Recently in Strategy 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And you know what?  They were right.

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

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

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

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

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

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

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

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

Here are a few headline statistics:

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

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

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

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

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

What to make of this?

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

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

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

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

#3, collaboration at scale.

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

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

#5, experimentation and big data.

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

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

Etc.

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

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

#7, imagining anything as a service.

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

That's not the point.

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

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

Merely to point out that, pregnantly, McKinsey writes:

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

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

#8, the "multisided business model"

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

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

Or Google.  Their sponsored ads subsidize our free searches.

What might that look like for law-firm land?

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

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

---

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

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

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

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

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

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

Welcome to law-firm land.

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

Consider a hypothetical firm:

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

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

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

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

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

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

Now what?

---

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

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

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

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

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

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

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

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

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

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

This should serve as a clarifying moment.

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

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

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

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

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

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

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

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

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

So where does this leave us?

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

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

Now, this is nothing to be afraid of.

Will the new competitors come?

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

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

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

Or ours.

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

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

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

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

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

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

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

So far, that's merely reality.

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

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

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

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

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

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

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

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

As McKinsey drily reports:

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

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

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

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

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

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

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

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

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

---

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

What do I mean by that?

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

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

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

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

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

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

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

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

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

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

And thus with law firm performance metrics. 

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

Then what am I suggesting?

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

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

Sorry to break this to you.

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

If so, Dear Reader, we have a trend:

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

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

From The Lawyer, June 7.

This of course on the heels of

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

Of what precisely does this "trend" consist?

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

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

Logistical/practical reasons and strategic/global reasons.

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

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

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

Strategic/global reasons:

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

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

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

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

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

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

So what's on everyone's mind here?

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

Here are the key topics:

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

Bottom line?

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

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

In the meantime, the watchword is: Agility.

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

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

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

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

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

Clients on Quality	Firms on Quality
Often "good enough" is good enough	We need to run down every conceivable contingency no matter how remote-and extinguish it with a string cite
80/20 rule	99.99%
Financial metrics, cost-benefit, ROI	Professional ethics and intellectual tradition
Business judgment	The traditions of excellence in our firm

Does this sound familiar?

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

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

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

That's the view from corporate America.

We would, of course, invert this listing:

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

What happens when these two worldviews collide?

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

• denial
• anger
• bargaining
• depression
• acceptance

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

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

Here's my worry:

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

Is good enough good enough any more?

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

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

---

What, then, is to be done?

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

So, for starters:

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

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

---

Update:  Steven Levy, a loyal reader, writes:

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

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

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

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

Wired recently named a new phenomenon the "good-enough revolution." You can see it in the juxtaposition of the iPad and the Flip video camera. When Steve Jobs introduced the iPad (not unlike what he's said with many other over-the-top Apple product introductions), he said that unless a product was "far better" than what already exists in the market, it had "no reason for being."

So people are paying $500 for the entry-level iPad, with US demand so robust that the European introduction has been delayed because of supply shortfalls. But at the other end of the spectrum is the world of Ikea, H&M, and the Flip camera: Making things that are adequate and well-priced. Actually, that's doing them a disservice. They're extremely well suited for purpose. And the purpose is not high-end. Nor is the price.

You bring an Ikea desk or bookshelf home, slap it together, and it just plain works. When it's time to renovate and you're done with it, no big deal. H&M creates disposable fashion for the season: Wear it now, and when the seasons change, toss it away. The Flip camera has one great big red button; it means "record."  Although it comes with an instruction manual, it seems perfunctory, a nod in the direction of folks who expect electronics to ship with volumes of documentation (the Flip's "manual" is actually the size of a card deck--if card decks had only 10 cards).   What's wrong with any of these business models?

According to much of the world, not a lot.

Does that mean there's no room in the world for the iPad? Scarcely. The MacBook Pro is one of the nicest laptops on the market (think of it as an even higher-end version of the iPad [techies, I'm sorry!--I know the iPad is not a laptop substitute, at least not yet, so hold your emails]) and the 17" screen version costs $2,499 to start. Nicely featured, it's easily over $3,000. And, yes, a drop-dead gorgeous machine. Taiwan's Acer has made a very nice business out of making dirt-cheap, reasonably reliable laptops for under $500. With both Apple and Acer, you know what you're getting.

