions of (i) our substantial equality with the "other(s)" with whom we must deal; and (ii) the reasonable availability of just remedy(ies) when "fairness" toward us seems to have been violated. 

 The actual and perceived degree of availability of fair recourse to tolerably unbiased tribunals therefor goes hand in hand (in a self-reinforcing cycle) with cultural growth toward or decline away from an ethos of "fairness."  But where does growth toward fairness germinate?  The tipping point away from fairness concerning the "other" seems to remain at least a lively temptation for each of us, so our ethos of fairness is always up for grabs.  Let go of it, and everything we do begins to become impossible, at least until some courageous others take hold of it again.

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?

Perhaps I don't write as much as I should about lateral partners.

I mean the economic phenomenon of lateral partner hiring, not gossip that much of the legal press seems to specialize in about specific "gotcha" movements of partners or small groups from Big Loser firm to Big Winner firm--stories whose half-life, in my experience, is measured by how long it takes for Big Winner firm to suffer a "shocking" loss of partners in its turn. Truth be told, much of it seems on the surface to be a revolving door.

Of course it's not really so simple.

If you stand back and look at the lateral partner migration phenomenon on a macro basis over the past two decades or so, what I think you see is a vast, and economically compelling, sorting-out. It's a sorting out of partners with high-margin, high-value practices migrating to firms where there are kindred souls and where the value of their practices can be maximized, and, on the other side of the coin (as it were), partners with low-margin, commoditizing, practices moving out of firms less willing to support those practice areas and into firms where they still feel welcome.

If you were to graph this in a conceptual way, I surmise you'd find something along these lines:

• People specializing in white collar crime, corporate governance investigations, tax litigation, high-end M&A (well, at least until last September 15), securities litigation, and other "high end" practices are by and large moving to firms with higher PPP's and greater prestige.
• Generalists in commercial litigation or corporate transactions are probably churning around a bit but not, on the whole, moving up or down the food chain as a cohort.
• And those in now-disfavored areas such as T&E, employment, or generic real estate are moving down-market to less prestigious firms with lower PPP.

This is a surmise, as I said, but I would like to believe an informed one.

Why, you may be asking, would anyone voluntarily move down-market? They wouldn't, and they don't. They have no choice. Firms that have decided they no longer care to be in the business of (say) T&E or employment simply make it clear there is no long-term home for them, and so they find a home where they can. Nobody guaranteed you a rose garden.

What else can we say about lateral partner movement?

The primary, most important, and most amazing thing to say about it is that it's both something many firms have obsessed about for the past many years (decades?) and that by and large we're terrible at making it work.

One managing partner recently told me that his firm's batting average was 1 in 3: One lateral in three succeeds. Another told me that they seem to have equal shares people who hit home runs and those who unceremoniously ground into double-plays--and that no matter how hard they analyze everything, they can't tell which will be which up front. They continue to be surprised both by who succeeds and who flames out.

Indeed, this mirrors my own experience.

For many firms, for the past many years, a core part of their strategy has simply been "lateral acquisition." And the primary reason I haven't written about it much, if at all, here on Adam Smith, Esq., is because I simply don't know what intelligent observations can be offered on that "strategy" in general. So much depends on the specifics of (a) clients; (b) cultural fit; (c) timing; (d) sexiness or sudden lack thereof of the practice area being sought [remember the firms who paid at the top of the market for private equity folks?--I do]; (e) receptivity or hostility by the incumbent partners; (f) emotional and intellectual flexibility of the incoming lateral; and (g) did I mention culture?

In other words, it's hard to discuss a "strategy" that is so hyper-dependent on intensely local and personal considerations of chemistry and nuance.

Two last observations before I move on to what I think is actually new and different and fascinating in today's lateral marketplace.

First, there's ample evidence from the worlds of celebrity entertainers and sports stars that marquee names tend to capture essentially the entire present discounted value of their economic contribution to the firm (the record label, the movie studio, the Yankees), leaving very little if any "surplus" for the acquiring firm. While the data in law-firm land to examine this question are, systemically, sorely lacking, it's worth thinking about. (I cite entertainment and sports only because they have a wealth of publicly available data which economists have glommed on to in order to analyze who "captures" the value of the Big Name.)

Second, we have the unfortunate phenomenon of the serial killer mover. You know the type: They'll move for a 10-15-20% bump in pay (preferably with a guarantee, thank you very much), ply their trade for a few years until their new host gets tired of them or cottons to their game of large promises and underdelivering, and then they'll move on again. If clients ask me about folks like this, all I can say is that the best predictor of getting divorced is having been divorced.

This brings me to why I wanted to write about lateral partners now.

I detect a new reason for lateral partner movement, which I've never seen before.

I characterize it as laterals motivated to move because they're asking themselves, and implicitly their firms, "What's the plan here?" And not finding a persuasive answer.

