Recently in Globalization Category

• Hogan/Lovells
• Sonnenschein/Dentons
• Squire Sanders/Hammonds
• Proskauer/Berwins

Question:  Which of these four does not resemble the others?

While you're thinking about that...

As LegalWeek described the Hogan/Lovells deal at the time:

Aside from its banking and corporate practices, the combined firm will be strongly represented in  regulatory, antitrust, intellectual property, real estate and litigation.

[Warren] Gorrell [chairman of Hogan] told Legal Week: "We are putting together a new kind of firm - not a Washington or UK-based firm but truly a different kind of firm."

"The proposition is unique - we will be able to attract new business going forward," said [Lovells managing partner David] Harris. "We will have scale and a profile that will be much more powerful."

The deal will see the firms keep two operational centres, one in London and the other in Washington DC - rather than opting for a single base, with a total network of 40 offices with wide coverage in the US, Europe and Asia.

The points to note about these statements, carefully crafted as they are, are that (a) no mention is made of New York; and everyone knows that the (b) the fundamental strength of the combination remains in litigation and not transactional matters.

Sonnenschein/Dentons?  Again, from the trenchant analysis of LegalWeek (emphasis throughout supplied):

Even the charitable would say both Dentons and Sonnenschein have not hit their stride over the last decade, having failed to quite keep pace with their peer group. On most financial benchmarks, Dentons has been the least impressive performer in its division in recent years and, as such, the 2000 tie-up between Wilde Sapte and Denton Hall must be judged a disappointment. What was by some measures the UK's eighth largest legal practice at the time of the union had fallen to 20th in revenue terms by 2009. And while Dentons had shrunk considerably since the 2000 deal, its profits have also substantially lagged rivals, even with this year's 20% jump in PEP to £360,000 (average PEP for a UK top 50 law firm in 2009-10 will almost certainly be well above £500,000). The years following the deal also saw the closure of its Asia network and the break from its European network.

But perhaps the clearest indication that the UK firm has struggled to live up to its potential comes from casting your mind back to the 1990s and the reputation of the legacy Wilde Sapte. This was one of the most respected banking outfits in the City, a practice that developed names like James Johnson and Nick Syson. It was also the firm that came within a whisker of merging with Arthur Andersen in a deal that clearly unnerved the magic circle until the big five accountant walked away at the 11th hour. A credible case could be made that even merely the spectre of the Andersen/Wilde Sapte union was enough to galvanize the magic circle into the revolution that turned the group into genuinely global powers. If you accept that analysis, then Wilde Sapte has been one of the most influential practices in the UK legal market of the last 25 years, even if it failed to benefit from its own vision.

With that legacy, it seems both sad and fitting that the Wilde Sapte name should now disappear. Back in 2000 the idea that a firm of the pedigree of Denton Wilde Sapte would hook up with Sonnenschein - which remains best known in the UK for pulling the plug on its City arm a decade ago - would have seemed unthinkable, but it's time to move on.

LegalWeek has to be kind, but its commenters do not, and while I put zero to less-than-zero stock in anonymous comments, this deal came in for some of the more vituperative criticism I've seen lately, among which "two drunks holding each other up" was one of the more kind.  The opinions reflected in comments are not necessarily those of Adam Smith, Esq., or its management.

And, squaring the circle, this LegalWeek coverage of Squire Sanders/Hammonds:

But the greatest point of comparison is the essentially defensive nature of the tie-ups. If you were to take a 10-year view of the UK's top 25 law firms, judged purely on the numbers, Hammonds and Dentons would be the two firms that have most struggled to deliver on their considerable promise. Indeed, it speaks volumes about the reverses that have beset Hammonds over the last decade that many now forget what a hugely potent brand the firm once was. Go back to its mid-1990s heyday and it was the then Hammond Suddards that many were betting would prove how far a regionally-bred law firm could go, not Dibb Lupton Alsop (which went on to become the DLA in DLA Piper).

The loss of that status was quick and not pretty: heavy expansion costs and a City office that struggled to gain traction strained Hammonds' finances. Soon the firm was facing an exodus of partners, overpaid drawings and plummeting profits, a situation which culminated in the firm's decision in 2005 to put in place a partnership lock-in to stabilise the ship.

While some were expecting such tactics would fail, it is to the great credit of the firm and in particular managing partner Peter Crossley, who was on the first wave of the clean-up crew, that the doubters were proved wrong. Over the last five years the firm has continued to play a tough hand extremely well, but there has been no escaping the feeling that Hammonds wasn't going to regain its former vigour without doing something large and structural. Enter Squire Sanders (which had informally discussed a tie-up with Dentons before the Sonnenschein deal).

Despite having built a large US practice and a comprehensive network across the Central and Eastern European region, Squire Sanders has a few issues of its own. Its profits per equity partner for 2009 of $795,000 (£521,000) are well ahead of Hammonds' 2009-10 figure of £364,000, but that remains well below the $1.2m (£774,000) average across the Am Law 100. The firm, which last year saw veteran chairman Thomas Stanton hand over to James Maiwurm, has explored a number of mergers over recent years without closing a significant foreign deal.

Yet if the proposed tie-up is defensive, that appears strongly in its favour. It's an irony of strategic unions that deals done in such circumstances tend to do better than mergers between firms on a clear upward slant. Mergers often flounder because two sides believe in their own superiority and refuse to integrate, promoting an insidious wistfulness for the good old days. There's nothing like a nice run of calamities and dead-ends to make one constructively minded, helpfully self-critical and focused on the future. Perhaps all law firms considering a merger should engineer a few disasters before hand to sharpen their resolve.

There is one interesting wrinkle that is worth noting with the deal: the 436-word statement the firms issued announcing the talks, aside from making the mandatory nods to'global coverage', 'shared culture' and 'ambitious aims', also makes no less than four separate references to providing value or cost-effective services. As an explicit aim it should give the combined practice a little more distinction since many law firms see going global as a means of escaping domestic price pressures.

This leave us with, yes, the Proskauer/Berwin merger (talks have been confirmed on both sides, but the deal is clearly not finalized).  Berwin was among the hardest-hit City firms in the downturn because of its concentration on private equity and commercial real estate, but Proskauer also has a strong private equity practice and that sector, while down, will never fundamentally be out.

So why do I nominate this as the one of the four that does not resemble the other four?

Three key reasons:

• It would put together a heavily New York-centric firm with a heavily City-centric firm, creating a footprint with 400 lawyers in each trans-Atlantic financial capital; and
• The resulting firm would have a strong corporate focus (albeit with smaller, but high-powered, litigation capabilities on both sides of the pond).
• I can't think of a comparable offering in the marketplace.

Isn't this, then, on a less celestial scale, the long-rumored Freshfields/Sullivan & Cromwell deal?  Two very strong corporate practices, New York and London-based, offering something new in the marketplace to clients?

All I can say to you, by the way, if you're still awaiting the Freshfields/S&C deal, or its functional equivalent, is please introduce me to your fast-forward future time machine, because I would love to experience it.

Finally, the Proskauer/Berwins deal strikes me as client-oriented rather than firm-oriented:  It seems designed to create a firm with capabilities that aren't readily replicated elsewhere among its peer group, or otherwise, and if it's grounded in any internal sense of urgency on either side to "do a deal," I just don't see it.  Witness the protracted period of contemplation, discussion, and, presumably, massaging the respective partnerships, both of whom are known to be strongly democratic, Quaker-meeting-ish (in the good, consensus-driven sense).  Deals done of desperation aren't paraded in front of the public for months; they are typically announced days or weeks before the obligatory partner vote, with, one can only assume, names taken of those voting against, for future reference.

The other dimension in which the Proskauer/Berwins deal does not resemble the others, of course, is that it hasn't happened.

You now know where my money is riding on that score.

I will be in Sao Paulo from September 21st--24th. 

Aside from a couple of speaking presentations, the primary goal of my trip will be to gather market intelligence on this intrinsically fascinating, deeply promising, and yet, at least to North American eyes, often inscrutable market.

I have long believed that we tend to underestimate the long-run importance of the "BRIC" countries, and this trip is part of an intentional effort on my part to educate myself better about them, up-front and first-hand.  As for the importance of Sao Paulo, it's not merely the financial center of Brazil, but the most populous city proper in the Americas--over 11 million residents--and the second most populous metropolitan area--nearly 20 million residents.

In any event, if any Adam Smith, Esq. readers are in Sao Paulo and would like to get together, please drop me a note. I promise to arrive with nearly insatiable curiosity, and no preconceptions.  I promise to leave with at least the curiosity part intact.

 

Technology can be a blessing and a curse and, while my feet are firmly planted in the former camp, that's not why I'm writing what, I hope, you are about to read.  Because it is about technology.  I'm writing it for two reasons:  I hope it provides an overview of what some of the smartest thinkers on technology that we have going these days are saying and, love it or hate it, technology is something we all spend a lot of money on.  So that gets my attention in and of itself.

Our basic text for today is McKinsey's Ten tech-enabled business trends to watch, which is addressed, as per McKinsey's standard operating procedure, to "senior executives [who] need to think strategically about how to prepare their organizations for the challenging new environment."  I hope that audience would be you.

Here are a few headline statistics:

• Facebook has 500-million users, five times more than two years ago.
• More than 4 billion people worldwide have a cell phone, and more than 10% of those are fully web-enabled.

I could cite more, but you get the drift.  McKinsey lists the ten trends as follows. 

Not all, by any means, apply to law-firm land, but all are worth reflecting on and those that do apply squarely to us deserve some comment:

• Trend 1: Distributed cocreation moves into the mainstream
• Trend 2: Making the network the organization
• Trend 3: Collaboration at scale
• Trend 4: The growing 'Internet of Things'
• Trend 5: Experimentation an big data
• Trend 6: Wiring for a sustainable world
• Trend 7: Imagining anything as a service
• Trend 8: The age of the multisided business mode
• Trend 9: Innovating from the bottom of the pyramid
• Trend 10: Producing public good on the grid

We realize, and apologize for, the fact that this is cast in the unfortunate, hostile to English, and un-euphonious argot of consultant-speak, but we place a higher value on quoting sources accurately, so there you have it.  (It could and does get worse, by the way, but we'll try to spare you.  For example, a little further along in the piece you encounter this positively remarkable demolition derby of words:  "Because some of the most powerful applications of these trends will cut across traditional organizational boundaries, senior leaders should catalyze regular collisions among teams in different corners of the company that are wrestling with similar issues.")

