Tales of the Takeover Decades from Inside Wachtell

I just finished reading Tombstone:  A Lawyer's Tales from the Takeover Decades (Farrar, Straus & Giroux:  1992) by Lawrence Lederman, former chairman of the corporate practice at Milbank-Tweed (and still a partner there), who started his career as an associate at Cravath in 1967 and joined Wachtell as lawyer #24 six years later, soon to become a partner. 

The book recalls his "present at the creation" moments of being in on, and watching unfold, the astonishing financial-engineering explosion that was the late '70's and early '80's:  Bob Bass, Ivan Boesky, Carl Icahn, KKR, Michael Milken, Boone Pickens, et al.  All the "barbarians" are present and accounted for, but so are the remarkably dedicated, sagacious, and creative lawyers who facilitated the "ordinary" deals, primarily by educating sometimes-naive clients over what the marketplace would inexorably cause to happen once a company was "in play," but who, more importantly, changed the rules in many deals by inventing such devices as the leveraged buyout, the recapitalization, and the poison pill.

Aside from the sheer rollicking pleasure of reading about high jinks by these masters of brinksmanship—and learning just how much of it was truly made up as they went along—Lederman provides a window into two topics near and dear, or so I hope, to the hearts of readers of this blog:  The first is simply a high-level series of examples of how real-world economic calculations are made by some truly gifted strategists; and the second is insight into the high-end practice of law.

An instance of economic calculation concerns "golden parachutes," the late-1970's invention seen largely by the media and the public as exercises in naked greed and self-dealing:  What, one can still hear the critics decrying, could possibly justify throwing millions of dollars at executives who, by hypothesis, will perform no further service?   That analysis falls into the popular fallacy of looking at matters statically rather than dynamically. 

In other words, it assumes the enhanced and accelerated payments to departing executives exist in a vacuum without connection to the surrounding context of the takeover.  As Lederman correctly observes (p. 128), "in fact they facilitated the takeover.  It was the board's way of easing management out."  And, consider the human context as well: 

"For many [in senior management] the jobs had taken years of effort to achieve....  The knowledge acquired by many of these executives was largely limited to the industry in which their company was involved.  There would be few opprtunities for them elsewhere.  A senior manager's job also carried with it a position in the community and often defined social standing.  Much of that would be lost."

Or consider Marty Lipton's shrewd decision to focus Wachtel exclusively on the "defense" side of takeovers (p. 211, emphasis supplied):

"Opposing [Michael] Milken positioned Wachtell Lipton as primarily a defense firm.   The choice was not a necessary one.   Skadden Arps flourished representing both sides.  But limiting representation to target companies was a choice that Goldman Sachs had made years earlier, and it had proved very profitable for them... The early decision of Lipton to say that the firm would not join with Skadden Arps in raids [also] proved very successful.  [...]   When the poison pill defense was developed by Lipton and validated by the courts at the end of 1985, Wachtell Lipton's place as the premier defense firm was assured."

This constitutes one of the boldest, most decisive, and most successful market positionings by a law firm in the late 20th Century.

As the last example of consummate strategic thinking, consider this tactic by one Jack Seabrook, chairman of IU International, a $2.5-billion conglomerate as of 1979.  One of IU's subsidiaries was a 58%-owned Canadian utility, which the Canadian government strongly preferred to see majority-owned by Canadians.  Seabrook had no particular love for the utility business, so watch his thinking (p. 139, emphasis supplied): 

"IU, Jack told us, planned to start an exchange offer in Canda, exchanging the stock of its subsidiary Canadian Utility with IU's Candian shareholders for IU common stock.  The exchange would only be made in Canada.  In the proposed swap of stock, IU's ownership of Canadian Utility would be reduced from 58 to 48 percent.  [...]  For Jack, however, the proposed swap was the official scenario, not the way he would like the matter to come out.
       "What he thought might happen, Jack told us, was that once he announced an exchange offer and indicated that IU was prepared to reduce its ownership below a majority, there might be bids from a number of Canadian companies for IU's whole majority interest in Canadian Utility.  That would give him an opprtunity to negotiate for the sale of control, affording IU a chance to get a large premium price..."

And so, indeed, does it proceed.

Finally, consider his essential distillation of the differences between investment banking and law firms, including his deeply insightful, almost off-handed, observation about an "unintended consequence" of the billable hour (p. 118, emphasis supplied):

"[Investment] banking firms were oriented to doing transactions that brought in fee income and were sensitive to changes in the market.  [...]  Most partners were well off financially and retired in their early fifties.  Important responsibilities were necessarily given to young people, all ready to embrace change.  In the law firms, however, changes in the marketplace had to filter through to the top-tier lawyers, who were tradition-bound, much older than their bankign counterparts, and remote from the market.  Also, lawyers billed on an hourly basis, making one kind of work not much more profitable than another.  As a consequence, law firms rarely developed new specialties.  And lawyers didn't move around from firm to firm as much as business people.  Accordingly, there was limited ability to move or to grow into new areas of the law."

Wachtell, of course, up-ended the billable hour as the default billing methodology, and, with that, proved its ability to "move into new areas of the law" in spades.

Alas, Tombstones is out of print.  I found my copy at Powells, but you might also try Amazon, Alibris, or other book search sites [ISBN# = 0374278458].  You will be deeply rewarded.

Practice Group Management & Business Plans

A theme I want to develop, and which I've alluded to before, is the impact that "Practice Group Management" can have on a firm's strategy, cohesiveness, and profitability.  What is "practice group management," in a nutshell?  It's creating a dedicated position—which may be filled by a former lawyer or a non-lawyer—as a quasi-chief operating officer of each of the firm's primary practice groups, in a "matrix" reporting relationship both "vertically" to the senior partners who actually run the practice and "horizontally" to the firm's CFO, CIO, CMO, etc., in order to obtain the tactical resources the practice group needs.

Hildebrandt has a new article out about this, focusing on do's and don't's for generating and executing a practice group's business plan.  Why a business plan at all? Without one, how do you know:

• if your strategy is evolving rationally and effectively;
• if the proper resources are—and are not!—being devoted to the practice group; and
• if the group's overall performance is meeting plans and expectations.

How does one develop a business plan, and, equally importantly, where can one go wrong?  First, both the practice group itself and firm management must take the plan seriously.  This means, at the very least, making sure the firm's strategy and that of the practice group are in alignment.  How obvious is that?   Apocryphally or otherwise, they report that "in some firms, practice leaders tell us that they have even submitted the same plan year after year with a different cover page;" can you say, "out to lunch?"  (Actually, can you say, "get me the *&@*# out of this firm!")

Conversely, getting the practice group itself to take the plan seriously requires full engagement from the start.  The practice leader should not draft the plan and circulate it for comment, because the group will tacitly reject it as the foreign body it is.  Rather, the practice group as a whole—OK, make it the partners only if you must—should develop it as a body, ideally at the groups annual retreat (and now's the time to inaugurate that tradition if you haven't already).   Fine, but what, then, is the actual content of the plan?