And that's precisely the point, isn't it?

What has happened to the rest of the market, what might be called the Big Middle?

A few suggestions:

• Department stores;
• A&P, Dell, Sony, General Motors, Sears;
• Time, The Saturday Evening Post, Readers' Digest, Book of the Month Club.

You get the idea.

So far, what I've said is something you could have read about in James Surowiecki's New Yorker column of March 29, Soft in the Middle., albeit with my extrapolations.

But now let's apply it to LawFirm land.

Brand names, including middle-market brand names, used to be able to rely upon their very names for insulation on the pricing front; those names signaled reliability, a guarantee of quality, and no need to investigate further. That may not get you so far any more.

Increasingly, the world appears to be evolving towards a landscape where there are MacBook Pro's and Acer's, but not so many Dells; more Lexuses and BMWs and Corollas and Civics, but fewer Malibus and Ford F-150's; more artisanal cheese and wine, and more Velveeta and Gallo, but less generic cheddar and house chardonnay.

For us, imagine we're entering an age where Cravath, Slaughter & May, Wachtell, and their ilk will prosper inordinately; and demand for firms that optimized their processes at the other end of the spectrum--Littler Mendelsohn, Eversheds, and others--will also thrive.

What does that leave for firms in the middle?  

Aaah, you say, but my firm is exempt; it's special.  So, in their day, were all the brand names listed in my bullet points above.

Just a thought.

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

Somewhat colorfully, it accuses the firms as follows:

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

Perhaps three-star hotels would be less objectionable?

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

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

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

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

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

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

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

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

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

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

We shall see how long the Indian barriers last.

Last week I had a chance to sit down with Howard Altarescu of Orrick, who I felt compelled to get to know better when he was the first, and still the only, person to know the answer to a question I like to pose, whenever I have the chance, to groups of lawyers discussing business issues facing law firms. First the question, and then my conversation with Howard. (The answer to the question is at the end of this column, but jumping ahead, as P.D. James or Sir Arthur Conan Doyle would attest, is cheating.)

Q.: What is the one line item that appears on virtually every corporation's balance sheet but not a single law firm's?

Actually, that introduction was not remotely fair to Howard, although it was intended to engage you, Dear Reader, in thinking about the answer to the question as you read on. The fact is that I'd heard about Howard for quite some time and when I found myself in the same room with him, the opportunity to connect was not to be denied.

Howard's background is distinguished, to say the least:

• Boston University BA and BS
• Boston University School of Law JD and Articles Editor, Boston University Law Review
• Partner at Cadwalader
• More than 20 years at Goldman Sachs
• And now a partner at Orrick, since June of 2008 (think about that timing for a moment-after Bear Stearns' collapse but before Lehman's). 

Howard is today working with a number of financial institution clients run by former Goldman colleagues (and others) and is also representing the FDIC on its proposed new securitization program.

Howard also considers himself a confirmed capitalist and a Liberal Democrat, which is a combination I find scarce and therefore (Econ 101) valuable. Part of that relatively unusual combination of traits may come from Howard's background, where he was the second college graduate in his family and the first to go to law school. His father owned a small TV shop in the Bronx, and Howard grew up in New York and, save for his BU days, has always been based here.

And, since you asked, none of his three children is going or will go to law school, and that appears to be more than fine with Howard.

But back to Howard: He joined Cadwalader right out of law school and had the good fortune to become a protege of Tom Russo (now GC of AIG after a brief stint at Patton Boggs and 15 years as chief legal officer at Lehman Brothers). Early on at Cadwalader, Howard worked on the seminal KKR deal of Houdaille Industries. KKR was so little known in the market at the time that the team had to conduct due diligence on who, exactly, these guys were.

Howard also got the chance to work on the first Freddie Mac structured mortgage pass-through offering in 1975. When I say "first," I mean first. Howard related how he was told to sit down with a clean legal pad because there were literally no precedents for this type of deal structure. He walked the halls at Cadwalader, going from partner to partner, asking them for their input in each separate piece of the deal.

