Recently in M&A Category

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

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

While you're thinking about that...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Three key reasons:

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

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

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

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

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

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

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.

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.

Hogan & Hartson/Lovells?

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

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

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

In addition, cities where both firms have offices are:

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

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

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

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

So: What does this really mean?

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

A sampling:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Merry Christmas, Happy Holidays story of the first order:

As noted this morning by The New York Times, Above The Law, and The WSJ Law Blog, Sonnenschein is acquiring about 100 lawyers, including 40 partners, from 160-year-old Thacher Proffitt & Wood—technically, not a merger of the firms but a large lateral group acquisition.  The lawyers come from Thacher's four main practice areas, including Structured Finance, Corporate and Financial Institutions, Real Estate, and Litigation, and include the chairs of each group.. 

The sad news is that this represents the end of the road for Thacher as a firm, but the reason to celebrate is that this extremely talented group of lawyers will have the opportunity to remain together, serving their clients from a broader, more diversified, and financially strengthened platform.

Are there larger lessons in this deal for our industry?  I believe so, but for now I'll leave those for another day.  (Hint:  They have to do with heavy concentration on specific practice areas.) 

For the moment, it's a much-needed vote of confidence in the ultimate recovery of the financial services sector:  Thacher's core clientele included all the biggest banks and investment banks and today a marquee client is the US Treasury Department itself, under the TARP program.  The sector will regain a pulse eventually, and this is a sign that I'm not alone in that faith.

Sad as it is to see a storied firm, bombed out of the World Trade Center twice and still resilient, reach the end of its road, what really matters is not the name of a brand, but the individual lawyers and professionals. No one at Thacher died during the two WTC attacks, and none will "die" professionally today. That's why it's a good news holiday story. They are living to fight another day, and (disclosure) from personal experience and acquaintance, I can testify that they're fighters.

Nothing less than a generational transformation of investment banking and the financial services industry at large.  Its implications for, among other things, the economies of New York City and London, the structure of global capital markets, and our own dearly beloved industry, are impossible to predict with any high degree of confidence, but I think we already know a few things.

First, as an AmLaw 50 Chairman I know well put it to me yesterday, "the business model of 35 times assets:equity ratios is over."  That works great in flush times but it kills you (literally) in times like these.

"Lend long and borrow short" was always a game that threatened to turn the tables on you at the worst times in the nastiest of fashions, and it turns out that "invest long and borrow short" is no less so.

Does this mean that the "Masters of the Universe" investment banks will more closely come to resemble--or pair up with--conventional deposit-taking banks? Of course, that's already happening, and we can envision a world where financial services institutions break down into:

• Truly global mega-banks (Bank of America, Candidate A) which take deposits, issue credit cards, offer mortgages, cater to every customer from retail walk-in checking account folks to small businesses, luxury private wealth management, and Fortune 500 underwritings;
• Boutiques offering investment advisory services, M&A counsel, and the like (think Greenhill or Evercore);
• Hedge funds, private equity, and venture capital (Blackstone, SAC, KKR, Kleiner Perkins); and
• Unknown and undefined institutions yet to be invented and unfurled.

The last point is the most important. Investment banking reinvents itself (by opportunity and necessity) every decade or so, and there's no reason to imagine this time will be any different. Where does this innovation come from? At the risk of contradicting my next point, historically it has come from New York. And who does it? Creative and, yes, greedy, investment bankers, but also lawyers at the premiere firms, working hand in glove to imagine, craft, and define the products and services the industry will offer in its new incarnation.

Depressed and demoralized? The sin, we know, in America, is not being knocked down. It's failing to jump right back up. We may have seen the end of investment banking as we've known it for the latter half of the first decade of this century, but we have not seen the end of creative financial engineering.

Second, this cannot be good news for the economy of New York City.

This pains me, as a Manhattan native born and bred, but I value realism over sentiment.

London already has the unspeakable advantage of time zone: If you want to do business with North America and Asia (not to mention the Mid East) in one day, London is a terrific place to be. It also happens to be a very civilized place to live, and it's possible to do so in fine style provided one's pay is denominated in pounds Sterling.

As for New York (the numbers vary), something on the order of 10% of all jobs in the City are/were in financial services, but they account for 25% of total payroll and a "multiplier effect" of 3 jobs per financial services sector job--which produce average annual salaries of $280,000. If you cut substantially into that employment, purchasing power, and tax base, as we're in the process of doing, everything from demand for caterers to jewelry to BMW's and co-op apartments is going to decline. Stemming the pain, we can only hope, will be the "America on sale" psychology, and reality, of the weak dollar, bringing foreigners here to drive demand for everything from, again, iPhones at the Apple Stores to Fifth Avenue apparel to Central Park West co-ops.

In the long run, New York will always be the financial capital of North America, and in some symbolic, enduring, and romantic, gritty, black & white night-time rain-soaked pavement sense, the port of entry to the American dream. But it will have substantial, and ever-stiffening, competition on the global stage.

Third, this is indeed a fundamental de-leveraging of financial institutions worldwide, as nicely captured today in a front-page WSJ article:

The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government's unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.

Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. [...]

At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.

But many of the distressed assets are hard to value and there are few if any buyers. Deleveraging also feeds on itself in a way that can create a downward spiral: Trying to sell assets pushes down the assets' prices, which makes them harder to sell and leads firms to try to sell more assets. That, in turn, suppresses these firms' share prices and makes it harder for them to sell new shares to raise capital. Mr. Bernanke, as an academic, dubbed this self-feeding loop a "financial accelerator."

Now that there appears to be a sort of "Resolution Trust II" on the horizon, we may be out of the immediate woods. But there's no question the financial services landscape is changing before our very eyes, in ways likely to last for the duration of many of our careers.

Fourth, it seems a virtual certainty, regardless of what happens in the US electorally in November, that we will be entering a more highly regulated world. And not just in the US, but in the EU as well.

You can applaud or decry this, ideologically, but everyone I speak to--unanimously--thinks it's a foregone conclusion.

Now, regulation per se is always a good thing for the business of lawyers. Whether it's a good thing for the economy and the vitality of our capital markets is something else altogether. On the whole, the consensus is that "new regulation is going to solve the problems that are already behind us. Just like Sarbox 'solved' the problem of Enron, retroactively, and just like the Transportation Security Department's airport screening procedures 'solve' the problem of 9/11, seven years too late." (This from an AmLaw 25 managing partner I spoke with today.)

His view, and mine, is that regulation is always backward-looking, and tends to be an encrustation on an already-existing structure, rather than a clean-slate, "zero-based budgeting" analysis of what we really need going forward. You read it here first.

Fifth, this type of economic environment will accelerate segmentation and consolidation in our industry.

Among law firms as among financial institutions, there will be winners and losers emerging from this downturn. Among the "losers" we may already count Heller (look for a post-mortem in these pages to come) and Thelen and perhaps one or two others that will outright cease to exist. Short of dissolving, other firms will find their competitive postures impaired, their attractiveness to laterals and law students compromised, and their viability as independent going concerns in question.

David Morley, new senior partner of Allen & Overy, announced last week in conjunction with release of their Annual Report:

I see us becoming the most successful of the emerging global elite of law firms. Those firms are beginning to set themselves apart when defined by scale, geographic reach, quality of people and concentration on high end, premium work for the largest clients. As each year passes the members of that emerging group, and what it takes to succeed in it, become clearer.

This throws down the gauntlet, does it not?

Yet I for one believe David has it precisely right. There may be six, there may be 12, but there will not be an AmLaw 100 or a UK 50 of firms that are truly viewed as the most global of players catering to the most global of financial institutions and corporations as we move on down the road into the second decade of the 21st Century.

If you believe that the tectonic shifts in our financial services industry going on this week mean that the world will be comprised of fewer and larger institutions, will they not indeed look to commensurately globally capable law firms? I believe they shall and must.

Sixth, what do you do now?

I believe you ramp up your competitive efforts. This is not the hour of the timid or the paralyzed.

If you haven't already figured out who you are and what you want to be, it is all but too late. Not "TOO late," but getting close. (And if you're on the fence about where you are, can we talk?)

If you have it figured out, but aren't there yet, this is the time to put your convictions to the test. Economic troughs like this don't cement the status quo, as I've said before, they tend to disrupt it. Now's the time for you to make your disruptive move. Incumbents may not like it, but there is no hereditary right of incumbency.

Above all, do not lose heart, be optimistic, believe in the value your firm and your partners can provide.

• Corporations' demand for financing, for credit, for leverage, and for capital is not going to diminish.
• Globalization is here to stay.
• Regulation is not shrinking, it's growing.
• Wall Street reinvents itself every decade or so; financial services are going to come back, securitization most prominently included.

Watch your costs.

Be opportunistic about the real estate landscape if you need to relocate or expand.

Hire and recruit prudently.

Ask probing questions about people and other assets who are on the street; it may be through no fault of their own, but then again.

Most of all:

Be bold. Fortunes are never made by buying at the top.

I've never seen so much opportunity as now.

Best of times or worst of times to make some acquisitions?

This is one area where the head/heart divergence may be more radical than usual—and where it could really cost you.

Here's how McKinsey poses the dilemma:

"As the credit crunch threatens to become a global downturn, corporate leaders have a choice: pull in their horns and ride out the storm or look for opportunities to pick up bargain-basement assets that will help them grow and create future value for shareholders. If past is prologue, more will follow the first course—which is a mistake."

The head/heart opposition is simple to understand:  While your head tells you that one of the best times to invest is in a downturn, that's precisely when your heart quails.  "Buy low, sell high" is advice so impeccable as to achieve the truly advanced state of tautological, but "buy high, sell low" is more descriptive of the way people actually behave across economic cycles. 

I may not be able to change your heart—only you in league with your spouse or your shrink can do that—but I can at least hope to arm you with the intellectual fortitude to mount a stalwart case for exploring some acquisitions now, in the teeth of the fretful and querulous naysayers.

Based on a survey of over 200 global companies, the authors (who also collaborated on the May 2008 book The Granularity of Growth), derive two pivotal conclusions:  The most powerful way to position one's firm for growth coming out of a downturn is through selective acquisitions during that downturn, and, conversely and with wonderfully rewarding and symmetric logic, during an upturn selective divestitures create slightly more value than acquisitions.

If only people behaved that way:

This shows the actual behavior across a sample of 537 product/service lines (from 187 companies) between 2001 and 2004, in reaction to a "major" (> 10%) upturn (top blue bars) or downturn (bottom green bars).  Essentially, the lessons are:

• Companies are more likely to divest during a downturn;
• And more likely to acquire during an upturn;
• While the reality remains that during both upturns and downturns the most likely course of action of all is simply to do nothing.

Again, this is understandable.  But that, I would argue, is less an excuse than an indictment of conventional wisdom. 

Do you want to "protect your balance sheet" during a downturn?  Sounds logical.  (And, to be sure, some firms simply aren't in a position to do otherwise.)  And as revenues flag and margins are compressed, you may focus on cutting costs and trying to at least match previous periods' earnings levels.

But the savviest growth companies do otherwise.  Famously (as even the usually somnolent business coverage of The New York Times realized in 1999), GE Capital immediately went on a capital spending binge following the Asian financial meltdown in 1997:

The last two years alone, [GE Capital] has made at least eight major investments in four Asian countries, expanding its assets to about $20 billion in the region. Acquisitions included two consumer-credit businesses, a life insurance company and a $5 billion leasing company in Japan, a consumer-credit business and a portfolio of car loans in Thailand and a life insurance unit in the Philippines. It also has its sights on a stake in a South Korean bank.

[...]

[T]he 1997 Asian financial meltdown and resulting recession turned the area into a vast bargain basement. Here was GE Capital's chance to buy up distressed companies and establish itself in the one part of the world where it lacked a strong presence.

''There's no question that financial turmoil has resulted in an environment that facilitates deal creation,'' Denis J. Nayden, president of GE Capital, said in a telephone interview from the company's headquarters in Stamford, Conn. ''Yes, we have moved into that opportunity.''

In other words, countercyclical growth works. 

If you're in a position to do so, think about trying some for yourself.  You may like where you'll end up on the other side of this credit markets lockdown.

We have our first comprehensive report on how 2008 is shaping up financially, courtesy of The American Lawyer, and Dan DiPietro of Citi's Private Bank, and it paints a picture of what are soon going to be, if they aren't already, vastly diminished expectations.

Let's set the scene.

Since 2001, we've enjoyed overall consecutive year over year growth rates at almost double digit levels in practically every metric that counts. Here are the CAGR (compound annual growth rate) figures for the 2001 to 2007 time span:

• Revenue: 10.6%
  • YTD 2008: 4.8%
• Gross billable hour demand: 3.9%
  • YTD 2008: -0.3%
• PEP: 9.3%
  • YTD 2008: -9.1%
• Growth in the ranks of equity partners: 2.9%
  • YTD 2008: 1.7%
• Associate compensation (roughly 23% of total firm revenues): 10.1%
  • YTD 2008: 15.2%

Now all of these trends have turned negative:

• Revenue growth has reversed, with demand the weakest since 2001
• Since firms have continued to add lawyers, there's "profit margin compression"--lower revenues hit higher expenses

And, fascinatingly:

The slowdown is hitting the most profitable firms the hardest. In the first half of 2008, demand dropped off even more dramatically and expenses increased at a more rapid pace at the top firms, resulting in even greater margin compression and a steeper drop in productivity than experienced by their less profitable rivals. The practice areas that normally provide a lift in a downturn -- restructuring, bankruptcy and litigation -- have not helped cushion the drop-off in transactional work.