Essentially, it's "where are we today, where do we want to be in one to three years, and what concrete steps do we need to take to get there?"   In other words:

• what core services do we offer?
• what economic, national, and global trends are affecting the value of those services?
• who are we competing with [be brutally honest on this one]; and
• what makes our group truly distinctive [as above: and the answer is not "the quality of our lawyers," which is merely the price of admission].

If you're starting to feel depressed, and thinking this will all amount to an inordinate waste of time, making already-cynical lawyers more so, you need to decide if you honestly prefer the alternative, which is letting your group drift rudderless into the future, following a "strategy" of spasmodic and opportunistic initiatives occasioned by circumstance and your competitors.  Or, ask yourself this:  What would you advise a client in a hotly competitive industry who was leaving its future in the hands of chance?

Are Your CIO and Your Managing Partner on Speaking Terms?

You may not be familiar with the name Michael Schrage, but as an early founder of MIT's path-breaking Media Lab, and as a gifted writer no matter the topic, he's someone I read whenever I come across him.   His latest piece is in the elastic and forgiving form of a hypothetical, anonymous, note from a Fortune 1000 CIO to a "trusted colleague" reciting the CIO's recent (perceived) mistreatment at the hands of the firm's CEO.

As you read this, I will ask you to substitute "AmLaw 200" for "Fortune 1000" and "managing partner" for CEO.  The counts of the indictment are as follows:

• As soon as a system or function is buttoned down and running robustly and smoothly, the CEO wonders why it can't be outsourced.
• If the CIO proposes an initiative (CRM in Schrage's example, substitute KM in our world) that actually comes in winningly on time and within budget, the biggest gorilla on the premises (Schrage: Sales, Us: Corporate Practice) gets envious and wants its own, incompatible with the "enterprise" system; to which the CEO responds, "let Sales have its system; just integrate them."
• The CIO realizes that he has been spending too much time trying to do the best job possible rather than trying to do the best possible job as the CEO would envision it, and that the CEO inadequately understands technology, which is partly the CIO's fault for failing to explain it.

Sound familiar?  The scary part is that Schrage leaves us hanging; this is the dilemma, rest in peace.  Businesspeople are at least "supposed" to understand the value of IT, whereas lawyers generally grew up ignorant of or allergic to it, and proud of it.  Too harsh?  Imagine putting these words into the mouth of a senior partner at a big firm, or a CFO of a Fortune 500: "My secretary screens my emails."  Which is more plausible?

And if it's bad in a (median) Fortune 1000, is it better in the AmLaw 200?  I invite those in the trenches to email me with both horror stories and enobling tales of redemption.

Blogosphere Meets Real World: A Gift

Back from four days in California (Laguna) for Christmas, seeing my wife Janet's parents.  No matter how many Christmas's I have spent in California or, earlier in my life, Florida (Sarasota, where my parents retired), I simply cannot get used to waking up the morning of Christmas Day to palm trees and balmy breezes.  But then again, the entire Sunbelt phenomenon escapes me—New York City is about as far south as I could comfortably live, and, to me, the comforting warmth of piling on layers of wool beats the hermetic recycled cool of airconditioning hands-down.  I will confess that my morning runs were lovely, with the sun barely rising over the Santa Ana mountains as I covered the rolling terrain of Orange County over its 8-lane boulevards with their meticulously graded and all-but-unused broad sidewalks.

Highlight of the trip by far, at least to me, was the opportunity for Janet and me to have breakfast Sunday morning with the world-renowned J. Craig Williams of "May It Please the Court," (Craig is one of the "Savvy Blawgers") and his engaging, outspoken, and thoroughly professional significant other, Lisa, who has no uncertain opinions about the need for lawyers to leave the management of their firms to adults (read:  businesspeople such as her).  I am relieved to report that Craig, who "hasn't balanced a checkbook since I was 18," agrees with her.  He must be doing something right, because his law firm, which is less than two years old, already has five lawyers—something their business plan envisioned for the fifth year of operations. 

I have always believed that the virtual blogosphere can create and subsequently help cement personal connections in the off-line world, and this happy meeting only confirms that.  A Christmas gift from cyberspace.

Merry Christmas

"Adam Smith, Esq." was born early last year, and, as the calendar inevitably rolls over, I want to wish each and every reader a Merry Christmas, and the most propitious of New Year's, reflecting whatever your hearts most desire and your dreams most aspire to. 

Much as I wish I could meet each and every one of you, time and distance conspire against us, so I leave you for Christmas with the hope that you have a true companion by your side, that you enjoy the miraculous blessings of dark black coffee, inky red wine, cheese with a non-negotiable point of view, and bread that fights back.

Signing off, then, from New York to spend a few days in California, I leave you with Rockefeller Center, a core, familiar, always-new, and indispensable node on the urban ecosystem that is New York City:

How to Change Everything

More from the redoubtable FT about what may transpire from marketplace forces released after (the widely expected) adoption of the Clementi Commission recommendations in the UK.  (If you don't know what the Clementi Commission is, as one of my law professors would have scolded with juicy delight, "you haven't been paying attention," but I choose to view life through a mellower lens, so take a look here.)

We start from the premise that the prospect of injecting public capital into a law firm—or even admitting non-lawyers to the ranks of equity ownership in a private firm—is anathema to a large swath of the profession.  Indeed, as Sir David himself puts it, "Certain lawyers dislike being described as part of an industry. They see a conflict between lawyers as professionals and lawyers as business people." 

Rare is the expressive pith with which this captures much of what this blog aspires to be about.  Are the "profession" and the "business" strange bedfellows? I would answer with more than a resounding, "No;" I would answer that the virtues of each enhance the strengths of the other.

But let's clarify what engages our attention here:  Not that the UK equivalent of the American Automobile Association, or the supermarket chain Tesco, are making noises about starting up their own branded law firms to serve the consumer masses.  Rather, we're interested in the implications for the Magic Circle and blue-chip firms.

Far and away the most important, I believe, will be the pressure—indeed, the inevitability—of allowing and inviting professional managers in firms to become equity participants.  The implication is clear: Participating pari passu in ownership with a firm's senior lawyers "puts you in a different place mentally," as one such aspiring manager nicely puts it.

That running a major law firm today is largely like running any other big company can no longer be denied.  And senior management's expectations about the availability of the full arsenal of compensation tools, including equity, should be no different.  When this happens, it will have profound cascading effects analogous to the opening up of the market for lateral partners in the 1980's—which, it is not too much to say, changed everything.

Winter

The first day of winter and 13 degrees for my run in Central Park this morning.  This expresses it wonderfully:

 

 

The First "Savvy Blawgers" Panel Challenge: Results

The returns from the First "Savvy Blawgers Panel" Query are in, and it's time to report on what the aggregated intelligence of this rare and unusual combination of individuals has come up with.  The "Savvy Blawgers Panel" notion, as explained before, is for me to pose a question to a selected group of the more astute, savvy, articulate, thoughtful, and just plain opinionated members of the legal blogosphere, and to post their collected wisdom here on "Adam Smith, Esq."

