Of Revenue Trends and Winners & Losers

I promised a more substantive gloss on the AmLaw 100 results, and, while I have not run this by any Ph.D.'s in statistics, I think it tells a fascinating and possibly powerful story—which, more importantly, might even accord with some of the hypotheses and intuitions floated hereabouts on the trend of consolidation among the AmLaw 200.

First, eyeball this:

What, you may rightly ask, is going on here?

Let's back up.  One of my hypotheses, articulated when I first posted this year's results, is that "the rich are getting richer."  By this I meant to suggest that the leaders of the AmLaw 100 pack are pulling away from the laggards at an accelerating rate.  So far, most of my basis for surmising this has been based on anecdote, isolated "data points," and caffeinated or lubricated conversations with friends and colleagues about Big Trends for the Next Ten Years.

Then it occurred to me that if there is something to this hypothesis—if the AmLaw 50, say, are gaining ground on the AmLaw 51-100—then the year over year revenue growth might reveal something.  So on this graph I calculated the year-on-year revenue growth for the AmLaw 100 for the past three years (yielding two one-year-over-one-year series and a two-year series).

So what do we see?  I would argue:  Striking visual evidence that the hypothesis is correct.   For each of the three series, the rate of increase in revenue is higher for larger firms than for smaller.  

I performed one other test.  Using Excel's "forecast" function, which extrapolates a series out to a future data point, I asked what revenue growth would look like for AmLaw firm #200, and these are the almost shocking results:

• Based on an extrapolation of the 2004 vs. 2003 series, firm #200 would have revenue "growth" of -7.18%.  (Yes, that's a minus sign.)
• Equally damning, based on an extrapolation of the two-year series (2004 vs. 2002), that same firm would scarcely enjoy any net revenue growth at all for the two years:  Specifically, a charitable-to-call-it-anemic 0.12%.

I anticipate copious emails from the incredulous, the triumphant, and the Ph.D. statisticians.

---

Methodology Update: Posted by Bruce at 8:45 am 30 June 2005:

You may be wondering whether I tracked the revenue-growth performance of each individual firm in the AmLaw 100 during this period or whether I analyzed the overall composition of the group.  Answer B. 

In other words, my interest was in "what it takes" to stay in the AmLaw 100 at a macro level, not whether the strategies of individual firms were, relatively speaking, successes or failures.  So, for example, firm #10 in 2004 was Sullivan & Cromwell; in 2003 it was Kirkland & Ellis; and in 2002 it was McDermott, Will & Emery.  My data point for "firm #10" on these time series, therefore, actually represents the performance of three entirely different firms. 

But since my goal, as noted, was to analyze what it takes to be (in this case) "Firm #10," this methodology seemed the correct one.

Other questions?

The Tale of the Pencil-Sharpener

At a meeting at Milbank yesterday, a senior partner had occasion to recount the tale of the pencil-sharpener, which was an actual employee at the firm decades ago.

The pencil-sharpener's role was to circulate throughout the office collecting used pencils and replacing them with sharp ones. So far, so good, and so far, so invisible.

But one day the senior partner had reason to visit a paralegal's cubicle and noticed that all the pencils, while sharp, were very short; and all of his pencils were very long.

You can intuit the rest. The pencil-sharpener provided partners with long pencils, associates with medium-length ones, and paralegals with short ones. Legend has it that a partner presented with a short pencil threw it back at the pencil-sharpener, and a lesson was learned.

A quaint tale of a bygone time where associates and paralegals were duly put in their place, silently and (almost) invisibly, but with utter certitude and devastating effects were they to be reflected upon for a moment.

Isn't it great we all know better now?

The AmLaw 100 For 2005

As promised, here's the AmLaw 100 for 2005. I'll have some substantive commentary later today, but for now I'll primarily limit my gloss to that provided by my friends at American Lawyer Media: 

"Five Am Law 200 firms posted gross revenue in excess of $1 billion in 2004, the largest number ever. Sidley Austin Brown & Wood broke the billion-dollar barrier for the first time in 2004, while the others did so previously -- Skadden, Arps, Slate, Meagher & Flom in 1999; Baker & McKenzie in 2001; and Latham & Watkins and Jones Day in 2003."

My very quick and dirty calculation of the change in revenue over last year's AmLaw 100 is that at the top (Skadden, what a shock) the increase was 8.27% ($1.440-billion vs. $1.330-billion), while at the bottom (Ballard Spahr this year, Preston Gates last year) the increase was only 5.82% ($200-million vs. $189-million). Are the rich getting richer? Very preliminarily, it certainly looks that way.

