Recently in Partnership Structures Category

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

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

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

So let's listen for a moment.

He said two things that struck me:

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

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

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

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

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

But enough on that.

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

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

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

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

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

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

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

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

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

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

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

Q: Have you seen a change in attitude?

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

And second, in terms of client expectations:

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

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

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

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

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

So:

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

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

Thanks, Cesar.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Were there reasons for this?

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

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

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

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

Lloyd Blankfein

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

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

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

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

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

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

So, whither regional firms?

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

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

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

Why?

Fundamentally, we're no longer a regional country.

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

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

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

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

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

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

In a word, so long, regionalism.

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

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

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

If you suggest that it's knowledge of local:

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

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

What are the remaining advantages of a regional firm?

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

We're all ears.

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

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

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

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

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

So what's the analogy to a lateral partner?

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

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

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

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

If that's the case, join the club.

My reaction is precisely the same.

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

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

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

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

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

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

Try telling that to your next startup client.

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

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

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

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

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

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

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

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

Regards,
[xxxxxx]

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

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

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

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

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

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

Bruce --

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

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

I have two questions:

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

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

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

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

So, what more have we learned?

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

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

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

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

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

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

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

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

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

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

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

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

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

Of course it's not really so simple.

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

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

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

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

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

What else can we say about lateral partner movement?

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

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

Indeed, this mirrors my own experience.

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

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

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

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

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

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

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

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

Some context:

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

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

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

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

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

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

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

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

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

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

This is a quantum leap.

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

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

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

What has this to do with BigLaw?

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

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

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

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

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

Stay tuned for the next installment in this series.

Pop quiz: Which of these would be worse:

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

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

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

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

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

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

So what?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• status
• certainty
• autonomy
• relatedness
• fairness.

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

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

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

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

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

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

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

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

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

What might all this mean for you as a leader?

Apply it to yourself, is the short answer.

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

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

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

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

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

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

Back in March at the American Enterprise Institute annual dinner, Charles Murray gave a talk entitled "The Happiness of the People."   The managing partner of a large AmLaw firm recently brought it to my attention.

The AEI's "abstract" would have you believe that the speech responds to the premise that "America's current leaders seem to be leading us down the path to European-style social democracy," but it's actually nothing of the sort.

The speech is remarkable, not just for its non-ideological, unorthodox, fascinating, and deeply insightful perspective on human nature, but, so the managing partner suggested and so I agree, because it's pregnant with implications for the proper molding of the culture of high-performing law firms.

The speech does proceed, however (as advertised), from the premise that a critical question facing the nation given some of the predilections of the Obama Administration is "Do we want the United States to be like Europe?"   Whether or not you ascribe those motives to or endorse that characterization of the Obama Administration, I'd like to ask you to step back and put that aside in order to be able to reflect without prejudice on Murray's insights into the elements necessary for the proper expression of human nature.  (Nor, for the record, is Murray a hard-bitten opponent of the European model.  Indeed, he writes that "Not only are social democrats intellectually respectable, the European model has worked in many ways. I am delighted when I get a chance to go to Stockholm or Amsterdam, not to mention Rome or Paris. When I get there, the people don't seem to be groaning under the yoke of an evil system. Quite the contrary. There's a lot to like--a lot to love--about day-to-day life in Europe.")

Nor s his critique focused on the economic consequences of the "European model:"  "[It] has indeed created sclerotic economies and it would be a bad idea to imitate them. But I want to focus on another problem."

He begins with Federalist 62, which, he scrupulously notes, was "probably" written by Madison:

"A good government implies two things: first, fidelity to the object of government, which is the happiness of the people; secondly, a knowledge of the means by which that object can be best attained."

"Happiness," rather than equality, security, or prosperity, is the key word, and "happiness" in the Aristotelian sense of an enduring and well-justified satisfaction with life as a whole.  This is "happiness" in the sense of "deep satisfaction," or, viewed from the public as opposed to the private perspective, reflecting the old-fashioned notion of "a life well-lived."  And on this score the European model is profoundly flawed:  Simply put, it does not conduce to Aristotelian happiness.

How so?

"It drains too much of the life from life."

This seems a large indictment, but here's what Murray is driving at:

[When I talk about "deep satisfaction"]  I'm talking about the kinds of things that we look back upon when we reach old age and let us decide that we can be proud of who we have been and what we have done. Or not.

To become a source of deep satisfaction, a human activity has to meet some stringent requirements. It has to have been important (we don't get deep satisfaction from trivial things). You have to have put a lot of effort into it (hence the cliché "nothing worth having comes easily"). And you have to have been responsible for the consequences.

There aren't many activities in life that can satisfy those three requirements. Having been a good parent. That qualifies. A good marriage. That qualifies. Having been a good neighbor and good friend to those whose lives intersected with yours. That qualifies. And having been really good at something--good at something that drew the most from your abilities. That qualifies. 