The members of the Savvy Blawgers Panel are:

The Official "Adam Smith, Esq." Savvy Blawgers Panel
Blog	URL	Host
Adam Smith, Esq.	http://www.adamsmithesq.com/blog	Bruce MacEwen
Bag and Baggage	http://bgbg.blogspot.com/	Denise Howell
Common Scold	http://commonscold.typepad.com/	Monica Bay
Dennis Kennedy	http://www.denniskennedy.com/blog/	Dennis Kennedy
Ernie the Attorney	http://ernieattorney.typepad.com/	Ernie Svenson
Excited Utterances	http://www.excitedutterances.blogspot.com/	Joy London
Inter-Alia	http://inter-alia.net/	Tom Mighell
May It Please The Court	http://www.mayitpleasethecourt.net/journal.asp	J. Craig Williams
Notes from Legal Underground	http://www.legalunderground.com/	Evan Schaeffer
Professor Bainbridge	http://www.professorbainbridge.com/	Prof. Stephen Bainbridge
Real Lawyers :: Have Blogs	http://kevin.lexblog.com	Kevin O'Keefe
Strategic Legal Technology	http://www.prismlegal.com/wordpress/	Ron Friedman
The [Non]Billable Hour	http://thenonbillablehour.typepad.com/	Matt Homann

What are the rules for the panelists?  There are none.

They're not required to respond to every query (and the queries are intended to be infrequent and thought-provoking rather than ongoing and shallow), and the timing, length, and format of their response is entirely up to them.  All I promise to do is compile their responses, perhaps contribute a little color commentary about themes, similarities, differences, outright contradictions, etc., and post them for your (and my) edification.

So without further ado, the first ever Savvy Blawgers Panel query:

"Looking out five to ten years, what will the single most significant change be in terms of how sophisticated law firms (think AmLaw 200) are managed, on the 'business side'?"

Here's my "executive summary" of their responses: First of all, law firms will at last get religion about professional management: "these firms are realizing they must function like businesses if they are going to survive." Second is the omnipresent nature of technology, which "is the gasoline on this fire."

Exercising their right to abide by "no rules," other savvy blawgers commented upon the evolution of small (not AmLaw 200) firms, and upon how other firms currently "under the radar" may adopt new business models to mount attacks on the AmLaw 200 incumbents.

Finally, we had the magic and fabulously unexpected answer:  "Changes in management of big law firms over the next 10 years?  Hmmmmmm.  First, big law firms, simply by virtue of their size, are not generally trend-setters.  I'd have to say zero significant change." [Credit Ernie the Attorney for this wonderful and insightful outlier.]

For the full run-down on what this spectacularly talented group had to say, read on...

Kicking things off by mincing no words about the scope of change to come was Monica Bay of The Common Scold:

---

I think we are in the midst of a huge paradigm shift that is radically changing the entire legal industry. In a nutshell, the profession is changing from a private club to a corporate model, from "Eat What You Kill" to collaboration. It isn't happening overnight, but it is profound and I truly believe that any firm that doesn't pay attention will end up as roadkill.

There are several factors that are driving this move, most significant is the empowerment of clients (be they major corporations or rural individuals) who, because of the vast increase in knowledge access (largely due to the Internet's maturing), expect their lawyers to truly counsel them, rather than parent/priest them. Clients want their attorneys to help them choose among options, and truly serve as business "partners" in addressing legal issues, both proactively and reactively. They no longer have any patience for lawyers who function as the Wizard of Oz,working behind curtains, then handing out a three-word bill "For Services Rendered."

As law firms are pushed by clients to deliver services "better, cheaper and faster," and as clients stop marrying a firm for life, and instead, hold beauty contests for work, these firms are realizing they must function like businesses if they are going to survive. Also fueling this shift is the merger-mania where a large firm may have thousands of offices, multinational venues, rather than a cozy group of no more than 300 attorneys.

For the first time, firms are realizing that they must bring in true administrators, not just assign whoever best counts beans to be the CFO and the woman closest to partnership status(and better still, if she's a person of color) to be the de facto HR director. And - shock of shock - some of these new executives demand status, power, and money, and aren't content to sit quietly in their offices and be invisible. (See "Low Visibility," www.thecommonscold.com)

Finally, legal technology is the gasoline on this fire. It is not the cause of the change, but it empowers the change. Technology tools, despite resistance (mostly because nobody, including me, wants to stop working long enough to get adequate training, and expects everything to be intuitive) will truly help the firms make more money - even tho in many cases that may initially be counter-intuitive. And they will help the firms provide better service, better work, for clients; and will help staff at all levels, from the firm's receptionist to occupants of the corner offices, have a more balanced, healthy, passionate life (First tip: buy Bose headsets:)

---

Next we move from Monica's "to the ramparts" to Ron Friedman's more measured view:  Change, to be sure, but slowed by the cultural constraints traditional to the profession:

---

I started in the legal market in 1989 after three years as a Bain & Co strategy consultant. I observed glaring inefficiencies and convinced myself that the legal market would rapidly change in fundamental ways. I was wrong; change has been slow and evolutionary. Chastened, I no longer predict revolution. I think that in the next 5 to 10 years will bring increasingly sophisticated financial analysis, particularly wide adoption of more detailed profitability and financial/competitive analysis. Firms will gain deeper insight into profits by practice, office, matter type, and perhaps even lawyer. Some firms may not act on their findings, but over time, the analysis will drive decisions from mergers to compensation to how matters are staffed. If true, this will not be as visible as other developments such as the advent of marketing departments, so observers will have to read the tea leaves closely to confirm this.

---

Ron's reply struck a particularly responsive chord with me—not, as you might surmise, for his being "chastened" at the pace of change in the profession, but rather, for his focus on "increasingly sophisticated financial analysis," including the first genuine analytics of profitability.  Profitability is, to me, a pole star (imagine!—I admitted it), but also, given today's state of affairs, largely a black art.  I've written about the importance of this before, and since we all seek confirmation of our views, Ron's comments rang true.

Craig Williams struck a similar note, with an emphasis on how small and mid-sized firms are leading the way "because they're not bound by the hierarchy and egos of the AmLaw 200:"

---

I think that law firms will finally come to the realization that they are businesses. The much-publicized failure of Brobeck has created the understanding that law firms can no longer be managed by lawyers; they must be managed by business people.

Our comparatively small five-lawyer firm already fits that mold. The lawyers practice law and the "managing partner" is a 20-year veteran financial business manager who handles the business end of the firm. It works marvelously. Certainly, the managing partner lawyer participates in the firm's financial decisions, but by and large, the firm is run by a business person, not a lawyer.

The AmLaw 200 will switch to this model in the next five to ten years or they will fall prey to the long list of mismanaged law firms. Smaller firms, which by far and away make up the majority of lawyer income when compared to the big firms, are already on their way there. The small to mid-level firms can react much more quickly than the big firms because they're not bound by the hierarchy and egos of the AmLaw 200.

