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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.

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

Welcome to law-firm land.

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

Consider a hypothetical firm:

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

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

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

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

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

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

Now what?

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

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

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

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

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

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

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

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

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

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

In times of accelerated turmoil such as those we've been living through and which appear likely to continue, to the eye's visible horizon, it can be useful to return to first principles.

So, herewith, a quick precis of Joseph Schumpeter's famous analysis of capitalism in Capitalism, Socialism, and Democracy (1942), and in particular his exegesis of his powerful and original concept of "creative destruction."

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as US Steel illustrate the same process of industrial mutation--if I may use that biological term--that incessantly revolutionizes the economic structure from within [emphasis original], incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

Following on this, Schumpeter observes that it's "useless" to analyze a large firm's behavior at a single point in time, since the behavior of a firm is "on the one hand, a result of a piece of past history, and on the other hand, an attempt to deal with a situation that is sure to change presently--an attempt by those firms to keep on their feet, on ground that is slipping away from under them."

Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. [Strategy] must be seen in its role in the perennial gale of crative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull.

This also implies that the popular concept of perfect competition is, by and large, meaningless if one wants to grasp the world as it really is--although it has the academic virtue of being highly susceptible to mathematical modeling.

The primary flaw in perfect competition is that it "is always suspended whenever anything new is being introduced" because buyers and sellers cannot possibly have complete information about a potential market. Indeed, Schumpeter believed that most quasi-mature industries (law certainly qualifies) more closely resembled oligopolies, where "there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoes, an indefinite state of warfare betweeen firms."

The type of competition that overturns everything familiar is not that based on price or quality, which are, after all, continuums, but "the competition from the new commodity, the new technology, the new source of supply, the new type of organization [since this] strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives."

And this looming threat is ever-present: "It disciplines before it attacks." Ignoring the potential impact of a spasm of creative destruction upon an industry is nothing less than ignoring a characteristic of capitalism which is intrinsic and endogenous.

So where does this leave us?

Were we to resurrect Schumpeter (1883, Czechoslovakia-1950, Connecticut) from the dead, and ask him to comment on this train of thought vis-a-vis law-land, here's my supposition as to what he would say:

• The threat to the industry of BigLaw as we know it is not the next Skadden, the next Latham, the next Wachtell, the next Quinn Emanuel or Boies Schiller or Bartlit Beck.
  • These are fundamentally familiar business models, indeed so profoundly familiar that to outside observers they surely appear indistinguishable from the largest and most prestigious firms with the longest pedigrees.
    
    
• Instead, the threat will come from unforeseen competitors currently outside the tent, and who have no interest in being inside the tent.
  • Some of these competitors, perhaps most of them, don't exist at the moment, or if they do exist, have only begun to find their sea legs.
    
    
• You can't foresee what these new competitors will do; indeed, they themselves can't even foresee it yet in any clearly articulated or planned way.
  
  
• And they won't look at all like BigLaw as we know it; if they did, they wouldn't be "creative destroyers."

Now, this is nothing to be afraid of.

Will the new competitors come?

Given that in the US alone, the total annual revenue of private, for-profit law firms is about $225-billion, yes. We inhabit a very large industry.

So the question is what can they do that we can't?

The tremendous advantage we have over these nascent competitors is that we know our clients and we know the law: In vastly nuanced fashion. But this won't do us any good if we're oblivious, indifferent, or too comfortable and complacent to recognize what's on the horizon. Our knowledge of our clients, and our tightly bound relations with them, is the only barrier to entry that we really have; but it will give us enough breathing room to figure out how to meet the new competitors on their own ground.

Or ours.

But only if we are prepared for the fight. Because the fight is endogenous to capitalism.

The phrase "an American original" may strike you as overused, and I might agree, but I'd have to limit it to the narrow sense in which it may be applied to more people than deserve it. In other words, there aren't enough of them.

But today, we have a genuine contender: Jerry Della Femina, the famous advertising man, Hamptons restaurant owner, and creator of himself, profiled this past weekend in the FT.

What on earth, you are about to ask me, could Jerry Della Femina have to do with law-firm land? Well, stick with me here.

The occasion for the FT's profile was presumably the new season premiere of "Mad Men," "Matthew Weiner's phenomenally successful show about the advertising world in New York in the early 1960s," based on Della Femina's own memoir of the era, published in 1970, From Those Wonderful Folks Who Gave You Pearl Harbor. (The reference will become apparent; as I said, stick with me.)

Brief obligatory what/where/when (courtesy the FT):

1936 Born in Brooklyn

1961 Junior copywriter, Daniel & Charles

1967 Founds Jerry Della Femina & Partners. By 1970, the company is billing $20m a year

1972 Plans takeover of Saatchi & Saatchi (fails)

1984 Sells his agency, but continues to work there

1992 Sets up new firm, Jerry, Inc. - and opens a successful restaurant

1994 Jerry, Inc. merges to become Della Femina, Rothschild, Jeary & Partners - where he still works today

The studious will note no academic degrees listed, because there were none--he graduated from Lafayette High School and "attended" Brooklyn College. But he was the self-taught polymath extraordinaire, borrowing 10 books at a time from the New York Public Library ("Hemingway to pulp fiction") and says that he has a "small vocabulary," but one which he "moves around fast."

His father worked three jobs, as a pressman at The New York Times, a soda jerk in a coffee shop, and operating rides at Coney Island; his mother sewed dolls and dresses. Growing up in Gravesend, Brooklyn (notoriously characterized by a US Senator as the "breeding place for crime in the US"), he resolved as a child go "get out of here." So how did he become the Jerry Della Femina we think of today?

In the early 1960s, he started sending ideas to one of New York's smaller advertising agencies. Finally, the agency invited him in, and he offered to work for free. The partner said: "We have to pay you a token salary. How about $5,200?" Della Femina thanked him quietly, shook his hand and agreed to start on Monday. But when he got outside, on to lower Madison Avenue, he screamed with joy. "That 'token salary'," he explains, "was more than any Della Femina in the history of Della Feminas had ever made."

Perhaps his genius stemmed from his profound common sense and pithy ability to distill what everyone had to be thinking into the lingua franca: "When he wrote lines such as, "Are you scared stiff your first color television set's gonna turn out to be a $500 dog?", he was thinking about his mother in Brooklyn. "

But the Della Femina magic touch had just begun:

[Della Femina had started at] one of the smaller, Jewish agencies. He says: "I worked there for two, three months and I was coming down in the elevator one night at 9.30pm and the new boss gets on and he says, 'Workin' late tonight, kid?' And I said: 'Ma nishtana halayla haze mikol haleilot?' which is a Hebrew prayer meaning, 'Why is this night different from any other?' He gave me a $3,000 raise before the elevator hit the bottom." Not every Italian kid from Gravesend, Brooklyn, could pull that off.

This begs the question: Could anyone pull that off today?

Della Femina seems to have mixed feelings on how the advertising business has evolved. Under "Progress," one must surely count:

• That people no longer smoke four packs of cigarettes a day,
• That the "three-martini lunch" made immortal by Madison Avenue itself, has waned, permitting useful work to be done in the second half of the day,
• That casual sexism is a thing of the past, at least in the open,
• That formal sexism is very much a thing of the past (Get this: "For 25 years his firm ran a secret sex contest, in which people voted for the person they would most like to sleep with. The winners would get a weekend together at The Plaza Hotel, and the event lasted into the 1990s")
• Clients would not say to an Italian from Brooklyn (as Ford Motors did) that they didn't want someone "of your kind"
• And people who succeed and buy nice clothes are not told, as Della Femina's mother told his wife, wearing a "fabulous" outfit, "you look like a Jew."

On the "What We've Lost" front, count:

• Computers: According to Della Femina, they're wonderful but they're cold, and what comes out of them is cold.
• Less risk-taking in copywriting or art direction: "People just basically sort of do their job."
• There really was more creativity then: People meeting with giant note pads and art directors with drawing pads. Now it's PowerPoint.

And the cryptic "from the wonderful folks who brought you Pearl Harbor"? His brainstorm when a large agency he'd just moved to was pitching the Panasonic account. "The room fell silent," the FT dutifully reports.

His persona, of the original mad man, did have this effect: He knew he had clinched an account when an executive at the potential client said "You are not as crazy as I thought you'd be."

The tale of his skirmish with the elders of the town of East Hampton is also priceless. Shortly after buying a house there, he opened a fruit and vegetable store, Jerry and David's Red Horse Market. First, the town required him to paint the shop in regulation green. He refused. Clash. Next, he placed pumpkins outside, and was told that they were impermissible"advertising". He said, "I am an advertising guy, and let me assure you those are not advertisements, those are pumpkins."