The Billion-Dollar Club Expands

2004 Rank	2003 Rank	Firm	2004 Gross Revenue	Lawyers
1	1	Skadden	$1,440,000,000	1,554
2	2	Baker & McKenzie	$1,228,000,000	2,992
3	4	Latham & Watkins	$1,206,000,000	1,502
4	3	Jones Day	$1,190,000,000	2,076
5	5	Sidley Austin	$1,029,500,000	1,405
6	7	White & Case	$953,000,000	1,685
7	6	Mayer, Brown	$911,000,000	1,258
8	8	Weil, Gotshal	$905,000,000	1,080
9	10	Kirkland & Ellis	$835,000,000	897
10	11	Sullivan & Cromwell	$833,000,000	589
11	9	Shearman & Sterling	$775,000,000	963
12	58	Wilmer Cutler	$750,500,000	960
13	12	McDermott Will	$745,000,000	975
14	15	Morgan, Lewis	$723,500,000	1,112
15	20	Greenberg Traurig	$712,000,000	1,149
16	13	O'Melveny & Myers	$697,000,000	910
17	18	Cleary Gottlieb	$695,000,000	844
18	14	Gibson, Dunn	$693,000,000	745
19	19	Simpson Thacher	$691,000,000	632
20	21	Hogan & Hartson	$630,000,000	898
21	17	Akin Gump	$612,000,000	822
22	23	Paul, Hastings	$609,000,000	835
23	16	Davis Polk	$604,500,000	538
24	22	Morrison & Foerster	$593,000,000	882
25	27	Piper Rudnick	$580,500,000	905
26	26	Bingham McCutchen	$565,500,000	790
27	24	Holland & Knight	$551,000,000	1,155
28	25	Foley & Lardner	$542,500,000	869
29	28	Winston & Strawn	$516,500,000	793
30	32	Paul, Weiss	$504,000,000	480
31	33	Reed Smith	$503,500,000	881
32	30	Fulbright & Jaworski	$491,500,000	831
33	29	Orrick	$484,000,000	666
34	40	Debevoise & Plimpton	$478,500,000	536
35	36	Heller Ehrman	$472,000,000	628
36	37	King & Spalding	$470,000,000	707
37	37	Cravath	$455,000,000	389
37	34	Vinson & Elkins	$455,000,000	661
39	31	Arnold & Porter	$454,000,000	639
40	41	Dechert	$441,500,000	678
41	35	Hunton & Williams	$440,000,000	781
42	39	Pillsbury Winthrop	$432,500,000	643
43	42	Milbank, Tweed	$431,500,000	480
44	64	Wachtell	$431,000,000	197
45	43	Baker Botts	$420,000,000	643
46	51	Cadwalader	$416,000,000	486
46	52	Willkie Farr	$416,000,000	507
48	53	Sonnenschein	$411,000,000	660
49	55	Ropes & Gray	$404,500,000	501
50	50	Alston & Bird	$402,000,000	664
51	49	Proskauer Rose	$395,000,000	584
52	47	Squire, Sanders	$393,500,000	675
53	48	Dewey Ballantine	$380,500,000	524
54	46	Wilson Sonsini	$377,500,000	540
55	45	Bryan Cave	$372,500,000	726
55	62	Kirkpatrick & Lockhart	$372,500,000	697
57	57	Katten Muchin	$368,000,000	581
58	56	Kaye Scholer	$362,000,000	458
59	61	Fried, Frank	$359,000,000	438
60	54	LeBoeuf, Lamb	$356,500,000	601
61	44	Howrey	$352,000,000	525
62	67	Nixon Peabody	$348,000,000	593
63	65	McGuireWoods	$344,000,000	686
64	63	Covington & Burling	$337,500,000	463
65	59	Dorsey & Whitney	$330,000,000	619
66	73	Seyfarth Shaw	$313,000,000	603
67	69	Goodwin Procter	$302,500,000	433
68	72	Perkins Coie	$297,000,000	603
69	76	Schulte Roth	$292,000,000	354
70	68	Cooley Godward	$289,000,000	418
71	70	Baker & Hostetler	$284,000,000	605
72	80	Duane Morris	$264,000,000	480
73	71	Jenkens & Gilchrist	$258,000,000	435
74	79	Jenner & Block	$253,500,000	381
75	74	Shook, Hardy	$252,500,000	490
76	81	Blank Rome	$247,500,000	459
77	77	Chadbourne & Parke	$241,000,000	382
78	78	Thelen Reid	$240,000,000	413
79	83	Stroock & Stroock	$238,000,000	331
80	84	Kilpatrick Stockton	$236,000,000	442
81	90	Womble Carlyle	$233,000,000	475
82	93	Steptoe & Johnson	$232,500,000	335
83	75	Coudert Brothers	$230,000,000	552
83	92	Sheppard, Mullin	$230,000,000	366
85	82	Cahill Gordon	$227,000,000	242
86	86	Finnegan, Henderson	$225,000,000	292
87	95	Fish & Richardson	$224,500,000	304
88	91	Wilson, Elser	$222,000,000	675
89	86	Venable	$221,500,000	394
90	93	Andrews Kurth	$217,000,000	394
91	89	Mintz Levin	$216,500,000	373
92	88	Drinker Biddle	$213,500,000	426
93	85	Gray Cary	$213,000,000	350
93	96	Patton Boggs	$213,000,000	396
95	98	Haynes and Boone	$210,500,000	419
96	107	Pepper Hamilton	$209,500,000	382
97	97	Troutman Sanders	$206,500,000	468
98	101	Cozen O'Connor	$205,500,000	463
99	105	Faegre & Benson	$204,500,000	456
100	102	Ballard Spahr	$200,000,000	412
1 Due to the merger of Wilmer Cutler Pickering and Hale and Dorr in June 2004, there is no year-over-year comparison for the merged firm.
(The American Lawyer, July 2005)