Some context:

• I'm not talking about laterals tempted to move by a 10--15% bump in compensation. If somebody moves for that "reason," you can bet there's something else really going on.
• I'm also not talking about extremely senior (in years, that is) laterals who may be about to bump up against their firms' mandatory retirement age and are looking for an escape hatch; that's not the type of "what's the plan?" I mean.

Rather, I'm talking about youngish to middle-aged laterals who can realistically envision another 20 or 30 years of productive laboring in the vineyard, who look at their firm's reaction to the Great Reset we're living through and who do not perceive a credible response. Firms, in other words, without "a plan."

Now, if you're 55 or so and up, this scarcely matters. Momentum, if nothing else (market shares, and perceptions, lag reality by years), will carry you through safely to retirement.

But what if you're 35 or 40, or even 50 and are allergic to the concept of "retirement?" Then you have a serious problem if your firm appears to be clueless in responding to the seismic changes afoot.

I see this in laterals' resumes now coming out of firms they never used to come out of. And it's not about the money, and it is most assuredly not about the "prestige." Not that these people are going down-market; that's the last thing they need to do. They're simply going "sideways-market," which in and of itself makes little sense; thus my hypothesis that something else is going on.

The most important conclusion I can draw from this is that strategy matters. It matters if for no other reason than your partners now believe, perhaps for the first time in their careers, that it matters. People didn't used to shuffle between firms because they feared the ship they were on was rudderless, or captained by intellectually absentee management. This is what's new.

And here's my diagnostic suggestion for you: If your firm has recently lost a few people, ask yourself--really ask yourself--why they left. And if your firm is seeing great resumes, particularly resumes of a caliber you didn't typically used to see, ask those people what's motivating them. Dollars to doughnuts it's not the money. I bet it's the strategy.

According to the most recent fossil record discoveries, life on Earth dates back about 3,450-million years. But for about the first 85% of that time span, organisms were extremely simple, composed of individual cells, occasionally organized into colonies.  Pretty dull.

Then something striking happened, about 530-million years ago, which is now known as the "Cambrian explosion." For reasons not entirely understood--oxygen reaching critical levels in the atmosphere? more sophisticated predator/prey competition? an immediately preceding mass extinction? "co-evolution" of related species?--evolution came up with a brilliant invention: Mutli-cellular life.

Multicellular life, as expressed in the Cambrian explosion, is not just aggregate-cellular life.  It's organisms with structure, with layers, appendages, limbs conducing to mobility, eyes, ears, and dedicated noses, protective carapaces, offensive tools such as teeth and claws, and essentially the entire array of what we customarily think of as the Lego blocks that can go into making up modern-day and even prehistoric animals. (Something similar happened with an explosion in the diversity of land-based plants about 400-million years ago, in the Devonian period.)

This is a quantum leap.

A profusion of widely diverse body types and anatomical plans arose, some constituting direct predecessors to animal life as we recognize it today (for example, if it's mobility you're after, four limbs--not more, not less--turn out to be really useful). Many many other plans, almost certainly the majority, were less optimally adapted and now belong to extinct lineages--such as Opabinia, with five eyes and a nose like a fire hose, or Wiwaxia, an armored slug with two rows of protective upright scales.

Interestingly enough, the Cambrian explosion was sufficiently powerful, diverse, and creative that no design template for a modern animal post-dates it. In other words, structurally and conceptually, pretty much every animal we see had a recognizable predecessor dating to this period. To be sure, evolution can produce shockingly powerful advances given a few hundred million years, but the point is that it was the seminal moment in the creation of multi-cellular life, where "a thousand flowers bloomed." While many were proven more or less in short order to be false starts and dead ends, the point is that the intensity of experimentation led to some extremely durable and well-proven animal models.

Take a look (click to play the 25-second PBS video):

What has this to do with BigLaw?

My thesis is that since, say, around 1980, we've been living in an ecological mono-culture: We have all been one-celled creatures, in the sense that we have all had one and only one strategy: Growth.

Aside from our "mono-strategy" as an industry, we have had:

• Mono-associate career paths (8 years, plus or minus, of lockstep to partnership);
• Mono revenue models (the billable hour);
• Mono levers for increasing profitability (primarily, by increasing leverage);
• And mono techniques for gaining competitive advantage (primarily, lateral partner recruitment).

I believe we're on the cusp of our own "Cambrian explosion," where we may begin to see a wealth of experimentation with different business models.

If the Cambrian explosion of 540-million years ago is any guide, there will be a lot of false starts and dead ends, a/k/a extinct species and firms. But there will also be some far-seeing, fast-running, high-flying, incalculably intelligent designs.

Stay tuned for the next installment in this series.

Hogan & Hartson/Lovells?

As amply reported (Legal Week, The National Law Journal, The Lawyer), the firms are in merger talks and, since no one is remotely denying the reports, we can only assume it's all quite for real.

We'll get to what we think it means in a moment, but first, to the numbers:

*All figures in US$, using a conversion ratio of 1.594 $/£.