It's not just a failure of the classic countercyclical practice areas to kick in; there appears to be a structural component involved as well.

When firms are broken out by profitability, our data produced an interesting finding. The firms that soared in 2002 through 2007 were harder hit in the first half of 2008 than their less profitable peers. From our sample of 165 firms, we broke out 63 top-tier firms (defined as those with profits per equity partner above $650,000 in the year 2000). Over the past six years, this group has consistently produced higher growth in revenues and PPEP than other firms.

That changed dramatically in the first half of 2008. Growth in PPEP for 51 of the 63 top-tier firms that reported their results to us plummeted from an 11.7 percent increase in 2007 to an 11.8 percent drop in the first six months of 2008. In contrast, their less profitable rivals experienced a 5.3 percent drop in PPEP in the first half of 2008. After reaching a seven-year peak of 7.4 percent growth in 2007, demand at top-tier firms actually dropped 1.6 percent in the first half of 2008. Again, this decline compares unfavorably with the 1.1 percent rise in gross billable hours at the other firms in our sample.

Top-tier firms experienced even greater profit margin compression than their peers, with revenue growth of 4.3 percent and an increase in expenses of 10.9 percent. In contrast, the other firms we surveyed had revenue growth of 5.5 percent and a rise in expenses of 9.1 percent. Demand at top-tier firms declined in both the first and second quarters of 2008, in contrast to their less profitable competitors, for whom demand dipped in the first three months but increased in the second three months.

The posited explanation is that since firms with the highest profitability tend to concentrate on serving the financial services industry's demand for transactional work, they are suffering disproportionately from the freeze gripping that sector. This rings convincingly true to me. And the data support it: Hours per lawyer have dropped 8% at these top-tier firms compared to a decline of 2.9% elsewhere.

One last observation from the report and then some commentary.

What Citi defines as "international" firms, with between 10 and 25% of their lawyers abroad, "experienced greater profit margin compression than any other group of firms." By contrast, "global" firms, with more than 25% of their lawyers abroad, have experienced the least profit margin compression.

If you assume that firms just beginning, or in the early stages, of international expansion are focused on the UK and the EU, this makes some sense: Those geographies are experiencing a similar, though not as sharp, a slowdown as we here in the US. So their geographic diversity hasn't helped much. By contrast, if you think Citi's definition of "global" firm identifies firms farther down the globalization path, they're likely to have substantial presences in Asia and the MidEast--areas anything but suffering from the Western economies' downturn.

More importantly, this speaks to the power of a diversified portfolio of practices--both by specialty and by geography.

So: What's to be done?

Since you can't create a truly compelling international platform by yourself overnight, you have one aggressive and one passive option. The aggressive one is to carefully, thoughtfully, and thoroughly explore a potential merger with a firm that, together with yours, would provide that international platform.

Globalization is here to stay, and the notion of a powerhouse firm based primarily in one country--no matter how large the domestic economy--will increasingly become a mark of irrelevance.

The more passive, or perhaps I should say more cautious, response is simply to do what you can to cut costs.

There's just one problem with cutting costs: Your biggest costs are (a) people and (b) office space.

You can't cut corners on either one. And, as many firms learned to their lasting chagrin after the dot-com bust, if you cut associate ranks drastically to improve short-term results, you have no mid-level bench strength when the good times return. Neither your clients nor people in your recruiting pipeline--nor partners who have to turn down work or over-stress their colleagues--forget this soon.

Which brings me to the real point.

Firms that are "suffering" (down 10% in profits?--let's get a grip, people) are probably in that situation because they made bets--hopefully calculated--to concentrate on practice areas that were hot. That's all well and good, if they were consciously chosen bets placed with an understanding of the odds of their coming up snake-eyes.

Managing a sophisticated law firm is not remotely a quarter by quarter exercise, and it's also not a year by year one. It requires explicit, considered, hard thought through choices about what your firm is, what it's capable of, and what it can credibly and realistically aspire to given your client base, your recruiting pipeline, and a clear-eyed view of your partners' and associates' appetite for change.

And then it requires a consistent communications effort, forceful, undeviating, adapted to different audiences at different times but indistinguishable in thrust. You need to be shockingly clear about the vision, able to crisply articulate it, relentless in communicating, and prepared to reinforce it all with carrots and sticks.

Come to think of it, maybe it's easier just to cut costs.

I recently had the chance to sit down with Jay Zimmerman, Chairman of Bingham, to discuss the changes he's seen over his career, and to talk about the future of the legal industry and Bingham. Herewith a synopsis.

Jay (Harvard, Harvard Law) started his career in New York at Debevoise, but within a couple of years moved to Boston and joined what was then Bingham, Dana, and Gould. Making partner in 1986, he relocated with his family the following year to London to manage what was just about then the tiniest office imaginable for Bingham--one partner and one associate--and ended up staying seven years. (Since Jay's transatlantic stint, the London office has grown to 45 lawyers, focused on financial restructuring and financial regulatory practices.) Enjoying the quintessential ex-pat experience, Jay got to the point where he never expected to return. But of course he did, to lasting effect.

"Are you sorry in any way that you left London? Obviously there's a school of thought that London has or will overtake New York as a financial capital."

"Well, I wouldn't write New York's obituary quite yet!" Nor, he volunteers, would he worry about the "New York elite" firms who haven't yet invaded London to a material degree. They have the resources and the will to do so when they see fit, he opines. "It's a problem lots of firms would like to have."

The firm he returned to relied on Bank of Boston (founded in 1784) for fully one-third of its business, and the comfortable relationship engendered complacency (my reading, although Jay would probably be more politic). Sure enough, in the recession of the early 1990's the Bank was challenged: Its share price hit a low of $3. In 1996 (we now know) it was to merge with BayBanks, then to be acquired in short order by Fleet (1999) and finally by Bank of America (2005).

Although Jay and his partners had no inkling of that subsequent history, it was clear that with such extraordinary over-reliance on one key client, and with essentially all of its 200 lawyers based in Boston, Bingham had what was not exactly a business model for durability in a world of change.

In 1994, Jay was elected Chairman and embarked on nothing less than a concerted transformation of Bingham, with no fewer than nine mergers since 1997, and the following results:

Increasing the number of offices from one with three small satellites to 13, across the globe;

• Quadrupling its size and then some to nearly 1,000 lawyers;
• Growing revenue eight-fold; and
• Increasing revenue per lawyer from about a third of a million dollars per year to nearly $1-million.

Last year was Bingham's best on the financial front. As for 2008, Jay reports that the firm is experiencing an even stronger first half compared to last.

How did Jay do this? As he observed drily, "fear is a great motivator."

Other firms have tried to move from a metropolitan or regional base to a national and even international platform, with varying degrees of success. How has Bingham done it?

"Well, for starters, Boston was, second to New York, perhaps the most sophisticated and highest-rate legal market in the domestic US. If you want to try to build a global firm, it helps to begin in what's a relatively high-end home market.

"LA has produced some absolutely terrific firms, Latham, Gibson Dunn, etc., but when you think about it the LA market itself is an uncommon place for very high-end law firms to come from: It's not a powerful financial capital, it doesn't have a lot of Fortune 500 headquarters, and its industries are widely dispersed. But then again, when you look at where other nationally prominent firms have come from (the Midwest, for example, and I say that as a St. Louis native), Boston wasn't the worst place to start."

It's clear to me, I observe, that Jay personally has been a large part of the driving force behind Bingham's decade of expansion. "How do you deal with the challenge of leading notoriously autonomous and independent-minded lawyers? Obviously this is a challenge for any managing partner or Chairman, but when you embark on a course of, essentially, transformation of the firm--not a 'steady as she goes' strategy--you've really upped the ante."

"It's probably a cliché, but it's communicate, communicate, communicate. I'm constantly traveling--in fact I just got back from London and Tokyo--and I meet and talk with as many partners, associates, and staff as I possibly can. I do videotapes. [There's a nice sampling on the firm's website--Bruce] In fact I just did a videotape for the summer associates, who are just starting. But there's no question it's a challenge. You need to be out in front of your partners, but not too far out in front."

And the message is?

"The message is two-fold:

"Number one, this firm is ambitious, and our lawyers need to be ambitious. They need to understand that. When I talk to people we're thinking of recruiting, I try to get a sense of their level of ambition. People want to fit in, and we as a firm want them to fit in. So ambition is part of what we're all about.

"Number two, we love change. You don't hear that often from a law firm, but the fact is that the status quo is good for incumbents, and we're not an incumbent. In change we have opportunity; in stasis we don't. So people here need to be prepared to embrace change."

I observe that law firms can be fragile institutions. Is that something he worries about?

"Of course. We're all here voluntarily. And when you're in the business of assembling a bunch of highly talented people, one of the consequences is that those people have options. The only reason they come back up in the elevator in the morning is because you've presented them with, and continue to present them with, an attractive career proposition. But yes, I pay a huge amount of attention to that. It goes back to communication, and to having people here who fit in and want to fit in."

Is "work-life balance" part of that equation? Part of the task of retaining talent? And how different is "Gen Y?"

"Well, they're really hugely different. The original IBM PC was introduced in 1981 and our new associates were born after that. They've grown up digital; it's not news. But I don't think the term 'work-life balance' is helpful, descriptive, or informative. If you're going to make it here, you need to be committed. What has changed is that commitment takes a different form. When I started at Debevoise, it was all about 'face time.' You needed to be seen in your office at 7 or 8 or 10 pm, and the same on Saturday mornings. But today of course you can work from pretty much anywhere--so long as you do the work.

"But again, the commitment hasn't changed. Look at young investment bankers starting out. They get told, 'Look, you're going to make a lot of money, but you need to be on call 24/7. We're not going to need you 24/7, but you need to be on call.' For our associates, what I tell them is that it's all about realism. If they're realistic about the commitment this profession demands--as well as the rewards, intellectual, professional, and otherwise, that it can provide--then they'll be fine. If they're not realistic, they're in for a rude awakening."

I ask if he's familiar with the industry structure I call the "hollow middle," where consumers gravitate toward either the high-end, high-quality providers, or the mass market, value providers, but not in meaningful numbers to any middle-market providers. This industry structure is remarkably common and seems to be stable--an "equilibrium," as economists would put it. For example (think about whether these don't represent your own buying patterns):

• Apparel (you want Armani or Gap)
• Cars (BMW, Lexus, Mercedes, or Toyota and Honda)
• Alcoholic beverages: Beer, wine, and liquor (fill in the blank)
• Groceries (Roquefort or a dozen eggs)
• Financial services (free checking for life or Bessemer Trust)
• Etc.

Jay thinks it may hold lessons for the legal industry. And we know where he wants Bingham to be.

I realize that I don't have a firm grasp on Bingham's international strategy, so I pose the question bluntly: "Tell me what it is."

Jay says he likes to use the phrase "global relevance." By that he means Bingham attempts to offer a practice focused on one of their core strengths, which is global restructuring and financial regulatory work. They strive to offer this in London, in Tokyo, and increasingly in Hong Kong. "There are a lot of opportunities out there which are very real--they're just not opportunities for us." In other words, Bingham doesn't need to have a dozen offices across the EU, or any offices in mainland China until the financial systems there mature a bit more.

"What makes this strategy work for you?"

"Well, first of all, there are spinoff benefits to other practice areas, including litigation, corporate, and finance work itself. But secondly, we're benefitting--as we have in other areas--from changes and even relative turmoil in the markets. I'll give you an example. Ten years ago in London everything having to do with restructuring distressed companies or distressed assets primarily involved banks: They had extended the credit, their covenants that were being violated, and they were in the driver's seat. Since we didn't have old-line relationships with those banks, we didn't have the connections necessary to attract that kind of work.
"But today lenders are all over the lot: They're hedge funds, maybe private equity, other sources of capital, and bondholders are no longer passive--they're aggressive. This gives us many points of entry, and they're not all the traditional institutional players. As I've said before, it's a different world, and that creates opportunity for us."

And what of the future?

"We believe that as globalization accelerates and the world becomes a more complex place, there will be increasing demand--both in absolute terms and across geographical regions--for sophisticated restructuring capabilities, again, with all the financial regulatory authority interfacing that goes with it. We don't think this practice focus is at any risk of obsolescence."

Regular readers will know that one of the "evergreen" topics here at "Adam Smith, Esq." is what can possibly explain the fact that for the past 30 years essentially 50% of law school graduates have been women and for almost the same period of time only about 15% of BigLaw partners have been women. Neither number is budging. Why, I ask Jay, is this?