Get An Early Preview of the AmLaw 100 Right Here

My friends at American Lawyer Media will release an early "preview" copy of the 2005 AmLaw 100 to Adam Smith, Esq. readers this coming evening, Tuesday, June 28.

Sign up for an email update, subscribe by RSS, or just come back here Tuesday evening. I for one will be all eyes.

Where Is Sally?, or Knowing Who You Need to Know

Perhaps the most valuable achievement of a highly-functioning Knowledge Management system is the ability to identify a colleague within your firm who has pretty much the exact expertise you're looking for, when you need it.  I call this the "Ask Sally" moment, as in "Ask Sally; she'll know." 

Traditionally, firms that have tried to create this capability have approached matters with a fairly blunt instrument:  Surveying everybody, or at least every professional, to ask them point-blank where they consider themselves an expert.  Of course there are any number of problems with this, from the practical (it takes time; it needs constant updating) to the epistemological (do you mean what I mean by "expertise?").  Stories of companies investing millions to create such systems, and then watching them lie dormant and neglected, are legion.

But what if it turns out that your firm might already know most of what it needs to about your professionals?  If you cobbled together—this means you, IT!—information from many of the internal databases you already have, might you not end up with a reasonable facsimile of such a system? 

For example, HR has information on everything from what office and department you're in to where you went to law school, what CLE topics you've studied, and who you've worked with (performance reviews).   Finance and accounting know which clients and industry groups you've worked for and how much and for how long (time and billing records).   Marketing knows if you have any articles, whitepapers, or even patents to your name.  &c.   Pull all these together with baling wire code, set an internal version of Google or Verity loose on it, and you might be surprised how far you get.  This could be a case of knowing more than you think you do. 

Better yet, you don't have to survey anybody, and the information is continually refreshed through the ordinary course of doing business.  Before you give me too much credit for this, read McKinsey's take on it.

Wikis 101

CIO Insight has the shortest, sweetest guide to wikis behind the firewall that I've yet seen:

• Wikis are a social innovation, not a technological one.
• Wikis turn the notion of "permissions" built into traditional knowledge management DMS's and CMS's upside down; suddenly everyone has permission (and ability) to edit everything.
• If you're worried about people on your payroll vandalizing an internal wiki, you have a bigger and different problem; are people vandalizing the Coke machine?
• Last and of breathtakingly paramount importance:  "You can't know a priori what people need to know and share, but big knowledge management systems make a lot of a priori assumptions. Wikis don't."

I rest my case.

Chief Strategy Officers: The Line Forms to Your Left

Pepper-Hamilton, HQ'd in Philadelphia, which I've always been irrationally fond of, becomes the latest firm I'm aware of to appoint a Chief Strategy Officer—a litigation partner whose bio highlights his fascination with issues at the intersection of law and economics, an ardor I fell victim to long long ago.   He sounds as if he might potentially be qualified, at least if raw intellectual horsepower counts (and yes, it does):  a magna cum laude grad of Harvard Law School and editor of the law review. 

At least as interesting as the creation of the "CSO" job was this announcement that Pepper-Hamilton is moving towards a corporate managerial structure:

"Pepper recently restructured leadership responsibilities to reflect a more practical approach to firm management. It created a five-member core management team, the Operating Committee, that is responsible for day-to-day management of the firm and for initiating strategic planning and growth opportunities. The Operating Committee will work under the direction of the Executive Committee, which functions in a capacity similar to a corporate board of directors."

So what is this all about?  A recognition that if the firm wants to expand in size and geographic footprint (which it unabashedly says it does), you need at least one senior leader devoted to that strategy.  Give them great credit.  The proof will now be, as always, in the pudding.

"Adam Smith, Esq." Finalist Among Practice Management Blogs

Congratulations are in order to Jim Calloway for winning the "Favorite Practice Management" blog award over at TechnoLawyer (complete list of winners and finalists).  