That's why most of us practice in small to mid-sized firms anyway. Just like the rest of the country, the entrepreneurs lead the pack, not the GM's and IBM's. In the legal industry it is the small firms like [ours] that act more nimbly than the Gibson-Dunn's, Lathams' and MoFo's of the industry.

---

Dennis Kennedy takes matters in a slightly different direction, suggesting firms will "diversify"—both in terms of their service offerings and their own internal and external ecosystems.  Can anyone say, "Capital Asset Pricing Model?"

---

The most significant change for successful firms will be the development of a diversified, portfolio approach to the various businesses of a law firm - services, products and licensing of intellectual property - in a much more diversified environment of people and outside partnerships.

---

Today, you get credit on The American Lawyer's "A-List" for "diversity," but Dennis is predicting it will be the future (it already is the present, at least compared to the 20-years-ago past).

Our next respondent wins "most prolix," but her passion for her topic shines through.  I've bolded what I see as key points.

---

I think technology will play perhaps the most significant role in the management and operation of the business side of all law firms, sophisticated or otherwise. I appreciate that I may be stating the obvious but technology, or lack thereof, factors into all other aspects of firm management. That would include the managing staff issue - having trained business professionals running the business aspects of the firm and the attorneys and law staff practicing law.

Technology (software) has helped firms obtain information quickly and in a useable format for all different aspects of firm management, from financial reporting and analysis to client information (due to the data management and SQL aspects of many programs), customer service feedback (client/customer service e-mail questionnaires and other data gathering requests), to customized reports of all kinds and types for any application.

Before technology, the gathering, analyzing and application of this information to firm management was a mammoth job - often not done because of the overwhelming size of the task.

Technology will only continue to improve and grow firms more if they are interested in using technology. Improved management of a firm results in improved client relations, profitability and positive growth.

With the accessibility of data and ability to integrate it into other programs - some even as simple as Excel, data can be accessed, gathered, exported, manipulated and compiled into reports providing business [firm] owners/managers with most anything they would need or want to know about their firm.

It gives owners and managers the ability to make most any kind of business decision from the compiled data. It allows owners and managing partners the ability to plan more effectively, change quickly, and be more flexible in the direction and growth of their firm. It may help them to avoid potentially catastrophic issues looming on their firm's financial (or otherwise) horizon (think one of the AmLaw 200?).

Technology, used effectively, gives managers power because they can track, measure and manage their growth, staff, client base, and more. The present and future possibilities are endless.

The real, and current, challenge I see is for small to medium-sized firms. For this group, "sophisticated technology" is fairly limited. The available software for this group or body of firms is average, but not exceptional. This same body of firms constitutes the highest percentage of the total number of law firms in the country, and perhaps the most economically significant percentage.

Since these small to medium-sized firms are not typically in a financial position to have carte blanche in selecting, purchasing and implementing state-of-the-art software systems like Omega, Pro-Law or Rainmaker for timekeeping, billing financial and management and reporting, or similar software for practice management (including contact and case management) and document management software, it becomes a significant challenge for them to work with what is currently available. Some of the biggest firms have their software programs "custom" written based on their firm's specific needs. This is not financially feasible for the vast majority of firms - the small to medium-sized.

Until the small or medium firm is at the "critical mass" point where their growth, management team and finances can support the cost of the "Cadillac" or "custom" programs the large firms use, they have to make do with the currently available programs.

That is not to say that the current programs for the small to medium-sized group are substandard. These software programs are quite good in many ways, and more economical for this group. The programs do, however, have their sometimes significant limitations.

Integration between programs at the small- to medium-size firm level can also be difficult if not impossible resulting in the inability for data to be gathered, manipulated and summarized into meaningful reports.

Affordable, effective software would seem the key. Small to medium-size firms could become "sophisticated" and have the ability to effectively manage and grow to larger firms, better able to make the transition and adjust to the growth during the [five to ten year] process.

This is not to say that one cannot afford NOT to buy the best for the facilitation of their firm's set-up, change and growth, but let's be realistic here. This body of firms does not typically have the need for in-house or full-time IT departments or persons. They also don't have/make the time to analyze or implement their technology, or the disposable six-figure sums this kind of hardware/software/technology requires in anticipating their firm needs and future growth.

In the planning stages of our firm, and every year to two years, we analyze our current IT systems (we use outside consultants presently with me as the internal IT interface/supervisor) and determine what we need to take our firm's sophistication and growth to the next level. Our initial planning never included a budget of six figures for our technology, hardware and software systems but we have quickly arrived there.

We did, however, seek to model our firm structure like a "big firm" or business corporation. That model included sophisticated technology that would allow us the ability to grow into bigger and better technology as our firm grew. Of course, effective management is also key...the human factor of the aspect of technology.

Ultimately they go hand in hand. Today's quality management staff (true, trained business people who may or may not be lawyers within a firm) combined with continually improved and upgraded technology will generate the AmLaw200s of the future.

---

It's hard to disagree that the marriage of professionally trained business people, and financial and practice-management technology, will indeed "generate the [winners] of the future:"  What made this response compelling to me, and the reason I included it complete and uncut, is the feet-on-the-ground perspective of this contributor.

Joy London, of the indispensable "excited utterances," didn't have time to respond in her own words, but she did point out a recent article in Managing Partner magazine, which contained this pregnant excerpt from an interview with the former director of strategic development at Taylor Wessing (a big UK firm, FYI).

---

What do you see as the major trends/challenges for law firms in the current marketplace?

There is a now a heightened awareness of the importance of business management in law firms. Over the past 15 years, legal practices have, quite rightly, invested heavily in professional managers to help them run their businesses more effectively, but, right now, many of them are asking whether they have the right calibre of people, while also reviewing the way in which these people actually work with partners to achieve their objectives. A major challenge facing law firms is the ability to make good, long-term decisions and getting the right people managing the business is crucial to that.

The problem is that, all too often, law firms recruit in haste and repent at leisure. They are arguably not as careful as they should be in their recruitment of senior managers, which means that these relationships often don't work. This is one of the reasons why major law firms are now thinking that there are times when they need to bring somebody in on an interim basis while they take the time to find the right permanent director of, say, finance, HR or business development. We are seeing these kinds of gaps occurring in law firms with ever greater frequency and this is where a safe pair of hands can prove very useful. Interim managers are immediately effective and can add a lot of value over a short period. It also makes good sense from the point of view of business continuity and risk management.

On the strategy side, I think that law firms have spent the past five to ten years finding out what strategy is all about. But there is often a big gap between deciding what the strategy is and then implementing it to its full potential, and we find there can be a significant disconnect between what law firms say that they are trying to achieve and the daily lives of the people they employ. This lack of engagement between employees and their law firms is arguably the most worrying weakness and represents another major challenge.