This led to other first-of-its-kind deals, including representing Freddie Mac on its first CMO issuance (in 1983) and Goldman Sachs on its first mortgage-backed bond issuance (1984, in case you were wondering).

Shortly thereafter, Goldman decided to get into the mortgage business in a serious way and hired Howard away from Cadwalader. He would be there for over 20 years.

Howard was head of the mortgage finance department, and soon became involved in Mexico advising the government on the creation of a secondary mortgage market. This led to a fine run until the 1994 peso crisis, which needless to say blew it all away. But in the process, Howard had been "bitten by the emerging markets bug." He reported that the following six years (1994-2000) involved his commuting to South America and leaving notes for his children such as "Tuesday: To Mexico. Wednesday: Argentina. Thursday: Home for dinner." Stress on the system aside, this seemed to work until Mexico defaulted, Russia defaulted, and Argentina defaulted. Howard reports his reaction at that point: "No mas!"

What next? John Thain, then President of Goldman (2001) suggested Howard go to the equities division, but, Howard reports ruefully, he declined. Rueful? Yes, because Howard returned to the mortgage department (COO of Principal Finance, Head of Mortgage Finance and other roles) and then the mortgage market simply died. Whereupon Howard decided it was time to do something else.

While Howard was in discussions with a number of former Goldman colleagues and others, a long-lost friend from 20 years earlier at Cadwalader, Mark Levie, called Howard from Orrick and one thing led to another.

Why Orrick?

"I hadn't, honestly, followed the firm and I was not looking to go back into the practice of law; but the more I got to know about Orrick and the more people I met, the more I felt that this was something different and quite interesting. The attitude was innovative, commercial, and entrepreneurial.  There was also a focus on teamwork and culture that very much reminded me of Goldman Sachs.  Partners on the transaction side like Cam Cowan in DC, Michelle Taylor in Hong Kong, and Jim Croke and Ron D'Aversa in New York, as well as litigators like Mike Delikat, Josh Rosenkranz and Michael Hefter, really know their clients, take a proactive approach, post other partners on developments, and treat their practice as a business."

So what does Howard actually do today?

"I have a broad strategic, advisory and business development role. A typical day involves lots of calls and meetings, with clients focused on business development opportunities as well as with other partners on a variety of transactions and other matters. Like at Goldman, I believe there is great value to the firm in teamwork, being inclusive and open, posting broadly, giving others the opportunity to provide input as well as for all to benefit from whatever may be learned in particular situations."

And when is the mortgage securitization market coming back?

Now.

He reported that they're working on deals, some of which are private placements that don't rely on ratings agency imprimaturs. In the short term, he believes, there won't be a large volume of deals because of the difficulties in getting a rating agency blessing; but in the meantime, smaller deals can be done with sophisticated investors without ratings, and some public deals are also possible.

I tell Howard that I don't believe ratings agencies will ever again have a scintilla of credibility, and I ask him how will we ever again have large-scale deals in that case?

He proposes a future in which consortiums of investment banks or other institutional investors could sponsor mutual ratings.

As a securities lawyer, I can't resist asking him about what the disclosure documents for these hypothetical new securitized issues would look like. First, he penetrates to the heart of the issue of disclosure documents with this memorable observation:

"Disclosure documents have always been written for litigators after the fact."

Going forward, Howard says we need to get back to the founding purposes of the securities laws:  "Full, fair, and accurate disclosure to investors must be the primary purpose."

He believes that the key provisions in deal documents will involve the loan repurchase enforcement mechanism when there are rep/warranty breaches..  In exigent circumstances, who gets what voting rights and when? Recalling, perhaps, the early days of his career when no templates existed and there was little if any prior art: "Nothing is carved in stone."

Meeting adjourned.

So what, if anything, can we learn from Howard's experience?

You may be concluding, "Not much," because you've decided it was a different era. And indeed it was, in many ways. Howard reported that when he was a first-year associate at Cadwalader (nine months in, to be precise), Tom Russo was leaving to join the then-newly formed CFTC and Howard was told that he would be taking over Tom's key client relationships in the broker-dealer sector because "you know these people better than anyone else in the firm."

Could that happen today? You be the judge.

But something more timeless and essential struck me about Howard's career: He was at the crossroads of innovation.

