Well, when, for example, it reports on a development so small as to be trivial--but inflates its import and meaning greatly out of proportion.

Or when it is premised on statistical analysis but doesn't pursue where the data might lead in any analytically sophisticated or helpful way.

Or when the environment at large is changing in such profound and unprecedented ways that one would be craven or naive not to suspect that the "key finding" under discussion might not merely be an innocent and entirely unintended piece of collateral damage.

We now have a trifecta, in The American Lawyer's annual Diveristy Scorecard 2010

which counts attorneys of color in the U.S. offices of some 200 big firms. In each of the previous nine years that we've compiled the Scorecard, the percentage of minority attorneys at all participating firms increased, rising from less than 10 percent in 2000 to 13.9 percent in 2008. In 2009, for the first time, that proportion dipped, to 13.4 percent.

The drop in law firm diversity may be small, but it's important.

How significant can this be? If you compare 13.9% to 13.4%, the change is less than a 5% proportionate decrease. Yet according to the very same story, "overall, big firms shed 6% of their attorneys [and] 9% of their minority lawyers." This kind of statistical "what's going on here?" cries out for deeper analysis.

Unfortunately, we don't really get that.

We do, however, learn that there are other reasons for concern:

Diversity advocates call the drop a warning sign that shouldn't be ignored. "I think [that] when you're looking at any numbers of a population you're trying to increase, and you see a decrease, that's significant," says Venu Gupta, executive director of the Chicago Committee on Minorities in Large Law Firms. "I guess I hoped we wouldn't be going backward," echoes Fred Alvarez, chair of the American Bar Association Commission on Racial and Ethnic Diversity in the Profession and a Wilson Sonsini Goodrich & Rosati partner.

The decrease in minority head count confirms a concern voiced by many in the legal industry: that the massive law firm layoffs of 2008 and 2009 would hit minority lawyers especially hard. "There were fears when the recession began that these folks would be disproportionately impacted, and it appears to be the case," says Thomas Sager, general counsel of E.I. du Pont de Nemours and Company and a longtime diversity champion. Sager and other observers fear that this year's falloff could be the start of a new downward trend, given a climate of slower law firm hiring, fewer African American law school students, and so-called stealth layoffs. [...]

Consultant Arin Reeves of The Athens Group says minority associates suffer when work dries up: "Your ability to meet hours is reflective of whether or not you've been invested in."

Now, not to gainsay what's being reported here, or its potential import if the cited trend continues for the next several years. The biggest news (which is in the lead paragraph, as it should be) is that for the first time in the 10 years that TAL has been conducting the Diversity Scorecard, there's an overall drop in percentage of minority attorneys. When a trend goes on for as long as it's been measured and then reverses, that is indeed news.

My reservation is less with the headline and more with the rather alarmist tones of concern excerpted above,which give the story its punch and its juice.

The problem is that the deeper you dig, the less there there is there.

How so? In trying to analyze what might be behind the numbers, I found that that last remark (above) from Arin Reeves provided the beginning of a clue. The clue lies in the focus on associates. Here's another bit of evidence:

For a long time, the way that law firms beefed up their diversity numbers was really to have a lot of diverse associates in the first-and second-year classes," says Gupta from the Chicago Committee on Minorities. If a firm didn't hold on to its minority associates--and many didn't--it was relatively easy, Gupta says, to hire more in the next recruiting season.

But that was in a so-called normal economy. These days, firms can't quickly replace the minority attorneys they lose through voluntary or involuntary attrition. Reduced recruiting is another factor that is likely contributing to the decline in minority attorneys.

In other words, firms' diversity scores disproportionately rely on their associate ranks.

So let's take a look.

Here's the data:

As I look at this, I see a much more nuanced--and optimistic--story.

Overall, to state the obvious, serious cuts came in the ranks of associates and non-equity partners. (Caveat: The story doesn't specify whether "partners" as used by the author means equity or both equity and non-equity, but since industry-wide we've seen no meaningful growth in the ranks of non-equities in the past year, I'll assume it refers to equity only.)

But (second big caveat--given the data we are provided) minorities did better than average in growing their representation among the partnerships. How, pray tell, is this bad news on the diversity front? It's possible--not that it makes for an alarming story, of course, but it's possible--to interpret this data as implying that the long hoped-for ascension of minorities into the partnership ranks is actually taking place.

Finally, the missing statistical analysis: The only way to really tell whether the disproportionate layoffs of non-partners among minorities (see table above) has resulted from firms' using the economic downdraft to try to conceal what in their dark and secretive hearts is prejudice pure and simple--highly implausible, in my book--is to separately break out the demographics of lawyers laid off for economic reasons, which the article says is "a project beyond the scope of this survey."

More's the pity.

Because that's the only way to tell whether (Theory A) something nefarious and troubling is going on here, or whether (Theory B) the macroeconomic environment was disproportionately harsh on associates in general and junior associates in particular--and whether the posited over-representation of minorities in those ranks simply, but innocently, took its toll.

Care to vote?

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

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

NALP.

Here's how the stars are aligning.

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

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

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

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

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

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

Consider the timeline:

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

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

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

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

One word: NALP.

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

What are the symptoms of this?

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

Exhibit B: It has five-year strategic plans.

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

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

What's wrong with that?

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

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

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

Faced with:

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

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

Here, specifically, is what they said:

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

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

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

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

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

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

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

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

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

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

Consider some elements of the NALP-enabled hiring regime:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

My own suggestion is that firms do just this.

As I wrote in December:

So what's to be done?

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

Clearly, NALP has become a toxic organization that:

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

Hard to do, you say?

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

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

And what, then, of next recruiting season?

Simple:

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

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

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

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

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

Abolish NALP.  Now.

Please take a look here, and sign up here.

Hope to see you there!

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

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

Here's the headline, from The American Lawyer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Am Law 100:
Sonnenschein Profits Drop 3 Percent

The American Lawyer

By Ross Todd

January 22, 2010

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

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

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

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

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

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

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

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.