Matters escalated to a summons and arrest warrant being issued against him, and his lawyer advised him to turn himself in quietly. But, apprised that if he turned up at the police station instead of court, he would be publicly handcuffed and given the perp walk, three guesses as to what he chose to do.

There were photographs all over of Della Femina in handcuffs. Later, he sued the town for wrongful arrest, and won.

And the relevance, at last, Patient Reader, to law-firm land?

The FT reporter asks:

"Was it calculated, though, or just natural exuberance?" Della Femina looks me straight in the eye. "I invented myself."

The point precisely.

We need more lawyers who "invent themselves." We need more lawyers who are American originals. We need more lawyers driven to grow wildly beyond their roots. We surely need more lawyers who are slightly mad, whom clients hire when they realize they're "not as crazy as I thought you were."

More lawyers, in other words, who are the next generation's legends of the bar: Who are brilliant, fearless, profoundly insightful polymaths.

And who, again, invent themselves. Because that is the root of unwavering authenticity.

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:

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.

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.

We're not actually on a leadership jag here at Adam Smith, Esq., but we understand if you might feel that way.

Deborah Rhode, who's taught at Columbia and Stanford Law Schools, published a piece in the June American Lawyer (paid subscription required for access) called "Flying Blind," about how law schools do essentially nothing to train students in leadership skills.  Here's the issue:

Most lawyers never receive any formal education in leadership.  Nor do they generally perceive that to be a problem, which is itself problematic.  [...] 

That inadequacy is striking, given that no occupation accounts for such a large proportion of leaders.  The legal profession has supplied a majority of US Presidents, and in recent decades, almost half of Congress, 10% of the CEOs of S&P 500 companies, and innumerable heads of government and nonprofit organizations.

The assumption seems to be that leaders are born, not made, so what's to be done?

But as we know, and as I've written repeatedly, that just isn't so.  Leadership can be taught and, better yet, can be learned, primarily through serious reflection on experience--including learning from one's own mistakes and observing the traits of other demonstrably successful leaders.  Yet when it comes to picking leaders of our own firms, what do we do? Historically (and this may be changing, albeit glacially), we put people in leadership positions because of their rainmaking track record, which, as one observer Deborah Rhode quotes, observes drily, "This carries considerable risks."

I would argue that lawyers need leadership training more than anyone--simply because lawyers are, intrinsically, so hard to lead.  We're notoriously good at challenging authority and place almost untoward value on autonomy. 

What, then, does leadership training consist of? Cultural and intellectual broadening, primarily, including deep reading in history and biography as well as management theory (selectively, OK?--I've read far more than my share of the stuff and the dross to gold ratio is about 100 to 1), moral philospohy, political science, and yes, of course, economics.

Where do leaders go astray?

Primarily--Gen. Stanley McChrystal's recent sad and sorry experience being Exhibit A--in assembling a coterie of acolytes whose raison d'etre seems to be sycophantic. What do we actually know about how "yes men" affect leadership skills? Plenty, and none of it is pretty:

A core insight of recent research is that leadership is a relationship, not a status. Influence has to be earned, not asserted or assumed. [In a survey of some 70,000 individuals], Santa Clara University business professors James Kouzes and Barry Posner found the statement that ranked the lowest in a list of 30 leadership behaviors was that the leader "asks for feedback on how his/her actions affect others' performance."

Yet another critical dimension of leadership is simply self-awareness. The best leaders ask themselves how they are perceived, understanding that they will never really have a complete and candid answer to that question; the worst plow on, oblivious to how others perceive them, what lessons they learn, or how hypocritical their behaviors might seem.

Which brings us, in closing, to The New York Times story earlier this week, "In Law Schools, Grades Go Up, Just Like That," revealing that about a dozen law schools, including Loyola, NYU, Georgetown, Golden Gate, Tulane, USC, UCLA, UC/Hastings, Vanderbilt, and presumably others, have either unilaterally increased students' grades retroactively (adding, say, 0.333 to everyone's GPA in the case of Loyola) or "relaxed" their grading standards "in order to be more competitive in today's job market."

In how many ways can you say "disconnect?"

The Times story reveals behavior which leaves me with my jaw on my chest and my erstwhile pride in being a member of a learned profession subject to serious challenge.

The law schools who are re-writing history are engaging in behavior which is appalling, unspeakable, indefensible, and beneath contempt. This Times story, jocular as it was in tone, reveals people behaving in ways--and make no mistake, they're individuals, people with names and families and academic pedigrees; this is not the behavior of deracinated "institutions"--that have long since lost sight of any connection to a moral compass.

"The market made me do it," you might imagine them saying in defense?

Vanity Fair runs a column in every monthly issue on the inside back page of the magazine they call "Proust's Questionnaire," which asks such questions as "What's perfect happiness," "What's your best/worst trait," etc. And occasionally they ask "On what occasion do you lie?"

Never have I seen an interviewee try to get away with, "when the market makes it convenient."

If "convenience" justifies out and out misrepresentation, then I would like you to join me in celebrating the 141st anniversary of the publication of my own famous novel, War & Peace.  (Convenient for burnishing a reputation, no?)

Dear Reader, this is no joke.

If Deborah Rhode is right, and I devoutly believe she is, the leadership initiative should begin in our law schools. On the evidence, that's the last place in sight we should look for leadership.

Very truly yours,

Your deeply saddened Scribe.

Update, 28 June:

A regular reader writes:

Great piece on leadership and law schools.  Here's what Dean Robert Post of Yale Law said about the distinctive elements of a Yale Law education in his June 2010 letter to the law school community:

 It has become increasingly clear to me that at Yale we aim not merely to promote mastery of the discipline and practice of law, which many law schools seek to do, but we aspire also to produce the confidence and self-respect necessary for leadership:  We want our students to understand that what they do matters.  This is a high aspiration, and when we succeed our students experience the kind of gratitude and affection that was palpable at graduation."

[Our correspondent also notes:]  It took me six years to get through law school because of time I took off for grad school, but I still find it remarkable that I overlapped in those six years with three sitting Supreme Court justices; the current Secretary of State; a former President of the United States; the current Deans of both the Harvard and the Yale law schools; and many more figures in leadership positions.  Yale Law School is the intellectual equivalent of the deep end of the pool, and though it's grading system is rather impressionistic I doubt seriously that anyone on that faculty would change an impression retroactively.

How refreshing is this--and thanks to our correspondent for contributing to the dialogue.

On reflection, I should have noted the obvious in my original column, to wit that one cannot tar all law schools with too broad a brush despite the 3rd-degree felonies of a few.  So noted.

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

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

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

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

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

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

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

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

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

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

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

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

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

and

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

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

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

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

Trusting Your Gut

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

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

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

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

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

These situations are called "high validity."

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

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

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

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

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

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

Then stand back.

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

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

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

Actually, there are:

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

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

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

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

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

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

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

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

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

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

Dear Reader, please stay "uncured."

Avoiding "Gut Bias"

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

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

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

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

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

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

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

Second, did we get reliable feedback in the past?

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

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

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

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

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

All is not lost.

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

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

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

But then, that could just be my gut speaking.

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.

Orrick announced on May 12 that "it will no longer use or report, internally or publicly, the metric of Profit Per Equity Partner."

Please join me in prayer, dear congregants, that this will inaugurate a trend.

I'll explain in a moment, but first, Orrick deserves the floor (from their press release):

The firm believes the fundamental changes taking place in both the business of law and in the relationship between law firms and its clients have made the metric no longer constructive or informative for the firm or the industry.

"The legal profession is at a transformative moment, and now is the time to reconsider all of the metrics we have traditionally used to measure success," said Ralph Baxter, Orrick's Chairman and CEO. "Our partnership is engaging in a serious dialogue to identify more appropriate metrics to evaluate our firm, to strengthen our client relationships, and to make our lawyers' careers even more meaningful. Moving away from the Profit Per Equity Partner metric is a step toward greater accuracy and transparency about law firm economics, and it will focus us even more on how we deliver value and efficiency to our clients."

(Disclosure: Ralph and I have discussed alternative metrics for law firms in general, but I did not have any hand in Orrick's decision.)

Now, let me specify what I'm not going to talk about: Nothing logistical or prudential about this decision. I'm not interested in whether The American Lawyer can reverse-engineer the Orrick PPEP calculation (with or without willing sources); I'm not interested in whether competitors or even Orrick partners might conceivably wonder if the firm had something to hide; and I'm not interested in whether his will help, hinder, or be immaterial to Orrick's prospects in the lateral market. All those things I leave for others to speculate upon. So to the game.