A couple of weeks ago I participated in a conference at Georgetown Law (which I had helped organize), during which Prof Peter Sherer of the University of Calgary presented a paper  about the history of leading law firms during the Great Depression. His conclusion?

The firms that survived, and thrived for another 80 years and potentially more, were those that had a "critical mass of flexible young partners" and that were able to remake their firm competencies and expertise and, accordingly, benefit from a flight to quality by clients.

How does this relate to Howard's career?

• Agility
• Being at the forefront of what's new
• Thinking young

Take a lesson.

---

And oh yes, the answer to the question posed at the top of the show?

Retained earnings.

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

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

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

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

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

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

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

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

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

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

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

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

May I elaborate?

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

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

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

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

Why?

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

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

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

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

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

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

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

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

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

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

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

That's not the way it turns out.

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

What's going on?

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

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

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

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

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

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

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

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

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

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

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

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

What's going on here?

Nothing that would have surprised Coase.

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

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

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

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

Stop there.

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

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

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

---

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

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

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

Very throughtful indeed.  And a useful reminder to those of you who think that Wealth of Nations was all Adam Smith wrote.  Theory of Moral Sentiments is actually equally profound.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You have been warned.2

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

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

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

Doubt me?  Take a look:

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

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

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

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

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

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

Well, so what?, you may be thinking. 

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

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

A clear identity

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

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

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

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

Brand.

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

Not every day do we get what appears to be good news on the much bruited-about topic of the US's global competitiveness.  But courtesy of today's FT we have just that, in New  York ties with London for finance crown. 

A consultancy with the New Age-y name of Z/Yen, commissioned by the City of London Corporation, prepares a semi-annual "Global Financial Centres Index" and this year's results put the Big Apple and Big Ben in a dead heat at 775 points apiece.  Although the methodology is something of a black box, it " combines a survey of financial professionals with factors such as office rental rates, airport satisfaction and transport."  A total of 75 global centers worldwide are ranked, with Hong Kong and Singapore (3rd and 4th, respectively) making sizable gains on the Atlantic Anglo pair.

New York fared better than London for business environment, availability of people and infrastructure, even though those participating in the survey agreed that New York had taken the bigger hit from the financial crisis.

Meanwhile, London hurt its own cause by raising the top personal income tax rate to 50%, along with a 50% payroll tax on all bonuses over £25,000.  (France and Germany pulled similar stunts; the US, of course, has at least so far not.)  Here are the top 10 cities:

Meanwhile, I was in front of about 100 managing partners, executive directors, and other senior law firm leaders here in New York last month and the sponsor of the event had kindly agreed with my suggestion that we arm attendees with wireless polling devices.

One of the questions I asked was "Five years from now, it will be clear that the greatest growth in demand for corporate/financial legal services is in:"

You can see that New York garnered a handsome 25% of the votes (multiple selections were not allowed).  In order, people voted for:

• China, including Hong Kong:  31%
• New York:  25%
• The rest of Asia, including Japan and India:  22%
• The EU, and Central & South America:  Tied at 8% apiece
• London:  6%
• The rest of the US:  0%

Another way of looking at this is that between them, New York and Asia-writ-large had 78% of total support, while the entire rest of the world had (obviously) only 22%.

If you've been to China lately, you know that as far as the Chinese are concerned, there are only two economies that matter:  Theirs and the US.

There may be life in this little old narrow island yet.

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

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

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

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

Back to succession planning.

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

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

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

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

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

The next question is: What are you looking for?

Let's start with your firm's strategy.

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

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

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

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

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

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

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

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

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

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

Could we do it better?

Need we do it better?

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

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

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

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

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

I generalize, of course.

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

	Revenue	Net Profits	RPL	PPP
Arnold & Porter	+2%	+12.3%	-1.1%	+1%
Bracewell & Giuliani	+<1%	-7.7%	+4.2%	+10.2%
Dechert	-12.6%	n/a	n/a	-8.6%
Fulbright & Jaworski	-7.5%	-6%	-6.3%	-5.2%
Holland & Knight	-10%	flat	-1%	+2.6%
Howrey	-16.3%	-28.3%	-19.2%	-34.9%
Kirkland & Ellis	+2%	+16%	-3.6%	+1%
Mayer Brown	-14%	-19%	-7%	-4%
Patton Boggs	-2%	n/a	-7.4%	+3.7%
Paul Hastings	-9.8%	n/a	+4.4%	-1.4%
Vinson & Elkins	-4.8%	+5.5%	-6.2%	-3.1%

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

So what do we see?