All these activities, Murray observes (uncontroversially, I think) occur within four institutions:  Family, community (which can be virtual), vocation (or avocation, or cause), and faith (which can be a- or non-religious, in my opinion, although Murray presumably would beg to differ).  If, then, the goal of social policy should be to help make those institutions "robust and vital," then "the European model doesn't do that.  It enfeebles every single one of them."

Again, a large charge.  But we've reached the crux of his analysis:

Put aside all the sophisticated ways of conceptualizing governmental functions and think of it in this simplistic way: Almost anything that government does in social policy can be characterized as taking some of the trouble out of things. [...]

The problem is this: Every time the government takes some of the trouble out of performing the functions of family, community, vocation, and faith, it also strips those institutions of some of their vitality--it drains some of the life from them. It's inevitable.   Families are not vital because the day-to-day tasks of raising children and being a good spouse are so much fun, but because the family has responsibility for doing important things that won't get done unless the family does them.

If this sounds a bit too abstract and theoretical (certainly at first blush it frankly does), Murray makes it concrete:

When the government takes the trouble out of being a spouse and parent, it doesn't affect the sources of deep satisfaction for the CEO. Rather, it makes life difficult for the janitor. A man who is holding down a menial job and thereby supporting a wife and children is doing something authentically important with his life. He should take deep satisfaction from that, and be praised by his community for doing so. Think of all the phrases we used to have for it: "He is a man who pulls his own weight." "He's a good provider." If that same man lives under a system that says that the children of the woman he sleeps with will be taken care of whether or not he contributes, then that status goes away.

I am not describing some theoretical outcome. I am describing American neighborhoods where, once, working at a menial job to provide for his family made a man proud and gave him status in his community, and where now it doesn't. I could give a half dozen other examples. Taking the trouble out of the stuff of life strips people--already has stripped people--of major ways in which human beings look back on their lives and say, "I made a difference."

The immense perversity of "taking the trouble out of" being a spouse or being a worker is that, as soon as the trouble is taken out, human beings lose interest in it.  Witness Europe:

Scandinavia and Western Europe pride themselves on their "child-friendly" policies, providing generous child allowances, free day-care centers, and long maternity leaves. Those same countries have fertility rates far below replacement and plunging marriage rates. Those same countries are ones in which jobs are most carefully protected by government regulation and mandated benefits are most lavish. And they, with only a few exceptions, are countries where work is most often seen as a necessary evil, least often seen as a vocation, and where the proportions of people who say they love their jobs are the lowest.

How can this be?, you're asking yourself.  And yet you immediately, gut-instinct level, know the answer.

Murray elaborates on the human psycho-social-cultural dynamic at work here, and particularly on the implications of what he calls the error of "the equality premise."  As he would have it:

The equality premise says that, in a fair society, different groups of people--men and women, blacks and whites, straights and gays, the children of poor people and the children of rich people--will naturally have the same distributions of outcomes in life--the same mean income, the same mean educational attainment, the same proportions who become janitors and CEOs. When that doesn't happen, it is because of bad human behavior and an unfair society. [...]

Within a decade, no one will try to defend the equality premise. All sorts of groups will be known to differ in qualities that affect what professions they choose, how much money they make, and how they live their lives in all sorts of ways. [...]

There is no reason to fear this new knowledge.   Differences among groups will cut in many different directions, and everybody will be able to weight the differences so that their group's advantages turn out to be the most important to them.

If we "repeal" the equality premise, there's just one problem.  As your life experiences accumulate--in the vital contexts of family, vocation, community, and faith--you will slowly become more and more responsible for the life you are living, and the ultimate question whether it all adds up to "a life well lived," and to "deep satisfaction" with what you've accomplished, in the eyes of both yourself and those who populate those vital contexts.  The "European model," or the indulgently paternalistic law firm, would steal that responsibility away from you.  This would be a Faustian bargain.

And so there's hope.  Not only the hope that I have always fervently embraced, which has its roots in the truest and noblest strains of what it means to be American, such as our uncanny predilection for optimism, even when there seems to be no explicable reason for it, or our still amazing lack of class envy (we celebrate rather than resent success), or our potent assumption that each of us is in charge of our own destiny.  More than that, it's the essential belief in the powerful respect due individuality:

Restoration of the premise that used to be part of the warp and woof of American idealism: people must be treated as individuals. The success of social policy is to be measured not by equality of outcomes for groups, but by open, abundant opportunity for individuals. It is to be measured by the freedom of individuals, acting upon their personal abilities, aspirations, and values, to seek the kind of life that best suits them.

Combine this profoundly American value, now merely two centuries old and counting, with the insights emerging from behavioral evolution (confirming what some texts over two millennia old have taught) that the "life well-lived" requires dynamic and energetic and fruitful engagement with those around us, and you begin to have the ingredients for a "vibrant and robust" culture.

And as for your firm?

Well, haven't we just laid it out?

Focus on individuals.

Eschew equality of outcome but insist on equality of opportunity.

Expect optimism in the face of deepest adversity.