Why do I "pray" (I exaggerate, but only to underline my belief in Orrick's move) that this become a trend? Let me count the ways:

• We all know, wink-wink, that PPEP is a consummately manipulable number. Even The American Lawyer has never mounted a resounding rebuttal to this widespread assumption. If it's a metric that can be gamed, how much weight does it deserve?
  
  
• PPEP is an average. As Cesar Alvarez of Greenberg Traurig famously said, the only PPEP that matters is "profits per me." I'm not being facetious. There are firms with (for example) a reported PPEP of $1.2-million and a band of equity partners' actual incomes from $500,000 to over $5-million. It's like the old joke about "Bill Gates walks into a bar...." (and the average net worth of those in the bar becomes $5-billion).
  
  
• Of far greater weight is the indictment of PPEP on the merits. Unfortunately, in the 30 or so years since it came to prominence under the fabulously talented Steve Brill, it has come to encapsulate Everything You Need to Know about a law firm. That of course is unadulterated pap, but we find ourselves drawn to it with an almost voyeuristic pull, much as we'd be drawn to salacious, compromising pictures of prominent politicians or Hollywood celebrities.
  
  
• And with the same effect: It tends to override the reasoning faculties of our frontal lobes.
  
  
• So what, if I'm proposing to dethrone PPEP, matters more in terms of evaluating a law firm's performance? Here are just a few candidates:
  
  
  • 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.

And I could go on, but you get the point: PPEP is a remarkably crabbed, narrow, and, at this point, antiquated measure of law firm excellence. "Antiquated," in particular, because we've all learned long ago how to game it. It doesn't mean what it used to mean, at least if meaning consists in reliable comparability across firms.

You, there in the back, standing up and waving your hand?

Yes, I know, there's a case to be made that it's only fair that PPEP be "a part of the mix" of evaluating a firm, and that it tells the market something important about how a firm is able to distill the ineffably convoluted blend of clients, talent, markets, global platform, and infrastructure into a magic output.

I'm here to tell you the pendulum long ago swung preposterously far in your direction. And that we're long overdue for a big correction.

Far be it from me to aver that profits don't matter; they matter tremendously.  Baxter feels the same way, judging from his talk with Above The Law:

We're not saying that it doesn't matter to be profitable, it does. We're not saying that it's not important that our most senior partners are compensated in a way the matches the great law firms in the world. And they will be.

Whatever possessed us to rely on this shockingly narrow and unitary metric for so many years, I believe its time has passed. It served a salutary purpose in the beginning. That purpose was (a) transparency where opacity previously reigned; (b) objective comparability where impressions and reputations previously reigned; and (c) shining a light on quality of management where kitchen-table and seat-of-the-pants amateurs had always prevailed. That time is long past.

A final observation: Do you know what your clients' GC's make? (Unless they're public companies and the GC is one of the top five highest-remunerated officers, the answer is almost assuredly not.) Their AGC's, deputy GC's, or business head units?

Then why should they know that (roughly, that is) about you?

This may be the key point.

Clients hate PPEP. All it can possibly accomplish is to inspire envy. "I work just as hard or harder as XYZ, and s/he makes $#.#-million!"

Is this a terribly smart thing for us to be doing to ourselves?

Let us close by joining in prayer....

qual-i-ty: L qualitas 1a: peculiar and essential character [...] 2a: degree of excellence, caliber ... 2b: degree of conformance to a standard (as of product or workmanship)... 4a: special or distinguishing attribute, characteristic.

--Webster's Third New International Dictionary, �1909-1971

What is "quality" in legal services and professional representation of a client?

Had you asked me that a few years ago, I would have cocked my head and looked at you sideways. We all know what it means; we went to name-brand law schools which trained us all to be future Supreme Court clerks, and we learned at the knee of Professor Kingsley and Christopher Columbus Langdell.

But let me pose a thought experiment which is, for better or worse, less and less a "thought" and less and less an "experiment," and more and more a reality on the ground.

Does this sound familiar?

By now, we've all been educated to a fare-thee-well on the coming brave new world of alternative fees, Value Challenges, and the "worthlessness" of junior associates. And we've attended the conferences and seminars sponsored by obliging vendors standing ready, at our service, to help us cope with this new reality.

McKinsey, which advises that the purchasing function should have a key seat at the table in strategic affairs discussions-and not a peripheral or subservient role-divides quality into three segments:

• Good enough: Sufficient for almost all purposes almost all the time.
• Excellent: Occasionally needed when germane to reputation, marketplace perception, or positioning.
• Superb: Very rarely required, perhaps only when genuine organizational threats are in play.

That's the view from corporate America.

We would, of course, invert this listing:

• Superb: Why you come to our firm, what we do, and who I am. (Don't for a second underestimate that third element; it's why you get up in the morning and how you hold your head high.)
• Excellent: When we try to execute a representation with some degree of sensitivity to costs, based on a longstanding relationship.
• Good enough: Who do you think we are? You've come to the wrong place.

What happens when these two worldviews collide?

At first, we may go through the five stages of grief, per Kubler-Ross:

• denial
• anger
• bargaining
• depression
• acceptance

Let's pretend we get all the way to acceptance, however. After all, the client is always right. (Right?)

As faithful readers know, I majored in economics in college and went through the courses in the MBA program at NYU's Stern School of Business, so I have a reasonable degree of sympathy to the clients' view of "quality." I might add that, as a Scot, I profoundly appreciate the parsimonious dimension to their attitude.

Here's my worry:

• You and your firm agree to a client's request/demand that a certain matter is only worth "good enough."
• You give it good enough-plus 10%, let's say, just because you can't help yourself.
• Case closed.
• Tick....tick....tick
• Sometime later, things go seriously south with the matter formerly deemed closed.

Is good enough good enough any more?

And who's to blame-your firm or the client-for the fact that merely sufficient legal advice has come back to bite?

Actually, you might not want to let your malpractice carrier think about this too long.

What, then, is to be done?

We all know there are no guarantees in life, but I also believe that consenting adults can reach free market solutions-premised on full disclosure-that help people anticipate what the rewards are if things go right and where the responsibilities lie if things go wrong.

So, for starters:

• Be ready for, and open to, "good enough" engagements.
• But think about them especially hard--ironically, harder than you might think about bet-the-ranch engagements.
• Have extended, open-ended, probing conversations with your client opening their eyes to the full implications of "good enough."

And finally, don't underestimate your own firm's market power. That's what clients are trying to start to exercise. They're not the only party at the table.

Update:  Steven Levy, a loyal reader, writes:

I think this is a question that people are just starting to address.

Any business decision contains risk, and good decision-makers build risk premiums into the overall cost analysis. Why is it not reasonable to sign a work agreement in the legal arena recognizing and accepting risk? We do it everywhere else. For example, my home insurance excludes earthquake damage. (I live in an earthquake zone, and so I choose to purchase separate earthquake coverage.) Both the insurer and I recognize the limits of the coverage.

Agreements to engage legal services are negotiations between two highly competent and knowledgeable parties. Why can't they include a definition of 'good enough' that makes clear the quid pro quo of less money/less depth?

You can read more of Steven's thoughts, including his elaboration on the earthquake/risk analogy, at his "Lexician" site.

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

Unfortunately, I've seen, up close and personal, law firms that suffered serious setbacks-or even failed outright-due to what could only be called "failure of succession planning."

What brings this to top-of-mind prominence is of course everyone's obsessive issue namely The Great Reset we're still experiencing, with an environment unlike anything current managing partners and senior leaders have ever seen before. If your firm is soon to be looking towards a new firm chair (by clicking of the term limitation clock or otherwise), you would be extremely well advised to think about succession planning.

A word about term limits: First, I'm of mixed mind about them. Second, I'm against them. Yes, I see and understand the attraction of wanting an institutionalized way to instill fresh blood, and sclerosis is an organization-killer second to almost no other. I have also seen more than one firm blessed by a gifted leader who had to step down after the allotted eight (or whatever) years, only to be succeeded by a relatively inept compromise-choice who at best oversaw a period of treading water for the firm and who at worst led to its actual implosion (no kidding).

But if the incumbent is doing a great job, knows how to do it, remains fresh and energized and challenged by the job, and finally and most importantly continues to maintain the good will and enthusiastic endorsement of the partnership, why stop a good run short? Ultimately, the cure for a super-annuated leader is for someone to challenge them and win. When the time has come, my prediction is reliably that it won't be that hard.

Back to succession planning.

McKinsey has now stoutly weighed in on this evergreen topic, hanging their story on what journalists like to call a "peg":  Ken Lewis' announcement that he would be stepping down as CEO of Bank of America, with no remote plans for an actual successor in sight. And if you're feeling defensive right around now that your firm has no concrete succession plans in place, McKinsey reports that while 84% of directors believe such planning is more important than ever, only half actually have a plan in place.