---

A "gap" between strategy and its communication to, and enthusiastic embrace by, employees?!  That never happens in the US...  On the other hand, I suppose we should consider ourselves blessed if firms have at last recognized there is such a beast as "strategy."

Matt Homann also reports from the precincts of small-firm-land, and similarly finds them more innovative, nimble, and responsive to client demands.  Matt even suggests appointing a "chief client service officer" whose mission would be to learn from other companies known for excelling at customer service.  But he saves the best for last.

---

Q: "Looking out five to ten years, what will the single most significant change be in terms of how sophisticated law firms (think AmLaw 200) are managed, on the 'business side'?"

A: I have spent all but two years of my legal career as a solo practitioner or as a member of a two-lawyer firm. Because I’ve never worked for a “sophisticated” AmLaw 200 (or even AmLaw 20,000) firm, I’m afraid I can’t give a meaningful answer to Bruce’s question. Instead, I’ll answer a different question: What is the single most significant change small firm lawyers hope AmLaw 200 firms don’t implement in the next ten years?

The single greatest competitive advantage small firm lawyers have over their big firm counterparts is the ability to quickly adopt and implement innovative practice methods. Though many small firm lawyers have fallen into the billing-by-the-hour business model practiced by most large firms, I would suggest that a significant amount of the alternative pricing of -- and value billing for -- legal services comes from the small firm lawyers in this country. In my firm, for example, we have completely abandoned the billable hour and have moved to a service-pricing model that gives our business and transactional clients a range of services (including “free” telephone calls) for a monthly fee or a flat per-project cost. In doing so, we’ve managed to make our clients happier, increased our margins, and decreased the time we spend in the office. My greatest fear is that AmLaw 200 firms will adopt and embrace a similar business model.

In contrast to small firms, large firms have an unbelievable amount of institutional knowledge. For any given legal project, large firms have likely completed a similar (or the exact same) task hundreds of times. Their “inventory” of documents, memos, briefs, complaints, and opinion letters dwarfs the resources available to small firm lawyers. My fear is that if a large firm decides to couple that “huge selection” with “everyday low prices,” the WalMartization of the legal business will begin.

In short, if large firms were to apply the “Big Box” retail concept to the delivery of professional services, small firm lawyers would disappear like Main Street retailers when Wal Mart comes to town. Just think, the complex, expensive legal work most big firms seek is only a very small tip of a very large iceberg. Most business and transactional work is of the garden variety. There is no reason a large firm couldn’t set aside a team of associates and partners to do that kind of work for hundreds or thousands of small businesses for a low monthly or annual fee.

Doing quality work is just a small part of the equation. The big firms would have to deliver an improved customer-service experience as well. Instead of locking young associates away in the library for years, have them be the first point of contact for small business customers (even better, hire retired lawyers as “greeters” for new clients). Train these lawyers to answer the basic legal questions on the fly, perhaps by consulting a firm-developed knowledge base, and promise an answer to more complicated questions within a day or so. Guarantee telephone calls returned within 60 minutes – or that month’s service is free. Designate a chief client-service officer, and make that executive’s compensation dependent upon customer satisfaction levels. In short, take a look at what non-legal companies that excel at customer service are doing, and improve upon it.

Finally, to make this model a sustainable one, firms must hire the best and brightest students. Instead of focusing on the top five percent, recruit and hire law students based upon their capacity for creative and innovative thinking, people skills and business acumen. If law firms concentrated on hiring the best lawyers (instead of the best law students) schools may be forced to actually prepare students to practice law, instead of giving them the esoteric theory-based education most law students get now.

Do I think that most big firms will take these suggestions to heart? Not really. And for that I am thankful.

---

You thought that exploring alternatives to the unholy billable hour is the act of a radical?  Here's a firm that has abandoned it entirely.

Or that writeoffs when clients protest about disappointing service is a cost of doing business?  How about offering a one-hour returned phone-call guarantee or that month is on the house?

Quality work speaks for itself?  Guess again.

Finally (and thank you for reading this far, even if you've taken it in chapters), Prof. William Henderson of Indiana University School of Law/Bloomington sees ferment afoot in the makeup of the AmLaw 200 themselves, and credits the "creative destruction" a-coming with alternatives to the "poor incentives created by the billable hour" including various fee structures that encourage a cost-effective mindset and embody splitting efficiency gains with the client. 

Next thing you know, lawyers will start behaving as though the principles of economics had not been suspended upon admission to the bar.

The last word is Bill's.  And to Savvy Blawgers one and all, and you, dear reader, the happiest of holidays; may they bring the companionship of your truest friend, warmth, good cheer, and the free time to read incredibly long blog posts.

---

During the next five to tens years, the best AmLaw 200 firms are going to behave more like businesses and less like stuffy bill-by-the-hour professional firms. We are going to see this trend in two ways.

First, top-notch litigation firms are going to start experimenting more with contingency cases. Two relative newcomers to the AmLaw 200, Boies, Schiller & Flexner and Kasowitz, Benson, Torres & Friedman, have posted extremely high profits per partner (PPP) due in large measure to plaintiffs work. Perhaps a decade ago, white shoe firms would have held their noses at the prospect of mingling with the plaintiffs bar. However, PPP has become the dominant variable for ranking law firm success. How those profits are generated is becoming less important.

Second, the most business-saavy law firms are going to recognize that they are often in the best position to judge the "value" of their clients' cases. Following the model originally developed by Fred Bartlet at Bartlet Beck, more law firms are going to share the risk of their clients cases through discounted fees with performance kickers. Reduction of risk commands a market premium, and large law firms--if they are willing to engage in elementary business calculus--are arguably in the best position to partially hedge the outcome of their clients' cases. Firms that play this game well will be in high demand and very profitable. Firms that refuse to play this game will have significant signaling problems, especially as discounted fees and kickers become more mainstream.

Finally, I think the above trend of risk-sharing, in exchange for premiums and kickers, offers a more attractive future for law firms than ever-higher billable hours and billable rates. In my opinion, it may be counterproductive for law firms to make strategic decisions based on cost accounting that ranks firm offices, practice groups and ultimately lawyers. This just produces a short-term view to bring in more money to the firm without achieving better or more cost-effective legal results. Why not acknowledge the poor incentives created by the billable hour and offer to split the efficiency gains with the client? To my mind, this is an idea whose time has finally come.

Color Palette 2.0

Yours eyes don't lie; we have changed the color palette, and sharpened up the top-line banner while we were at it.   Although, I personally am fond of the "believing is seeing" formulation—an ironic trope on the surpassing ability of human beings to see what they want to see.

We're going to stay with this new color palette for awhile (a week?  two weeks?) and see if it generates any strongly positive or negative feedback.  In the meantime, never accuse me of not doing my best to listen to you all, dear readers.  Feedback is, as they say, a gift. 

Can You Read Me Now?

Reader participation alert!

The question du jour which I'm posing to all of you, dear readers, is:  Should I change the white-text-on-black-background look of the site?