What to make of this?

Their trends ##1, distributed cocreation, 4, the Internet of Things, 6, wiring for a sustainable world, 9, innovating from the bottom, and 10, producing public good from the grid, we can pretty much write off for present purposes.

But #2, making the network the organization, speaks quite directly to the challenge of outsourcing.  McKinsey puts it this way:

We believe that the more porous, networked organizations of the future will need to organize work around critical tasks rather than molding it to constraints imposed by corporate structures.

What they mean by that is that we need to define where work can optimally be done, and get it done there, not necessarily within our four walls.  This need not be frightening, as I've written before:  For example, drawing on external expertise could involve tapping into your firm's alumni network and even its retiree network--imagine the energy that a recent retiree would deliver to answering an inquiry in his/her area of expertise. 

#3, collaboration at scale.

This means things as simple as investing in high-capacity, high-resolution videoconferencing and shared online workspaces.  At one (unidentified) "high-tech enterprise," the "savings on travel were four times the company's technology investment [while] contacts per salesperson rose 45% [and] 80% of the staff reported higher productivity and a better lifestyle." 

Where you can trip yourself up, however, is in assuming that technological tools per se will enhance collaboration:  They won't, necessarily.  What will enhance collaboration is if technology enables human interactions that people were already engaging in, or wanted to engage in.

#5, experimentation and big data.

No, we will never be as web-metrics, analytically savvy as Amazon or eBay, not to mention Google, who determine empirically everything from where to place buttons on web pages to the sequence of content the visitor sees, but we could at least be a little smarter about analyzing our clients' spending patterns with us.  Such as:

• What is your firm's "share of wallet" of a client's total outside counsel legal spend?  Growing, or declining?  In what practice areas?
• What factors are correlated with client attrition and with client retention?
• Do "acorn" clients grow into oaks?  (Anecdotally, I'd be shocked if they do, but you might want to find out based on actual data and not simply partners' lobbying for their acorns.)
• Which cohorts of your clients are the slowest and fastest to pay?  Which complain the most about billing and provide the lowest realization and which complain the least and provide the highest?  What can you learn from this?

Etc.

The point is not that we can't figure these things out.  A decade ago, to be sure, we probably could not have. But now is not then. 

Now we can at least take an educated guess at figuring these things out.  And not to do so is, I submit, tantamount to managerial malpractice.  (But then, you know that I'm a data junkie at heart.)

#7, imagining anything as a service.

We are, of course, one of the quintessential service industries, so this is easy:  We sell knowledge, and knowledge classically lends itself to digitization and zero-marginal-cost reproduction. 

That's not the point.

The point for us is that "cloud computing" should enable us to really get serious about alternative career paths and attorneys who want to work from home (or from the totemic South Sea Islands), or only a certain number of hours or days per week, or intensely on a particular transaction or litigation and then be "on the beach" for x months. 

You may be thinking that all of this (a) has been tried and failed; (b) won't ever seriously be tried because it couldn't possibly work; and/or (c) will be shown to fail as soon as it is seriously tried.  I am not here to argue for or against any of those propositions.

Merely to point out that, pregnantly, McKinsey writes:

Business leaders should be alert to opportunities for transforming product offerings into services, because their competitors will undoubtedly be exploring these avenues. In this disruptive view of assets, physical and intellectual capital combine to create platforms for a new array of service offerings. 

What's "pregnant" about that observation is the warning that "competitors will undoubtedly" be trying to exploit the ability to deliver legal services from a distributed platform.  Even if we're not. En garde.

#8, the "multisided business model"

Apologies, first and foremost, for the opaque consultant-speak.   Perhaps even McKinsey can't help themselves.

But a "multisided business model" is nothing more than a business that has more than two counter-parties:  More than the buyer and the seller or more than the law firm and the client.   Wildly familiar examples are the newspaper, magazine, and television industries, where the publisher/broadcaster delivers content to the reader/viewer, sometimes for free and sometimes by subscription, while a major portion of the publisher's revenue, and the consumer's time, comes from advertising--the third party to the industry model.

Or Google.  Their sponsored ads subsidize our free searches.

What might that look like for law-firm land?

I submit that we have not begun to capture, analyze, and re-package the vast amounts of data we have on litigation or on corporate transactions.  For example, what if a firm with a significant management/employment practice began to systematically try to capture what the underlying characteristics were of cases that led to expensive and horrific claims versus the characteristics of cases that were benign and settled quickly and cheaply?  Or if a corporate-centric firm analyzed what clauses in prospectuses, 10-K's, and other disclosure documents were the most frequent subjects of litigation?  Or if an IP practice could analyze, on a geographic or time-series basis, where challenges to patents were rising and where they were subsiding?

Don't you think that non-clients would be willing to pay a fair amount of money for that information?  If so, welcome to the multisided business model world.

---

Your view may be that some, all, or none of this is going to come to pass, or that however much of it does won't affect us. 

The point of all this is different:  Think about what it might mean for your firm if any of it happens.  Use these possible scenarios to broaden your conversations with your partners, your clients, and your associates and staff.  If a competitor or peer firm of yours decided to embrace one or more of these potentialities, how would you respond? 

The abrupt resignation of Mark Hurd as CEO of Hewlett-Packard this past week over a seemingly trivial expense account peccadillo or non-harassment sexual harassment charge may have many people scratching their heads, but the smart analysis is that, as brilliant as  he evidently was at delivering operational results by cutting costs, he also demoralized and insulted employees and staff left and right, and cut R&D to the bone, which is why HP was caught flat-footed by the Apple iPad. 

Consider that a cautionary tale.  After all, a larger form-factor iPhone could not exactly have been a shock to anyone paying attention to Apple, or to the evolution of technology in general.  Yet HP was unprepared.  Evidently, they weren't thinking about the future.  You better be.

Don't wind up as HP did in this case.  And please don't end up as Mark Hurd.

Outsourcing is here to stay. Whatever you call it, and whatever you think of its quality, clients have tasted of the fruit of the forbidden tree and they're not going back. If document review can be conducted by Ivy League law school grads trained at white-shoe and Magic Circle firms for $50/hour instead of $350/hour, what's not for a client to like?

Of course, "outsourcing" comes in many forms. Essentially, there are two dimensions to dividing this world, providing the always-handy matrix:

	Foreign	Domestic
Owned	Clifford Chance/India	Orrick/Wheeling, WV
Rented	Integreon	Axiom

The population of the cells in this table is, rest assured, by no means exhaustive; it's merely indicative and representative. (PR people for omitted firms, please hold your fire!)

The point is simpler: Every cell of the 2x2 matrix is occupied, and betting people would put money on the population of each cell growing, not diminishing.

A particularly interesting firm, which has ambitions you may deem admirable or frightening or a combination thereof, is CPA Global, which bills itself as the world's leader in legal process outsourcing, and which raised a mere $700-million in a private placement in the UK this past spring. For that nice sum, the investors got what? 49%. Not even control. This is a war chest on a scale the AmLaw 10 and the Magic Circle, put together, would be very hard-pressed to match. And they'd probably have to cede control.

So far, that's merely reality.

The more interesting question is, What do you do now?

Last month, McKinsey published an article called When companies underestimate low-cost rivals, which poses the dilemma thus:

When low-cost competitors appear, one of the toughest decisions facing executives in companies with premium products and brands is whether to respond. Should the company or business unit adjust its strategy to meet the low-cost threat or should it continue business as usual, with no change in strategy or tactics?

Of course, Clayton Christensen famously wrote about this topic in general in The Innovator's Dilemma, which I always thought should actually be titled either The Innovatee's Dilemma or The Incumbent's Dilemma.  Established firms are at existential risk of ignoring or surely underestimating the nature and magnitude of the challenge, and the crux of the dilemma is that the risk arises precisely from the incumbent firms doing what they ought to be doing, namely focusing on their existing clients and existing competitors. 

As if that weren't bad enough, there's another dimension to the challenge posed by young and initially quality-compromised,  unworthy, upstarts:  It's not just that they can steal market share from the relatively small slice of clients who are extraordinarily price-sensitive, it's that they can slowly change client behavior.

As an example, McKinsey cites the entry of low-cost European airlines--Ryanair, easyJet, et al.  It's not just that they have taken market share from British Air, Air France, Lufthansa, etc., it's that they've changed passenger behavior.  People now think nothing of going abroad for the weekend, or even of commuting to another country for the workweek and returning home, by air, every weekend. 

Another challenge is that down-market upstarts can, accretively and incrementally, begin to move upmarket. EasyJet has adopted this strategy, leaving Ryanair at the rock-bottom price point. In the US, Southwest may be moving in a similar direction to EasyJet; they've introduced some (modest, to be sure) upscale alternatives such as a "Business" offering that permits priority boarding for a fee.

This is where it really begins to get dangerous in law-firm land.

As McKinsey drily reports:

Customers are often quite keen to have more competition among suppliers and in some cases help low-cost suppliers upgrade their offerings by providing information and support.

The ambitions, and business strategy, of CPA Global and their ilk are no secret: Bypassing law firms altogether and marketing their offerings directly to clients. If another word for outsourcing is disintermediation, welcome to the ultimate disintermediation: They would like to take the law firm out of the equation altogether.

Before you throw up your hands and stop reading, consider the smoothness of the upward-rising curve of value in all the integrated services law firms provide. Ooops: Did I say integrated?

Traditionally that has surely been so, and there are arguments why all those services should come from one firm, but if the economics of chunking up those services and mixing and matching providers become compelling enough, sophisticated GCs may feel it worth a rethink.