"As a father of two grown daughters, I think about this often, so I'd like to take some time to share my thoughts on this. The unfortunate reality of today is that you can't defy gravity, but I am optimistic things will change.   By 'you can't defy gravity' I mean that graduates of our elite law schools, for the most part, marry people with equally promising career prospects. So you have all these couples composed of a pair of high-achieving people starting off.

"When it comes time to have a family, it often makes economic sense--putting aside any emotional issues--for one spouse -- and it is usually the woman -- to focus on raising the kids. If you assume that many of these couples are in a position to live on one income, it's probably not so surprising what we see happening in the workplace.

"This scenario is not unique to law firms. We need to do a better job as a society to ensure that there are equal opportunities for women to pursue their career ambitions -- and not be automatically placed in a position of choosing between starting a family or building a successful career. Ultimately what we can do, and I do believe that we do this at Bingham, is to provide the opportunity for all our lawyers -- men and women -- to succeed.

"For women, we encourage flex- and part-time schedules. It is not uncommon for us to elect women partners who are or have been part-time. We provide an environment where women are encouraged and are given every opportunity to succeed. Our efforts have not gone unnoticed internally as well as externally. We're consistently noted for our positive and supportive work environment by FORTUNE in its '100 Best Places to Work For' issue (for five straight years), and by Working Mother and several regional publications where we have offices."

As we're preparing to adjourn, Jay recommends to me a Harvard Business Review article that has been influential in his thinking, "Strategy as Active Waiting" [only available for a fee, but I've bought it and look for a column about it here soon]. The concept is essentially:

• Keep your priorities clear, but your roadmap fuzzy;
• Test the future; examine your assumptions; keep an eye on the horizon;
• While you're watching, keep the pressure on your day to day competitiveness; don't let up; and
• When you see an opportunity opening up, focus on it with urgency.

As I'm about to get up, Jay asks abruptly if I think leaders can be made.

"No, I don't," I say. "You can 'make' managers, and you can expose people with leadership potential to career-broadening environments (say, sending them to Hong Kong for 3 years), but no, I don't believe you can 'make' a leader out of whole cloth."
"I agree; nope, you can't." (I'm relieved to have provided the right answer.)

There's little doubt Jay has managed Bingham with urgency and focus. The challenge--scarcely unique to Bingham--is now maintaining their strategic focus as they expand internationally. And besting the hollow middle.

I'm at the Georgetown Law Conference on the "Future of the Global Law Firm" for the next couple of days.

I'll try to report in as close to real time as I can, but whether or not I achieve that objective, look here on "Adam Smith, Esq." for the most complete coverage of this promising and unprecedented conference.

The Times (UK) asks today, "Slaughter & May v Clifford Chance:  Who is pursuing the best route?"

The article puts head-to-head two concepts of what makes for a great and powerful law firm:  World-leading profits per partner, on one hand, vs. a truly global footprint and powerful international capability, on the other.  At over £2-million/year in partner profits, Slaughters is up where the air is very thin indeed—indeed, if you believe The Lawyer's latest rankings of the Top 50 US firms, one and only one firm is in that same troposphere, the usual suspect, Wachtell. 

But if what you care about is multinational local law capability, Clifford Chance is your horse.  In fact, in the past ten years Slaughters closed offices in New York and Singapore, leaving outside London only Hong Kong and Brussels.  It serves clients abroad through the familiar network of "best friends," and its friends are not only that but are highly ranked firms each in their own right:

• Bredin Prat in France,
• Hengeler Mueller in Germany,
• Bonelli Erede Pappalardo in Italy, and
• Uria Menendez in Spain.

We'll get back to Slaughters vs. CC in a moment, but first let's juxtapose that network of friends with thoughts from this piece courtesy of The Lawyer about "European unions." Citing Eversheds, Pinsent Masons, and CMS Cameron McKenna, the article posits that "With networks, national firms have found they can leapfrog City rivals with their own European offices, only without the hassle and expense of launching on the continent." Sounds a bit too glib to me, but let's entertain the hypothesis for moment.

Because, you see, we actually have not two models but three: Slaughters, CC, and the Networks. (You object that Slaughters is actually a Network, albeit perhaps a granddaddy of them all? I demur. Slaughters is Slaughters with or without its network: Eversheds, Pinsents, and CMS are far less interesting without their networks--and none of them is Slaughters.)

Slaughters would and does argue that its ability to provide absolutely top-notch service (advising 29 of the FTSE 100, more than any other City firm) is its trump card, and that having local law capability elsewhere is irrelevant in terms of why clients initially come to it--or, if relevant, that the top-quality "best friends" serves that need. CC would argue that corporate clients expect a seamless service delivery experience across all offices of their chosen law firms, and that only its footprint realistically matches that of its global clients.

Here's the issue as described by those on the front lines:

"The one-stop shops have a very powerful weapon, [Tim] Clark [retiring as senior partner at Slaughters] suggests: their brand. “This helps them to appear to the outside world as having a uniformity of approach and quality that is the same as their London office. Because that’s not necessarily the case, it allows us to compete very effectively.”

"[Guy] Morton [joint senior partner of Freshfields] counters by arguing that “the disadvantages of relying on a non-integrated network will become more pressing as clients become more truly international and more used to going to a single firm for multijurisdictional work”. There will not be a sudden implosion of the Slaughter and May model, he suggests, but the Freshfields model will gradually gain competitive advantage."

Both of course ignore the Network model. The truth is that there is no unitary "Network model:" There's a spectrum. At one end is CMS, where the firms are tightly integrated on virtually every dimension short of sharing profits. At the other end is a Nabarro, an Addleshaws, or a Berwin Leighton Paisner where relations are diplomatic and friendly but not exclusive or necessarily oriented towards closer and closer integration down the road.

Even Eversheds noted that its network partners wouldn't always jump when clients called until Eversheds landed Tyco as a major client and got the troops' attention. And other affiliations are at even more developmental stages: Addleshaws recently added the ability to do joint billing, and the service was considered noteworthy enough to merit coverage in the article. Other astonishing developments? Co-branded websites and integrated marketing materials! What next? A common currency?

Seriously, the point of a network is nothing other than seamless client service. The goal is not to create an organizational superstructure worthy of study in a business school case, but simply to deliver impeccable legal advice to clients who need cross-border integrated service and are indifferent to the letterhead of the person they're dealing with at the moment--provided only the prerequisite baselines of quality, timeliness, and consistency. Ideally, the client should see no difference whatsoever between the responsiveness of a "network" office and the responsiveness of one of the UK firm's own domestic branch offices.

Are these sustainable equilibria?

At fear of inspiring emails from those begging to differ (actually, bring it on), I believe loose, permeable, and utterly flexible networks are not much stronger than the tissuepaper uniting them. It seems less than dating, much less going steady and much much less than living together or getting married (merging). Not be flip about it, but more akin to what today's young adults categorize as "friends with benefits." Eminently flexible, eminently exit-able.

With commitments should come consequences, and without consequences there seems no real commitment.

Are there, still, "benefits?" Surely so, to clients and to the firms involved on both sides. The "referring" or hub firms gain needed expertise on the ground without the requirement to invest over a period of years or decades with uncertain results. The "referred" or spoke firms gain business they wouldn't necessarily otherwise obtain, and the hope of more in future. That, after all, is why these networks are so common. If they were pure and simple examples of market failure, they would cease to exist.

But we're not about whether they can or do work; we're about whether they're optimal, and I cannot believe in the long run they are. There are too many countervailing incentives, too much room for co-opting competition, too many reasons (economic and cultural) for impromptu alliances to fade away and disintegrate. A temporary solution, and an understandable ad hoc response to global clients and non-global law firms, but a response for the ages? I doubt it.

But this brings us back to the Slaughters vs. CC debate.

Building either firm is an astonishing achievement. With Slaughters, the ££ speak for themselves. With CC, the shockingly powerful network on the ground speaks for itself.

My question is whether in the next 10 years we shall see emergence of a firm that combines both: World-beating profitability, which reflects superb quality of talent and corresponding high-end premium work entrusted by the world's top clients; and a global network second to none, with robust Anglo-Saxon and local law capability worldwide.

Now that would be a firm to be part of—or to envy.

Today Altman Weil announced its release of The Legal Transformation Study:   Your 2020 Vision of the Future, published by Decision Strategies International:

“The comprehensive industry assessment identified 11 key global trends and uncertainties shaping the future of the legal industry, then developed four possible planning scenarios that the legal industry may face in the next decade,” said Paul Schoemaker, Ph.D., research director of the Mack Center for Technological Innovation at Wharton Business School, and the founder and executive chairman of Decision Strategies International.  “These four scenarios can be used as a framework for challenging current service models within the industry, answering key strategic questions, and helping stakeholders, including corporate law departments, law firms and legal service suppliers, identify proactive strategies to ensure future success.”

"According to Dr. Schoemaker, four possible scenarios for the delivery of legal services between now and 2020 are summarized as follows:

- Blue-Chip Mega-Mania: A model that emphasizes the global consolidation of legal service providers and the dominance of giant law firms with vast global presence and offerings spanning all legal areas.

- Expertopia: A scenario that envisions the increasing complexity of the law and challenges of corporations operating in multiple environments worldwide, thereby placing a premium on specialization and expert-driven cultures at legal services organizations.

- E-Marketplace: A model built on the premise that technology will be a catalyst, but not the core, for an industry transformation in which an array of Web-based technologies will make information more available and expert judgment more valuable.

- Techno-Law: A scenario that contemplates rising corporate investment in automation capabilities throughout the legal services industry, leaving only the high-end services to be delivered by legal professionals and potentially requiring a complete reconstruction of the traditional business models in the legal services industry.

“In the past, law firms and corporate law departments have frequently been taken by surprise by unexpected forces that directly influenced the practice of law,” said Jim Seidl, president of Legal Research Center and co-developer of the Study.  “The findings of this Study will empower legal service providers to proactively compete more successfully in the global legal marketplace, reduce the risk of unexpected business surprises and threats, and identify new opportunities for business growth in the next decade.”

“As a provider of services within the dynamic electronic discovery services arena, we closely monitor current trends and anticipate the future of our profession to help our clients make well-informed decisions and achieve favorable results,” said Greg Mazares, president and CEO of Encore Legal Solutions.  “The Legal Transformation Study is an important tool we can all use to prepare for any number of potential business scenarios.  We are pleased to have been a primary developer of the Study and look forward to sharing the results with our clients and other legal professionals across the nation.”

“This Study is a tool to test the resiliency of law firm strategic plans across a range of possible futures, or to develop new plans more likely to assure their success,” said Ward Bower, strategy consultant at Altman Weil.  “This is critical stuff for law firms.  If they get their basic direction wrong, they’re toast.”
 
“There can be no doubt that we are poised for significant change between now and 2020, with a wide range of business, technological and regulatory forces sure to have a major impact on the way that legal services are delivered to corporations worldwide,” said Mark Chandler, general counsel of Cisco Systems, and a Study contributor.  “This groundbreaking Study identifies the likely components of these industry changes and prescribes important guidelines for how corporate law departments, law firms and other legal service providers can start planning now to seize these emerging opportunities while protecting against competitive threats.”

Sponsors include of course Altman Weil, and Jomati, but also Encore Legal Solutions, Bridgeway Software, Inc., Deloitte Financial Advisory Services LLP, DuPont Legal, Eversheds, Intellevate, Meritas and Solomon Page Group LLC. 

You can order a copy here. 

Just back from an abbreviated week in London (essentially Tuesday through Thursday).  Herewith a report.

I met with the managing partners of a good half-dozen firms, fairly representative of the marketplace, and unsurprisingly the top question on most minds is what the economic downturn portends.

Unlike most of life, where a bell curve distribution is the best first approximation of almost any sampling, views on this topic are bimodal:  Either people tend to believe things could get quite bad indeed, or else their  firms are having bang-up first quarters here in 2008.  To be sure, those on both ends of this spectrum are hesitant to predict that their gloomy or sunny outlook will endure:  Uncertainty, in spades, is the watchword of the day.  And so I resolved to try to delve into deeper and more enduring questions.

Primary among them are whether London will overtake New York as a global financial capital, and what the prospects are for a major (as in "headline news") US/UK  law firm merger.

In a bit of contrast to last time I was in the City last November, there's a more cautious and less triumphalist air about London attaining supremacy over New York.  (I will resist the temptation to link this, as rich as it is, to the overwhelmingly delightful, gratifying, and juicy self-immolation of Eliot Spitzer, which occurred during my trip.)  Now, the view  seems to coalesce around a consensus that New York and London will always be transatlantic cousins, each with respective styles and strengths and weaknesses, but neither regnant over the other in capital markets.

Interestingly, one lunch I attended featured a speaker (an American by birth but one who has lived in London for 20+ years) who discussed the cultural  differences between doing business in the US  and the UK.  If you will indulge me in a bit of editorial license, these were the highlights of her talk:

She also told the anecdote of a set of deal documents being jointly worked on by a US and a UK firm.  As drafts were updated, the routine became that the US firm would turn on "track changes," insert its revisions, and email it across.  The UK firm, by contrast, would leave the document untouched but return it with a cover memo suggesting editorial revisions.