In addition, cities where both firms have offices are:

• New York
• London
• Hong Kong
• Beijing
• Paris
• Tokyo
• Munich
• Moscow

On a pro forma basis, the combined firm--assuming a complete merger--would have these characteristics:

• Revenue: $1.9-billion
• Number of lawyers: >2,500
• Global rank: Neck and neck with Latham & Watkins and Allen & Overy, all in a horse race for Global Firm #7:
  • DLA Piper: $2.26-billion
  • Linklaters: $2.23-billion
  • Freshfields: $2.21-billion
  • Skadden: $2.20-billion
  • Baker & McKenzie: $2.19-billion
  • Clifford Chance: $2.16-billion
  • Latham & Watkins ($1.92-billion), Hogan/Lovells (roughly $1.9-billion), Allen & Overy ($1.88-billion)

Finally, the practice mix would seem at first glance to be highly complementary. Hogan is known especially for its regulatory/government law practices, antitrust, litigation, intellectual property, real estate, and a substantial level of corporate work. Lovells, somewhat unusual for a UK-based firm, also has a relatively robust litigation practice and is less deal-driven than (say) the Magic Circle, as well as having strong real estate, antitrust, and regulatory law capabilities.

So: What does this really mean?

Already the naysayers, of course, are keening about the challenges and the obstacles.  To be fair, the commentary has not been uniformly negative, with (for example) Alex Novarese of Legal Week saying that "at first glance, there appears much to commend this union," but he is quite the exception.

A sampling:

• "Merger-averse Hogan" supposedly reversing field;
• "partner compensation is, of course, a tougher challenge;"
• "transatlantic deals are fiendishly difficult to pull off;" and "transcontinental mergers have a mixed [read: dubious] history;"
• "US/UK deals are notoriously difficult to secure given the challenge of marrying differing partner compensation and accounting models;"
• "it's not clear what a merger would do for the combined firms' profitability;" and, of course, the inevitable
• "there could also be conflict over whether control of the combined firm would reside in Washington or London."

I'm here to tell you that it's time for us all to just get over ourselves.

So far as I can tell (no insider knowledge here, folks, sorry to report), this deal makes superb sense.

For how many years/decades/centuries have major corporations been doing transatlantic business on a routine basis? And somehow they have been managing to smooth out the differences between the pound sterling and the dollar, the differences between compensation expectations in the US and the UK (not to mention New York and London specifically), the differences between driving on the right and on the left, and of course the grain of truth in the famous quip about being "divided by a common language."

As for the New York/London divide specifically, we are informed by a UK legal publication that the architects of this deal should be grateful Hogan doesn't have its roots here in the Empire State: "A conservatively-run practice like Hogan, with a centre of gravity outside the brittle egos of Manhattan, shouldn't be the hardest American firm to align with a UK practice." [Note to visitors to the home office of "Adam Smith, Esq.:" Please check your egos at the door; we do.]

Are there challenges? Of course; there are challenges to running each of the firms today, as they stand alone. Would the challenge of running the combination be twice as great? Perhaps, but I doubt it--at least it would decline over time, and in the meantime there would be double the resources to devote to the challenges. Combinations that have far more moving parts than this one (just to pick a current example, Kraft/Cadbury) are pulled off routinely in CorporateLand. Why do we presume market forces end where legal services begin?

More importantly, do you see what's going on here?

Each of the obligatory reservations stated to the deal--partner compensation, the putative transatlantic "challenge," whether Washington or London would "win"--is at bottom a rather shameless exercise in navel-gazing.

When I said it's time for us to "get over ourselves," this is precisely what I meant. So far, the tenor of discussion about this proposed merger has been--at least when it shifts from pure journalistic reporting to implied or overt opinion--about as sophisticated as sports bar debates. (I am compelled to note one outstanding exception, which I would like to believe serves to prove my rule, namely the thoughtful commentary by Aric Press, "What a Hogan/Lovells Merger Would Mean.")

This is potentially a transaction that will change a conspicuous portion of the BigLaw landscape globally. Prattle as we may about the "globalization" of the profession, the Global 100 law firms are still (for reasons that have understandable, if archaic, roots in history and regulation-by-jurisdiction) almost shockingly insular, domestically rooted institutions. Of those 100--pop quiz--how many have:

• Over 50% of their lawyers outside their home country? Only 10 (yes, including Lovells, and counting DLA worldwide and DLA international as one firm).
• And of those 10, how many are of US origin? Two, namely White & Case and Baker & McKenzie.
• Between 30 and 45% of their lawyers outside the home country? Again, only 10, with a somewhat more respectable 7 of US origin.
• And below the 30% bar, the pickings get slim indeed, including some heavyweight name brands with surprisingly low numbers. For example? I would argue that if at least 3 out of 4 of your lawyers are in your home country, you're not yet seriously international. Here are some candidates (not to single these out, just to make a point):
  • Sullivan & Cromwell: 22% of lawyers non-US based
  • Skadden: 16%
  • Sidley Austin: 16%
  • Davis Polk: 13%
  • Simpson Thacher: 11%
  • &c.