Here's the diagnosis and, to some extent, the prescription:

So why doesn't succession planning get the attention it deserves? For CEOs, spotting the talent that will eventually replace them can be an unwelcome intimation of executive mortality. For boards, bringing up the succession can feel awkward when things are going well. When they are not, it can feel like a threat. But these are excuses, and not particularly good ones.

When CEO succession is a regular, structured process that forms part of the board's agenda, it becomes a matter of routine, no more sinister than the annual compensation review. In fact, boards should view CEO succession as a strategic process intimately related to corporate performance. To that end, succession planning should include not only the CEO's job but also all mission-critical positions in the organization.

Now, you don't have a "board," but presumably you have an Executive Committee or the functional equivalent. And de-fanging the process by extending it to include all "C-suite" executives and practice group leaders should also help.

The next question is: What are you looking for?

Let's start with your firm's strategy.

You need someone, to state the obvious, who buys into the espoused strategy. With a vengeance: Lip service won't cut it. And you might even want to think about bringing in an outsider for a dispassionate view:

The board and the CEO must therefore agree on the company's future strategy and the competencies it will require and then agree on how they will be assessed and evaluated in the candidate selection process. If succession planning reveals a fundamental misalignment within the senior leadership team, that discovery can be a blessing in disguise if it happens early on.

One Fortune 500 company, for example, engaged an independent third party to interview each of its directors as part of the succession process. It learned that there were diverse opinions among the directors on whether the company should continue to pursue an aggressive acquisition strategy, which had been the primary vehicle for growth, or focus during the next few years on integrating the most recent acquisitions. This finding resulted in an open discussion between the board and the incumbent CEO. In the end, they jointly agreed that while a near-term focus on integration was critical, the company also needed a measured M&A strategy for future growth, and therefore a CEO with proven competence in M&A.

The McKinsey piece goes on to describe whether it's optimal to only look inside the firm (never!) or to explore another option altogether:

The second component requires looking outside the company to map and benchmark the talent market. How do our people compare? Who might be available? Companies that fail to ask these questions can become myopic, thinking that they have the talent they need when they don't.

The day a law firm does this, of course, will be the day we all know that we have truly grown up as a professionally managed and sophisticated industry. Or else we will have lost our souls. Uncharacteristically, I remain on the fence about that. But those of you following at home can think about it.

Lastly, how about a dose of reality about how this is all really done today? And how would that be? By process of elimination, of course. Our next Managing Partner needs to be:

• Not too young and not too old;
• From a significant practice area in the firm;
• From a major office in the firm, if not historical headquarters itself;
• Exceptionally well regarded as a practitioner;
• With a high record of billable hours, origination credits, and business generation;
• Who has mentored some associates who have become successful;
• And who doesn't have significant cohorts of the firm aligned defiantly against him/her.

Once you eliminate folks not able to slip through all of those gates, you generally find yourself with a very short list indeed. Actually, it often has just one name on it.

Scientific it ain't, but that seems to be how we typically do this.

Could we do it better?

Need we do it better?

The next few years will test firms, I submit, as they have never been tested before in living memory.

Succession planning deserves a bit more respect. Just a thought.

Earnings Season is now in full throat, and we're beginning to see a remarkably consistent pattern emerge:

• Revenues essentially flat to down 10%
• Profits flat to slightly down-but PPP flat or even up a bit

I generalize, of course.

But here is some of the evidence (these are randomly selected from more recent releases):

I could go on, but you get the idea. And again, I emphasize that these are random names, selected, frankly, from the latest data I could readily put my hands on. I would like to think a random sample implies it might be statistically representative of a larger universe.

So what do we see?

The first column, revenue, ranges from essentially flat (certainly inflation-adjusted flat) to rather seriously down. This is of course the pole star that management must manage to. It's a rigid, unyielding number, particularly in cash-basis accounting businesses, from which there is no escape in terms of everything else you can try to manage on the expense side of the income statement. More on the implications of this in a moment.

"Net profits," the second column, are pretty much all over the place, but I'm not sure how much information that metric contains, so this doesn't particularly alarm or delight me.

When it comes to RPL, however, faithful readers will know that this is one of my favorite all-purpose law firm "performance" measures. Why? First of all, it's hard to fudge either the numerator or the denominator. (Sure, you can play games with FTE's and so forth, but frankly most firms aren't that focused on this metric to go to the bother.) So what's the RPL story?

To the extent it's disclosed, or calculable, I view RPL as something of a rough proxy for "quality of practice." By that I simply mean that the more clients are willing to pay you, on average, for a lawyer-year's worth of time from your firm, the higher the value clients place on what you do for them. At the margins and in the short run, this may be influenced by tweaking hourly rates or recognition percentages, but over the long run and in extremely revealing ways, the trend of your firm's RPL (vis-a-vis your peer group, as always--discipline, people!), be it up or down or sideways, tells an enormously important and almost incontrovertible story about the trajectory of your practice. You can be going up-market, down-market, or staying-market, but RPL, over time, won't lie.

So again, what does RPL reveal? Pretty simply this: It was a tough year. If you eliminate the highest and the lowest changes in RPL, the remaining cross-section looks like it's down in the middle single digit percentages. The sky is not falling, but people clearly aren't as busy, or aren't as busy on valuable matters, as the previous year. But the most important part of that sentence is the introductory clause: We're not in dire straits.

Finally, of course, column #4, the sexiest column of the all. Permit me to suggest that the PPP story is the second simplest story to tell, after the gross revenue story. Again, eliminating the highest and the lowest to normalize against outliers, the story is one of essentially flat year over year PPP.

The two key numbers come back to this: Revenue flat to seriously down, PPP flat to very mildly down.

Here's where I think law firm management deserves credit (again, generalizing).

Most of corporate America would be delighted to have emerged from 2009, or any difficult period, with revenue decidedly down but profits marginally up. It takes turning the ship quickly. And here's the good news from our industry: We did just that.

If you look at any of the charts tracking layoffs during 2009 (if you haven't, that's OK, I have so you don't have to), more than half the year's total layoffs took place in the first 3 months of the year. In other words, management reacted quickly.

Remember that September 2008 was the carpet-bombing month of damages to the financial system: Not just the Lehman bankruptcy, but the WaMu takeover, largest in history by the FDIC, the death of investment banks as we know them, the BofA/Merrill takeover, the $85-billion AIG investment, the Fannie Mae/Freddie Mac implosions, and even more-all in a single 19 days.

For firms' management, widely if not across the board, to have responded with historically drastic measures one short quarter later is, to me, nothing short of surprising. Management deserves more credit than it may have gotten.

As an industry, we did respond with alacrity. Kudos where kudos are due.

Now, two last thoughts.

First, the human toll of layoffs.

Putting aside partners who were overdue to be "spoken to," non-equity partners who were in place only because of a cowardly preference by their practice group leaders for avoiding awkward conversations, associates who long since "checked out" psychologically and in terms of commitment, and staff who might have come to view their jobs as sinecures--all of whom needed to be excused for the health of the firm overall, and overdue much of it was--there are still the legions of people who were collateral damage. People who were doing their best, even if it wasn't good enough. My heart goes out to them, and I've known more than a few.

But second, the Darwinian logic of the marketplace that compels firms to sustain PPP in the face of the most gruesome downturn in any of our careers is not cavalier and not selfish.

Why is PPP so important?

Because it is nothing less than the lifeblood, in today's currency, of firms' ability to compete for talent in the market. (Whether tomorrow could look different is a story for another day.)

If management allows PPP to take a serious hit in today's hyper-mobile environment, they may find that all of a sudden there are fewer partners and no profits. Lights out. And that, of course, is when the collateral damage to the secretaries with 20 years' service and a learning-disabled child at home hits you between the eyes.

Jack ("Neutron Jack") Welch famously said that his 20/70/10 forced-ranking of stars, the solid bench, and the ankle weights who had to be cut off, was not inhumane. It was the only way to provide a healthy and ever-renewing organizational environment going forward in which the stars and the solid citizens would not be tethered to the subpar and the serving-time.

So looking ahead to 2010, take heart. By and large we did what we had to do at the start of 2009, and the numbers, which overall and in the long run don't lie, are starting to report that story.

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.

Do you occasionally despair of changing the status quo, no matter how irrational it has exposed itself to be, simply because of the vast inertia associated with "the way it is," not to mention the vehemently self-protective behavior of any organization whose importance would be diminished--or, quelle horreur, whose very reason for being would be destroyed--by a move to a new reality?

First of all, despair is a remarkably unproductive approach to most problems.  An optimist at heart, I resist succumbing at all costs, regardless of the odds.