After a few rounds of this, the US firm piped up with some exasperation that the UK lawyers were requiring double-work:  First, to read the memo and determine the validity of its points, and second to actually make  the changes.   Why not just  make the bloody changes?  And here, of course, we have a cultural misunderstanding:  The UK  lawyers were merely being politely deferential in not assuming they could trespass all over the so-far-agreed-upon document.  The US lawyers were assuming that  efficiency and expediency were the goals. 

Also anecdotally, in the departure  lounge of my return flight, a woman asked me from behind my back, "How are your dachshunds?"  Having succeeded in getting my attention, she turned out to be a former neighbor on the Upper West Side, in a building catty-corner to ours, who had moved a few years  ago to London with her investment banking husband for a tour of duty.  I told her that I hoped she felt as at home in London as in New York—on occasion I'm tempted to envision it as almost the sixth borough of New York—and then I took the opportunity to ask her how she would  compare the two cities, as someone with a ringside seat to each.  She replied that London is like Brooklyn Heights—unmistakably an urban locale with its own indelible identity, but less frenetic and less dense than Manhattan, lower-rise.

As noted, the other enormous question of interest (well, at least to me) was the prospect for a headline merger.   Previously, I must say, this speculation has  tended to be dismissed with suspicious abruptness on both sides of the pond.

This trip  was a bit different.  People were far less dismissive, and many indeed even owned up to the potential strategic and business logic of a hypothetical US/UK (read:  New York/London) merger.  Culture, of course, will always be the obstacle, but the financial misfit that was presumed to exist heretofore may be eroding as practices converge and globalization truly kicks in. 

One point of view I heard in different contexts and expressed in different ways, but pregnant with potential meaning about the market's readiness for a merger, was this:  Some US firms are relatively strong in Asia and some UK firms are relatively strong on the European Continent.  Wouldn't that make for a potentially interesting combination, delivering the three first-world continents, North America (including New York), Europe (including London), and Asia?

But repeatedly, the reservation was voiced that it is so intrinsically difficult to sustain long-run investments in new geographies and practice areas where partners' expectations are to "strip-mine" the firm of cash at the end of every year and even the most visionary managing partners with the greatest commitment to the long term find it almost impossible to orchestrate continuing, loss-producing, investments.

Pop quiz: Q:  What's the one line item that appears on every corporation's balance sheet that I suspect you have never seen on a law firm's?

A:  [tick-tock-tick-tock.....]  Retained earnings.

This still begs the economic question which applies to mergers and long-term investments in new geographies alike:  Why, if the initiative would benefit us all in the long run—better work from happier and more valuable clients, higher profitability, stronger weapons for recruitment and retention—can we not stomach the short-term sacrifice?

I have no answer to this question.

Which makes me optimistic that, during my career, we shall see a transformative merger.

But, you protest, conflicts will become insuperable the larger firms get?   You know as well as anyone that rules are made to evolve and adapt, and with Chris Perrin, the general counsel of Clifford Chance, calling for relief from conflicts just last week, can reform be far behind?  (He would permit sophisticated clients to waive conflicts in any and all circumstances.)

In any event, I predict that I'll be going to London pretty regularly.  Not the worst duty.

Consider your reactions to these three hypothetical scenarios:

• In light of slack demand, BMW announces a combination of price cuts, rebates, and financing incentives that would save you 15%. More or less likely to visit a dealer?
• The Dow Jones Industrials are down 15% year to date. More or less likely to add stocks to your portfolio?
• Reflecting softened deal flow in their area of expertise, a boutique firm that would be a nice fit with your firm announces revenue down 15% year over year. More or less likely to invite their managing partner to dinner?

Of course all three scenarios are structurally all but indistinguishable. So why would your instinct be to run to the BMW dealer, hold your fire on further stock investments, and postpone the dinner invitation for another few quarters to see what happens?

The good news, such as it is, is that if those are your reactions, you're in ample company. Actually, the first two scenarios—the "15% off sale" on BMW's and on stocks are by now a classic example of the irrationality of homo economicus. We love getting a deal on goods and services (and new homes, anyone??), but when investments are "on sale," we run for the hills.

But here at "Adam Smith, Esq.," we don't cover BMW's or the stock market, so let's focus on scenario #3.

Fortunately, yesterday morning's New York Times published a piece, "Mergers in a Time of Bears," speaking to #3. It describes a study published in this month's Academy of Management Journal (evidently unavailable online) which it summarizes thus:

"Most mergers fail.

"If that’s not a bona fide fact, plenty of smart people think it is. McKinsey & Company says it’s true. Harvard, too. Booz Allen Hamilton, KPMG, A. T. Kearney — the list goes on. If a deal enriches an acquirer’s shareholders, the statistics say, it is probably an accident.

"But a new study puts a twist on the conventional wisdom. It’s not that all deals fail. It’s just that timing appears to be everything. Deals made at the very beginning of a merger cycle regularly succeed. It’s the rest that fall flat."

The statistical analysis behind this provocative (but intuitively attractive) proposition must remain opaque, not only because the primary source seems unavailable, but because, as theTimes describes the methodology somewhat unhelpfully: "The professors measured the acquirers’ stock appreciation or deprecation by using a fancy calculation of what they call “abnormal returns,” which examined share prices five days before the announcement of the acquisition and prices 15 days later. The math is complicated, but they say the “abnormal return” is predictive of stock performance in the future."

Be that as it may, and taking the good professors at their word, what's really going on here?

My emphatic diagnosis of what is not going on here is "Think Different." What is going on here is the herd mentality affecting behavior and decision-making at the highest level. And we are reminded that that is no way to outperform the market. "Baron Philippe de Rothschild, ever an opportunist, is said to have advised, 'Buy when there’s blood in the streets.'" Warren Buffett has clearly subscribed to this advice, if not to its precise expression at the hands of Baron Rothschild.

The moral of this to me is clear: Being a victim of bandwagon effects is no way to exercise leadership and in spades it is no way to steal a march on your competitors. I assume you all noticed that Latham announced last week the simultaneous opening of three new offices in the Middle East (in Dubai, Abu Dhabi, and Doha). This is not shrinking-violet behavior, and it's not batten-down-the-hatches behavior. In my opinion, it's straight out of the Corporate Finance 101 playbook: Increase portfolio diversity, reduce Beta, maintain returns.

But you have to be willing to diversify. Buy more stocks. Schedule dinner with that managing partner. Or, as the Times less circumspectly puts it, "C.E.O.’s should stop being such scaredy-cats. While everyone else is battening down the hatches, go make a deal."

By now it's been amply reported that 55 of Anderson Kill's 126 lawyers are leaving for Reed Smith, effective February 1.   In classically hyper-ventilating fashion, the Brits (Legal Week) reported that Reed Smith "has swooped, ...taking almost half the fee-earners."  Adding to the somewhat melodramatic coverage given the story were confused and even conflicting statements initially coming from the two firms.  For example, on law.com the two firms couldn't seem to agree on the number actually departing, with Reed Smith sticking by the figure of 55 and Anderson Kill rather obliquely calling the number departing "fluid."  Meanwhile, on the widely read WSJ Law Blog, their second story about it said:

"Law Blog colleague Amir Efrati spent a good part of today tracking down the story behind the story. The Law Blog’s conclusion: given how little the firms agree on the circumstances surrounding the failed merger, it might be just as well that they didn’t tie the knot."

I decided I'd prefer to get to the bottom of things on my own, so last weekI had a chance to catch up with Greg Jordan, Reed Smith's managing partner, and the real story is a bit more complex (and human, and nuanced) than the immediate and somewhat sexed-up reports would have had it.

First, here are some of the basic facts:

• As noted, the deal is effective 1 Feb 2008
• A total of 56 lawyers out of about 120 at Anderson-Kill are coming over to Reed Smith:  25 partners, 3 counsel, 27 associates.
• Some  of the key personnel who came over include:
  • Jeffrey Glatzer, a bankruptcy litigator, and former Anderson Kill firm-wide president and CEO
  • Lawrence Kill, an antitrust lawyer and a name partner
  • James Davis, managing partner, Chicago
  • John Ellison, managing partner,  Philadelphia
  • Steven Cooper, head of litigation, and  J. Andrew Rahl, Jr., head of bankruptcy, both members of the executive committee.

As for how the talks began—and they were merger talks at the outset—Greg reported, which is not news, that Reed Smith is always on the lookout for ways to build  key practice areas, and since insurance recovery work is an important practice, the talks with Anderson Kill were logical. 

Another aspect of the early reports was also correct:  That the merger talks ultimately broke down over conflicts.  The exact nature of the conflicts, however, is slightly different than typically implied—it was not that Reed Smith represents large swaths of the insurance industry and Anderson Kill typically sues the insurance industry—but rather that the two firms found themselves representing different interests in some large bankruptcy proceedings.  (The rules and customs of the federal bankruptcy court are, shall we say, beyond the scope of "Adam Smith,  Esq.," but suffice to note that they are a land unto themselves where, among other things, even knowing and informed  consent to waiving potential conflicts is often a non-starter.)

Things then got complicated. 

Whether or not the conflicts were irreconcilable, ultimately, it was simply too hard—quite understandably—to ask  one or both of two groups of dedicated lawyers who had worked long and hard on sizable matters to resign their client representations.  And so the merger talks broke off.

But introductions had been made and some unmistakably positive impresions formed.  Soon, some senior Anderson Kill partners came back to Reed Smith and asked if they could still merge if they could  do it with almost everyone instead of everyone.  Reed Smith's response was that since it wouldn't work as a "whole firm" merger, then it was really up to Anderson Kill to solve their partnership issues and work out any alternative they'd like to propose, but that  Reed Smith would entertain continuing discussions if they could do that and there was anything they wanted to come back with.

Ultimately, the Anderson partners did resolve their issues and Reed Smith extended offers to 57 lawyers at Anderson Kill and 56 accepted.  As Greg somewhat ruefully put it, "it ended up being a heck of a lot more complicated than a straight merger would have been."

Does Greg have any regrets as to how it played out?

"In terms of the business for both firms, going forward, absolutely not!  For us, it's one more step in our  plan of filling in  gaps in our  practice areas, helping us build out our litigation and restructuring practices, and continuing to invest in our key offices in New York, Chicago, and Philadelphia.  And as for Anderson Kill, we think, they are going to do very well going forward; they have a good group and a good plan and we wish them all the success in the world."

Absolutely no regrets?

"Well, I have to admit  the way it  was reported made us look a little predatory—that was unfortunate and unfair.  But  I guess I understand it made for a better story."

What, then, are we left to learn from this?   My read is that both firms—and, on the whole, the individuals  involved—are going to be far better off in the long run.  And I don't think this is happy talk.

One of the peculiarities of the practice of almost any individual lawyer, and one of the few abiding truths in our world, is that some people are better off having a platform behind them that provides a diver

unse practice set, high capacity when needed, and a relatively ambitious geographic footprint, and for others those characteristics are irrelevant at best and an expensive and irritating distraction at worst.

My working hypothesis about all this, then, is that the people involved understood that—intuitively and subconsciously if not analytically and with cold rigor—and made  their self-enlightened choices.

Where I come from, that's the way the market is supposed to work.

And don't we, after all, see this all the time on a smaller scale (one admittedly not lending itself to breathless leads in the press)?  Don't we see people migrating laterally from smaller boutiques, regional and specialty firms, to larger national and international platforms, and don't we  also see exactly the reverse?  This was simply a bunch of people doing both those things simultaneously.

Annually, Hildebrandt and the Citi Private Bank issue a "Client Advisory" and this year's is just out. 

What will doubtless grab headlines (and already has at places like the WSJ's Law Blog) is the downbeat forecast for 2008—the first since 1998, according to the Advisory—affecting both transactional and litigation work, inspiring the inevitable "perfect storm" cliche.  I devoutly hope  you don't come  to "Adam  Smith,  Esq." for headline news (or cliches, for that matter) so herewith my own take on what are the highlights of a remarkably comprehensive and data-rich report.

They open by calling 2007 two very different years rolled into one:  There was the pre-subprime first half and the post-subprime second half.    More specifically, year-on-year revenue growth and "demand" growth (billable hours) were 13% and 7% respectively at mid-year, but declined "dramatically [and] significantly" in the second  half of the year driven by the "precipitous drop  off in structured finance," across-the-board declines in M&A and transactional work, and even a "softening"  in that all-American  indoor sport, litigation.  If  the first half of the year  shot the lights out (from 2001—2006, revenue and demand growth averaged 10.5% and 3.5%, respectively), the punch bowl was definitely yanked away in the second half. 