Demand engagement with the community.

Celebrate the "life well lived" (the career well performed).

And most importantly:  Beware "taking the trouble out" of things. Because the deep secret of human nature is that we don't appreciate that.  We not only don't appreciate it, we don't respond well to it.  We not only don't respond well to it, it's toxic to our communities, and it devalues the very virtues you thought you were trying to promote.

So in a word:  In your firm, dare not try to take the trouble out of things.

Last week I had a chance to sit down with Tomasz Wardynski, founding partner of Wardynski & Partners, based in Warsaw, which is now a firm of close to 250 people including 137 lawyers with 22 partners, of whom 9 are equity and 13 are salaried or limited partners.

I was looking for perspective on the Eastern and Central European markets, and Tomasz was more than prepared to oblige.

"2010 will be very very tough," he began.  "There is no more inertia" remaining in the system from the end of the boom.  Therefore, he opined, the challenge for senior management is to "change the partners' attitudes."   Tomasz was pellucidly clear that it was not optional for partners to decide whether to go along.

"For the first time in my firm, the equity partners will need to make substantial investments of capital."  And if someone resists making the capital contribution?  "Well, then, they won't be an equity partner, will they?  That is always their choice."  And:  "It's really very simple:  You need to make sure you have fewer people than there is work to do."

Recently the firm has shifted to pure lockstep compensation of partners.  Previously, there had been a small retention, which was then distributed in the discretion of management, but they decided to end it because "it involved too much emotion: not worth it."  Progress through the lockstep is based on a subjective evaluation of performance plus an expectation of 2,000 hours/year, "which is not very demanding, after all."

"How do you train people?"

"Well, this is an issue because the universities are not very good at it.  It's a combination of watching, lectures, and the firm's own 'development center.'" Training clearly represents a substantial investment by, and commitment on behalf of, the firm.

The path to partnership is 8 to 10 years, during which associates are paid based on merit:  "Some of them make more than limited partners."

How does he feel about media coverage of the legal industry?

"Rankings are put together by smart media outlets to play to the vanity of lawyers."  And, he added in emphatic words, those rankings are extremely detrimental to the profession.  "Perhaps the only media phenomenon that's more destructive than rankings is the American Lawyer profits-per-partner numbers.  This is simply awful; they have transformed the profession, and they claim innocence.  Preposterous."

Clearly, Tomasz believes the AmLaw PPP numbers are not only a caustic influence on behavior, but borderline fraudulent.  The problem with the PPP numbers' accuracy?  "Running a law firm is a cash business.  But if I want to inflate profits by accruing some expenses and some revenues, I can come up with any numbers you like."

Tomasz expressed a strong belief in highly professional management of his firm.  "Five years ago we started introducing professional management systems into the business--human resources, information technology, knowledge management, and coaching for all lawyers."  Surely not all lawyers, I interjected?  "Well, yes, all.  And we have a very strong CFO who manages our finances extremely closely."

What's your biggest management challenge in this environment?

"The hardest problem to deal with is people who are very talented but who don't have enough work to do.  That's the hardest by far."

What else are you dealing with that's new?

"Last year we decided not to pay out profits from the firm above the level of partners' standard draw.  This is a protective measure."  And how long will you keep this in place?  "I foresee a downturn in the shape of an 'L,' not a 'V.'"

Let's step back, I suggest:  Why did you decide to start the firm?

"I had no choice but to start the firm.  I had clients needing to get deals done." 

And did you envision its growing so large?

Without missing a beat:  "Yes.  We were clearly in the right place at the right time."

What other issues are you facing today that are new?

"The next issue will be whether clients can pay.  The challenge of course is that you can't really protect yourself because you can't demand payment up-front, and you can't sue clients."

What else?  How about keeping the talent pipeline flowing?

"Yes, absolutely!  You cannot stop recruiting, so all you can do is to share the risk with people, to the extent they can bear it.  This recession may last a long time."

Other worries?

"That state intervention--not just in Eastern Europe, but in the US, the UK, conceivably even Asia--may suppress investment and entrepreneurship.  The very notion that some institutions are 'too big to fail' is monstrous.  Failure is what some of these banks richly deserve; they have it coming to them.  The namesake of your site would be apoplectic."

How's the regional CEE environment?

"Poland actually has +0.8% growth this year; it's not great, but it's greater than zero.

"Hungary has been suffering for two years.

"Latvia is very bad.

"Ukraine:  Disaster!"

But overall Tomasz remains an optimist: 

"Life is strong, and it will continue.  The economy will be boiling again in places where it seems unimaginable today. 

"What really counts at this moment is discipline.  People have to be mobilized.  You cannot lose...[he appears to be momentarily, and uncharacteristically, searching for a word].  You cannot lose speed!

"Even the strong-willed, independent, and autonomous partners have to believe in central management in this environment.  It's too dangerous not to.   Not only our livelihoods, but the welfare of our families and our children are at stake.

"Life is not a fairy-tale."