Be that as it may,  I believe the odds have just shifted--dramatically--in favor of ringing the death knell for what has become a toxic, market-poisoning, and increasingly archaic institution:  One which may be a walking antitrust violation to boot.  That would be?

NALP.

Here's how the stars are aligning.

In late December of last year, I decided to write about the defects and vices inherent in the NALP-dictated law student hiring process.  Most of you presumably have not seen my column on this topic, since it appeared in the Adam Smith, Esq. monthly subscriber-only newsletter. 

[If you're wondering what our monthly subscriber-only newsletter is all about, it's quite simple:

The newsletter, distributed by email monthly and archived permanently online at a password-protected site, contains material which has not appeared on this site, the Adam Smith, Esq. online publication, which of course remains free.  By contrast, the newsletter's premium content includes several articles each month which have not been published here and will not be published here.  Annual subscriptions are available at modest rates, including rates for individuals and firms of various sizes.  Firm-wide subscriptions are quite economical on a per capita basis.  You can subscribe here]

Since my views on NALP have not materially changed in the few short weeks since I wrote my original article, permit me to reproduce some of its highlights.

The "Great Reset," as I call it, exposed many latent flaws in the BigLaw business model, which happier, more oblivious, and more affluent times forgave and excused us from having to recognize. (Indeed, many did not recognize them as "flaws" at all; they were simply the honorable traditions of a profession that had always done things the way they were done.)

One of the most irrational was the excruciatingly long lead time between committing to hiring what would, de facto, be incoming associates, and knowing what the actual marketplace demand for additional young lawyers at your firm would be when they finally joined, years later.

Consider the timeline:

• Can you project the demand for new starting lawyers three years hence? Well, that's precisely what you were expected to do. And for long enough, it didn't really matter. But here's how it works:
• Given the highly significant datum of first year law school grades (sorry, lost my head), your firm interviews these 1L's late in the summer before they start their second year, making them offers to be summer associates one year hence.
• After they become summer associates, it is of course one more year before they'll start.
• Unless they clerk for a year--and we like people who clerk!--in which case add a year.

So when you were projecting the demand you'd have for new lawyers in September 2009, you had all the data you needed--given that it was summer 2007 and not Ben Bernanke, not Hank Paulson, not Warren Buffett, not anyone in sight, knew what was coming.

Clearly, this works splendidly:  Assuming, that is, that your firm and law students alike enjoy canceled and postponed offers, the prospect of a "pileup" next year as this year's deferred grads run into the new crop, the drastic measure of some firms' simply "taking a year off" recruitment altogether, and the manifestly open question of whether deferred start dates may not turn into canceled start dates.

While corporate America has moved relentlessly towards "just in time" supply chains, we seem to be stuck in the prehistoric past. Are MBA's hired this way? (No, to state the obvious--if they were, they'd be hired before they even started business school.) BA's? No. Ph.D.'s? No. So why JD's?

One word: NALP.

NALP was founded in 1971 and, like many organizations well past their first generation, it's showing signs of having lost sight of its mission.

What are the symptoms of this?

For starters, organizations tend to become more and more self-referential as they enter senescence. Exhibit A: The NALP"History" page devotes a good three-quarters of its space to recounting the original members present at the 1971 founding, the locations of every annual meeting, and all the past presidents. Not a word about changes in the legal marketplace over the past half-century and how NALP has responded.

Exhibit B: It has five-year strategic plans.

Exhibit C: It has a "Mission" (bad initial sign), the introductory paragraph to which reads in full:

"NALP is dedicated to facilitating legal career counseling and planning, recruitment and retention, and the professional development of law students and lawyers."

What's wrong with that?

Simply that I have never, in a lifetime of working in law firms, in-house, and now as an analyst of and consultant to the industry, ever heard a single soul mention NALP in connection with any of those activities. They may think that's their mission but, to be charitable, they are flying under everyone's radar.

But all this is really unfair, because it's too easy.

Here's the real horror about NALP: Its reaction to this seismic shock our industry has been going through for 18 months (with no convincing signs that we're out of the woods).

Faced with:

• The highest level of layoffs since reporting began was in 2009. Worse than that, actually: More layoffs occurred in 2009 than in all prior years combined.
• Numerous failures of "name-brand" firms with, I predict, more to come.
• Soup-to-nuts re-evaluations of associate career paths.
• Soup-to-nuts re-evaluations of alternative billing.
• Soup-to-nuts re-evaluations of outsourcing, "staff" and "contract" lawyers.
• Widespread firings of non-equity partners and de-equitizations of full partners

Yes, faced with all this, once-in-a-career events each and every one, NALP's response was? This past July, to reaffirm its principles absolutely without change, amendment, or even sober relaxation of them in a time of crisis.

Here, specifically, is what they said:

Nevertheless, after weighing a variety of options, the Board is convinced that this is not the time to abandon or change the ethical guidelines that direct our professional expectations and behavior, and we urge all NALP members to adhere to the Principles and Standards.

These are the unmistakable indicia of an organization utterly out of touch with reality and resolutely determined to elevate the sanctity of its own pronouncements above the well-being of those it supposedly serves.

One thing has changed since I wrote those words, namely that on January 7, 2010 the NALP "Commission on Recruiting in the Legal Profession" released a report containing recommendations for changes to the annual recruiting season, the core of which is to prohibit any offers of employment to 2L's until sometime in January, the so-called "Offer Kick-Off Day."  Further, offers extended on the OKOD would remain open for 14 days.   Bear in mind that interviewing would still occur in August, but that firms would be forbidden from "signalling" their interest in any individual student for nearly the next six months until OKOD.

All of this to be enforced by an elaborate and draconian system of law schools' concertedly threatening to boycott offending firms--charmingly called "cheaters," and tagged as engaging in "unethical" conduct.

While I am only an armchair and not remotely an expert antitrust practitioner, Jones Day recently submitted Comments to NALP (the 8-page letter available here, which I commend to you in its entirety) not only attacking the logic, fairness, and even feasibility of the revised NALP proposals, but also making a compelling prima facie case that the proposal is deeply suspect as a matter of law, constituting a concerted refusal to deal or group boycott.  Greg Shumaker, Jones Day's hiring partner, who authored the letter--and who I was able to interview on the phone about this--writes:

In any other industry, this would immediately be perceived as suspect under the antitrust laws.  Efforts by associations and professional organizations to "regulate" competition among themselves have been found to violate the antitrust laws in numerous contexts.  [Citations omitted.] 

Given the adverse effects on competition and on law students, the Report's proposals, if agreed to by law schools and firms and challenged by an appropriate plaintiff, could well be found to be an illegal restraint of trade. [Page 6 of the cited letter.]

While Greg told me, as of the time of our conversation (a few days ago), that no other large firms had expressly offered support, I have to believe more will get onboard as they think through the actual ramifications of the proposed NALP rules.

Indeed, in an opinion piece published today in The National Law Journal, Peter Kalis, the chairman and global managing partner of K&L/Gates, characteristically minces no words in his denunciation of NALP:  Indeed, the title of Pete's column is the pungent and terse, "Abolish NALP Now."  (Disclosure:  I consider Pete a friend.)

NALP is, and for some time has been, a market imperfection -- no more and no less. For the common good, it should be abolished, and we should start from scratch.

Consider some elements of the NALP-enabled hiring regime:

• Employers meet on campus with law students for 20 to 30 minutes. What can you learn about a candidate in a 20- to 30-minute interview except whether he or she drools? What can you learn about a law firm except whether the interviewer is an imbecile?

• At many law schools, employers can't prescreen their interviewees. In some instances, employers are not permitted to see transcripts in advance. At times, employers are required to interview students who don't even rate the employer as a likely destination.

• Because of the importance of law firm summer programs, interviews and hiring decisions are essentially made two years in advance of a start date and after two semesters of legal education.

• Offers are required to be open for 45 days. Employers interview law students in August, invite them to visit, extend an offer after the visit and then keep the offer open until November or December. The 45-day requirement deadens a market that should be dynamic and highly interactive.

• From the students' standpoint, the system allows stars to hoard offers, freezes employers in place and deprives the market of the fluidity necessary to operate efficiently.

In the past couple of years, the Great Recession impeded the orderly flow of law students into the profession. Law firms scrutinized their business models, including their hiring assumptions. It was a time for nimbleness on all sides if the interests of law students and employers were to be served. Yet the NALP-enabled system -- including, inexplicably, rigid adherence to the 45-day requirement -- plodded woodenly along in fall 2009 to the detriment of all concerned.

Pete writes that he "earlier passed on [his thoughts] to NALP," and discusses further irrational elements of the new NALP proposal:

• Although no formal offers could issue before the January date, firms could give "winks and nods" to their top choices starting with interviews the prior August. Law students would have a sense of which firms will extend offers to them, unless, of course, law firms wink and nod indiscriminately to keep options open.