I have wondered—and I imagine you have wondered—whether the fabled "resiliency"  of our industry in economic downturns won't ride again to our rescue, as the classic  countercyclical practices of litigation, restructuring, and bankruptcy kick in.  While it's too soon to tell for sure, the Advisory reports that the answer so far is "not yet."  If this holds true it will indeed be bad news.  But never bet against the  creativity of those in the business of pleading a cause of action and repulsing a motion to dismiss.

A far more interesting perspective on why this downturn may be different from prior  downturns relates to the changing composition of partnerships compared  to, say, the 2001 downturn. In a nutshell:

• We have more non-equity, or income, partners; and
• Those are the least productive cohort of  any firms.

Put differently, leverage is more expensive than it was last time  around, simply because  non-equity partners are more expensive than associates and  they're less productive, if "productive" = "billable hour output."  This is indeed new, and here are the figures to back it up:

As faithful  readers know, I have long believed that creating, and growing, a material non-equity partner tier is a double-edged  sword, and this chart seems to seal the case that, in too many firms, it can be a way of avoiding awkward conversations and hard decisions with the intended result (increased leverage and PPP) being defeated for want of rigor and discipline in implementation.

The Advisory doesn't discuss this, but one of my hypotheses about introducing, or increasing, a  non-equity tier is  that it changes the composition of those lawyers considering your  firm, in unintended but deleterious ways.  Permit me to explain. 

If you're a single-tier firm, associates (home-grown and lateral) who join you will, at some fairly conscious  level, believe that they could win the partnership tournament and grab the brass ring:  "I've never lost  a competition in my life before, and I'm not about to start," might paraphrase the mindset.  But  if you're a two-tier firm, a significant cohort (and a growing one over time, as reputation spreads and becomes entrenched in people's minds) of lawyers  coming to you will have a different perspective on why:  "$300-400,000/year, adjusted for inflation, so long as  I don't screw up, and I don't have to beat my brains out?  Not a bad deal—I'll take it!"

As you  can see, single-tier  firms attract  a very different candidate set, and that has genuine consequences in the ambitions,  the competitiveness, and the business-getting energy level of the firm as a whole in the long run.  Ignore this you may, but know what bargain you have made.

Another difference today as opposed to the 2001 dip is the level of client push-back on rates.  We all know that "convergence," RFP's, beauty contests, and demands for discounts have never been more prevalent.  Less anecdotally, the Advisory reports that realization has  declined over the past year, from 91.2% in 2001 to 90.8% in 2006.  Although this seems small on the surface, it "represents a substantial amount of money"—and, I  might add, an amount of money that would  otherwise drop straight to the bottom line.  If the "plan" of most AmLaw 200 firms to safeguard  their revenues in 2008 is  simply to raise rates, that plan may have to be taken directly back to the drawing board.

Finally,  when this  report was released this morning, it so happened  that I was about to deliver a keynote speech to a conference room full of legal industry professionals and so I took the opportunity to deliver a pop quiz.  Herewith the same, for you.

Q.: What percentage  of newly created equity partners last year were  "home grown" (promoted from associate) vs. laterally recruited?

A.:  [tick tock tick tock....]

Answers from my audience ranged  from 10-30% lateral, with one outlier  guessing  50/50.

The outlier won:  The actual figures  reported in the Advisory were 52% home-grown/48% lateral.   This is a marked, almost shocking, departure from the situation 10 or even 5 years ago.   You may laud or decry this ("talent  rises to its level" or "loyalty and collegiality are  dead") but there is no gainsaying it's different  than our previous experience.  And its relevance to the hypothesized downturn we're discussing?  Simply  this:  Laterals are typically the  first out the door in bad times.  Or, as I have put it only half in jest, "The best predictor of getting divorced is having already been divorced."  Those expensive laterals you acquired at the (retrospective) peak?  En garde.

The Advisory, which I  commend to you in full,  is a welcome departure from so much commentary on our beloved industry, in that it is anything but  fact-challenged.  Indeed, it's fact-dense; some will  be  explored in future installments here on "Adam Smith, Esq.," but  let me leave you with one last fact and one last opinion.

Fact:  Breaking the "higher profit" firms into three segments, superior (+12.6% annual increase in PPP since 2000), average (+6.2%), and  under-performers (+3.5%), the  correlation between  having an international footprint is striking:

• "Superior:"  17% of lawyers are outside the US
• "Average:"  14%
• "Under-performers:"  7%

Causation?  Please, you know better than to reach that seductive conclusion on such limited evidence, but correlation indeed and compelling as an anecdote beyond belief.

Opinion:  However the economic news of this coming year  unfolds, both for America and world writ  large (don't believe in the rumors of "decoupling" between America and the world—not yet, anyway), and however it unfolds here in law-firm land, the key challenge for  managing partners and executive committees will have almost nothing to do with absolute performance and almost everything to do with relative performance.

In other words:  Manage expectations.

We now have a significant cohort of partners who have rarely experienced much less  than double-digit annual increases in every germane (to them) statistic in sight:  Revenues, profits, and PPP.   God forbid those numbers  fall into the low single-digits or go negative.  But God may not forbid. 

You aren't God, but you are if nothing else the voice  from on high.  Start, if you haven't already, preparing the landscape.  And, as I've written, fear not.  Do  not  reflexively batten down all the hatches.   Now more than ever, talent management and cultivating truly  close relationships with clients matter.  Invest in those two things—the supply and the demand,  if you will, for your firm—and steal a  march on your  more conservative brethren.  Exit the downturn with the wind at your back.  Manage expectations, to be sure:  But no fear.

I previously asserted that corporate America teaches that firms that treat recessions as opportunities rather than threats could steal a march on their more conservative brethren and emerge into the post-recession recovery as more powerful competitors.

Today I'd like to back up that claim.

It's germane because even in the few days since I published my prior piece the cascade of bad economic news has intensified.   (For example, I said then that the stock market had opened the year with its worst performance in 30 years; it's now become its worst year-opening start since  1928.)   So what's a managing partner to do?

No fear.

Here's what McKinsey had to say, based on a study of about 1,000 mainly industrial US companies over the time span 1982—1999, which of course straddles the 1990—1991 recession.  In a nutshell, firms who exploited the opportunities inherent in recessions:

• pursued more M&A deals during recessions than during normal times (compared to their lagging and more conservative peers);
• spent more on "SG&A" (selling, general, and administrative expenses, for which you can roughly substitute "overhead" and be not far wrong) during downturns than their peers and more as a percentage of revenue than they themselves spent during flush times; and
• also followed the SG&A spending pattern with respect to R&D and advertising.

All of these behaviors are contrarian, even scary.  But I told you to have no fear, so let's explore this a bit more.

As for M&A, during normal times the contrarian firms did 63% fewer deals (measured by value of assets acquired vs. the median in their industry over the same time frame), but during recessions they closed the gap with their peers, not only pursuing more deals—their peers essentially exited the M&A business entirely during the recession—but pursuing larger deals, and devoting the management time needed to study, execute, and follow through on opportunities for acquisitions.  Does "buy low" come to mind?

But "the most dramatic" divergence between the aggressive leaders and the laggards was, as noted, in how they changed their operating spending mix.  Counterintuitively, they invested more in SG&A, in R&D, and in advertising.  And not just more than their batten-down-the-hatches peers, more than they themselves spent as a percentage of revenue during flush times—when they were among the most efficient and productive among their peer group in these "overhead" costs.

This represents how the more successful, aggressive firms changed their  spending across the three areas vis-a-vis the industry average, on a size-adjusted basis.   The story is simple:  The winning firms ramped up spending more than their peers during recessions and less than their peers during expansions.

What's  going on here?

Rather than tightening their belts, the aggressive firms apparently sensed opportunity and chose to invest in these areas in hopes  of a longer-run payoff, whereas during flush times they focused on operational efficiencies.  In other words—although they always invested more than their peers in R&D—their strategy was to sacrifice short-term profits in bad times for the sake of longer-term advantage:   And to more than make up  the sacrifice when good times returned.

And the market seemed to recognize this.  For industrial firms (which these primarily  were), a rough and ready proxy for how the market views firms' prospects is the "market to book" value ratio.  If you think about it, this makes some sense:  The book value is presumably about the least the firm would fetch if broken up for parts.  And to the higher the value the market places on the firm above that floor, the more the market evidently thinks the firm is excelling  vs. its competition.  Note in this chart how the winners accelerated away from the pack in the post-recession period:

Both during recession and expansion, you could say, in a sense, that they "spent smart."  But that's somewhat tautological.  The whole premise of the McKinsey study, after all, was to identify winners and losers. 

I think the key point is subtly different, and it is, as I said:  No fear.  Contrarian views can sometimes win.  Is it "risky" to increase operating expenses during a downturn?  So  it  would seem.  But the real risk may be in following the herd.

Regular readers, or simply those with good memories for the jovial Cornell University economist Alfred Kahn, who briefly served as Jimmy Carter's czar over wage-price controls, as well as the last head of the unlamented Civil Aeronautics Board (where he deregulated the domestic airline industry), will recall that he was strictly instructed by the White House not to utter the "R-word" (recession) in Congressional testimony he was about to give. So, when inevitably asked by the good Representatives whether the economy was in a recession, he replied faithfully that he could not say that, but that it was in his view in "a banana." (Subsequently, following complaints by banana industry lobbyists, he changed the term to "kumquat," presumably a fruit with less vocal representation in Washington.)

So: Are we facing a "banana"? And if so, what should you do about it?

Let's start with some data points:

• Morgan Stanley, Goldman Sachs and Merrill Lynch have issued "recession warnings."
• The Economist's somewhat impish "R-word index," which counts how many times in a quarter the word appears in The New York Times and The Washington Post, and which accurately forecast the 1980, 1991, and 2001 recessions, is nearing a new peak.
• "It is hard to be an optimist," Sullivan & Cromwell Chairman H. Rodgin Cohen said [of the outlook for M&A activity in 2008]. "With the markets where they are, it is going to be a tough year. The markets hate uncertainty, and we are in an uncertain time."
• Gold and oil are both at or near all-time (inflation-adjusted) highs.
• The front page of just one day's Wall Street Journal lists the following facts:
  • American Express drops 10% in one day after announcing increased writeoffs and delinquencies; Capital One, MasterCard, and Discover also drop;
  • Retailers ranging from McDonald's to Tiffany report disappointing same-store sales;
  • The stock market has started 2008 with its worst year-opening slide in over 30 years; and
  • A Barron's roundtable questions whether the 25-year bull market is running out of gas.
• The American Lawyer's most recent survey of law firm leaders (last month) was appropriately headined "Fog Advisory"—the outlook is unclear.
• And, of course, Cadwalader laid off 35 finance attorneys.

Of the prospects for a recession, the schools of thought are various, ranging from:

• It's already started, we just don't know it yet (Goldman Sachs);
• It's imminent unless we take drastic stimulative steps (all the Presidential candiates, Jim Cramer);
• It's too early to tell; the data are unclear (evidently, Ben Bernanke);
• It's probably a long shot (most Fortune 500 CEO's, most AmLaw 200 MP's);
• Who, me? What recession?! (no one that I'd consider worth taking seriously).

A salient characteristic of recessions is that, in all too many cases, they can be self-fulfilling prophecies. Once the drumbeat of alarm grows deafening (the Economist's "R-word" index), people start to believe what they're reading and seeing, meaning that consumers dial back spendingto save up for harder anticipated times ahead; business slows or eliminates hiring to batten down the hatches, other businesses cut back on inventories, real estate developers dial back or put off projects, venture capital and private equity pull back hard on the reins, new projects and initiatives across the board are dialed back (IT investments, new offices, geographic expansion, starting new lines of business, launching new products) and before you know it we have an honest-to-God, certified Recession on our hands. Sometimes perception is reality. (Or, as Bernard Berenson famously remarked about the difference between art objects and the historical events they may have sprung from, in the case of actual events, you can never go back and relive them or understand them as those taking part understood them, but with art objects, "the object is the event.")

Saying it can be a self-fulfilling prophecy doesn't make it any easier to avoid, of course.

This brings us to law-firm land.

Famously, law firms are said to be recession-proof. That's not true. "Recession-resistant" might be closer, but that's not quite true either. I prefer to characterize firms as "a-cyclical," meaning not necessarily tied directly to the macroeconomic tides, but still having ups and downs.

What's going on for 2008, then?

Clearly, some practice areas are suddenly quite out of fashion, including securitization of debt obligations and perhaps structured finance overall. Hedge fund activity appears to be going quieter, as does private equity and, perhaps with them, M&A. (The hope for M&A is that "strategic" M&A will supplant financially-engineered M&A, but I doubt it will be enough to take up the slack since the limit on financially-engineered M&A is the limit on liquidity, until quite recently sky-high, whereas the limit on strategic M&A is always what makes sense in the marketplace, a far lower ceiling.)

Will restructuring and bankruptcy take over where these practices have left off? To a degree, to be sure, but probably not in whole. That leaves us roughly here, as I read it:

• I don't see a Katie-bar-the-door downturn, but more of an interruption in the post-2001 expansion. Inflation is relatively quiet (although $100/barrel oil makes things look bad, and other commodites are rumbling), which gives the Fed some latitude on rates.
• Inventories are well under control, thanks in part to the supply-chain revolution of the last 10 years.
• Unemployment is at almost historic lows.
• Excesses in the lending sector need to be worked out, to be sure, but we're already seeing aggressive and accelerating moves in that direction.