The point is simply this: As an industry, we are not nearly as "internationalized" as our clients, and certainly not remotely as global as the premier clients we all aspire to serve.

It sounds to me as though the leadership of Lovells and of Hogan & Hartson are focusing on genuine strategic objectives and not on "who's on first."

We all need to grow up, snap out of our self-referential and unappealingly self-regarding reveries, and seriously contemplate what this may portend. And from my perspective, it will all be good. Overdue, but good.

Regular readers know that among the many demigods in my polytheistic pantheon is the subaltern who stands guard to keep the faculties of Critical Thinking from being waylaid by cant or derailed by sensationalism.

This brings us to our two seemingly far afield and disconnected-from-each-other texts for today:

• Don't Blame Flu Shots for All Ills, and
• Melanoma on the Rise, or is it Just Diagnoses?

The flu shot piece (NYT, yesterday) reports that

As soon as swine flu vaccinations start next month, some people getting them will drop dead of heart attacks or strokes, some children will have seizures and some pregnant women will miscarry. [...]

Every year, there are 1.1 million heart attacks in the United States, 795,000 strokes and 876,000 miscarriages, and 200,000 Americans have their first seizure. Inevitably, officials say, some of these will happen within hours or days of a flu shot. [...]

"There are about 2,400 miscarriages a day in the U.S.," said Dr. Jay C. Butler, chief of the swine flu vaccine task force at the federal Centers for Disease Control and Prevention. "You'll see things that would have happened anyway. But the vaccine doesn't cause miscarriages. It also doesn't cause auto accidents, but they happen."

To counter what the Centers for Disease Control and other federal agencies fear may be an all-but-inevitable surge in hysteria and alarmism about "side effects" of the vaccine, they have set up a war room, as well as a constantly updated Facebook page and Twitter feed. We should all, at the very least, wish them luck.

Otherwise we may find ourselves subject to the satanic twin of my Critical Thinking subaltern, "regulation by anecdote." Think this doesn't happen?

As Exhibit A, I would give you Sarbanes Oxley, a stupendous reaction to a handful of amazing outlier events. While Enron and Worldcom may have "shocked the conscience" (the strenuous and increasingly convoluted machinations of their perpetrators certainly shocked my conscience at the time), they lay so far outside the norm of corporate behavior that to base the most far-reaching reforms of our securities laws in several generations upon them seemed akin to legislating "knife ownership control" statutes based on the conduct of Jack the Ripper.

The larger moral from the swine flu story?

Human beings--by and large to our enormous credit--excel at finding patterns, teasing out cause and effect, and deducing what will be the probable after from the current before. But we are also more likely to exaggerate the actual probability of "A causes B" the more dreadful B is. Conversely, the more benign B is, the less likely we are to imagine causation. The benefit or peril from B, of course, has precisely nothing to do with the likelihood A was involved.

En garde.

The melanoma piece reports:

In recent years there has been a sharp rise in reported cases of malignant melanoma, the deadliest form of skin cancer [a 48% increase in just 13 years]. But a British study has found evidence that the epidemic may be due at least in part to "diagnostic drift," a growing tendency to identify and treat benign lesions as malignant cancers. [...]

The British researchers [also] found something odd in the data: almost all of the increase was in diagnoses of the earliest stage of the disease, where it is difficult, and sometimes impossible, to tell a malignant lesion from a melanocytic nevus, a type of benign mole. There was no change in the combined incidence of the later stages of the disease, and mortality increased only slightly.

First of all, I really wish I could take credit for coining the phrase "diagnostic drift"--a marvelously pithy piece of shorthand for a complex phenomenon. Alas, 'tis not to be.

The real interest of the piece comes in how it exposes the thought processes of dermatologists and epidemiologists discussing whether the increase is real, or drift.

The first clue that it really is drift and not real comes from the observation that the increase is disproportionately resident in very early stage diagnoses:

Melanoma is commonly diagnosed at various stages of severity, and if its incidence were truly increasing, the authors write, there would be increases found in all stages of the illness, not just the earliest. "We think that in borderline cases dermatologists and pathologists are erring on the side of caution," said the lead author, Dr. Nick J. Levell.

Arguing that it's real and not drift is Dr. Darrell S. Rigel, a professor of dermatology at New York University, who says:

"Every study over the past 10 years has shown that the absolute number of melanomas is rising," [...] The death rate from melanoma has also been going up, Dr. Rigel said, but so has the survival rate. In other words, while more people are getting the disease and dying from it, early identification and treatment has simultaneously allowed more people to survive.

Dr. Levell, our "drift" proponent, rebuts:

But if this were so "there would have to have been a coincidence of a large increase of just Stage 1 melanoma which had been almost exactly matched in both time and magnitude by a large improvement in therapeutic effect." He finds this "improbable."