For example: There are clear benefits to having the same team of lawyers that reviewed the critical documents prepare the witnesses and draft the briefs applying case law to the anticipated facts. But if all those activities are being performed at New York (or San Francisco, or Chicago) rates, the benefits of that integration better be strong. Because the CPA Globals of the world will offer to review the documents and deliver witness and exhibit binders at Bangalore, or at least at Fargo, rates.

And this is precisely where the independent outsourcing firms can have an impact. Once clients begin to get accustomed to the notion of being able to unbundle, or unchunk, legal engagements-be they disputed matters or transactional ones-there's potentially little end to it.

First, clients hire, or "request" (read: demand) that you hire an outsourcing firm for, say, document review. Next, the outsourcing firm makes it known that it can prepare witness binders, and next, that it can aid in the preparation of witnesses.

Do they threaten the Supreme Court appellate practices, the white collar crime practices, the top-tier M&A, government investigatory or regulatory inquiries, etc.? Not on your life. But might they cause us to have to engage in serious re-examination of all the components of our business model? Here it comes.

The bad news is that the days of charging $300/hour to have Ivy League graduates review documents are over, but the good news is that that mind-numbing experience will no longer be a rite of passage and you might actually have to provide your associates with more interesting work clients will pay for. In the bargain, your associates will be speeding their development into becoming real lawyers.

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This exposes the intersection between low-cost competition and the need for accelerated evolution of your firm's core business model in the wake of the Great Reset. Ask yourself what are the implications of the following aspects of the new normal, taken together:

• Associate recruitment, and attrition, are down.
• Associate/partner leverage is probably in decline to a new, lower plateau.
• Clients are increasingly effective at insisting that associates deliver tangible contributions to matters if the firm expects to charge for them.
• And as we've seen, clients averse to paying our retail rates for our traditionally bundled services have new alternatives, the providers of which fully intend to move up the value chain.

I would argue the implication is clear ("stark," if you prefer, but as for me, I'd choose "energizing,"or maybe even "chance of a lifetime"): our associates--indeed, your entire team--needs to move up the value chain even faster than your new competitors.

Serendipitously, the new normal landscape features far more favorable conditions in which you can do so:

• Fewer associates, with less attrition, means each must be more valuable to the firm (scarcity: economics 101)
• Enabling you to invest more in their professional development
• While they are freed from the intellectually vacuous scutwork of the past
• And as ever more powerful, sophisticated, and nuanced technology finally transforms Knowledge Management from a backwater (or a dream, or an irrelevance) into a daily, real world tool for professionals.

Finally, you might be surprised to hear that this all invites reflections on why your firm exists in its current configuration, and the market's tolerance for it to continue in that form.

In 1937, Ronald Coase wrote one of the most famous, and shortest (a dozen pages or so) articles, The Nature of the Firm, for which he decades later won the Nobel Prize, in which he explained why firms exist at all.

Why create the management overhead, bureaucracy, and administrative friction entailed in any firm of scale? Why not just purchase whatever is needed, when it's needed, on the open market?

Coase's answer was that large groups will enjoy a systematic advantage over smaller ones when large-scale coordination is called for, using skills organized more effectively and economically through personal interactions than through the market, with its inevitable transaction costs.

As globalization and technology have diminished these transactions costs, the need for your for to continue to demonstrate its economic and market superiority is under stress.

Your response must be to assume the mantel of an innovator within your own walls. Because the innovators outside your walls are coming.

 

[Linklaters Managing Partner Simon] Davies said the firm was focused on overall profitability rather than its revenue, which has suffered due to the deflated M&A market with about 40 per cent of income generated by the corporate department.

"Our objective has never been to maximise our revenue," he said [emphasis supplied]. "We're not focused on being the biggest firm by revenue but on being the leading firm as far as our clients are concerned."

--From The Lawyer story announcing Linklaters' 2009-2010 results, showing a decline of 8.8% in revenue to £1.18bn and also a decline of 6.88% in PEP to £1.21m.

This raises the question:  If not revenue, or if not PEP, what are the optimal metrics on which to judge law firm performance?

Orrick famously announced back in May that it would cease "using or reporting, internally or publicly, the metric of Profit Per Equity Partner."  And on the heels of that announcement I wrote about some alternatives I might endorse.  The list included:

• On the quantitative side:
  • Revenue Per Lawyer
  • Compound annual growth rate (CAGR) of revenue over a multi-year period
  • Realization rates (implying, I would argue, clients' perception of value-for-services-received)
  • Associate retention rates (or attrition rates, measured negatively)
  • Percentage of business from clients of long-standing duration (say, more than 3 or 5 years)
  • Percentage of all legal spend from top 10 (20/50/100) clients
    
    
• On the qualitative side:
  • Client satisfaction
  • Lawyer morale
  • Commitment to and investment in professional development
  • Commitment to and investment in such things as diversity and pro bono
  • The quality of firms the firm takes lateral talent from and the quality of firms they lose lateral talent to
  • The quality of firms the firm wins assignments from and the quality of firms they lose assignments to
  • Quality and morale of professional and support staff.

Most importantly, however, I believe we as a profession and as a management class need to stop genuflecting to the one-size-fits-all model of law firm performance.

What do I mean by that?

Simply that firms are increasingly segmenting themselves into different market positionings, and that applying one, or even a few, unitary  metrics across firms pursuing avowedly different strategies is guaranteed to produce misleading--and downright odd--results.

For example, much as I respect Simon Davis, I think being part of the Magic Circle means that you are, among other things, judged on overall size, that is to say, on annual revenue.  Who would claim that a firm with half, or one-quarter, of the revenue of Allen & Overy, Clifford Chance, Freshfields, or Linklaters would seriously be viewed as on a par with those?  In this league, size does matter.  (Which, among other things, is why Slaughter & May is not "really" a Magic Circle firm, or at best is one with an enormous bold asterisk after its name.)

Another set of firms--and yes, folks, we can name names--including Cravath, Slaughters, Wachtell, Weil Gothsal, and perhaps some relative newcomers such as Boies Schiller or Quinn Emanuel, positively invites us to compare them on the basis of PPEP.

Yet another set would like us to find them strong in global coverage:  Say, for example, Baker & McKenzie, DLA, Jones Day, Latham, Sidley, and White & Case, with a slightly newer orientation to the "global" value proposition represented by K&L/Gates, Orrick, and Reed Smith.  (Caveat, folks:  The trouble with naming names is you've named some people and you haven't named other people.  That's why letters to the editor are available; and I urge you all to exercise your right to add, subtract, and in general dissent.)

Another, separate, problem with cross-firm metrics has to do with averages.  Averages mislead.  Yes, seriously.  (In my original piece on this I used the familiar example of "Bill Gates walks into a bar....", and the average net worth in the place goes up to $5-billion.) 

Here's a fairly trivial example of how averages can mislead:  Imagine a firm with the vast majority of its lawyers in New York, or New York and London.  Now compare that firm's PPEP to another firm with relatively few lawyers in those high-margin markets.  Surprise!   Same would happen with Revenue per Lawyer, and, on the unflattering side (unflattering to the capital markets-centric firm, that is), with cost per lawyer.  The headline news would be if the capital markets firm had lower PPEP.

When stated baldly this way, none of us is the least surprised that "averages" across firms with completely different business models, strategies, and geographic footprints mislead at least as much as they reveal.  To abstract from our industry, what does the average fuel economy of Toyota's models tell you compared to the average fuel economy of Ferraris?  To say that Toyotas have "better" fuel economy is to focus on facts at the expense of the truth. (Focusing on facts at the expense of the truth is at the heart of many a cross-examination technique.)

Not to go metaphysical on you, but to do justice to the concept of what metrics are appropriate for measuring law firm performance, we need to delve for a moment into the difference between facts and truth.

Facts are convenient, tough, hard, unyielding little pebbles.  Not just facts like water freezes at 32°F or Oxygen is the 8th element in the periodic table, but facts like "during your deposition you said you'd seen this email and now you say you can't remember?"  Or, facts like today's announcement that "Clifford Chance boosted its average PPEP by 25% in the past fiscal year."  It's very hard to argue that facts don't stand for irreducible little nuggets of reality.  But facts can also tempt us into sloppy, lazy, and unreflective "analysis."   Such as:  "If CC boosted its PPEP by 25% and Linklaters and A&O didn't do as well, then that's bad news for Links and A&O."  Well, not so fast.

The difference between facts and truth brings to mind Oscar Wilde's famous definition of a cynic as someone who "knows the price of everything and the value of nothing."  As an economist, I'd be the last to tell you that price doesn't contain a lot of information.  But at times, as with the recent housing bubble, or the tech stock bubble of ca. 2000, prices can't really be trusted.  What you really need to know is what's the value of the asset?

And thus with law firm performance metrics. 

Before you conclude that any particular firm is doing well, doing poorly, or hanging out in the middle of the pack, you first need to figure out what that law firm is setting out to do.  What is their strategy?  Is it to be a "category killer" in employment law like Littler Mendelson or Jackson Lewis?  Then a high PPEP is probably not something they're striving for and it's unfair (and worse, irrelevant, and sloppy thinking, as noted above) to pretend that metric has much of anything to do with them.

Then what am I suggesting?

Not just that there is no "one size fits all" metric, which should be obvious if you're a student of almost any industry (autos, apparel retailing, wine and beer, cellphones), but that to gauge how any law firm is doing you first have to do the hard work of analyzing what they are trying to do.

Are they trying to be a global, but non-headquarters dependent, powerhouse?  Then you might want to know what percentage of their revenue comes from matters using substantial amounts of lawyers' time from multiple offices; or what percentage of revenue is "earned" by offices other than the originating one.  A little tougher to figure out than the Big Hard Rock of PPEP, isn't it?

Sorry to break this to you.

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."

Journalistic wisdom, or maybe it's just engaging newsroom lore passed down, has it that one anecdote is a story but three anecdotes constitute a trend.