I'm also pleased to report that "Adam Smith, Esq." and Dennis Kennedy were chosen as finalists. 

There's always next year....

Blogs As KM Platforms: One Result Is In

I previously wrote on the notion of knowledge-focused enterprises (make that:  law firms) using internal, behind-the-firewall blogs as tools for "doing" Knowledge Management.  For example, if your firm has one or two individuals expert in §1031 tax-free exchanges, why shouldn't they collaborate on a blog reflecting their experiences with real transactions and their dissection of the various issues that arise?  After six months or a year, your firm would have a valuable—and proprietary to you—knowledgebase in, to my mind, a near-perfect format:  By default, sorted chronologically so that whenever "timeliness" is deemed important, it's automatically presented in that format; archived by category so that subtopics can be immediately zeroed in on; and open to comment threads so that the author's first draft is not necessarily the last word, and ideas can be refined through interchange.  Even better, no one has to be trained to create and maintain a blog; as a Sun Microsystems analyst observed, "they're like pencils and paper; people know what to do with them."

So what's wrong with this picture?  Sidestepping the question of whether antediluvian attitudes might torpedo such an initiative before it could start, the biggest question to date has been one not susceptible to answering readily:  To wit, is anyone actually doing it?  And what has been their experience?

Now we have at least one case study.  Analyzing the experience of an unidentified European pharmaceutical company with 4,000 employees, operating in 20 countries, it tells the story of that firm's adoption and roll-out of six internal group blogs (150 bloggers total, no individual blogs) based on the Traction Software platform.  Traction was selected because it permits very fine-grained "permissions," as in who can post to, comment upon, edit, and view which blogs.  (For example, although this is a bit unclear, it appears that Traction can make posts to certain category "invisible" to certain users who otherwise have permission to read the entire blog.)

Bottom line:  A rousing success.  "Compared with setting up a similar project on a more traditional CMS or KM platform, the project has been simpler, faster, more effective, and less expensive to implement" (emphasis supplied).

Word to the wise:  The roll-out of this project was exceedingly thoughtful, including limiting it to a small group of self-selected evangelists at first, generating positive word-of-mouth, and providing user-friendly "daily digests" via email (than which nothing is more familiar, for better or worse) to ease people gently into the blog construct.  

Do you hear the same intimations of the exhaustion of top-down, muscle-bound, user-hostile Big IT that I do?

Malcolm Ryder Talks KM

My college friend Malcolm Ryder has been working in quasi-stealth mode for awhile now on a blog at the intersection of business strategy, IT consulting, and design, called Archestra, for the "architecture of enterprise strategy."  

Just recently he's put up a few provocative posts on one of my favorite topics, Knowledge Management, and readers who share my interest in KM should take a look.  [Aside:  What's so fascinating about KM?  To me, the appeal is that it is (a) so hard to get right (b) because it is at the intersection of technology and a firm's culture (c) but for a large and sophisticated law firm it needs to be a "core competence."  KM is, in a nutshell, an indispensable Everest to climb.]

Malcolm has put his thoughts together on:

• "Managing the Productivity of Knowledge Work"
  
• "Harvesting Tacit Knowledge" 
  
• "The Architecture of KM" and
  
• "What is 'What You Know' Worth?"

I'm highly confident Malcolm would welcome any thoughts you might have on his reflections.

The Internet's First Golden Age Is Now

Are we entering the 'Net's first golden age?

Wait a minute, you're protesting, the first golden age in Internet Years was the dot-com bubble, no?   I actually think not.

The dot-com bubble (in which I had a role on-stage in the chorus, although my name never made the Playbill), was in retrospect largely about companies trying to do things online that people had always been doing off-line:   Buying books and pet food, booking airline tickets, investing, and so on.  It was fundamentally a one-to-many model, even in the case of an arguable paradigm-changer like eBay, which deserves credit at least for creating a national marketplace that literally could not exist in the off-line world.

One of my theories about a new medium, the 'Net included, is that it starts out resembling the old medium to which it's most closely analogous.  So radio began by broadcasting vaudeville acts, TV by broadcasting acted-out radio soap operas, and the 'Net by emulating broadcast TV's top-down, take-it-or-leave-it, content.

The next generation of each medium arrives when it finds its "true voice," which is by definition not an imitation of something that has gone before.  Thus with radio it's music, news, and talk.  With TV it's sports, movies, and breaking news.  And with the 'Net, it's.....?   This.   (Courtesy of the Wharton School, headlined "Wikis, Weblogs and RSS: What Does the New Internet Mean for Business?")

The shift is from host-provided content to user-provided content: 

• From one-to-many to many-to-many.
• From large, intricate, zealously tended and feature-rich Big App's spanning acres of servers to small, lightweight, low-tech ways of publishing and communicating.  And perhaps in the most revolutionary sense
• From a command-and-control, gating, editing, and triple-checking process to wide-open communities of permissive social interaction driven by spontaneous and unedited expression.