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

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

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

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

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

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

---

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

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

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

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

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

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

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

---

Now, two last thoughts.

First, the human toll of layoffs.

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

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

Why is PPP so important?

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

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

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

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

The Law Society of England & Wales recently published Nick Jarrett-Kerr's Strategy for Law Firms: After the Legal Services Act, and Nick was kind enough to send me a copy for my perusal. (Disclosure: I've known Nick for years, although we have never formally worked together.)

The contents are wide-ranging, as you can see from these chapter titles:

1. The new world;
2. Understanding your assets;
3. Harnessing intellectual capital: strategies for optimal law firm infrastructures;
4. Understanding positioning and competitive advantage;
5.Developing a value-added strategy;
6. Alternative Business Structures as a tool to implement strategy;
7. Long term funding of law firms;
8. Mergers and acquisitions;
9. Law firm valuation (Michael Roch);
10. Remuneration revisited;
11. Governance, leadership and management in the changing law firm environment;
12. Summary and Prospects.

Although there's been less coverage of the Legal Services Act of late than when it was first being debated and then adopted in the UK (it actually only applies to firms based in England and Wales), I attribute that less to diminishing interest in the LSA than to the simpler reality that once the fireworks of the debate over adoption had concluded, there is little more to say until we see it kick into action (pending adoption of implementing regulations, probably in the next 12--18 months).

But if you feel the urge to prepare in advance, Nick's book will arm you better than anything published so far.

First, here's a bit more on the broad range of what it covers, and then we'll get to the heart of the matter: What Nick thinks that the "Alternative Business Structures" enabled by the Legal Services Act might look like. From the Law Society publications page:

Strategy for Law Firms guides firms through the strategic options available to them and suggests how they might position themselves to succeed in the market.

The book provides a practical approach that is underpinned by sound strategic and academic principles. The author offers insight, drawn from his vast experience of the legal market, on a range of topics including:

• harnessing a firm's intangible resources and capabilities
• competitive positioning
• the creation of a value added strategic plan
• Alternative Business Structures as a tool to implement strategy
• mergers
• law firm funding and valuations, including external funding
• governance
• profit sharing.

The author has created a new framework with which to analyse and assess your firm's position in the market, and identifies and explains 15 possible models of ABS under the new rules.

Although primarily aimed at law firms in the UK, the book is relevant to legal firms around the world.

Of greatest interest to those of us waiting with baited breath to see the fallout when the LSA takes effect is Nick's proposed taxonomy of "Alternative Business Structures:" What, in other words, he theorizes will arise in the next few years. It's fascinating (see Chapter 6 in general, pp. 89--103).

First, Nick posits three reasons a law firm might entertain launching an ABS:

• A strategy for growth and/or diversification may require more capital than the partners care to or could raise internally.
• They may perceive a need to protect or increase market share by becoming part of a bigger brand.
• They may hope that an ABS will give them a vehicle for recognizing the value of capital they implicitly own in the firm.

He then follows with his taxonomy, which is worth elucidating in some detail:

• Business forms mostly owned by lawyers:
  
  
  • Traditional law firms: There is little real doubt this model will continue, as the attraction of minimal non-lawyer involvement in firm governance is altogether real.
    
    
  • Marketing umbrellas: Here Nick envisions a sort of franchise model where operational decisions remain firmly in the hands of the extant partnership but marketing and branding support is provided by a centralized operation. It's hard to imagine this succeeding, however, without some quality standards being imposed so the hope of minimal operational involvement may have a vanishing half-life.
    
    
  • The full franchise: This builds upon #2 by adding centralized guidance and specifications for systems, processes, and standards that franchisees would be obligated to meet or face expulsion. The benefit to the firm joining the franchise is presumably increased exposure and being able to borrow from the halo of assured-quality granted by the franchise name; the cost is typically an initiation fee and a monthly management fee thereafter.
    