Another expert weighs in on the side of "real" as follows:

Dr. Julide Tok Celebi, an associate professor of dermatology at Columbia, strongly disagreed with the study's conclusions. The increase in melanoma is real, she said, and "the only logical explanation is environmental exposure." She added that these days people were being exposed to "significantly greater" amounts of ultraviolet radiation.

Oh, yeah?

Levell (drift) again:

"Squamous and basal cell carcinomas are no doubt caused by sunlight," he said, "and those increases are concentrated on the face and neck." But the diagnoses of melanoma in the registry were mostly on the back, trunk and limbs, areas not consistently exposed to the sun. This means that exposure to sunlight cannot explain the increased number of lesions reported as malignant.

Ladies & Gentlemen of the jury, what say you? Drift or real?

The point, of course, is not which view is right, the point is to watch Critical Thinking in action.

And yes, you should always try this at home.

How could the SEC have missed all the warning signs about Madoff?

Understand that I don't have a dog in this hunt. Although I'm a securities lawyer by training, I never worked at the SEC and, so far as I know, I'm not close to anyone who lost serious money with Madoff. But as reports have come out this past week about the bungling revealed by the internal investigation, you have to ask yourself what adult supervision was in place at the Commission.

If you, like me, have been wondering about this, I've been reading all I can in an effort to arrive at an hypothesis to explain it. And I only report this because I think (fear?) it has potential lessons for all of us.

A few days ago,The New York Times summarized it thus (emphasis mine):

The report details six substantive complaints against Mr. Madoff received by the agency, which were followed by three investigations and two examinations. Yet the agency never verified Mr. Madoff's trading through a third party. Time and again, it was noted that the volume of his purported options trades were implausible. When the enforcement staff received a report showing that Mr. Madoff indeed had no options positions on a certain date, the agency simply did not take any further steps.

In fact, the string of lapses was capped by a staff lawyer receiving the highest performance rating from the agency, in part for her "ability to understand and analyze the complex issues of the Madoff investigation."

Here are a few other selective nuggets:

Mr. Kotz recounted incidents in which investigators seemed hopelessly out of their depth, far too credulous and perhaps just plain lazy.

One investigator described Mr. Madoff as "a wonderful storyteller" and "a captivating speaker" after the 2005 encounter in which Mr. Madoff, a former Nasdaq chairman, boasted of his ties to people high up in the S.E.C. and said he was on the short list to be the next agency chairman.

...

The inspector general revisited the failure of the S.E.C.'s Boston office to take seriously the warnings of Harry Markopolos, a private fraud investigator who had been trying since 1999 to get the agency to investigate Mr. Madoff. The failure to heed Mr. Markopolos was almost inexplicable, except that some agency officials did not like him personally, Mr. Kotz said.

...

From 1992 until the Madoff empire imploded, one inquiry after another went nowhere, the inspector general said. Some investigators "weren't familiar with securities laws," and some seemingly refused to believe their own ears even when Mr. Madoff contradicted himself or offered illogical answers to questions.

...

At one point, investigators drafted a letter to NASD seeking independent trade data, "but they never sent the letter, claiming that it would have been too time-consuming to review the data they would have obtained," the inspector general wrote.

And from the Wall Street Journal:

On May 21, 2003, an unnamed hedge-fund manager sent an email to an SEC examiner laying out concerns that Mr. Madoff's self-described trading strategy didn't add up. The manager said the strategy wasn't duplicated by anyone else in the market, Mr. Madoff's accounts were in cash at month end, and there was "always replacement capital." These could be "indicia of a Ponzi scheme," he wrote.

However, the SEC didn't open an examination until December 2003, and an agency memo said the focus would be on front-running, a potentially abusive trading practice. The memo didn't raise questions cited by the hedge-fund manager, such as why there was an apparent lack of volume in the market to reflect Mr. Madoff's supposed trading strategy.

Senior examiner John McCarthy told the inspector general that it wasn't a mistake to focus solely on front-running "because that's where my area, my team's area of expertise led," according to the report.

We learn today that over five years ago the SEC reviewed internal emails from Renaissance Technologies (James Simons' hedge fund firm) that raised serious questions about Madoff including what Simons' son Nathaniel called "several strange characteristics" of Madoff's operation including unusually low fees, rumors that Madoff cherry-picked profitable trades for favored clients, and (from Renaissance's "chief scientist," Henry Laufer) questioning Madoff's timing in selling investments to exit the market and holding primarily cash to avoid losses hitting competitors:  The timing of the moves, Mr. Laufer said, was almost statistically impossible. "We would have loved to figure out how he did it so we could do it ourselves," he testified this year to the SEC. "And so that was very suspicious." He added that unearthing Mr. Madoff's fraud "is not rocket science," and was dismayed the SEC had failed to do so.

What do these various exercises in laziness, incompetence, terminal blindness, and general on-the-job abominations add up to?