In other words, we can now do with the 'Net  things we could never do off-line:  This is, indeed, "The New Internet."

There are several ways to think of this, but one that sums it up nicely is to characterize the past decade as having built up the physical infrastructure and anticipating that the next decade will build up the social infrastructure.  Now, a "social infrastructure" comes with no guarantees, and as with the LA Times' famous lightning-speed retreat from wiki-editorials reveals, a few vandals can wreck the neighborhood.  The tradeoff for accepting this risk—which within small virtual neighborhoods is de minimis—can, however, be enormous.

Moreover, what's going on is nothing other than the 'Net returning to its roots:

"If you go back to the thinking of the earliest visionaries with respect to the Internet, that was exactly the picture they were painting. [...] The original vision of the Internet being a medium that is genuinely peer-to-peer, is loosely coupled and [which] sparks different kinds of interactions."

Then, the "social infrastructure" was set by the hacker/geek code, with its arcane but effective rules of courtesy and mutual respect enforced, of course, by white-hot flaming when called for.  There is every reason to believe that our most social of all species will be able to evolve an online culture that is both collaborative extraordinarily potent:  Certainly when you think of the intricacies of the supply chain required to deliver, say, your new Dell Inspiron laptop to your front door, a supply chain that touches down in Taiwan, the Phillipines, Hong Kong, mainland China, and Memphis, Tennessee (FedEx), with not even a moment's "command and control" issuing from Round Rock, Texas, you realize what human beings, guided by Adam Smith's invisible hand, are capable of.

Is this all starting to sound a little airy-fairy?  Then consider how business has evolved.  No longer is the goal to achieve Six Sigma perfection in churning out X thousand or million perfectly identical widgets; the goal is to innovate, to steal a march, to cause disruption.

"This changes the way you think about productivity in organizations where innovation, adaptability and dealing with complexity are the key challenges. So much of reengineering, which is what major corporations have been about for the last 10 or 15 years, has been about linear efficiency -- lining everything up in as tight a way as possible along a path. That's wonderful if you know exactly what it is you want to do, and the aim of that task will never change. Increasingly, that's not the relevant challenge. The challenge is adaptability, complexity, uncertainty and your capacity to mine the elements of your business, people and knowledge into different and new combinations."

This brings us back to law firms.  When has it ever been more important to deal adroitly and nimbly with uncertainty, to "mine your people and knowledge?" 

Envision new ways of working; with the New Internet, they just may be possible.

I'll Trade You 4 Pounds Sterling for 150,000 Pounds Sterling

Speaking of leadership, O Defenders of Justice, O Officers of the Court, restrain yourselves from doing this. 

When Yes, No, and Maybe Stop You From Deciding

"I won't take yes for an answer" has been variously attributed to everyone from Groucho Marx to Samuel Goldwyn, but now Harvard Business School Professor Michael Roberto says there's management wisdom in it.  True leaders, that is to say, cultivate constructive conflict, from which arise sounder decisions.

While this may strike all us enlightened, post-command-and-control types as obvious, in the real world it is still honored mostly in the breach.   Consider the recent sacking of Phil Purcell of Morgan Stanley.  Here's The New York Times on his management style:

"He was ruthless, autocratic and remote. He had no tolerance for dissent or even argument. He pushed away strong executives and surrounded himself with yes men and women. He demanded loyalty to himself over the organization. He played power games. He had little contact with rank and file. Is it a surprise that he was loathed by many executives?"

Or this, from the veteran of decades of Wall Street wars, Jim Cramer:

"Now it is well known on Wall Street that Purcell never managed down, just up, catering to the board in a way that made many people—including yours truly—think that he would have to commit a homicide to lose the support of these mostly handpicked backers. I personally loathed the guy, having done about $30 million in business with his firm without ever so much as a thank-you, let alone an acknowledgment of me or my firm’s existence as a client. I was small-fry for Purcell. We were all small-fry, I later learned."

Why do organizations continue to go astray in this way?  Consider the culture of yes, the culture of no, and the culture of maybe.

The culture of yes:  The most obvious and perhaps prevalent species of this managerial dysfunction is when all smile and nod at proposals or during meetings and then retreat to their offices to voice their objections, undercut the phony "consensus," and ensure that nothing moves forward.  This is indeed the "yes" that means "negotiations have commenced."

The culture of no:  Famously, at IBM before Lou Gerstner arrived, anyone involved in a decision could "fail to concur," and the initiative would be scrapped.  Archaic as that sounds—and it was barely 15 years ago—a stylishly mod version, comfortably enthroned in a position of honor in the large tent of P.C.'ness, is today's "precautionary principle," which holds that virtually any uncertainty about consequences of an innovation should preclude its embrace unless and until its proponents can prove against all objections that it will do no harm.   Cost/benefit?  Mature judgment?  Responsibility?  Out the window.