    
  • The roll-up. In this familiar technique, investors--who may be outsiders such as private equity or venture funds or who may be industry incumbents seeking growth--buy a series of firms and re-brand them as their own, potentially consolidating significant portions of an industry in the process. To some extent, we have already seen this. If you doubt me, simply look at the New York or London markets: You will have a hard time finding small, attractive, independent law firms still standing. Amost all have been swallowed by out of town firms or indigenous firms bent on growth. (Parentheticaly, this appears to be the primary motivation for Slater & Gordon, the Australian firm which launched its famous first-of-a-kind IPO two years ago.)
    
    
  • The virtual firm: We have already seen examples of this type of firm emerge and given the relentless march of technology--which excels at enabling collaboration at a distance--we will surely see more. One notable entrant that's up and running is Axiom Legal, which provides on-demand teams of lawyers with premium pedigrees to clients without heavy investment in office space or infrastructure.
    
    
  • Legal multi-disciplinary practices: These got an undeserved and unfair black eye about a decade ago when they were seriously proposed here in the US and strangled in their crib by a combination of the ABA's lobbying "FUD" (fear, uncertainty, and doubt) and the untimely implosion of Andersen Legal, which seemed to prove their inherent risks--although, of course, it proved no such thing.
    
    
• Business forms mainly owned externally:
  
  
  • Integrated MDP's: These would combine a division offering legal services with other divisions offering allied service, such as investment or tax advice, real estate brokering, accounting, and even garden-variety investment banking services. The putative rationale is that clients would appreciate one-stop shopping, but as we've seen over the past decade in the experience of financial "supermarkets," the best that can be said about that model is: Unproven. Indeed, Nick admits that it "could prove to be a regulatory and liensing nightmare as the various regulatory bodies for the different professions involved tussle for supremacy."
    
    
  • Externally financed growth: This is probably the classic vision of firms contemplating outside "sugar daddies" who would come in as minority owners, contribute substantial capital, and not demand a controlling or even important voice in management. The concept is that private equity investors (say) would be willing to take relatively passive roles. Don't count on it. In fact, assume that serious private equity investors will demand majority control, period.
    
    
  • Branded conglomerates: This model starts from the reality that the boundaries of what constitutes "legal advice" are porous. What about tax advice from accountants? M&A advice from investment bankers? For that matter, mortgage or real estate investment advice from real estate brokers? The structure envisioned here is a panoply of more or less related services of which classic legal advice is only one, all operating under a single roof and brand name. A logical place to acquire the legal services component of such a conglomerate would, of course, be to buy an existing law firm.
    
    
  • Law Firm, Inc.: The classic law firm IPO, floating itself on the market. Nick, and I, see very few firms going for this option, and probably almost no firms employing people who might be reading this piece right now. But it remains a sexy option, and doubtless some of the undaunted or (if you prefer) the naive and self-aggrandizing, will try it. All I can say is, hold on to your seats.
    
    
  • The integrated legal network: A hub and spoke model where a centralized provider of back office operations and administrative services would feed subsidiaries (the spokes) with cost-effective services benefiting from economies of scale, while allowing each "independent" firm to operate on its own. Of course, independence is here in the eye of the beholder, and without doubt standardized quality control and other relatively intrusive measures would be imposed. It's hard to envision how any non-commodity law firm would find this feudal kingdom an attractive prospect, but for smaller firms honestly recognizing a shortage of pure managerial talent, it could serve a valuable role.
    
    
• Fringe and other models:
  
  
  • Online firms: My friend Richard Susskind has recently outlined what this creature might look like in his The End of Lawyers? In his vision, the future (I should say, and Richard would say, a future) sees a confluence of disruptive technologies providing automated legal services including document assembly, baseline advice, audits, or simple updates on topics of interest to subscribers.
    
    
  • Not-for-profits: Not a "business" model, at all, in the eyes of born-in-the-bone capitalists, but possibly viable for firms that are willing to pay clients enough to cover out of pocket expenses and able to recruit professionals enlisted in the vision of providing services to their worthy target market.
    