• People staying vehemently within their "comfort zones" regardless of plain evidence in front of their very eyes that should shock them out of it (pursuing "front-running" instead of a potential Ponzi schedme because "that's my area, my expertise."
• Not sending a letter whose results would have been "too time-consuming" to analyze.
• Preferring the "capitivating storyteller" over the black and white facts.
• Discounting the warnings of someone because we "didn't like him personally."
• And finally, being so intellectually lazy as to specifically commend a staff lawyer with the "highest performance rating" for her supposed understanding of the Madoff Ponzi scheme when, of course, the truth was that she had no clue about any such thing.

The easy reaction would be to dismiss government bureaucracies as terminally incompetent, but you should know by now that I'm constitutionally allergic to dismissive rationales, and besides, we're talking about tragic consequences to the SEC's failure to police Madoff, be it in 1992, 2003, or even 2006. Fortunes were tragically lost and lives were potentially ruined (although I do not for a moment equate losing a fortune with ruining a life).

No, I'm looking for a deeper explanation. Because this is too big a story to dismiss as run of the mill human incompetence.

Could part of the explanation simply be the audacity of the Madoff fraud?  That it almost defied belief, even after it was fully disclosed?  Perhaps.  Similar theories, of course, have been advanced about our various intelligence agencies' failures to foresee 9/11:  The notion that Al Qaeda (or anyone) would fly two fully-loaded jetliners into the Trade Center towers might have seemed too preposterous to worry about seriously.  Yet, by analogy to the SEC/Madoff tragedy of errors, it turns out in hindsight that there were plenty of glaring clues--such as flight school students who couldn't be bothered with troublesome details about the exotic maneuver known as "landing."   

And even before the first (1993) bombing of the Trade Center, the head of security at Morgan Stanley/Dean Witter, Rick Rescorla, a British-born Vietnam vet (originally from Cornwall, who served in the British Army before emigrating here), with a ribald take-no-prisoners approach to life and work (I was a mere securities lawyer at the firm), told me Islamic radicals would love nothing more than to destroy this conspicuous symbol of Western capitalism.  Tragically, Rick was one of only three people at the firm who died on 9/11--he was staying behind to make sure everyone else got evacuated:  There's a memorial to Rick in Cornwall, which you can see here.

So it's not that preposterous.

What, then, explains it?

I hesitate to invoke "the banality of evil," and I'm slightly misapplying it when I do so, but I believe that's what we're dealing with.  To my mind, there's no question Madoff qualifies, in spades, for the title "evil," so my focus is on banality.  Not--here's my misappropriation of the phrase--the banality of Madoff, but the banality of the SEC's behavior.

Can't we see in hindsight that everyone at the agency appeared to be behaving in an eminently reasonable manner, oh-so-dutiful and correct?  After all, if your "team's" expertise is front-running, how can you be expected to delve into indications of a Ponzi scheme?  What's wrong with discounting news from a disfavored source?  Being capitivated by a storyteller?  People behave like this in our homes, churches, schools and universities, on our athletic fields and in the media, and--in our offices,

It's all so so banal, isn't it?

What's missing, of course, is the indispensable ingredient of Critical Thinking.

Truth time:  How do you measure your own personal performance on this score?  That of your team?  Of your firm?

Critical Thinking can cover a lot of territory, but it's often postulated as the core justification for our entire higher education industry:

• Being able to think past what the author asserts;
• Evaluating "facts" for plausibility, alignment or dissonance with other conditions or characteristics we know to be true;
• Testing analogies, metaphors, syllogisms, and other argumentative techniques for rigor and internal consistency;
• Abstracting from the source (the alternative is to shoot, or muzzle, the messenger);
• Trying to square assertions with prior and subsequent statements--or finding good and sufficient reason for new developments;
• Being so familiar with pleasant and familiar tropes that bid to explain so much that we prefer not to see past or beyond them (e.g., "our human heritage of nomadic hunter-gatherers on the savannah explains sexual and economic behavior to this day");
• Having the imagination to ask "child-like" questions about bedrock assumptions so profound we rarely even articulate them;
• And, above all, getting out of our intellectual "comfort zone" to do the hard work of rigorous analysis.

How good are you, really, at this?  I can report from first-hand experience it's a tall, even life-long, assignment.  But worth it.  Fortunes, and even lives, could be at stake.

Results are in from our poll of a few weeks ago in Where Have You Gone, Work-Life Balance? and here are the results (multiple answers were permitted):

Since it's hard to read, here are the results in order of popularity.  The question, again, was "Work-life balance is:"

• flatly incompatible with firms performing at the highest level--39 votes
• compatible with high performance if it helps retain talent--29 votes
• so last August--26
• achievable in firms of all stripes given flexibility--20
• a useful notion only in the "lifestyle" cohort of firms--15
• an indulgence affordable to firms only in times of high lawyer demand--14
• a weak accomodation to lawyers who aren't serious--10
• a humane and "evergreen" virtue responsive to reality--9
• a disservice to high-performing professionals--8

What may we conclude?