The culture of maybe:  My personal favorite, because it finds fertile ground in the mindset of lawyers.  This has also been nicknamed "paralysis by analysis," and is the attitude that all the facts must be on the table before one can decide.  "A good plan now beats a great plan tomorrow?"  Sure, pal.

This leaves us with the practical challenge of encouraging candid, frank exchanges.  A good place to start is with the leader staying mum on what he or she thinks, and instituting and reinforcing a fair (think "due") process where all viewpoints can be heard.  Of course, the leader must ultimately take responsibility for decision and action:

"Leading a fair process does not mean trying to satisfy everyone in terms of the ultimate decision that is made. Instead, it means creating a process in which leaders have demonstrated authentic consideration of others' views."

Crucial to maintaining open debate at a high level is disciplining those who break the rules: Those who mount ad hominem attacks, undercut arguments in private or "offline," or who refuse to participate. In other words, a key leadership trait is enforcing the debating rules.

Before you next need to arrive at a consultative decision, take a look at the whole article.

Coudert Chapter 3, In Words of Plain Anglo-Saxon Derivation

The UK press, not known for a dainty approach, is covering the developing (or should that be "unravelling") story of Coudert with no minced words:

• "Coudert in Crisis..." and
• "Living in the Past."

Watching this happen is immensely sad, as it need never have happened. 

Perhaps after the dust settles there will be something positive to take away by way of "lessons learned," or perhaps I'm just grasping at a straw of hope in following a dismal story.

Publicly Traded Law Firms: The Starter's Pistol Has Fired

When the Financial Times speaks, people listen, so try this on for size:

"The old model of partnership between lawyers alone has its drawbacks for large law firms, which are complex businesses - the biggest are multinationals in their own right. Yet management is often weak. Compared with the best companies, they are often bad at marketing, customer relations, innovation, use of information technology and process management.

"Law firms need to compete for the best managers, finance directors, marketing experts, technology officers and human resources professionals. Such people may be unwilling to join firms where they are second-class citizens."

And this would be apropos of what, precisely?  The UK's famous Clementi Commission, of course.

Now that firms in the UK can, at least in principle, be publicly owned (and traded) entities, what are the implications?  How about a firm with a market cap of £5-billion?  Not unreasonable, given comparables. The chorus of "not so fast"'s has already arisen:

• "Law is a special case."  Yes, and investment banking was a special case before Morgan Stanley, Goldman, et al., went public.
• "Being public would put too much focus on profits."  Vs. precisely what eleemosynary attitude today?
• "Being public would force us to put profit ahead of ethics."  Sure, and the heads of Arthur Andersen, Enron, and WorldCom are available for interviews confirming the sagacity of that counsel. 
• Lastly, and perhaps briefed at the greatest length and with at least superficial plausibility:

  "In the US, a conflict of interest arises if an attorney's duties to a third person could materially harm the interests of that attorney's client. Furthermore, under the so-called "rule of imputation", this conflict is imputed to the entire firm, not just the affected lawyer.
  
  "Under corporate law, however, corporate officers and directors have a fiduciary relationship with the corporation's shareholders. As a result, a managing attorney or an attorney who is serving as an inside director in a hypothetical publicly traded law firm would owe duties to both the firm's shareholders and the firm's clients. Furthermore, the fiduciary relationship owed to the firm's shareholders could potentially conflict with the professional duties that the firm's attorneys owe to their clients, and vice-versa."

There are (at least) three come-backs to this reservation.  First, if ownership of the public law firm is widely dispersed, as is all but universally the case with listed companies (the exceptions are usually family-controlled dynasties that have emasculated minority public ownership), no single shareholder would have a "material" interest in the firm which could remotely approach the interest of a client; in other words, the conflict would remain purely hypothetical.  Second, the precise contours of the "conflict" are difficult to discern.  I hypothesized earlier that if Goldman-Sachs bought a large stake in (the future-ly public) Shearman & Sterling, Morgan Stanley might object since S&S is their "go-to" firm.  Short of such outright buy-off's, I would assume, and economic theory would confirm, that all a shareholder really "wants" out of an investment is superior performance—and under the classic corporate separation-of-ownership-from-control model, the shareholder should leave management alone.

Third is the possible case where the conflict is real and unavoidable.  In that case all one needs do is address it with the familiar toolset for dealing with conflicts:  Resign the representation, obtain knowing and informed waivers, etc.  In other words, we can deal with this, children, if we really see advantage in being public.