What should firms do to prepare and adapt?

First of all, panic not. Temper your partners' expectations for ever-more-glorious PPP numbers (but you were already doing that, right?--yes, thanks, I thought so). You and your firm are not responsible for the credit crunch, although you'll be hit glancingly by the consequences.

Second, let the magic of attrition work its powerful wonders. You'd be surprised how quickly payrolls lighten up if you just take your foot off the accelerator for a bit. Of course, they'll lighten up unevenly and not necessarily where you most wished they would—people are not stupid, and those most at risk are most likely to hang on tight—but you can reallocate and adjust, which is more humane than slashing (and preserves your firm's reputation for the next up-cycle,when it will matter).

Third, consider a long shot. Rent (occupancy, all-in) is your second greatest expense after people. I'm not counseling or predicting that landlords may suddenly become souls of Christian sweetness and enlightenment, but we also know that unoccupied office space (vacated, perhaps, by a mortgage lender?—just kidding) is anathema because it is, essentially, an irretrievable missed opportunity to collect revenue, not unlike a vacant seat on an airliner about to pull away from the gate. Each month space is empty is a month's rent that will never be recovered. So, opportunistically and with obvious attention to the peculiarities of your local marketplaces, see if there might not be bargains to be had.

Fourth, and apropos attrition, think about repositioning people. Don't tell me people get zero cross-training as it is. First, this is an excruciatingly poor use of expensive talent. Who knows at age 26 or 28 whether they're a litigator or a corporate type at heart? (I surely did not, and making the wrong impulsive choice of litigation was a mistake it took me nearly a decade to recover from and find my home in securities law.) Do not treat $160,000/year talent that shabbily. A second reason to cross-train is if you find yourself in the situation you may find yourself in in 2008. A third reason is the simplest of all: Lawyers with generalist exposure are the best lawyers of all. And isn't that what it's all about?

Finally, avoid the defensive crouch.

Be courageous; be brave.

If there is a downturn, seize the opportunity to pick up talent and grow your firm's capability; some top-quality people may find themselves on the street, or casting about for opportunities, through no fault of their own. Keep your antennae up; let them know you're answering phone calls and emails.

Regularly, in corporate America, firms that grasp the opportunity to build, inexpensively but strategically, in downturns, emerge into the recovery turbo-charged. You can do the same. Seize the downturn, if downturn it be. It needn't be a falling knife.

Why do law firms merge?

The fact is, I wonder sometimes myself.

More seriously, there is typically an array of stated and unstated reasons, among them:

• Growth for the sake of growth:  Inadvisable.  Size alone doesn't guarantee anything particularly desirable, and may guarantee some things undesirable, such as increased managerial complexity, more difficulty achieving the holy grail of the "one-firm firm," more partners who  are relative strangers to one another, and increased odds on serious conflicts.
• Merging to achieve a stronger geographical footprint:  This can make great sense, so long as you understand that not all cities or regions are created equal, and that some are far more strategic than others.  If your firm views itself as a financial services powerhouse, for example, you need to be in New York, London, and Hong Kong.  If you're into high tech, San Francisco and/or Silicon Valley are probably non-negotiable.  Even without specialties—say you're a general practice firm with a full range of transactional and dispute resolution capabilities—you still want to be where the clients are likely to be.  So if you're US-based, you need to cover New York, California, Washington, DC (for the regulatory dimension), and perhaps  another couple of centers of gravity of economic activity such as Illinois or Texas.
• Merging to add practice capacity:  Also a  potentially astute strategy, depending on how the hole you're trying to fill fits in among your core practice areas.  The increasing proportion of value in 21st Century goods and services represented by intellectual property largely explains, to my mind, why we've seen so many IP boutiques acquired or dismembered over the past decade or so—and why it may be increasingly difficult for the few left to survive as stand-alone entities.  It's difficult to bill yourself as a full-service firm in either the transactional or the dispute resolution space without an integral IP capability. 
• Merging from a defensive crouch, or to paper over a recent black eye, or to project a superficial image of dynamism:   All lousy ideas, needless to say.  Nevertheless, such mergers happen on a regular basis, with the firm that constitutes damaged goods asserting its high levels of energy and forward momentum rather too insistently.   A recent high-profile merger here in New York comes to mind.

Then there are the mergers where you have to admire the clarity of the vision.

Here I'm referring to the K&L/Gates—Hughes & Luce merger, which by final vote of the two partnerships will go effective January 1st.  (Back in July, merger discussions were revealed.)  Here's coverage in the Dallas Morning News, the Texas Lawyer, The Lawyer, Legal Week, and The  National Law Journal.  For the record, the combination of the 149-lawyer Hughes & Luce with the roughly 1,400 lawyer K&L/Gates will have nearly 1,550 lawyers in 23 offices:  18 across the US plus Beijing, Berlin, Hong Kong, London and Taipei. 

And what is the rationale?

For K&L/Gates, it's to establish a serious presence in Texas (over 200 lawyers in Dallas, Fort Worth, and Austin, as contrasted to just 35 lawyers in Dallas today).  Texas may logically be viewed as the third important center of economic activity in the United States, after New York and California, with a growing number of Fortune 1000 companies headquartered there—and no longer limited to the petroleum or energy industries. 

For Hughes & Luce, it's to gain access to the three-continent platform K&L/Gates brings to the party:  The US, Europe, and China.   Peter Kalis, chairman and global managing partner of K&L, pointedly noted that "Texas is a strategic market that is underserved by firms with credible, [international] platforms," which Edward Coultas, managing partner of  Hughes & Luce, echoed from the other side of the table by observing that "It removes any question of a platform issue, and we really like this firm, the people, the quality of lawyers. It's the expertise we will have at our fingertips."  The "platform issue," indeed!  Isn't that fingering rather precisely the ceiling on Hughes & Luce's growth as a Texas-native firm?

In short, a bilateral win—on paper.

The ever-gnarly issue of cultural  compatibility remains, of course, on which the only sensible observation to be made at this point is that time will tell.

But for what it's worth, speaking as someone rather familiar with the K&L culture, I think the auguries are promising.  Hughes & Luce dates only to  1973 when four lawyers with an average each of just five years of experience broke away from an established Dallas firm to fill what they perceived as a gap in the marketplace:  Focused, responsive, high-quality legal work for the Texas business community, then in a period of particularly rapid growth.    The firm's website speaks unabashedly about their "history  [being] one of innovation," and adds:

"While the coming decade will present significant challenges to the legal profession and to Hughes & Luce, we are poised to accept the challenge.  The firm's history has made dealing with change the norm, not the exception.  The firm remains confident that the combination of talent, energy, seasoned judgment and institutional know-how will continue to produce 'first-ever' results."

If I have read K&L remotely right, this sounds like a terrific natural fit.

And if it turns out not to be?

At least they're doing it for the right reasons.

As we've known since October 19, Reed Smith reached agreement to merge with Richards Butler Hong Kong, nearly a year after completing its merger with Richards Butler (UK) in London.  The agreement will add about $60-million in revenue and a little over 110 lawyers in Hong Kong and a small office in Beijing (with a license application pending to open in Shanghai), and, most importantly for Reed Smith, puts it on the third of the three continents where global firms needs to be in today's Flat World. 

I wanted to get a fuller perspective on the deal than just the facts and figures, however, so a couple of weeks ago I spoke with Tom Todd in Hong Kong, a senior Reed Smith partner who has been driving the integration and who relocated from London, where he had been working on the Warner Cranston and then the Richards Butler integrations.  Tom originally is from Pittsburgh, but evidently hasn't been spending too much time there lately.  Tom joined Reed Smith straight out of Harvard Law in 1967, and thus has been with the firm 40 years.  His undergrad degree is in history from Williams, Phi Beta Kappa.

A bit of background for those perhaps unfamiliar with the players:  Tom was part of the senior management team at Reed Smith for many years through 2000, and, as of the mid-1990's, the firm's strategic plan had been to gain stature and scope in the Mid-Atlantic and Northeast states—all in one time zone.  While this may sound unambitious, it was not to last for long, and the firm at least was one of the first to link all its offices through a single computer network, demonstrating a commitment to multi-office operations and management. 

A consensus began to emerge that the firm needed to be in London, the ultimate result of which was the 2001 merger with Warner Cranston, a UK firm with 60 lawyers in London and 10 in Coventry.  

As Reed Smith's strategic plan has evolved, one pillar has remained unchanged:  To ensure that it revolves around its clients and their needs, particularly to ensure that Reed Smith has a significant presence in markets important to those clients.  Historically, key industries for the firm have included financial services (Tom is a partner on the relationship with Mellon Financial, and continues in that role following its merger with the Bank of New York in July 2007) and life sciences.  The Richards Butler/London merger added a focus on shipping, trade finance, and media.

Getting down to the Hong Kong Richards Butler deal, Tom's first observation was to cut through the swirl of media clutter (well, at least for those of you who follow these things) that has surrounded the extended period of uncertainty following Reed Smith's merger with Richards Butler/UK (London) and its conspicuous non-merger with Richards Butler Hong Kong.  [There are tax reasons why the two pieces of Richards Butler had been set up formally as separate legal entities, which are both too obscure and too irrelevant to go into, but that was why a merger with one was not automatically a merger with the other.]  

Suffice to say that immediately upon announcement of the London deal, the question on every observer's lips was, "So, when is Hong Kong?  Or is Hong Kong?"  Tom's rebuttal to this is that all deals take time—which he believes is a good  thing—and even the UK deal had taken about a year to bring to fruition.  The Hong Kong deal was not much different, at bottom, "except that we were doing it in a fishbowl—which, let's just say, never makes things easier."

So what has  Tom been actually doing to advance the prospects for the merger and now the integration of the two firms?  First, simply getting to know all Richards Butler/Hong Kong lawyers, their practices, and their clients.  Second, facilitating introductions back and forth between Richards Butler/Hong Kong and Reed Smith in the US and UK.  Third, meeting with clients to reassure, inform, communicate, and seek their thoughts.  And finally, sitting in on, but, he notes pointedly, not leading or running the activities aimed at combining the two firms.  (A formal integration committee will be established now that the merger is approved.)

And what exactly is so special about this?  Isn't that the way any well-run firm would do it?  Perhaps, but Tom reports, and I have no basis for disagreeing, that he's not aware of any other large firm that puts a senior lawyer on the premises of the merging firm for the explicit and dedicated purpose of facilitating integration.  He notes that his role is manifestly "not to run anything, and not to change them, but to provide the glue between the two firms and help them get to know each other."  I ask if he was involved in the negotiations leading to the merger and he reports firmly that he was not.  I gather he thinks it an advantage to have stood back from the process of negotiation per se and only to step in when the firm's leadership believes he could be helpful as a partner on the ground going forward.

"And how do you know that integration has been a success?" I ask.

"Well, our philosophy has always been to try to pick people we want to combine with because of their talents and their capabilities and their knowledge of their own local marketplace (and we don't believe we have all the answers).  Our intention, our hope, and at least in part our experience, has been that if you've made the right decision you will find out there are both people and processes that will improve Reed Smith. 
"And on that score I think our track record speaks for itself:   Just look at the key people now in positions of senior management at Reed Smith that came initially from other firms:

• Dave Duckhouse, our CFO, came from Warner Cranston
• Mark Dembovsky, our Chief Strategy Officer, also came  from Warner Cranston
• Roger Parker, our Managing Partner for Europe and the Middle East was the Managing Partner of Richards Butler
• Colleen Davies, head of our Litigation Department (nearly 800 lawyers) came to Reed Smith from Crosby Heafey in that 2003 merger.

"And I could go on."

I'm sure you have heard the same objection I have to putative mergers, or even to the very thought of a merger:  "Our firm's culture is such that we could never stand for being taken over."

I submit that mergers done right are the antithesis of takeovers.  Can your firm do them right?

Twenty years and a few months ago (apologies for missing the actual anniversary), the merger of Clifford Turner and Coward Chance was announced, which changed the landscape of our industry forever.   Not just in the City of London, but across the globe.

It's worth a moment's reflection on how that happened and what its repercussions have been.

This is how the Times (UK) reports it in retrospect:

"This revolution did not go unnoticed. The Times reported under the headline 'Solicitors' merger creates City giant' that 'two of the City's biggest firms of solicitors are to merge to create the country's first ‘mega' law firm which will have a turnover of several million pounds'.

"The use of 'mega' was key. With one bound the two constituent firms had overleapt to double the size of what had previously been the biggest firm, Linklaters & Paines. The natural order of things had been changed dramatically."