If so, Dear Reader, we have a trend:

Mayer Brown has been in secret merger talks with Simmons & Simmons as the Chicago-headquartered firm looks at ways of bolstering its dwindling presence on the UK side of the Atlantic.

It is understood that the two firms held talks, which have now been aborted, over the possibility of creating a £1bn global business that would have gifted Mayer Brown more UK and European coverage and extended Simmons' reach in Asia.

From The Lawyer, June 7.

This of course on the heels of

• The formal closing of the Hogan Lovells merger
• The announcement of the Sonnenschein/Dentons deal, and
• The putative deal between Proskauer and SJ Berwin

Of what precisely does this "trend" consist?

First of all, what it resolutely does not consist of: It does not presage the epic future merger wave, long predicted and perhaps never to be consummated, of the Magic Circle with New York's white shoe or bulge bracket firms. (Not to be oblique about it: This does not foretell Freshfields/Sullivan & Cromwell or Allen & Overy/Simpson Thacher.)

But it does tell a story that's beginning to be compelling: The Silver Circle, or the chasing pack, or UK firms ##10 through 30 or so are attractive merger candidate for US firms outside the New York gilded elite-and vice versa. Why?

Logistical/practical reasons and strategic/global reasons.

The logistical/practical reasons are that people have figured out that you don't have to do a real, complete merger. You can steal a page from the DLA playbook (or, now, the Hogan Lovells and announced Sonnenschein/Dentons book) and not really combine your financial books across the US and UK practices. This accomplishes several neat tricks at once:

• You don't have to integrate cash (US) and accrual (UK) accounting systems;
• You don't have to really integrate currencies, and you can hope that partner compensation and other material currency-dependent metrics simply even out over time-one side of the pond wins some years and the other side wins other years;
• You don't have to synchronize calendar-year (US, generally) fiscal years with March 31st (UK, generally) fiscal years; and
• You can manage the whole kit and caboodle through a "Swiss verein" type holding structure.

Never underestimate the power of the simple do-ability of a deal to affect lawyers' willingness to pursue it.

Strategic/global reasons:

• Whatever the relative cyclical and secular ups and downs of London and New York, it will remain the case as far as the eye can see that London will be the financial capital of Europe and reference point for the Mideast and New York will remain financial capital of North and even South America, and both will remain reference points for Asia and BRIC.
• On the order of 12 of the top 20 major metropolitan area legal markets in the world are US cities; if you pretend to be a global law firm without covering at least some of those markets, you are, if not kidding yourself, surely missing out on some major revenue streams.
• The UK firms traditionally have stronger Asian networks than US firms could ever have hopes of aspiring to. If you share the Asia-centric perspective that only Asia and the US really "matter," globally, as economies, you need to be in Asia. Strongly, on the ground, with history.
• What about the EU, you're asking? Sickly as it is at the moment, with the existential fate of the euro still in the balance, it remains a huge economic engine and it's not going anywhere. Here again the UK firms have traditionally cultivated much stronger networks from Paris and Madrid to Warsaw and Moscow, and these are extremely valuable assets which are extremely costly to build from scratch. The history of "greenfield" office developments has not, by and large, been pretty.

Now, are any of these strategic and logistical reasons actually new? No, of course not. The Swiss verein structure, for example, has been around in accounting firm land for decades. And it's hardly news that UK firms have historically stronger roots across the EU and Asia than US arrivistes, nor that UK firms are nowhere to be seen in America outside a few highly challenging outposts on the island of Manhattan.

What's new is that people are suddenly realizing how all these ingredients might fit together.

And they do fit. The upshot being that many people think the starter's pistol may have fired.

Now, the risk is two-fold. We have the Scylla of firms, on both sides of the pond, that ought by all rights to seize this opportunity for a beneficial combination, but who won't, courtesy of inertia or cowardice or simple inattention. And we have the Charybdis of firms that will think they see a window about to slam shut and will make ill-conceived deals which they will seal in haste and repent at leisure, resulting in mangled fingers at best and limb amputations at worst.

Of course, you and your firm are too smart to fall into either camp.

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.

"Indian law group names City leaders in call for action against foreign firms" read the headline in LegalWeek a few days ago. The (brief) article goes on to explain that a group called the Association of Indian Lawyers filed a petition for a writ compelling the Indian Government to act against foreign lawyers in the Madras High Court naming, among others, Allen & Overy, Clifford Chance, Shearman & Sterling, White & Case, and the legal outsourcing firm Integreon.

Somewhat colorfully, it accuses the firms as follows:

"The issue is no longer about the entry of foreign law firms, it is also about the manner in which these foreign law firms continue to do business in India despite a ban on them. These firms have already entered India indirectly and are operating out of five-star hotels and business centres."

Perhaps three-star hotels would be less objectionable?

This follows the news that Ashurst, Chadbourne & Parke, and White & Case all agreed to close their offices last February after the Bombay High Court "ruled against the practice of law by foreign firms in India."

Despite the ever-sunny ABA Journal's attempt to put a positive gloss on it ("Still Open for Business"), quoting a Baker & McKenzie senior counsel as saying that "it's nothing to get excited about," the question remains:  What are they thinking?

To paraphrase the late William F. Buckley, Jr., you can stand athwart the tide of history and yell, "Stop," but it's a feckless endeavor. The inexorable trend of the past century and more has been towards:

• More powerful globalization;
• More open national borders (in terms of trade in goods, in services, and vis-a-vis people and ideas);
• And accelerated "creative destruction" as competition, in its ruthless but fabulous way, ensures that only the fittest survive.

Consider the US car industry, notorious basket case whose problems were of course first exposed by the invasion of the Japanese in the 1970's. Detroit had been selling essentially--with or without tailfins--the same cars for two decades, from the early 1950's through the early 1970's. Can you name a significant innovation during all those years? No airbags, no disc brakes, no 4-wheel independent suspension, no improved fuel economy, no advances in automatic transmissions or even sound or heating/airconditioning systems. Nothing.

But consider the cars of today vs. those of the 1950's. Here's a fascinating comparison that shows what happens when a 2009 Chevy Malibu has a head-on collision with a 1959 Chevy Bel Air (thanks, NHTSA).  

The moral is simply that competition causes everyone to raise their game. Raise your game or, as the schoolyard (or NFL) taunt would have it, "Go home."

The Indian lawyers challenging US and UK firms are decisively and apparently blindly on the wrong side of history.  They appear frightened at the prospect of having to "raise their game" and, as industries in denial are wont to do, would prefer salvation-by-government to the vicissitudes of an open market--vicissitudes which we know, from the teachings of everyone from Joseph Schumpeter ("creative destruction") to Clayton Christiansen (The Innovator's Dilemma), lead rapidly to tremendous improvements in products and services.

Perhaps the only explanation for this obtuseness was the one provided nearly a century ago by Upton Sinclair:

"It is difficult to get a man to understand something when his salary depends upon his not understanding it."

We shall see how long the Indian barriers last.

A few days ago the juxtaposition of two articles, one in The Wall Street Journal and the other in The Times (UK), struck me as too rich not to point out.

The WSJ wrote, in "Gap Widens Between Tech Richest and the Rest," that:

A handful of cash-rich companies are consolidating power in the technology industry, using their wealth to expand into new businesses and making it harder for small and midsize competitors to break through.

In the past two years--in the teeth of the recession (think about it)--Apple, Google, Microsoft, Oracle, and six other large tech companies generated over $68-billion in new cash, compared with $13.5-billion, just 20% as much, for all of the other 65 tech companies in the S&P 500 combined.  The results are clear:

Because of their massive cash accumulation, these companies can afford to take risks that smaller companies can't at a time when the economy remains fragile. The result is a bifurcated tech landscape, says Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology's Sloan School of Management. [...]

The repercussions from the cash discrepancy are being felt throughout the industry. Some midsize tech companies are giving up trying to compete with their larger rivals.

"I'm not going to fight" being a mid-tier company, says Enrique Salem, chief executive of security-software maker Symantec Corp., which has annual revenue of $6.1 billion and cash reserves of $2.6 billion. "It's a losing proposition for me to try to catch up with Oracle."

So what's a smaller or mid-size competitor to do?  Assuming that folding one's tent is not an option, the only answer is to take on more risk.  In plain English, you have to really stick your neck out:

Says Ciena CEO Gary Smith. "A large company can make a mistake in one of these acquisitions and it isn't going to be hugely impactful to them."

Ciena has no such luxury, he says. "Clearly, if we get this wrong, it will not have a good outcome."

Meanwhile, The Times (UK) wrote in "Law firms turn to banks, not partners, for cash," that:

Leading law firms increased borrowing by 40 per cent in response to the financial crisis, despite the sector's traditional aversion to taking on bank debt.

Debts among the 40 biggest legal practices whose accounts are publicly available rose to £591 million in 2008-09, according to data compiled by Grant Thornton, the accounting firm. The previous year the debts were £425 million.

Peter Gamson, head of the professional practices group at Grant Thornton, said that many firms had turned to their banks for funding rather than asking their partners to contribute more capital. The average partner now has £138,000 invested in his or her firm, compared with £128,000 before the crisis hit.

"It certainly looks like a lot of firms are going to a bank to get funding rather than sitting partners down and saying: 'Look, guys, we've got to put some more money in,' " Mr Gamson said.

Now, that may be lovely insofar as it helps partners sleep at night, but the clear message of our friend Mr. Gamson--as well, of course, as that of the entire tech industry as recounted in the WSJ--is that it leaves firms on very tenuous footing indeed.

The lack of working capital left many firms stretched when the downturn began, Mr Gamson said. "As a sector, [legal services] looks very undercapitalised. There's a huge reluctance to ask partners to contribute more capital. The question is how long you can play that game?"

Mr Gamson warned that the low ratio of capital to debt at many mid-tier firms could make it harder for them to grow when the market recovers. In addition it could deter funding from investors when new rules on outside ownership take effect next year. "Any investor is going to look at the business and think: 'Are the owners of this business being realistic about how much they're putting on the line?' " he said.