Here's the story:  When I first launched "Adam Smith, Esq.," I was seeking a distinctive "look and feel" to the site, and settled on this color palette because I felt it communicated a strong, bold, confident tone.  From time to time, however, people have commented that it's just plain hard to read—including not incidentally my wife, who knows her fair share of art directors.  Now, understand that I want to do everything in my power to invite greater readership, so if the design is off-putting, it should be changed.

On the other hand, the reason I have not changed it until now is my fear that the existing look and feel is part of the "brand equity" of Adam Smith, Esq., and not something I'd toy with lightly.

So there you have it:  The polls are open (although "comments" are not).  Please shoot me a quick email (as brief as "keep" or "change" is all I need) using the cunningly named "Email Me" link just to your right.

You Thought Market Forces Were Formidable Now?

Say "Clementi Commission" on this side of the Atlantic and draw blank stares; say it on the other side and it is safe to say you will launch an immediate fray.

The Commission has proposed, and the government has pledged to support, legislation that will permit non-lawyers to own law firms, and even for law firms to go public.  Before you start bouncing off the walls and ceiling, consider the rationale in a nutshell: “I do not believe that many of the restrictive practices under which lawyers work can still be justified as being in the public interest.”  And who among us, once we've caught our breath, can truly argue with that?  (For the record, some "consumer-protection" style regulation will remain in place.)

But as I've warned you before, this is not a blog about ethics, it's a blog about economics, so what might one foresee on that front?

First off, to state the obvious, the Linklater's, Freshfields', and Lovells' of the world have zero need or desire to go public, and I'm sure a plethora of small- and mid-sized firms below the UK 100 radar feel precisely the same.  As with technological innovation, just because you can do something does not imply you should.

Second, going public is the extreme end of the bell curve, and will probably end up being at least two standard deviations beyond the mean.  But at the mean, I would predict firms will offer, or sell, equity to senior non-legal business managers including those who would here have titles like Executive Director, CFO, CIO, and CMO.  This could be the genuine beginning of the end of the caste system where only fee-earning partners really count.

Third, and of surpassing fascination to me, will be to watch how market forces begin to shape this brave new landscape, applying their disinterested Darwinian pressure over time.  Thus I predict:

• An emerging class of supermarket commodity services firms, providing relatively generic wills, tax and real estate services, matrimonial and garden-variety litigation practices, small business "corporate" work, etc.  Some of these could become reasonably large entities, and consolidation in pursuit of market share and economies of scale will be the governing principle.
• At the other extreme, a small group of highly sophisticated boutiques may offer equity to raise capital in order to reinvest in their premium practices.  If Goldman-Sachs and Christie's can be public, why not Boies-Schiller?
• In the vast middle, increasing focus on developing and publicizing distinctive, credible, and "ownable" marketing statements about why XYZ firm is different, and why you should invest in it.  Where does this notion come from?  From the competitive drive to lower a (public) law firm's cost of capital.  To take a step back, the only compelling reason to go public is to raise capital—otherwise who in their right mind needs to put up with the regulatory and disclosure obligations involved?  But if you're doing it to raise capital, you want to pay as little as possible for those funds:  That means you want as high a P/E as you can obtain, and surely one above the new Law Firm Equity Index median P/E.  How, in turn, do you achieve that?  Well, presumably you're already doing all you can to increase "E[arnings]," so you have to persuade the marketplace that one $ (or one £) of future earnings from your firm is more valuable than it would be from other firms.  In other words, you have to state a distinct value proposition.

Will the Clementi Commission achieve its goal and will this actually happen?  Beats me, but it is devoutly to be wished.

Bring it on!

25 Years of Legal Technology

The estimable Ron Friedman, who's been covering legal technology since 1989, has done a nice recap of the past 25 years of legal technology for The American Lawyer.  Two messages here:

• No matter how much you may bitch and moan at technology today, it's useful to be reminded how far we've come. I personally recall when Davis-Polk used vi for word-processing.  (Count yourself fortunate if you've never heard of "vi"; it's a UNIX text editing program [with apologies to the Slashdot crowd].)
• Predictions of where technology will go are utterly useless; the only meaningful rule is to be ever-vigilant, flexible, and to adapt.

Sometimes in reading articles like Ron's I am momentarily seized by the desire to be 10 years old again, just so I could live to see another generation of technological innovation.  But then I remember the purgatory that was adolescence and come to my senses.

Genesis I:1, or How This Blog Came to Be

In case you don't see Law Technology News regularly, their year-end issue features, at pg. 24 in the "real" issue, my article on "How I Came to (Love) Blogging," thanks to the capable and gentle stewardship of that editorial ball of energy, Monica Bay.

The background story on how "Adam Smith, Esq." came to be.  And the key, you will learn, is simply picking your topic:  Providing a cogent answer to the question, "What can I write about that I'm passionate about, that no one else has totally and competently covered, and that is not so narrow or so broad as to be impossible?"—well, answer that and you're on your way to your own blog. 

You have been warned.

Billable Rates Rise Again. So What?

Half full or half empty?   That's my somewhat non-plussed reaction to the National Law Journal's release of its annual hourly billing rates update.  Of the 110 firms responding to the questionaire, 88 reported increases in partners' billing rates and 81 in associates' billing rates.  But here's the key take-away demonstrating the schizophrenia of this survey:

Akin Gump Chairman R. Bruce McLean said that even with this increase, the firm did not raise rates as high as the economy would have allowed this year. "We misjudged where the market was," McLean said. He explained that in most of the firm's practices, deciding where to set rates is often based on "vague and historic" information.
The firm's strategy, McLean said, is not to be a "market leader" in rates but to stay in the middle range of fees competitors are charging.
But determining where the high and low margins lie can be difficult.
"Most of the high-end firms still have problems with partners in increasing their rates to [match] the market," said Joel Henning, vice president and general counsel for Hildebrandt International, a law firm consultancy. As a result, he said, law firms sometimes shortchange themselves.
"Lawyers tend to be terrified of losing clients because of increased rates," he said.

Choose your poison: Rates rose, that's a fact, but not as much as "the economy" [read: the market] would bear, according to the supremely astute Bruce McLean of Akin-Gump, or else lawyers are "terrified" clients will desert if they keep this up.

I have a third theory:  Firms will raise rates at the high end where price is, essentially, no object; this is rational behavior and should be expected to continue in the teeth of economic upturns or downturns.  But the quoted rate, as all of us who live in New York and have been to the Lower East Side know, is not always the actual or realized rate. 

Revenue = [Billed Rate] - [Discounts + Writeoffs]

The survey, recall, asked for Billed Rate.  Caveat lector.

Are We "Corporate" Yet?

Just how "corporate" is the management model at sophisticated firms?  While there may be superficial similarities of structure in an increasing number of firms, Legal Week posits that if lawyers simply mimic a corporate form of management without actually possessing the—horrors!—skills of businesspeople, it is an empty exercise.