    
  • In-house options: Who's to say that in-house departments couldn't decide to offer their industry-specific expertise outside the walls of their corporation? Although the corporation might not see it as a "core competence" (it's not), if it were viewed as free incremental revenue for a resource that had to be maintained in any event, who's to object? Whether they'd be viewed as serious competitors to dedicated private law firms is another question. The more important question, in my mind, is why a corporation would provide top-notch, or even adequate, industry-specific legal advice to other firms that almost by hypothesis are direct competitors? Nick suggests this idea, but I don't know how serious he is. I wouldn't be.

Nick concludes with four predictions, only one of which I will share with you. For the rest, you need to buy the book. The one? "Pressures on margins will intensify.'

If you want to have intelligent plans for dealing with that prediction, not to mention the other three, perhaps your law firm needs a strategy.

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.

Turbulent..  Challenging.  Unprecedented.  Once-in-a-career event.  Paralyzing.  Opportunity. 

However you want to characterize the period we've experienced and are still working our way through and out of--and shall be, I predict, for a few more years--if it has served a salutary purpose, and it has, it's been opening firms' senior leadership's minds to the possibility of "thinking different."

Welcome to Game Theory.

Game theory, codified it not invented by John von Neumann and Oskar Morgenstern in 1944 (Theory of Games and Economic Behavior), has grown to encompass the analysis of interactions between individual actors in complex socioeconomic contexts which tend to resemble markets:

• Interactions among the players are repetitive; that is to say, it's not a one-time only encounter or a sort of sudden-death overtime.  This is important because it introduces the notion of maintaining and enhancing one's reputation.  Scorched-earth tactics and burning bridges are, shall we say, suboptimal.
• Each actor is presumed to be rational, at least insofar as they can see their own self-interest--
• But their own self-interest anticipates others' reactions to their own choices, decisions, and "moves."

Grossly oversimplified presentations of game theory--more by way of caricatures than presentations--have become standard fodder for MBA courses, typically in the form of the classic "prisoner's dilemma," with unrealistic but theoretic-model-friendly assumptions such as: the prisoners can't communicate; the game is never repeated; each can give only one answer at one point in time, etc.

Needless to say, the real world involves immeasurably more dynamic,more multi-player, and more protracted in time, considerations than the textbook prisoner's dilemma. 

So what use can game theory possibly be?

Our reliable friends at McKinsey have attempted to answer this question, in "Making Game Theory Work for Managers," which advertises itself as nothing less than an attempt to "generate answers representing the best compromise between risks and opportunities in all likely futures."

How successful are they?

Here are some of the dilemmas faced in trying to adapt theoretical game theory to the senior leaders' real-world role:

• Striking the appropriate balance between simplification of a problem to make it manageable vs. retaining enough complexity so that it's relevant.
• The extremely detail-oriented nature of any particular hypothetical exercise in game theory --our good professors call this "sensitivity to initial conditions."
• The preference of theory to generate a single monolithic predicted outcome rather than an array of more and less probable, more and less favorable, possibilities. 
  
  

(Digression:  If I were asked the classic nasty/aggressive interview question, "What's your greatest fault?," and had been administered truth serum, I suspect I'd blurt out that I don't like to state the obvious.  Because....it's obvious.  I much prefer to dwell in the land of nuance and greys rather than black and white.  Of course, this is a signal failing if you cannot assume, as I do but is often not the case at all, that your interlocutor shares the same premises you do as to exactly what's "obvious" and what isn't.)

The new and more dynamic model discussed in the McKinsey piece claims to improve upon the artificially constrained textbook model as follows:

 Instead of predicting a single outcome, with all factors balanced, the model first generates a narrow set of strategic options that can be adjusted to account for changes in various assumptions. Instead of solving an individual game, the model automatically involves a sequence of several games, allowing players to adjust their actions after each of them, and finds the best path for different combinations of factors. As one result, it supports executive decisions realistically by presenting managers with the advantages and disadvantages of the strategic options that remain at each stage of the progression. In a second step, the model finds the "best robust option," considering its upside potential and downside risks under all likely scenarios, assumptions, and sensitivities as time elapses. This approach is different from attempts to look for equilibrium in an artificially simplified world.

Are you thinking, about now, that these are generalizations that have little but platitudinous application to any issues you're actually facing today?