Most striking to me is the honest, and fairly emphatic, disagreement over whether or not work-life balance is compatible with high performance.  Lacking any a priori hypothesis as to why this might be so, I'm tempted to fall back on the explanation that people may simply be reporting on their own experiences.  That is to say, if one has sacrificed mightily in terms of family life to be a high performer, one probably thinks that's the way the world works and that work-life balance is accordingly incompatible with being at the top of one's game.  Conversely, if one has had the benefit of at least a period of decreased demands, one may believe everyone should be able to accomplish that as well.

Here's another way of slicing the results, however:  If you add up all the votes cast for a "negative" view of W-LB vs. all those cast for a "positive" view, you get:

• Negative:  112
• Positive:  58

or nearly a 2:1 ratio of negative to positive views.  (I count "so last August" as negative, since it fairly strongly implies the issue is dead for now.)

High performers of the world, unite!  You have nothing to lose but your work-life balance.

Pop quiz: Which of these would be worse:

• Learning that, based on economic performance, lawyers in your practice group (including yourself) would be getting year-end raises smaller than average across the firm; or
• Feeling that you, individually, are being systematically shunned by the head of your practice group.

If you answered (b), welcome to the Mammal population.

I'm not being facetious. Neuroscientific research described in Managing with the Brain in Mind, (Booz & Co., Strategy + Business, Issue 56, Autumn 2009, p. 59--not yet published online, but keep an eye on their site) demonstrates that mammals perceive the feeling of emotional exclusion (based on activity in the "suffering" region of the brain) as the neurological equivalent of the distress associated with physical pain.

According to Naomi Eisenberger, the UCLA researcher who designed the study reaching this conclusion (involving fMRI's and a rigged computer game, since you asked), "Most proesses operating in the background when your brain is at rest are involved in thinking about other people and yourself."

What does this mean to you as a manager? Plenty.

As social animals, and as mammals animals extraordinarily dependent on the support of members of our community, work is not a financial transaction, not a quid pro quo of compensation in exchange for behavior. It's social interaction, where being given an assignment we feel unworthy of, being reprimanded (fairly or unfairly), or feeling excluded are far more devastatingly negative experiences than the differenceof a few dollars, or thousands of dollars, at the end of the month.

So what?

Don't think you can treat people--especially highly talented professionals--like a hydraulic system or internal combustion engine, where you adjust the richness of the incoming fuel/air ratio (compensation) and get corresponding horsepower out of the system.

Now, this is not news to anyone who's legitimately earned a role in management (and who has any memory whatsoever of the schoolyard playground), but what's shocking to me is how often this core human insight is honored in the breach in large and medium size firms.

Before, we might have thought that leaders who were empathetic enough to engage employees' strongest talents, support and encourage collaborative teams, and generally create an environment fostering productivity and creativity were "nice to have's."  But the reason I bring this new research to your attention is it argues strongly that such leadership is a lot more than that:  It's indispensable to high-performing organizations.

In an important sense this new research challenges Abraham Maslow's famous "hierarchy of needs," which posits that higher needs can only be met once lower-level needs are satisfied and which ranks the "hierarchy," from bottom to top, as follows:

• physiological survival, such as breathing, sleep, food, and clothing;
• safety, such as personal and financial security, and health;
• social, such as friendship, intimacy, and family
• esteem, both from others and self-esteem; and finally
• self-actualization.

But if being hungry, being physically threatened (by a snake, let's say, a vicious-looking dog, or a reckless driver), and being socially ostracized all trigger the same response in the brain--which this research confirms--then "merely social" needs start to appear more fundamental.

Coincidentally, we got unintentional but powerful confirmation of where "social" needs fit, in what otherwise would have seemed a small bit of news this weekend: The story was that three fishermen were rescued after spending 9 days 200 miles off the Gulf Coast on top of a capsized boat---one day after the Coast Guard called off the rescue efforts as in vain, and by sheer accident as a sharp-eyed guy on a passing boat spotted what he first thought was an innertube and went to investigate.

The story continued that the three had survived on a few gallons of fresh water serendipitously saved from the boat, a box of crackers, "and some bubble gum."  (The nutritional value of bubble gum being a topic that had hitherto not crossed our minds.)  But what's germane about the story?  When asked by the inevitable reporter looking for a "human reaction," "What was the hardest part of the 9 days?," the spokesman for the three replied:  "Right around the fifth day we just really all wanted somebody else to talk to."

Bingo.  You're hanging on for dear life to a useless boat in the middle of the Gulf with dwindling and palpably inadequate resources of food and water, hope for rescue diminishing by the day, and you report that "the hardest part" of the ordeal was being deprived of human companionship?  I did not make this story up.

Making this more important is what happens when the threat response is triggered, as hunger, danger, and ostracism all do:  Analytic thinking and creative insight go right out the window, and in a professional, performance-driven setting, just what people need most deserts them. 