• This would create an intensely competitive but sloppy and confusing recruitment atmosphere resulting in weeks and even months of wining and dining and follow-up visits, a substantial increase in the cost of recruiting and more disruption to legal education and students' personal lives. To what end? Competition for jobs and talent should focus on finding where the merits and aspirations of the student and employer intersect, not on shock-and-awe campaigns. There should be a rational relationship between energy expended and insights gained on both sides.

• Students would be distracted by the longer time period in which to sort through employment choices for the following summer. Can it be good for law schools and law students that the entire first semester through examinations would be spent in the recruitment orgy?

• The most stellar candidates would await and receive offers from multiple firms, and, with no contrary incentive, those students would be unlikely to withdraw from consideration before the January date or to release a single offer after the January date.

• Prior to the 14-day acceptance deadline, candidates could accept offers and then withdraw their acceptances when they have an offer they desire more. This would cause an administrative nightmare and would hamper firms' efforts to achieve the appropriate class sizes and yield.

From the perspective of a simple economist, the most profound flaw in NALP's unilaterally imposed scheme is precisely the one Pete identifies, and which Greg Shumaker also discusses:  The sheer unreality, given human nature and the essence of competitive markets for talent, of expecting there to be no signalling between August and January.

But of course there will be signalling.  Not only will there be signalling, there should be every reason to encourage it.

Of course, once one admits that signalling in this artificially constrained timeframe makes perfect economic and competitive sense, then taking the next step is both trivial and inevitable:  Why resort to the imperfect mechanism of signalling (sometimes signals are misinterpreted, after all, not to mention that they require inordinate investments of time, energy, and funds in utterly unproductive activity, a deadweight loss all the way around)?  Why not just make the offer?

My own suggestion is that firms do just this.

As I wrote in December:

So what's to be done?

It's actually quite simple: Starting tomorrow, ignore any and all NALP guidelines and so-called "principles."

Clearly, NALP has become a toxic organization that:

• Straitjackets law firms into economically unworkable timelines;
• Forces law school career centers and deans to toe an unrealistic line which only discredits their opportunity to be of real service in a dynamic economy; and
• Most shameful of all, puts defenseless law students in absolutely untenable positions.

Hard to do, you say?

I ask: Who elected these guys, anyway? Who on earth do they think they are?

In one of our recent First Lady's immortal words, "Just say no!"

And what, then, of next recruiting season?

Simple:

Where: Rent a hotel suite just off-campus at schools you want to target, or simpler still, invite students straight to your offices if you have a location in the same city as a school you're recruiting at.

When: Whenever you are good and ready, and the market will tell you as much.

Why: To retake control over the indispensable pipeline of supply--talent--that is all you have to offer your clients in the future.

When an organization has manifestly outlived its usefulness, when it arrogates to itself the single-handed power to attempt to subvert the orderly workings of a critical marketplace for talent, and when it evinces not the remotest understanding of the folly of its proposals, that organization must die.

My December article had the same title as this column, but Pete's title is pithier:

Abolish NALP.  Now.

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

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

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

So let's listen for a moment.

He said two things that struck me:

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

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

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

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

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

But enough on that.

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

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

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

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

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

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

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

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

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

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

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

Q: Have you seen a change in attitude?

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

And second, in terms of client expectations:

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

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

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

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

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

So:

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

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

Thanks, Cesar.

If we were in Corporate Land, this would be the beginning of earnings reporting season, with the close of the customary calendar year-fiscal year for most of BigLaw.

It's too early to draw any statistically solid conclusions about what 2009 looked like overall, but sometimes a report raises so many more questions than it answers that it begs for a bit of comment, analysis, and "deconstruction," if you will.

That would surely appear to be the case with Sonnenschein's reporting.

Here's the headline, from The American Lawyer:

Profits per equity partner dropped 3 percent at Sonnenschein Nath & Rosenthal in 2009, according to figures reported by the firm late Thursday, and gross revenue was flat. PPP fell from $804,000 in 2008 to $780,000 last year. Gross slipped from $473 million in 2008 to $472.5 million, according to the firm.

So far, so innocuous. But if you read a bit more carefully, there's more to the story.

First of all, Sonnenschein added 100 lawyers from Thacher Proffitt effective January, 2009. To add 100 lawyers and be "very pleased" that gross revenue was flat must establish some new apogee or highwater mark in redefining "the new normal."

Second, the decline in RPL (using an apples-to-apples, same accounting method comparison, of which more momentarily) is -11%. This is can only be viewed as a quite negative indicator which suggests the firm, despite going through three rounds of personnel cuts in the past 18 months, may not yet be "right-sized" or certainly is not achieving pre-bust utilization rates.

Third, PPP dropped more than 12% in 2009 vis-a-vis 2008, and now we are told it dropped another 3%. But I understand that partners have been told that cash distributions to them are off 19%. This doesn't quite compute if PPP is actually down just 3%, unless something strange is going on with "cash."

Which brings us--fourth--to the weirdest and most inexplicable part of the Sonnenschein news (emphasis supplied):

The firm also restated its 2008 gross revenue numbers Thursday. Last year the firm reported $492 million in gross revenue in 2008, but yesterday Sonnenschein lowered that figure to $473 million. The firm attributed the discrepancy between the two figures to a change in accounting. Sonnenschein previously reported gross revenue on an accrual basis, but now reports it on a cash basis...

This is a firm founded in 1906, which has used Arthur Andersen and now McGladry Pullen as accountants. Why would this be the year they would change accounting methodology? I have no inside information as to why that might be the case, but it strikes me as oddly convenient that the change in stated 2008 gross revenue from $492-million to $473-million quite nicely enables them to say that revenue in 2009 was "flat" at $472.5-million.

Well, aren't revenues revenues? And isn't the cash basis more rigorous than the accrual basis? Yes, and yes.

First, I for one can't imagine advising a client to "restate" revenues, any more than I can imagine restating a budget once it's set. You can miss the budget or exceed the budget, but the budget is the budget. In my book, rewriting history just shouldn't be done, however tempting it might be to succumb to the desire.  States that do this are rightly accused of Kremlinology.

And second, as for whether cash recognition of revenues is more disciplined than accrual, the short answer is of course it is. You either have the check in hand by midnight December 31st or you don't. No squishiness or wiggle room to that. No woulda-coulda-shoulda.

But ponder for a moment the other side of the Income & Expense statement: Expenses. If you were recognizing expenses on an accrual basis (conservative accounting), but now you only recognize them on a cash basis (more aggressive accounting), voila, I can virtually guarantee you that reported profits will go up. (At least as a one-time shot, but that's a story for another day.)

Now, please understand: I have no brief against Sonnenschein in the least, and I wish the firm, its clients, its partners, associates, staff, and their many dependents all the best in these times of unprecedented difficulty.

Sometimes, however, you have to look behind the story. If there are innocent and plausible explanations for all of this, I welcome them and will publish any comments I receive as updates to this piece (assuming the writers' permission).

In the meantime, take what you read with a grain of salt. Or better yet, a nod to critical thinking.

The link to the American Lawyer article on Sonnenschein's reporting appears to be intermittently broken, so here's the original article. If I've offended "fair use," I apologize forthwith to the American Lawyer but the thing about the Web is that links should work.

The Am Law 100:
Sonnenschein Profits Drop 3 Percent

The American Lawyer

By Ross Todd

January 22, 2010

Profits per equity partner dropped 3 percent at Sonnenschein Nath & Rosenthal in 2009, according to figures reported by the firm late Thursday, and gross revenue was flat. PPP fell from $804,000 in 2008 to $780,000 last year. Gross slipped from $473 million in 2008 to $472.5 million, according to the firm.

"[The] bottom line for us is that we are very pleased with the performance in view of the substantial investment we made in January of 2009 to add 100 new lawyers from Thacher Proffitt," Sonnenschein chair Elliott Portnoy said via e-mail Thursday. Portnoy (pictured at right) was traveling and unavailable for a phone interview.

Last year marked the second straight year of lower profits at Sonnenschein; PPP dropped more than 12 percent to $804,000 in 2008. The firm also restated its 2008 gross revenue numbers Thursday. Last year the firm reported $492 million in gross revenue in 2008, but yesterday Sonnenschein lowered that figure to $473 million. The firm attributed the discrepancy between the two figures to a change in accounting. Sonnenschein previously reported gross revenue on an accrual basis, but now reports it on a cash basis to match the method it uses to report net distribution to partners. The change in accounting affects Sonnenschein's revenue per lawyer numbers. The firm reported Thursday a drop of 7 percent from $778,000 in 2008 to $722,000 in 2009. When using the numbers the firm reported last year, the drop in RPL is 11 percent from $808,000 to $722,000.