 Finally, the always cheeky and entertaining Gerry Riskin ("Amazing Firms, Amazing Practices") plays out a dynamic analysis scenario that has firms going public, senior partners cashing out for points offshore, the remaining loyalists finding their take-home profits diminished by the new demands of an investor class for actual results, and the public firm imploding as rainmakers desert for private competitors.  Read the whole deeply amusing thing.

But would this really happen?  Would it really happen more than once?  I suspect wannabe-public firms would learn a lesson promptly and put restrictions on capital extraction, as well as set the expectations of investors for fast-cash-out suitably underwater.

At last we come to the final question:  What on earth do law firms need all this capital for anyway? 

One word:  Innovation.  With capital available, what sums might firms not invest in everything from expert systems to ever-more transparent client communications, to proprietary knowledge bases?  After all, we all know that one of the most robust objections to investing in technology today is that it would deprive the partners of this year's new Mercedes.  Maybe, in future, it won't have to.

Coudert Merger? Update

Coudert merger update:  Baker & McKenzie, and DLA Piper are both reported to be "circling" Coudert.  

Neither B&M nor DLA denies it. 

To CIO's Seeking "Buy-In:" Snap Out of It

The universal, chronic, and incurable complaint of CIO's?  That they can't get management "buy-in" for their IT initiatives.  The syndrome is as follows:   The CIO/CTO has a great idea for a new way to support a business function, they do diligent research and determine best-of-breed vendor, put the thumbscrews to pricing, create a compelling case for the business value of the new app, and it dies upon contact with the COO/CFO/CEO.  Next quarter, repeat.  And repeat.

The often contrarian Michael Schrage combines diagnosis and prescription in analyzing this long-running mutual consternation society:  "Dude, stop selling 'buy-in!'  Salesmanship is not your friend."

But without buy-in, where are we?  Aren't we still staring at a landscape of still-born tech initiatives?  Actually, there is an alternative.   CIO's (and their departments) need to stop thinking of themselves as "leaders" [stay with me on this one, folks] and become "enablers:"

"In other words, IT shouldn't be a change or transformation leader; it should be a change or transformation enabler. What's the essential difference? For the purpose of this column, leaders are those individuals most responsible and accountable for setting the right objectives and ensuring the right results. Enablers, by contrast, are those individuals most responsible and accountable for providing leaders with the tools, techniques and technologies for achieving those objectives and results. Enablers make effective leadership practical and probable."

The gem of wisdom at the core of this is simple:  It requires executive management to take control of, and responsibility for, digital initiatives—it requires them to be imaginative and creative about the uses of IT.  In other words, they sell themselves.

Clifford Chance Returning to its Lockstep Roots

Cue the applause, please:  Albeit somewhat cryptic, this strongly suggests Clifford Chance is making a concerted effort to return to something much closer to its traditional lockstep partner compensation model.  

Called "actively managed" lockstep, the new model will apparently tighten both the criteria for admission to partnership and subsequent performance appraisals.  In a striking nod to recognizing the wide disparities in profitability that can arise across jurisdictions—through neither fault nor virtue of the partners affected—Clifford Chance will also expand the range from highest-compensated to least-compensated from its current 2.5:1 to 6.5:1.

One unidentified CC partner reportedly said, "We still want to be a lockstep firm and this is all about preserving that lockstep."  Five years after the Rogers & Wells detour, it's about time.

Getting Dressed for the Prom

While I've never been to a psychic or a tarot reader, or consulted my horoscope except when presented with the most utterly content-free tabloid, I'm about to make a prediction:  Coudert Brothers is grooming itself for a merger by shedding its less desirable offices.  Today it was the German office, and yesterday it was San Francisco.

What they will not shed are the jewels of their Asian network, or the indispensable New York base.  Short of that, there may be more to follow. 

A first on "Adam Smith, Esq.," then, a prediction of a future fact (as opposed to a description of a future trend or general state of affairs)—and if I'm wrong, the last such prediction, at least for awhile.

Who You Know or What You Know: How About Both?

"It's not what you know, it's who you know?" 

Agree or disagree, but there's no doubt a key capability of a law firm's KM initiative—assuming you actually want your attorneys to use it—is some capability for finding the apposite expert who can help.  I've called this the "Ask Sally" moment, as in, "Ask Sally; she'll know."

Within a law firm, a simple exercise in "Social Network Analysis" (SNA) can map who really is talking with who, and the results often surprise a firm, for better and worse.  A very common experience, for example, is to find a few very highly connected individuals appearing as hubs of knowledge exchange:  The problem is that many of those networkers extraordinaire are actually bottlenecks, suffering overload, as the sheer volume of incoming (and they're usually incoming) requests for assistance impairs their ability to get their own work done with a modicum of productivity.   Unless you try SNA, you may never know.