The change in the way the profession would come to operate can scarcely be overestimated.  Again: 

"Above all, it helped to usher in a new kind of lawyer - multicultural, multilingual and multinational in outlook of a type you will now also find also at Linklaters, Allen & Overy, Freshfields and Herbert Smith. In other words, as different as possible, says Chris Perrin (now the firm’s general counsel), from the stereotype of the stuffy, conservative, cautious, uninspired solicitor that had prevailed hitherto."

And of course there were skeptics at the time.  A common jibe was that combining two second-rate firms wouldn't make them first-rate.  And while that may have carried a sting because it carried a grain of truth, the fact was that the  marketplace—the international financial and business community—was beginning to demand a firm with international presence and scale, and the Clifford Chance merger, ideally conceived, was a response to that demand.

"'I recall an American saying to me that whichever law firm could produce the first cross-border legal product to an international standard would instantly create a following,' says [Jeremy] Sandelson [today Clifford Chance's London Managing Partner].  'We did it and that’s exactly what happened.'"

Following the merger came of course the challenge of managing the enterprise.  Geoffrey Howe, managing partner starting in the early 1990's, saw the need for, and acted fairly decisively to bring about, a more business-like approach, bringing in professionals other than lawyers to oversee certain critical functions, introducing systems and processes and carefully monitoring and evaluating the effectiveness of individuals. 

"The trick we had to pull off," he says, "was to introduce a decision-making structure that produced results without killing off the ethos of partnership." 

Today the expectation that major firms will by definition be global is scarcely challenged, which is one reason the Clifford Chance merger deserves a moment's reflection.  The certitudes we take for granted today were not always so. 

This should be humbling for starters—if we think we're so smart today, how could we have been so blind then?

But I'd like to suggest it should also be inspiring, and encourage us to question received wisdom.  What elements of what we take for granted today will look archaic twenty years hence?

Not to leave you hanging, I'll venture a few nominations for assumptions that will change dramatically before our careers are over:

• That a top-drawer US/UK merger will never happen.
• That there are inherent limits—managerial, structural, in terms of conflicts, etc.—to the size of global law firms.
• That lawyers have nothing to learn about handling their practice and their relations with clients from non-lawyers.
• That law firms have no need or use for capital beyond what can be readily raised directly from partner contributions.

Care to nominate some of your own?  If not, you can just read Tony Williams' "Ten trends that will shape the legal market," which include:

• Erosion of profitability at mid-tier firms
• Technology enabling projects to become "unbundled."
• Clients' driving fundamental change in how law firms  operate.
• An increasing segmentation between basic information and advice, available online or for fixed (and low) fees, and those  who can truly deliver exceptional value.

Why listen to Tony?   He was formerly managing partner of Clifford Chance.

Yesterday I was privileged to run a session at Hildebrandt's Sixth Annual Forum for Law Firm Management—"Getting a Seat at the Table"—Aligning Technology to Law Firm Business Strategy here in New York. 

My session was on "Sorting out IT Governance in Mergers," and I want to share the learning with you.  But preparatory to that, you need to know that we had the benefit of the experiences (and the senses of humor) of several high-profile veterans of Big Firm Mergers, including Don Jaycox, now CIO of DLA Piper US LLP, and formerly CIO of Gray Cary, who now has nearly three years of perspective on that celebrated three-way firm merger (DLA + Piper Rudnick + Gray Cary).  Also, with barely three weeks of perspective on events, in attendance was the CIO of Dewey & LeBoeuf.

By the way, wondering when IT is brought into the loop on the merger? Answers ranged from after the deal was all but sealed to months and months in advance of any actual negotiations.

With the enthusiastic and even impassioned help of those in the break-out session, here is what we distilled out as lessons for a CIO or IT leader going through a merger.  [Editor's note:  The discussion focused almost exclusively on mergers of equals or near-equals.  A merger of Very Big with Relatively Small was viewed as an acquisition requiring only a solid dose of project management skills to get through the period of deep-sixing Small Firm's systems and importing Big Firm's.]

Ruthlessly Prioritize

Under no circumstances will you have enough time to do everything you want or even think you need to achieve, so make sure that your rigorous focus is on the things that matter most.

Short, Intense Pain Beats Mild, Extended Pain

Need to integrate two document management systems each containing millions of records?  How about doing it across all your offices over a single weekend?  (Yes, this is a true story.)  Need to integrate half a dozen disparate phone systems, running everything from Cisco VOIP to Avaya, Northern Telecom, and even Rohm?   Make sure it's done by midnight of the effective date of the merger.

Conversely, if you want your marketing or IT department (again, true stories) to be dysfunctional for 18 to 24 months, just make sure the pre-existing incumbents from both firms remain in limbo for that period of time while management dithers.  One CIO present reported that his reaction to an indication that "co-CIO's" would be in place for an extended period was to go to his Managing Partner and say, "Fire me if you'd like; but do not under any circumstances have co-CIO's."  (He ended up top dog.)

Rise Above Politics

In almost any system you can name, from document management to time and billing to KM, you will find yourself saddled with two points of view each arguing the clear superiority of the system that just happens to be theirs.  Get past it.  Not only do you need to pick "best of breed" (keeping open the possibility that the winner will be "none of the above"), but you need to cement your credibility with senior management.  Yes, even though your credibility might have been unquestioned at your predecessor firm, you will be an unknown quantity to a significant number of decision-makers at the new firm.  And never forget that, as one veteran in our session put it, "one 'oops' trumps ten 'attaboy's'." 

It's 90% People, 10% Technology

The first important piece of fallout from a merger—or even talk of a merger—is that people become uncertain, anxious, and desperate for information, to the point of glomming on to every rumor that comes down the corridor, plausible or otherwise.  The second piece of fallout from this is that productivity drops through the floor.  And the third piece of fallout is that your best people—with the best prospects—begin taking calls from headhunters and, unless you act fast, departing.  You will then be left with the mediocre and sub-par performers.

So stop it from happening. This means getting on the road (in the air) to reassure people—truthfully, of course—that their own jobs are secure and that in fact the future under the combination will be brighter, more prosperous, and more challenging than before.  There's no substitute here for one-on-one face time.

Achieve High-Impact, Psychologically Powerful Changes on Day One

Have one unified website, one email address protocol, one phone-dialing protocol.  Yes, yes, you're allowed to put the whole thing together under the hood with baling wire and duct tape, but the appearance to end users  must be of a one-firm firm.

And another thing:  Strive for a succession of small, visible, wins.  Nothing will reinforce your credibility more convincingly than showing you and your team can achieve designated milestones on time and on budget.  (Conversely,  nothing will undermine you faster than promises unkept, so make sure you're realistic about what you can achieve.)

This discussion reminded me of an analytical model comparing alternative models of IT decision-making.  Here it is:

• Business Monarchy:  Highly efficient, but can lead to suboptimal IT architecture.
• IT Monarchy:  Leads to superb IT architecture and procedures, but may not align with business practices.
• Federal System:  IT, practice groups, office heads, etc., all have input:  Far and away the least efficient and also the most likely to generate the worst overall decisions.  But attractive to some participants since everyone has a seat at the table.
• Duopoly:  Business leaders suggest  what they need or want; IT responds with what they can provide, and a genuine dialogue ensues.  Typically a smart choice.
• Feudal:  Partners get what they want.
• Anarchy.

In general, the federal model is the least  effective, because it's the most time-consuming, bureaucratic, and prone to suboptimal politically-motivated decisions.  On the other hand, it's the most open in terms of  input (a/k/a "democratic") and therefore sometimes difficult to avoid in a law firm culture.

But if you can?  Strive for duopoly.  And:

• prioritize
• favor intense short-term pain
• eschew politics
• focus on people, and
• go for high-impact wins.

The annual "Adam Smith, Esq." Reader Survey is actively in progress, and I sincerely urge those of you who haven't taken the two to three minutes it takes to complete it to do so right now. 

The point of the survey?  Two-fold:  I want to learn more about you, so as to better tailor the content of the site to your interests, and you get to tell me both what recommendations you'd offer me and, perhaps more importantly from your perspective, what the most pressing/important strategic, business, or financial issue facing you or your firm is.  Let your voice be heard; take the survey now.

Meanwhile, an interim report on what we've heard on precisely that last question, which reads verbatim thus:  "The most pressing/frustrating strategic, financial, or business issue facing me/my firm is."  Herewith follows a distillation of what you've been telling me.

Associate retention is a tremendous challenge for many of you.  Comments include (all exact quotes):

• associate compensation:  lockstep or merit?
• the position of associates in BigLaw, of course
• insane associate salaries
• and many many others who just said "associate retention" and left it at that.

This has been an issue I've devoted extensive—but perhaps still insufficient—attention to on "Adam Smith, Esq.," and I'll vow to do even more about it.  Fair warning:  I have no snappy answers on this one.  To a large extent we are facing a collision between an irresistible force and an immovable object whose constituent components are attitudinal, generational, and financial, and which is perhaps not susceptible of an enduring resolution absent a re-examination of underlying business models.   In short, this has been long in gestation and may be long in solution.

The War for Talent  is an ongoing challenge, perhaps more pressing now than ever.  Comments included "Finding and attracting top-level talent to a small boutique firm," and "attracting talent at the salary levels our firm pays."

Knowledge Management was mentioned by a large number of you, as something that firms have to do well but that very few in fact are managing to accomplish.  Technology and upgrades of same were a close second in this area.

Business development and marketing are perennial points of pain, and "some things never change."   The only fault with the bromide that "some things never change" is that in this case it's false:  This is getting worse.   Here are some more direct quotes:

• Business Development. Almost all law firm management issues are ultimately directed toward growing the top line (associate retention, training, marketing, strategy, etc.) It would be good to hear about this at both the individual level (aside from the standard cliches of "write articles, give speeches, network, and ask for business from all your friends," what other business development strategies do partners use) and at the firm level (what steps have been taken by national firms such as Latham and Kirkland to become more prominent and self-sustaining; how do firms organize and manage their practices and partners to maximize business opportunity).
• Continual pressure on fees and use of procurement.
• The pressure from clients for ever more efficient, lower price, better quality services compounded by the impact of procurement officers who don't understand and show little inclination to want to learn.

Just last week I learned of a Fortune 100 company whose panel for evaluating outside counsel consists of three people:  An associate general counsel and—two purchasing managers.  This is indeed only getting worse, and I'll try to bring back tales from the field that may be helpful to more of you.

The Hollow Middle haunts some of you. Faithful readers of "Adam Smith, Esq." will know what the hollow middle refers to, but for those who don't a quick refresher.  An increasingly prevalent industry structure sees firms migrating both to the high end, high-value, premium quality level, and to the no-frills, low-end, commodity level, with little comfortable territory remaining inbetween.   For example:

• Cars:  Toyota, Honda, Nissan, Chevy vs. Lexus, Audi, Mercedes, BMW, Ferrari, Porsche
• All wine/beer/spirits:  Budweiser vs. micro-brews, generic vodka vs. single-malt Scotch, magnum generic "chardonnay" vs. subscriber-only "Screaming Eagle"
• Financial services:  No-fee free checking for life  from Wachovia vs. private wealth management from US Trust.

And you get the idea.  My hypothesis is that our market is going in the same direction.  Here are some verbatim comments reflecting that same point of view:

• What happens to mid-sized firms in Europe - will they disappear over the next ten to fifteen years as a result of the inflow of US and UK firms? What should our US strategy be, with many former sources of referrals now setting up shop next door? And if mid-tier firms are to stay, what will their role be?
• The polarization of the market (the shrinking middle with more and more work being classified commodity/low fee or bet-the-company/high fee
• "Mid-Market Mush" or "why bother with a platform that's mediocre?"  Our practice group is very strong and we're not sure whether we should be a boutique or stay in the firm.

Since this is already a theme I have been sounding for some time, expect to see more coverage of it here as its impact spreads.

Finally, we have what emerged as the most important concern of yours by far—head and shoulders above anything else I've mentioned until now.  And that is:

Management.   Law firms are intrinsically complex to manage, and you are painfully aware of that.  (Indeed, the truth of that observation might be said to be one of the foundational reasons why "Adam Smith, Esq." exists.)   The theme that emerges is that lawyers just plain are not predisposed to cooperating in the management imperative.  

Aside from seeming to have been inoculated with some vaccine that provides lifelong resistance to management in general, the presumed structure of rewards for partners today—divvying up all the profits at the end of the year and leaving the firm's balance sheet essentially back at zero —works strongly against investment, a long-term outlook, or a strategic perspective. 

Here are some of your comments and worries:

• Ineffective management. Rainmakers are not always the best communicators or managers
• 1. Lack of firm leadership; 2. Partner apathy in "running a business" beyond simply collecting a bonus; 3. Lack of strategic planning
• Persuading lawyers to understand that hiring a consultant is not (always) an admission of failure, but can be a way of creating / seizing an opportunity
• Transition from older partners to younger partners and division of income amongst the same.
• Continuing to find ways to motivate all of our partners and to have them recognize we're all in a state of continuous change.
• Firms competing in a global economy. Firms realizing they have to act more like corporate America
• The lack of real understanding as to how law firm organisations need to change to get the best out of people; the impact of globalisation on law firms.
  [And finally, perhaps my favorite:]
• Balancing the desire to grow as a firm versus the desire not to change. Our firm is looking to grow, and most everyone supports the notion, so long as nothing changes for the individual.