Part of the RPL drop can be attributed to Sonnenschein's boost in head count. The firm grew from 608 lawyers in 2008 to 654 in 2009. On January 1, 2009, Sonnenschein added 100 lawyers from New York's Thacher Proffitt & Wood, including 40 partners. The hires--the largest lateral group the firm has taken on--nearly doubled the size of Sonnenschein's New York office.

The Thacher Proffitt lawyers brought with them a $500,000 contract awarded in December 2008 by the U.S. Department of the Treasury to advise on its investments in the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF). In March, Sonnenschein was chosen along with Cadwalader Wickersham & Taft and Haynes and Boone to advise the Treasury Department on its role in last year's auto industry restructurings. The auto industry contract carried a ceiling value of $8.59 million.

Sonnenschein, like many firms last year, also employed a number of cost-cutting measures. The firm cut associate compensation in June and announced in December that it would roll out a new merit-based associate compensation structure in early 2010. In September the Am Law Daily's colleagues at The National Law Journal reported that the firm cut about 30 lawyers, including 10 income partners--the third series of personnel cuts at the firm in an 18-month period.

This report is part of The Am Law Daily's ongoing Web coverage of The Am Law 100's 2009 financials. Results are preliminary. Final rankings and full results for The Am Law 100 will be published in The American Lawyer's May 2010 issue and on AmericanLawyer.com. The Am Law Second Hundred will be published in the June issue.

Before it's too late to miss the brief window of opportunity for prognostications about the New Year, here's one more.

But first, let's back up a bit.

By almost anyone's lights, 2009 was dreadful for our beloved industry, even appalling. According to LawShucks, BigLaw laid off (read: fired) 12,196 people, of whom 4,633 were lawyers and 7,563 were staff. This, of course, ignores the reality that layoffs are surely under-reported.

Ugly enough, and the raw statistics don't remotely speak to the genuine, and too often borderline-tragic, realities of defenseless professionals finding themselves "redundant" (as the Brits either charmingly or bureaucratically term it), highly talented and expensively educated one and all. Worse, these people find themselves on the curb for reasons that either had nothing really to do with their performance or, if it was tagged to performance, for demerits that would probably not have had fatal repercussions a year or more ago.

For better or worse, that's not what I want to talk about here.

Adam Smith, Esq. is about the economics of law firms, and that's our topic.

Everyone, I believe, long ago wrote off 2009 in their own minds as far as financial rewards go.

• Associates are inured to salary freezes or even rollbacks.
• Staff expect the same.
• Everyone but everyone expects bonuses to be downsized compared to last year.
• Many non-equity partners, as far as I can tell, count themselves lucky to still be onboard.
• And of course, equity partners expect PPP to be flat to down anywhere from 5% to 25% or more. (You've heard the joke that "flat is the new up?" Chase Bank is rolling out a new campaign that "save is the new spend." Can you say "The End of History-- I don't think so."? This new mantra is foreign matter to the American DNA, and will be rejected by the host if it seriously attempts to implant itself in our expectations.)

Financial results for 2009 are, of course, just beginning to trickle out, and if past disappointing years are any guide--none of course remotely comparable to this--firms will not be rushing to punch the "send" button to announce their figures. Indeed, as is our wont, we will want the aircover of other firms announcing bad or worse numbers before we try to sidle our news into the media slipstream around 5:00 pm on a Friday before a holiday weekend.

But 2009 is not really on the agenda any more. We know about 2009 ad nauseum, we're done and we don't want, frankly, to hear much about it any more.

Which brings us to 2010.

I don't know about you, but I can take one bad year in stride. We all would prefer not to have to face a bad year, but as long as everyone in sight is more or less in the same boat, you can live with yourself, roll with the punch, and wax philosophical about the arc of a 40-year career.  Your spouse, family, friends, and professional colleagues will all understand.

Not so for 2010. People will want to know why 2010 will be different, and better. This is a potentially perilous topic.

A few fortunate firms will be reporting results that are on par or even better with 2008. But I predict the vast majority will be down on year-on-year comparisons, certainly in terms of reported PPP and even more certainly in terms of internally realized and distributed PPP. At too many firms, capital calls are up, distributions are delayed, and the future is unclear.

The most important question as we enter 2010 is very simple: "What now?" And "Why different and better?" This is the question that will be coming from your partners, associates, and staff as we grind out of the repercussions of late 2008 and 2009.

What's your answer?

The answer had best be persuasive, credible, and, perhaps most difficult, consistent with who your firm is and what has gone heretofore. You can't realistically turn the place around if that means making it something it never was, never ought to be, and isn't what your people signed up for.

In other words, the priority for senior management for 2010 is not just "making the numbers"--challenging as that will surely be--it's giving people a reason to believe.

Why will 2010 be better? How, exactly? How does this fit my image and vision of the firm? Not just how does it advance my career, but how is it something I can buy into, hearts and minds? "Trust us" as a response won't cut it.

And if you get this wrong?

I predict 2010, not 2009, will be the big year of shakeouts in the composition of the leading firms--and I mean that across the board, whether you define your peer group of competitive and therefore "leading" firms as the Global 50, the AmLaw 50, the AmLaw 200, or regional firms in your local market.

The dynamics are fairly simple: People wrote off 2009, but they're not prepared to write off 2010.  By "2010" I really mean the foreseeable future of their fortunes at your firm.  If this was the "Great Reset," then you should have re-booted, re-imagined, and re-invigorated your firm by about this time.  If you haven't, "2010" really means "as far as the eye can see."

In turn, people's  faith in how 2010 may turn out at your firm depends on their faith in the strategic vision of the firm. Is it credible? Ownable? Distinctive? Why, again, is 2010 going to be better than 2009?  

If you don't have a compelling answer to that, be prepared for bad news on the people front.  We often say it, but sometimes the obvious is worth repeating:  Within five or ten city blocks of your offices (all of them), there are probably two dozen buildings containing 50 or 60 elevator banks leading to the reception areas of major competitors.  How hard is it, really, for someone to choose another elevator bank?

At the outset, I promised you a prediction for 2010. At the risk of your revisiting this in January 2011 and finding what follows utterly wrong (Adam Smith, Esq., on principle, never deletes anything from our archives), it's simple:

• We will see more firms fail;
• And more "surprising" firms fail;
• More firms merge;
• And more"surprising" mergers

in 2010 than we have in a long long time.  Economics may be the proximate cause, but a failure of vision and belief will be the core cause.

Happy New Year.

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.

Many have been the descriptors proposed for the period we've been living through since about the middle of 2007, but few strike me as more apt than "turbulence." Why?

• Turbulence implies unconscious, or at least unintended, forces at work causing the disruption;
• Turbulence is unforeseeable, both from a distance, and locally, while one is in the midst of it;
• Turbulence is unpredictable; it doesn't rise and fall in a convenient sine-wave pattern, it ebbs, flows, circles, eddies and creates water-spouts, becomes violent and quiescent.

And most importantly, it's almost impossible to "train for" turbulence. The best one can do is try to keep one's head while all around are losing theirs.

This brings me to Don Sull's recently published The Upside of Turbulence: Seizing Opportunity in an Uncertain World. Don is a professor of strategy at the London Busness School and--full disclosure--someone I count a friend. He also writes a regular column for The Financial Times.

Don begins by disabusing us of the notion that the current economic crisis is our first or our only encounter with turbulence. Instead, he posits that it's been on the rise for 20 or 30 years. By one measure (the likelihood that a firm will be knocked off its leadership position), turbulence increased three-fold. The frequency of currency or economic crises has increased four-fold.

What's driving this?

Primarily, the accelerating integration of the world. Technology now diffuses worldwide in utter disregard of "national" borders (what a quaint concept indeed, China's censoring of Google notably notwithstanding). According to Don, one-third of the world's population that was not heretofore part of the market economy has recently entered it.

How should leaders respond?

Let's start, perhaps, with how they should not--but how they typically do--respond. By digging in their heels.

Well, to be fair, we can be a bit more nuanced than that. Many organizations confronted with turbulence decide, perhaps not unreasonably on the surface, to dig down and do what they've always done best, only do it better.

So the world is changing a lot, you see the changes coming. You've got the data, McKinsey or somebody else helps you to get your arms around what's happening. And instead of changing what you're doing, you just step on the gas, spin the wheels harder, and hope to get out of the rut. Usually you end up digging yourself deeper.

This is what Don memorably calls "active inertia."

Another response is to try to focus especially hard on the telescope in order to predict the future, in the belief that if you just "squint hard enough" you'll be able to accurately anticipate the future.