Permit me to state the obvious, but top management in a corporation has traditionally come up through the ranks of finance, operations, marketing, and IT, learning the ropes as they go.  Top management in a law firm has traditionally come up through the practice of this that or the other arcane legal specialty.  Fortunately, human beings are adaptable and their plasticity can (within limits) be enlisted in support of filling the various roles in management with the best-suited candidates.  Any law firm worth discussing will, for example, have within its senior ranks a tough negotiator, an acute and effective listener and consigliere, someone with at least half a knack for IT, another who survived Accounting 101, etc.  The question, then, is simply that of mapping the right individuals to the right tasks.

Of course nothing is so simple:

For a modern law firm to flourish, it must have highly motivated and well-equipped senior non-lawyer managers. Recognition of the importance of these non-lawyer roles is crucial if their contribution is to be as effective as it would be in a corporate structure. However, this is still a tall order in an environment where success is often measured by fee earning and billing ability alone.

There's the rub in a nutshell.  Law firms often remain caste systems where those with the billable hours and books of business are deemed the only ones worthy of the executive suite (well, the executive committee, anyway).

So ask yourself:  How many hours has Jeff Immelt billed for GE or Carly Fiorina for HP?  Which clients are they personally responsible for bringing in?  In law-firm land, they'd never be where they are.

Then ask yourself this:  In a world of global competition, which of these two models, the corporate-land one or the law-firm land one, is dysfunctional?

Will the Real Adam Smith Please Stand Up?

Adam Smith's thought (the real Adam Smith, that is) has been famously characterized by the economist George Stigler as a "stupendous palace erected upon the granite of self-interest."  I have long labeled this a "mischaracterization," and I am now pleased to report that I am in good company. 

To be sure, "self-interest" is a real phenomenon, albeit a rather humdrum one. Of far greater significance to Smith's thought, and his intellectual legacy, was his bedrock—and spectacularly uncommon at the time—belief that individuals, even the impoverished and unschooled, knew and understood their own best interests far more keenly than the wise and virtuous classes that were then readily perceived as their betters. 

This core faith in the judgment of every individual is the foundation upon which Smith rests his aversion to heavy-handed governmental intervention in the economy:  It is not (just) a "positive" argument Smith is making against excessive government involvement (i.e., the argument that the government tends to get it wrong, and that its interventions have pernicious unintended consequences); rather, it is primarily a "normative" argument (namely that the intelligence and autonomy of each individual should be minimally interfered with, and then only for the most compelling reasons and where there are no meaningful "less intrusive" alternatives).

In his crystal-clear but inimitable prose:

"It is the highest impertinence and presumption... in kings and ministers, to pretend to watch over the oeconomy of private people, and to restrain their expence either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs."

Need I add that these observations are of wide applicability today?   (Can anyone say, "school vouchers," where the wise and virtuous classes would deny poor parents the educational choice they themselves enjoy for their privileged children?)

But enough editorializing for this quarter; in case you hadn't picked up on it, I am a profound and enthusiastic admirer of the original AS.

And yes, I do believe he'd have his own blog today.

Where's the Dial That Controls Profitability?

Perhaps the single most challenging question to answer cogently—from both the economic and intellectual perspectives—is what can law firm managers actually do to increase profitability?   You imagine rightly, dear reader, that I have sacrificed more grey cells to attempting to wrestle this thorny issue to the ground than have many people, but it is a large topic.  This will be the first of what could well be many posts on this Ur-Question.

Let's begin with the basics.

Most people—certainly including executives with significant ownership of a private corporation or equity partners in law firms—would probably view a high level of sustainable financial performance as the metric of all metrics, but my view is that that observation is: (a) tautological; (b) remarkably unoriginal; and most important, (c) quite unenlightening as a guide to action in that no one has yet figured out how to directly improve financial performance in a world of global competition.  I view “strong financial performance” as akin to happiness in one’s personal life: It cannot be pursued in and of itself (with apologies to the Founding Fathers), but rather it’s the distilled end result or expression of everything else one has been doing.

For anyone who aspires to being an astute and effective manager, this poses a problem. The most important unitary measure of one’s success cannot be directly controlled.

Of course I’m not saying law firm managers can’t or shouldn’t do things like:

• prudently control costs,
• try to make smart hires,
• quickly correct bad hires,
• invest in professional development for associates and partners alike,
• launch targeted, credible, distinctive marketing campaigns,
• invest in or retrench from practice areas or even cities as conditions evolve,
• employ robust and appropriate information technology,
• astutely analyze M&A opportunities,
• and so forth.

The point is that these toolkits are available to everyone and we still have a long history of impressively profitable firms alongside the Brobeck's and Finley-Kumble's.

So what are the winners doing right and the losers doing wrong—specifically, what drives sustainable performance for a very high-end professional service firm?

I’ve adapted this diagram from David Maister*.  It’s intended to address the question of what managers can have an impact on that will in turn affect profitability.

*David Maister, Practice What You Preach (The Free Press, New York: 2001), Figure 7.1, p. 79 (correlation and causation coefficients omitted, diagram inverted).

This diagram strikes me as both intellectually and emotionally astute. Intellectually correct because Maister derived it from real-world empirical data and structural equation modeling, and emotionally correct simply because it has the indisputable ring of truth.  Of course a long-term orientation, respect, professional development, and (perceived to be) fair compensation are the foundation on which all else rests, and of course lawyer and employee satisfaction drives quality delivered to clients which determines profitability.

In Built to Last (HarperBusiness, New York: 1997), James Collins and Jerry Porras make a similar, in some ways stronger point (p. 8, emphasis supplied): “Contrary to business school doctrine, ‘maximizing shareholder wealth’ or ‘profit maximization’ has not been the dominant driving force or primary objective through the history of the visionary companies. Visionary companies pursue a cluster of objectives, of which making money is only one—and not necessarily the primary one. Yes, they seek profits, but they’re equally guided by a core ideology—core values and sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the more purely profit-driven comparison companies.”

So what, precisely, am I saying here?  Merely this:  "Profitability," Holy Grail though it be, is not something even the world's most gifted management team can control.  (If we could directly control it, we could repeal Chapter 11 forthwith.)  In sophisticated, global, high-performance professional service firms, getting a direct grasp on it is even more elusive.  However, we can control the most important conditions and prerequisites conducive to profitability.

How do we control those prerequisites?  My candidate is:

Practice Group Management

Stay tuned.

Piper Rudnick/DLA Round 2

More on the Piper Rudnick/DLA deal again courtesy of The Financial Times.  Nigel Knowles, managing partner of DLA, tosses out the unnecessary comment that "Piper Rudnick's reasons [for the deal] may be slightly more defensive, while ours may be slightly more opportunistic," premised on, well premised on, OK I got it, premised on the assumption that Piper Rudnick needs to be in Europe and Asia but DLA doesn't really need to be in the US.  If this is an early exercise in neck-biting, it augurs poorly.

The plain fact remains, as even Mr. Knowles acknowledges, that if you want to do the highest-value work, you need a "solution" that includes the US.  I stick by my guns that this merger bodes well to be one of the fairest in the land, but would somebody get Knowles re-write?