Much food for thought.  One implication is clear: I shall never lack for topics to discuss here on "Adam Smith, Esq." 

Your comments have been remarkably candid, serious-minded, insightful, and just plain human. 

As I've written before in various contexts, I believe our profession is currently undergoing a sea change in the structure and composition of the industry that will transform it in ways that will endure for essentially the remaining working careers of most of us. 

You have, if anything, confirmed the strains, pressures, and uncertainties of being in the center of this rapid transition.   The settled certainties of our parents' world are indeed long gone.

Having some inexplicable instincts alerting me to this coming vortex many years ago, I continue to find it fascinating beyond measure.   Please continue to share your thoughts with me, either through the Survey or, more directly, by email.

Over at LegalWeek, the big buzz this past week was all about the results of the annual survey they conduct of US firms operating in London which showed that 47% of respondents would consider a UK merger, up from 39% a year ago and just 29% in 2005.

The story was also picked up by their sister site law.com as well as footnoted in The New York Times' "DealBook." 

So, is it a story or isn't it?

Looking at the actual results, you see a lot of firms responding to the point-blank question "Would you consider a merger with a UK firm?" not with the presumed yes or no but coyly or demurely with "Undisclosed," "Unlikely," "Possibly," and so forth.  No word from LegalWeek how these Delphic responses were tabulated.

Be that as it may, there are some indisputable realities about the world in 2007:

"CMS Cameron McKenna managing partner Dick Tyler commented: “We have had more courtesy calls from US firms in the last six to nine months than the last 18 put together. There is a critical strength you have to reach and realistically if you want to have a strong corporate practice, you need employment, pensions, etc as support.”

And:

"Abrahams Russell recruitment consultant Greg Abrahams said: “This is driven by London becoming arguably the leading financial centre in the world and the closing gap between UK and US profitability. With the dollar/sterling exchange rate as it stands, there is more demand on the US side for a merger than on the UK side.”"

This also tells a true tale of the cultural obstacles to be overcome before a hypothetical deal could happen:

"Legal snobbery remains one of the biggest hurdles facing any transatlantic merger. It was snobbery and mutual suspicion on both sides that derailed the negotiations between Ashurst and Fried Frank Harris Shriver & Jacobson a few years ago. The same cultural problems dogged the Clifford Chance(CC) tie-up with Rogers & Wells.

On this side of the Atlantic, CC was accused of aiming too low. But more than a few big billers at Rogers & Wells had precisely the same attitude towards CC – understandably, some might argue, given the magic circle firm’s virtually non-existent profile in the US at the time."

Rather than put undue stock in ex cathedra statements of open-ness towards entertaining a merger, I'd prefer to focus on what US firms are actually doing in London, and one thing they're doing in increasing numbers if taking on trainees (those would be first-year associates, to you):  57% do so this year vs. 51% last year, and some firms with larger London presences (notably White & Case, the single largest firm there by lawyer headcount in the City) has been taking on nearly 40 per year for the past decade. 

Why does this matter?

Simple:  It's a sign of a genuine and enduring commitment not just to the City—where high-value transactional work is the celebrity model everyone wants to be seen in the company of—but to building a lasting and mature practice with the full range of capabilities required to be taken seriously as a local player and not just a wealthy visitor. 

There's another dimension:   Taking on trainees implies adoption of a different time-frame than the more conventional US approach of picking off lateral talent to ramp up quickly—always a two-edged sword in any event.  It's a far longer-term perspective, as it means investing in a talent-development pipeline that may not see serious results for 5,  10, or 15 years.

And that's why it tells you something:  US firms are, at long last, evidently deadly serious about being players in London in the long haul.

If you're like me, you have to wonder why it took so long for US firms to hear this wake-up call. Those who got there early (just for example, Cleary in 1971, White & Case soon after) have established leads it will be difficult to match. I have no blinding insight into why US firms ignored the patently obvious London marketplace for so many decades, but now that they are beginning to realize that even the world's richest domestic legal marketplace is only a one-legged stool on which to build a serious 21st-Century practice, they may be ruing their shortsightedness. At least they came by it honestly.

But this brings us back to whether the "US Ready to Merge!" soundbite is accurate, and I think not.  I certainly think there's far far less to it than the credulous might believe.  Why?

I still  perceive a marketplace not quite ready to "clear," or, perhaps more precisely stated, a marketplace where potential players have still-too-widely divergent perceptions of value, fit, and cultural congruence.   Does this make sense?  At a rational, objective, and economic level, none whatsoever.  If a merger would generate all but undeniable benefits for both parties, perception should matter not.  Yet we all know it does, sometimes to the point of obstinance, and a refusal to countenance even deals that, on  paper,  make tremendous sense.

Analogous is what we have seen in the past, and may see again, in the US residential housing market:  When prices fall drastically in a  particular region or metropolitan area, people who bought at the top demonstrate almost insurmountable aversion to selling their homes for less than they paid for them.   Economists (and I) will tell you this makes no sense.  The house is worth whatever it's worth, and what you happened to have paid for it is utterly immaterial. 

But as we can read in today's NYT, what economists believe and how people behave are two different things.  Consider this study from about 15 years ago:

"From 1989 to 1992, prices in Boston fell sharply, with condominium prices dropping as much as 40 percent. For a great many of those who bought condominiums during that period, selling could be done only at a significant loss. And, basically, many people refused to sell.

[A] study, “Loss Aversion and Seller Behavior: Evidence From the Housing Market,” [which] appeared in The Quarterly Journal of Economics in November 2001, gathered data on almost 6,000 Boston condominium listings from 1991 to 1997 and showed that for essentially identical condominiums, people who had bought at the peak and were facing a loss generally listed their properties for significantly more than those who had bought at a time when prices were lower.

"Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay."

Back to the US/UK law firm merger market:  What is the lesson? 

The lesson is that economic realities ought to trump sentimental notions such as not wanting to sell your house for less than you paid.  But they don't always.  People kid themselves, and do things like putting their house on the market at a price so high that it will sit there for a year or more, ignored or rejected.  If you really want to sell your house, price it at the market.   You won't have long to wait.

My suspicion is that the US/UK merger market is closer to Boston condominium-owners in 1992 than to an active, vibrant, and clear-eyed market.   Lots of people may say they want to dance with the pretty girls, but they're sitting on their hands.

CIO Magazine recently announced its 20th Annual CIO100 Awards, recognizing 100 CIOs deemed most  effective at transforming their firms through IT innovation .    The winners included CIOs from Bryan Cave, Foley & Lardner, Goodwin Procter, King & Spalding, and K&L Gates.

Notably, K&L Gates also captured one of the five "Plus One" awards, for Business Innovation.  (The four other firms taking home Plus One Awards were: Hilton Hotels for customer satisfaction, Johnson & Johnson Pharmaceutical Research and Development for competitive advantage, Marriott International for security excellence and Merrill Lynch for improved productivity.)  Notably, K&L Gates had an earlier 3-years-in-a-row run of CIO 100 Awards, from 2002 through 2004.  All in all, I thought something noteworthy might be going on in the IT arena at K&L Gates..

Accordingly, a few days ago I had a chance to catch up with Steve Agnoli, CIO of K&L/Gates, to learn about the background to the awards and explore how K&L Gates approaches IT in general.

Here's what I learned.

Steve arrived a little over nine years ago, at the then Kirkpatrick & Lockhart, and was the first CIO the firm had.  Why hire a CIO then?

"The firm had decided to move forward with a more aggressive growth strategy, and they realized that entailed building out their IT systems and the marketing infrastructure." 

Steve had never worked at a law firm before, but when friends asked him why he'd want to go to a law firm, his response was:  "Why wouldn't I?  It's a business like any other.  It has to get IT done right; it realizes IT is a key component of the business, with internal and external impacts."  And today does he still feel that way?  "Absolutely:  The whole firm feels that way, not just the IT department."

Not surprisingly, once Steve arrived his first order of business was getting the infrastructure right and making it scalable and reliable.  "That's always the key thing."  But once that's under control, you have the freedom to take a more outward-facing approach.  If Steve could describe the overall trajectory of his time at K&L Gates, it's been from "plumbing" and nuts and bolts initially, towards a more client-oriented focus in recent years.

And the "Business Innovation" CIO Plus One award?  "It was for our Legal Information System and our extranets.  LIS is a reusable infrastructure component, or application, which we can roll out across different industries and practice areas.  The goal of LIS is to provide a forum for K&L Gates lawyers' commentary and insights into cases, statutes, regulatory developments, and so forth, which we present alongside the primary sources.  The idea is to provide a 'one stop shop' for clients with legal issues in that area.  It's not just the raw material, it's our opinion, interpretation, and commentary."

I note that K&L Gates has been, shall we say, active in mergers, and ask Steve about their strategy for integrating systems across formerly separate firms post-merger.

The key, he says, is that they started preparing a long time ago for integrating combinations of firms.   Essential to the processs is to standardize:  Standard technology, standard procedures, standard processes, and a standard platform.  The pieces of that platform are:

• A Microsoft-based infrastructure
• Windows XP clients
• Lenovo brand PC's everywhere
• A consistent image on all PC's
• Servers that are all the same:  Same brand, same OS's, same patch levels
• Microsoft Exchange email
• A single provider of WAN hardware
• Similar equipment across all offices to provide WAN and LAN connectivity
• BlackBerry's as a default smartphone device (although they will support Windows Mobile units on request).

In other words, as Steve puts it, a "very boring" philosophy of equipment and infrastructure.  "Why learn two things when you can learn one?" 

Understandably, there are times immediately post-merger when hardware will not be standardized, but integration is accelerated by insisting on a standard user interface "on top" regardless of hardware differences "underneath."   For example, Steve notes, take phones:  With the Preston Gates & Ellis combination, PG&E used Cisco VOIP hardware and K & L used Siemens.  Nevertheless, on the day the merger became effective, dialing the prefix "101" got you the Seattle office no matter what equipment you were on.

Similarly, the website, attorney and professional staff bios, email addresses, stationery, billing templates, etc., are all standardized and consistent on day one post-merger.

So that's Phase One of merger integration.

Phase Two is integrating the key infrastructure itself:  WAN and network connectivity, key business processes and applications, HR, finance, time & billing, document management, litigation support, backup/disaster recovery, etc.  Phase Two, interestingly enough, commences before the merger is formally consummated and continues well after. 

Since Phase Two is largely inward-looking, there's more flexibility in timing.  For  Phase One, by contrast, the firm's self-imposed and self-enforced deadline is that the standardized user interface be in place the morning after the merger takes effect.

Phase Three is integrating the application inventory.  Ultimately, the goal is complete standardization across the entire firm regardless of office and regardless of user.

What other initiatives are on his plate?

Consolidated data centers is #1, he replies.  The firm is consolidating key computing infrastructure in primary and secondary facilities in a few regions around the world including the US, Europe, and later, the Far East.  Consolidation is "not just good IT hygiene," Steve opines, "but it serves the goal of freeing staff to serve our lawyers and their clients and spend a lot less time on just 'keeping the trains running on time.'"

I ask Steve who he reports to, and he gives me the right answer:  He reports to Pete Kalis, Chairman of the firm.  Why, Steve asks, is that the right answer?  In my experience, I relate, CIO's, be they in law firms or corporations, who report to the CEO or Chairman, have the proverbial "seat at the table," whereas those who report to the CFO, COO, or Executive Director, are viewed as well-paid plumbers, responsible for a utility like electricity or a dial tone, but not strategic partners in the firm's success.

While we're on this topic, Steve elaborates that the management committee has been "very supportive" of IT initiatives.  The firm "recognizes and offers sponsorship of IT.  Two things have to come together to enable IT to have a lasting competitive impact.  First, the actual ability to implement important initiatives, but equally important, the willingness of the firm to let it be done." 

What's the hardest part of your job, and what's the most rewarding?

Hardest is recruiting talent—"especially to a law firm.  People know that there are extremely high customer-service level expectations, at all times and at all levels, even in the back room."  Recruiting talent is an ongoing struggle, one that seems to be more of a challenge all the time.  Steve belongs to a Pittsburgh area council of CIO's from companies ranging from about $100-million to $5-billion in revenue, and at the most recent meeting everyone reported recruitment and retention of talent was their single biggest challenge.

The second challenge is staying relevant from a business perspective:  "Being more than a utility or a service provider—being a true client partner."  And third is obvious:  Scale.  As the firm grows, there's "a simple issue of magnitude."

The most rewarding?

Taking IT out of the back room and into the front office, all while supporting growth.  It may be challenging to retain people, but it's immensely rewarding to be viewed as a key part of the business.

So?  Take one energetic and disciplined CIO, add deep and enduring management support, sprinkle with clients willing to appreciate technology initiatives by their law firm, and, with luck and perseverance over a course of several years, you win a CIO100 award.  "Plus One."