Get real. (That's my advice.) Don is a bit more diplomatic:

"I'll be able to see through this foggy future. I'll be able to predict what's going to happen. I'll know what to do." That's just not going to happen. The record of people's predictions in business, or in any domain, is very, very poor. And as turbulence increases, the effectiveness of that approach decreases.

The final trap is trying to do what everyone else is doing. Now he's talking our language. As he succinctly puts it, if you're mimicking firms that are making the wrong responses, "it's unlikely that you're going to have a better outcome than they do." This observation of course is first cousin to Einstein's famous quip that the definition of insanity is doing the same thing again and again while hoping for a different outcome.

What, then, is to be done?

Be agile. Easier said than done, I know (and I've counseled agility myself). "Agility" is simply the ability to identify, and then seize, opportunities more quickly than your peer set. I've analogized it to running a race, where winners are dependent on native running ability, to be sure (but you have that, right?), but even more so on situational awareness of your competitors, seeing opportunities (a flagging competitor, or the fact that you're 200 yards from the finish and feeling strong), and taking advantage. But "seizing" the opportunity is apt, because in moments it will be gone.

We measure business opportunities in months or conceivably years, not moments, but the principle is the same.

First, you can be "agile" within your own operations: This is Toyota, or the Six Sigma god-head in general. Get smarter about what you do best, and do it better still.

Second, you can change your own firm's portfolio mix: Pull back from geographies and practice areas that may have outlived their usefulness (if they ever had a usefulness--topic for another day), and invest the saved resources in what you think the growth areas will be. Be attuned, in short, to opportunity costs.

Third, be strategically agile. Downturns provide, among other things, the opportunity to buy assets (office leases, most importantly talent) at below what-market-was a year or two ago. Be disciplined, be purposeful, but consider investing. Seriously.

Why? Don writes:

Many complex interactive systems--such as weather patterns, seismic activity, and traffic--follow what mathematicians call an inverse power law: the frequency of an event is inversely related to its magnitude. In turbulent markets, an inverse power law implies that companies face a steady flow of small opportunities, periodic midsize ones, and the rare chance to create significant value. Examples of golden opportunities include major acquisitions, transformational mergers, the opening of booming markets such as China or India, launching a breakthrough product like the iPhone, or securing hard assets on favorable terms during an economic crisis.

Given the unpredictable nature and uneven distribution of golden opportunities, a combination of patience (to wait for the right time to strike) and boldness (acting when that time arises) is crucial.

All this, of course, guarantees precisely nothing.

For one thing, how do you communicate the firm's strategic objectives to the partners, associates, and staff who will actually be the ones carrying it out? Don't you run the risk of inundating them with messages if you're trying to turn, relatively speaking, on a dime?

Well, yes.

All the more reason to stay focussed and decide very carefully about your priorities. Communicate those you truly believe in, in your gut. No more than three a year. Better, fewer.

But do not, above all, miss this opportunity.

A downturn brings hard choices into stark relief, provides an external rationale to justify difficult decisions, and offers "air cover" to reverse previous decisions. In the current market, senior executives should consolidate their major initiatives into a single list and make the hard choices needed to select a handful that are truly critical. To ensure that everyone gets the message, they should communicate the priorities throughout the entire organization, along with a list of initiatives that are no longer key objectives, to ensure that people do not waste resources on unimportant matters.

One final thought: economic crises can provide an ideal opportunity to invigorate the cultural transformation that is often needed to cultivate operational agility.

Cultural transformation? Indeed: That's where the rubber meets the road.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Were there reasons for this?

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

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

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

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

Lloyd Blankfein

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

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

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.

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

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

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

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

So is the same true for our industry?

I believe it is.

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

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

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

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

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

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

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

Litigators are facing no such risks.

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

So is there a fundamental threat to the boutique model?

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

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

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

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

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

Here the first in what I plan will be a series on Law Firm Business Models.

Today's topic is Regional Firms, and the focus of essentially every one of the columns in this planned series will be a discussion of whether the business model under examination is viable in the long run:

• What are its strengths and weaknesses?
• Are there characteristics or benefits it had to offer in the past that look to be less compelling, available, or plausible in the future?
• Conversely, are there reasons to believe clients will find the particular business model more to their liking in the future?
• What, if anything, is its particular appeal for lawyers?  (Remember Econ 101:  For law firms, clients are the demand and lawyers are the supply.)
• Does it have structural strengths or weaknesses vis-a-vis other law firm business models and which (strengths or weaknesses) seems more likely to grow in future?

Those are just suggestive questions, of course, and I imagine the particular discussion of any particular business model focus more on the traits of that specific model than how it fits into a Master Paradigm.  (I'm not big on Master Paradigms, in case you're wondering, and no, the initial caps were not to dress things up but to signal skepticism.)

So, whither regional firms?

Readers with very long memories might recall that fully three years ago I surmised that the merger of Kirkpatrick & Lockhart Nicholson Graham with Preston Gates & Ellis might portend something about the future of regional powerhouse firms. Specifically, The New York Times asked me what I thought or rather why I thought it might have happened, and proceeded to quote me as saying:

"Firms like Preston Gates that look to be comfortable as regional powerhouses may not in fact think that that's a very secure future, and they may want to ally with someone else and gain a bigger footprint."

I thought it might be true then and if anything has changed over the past three years it's only that I believe it more strongly today.

Why?

Fundamentally, we're no longer a regional country.

Much more meaning used to attach to "New England," "Dixie," the "Pacific Northwest," the "Rockies," and so forth. Now we're not so much a nation of scrapple in Pennsylvania, biscuits and grits in the South, baked beans in New England, guacamole in California, and bagels and lox in New York, as we are a nation of McDonald's and Starbucks and Denny's at one end and the Thomas Kellers, Bobby Flays, Wolfgang Pucks, and Gordon Ramsays at the other, all with their continent-spanning empires.

Even Times Square, for lord's sake, has become Gap-, Disney-, Toys-R-Us-, and Bubba Gump Shrimp-ified. It has turned into New York's great tourist-occupied outdoor mall mecca, with nary a local business left in sight.

Of course the well-chronicled, perhaps exaggerated, and surely overly romanticized assault of Big National Business on Small Local Merchants has been going on, as noted, for decades. 

As Exhibit A, I give you the department store industry, where Federated Department Stores, founded in 1929 in Columbus, Ohio, has been a consolidator extraordinaire.  Consider that it originally was a holding company for Abraham & Strauss, F&R Lazarus, Macy's, and William Filene's Sons of Boston, joined one year later by Bloomingdale Brothers of New York.

Here's a perhaps-incomplete list of the stores Federated has since acquired, merged with, or otherwise rolled up, all of which (with the sole outlier exception of Bloomingdale's) are now doing business under the unitary "Macy's" brand name:

• John Shillito of Cincinnati
• Rike Kumler of Dayton
• Burdines of Miami
• Rich's of Atlanta
• Foley's of Houston
• Sanger Brothers and A. Harris of Dallas
• Boston Store of Milwaukee
• MainStreet of Chicago
• Bullocks of LA
• I. Magnin of San Francisco
• Richway of Ohio;
• Twin Fair and Gold Circle (of various locales, merged)
• Lord & Taylor (subsequently divested as an independent entity)
• Famous-Barr of St. Louis
• Hecht's
• The Jones Store
• Jordan Marsh
• L S Ayres
• Meier & Frank
• Robinson May
• Strawbride's
• Kaufmann's of Pittsburgh
• And perhaps most famously and controversially of all, Marshall Field's of Chicago.

In a word, so long, regionalism.

So it has been with industry. If the South was textiles, Detroit cars, the Great Plains agriculture, and so on, now any company of scale that has survived has gone national and most international. You can say that this has been a trend since, say, World War II, and I would hasten to agree, but the internet has vastly accelerated it during the past decade.

Physical location is increasingly irrelevant. "Headquarters" has become almost a metaphysical term, and many law firms themselves (Jones Day, K&L/Gates, Latham) would tell you they have no such thing. Sourcing (shall we drop the term "outsourcing" once and for all?) has gone global, as have clients. Talent, capital, and most importantly of all for us, ideas, know few borders and no timezones.

What, then, is the precise marketplace niche of a regional firm?

If you suggest that it's knowledge of local:

• business conditions;
• law schools;
• recruiting environments and lateral candidate prospects; and
• cultural, philanthropic, pro bono, and other "soft" aspects of the local socioeconomic infrastructure;

then I would suggest to you that role is equally well served--perhaps better served--by the office managing partner of a national or international firm.

What are the remaining advantages of a regional firm?

Without (as I posit), a matching client base or an advantage in ability to track local conditions, I would turn the question around: Please (and I mean this) do tell me what you think the remaining advantages of a regional firm are?

We're all ears.