But we should not be surprised.  After all, the typical law firm (I'm hard-pressed to think of any exceptions, now that I think about it) "strip-mines" the firm of cash at the end of every year to pay partner compensation.  

Here's a parlor game for you next time you're feeling a bit churlish towards a colleague:  Challenge them to identify the balance sheet entry that appears on every corporation's statement but no law firm's.  The answer?  The line for "retained earnings."  I promise you no one guesses right.

Mr. Gamson puts it just about right:  "How long can you play that game?" 

And Ciena's Gary Smith completes the thought:  If you're playing with limited capital and make a mistake, "it will not have a good outcome."

You have been warned.2

A perennial question, not susceptible to any definitive resolution, is the classic, "Do you hire the lawyer or the law firm?" 

I actually think this is one of those too-cute-by-half semantic tricks designed to inveigle the unwary into Talmudic debates where only the person who originally posed the preposterous query can possibly come out ahead.  Because the answer is, of course, both (or neither).  Even Atticus Finch or Clarence Darrow would have been more successful with a powerful firm's infrastructure and support behind them, and conversely I dare you to find a great firm featuring second-rate lawyers.

This train of thought was prompted by an observation over dinner a few days ago by a friend who is both a lawyer and a McKinsey alum.  He remarked that McKinsey relies on its brand for attracting clients, but law firms seem to rely on high-profile individual practitioners.  As evidence, he pointed to the striking difference between mckinsey.com and the website of virtually any law firm:  On mckinsey.com, it's virtually impossible to find any individuals at all, whereas a prominent--sometimes the most prominent--feature of law firms' sites is always "Professionals" or "Attorneys" or "Our People," with extremely detailed bios of each individual.

Doubt me?  Take a look:

This is the page at McKinsey-->Home-->About Us-->Who We Are-->Leadership (under "Who We Are," there is no option other than Leadership, making the navigation a bit redundant, but there you have it).  Now, as best I can determine it's the only page at mckinsey.com that features any identifiable individuals. 

Caveat:  If you navigate to a specific location (e.g., their New York office), you can them use their "profile matcher" to find individuals, but you can only search by continent (Americas, Europe, Asia) and by one of 10-12 background areas.  If you click on the (first name only!) of any individual thus identified, you learn where they are and when they joined McKinsey, but nothing about their educational background or any real professional details beyond an explanation--seemingly in their own words--about why they love working at McKinsey.

By contrast, here are just two randomly selected law firm home pages.  Of course, there's nothing random about the selection at all:  They are merely two largest US and UK firms.:

Skadden prominently features "Attorneys" as its second high-level navigation option at the top right, the lead story under "Firm News" has to do with adding "prominent patent litigators," and the entire bottom third of the page is devoted to a profile of an individual partner (it rotates automatically).

As for Linklaters, "Who we are" is one of only three top-level navigation options, and one of only two aimed at clients ("Join us" is obviously not).

You get the point.  At least if websites are thought to be a window into a firm's soul, McKinsey believes clients hire the firm and we are behaving as if clients hire the lawyer.

Well, so what?, you may be thinking. 

I attended a PLI event here in New York last month where the keynote speaker offered one prediction with a high degree of confidence:  That we are moving into a world where law firms' brands will matter as never before.  Now, if your firm is like most, you haven't thought about branding very much, or if you're on the cutting edge you're just beginning to.   But I happen to think the speaker was on to something.

Indeed, for at least a few years now the London-based firm Intangible Business has written about "The UK's most valuable law firm brands."  And David Morley, Allen & Overy's worldwide Senior Partner, writes in his most recent annual firm report that "a clear identity" is one of the four most salient challenges he identifies (the others being strategy, people, and technology):

A clear identity

The other big change that I think we will continue to see is the increasing importance of a strong global brand and identity. Law firms have traditionally shied away from branding and talked more about reputation, but that will change.

In any industry, the biggest players are those that have a clear and truly global brand, and the legal sector is no different. It is particularly important for Allen & Overy to get this right as we face more and more competition.

As our work is mainly business to business, we are obviously not exactly a household name - no law firm is. But it's important that we continue to sharpen our brand so that we are at least a strong name in corporate boardrooms, banks and other financial institutions.

I know David well (and, disclosure, consider him a friend), but that has absolutely nothing to do with why I cite what he has to say on this score.  Rather, in my experience, David is deeply thoughtful, reflective, and far-sighted about our industry--a managing partner who steadfastly resists the lure of being drawn into the quotidian crisis du jour in order to focus on the long-term important and not the short-term urgent. 

Brand.

What's yours?  You have thought about it, haven't you?

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.

This weekend I received by courier from the UK the just-released report The Next Wave: Globalization After the Crisis, published by Jomati Consultants LLP, the London-based affiliate of Adam Smith, Esq.  If you don't know Jomati, you should:  Based in the City of London, it's headed by Tony Williams, former managing partner of Clifford Chance and then of Andersen Legal.  (You won't be surprised to hear that I count Tony a good friend.)

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.

The final agenda for the "Business of Law" program, this coming Monday, February 1st, at LegalTech/New York has just been released.

Please take a look here, and sign up here.

Hope to see you there!

Speaking of interesting conferences in New York, on Monday, February 1st, from 1:00--5:00 pm, LexisNexis is hosting a "Business of Law" Symposium at the New York Hilton, Sixth Avenue @ 53rd Street, home of the annual LegalTech confab, which this flies under the flag of.

Why do I mention it?

Because I'm giving the keynote, called Economic & Strategic Perspectives on the Current Environment, and I'll also be moderating the three subsequent hour-long panels, on:

• Knowledge Management:  How technology can drive competitive differentiation.
  
  
• New Structures for the New World?:  Addressing what components of the conventional law firm business model might need to change, including:
  • Associate career paths
  • Alternative fee and billing models
  • Revenue and profitability models
  • Lateral recruitment, and improving the batting average, and
  • Law student recruiting--taking on the NALP menace
    
    
• Future Strategies:  If growth for growth's sake is no longer the universal solvent we once perceived it to be, what new strategies are plausible, effective, and needed in the marketplace? 

If I may say so, we've also recruited some top-drawer talent for the panels, including Harry Trueheart, Chairman of Nixon Peabody, Bill Bachman, Chief Operating Officer of Bingham McCutchen, Sally King, Regional Chief Operating Officer of Clifford Change, Aric Press of The American Lawyer, David Lat of Above the Law, Oz Benamram, Chief Knowledge Officer at White & Case,and Saul Rosenberg, Director, Knowledge Operations, McKinsey & Company--as well as many talented others.

Bonus for attendees:  Audience members will be given wireless polling devices allowing you to vote anonymously and see the results displayed in charts at the front screen in real time.    Accordingly, each session will feature several questions for the audience designed to enlighten, or perhaps uncover latent inconsistencies in attitudes.

There's no special charge for the event:  More info here. 

Hope to see you there!

As we embark on a brave new year, I thought it condign treatment of 2009 and what lies beyond to spend a few moments on the broader view, and, more specifically, what industries may and may not survive the post-Internet, and more broadly the post-digitalization of life, future.

One could write books about this--several folks already have--so I will perforce be very abbreviated in my treatment of this, but I would hope a theme emerges. And of course this comes with the customary and obligatory caveat that it's all my surmise at this moment in time, lacking the foresight to imagine what the creative genius of our entrepreneurial classes will bring forth.

Won't survive

• Newspapers
• General interest magazines lacking extraordinary quality (yes, this excepts The New Yorker, The Atlantic, and a handful of others)
• Landline phones
• Fax machines
• Hard copies of all forms of entertainment--music, TV, movies (everything will be rented or streamed, although purists may hang onto printed books between covers for the incredible and still unsurpassed utility of their form factor, not to mention the symbolism of bookshelves [I probably count myself a purist])
• The following, as we know them today:
  • Realtors
  • Stock brokers
• Network TV
• Virtually any single-purpose piece of hardware:  GPS devices, calculators, and, I predict, Kindles and e-book readers.  It's simply way too cheap and appealing to add functions once one has the basic slab with a screen, a processor, and some memory.

I doubt any of these is terribly surprising.

Will survive, but in drastically changed form

• Car dealers
• Many point-of-sale services
  • We shall see the drastic integration of online and store sales
  • Ticket takers at cultural and sports events have seen their ranks cut by 90% as hand-held bar code scanners replace ripping and returning; while we're at it, when was the last time you actually bought a ticket--any ticket--from a human being at a box office?
  • Airline kiosks have supplanted counter attendants
• Banking and financial services
  • Including insurance and mortgage brokering.

I also think these are also relatively commonplace observations.

Will be oblivious

• Healthcare (digitalization of patient records will come, eventually, to be sure, but it won't fundamentally transform, much less threaten, the industry or anyone employed in it)
• Travel (not travel agents--the travel industry itself)
• Construction (hard to outsource or do "virtually")
• Utilities (same)
• Agriculture and mining (same)
• Oil and natural gas (same)
• Manufacturing of durable goods, including most importantly cars, trucks, and industrial equipment: Sometimes metal needs to be bent and people and goods need to move, and we don't yet have Star Trek teleportation in place
• Education (imagine making your Contracts 1st-year course a Webinar? I didn't think so)
• Essentially all of government:
  • Local (police, fire, traffic, zoning, water and sewer)
  • State (regulatory, welfare, Medicaid)
  • Federal (Defense, State, Treasury, etc.--run down the Cabinet list in historic chronological order)
• Personal care: Barbers, salons, manicurists, health clubs, personal trainers, spas
• Home and office maintenance: Cleaning services and maids, nannies, doormen, and all contractors and handymen--plumbers, electricians, carpenters, painters, etc.
• Sports
• And lastly, one of my favorites, the performing and visual arts.

What's most noteworthy about this last list to me is what an enormous slice of the economy it represents. And what a relatively trivial portion is represented by the first and even the second lists.

Which brings me to the point: The repercussions of the digitalization of the world may have been overblown.