In fact the authors essentially admit as much by saying that "The best way to understand the model is to examine it in action," and proceed to present their case study of having worked with the deregulation of the European railway network.  Starting this very month (January 2010), cross-border passenger service will be fully open to competition in the EU.  Germany, Italy, Sweden, and the UK have expanded on that by opening long-distance domestic passenger rail service to competition as well.

The first lesson to take away from this is that every market is very much its own.  Every market, that is, is highly specific.  Context matters.  History matters.  (In the case of rail, of course, geography matters.)  So think about what follows not in terms of one-to-one correspondence with challenges you might be facing, but as illustrative of a way of thinking about moves you might make and competitors and clients might make, in turn. 

Indeed, if there is one single notion I'd like to implant in your thinking with this column, it's the power of dynamic as opposed to static analysis. 

By that I simply mean that if you take Action X, the marketplace, clients, and your competition do not stand still.  In the military's inimitable phrase, "The enemy gets a vote."  (Dwight Eisenhower, or George Patton, or Douglas MacArthur [take your pick--attributions vary] said that "no battle plan survives its first encounter with the enemy.")   Static analysis would assume the environment is, well, static. Guess again.

So, to more on the European passenger rail market.

What might entrants to this newly deregulated industry anticipate?

Price wars are certainly a possibility.  On the other hand, network effects are very important to customers in rail service.  Not can you get me point-to-point, but how thick and dense is your network?  The ability to get to an extremely wide variety of destinations on one carrier (presumably for a favorable price) is not to be gainsaid. 

The analysts posit four main avenues of attack for new entrants:

• Meet incumbents on their own terms, by providing nearly identical service.
• Attack, by providing more frequent or cheaper service.
• Specialize, with a niche service such as high frequency at peak hours.
• Or differentiate themselves with an offering focusing on, say, leisure travelers who are very price-sensitive, but who don't care about cheaper, slower, older rolling stock, or conversely going for the high-end with premium, "business class only" high-speed luxury service.

As for the incumbents, they too have a range of options:

• Ignore the newcomers.
• Try to mimic their offerings and hope to prevail through greater brand-name recognition.
• Take the offensive by undercutting cheaper competitors on price, over-delivering vis-a-vis luxury competitors on service, and reinforcing networks and "hub and spoke" models.

Then there's a third level of dynamic change going on. How is the market, overall, evolving?  Again, there's an array of possibilities:

• Overall demand changes:  If rail service improves (in the eyes of travelers), car and plane trips will, relatively speaking, decline.  Trains will gain market share.
• Cost differentiation.  While newcomers may initially have cost advantages (fewer legacy costs), incumbents often enjoy economies of scale.  Which side of the balance beam prevails is highly context-specific.
• Network advantages.  Incumbents almost invariably have more mature and extensive networks (office platforms and practice areas).  This is difficult for newcomers to surmount unless customers demonstrate a preference for the boutique approach.
• And price sensitivity.  What, in economese, is the "price elasticitiy" of demand for your services?  You better hope that it's very low indeed (that is to say, that clients are highly insensitive to rates and fees, and that they perceive your firm's services as valuable with little regard to cost.

So what can we conclude?

Intriguingly, one of the most powerful and "robust" (as academics like to say) findings of the McKinsey study was this:

"When we run the European passenger rail model through an array of different situations, a critical factor appears to be the way demand reacts to liberalization. Will the new offerings seduce travelers to take trains rather than cars or jetliners, or will overall demand remain stagnant, leaving rail companies to battle for an unchanged pool of customers?"

Why do I highlight this?

Because we tend not to think this way.

But what if changes to the BigLaw business  model, including the possibility of increased demand for BigLaw services in lieu of substitutes, could actually increase our market share, as it were?  What are those "substitutes?"  In-house counsel, most obviously.  But also, and increasingly, outsourcing vendors located everywhere from downtown Manhattan to Bangalore and Fargo, North Dakota.  Why should our instinct be to run up the white flag in the face of this brave new competition?  We shouldn't be so shy, or callow, or scared.

---

The basic message is clear:  Think about what you might do.  Then think about what other firms will do.  Then think about what clients will do. 

Repeat.

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

Why do I mention it?

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

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

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

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

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

Hope to see you there!