Update:  Law.com's coverage is here. 

Update update:  You thought I was snarky about Knowles?  Check out The Lawyer:  "DLA Goes Galactic."

A Sensible Merger: Say What?!

So it's official:  DLA is merging with Piper Rudnick (which has already, more or less, merged with Gray-Cary).  The resulting firm, whose name will not long remain "DLA Piper Rudnick Gray Cary," will be the second largest globally by revenue, and third largest by lawyer headcount, with over 1,000 lawyers on each side of the Atlantic.  Weirdly, neither The New York Times nor The Wall Street Journal has anything remotely interesting to say about this, but The Washington Post and The Financial Times nail the story.

Predictably, it's being compared to the Clifford-Chance/Rogers & Wells deal, but I'd say the comparison is uninformed and unhelpful to analyzing the odds of success of this deal.  Faithful readers know that I approach any big-deal merger with a jaundiced view, knowing that (a) most fail to deliver the promised benefits in the long run; (b) simply pulling them off—integrating the plethora of essential systems from finance to email to matter and knowledge management, closing duplicative offices, reassuring clients and staff alike—can plunge the firms into a year or two of unproductive navel-gazing; and that (c) with cultural issues uniquely pivotal to success in law firm land, true "integration" can be excruciating to attain.

But surprise!  I give high marks to this deal, and wish them well with my heart and my head:

• the firms have duplicative offices in precisely zero cities;
• it's a merger of pretty-much equals, which starts relations off on the right foot (remember the Daimler takeover of Chrysler which was disastrously labeled inaccurately?);
• without of course being privy to the inner councils, it sounds as though the make-or-break issue of partner compensation has been addressed rationally and sanely, with the ultimate determination combining ingredients ranging from seniority to billable hours to intangible contributions to cost-of-living.

Also promising is that both DLA and Piper Rudnick have credible track records of entrepreneurial expanion through mergers heretofore.  Nor are they swinging for the fences and trying to become a super high-end Skadden displacer; they declare their focus to be the "upper middle market" or multinationals.

"Stay tuned," as they always say, but this definitely sounds promising.  Next, anyone?

"Unsustainable Trends Tend to Come to an End"

The American Lawyer is out with its annual survey of AmLaw 200 leaders and they are, as Aric Press succinctly puts it, "a confident bunch."  And why shouldn't they be?  The heck with 9/11 and the heck with the 2000 bubble melt-down:  88% are optimistic about next year.  Revenues are up more than 6% for the fourth year in a row—and since fully 89% of firms plan to raise rates again next year (the median hike being about 5%), and 73% foresee profits per partner rising more than 5%, what's not to like?

But dig, or read, a bit deeper and I see a protracted collision with reality in the offing.  Consider:

• 52% of these senior leaders report meeting with five or fewer of their firm's top 20 clients to discuss performance, and a truly shocking 6% report meeting with none.  In other words, these firms are collaborative and collegial in name only, with zealous turf guardians still de facto in charge.
• For help on management issues, firm leaders turn almost exclusively to "C"-level professional staff rather than their partners—91% of firms report five or fewer lawyers spend more than half their time on management.  (Stated differently, only a handfull of lawyers are seriously engaged in firm management.)
• But for all their reliance on COO's, CFO's, etc., those professionals are second among equals.

	% of firms who have:	% of firms where they belong to executive committee*
COO	84%	43%
CFO	93	14
CMO	80	4
GC	55	13

*"None" serve on the executive committee at 46% of firms. 

So what we have resembles the Cold War era Soviet Politburo, where an elite class with a somewhat arcane selection process are the titular rulers, but where the actual factories and trains are run by a subservient group of professional managers.  Am I being too harsh?  Consider that to crack the AmLaw 100 requires revenue north of $180-million/year.   That's a sizable enterprise by any measure.  How long will the increasingly indispensable C-level class stay down?

To be sure, there are some signs of ferment in this model:  While nine out of ten firms, as noted, plan to raise rates, two-thirds also report clients complaining about fees and demanding discounts.  And an astonishing 26% of firms report they're on the prowl for a merger partner.  Both of these results portend deeper changes ahead.

My read?  First of all, that there are in the economic sense no "substitutes" for the counsel of an AmLaw 200 firm; this is the primary explanation for the relative price-inelasticity of demand (despite the bitching).  Second, the AmLaw 100 have more pricing power than the AmLaw 101--200; but/and at this point in the profession's evolution the barriers to entry into the AmLaw 100 are steep and daunting.  So mergers are a logical response to the desire for ever-greater pricing power.

Do we live in fascinating times, or what? 

Joy London on Blogging 101

The always-inspiring Joy London of "excited utterances" has penned a Blogging 101 article for Legal IT.  Although much of what Joy has to say is targeted at what might charitably be described as the extreme novitiates in the audience (what a blog is, for starters), she has some insightful observations on why the blog medium and legal practice are a match made in heaven:

• people are a firm's true intellectual capital, just as the individuals constituting the legal blogosphere are the source of its true power;
• the mindset behind successful and effective blogs—an impulse to share reliable analysis and observation—is precisely the instinct that animates successful knowledge management in a firm; and
• at least in the legal blogging community, bloggers "exuberantly share links and observations."

Joy kindly concludes with a list of about a dozen of her favorite US- and UK-based blawgs, and—the envelope, please—"Adam Smith, Esq." is right there.  Yo, Joy:  Would you prefer a bottle of champagne, or Scotch?

Half Lockstep?

I've said it before, but it appears to be a source of chronic pain, so I will re-state my firm belief that, like pregnancy, you cannot be "half" lockstep and half not.  The logical universe of choices is:

• Pure Lockstep:  Fabulous if you can pull it off, but it's the increasingly rare firm with the history, the culture, and the relative freedom from exogenous shocks (e.g., lateral defections) that can stay so true.
• Eat What You Kill:  Generally dismal places to work, but unquestionably an example of capitalism at its most raw.  In my experience, such firms can be unstable for the long run, and major dislocations like the retirement of a big rainmaker can bring down the house.
• Modified Lockstep:  Not an oxymoron, but rather the practice of starting out with the presumption that compensation is lockstep, then modifying it in individual cases to reward/punish over/underachievers.  Permits the greatest flexiblity, as well as the chance to provide incentives for non-billable, firm-building efforts (serious pro bono efforts, associate development, bar leadership, etc.)

Clifford Chance has famously not achieved equilibrium on this issue, and the ongoing failure to bite the bullet continues to threaten their foray into the U.S. in general and New York in particular.  The most recent famous defector, Jim Benedict (to Milbank), summed it up with pith:

"I looked at the vote last fall [veto'ing "superpoints" for some New York partners] as saying that the purity of lockstep was more important than success in the U.S."

As any veteran of corporate-land mergers could have predicted, merging compensation systems at the most senior level simply cannot be avoided, elided, postponed, or finessed. And as any veteran of launching forays into New York could have predicted, superstars will demand their rewards.