Lest you think that this is all about avoiding dysfunctional human behavior, the good news from the new wave of neuroscientific research is "that the brain is highly plastic. Even the most entrenched behaviors can be modified." Neural connections are not static from adolescence (or thereabouts) onward, as once was thought:

Neural connections can be reformed, new behaviors can be learned, and even the most entrenched behaviors can be modified at any age. The brain will make these shifts only when it is engaged in mindful attention. This is the state of thought associated with observing one's own mental processes (or, in an organization, stepping back to observe the flow of a conversation as it is happening). Mindfulness requires both serenity and concentration; in a threatened state, people are much more likely to be "mindless." Their attention is diverted by the threat, and they cannot easily move to self-discovery.

What conditions, then, might conduce to "mindful attention," or at least to a disposition to collaborate instead of to clam up, to suggest imaginative or creative approaches instead of reproducing the last matter's approach by rote, or to truly engaged conversations instead of what we often get instead, punctuated monologues?

Again, the new research provides evidence that the predisposing conditions include:

• status
• certainty
• autonomy
• relatedness
• fairness.

Status is something we are constantly evaluating: Higher, lower, the same? In whose eyes? And high status is very important: It correlates with higher longevity and health (even adjusting for income, education, etc.). In a firm, the key point is that which indicators of status people value depend on the perceived values of the organization. If the firm is all about rewarding rainmakers, then the only "status" signal that matters is compensation. If the firm is committed to training and professional development, then recognition for increasing levels of professional competence and excellence will be at least as valuable in terms of morale-boosting and teamwork as serious raises.

Certainty is valued simply because its opposite, uncertainty, requires so much energy and attention, a/k/a distraction. Take this with a grain of salt: Moderate uncertainty (will we win the client? will we win the oral argument? will she go to bed with me the client approve our strategy?) can increase tension in very positive, creative, and energizing ways.

But too much uncertainty is simply exhausting. We have to pay so much attention to what seems like a series of unknown but potential threats (each one of which has to be assessed, discussed, and worried about) that we can't focus on what we're actually here to do. Particularly when change is on the agenda--especially if it's internally at the firm--all-hands efforts to reduce uncertainty are called for. Explain the rationale for change and then explain it again. Be reassuring not by assertion that everything will be fine but by explaining what is entailed and--one can hope--letting the logic of the change speak for itself.

Autonomy is an uber-value for lawyers. But it's important across the board, because the more autonomy one feels one has, the more capable one is of dealing with "the same" level of stress. The classic example is people who can control the hours they work vs. those who can't. A 40-, 50-, 60-, or even 70-hour week is relatively manageable if one feels in control of when one will be working and when not. But if quixotic and unpredictable forces from above dictate when you'll be working and when not, far fewer total hours can be worked productively before total burn-out sets in.

With lawyers in particular, be exquisitely sensitive to their perceived need for autonomy. Present options, not mandates; alternatives, not requirements; and offer independence wherever possible.

Relatedness goes right back to the old "friend or foe" distinction we all come hard-wired with. New people perceived as different may not be embraced in a spontaneous one-for-all hug. But if you lay the groundwork for new people to meet through social events (partner retreats, anyone?), the path will be smoothed towards accepting them as colleagues down the road.

Fairness may be the most critical ingredient of all. How many of you can sympathize with an executive who, when asked why he'd been at the same firm for 22 years, responded, "Because they always did the right thing."

Conversely, leaders perceived as having an "inner circle," whiffs of clubbiness, croniness, or old boys' networks, will destroy the perception of fairness in a heartbeat.

Particularly in times like these when cutbacks and pain are on the agenda, they must be perceived as fairly distributed, equitably arrived at, objectively parceled out, and explainable in common sense sentences containing words of few syllables.

What might all this mean for you as a leader?

Apply it to yourself, is the short answer.

Give people latitude to make their own mistakes (at least where it's not mission-critical). Buttress economic incentives with social reinforcement. If you're inclined to micromanage, try to wean yourself from the habit (it doesn't help your targets, and in the long run it doesn't help you).

The beauty of learning how to read your own reactions better, as a leader, is that once you're more comfortable in the zone of uncertainty, others will pick up on that cue and be able to relax into doing their real work rather than obsessively second-guessing your decisions. Don't be afraid to be spontaneous; it shows you're real and increases confidence.

The acid test may be this: Do you trust your colleagues in the firm to rise to the highest professional standards because that's what they believe in, because they feel confident their status entitles them to make autonomous decisions, and because they know they'll be treated fairly if they exercise their best judgment, regardless of the outcome?

As I said at the outset, you may think all this is obvious. I commend you if you know it all already. But the new research shows how profoundly grounded in our human and animal natures is the need for reinforcement of the social, not just the economic, context of our daily work.

Oh, and where do we fit in the Linnaean table?

Domain: Eukarya
Kingdom: Animalia
Phylum: Chordata
Subphylum: Vertebrata
Infraphylum: Gnathostomata
Superclass: Tetrapoda
(unranked) Amniota
Class: Mammalia
Linnaeus, 1758