I'm not a social psychologist and have less than zero desire to become one, so I won't attempt to hypothesize why so much ink has been spilled on the supposed topsy-turvy world we're plunging into, like it or not, but I would suggest you take another look at the people who work for industries in my first "won't survive" list, and I'll suggest what they have in common: They own the printing presses and buy those barrels of ink. (I buy gigabytes of server storage, but that's a separate matter.)

So what has this to do with Law Land?

I look at the lists presented above and ask what industries we are most like. Before I give you my thoughts, you might want to glance up and take another look.

I think we're some continually evolving combination of education, financial/medical adviser, and hands-on personal care.

How so?

Education, as a role for us, should I hope be obvious. We educate our clients, we are or at least want to be known as a "learned profession," and we have, actually, access to knowledge that the proverbial man on the street does not. We don't just rent this knowledge out to our clients, we should impart it so it becomes their own.

Financial/medical advisers are people to whom we entrust (one hopes) our every secret, hope, and fear. We should serve the same function. Too often, of course, we fall short, accepting superficial explanations from clients about what they want to achieve without delving deeper to truly understand their business objectives in the larger contextual scheme of things. We should be able to provide them with various roadmap's, decision trees, alternative ways of pursuing their objectives, with lesser and greater ratios of return and reward.

Hands-on personal care? Yes, because there is no substitute for being there. The more amazing technology and collaboration-at-a-distance becomes (what the Web, ultimately, is all about), the more important face to face personal meetings are. (This, incidentally, is why I'm long-term bullish on such global cities as New York, London, and Hong Kong.) The more people you know "virtually," the more you want to meet them in person.

Which should be something we do well.

Often, the value of hands-on care is underestimated when it comes to so-called commodity practices such as real estate transactions, employment law, and background-noise litigation. You underestimate the value of this at your risk.

Think that divorce or employment law are "commodity" practices that don't require sensitive and nuanced practitioners?  Try telling that to the wronged spouse who suddenly finds themself living in a trailer, or the 55-year-old assembly line worker laid off in Detroit. 

Clients still want to meet you, get to know you, feel you're in command and know your stuff; this can to this day only be done one on one.  No one in Bangalore can help.

Finally, a word on outsourcing: It's here to stay. Foreign or domestic, owned or rented by your firm, it is a wave (not the wave, but a wave) of the future. Get used to it. Baseline document review, legal research, perhaps even generic witness prep will be conducted by people who are not junior associates on your firm's payroll. This is simply reality. But is it a fundamental change in your business model? I hope your business model wasn't entirely premised on the role of junior associates.

Again, is the digitalization of everything an existential threat to us? I leave you to draw your own conclusions, but I think not.

Thoughts for 2010 and beyond.

Hasn't the last year and a half been a horrible nightmare? Aren't you sick and tired of our fallacious infatuation with the "free market"? Maybe we should bring back Glass-Steagall, reinforce Sarbanes-Oxley, create an uber-regulator for the financial services industry. Aren't we all well and thoroughly sick of deregulation and privatization? Most of all, hasn't capitalism shown us to a fare-thee-well that, left uncontrolled, it can all too easily run off the rails? What have we been thinking for the past couple of decades?

I mark this time because it was just over 30 years ago--May 4, 1979--that Margaret Thacher become Prime Minister of the UK, to be followed shortly thereafter as President of the US by Ronald Reagan, seen rightly in retrospect as cross-Atlantic twins as far as promoting the virtues of the free market and dragging down the curtain on the sad, sclerotic decade of the 1970's (stagflation, depressing cardigan sweaters, and "malaise," anyone?)

I'm reminded of this anniversary by Martin Wolf, writing in the Financial Times, who sums up what she did:

Mrs (now Lady) Thatcher entered office determined to reverse a national decline marked by high inflation, slow growth and trade union militancy. Her government emphasised monetary control, deregulation, particularly of the financial sector, flexible labour markets, and privatisation. The post-1997 Labour government did not overthrow these policies but built upon them. Labour increased public spending but not hugely: in 2007-08, expenditure was below where it had been under Mrs Thatcher until 1988-89. Labour also abandoned active fiscal policy, adopted inflation targeting, introduced central bank independence and welcomed the vigour of the financial sector.

Note the emphasis on "revers[ing] a national decline, ... monetary control, deregulation particularly of the financial sector, ... and privatisation."

We also can choose to celebrate the anniversary of another systemic earthquake, the 20th Anniversary (last month) of the fall of the Berlin Wall.

Why are you reading about these momentous--but exhaustively analyzed--events on Adam Smith, Esq.?

Simply this: To provide a moment's worth of perspective.

Since it has been 20 years since the Fall of the Wall, memory has clouded over what it represented: Very simply, the end of a 40-year experiment in which Germany, a First World Country by any measure, was divided in two economically, one region a market economy and the other centrally planned. Once the gap in living standards became so egregious, the experiment self-destructed.

John Kay, writing in the FT, reminds us of this, and reminds us, more importantly, of exactly in what the genius of the market economy consists. He cites three primary components, to which I would add a fourth:

• Prices act as signals for resource allocation.
• Markets promote innovation by adapting to change "through a chaotic process of experimention." And
• Markets diffuse political and economic power. "This is the most effective way to protect society from rent-seeking - a culture in which the principal route to wealth is not creating wealth, but attaching oneself to wealth created by others."

And the fourth, mine:

• Markets permit, enable, encourage, and all but insist upon individuals finding their own highest uses in society (the real meaning of the Invisible Hand, as I construe it). Few things contribute more highly to human happiness.

Scarred as we all are by the events of last September (2008, that is), we may be tempted to retreat to the faux security of command and control by the best and brightest. Don't go there; don't even be tempted to go there.

The market excels not just at creating and spreading new ideas, but at getting rid of failed ones. As John Kay puts it:

Disruptive innovations most often come to market through new entrants [and] from unpredicted sources. If you had been planning the future of the computer industry in the 1970s, would you have asked Bill Gates and Paul Allen? If you had been planning the future of retailing in the 1990s would you have asked Jeff Bezos? Of course not: members of the politburo, cabinet or large company board would have consulted grey men in suits like themselves.

Markets are not a well-oiled machine: they are a constantly changing, adaptive biological system. Pluralism is their motive force, their essence chaotic, their development inherently uncertain. If we could predict the evolution of markets, we would not need markets in the first place.

To tie this to reality, this week the always-worthwhile Economic Principals, concidentally, has a tour de force recap of the nascent venture capital industry, starting in Boston immediately after World War II, which begins:

"It is hard to describe how quickly attitudes changed in Great Britain in the wake of the Thacher Revolution. It was as if a oppressive shroud had been removed."

After noting that Deng Xiaoping did more or less the same for China, only perhaps on a greater scale, he hits his stride:

Of course New England businessmen were scrambling up "the value chain" for three centuries before the term would be invented. None knew where it led. But from cod to candy, from slaves and opium to ice and stone, from railroads and telephones to electricity and radio, merchant traders and manufacturers in Boston understood that the essence of competitive advantage was that it didn't last.

Now we're getting to the heart of how markets work.

Out of the shockingly tiny world of Boston-centric venture capitalists came, in the space of a short career:

• American Research and Development Corp., which merely sired Digital Equipment Corp.;
• Greylock Partners;
• TA Associates;
• Arthur Rock (West Coast, but who went to school on the Boston gang, with Fairchild Semiconductor and Intel to his credit);
• And just a few other Boston-funded startups including FedEx, Cablevision, Wang, and Biogen.

What about Silicon Valley?

Following is more commentary from the same Economic Principals piece upon the recently published A Vision for Venture Capital: Realizing the Promise of Global Venture Capital and Private Equity, by Peter Brooke:

But Brooke's book is equally interesting, about, for instance, about the difference between Boston and California. East Coast lenders didn't know much about technology, at least in the early days; they were generalists, not technologists. They took a portfolio approach, emphasizing diversification and limited appetite for risk, preferred companies that had a revenue base and were moving towards profitability.

The West Coast guys were not averse to supplying seed capital and early stage financing, all part of the pioneer spirit. "They were good at what they did, and gained an edge that they have never relinquished." That said, Brooke continues, technological savvy will take an investor only so far. It's still essential to know how to identify market opportunities, size up entrepreneurs and develop relationships "in which information and ideas flow freely."

These skills are not easy to acquire, he says, but those who possess them can add substantial value, "even without knowing everything there is to know about a particular product or technology." Harvard and MIT: it was ever thus.

The whole second part of Brooke's book is an extended meditation on changing styles of venture finance, meaning mostly startups, usually high tech firms, and private equity, meaning restructuring large public companies through buyouts. The same skills are required at either end of the spectrum, he says, but emphases differ.

On the manner in which today's financiers have insulated themselves from risk at the expense of their investors, he quotes [Tony] Perkins [co-founder of the legendary Kleiner Perkins] approvingly: "Today I stand in awe of the way the managing partners of some of the huge buyout funds reward themselves; fees for raising the fund, fees for managing the fund, fees for doing the deals within the fund, and profit participation for individual investment, whether or not the overall profits are achieved."

Why do I focus on what may now seem like old news? I mean, Fairchild Semiconductor and Wang, for heaven's sake?

Again, perspective: These firms were enormous drivers of economic growth in their day, and even though both ultimately failed (news flash--most firms do), the way we work today and our overall economy would be fundamentally poorer without them and their kind.

What, then, has this to do with Thacher and Reagan and the free market?

Simply this: Let us not lose faith.

All things considered, I believe that free market capitalism has done more to promote the quality of life of more human beings than any non-theological belief system in the history of mankind.

And even after all the Sturm und Drang we've been through since September, 2008, here's a telling graph comparing the growth, from the start of 1991 through the third quarter of 2009, of the US and other major world economies:

So if you think the Thacher/Reagan era of deregulation and its aftermath was a misguided detour, think again.  To recap:

• US up 63%
• Canada 60%
• UK 48%
• France 35%
• Germany 22%
• Italy 19%
• Japan 16%

Finally, if you think the Asian tigers are overtaking the US, here, courtesy of David Brooks in today's NYT, is an incontrovertible rebuttal: In 1975, US GDP amounted to 26.3% of world G.D.P. The US share today? 26.7%.

The genius of the free market, present and potent since before (yes, even before) Adam Smith, is not to be gainsaid.

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?

Clients coming to me--and they're coming to me as never before--seeking clarity on what this will all look like "on the other side" are usually, for starters, really asking "How worried should I be?"

Sometimes of late, to reduce the general anxiety level, I quip that "we're not the newspaper industry." I fear that this is occasionally taken as gallows humor, although I intend it as anything but.  What I intend it as is quite simple:  Perspective.

But what if we were the newspaper industry, or more broadly, the print periodical industry?  What then?

Actually, Booz Allen's Strategy & Business has just written about this very thing, in Reinventing Print Media.  Granted, much of it doesn't remotely apply to us (or even, being parochial, to Adam Smith, Esq., which never has been and never will be a print publication), but some useful learning nevertheless emerges.

Two trends have intersected to deeply corrode revenue for mainstream print media, the second of which is the familiar rise of digital media.  Essentially the only traditional publications that have been able to charge more than $0 for their online content are The Economist, The Financial Times, and The Wall Street Journal--all, of course, addressing a professional business audience with one-of-a-kind brand names.  Consumer oriented publications that can charge are as rare as hen's teeth.  They mention Consumer Reports and Zagat's,but I can't think of a single additional example, and even the mighty New York Times has had to reverse field on this score.  Whether the taking of a different set of decisions at the outset of the mass-market digital age would have made any difference is, at this point, academic in the most devastating sense.

The first trend, which many non-industry insiders are unaware of, is the accelerating migration of marketing spending towards so-called "below the line" activities.  "Above the line" spending represents classic paid media advertising; below-the-line is everything else, and everything else is now the bulk of spending, and growing.  (Like what?  Like in-store promotions, manufacturers' own web sites, loyalty programs, "viral" and word-of-mouth efforts, YouTube videos, corporate Facebook pages, etc.)

So what do the august gurus prescribe for our friends in the dead tree world?

First, the full menu, and then, what we might adapt to our purposes:

The first strategy is to develop deeper relationships with readers around targeted interest areas. This builds on a strength that has always been at the heart of publishing: Strong print brands enjoy a trusted relationship with their audience; readers are loyal to print publications because they provide high-quality content about specific interest areas. [...]

The second strategy is to tap into revenue streams beyond advertising and circulation.  [...]

The third strategy is to reinvent the content delivery model (with a particular focus on lowering costs) and to emphasize a "profitable core" of unique and brand-defining material  [...]

The fourth success strategy for the media company of the future is to innovate with new products and pricing models.

Permit me to suggest that all of ##1--3, if conceived broadly enough, can be useful to us, and only #4 lands at our doorstep with a resounding thud (largely, but not solely, because of the terminally vacuous jargon in which it's expressed).

One at a time:

#1, "develop deeper relationships with [clients] around targeted interest areas."  That sounds like something a lot of us already know to do quite well, thank you very much.  Consider:

• focused client seminars on new developments in areas critical to their industry;
• free "health checks" where you and a fellow partner or two might spend half a day discussing ways you've seen similarly situated companies get in trouble, and what could have been done to head things off;
• brief "secondments" of some of your junior team members to the client's offices for cross-pollination and insight into what drives day-to-day decision-making in their lines of business;
• and more, I'm sure, which you are creative enough to dream up.

Examples from ConsumerLand may help spur your thinking:

Procter & Gamble has built its own digital media assets in the home and beauty category, Nike targets runners and other athletes, and Diageo helps young adults find bars and nightlife. [...]

Hearst -- another leading magazine player serving a broad set of women's interests with titles such as Cosmopolitan, Good Housekeeping, Marie Claire, and Redbook -- produces Real Age, a Web site that provides health information and offers a test that evaluates more than 125 factors to determine a person's "real age." To date, Hearst has grown its database of women by more than 8 million registered users who have taken the Real Age test.

How about #2, exploring new "revenue streams" beyond the traditional sources?  Again, I think we know how to do this.  Instead of just defending your clients when they're in a dispute or advising them how to navigate a corporate transaction, how about offering training in compliance so as to help ward off some disputes to begin with?  (Ideally, start with disputes, such as employment litigation, which are fairly low on the food chain and only once you've demonstrated a track record there might you consider moving up the ladder.) 

Or, what is perhaps a more timely suggestion, given the inevitability of clients' sending massive e-discovery projects to vendors specializing in handling intensive document review projects in ways more cost-effective than throwing recent Ivy League law school grads at them, how about offering some creative suggestions about how you could help manage, supervise, and strategically guide those enormous "boots on the ground" efforts?  (You won't be hiring and paying the infantry anyway.)

#3 may be my own personal favorite.

Isn't this another way of expressing the mantra every firm purporting to have a strategic rationale would have offered you until very recently?  To do the "high value," "price insensitive" work?  This simply states it a bit more subtly and stresses the perspective of the client rather than that the firm:  "to emphasize a 'profitable core' of unique and [firm]-defining material."

From our friends, with my interpolations as to what it could mean for us:

"Print media companies need to employ a range of efforts, but first and foremost, they must focus resources on their "profitable core"  [of clients] and build from that base. The profitable core is the set of print and digital content [your firm's intellectual property, expertise, and know-how] that most drives audience [client] engagement around well-defined interest [practice] areas. It is only on those distinctive content assets that a media company can build a "right to win," competing for attention against marketers [non-law-firm competitors such as Thomson West or LexisNexis], user-generated content [in-house resources, including lawyers], and other media companies [law firms you compete against]. Identifying the profitable core requires thinking freshly about the zones or editions of a newspaper or magazine and eliminating sections that do not drive significant readership or advertising revenue [a/k/a rethinking your geographic footprint and practice area mix]."

---

The most important message of all, of course, is to abstract from the specific tactical or battlefield suggestions outlined in the Booz Allen piece or humbly suggested by yours truly, and to adopt the mindset of competing in a world where settled conventions about such things as associate career paths and the billable hour model are suddenly being called into question. 

A fellow named Aaron Shapiro, a partner in digital advertising agency Huge (which has clients including Ikea, JetBlue, NBC Universal, Thomson Reuters, Time Warner, and Walt Disney), puts it best:  He says this environment will require you to think as both startup and incumbent simultaneously.  "It will take aggressively fresh thinking," as he expresses it.

So no, we are not the newspaper industry.  But if you believe Booz Allen, even the newspaper industry ought to see reason for hope--conditioned on some "aggressively fresh thinking."

Not at all gallows humor.  Perspective.

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:

	Hogan & Hartson	Lovells
Revenue*	US $922.5-million	US $984.5-million
% change Year over Year	+4.9%	+10.9%
PEP	$1,160,000	$932,000
% change Year over Year	-1.7%	-11.3%
Revenue per Lawyer	$835,000	$695,000
Number of partners	202 equity/494 total	370
Number of lawyers	1,111	1,421
Non-home country offices	14	27
Non-home country lawyers	23%	82%
5-year CAGR of Revenue per Lawyer	+5%	+5%
5-year CAGR of Profits per Partner	+9%	+8%

*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.

When the business paper of record (I refer of course to The Wall Street Journal, at least here on this side of the pond, although I'm increasingly fond of the Financial Times), prints a prominent article on its Op-Ed page entitled The End of Big Law, as Arthur Miller might have put it, "attention must be paid."

I'm here to tell you to pay no attention.  Or, if you insist, that it will go deeply unrequited.

The author is Douglas McCollam, described by the Journal as "a former correspondent for BusinessWeek, [and] a contributing writer for The American Lawyer."  So far as Google and I can tell, he has actually written a grand total of one article for BusinessWeek and perhaps two or three for The American Lawyer, the most recent in 2005.

Mr. McCollam's credentials as a domain expert in our industry aside, the article falls quite spectacularly on its own merits, as a truly impressive exercise in the abject failure of critical thinking:

• "For the first time since the Berlin Wall fell, profits dropped..."  The same is surely true of almost every other industry and sector in the economy including, not to make an awkward point, the publishing industry. 
•  "[A] great many members of the American bar fell prey to the same strain of hubris that infected their clients. They embarked on empire building--opening offices from Beijing to Bucharest."   This could also be characterized as participating in the great post-cold-war phenomenon of globalization, or, more simply, as following your clients.  As for "hubris," I have yet to meet a managing partner not exquisitely attuned to the sentiments of their partners and the perceptions of their clients.  As CEO's of multi-hundred million dollar enterprises, they are a modest bunch indeed.
• "[B]ig law firms find themselves just another smokestack industry with too much capacity."  Last time I checked, we were not capital-intensive nor do we have but the most trivial base of fixed assets.
• Finally and perhaps summarily, nothing in the article connects to the headline, "The End of Big Law."  Nothing.

Much of me was loath to, and so I delayed, writing this column.  Indeed, I debated whether it was worth even drawing attention to this misbegotten exercise in tabloid journalism.  Besides, I trust your discernment and analytic skills, to see through such transparently jackleg and misbegotten efforts.

So only a coda on what a wasted opportunity for the WSJ.  Our industry represents 1.4% of GDP--we're 10% the size of healthcare, which has been receiving a bit of ink lately, and I'd like to think we're an economic locus of activity not to be sneezed at--and Murdoch & Co. the editors fumbled it. 

Alas.

By now the news is well and long since out (WSJ Law Blog, AboveTheLaw) that Howrey has decided to fundamentally change the nature of the first and second year associate experience, by focusing on training and an apprenticenship model in exchange for a substantial cut in salary.  DLA Piper has also announced it will be reducing the size of its associate classes and discarding lockstep, while Orrick announced, effective July 1, that it would ditch class years in favor of three bands of talent:  associate, managing associate, and senior associate, with competency gates between the bands.

And just a day or two ago, across the pond, CMS Cameron McKenna, Eversheds, and Simmons & Simmons said they are all moving to merit-based pay: 

Nigel Moore, HR partner at Camerons, said: "Someone being assessed by how competent they are rather than on the basis of years on the clock strikes a chord with the kind of person who wants to work here. From the client's point of view it also ensures they get the best man or woman for the job."

Nearly a year ago, I wrote about the precursor to the Howrey effort, but I believe this is a signal development and therefore worth spending a bit of time exploring.

Welcome to the first shots being fired in what I predict will be the coming War of the Dueling Business Models.

Well, if we care to be a bit less melodramatic, the reality is that the venerable and century-old Cravath system, which we all followed for so long for an admixture of reasons surely including inertia, the hope that some of the prestige/mystique would rub off, and a systemic failure of imagination, may be reaching the end of its life cycle.  Now firms have to do things differently, which means being more focused on their core strengths, more attuned to their clients, and, yes, not necessarily doing what everyone else is doing.  This of course is the single most powerful reason for the durability of the Cravath system.

The standing joke is that when one presents a new idea to a businessperson, their first question is, "I hope no one else is doing this!", whereas when you present the same idea to a lawyer, the question is, "But who else is doing this?"  Or, as I heard it expressed slightly differently just this week--and trust me, you cannot make this stuff up--when a particular managing partner was criticized because his firm wasn't terribly innovative, he replied, "It would be useful to have guidance from other firms on their efforts at innovation."  (I promised you you can't make this up.)

But back to departures from the Cravath system.  Will we see much more of this?

As a recent Vice Presidential candidate surely would have put it, "You betcha!"

Why?

Because we have come to the end of the road for business as usual.

Every firm--not just Howrey, DLA, and Orrick--is experiencing a severe problem as the deferred starting dates of summer associates and first-years begin to collide with (what would be the normal) starting dates of subsequent classes.  While few firms have acknowledged this publicly, and fewer still have discussed how they'll deal with it, one almost inevitable consequence is that two or more classes will be in competition with each other for the slots of one class--and a "downsized" set of class slots at that.  What's the answer?

A simple, but accurate, way to think about summer associate programs is through the familiar analogy of the pig in the python:

• Virtually all firms have a surfeit of associates as it is, both because of reduced demand and the utter and complete disappearance of natural attrition (nobody but nobody is quitting voluntarily in this environment);
• Summer associate programs were put together before the meltdown and are, to put it diplomatically, not attuned to current reality;
• Every summer associate that could fog a mirror while keeping their clothes on used to get an offer; that cannot and will not be the reality going forward; and
• The common, understandable, and entirely rational spate of year-long deferrals is going to create a pileup a year from now.

In other words, if your firm has deferred the Class of 2009 from September 2009 to mid-2010, what are you going to do about the Class of 2010? Defer them to 2011? And the Class of 2011? As my high school physics teacher used to say in his inimitable New Jersey accent, "You can't play dat game fuh-evah."

One approach would be to tell two classes that they'll be competing for the (reduced) slots previously available to one class. This has a brute-force appeal, in that it solves the problem expediently and you have the pick of twice as many candidates for, say, half the slots. But it stinks of betrayal.

So firms that have announced deferrals are going to face, sooner rather than later, the two-years-on-one pileup: Not just one but two pigs in the python. There is no Platonically ideal solution to this arithmetic and calendar-driven problem. But I haven't thought of, or heard of, a better answer so far than that of simply taking a year off on-campus recruitment. 

The most forceful and cogent objection, and I readily agree it's got teeth, is that no firm can afford to forego one entire year of seeking out the best available talent coming out of the nation's law schools. If your firm so chooses to jam two years' worth of graduates into one year's worth of opportunities, so be it, and that's surely one rational response among others.  My only thought is that If someone does have their heart set on working for your firm, they'll still know where to find you, and last I noticed we had not outlawed the lateral marketplace.

Radical as it may sound, I think some firms will "take a year off."  Not just asking their incoming associates to defer for a year, but re-synching their recruiting to their demand by opting out of recruiting altogether for a year.  Really, how many alternatives are there?  You can renege on commitments already made to students who are, at least to some extent, known quantities in favor of unknown future quantities, or you can continue to appear for on -campus recruiting knowing in the back (or front) of your mind that you will be making few or no offers:  Both appear economically irrational and morally dubious to me. 

MIght it not be better to be open about The Pig and conform everyone's expectations to reality by announcing a one-year recruiting sabbatical? 

Indeed, Morgan Lewis has announced it's canceling its summer associate program for 2010:

In a letter to law school deans, Morgan Lewis' firmwide hiring partner Eric Kraeutler said the firm first wanted to fulfill present obligations.

"We continue to be committed to law school recruiting and entry-level hiring. However, our highest priority is to provide opportunities for our existing associates and 2009 summer associates," Kraeutler wrote.

You have promised (your word is your bond, isn't it?) slots to the current class, whereas you haven't promised, so far, anything to the succeeding class. This must be what Eric Kraeutler was thinking when he said they would put existing and 2009-promised associates ahead of future unknowns. (Disclosure: Eric and I were Princeton classmates, but I haven't spoken to him about this column, although I'll send him the link once it's published.)

From our flank now comes the salvo, Welcome to the Future:  Morgan Lewis Signals Armageddon, which opens with this and gets only more apocalyptic from there:

There's no way to overstate the importance of last week's announcement by Morgan, Lewis & Bockius that the firm was canceling its summer associate program and on-campus interviewing (OCI) for the summer of 2010. ... OCI is not just any activity for a big law firm. It is, in the language of modern business, the core process of a large law firm.   The whole value proposition of a large law firm is built around the syllogism: "We hire the smartest people from the best schools. They work the hardest and do the best work. And we charge the most money." 

In case you missed it, this would indeed be Armageddon.  If "the core process" is broken, then to be sure "the whole value proposition of a large law firm" is on its deathbed.

What, then, to do?   From the premise that we are experiencing apocalypse now, we learn "the urgent necessity to 'mark to market,' to correctly set prices based not on wishful thinking or yesterday's sense of entitlement but on reality."  The implications of this new-found operational discipline and rigor, which are then enumerated, include, among other things:

• Telling publishers and technology vendors there are too many of them and that there will only be one winner "and you have 15 minutes to decide if you want to be that guy."
• Beating up on landlords, including unilaterally halving rents per square foot and unilaterally abandoning space, all presumably achieved in a consequence-free zone.

Culminating in "If you didn't realize this before, Morgan Lewis just stamped it on your forehead."

---

A bit of perspective, prithee? 

To begin with, we are not the newspaper industry, or even the investment banking industry:  We are not dealing with existential threats to our continued existence in a 21st Century global economy. 

Indeed, if you believe any of the following:

• Globalization is here to stay;
• Regulation is going to become more complex, not simpler;
• Cross-border transactions and cross-border mobility of people, ideas, and capital will accelerate;
• North America, South America, Europe, and Asia are each centers of financial and economic power in their own way;

then you have to believe the future for our industry has never been brighter.

Are our business models changing? 

I believe they are, and I also believe the risk of attempting to meet the changing client- and economically-driven zeitgeist of our industry through denial and passivity has never had a shorter half-life.  I'd actually give denial a half-life of two--five years.  (And to think that GM had 30!)

But our value proposition, apocalyptic commentators to the contrary, is in many ways more powerful than ever.  The smartest people from the best schools, working very hard and doing great work, are worth whatever the market will bear.  And so far as the eye can see, the market for that extremely limited supply of focused and applied expertise will bear a lot.

You are cordially invited to a special event:

What's Next for Global Legal Services? 

Bright Ideas from Industry Leaders

Wednesday 22 July 2009

Washington, DC

  presentation and discussion with senior inside counsel, outside counsel and law firm executives.

 resenters are contributors to the new book:

Bright Ideas:  Insights from Legal Luminaries Worldwide

Bruno Cova, Partner, Paul Hastings (Milan)

E. Leigh Dance, President, ELD International (NY & Rome) - Editor

Tim Glassett, former General Counsel, Hilton Hotels international (LA)

Despina Kartson, Chief Marketing Officer, Latham & Watkins (NY)

Bruce MacEwen, President, Adam Smith, Esq. (NY)

Deborah McMurray, Chief Executive, Content Pilot (Dallas)

Michael O'Neill, SVP and General Counsel, Lenovo (Wash DC)

Jolene Overbeck, Chief Marketing Officer, DLA Piper (NY)

Tom Sabatino, EVP and General Counsel, Schering Plough (NJ)

Mary K Young, Partner, Zeughauser Group (Wash DC)

www.BrightIdeasGlobalLaw.com

 

Where:      offices of DLA Piper LLC, 500 8^th St NW, Washington, DC                (between E and F Streets NW)

Time:        2:30pm-5:30 followed by a reception

Hosted by:         ELD International, global legal services consultancy, in cooperation with DLA Piper

 

How can we best answer today's extraordinary challenges in delivering legal services around the world? 

At this invitation-only event, presenters will share their perspectives and suggest how you can prepare for the future.

Program:

2:30          Registration and Welcome

2:45          Setting the stage:  Leigh Dance and Bruce MacEwen

3:00 - 4:15:  Changes in global supply and demand for legal services and what they mean:  where to invest, where to cut back

Speakers:  B. Cova, D. Kartson, M. O'Neill, T. Sabatino (moderated by L. Dance)

5-minute stretch

4:20 - 5:30:  How leaders can drive performance in international law firms and corporate law departments 

Speakers:  T. Glassett, D. McMurray, J. Overbeck, M. Young (moderated by B. MacEwen)

5:30 - 7:00 - reception - Bright Ideas book available for sale. 

 

RSVP before July 14 to: 

Freya Birdie, ELD International - fbirdie@eldinternational.com

Please direct your questions to:  Leigh Dance: +1 631 276 9365

or Mary K Young + 1 301 320 1518

This event is open to law firm leaders and in-house counsel only and, while attendance is free, space is limited.  You may RSVP indicating your interest in attending and the organizers will let you know if they can confirm your place. 

 

We hope to see you there!

E. Leigh Dance, ELD International, Inc.