I've discussed SNA before, but now CIO magazine has nice story including a sidebar about how Orrick is playing with it.   Can you say, "timely?:"

"[T]he corporate world has been waking up to the uses for this once arcane social science. Some of the interest stems from disappointment with efforts to build knowledge management databases that were largely ignored by employees. "We're seeing that companies want to have a picture of who the key knowledge brokers are in their organization," says [Prof. Rob Cross, of UVA's McIntire business school]. "The rise of blogs, online support sites and social networking sites—such as Friendster and LinkedIn—have also helped raise SNA's profile."

I've been reading Prof. Cross's 2004 book, The Hidden Power of Social Networks, as he seems to be the go-to guy for SNA.  Look for a review in the near future.

Non-Lawyer Partners Post-Clementi

The first post-Clementi shoe is about to drop in the UK, and it's a fascinating one indeed.  [For those of you who haven't been paying attention, the "Clementi Commission" proposed fundamental reforms of the way UK law firms are governed, essentially all of which have been adopted and are or soon will be effective.  Among the eye-openers in the lot were permitting non-lawyers to be equity owners of firms, which is the peg for today's post.]

Check this out:

Likelihood of different practice managers being admitted to the partnership

	Likely	Not likely	Already a partner	Do not have one
Finance	100	0	0	0
Marketing/business development	82	12	3	3
HR	82	18	0	0
IT	67	33	0	0

Source: Wheeler Associates/McCallum Layton

Such are the results of a survey of 51 managing partners from the top 100 UK and Welsh firms (Scottish firms are exempt from Clementi).   Will this finally begin to break down the caste-iron (sorry, couldn't resist) barrier between lawyers and "mere" business managers?  One can hope.

Of course, I am a lawyer so this should make no difference to my personal estate:   Were I not, however, I'd be researching the London housing market.

KM, Meet "Peer Production"

Just why is that "doing" Knowledge Management at law firms seems so hard?  Is KM itself simply an ineffable concept, meaning that virtually no two people agree on what it means?  (And that, when they then try to go about it, the results are what you'd expect, as if every building subcontractor on a construction site were looking at a different set of plans.)

Is it just that lawyers don't "share nicely" together (with the implication that they never will)?  Or is it merely a matter of getting the incentive structure right, implying that heretofore we've relied on weak and indirect incentives such as exhortation from above?

McKinsey, as befits them, has written a piece more or less asserting that if we only wrap a classic marketplace structure around knowledge management, our problems will be solved:

"[The most talented employees] will be unlikely to exchange their knowledge without a fair return for the time and energy they expend in putting it into a form in which it can be exchanged. [...]

"In short, effectively exchanging knowledge on a company-wide basis is much less a technological problem than an organizational one: encouraging people who do not know each other to work together for their mutual self-interest.  There is, of course, a well-known, well-tested solution to making it possible to exchange items of value among parties who don't know each other.  We call it a market."

This may come as a surprise to you, but I am of the increasingly firm view that this is wrong:  Paying colleagues within a firm (explicitly, in dollars and cents) for their know-how will prove not only ineffectual but divisive.

To be sure, McKinsey gets much of their discussion of KM right, starting right off the bat with their recognition that both "Build it--they will use it" and "Take it from the top" approaches will end in grief and disappointment.  They write that the approach of letting "a thousand Web sites bloom" is the best alternative so far, but still not good enough across a "global" organization because disparate "standards and protocols" will make information generated by specialists in one sub-practice group inaccessible elsewhere.   I can only scratch my head:    One wonders if the author never heard of blogs—inexcusable, if so, as the piece was written in the third quarter of last year.

Instead of neoclassical market models of motivation, I'd like to introduce you to the concept of "peer production," a shorthand coined by Yochai Benkler, a professor at Yale Law.  In an interview running as a sidebar to the cover story in this week's Business Week, Benkler explains the notion in a nutshell: 

"[Benkler,] who studies the economics of networks, thinks such online cooperation is spurring a new mode of production beyond the two classic pillars of economics, the firm and the market.

"Peer production," as he calls work such as open-source software, file-sharing, and Amazon.com Inc.'s millions of customer product reviews, creates value with neither conventional corporate oversight nor market incentives such as payment. "The economic role of social behavior is increasing," he says. "Things that would normally just dissipate in the air as social gestures become economic products." Indeed, peer production represents a sea change in the economy -- at least when it comes to the information products, services, and content that increasingly drive economic growth."

This is a large claim indeed, so let's unpack it a bit.

The most thorough introduction to the notion of "peer production" comes, surprise, in a paper by Benkler himself, "Coase's Penguin, or Linux and the Nature of the Firm," blessedly available online.  The guts of the Abstract (emphasis supplied) read:

"I suggest that [what] we are seeing is the broad and deep emergence of a new, third mode of production in the digitally networked environment. I call this mode "commons-based peer-production," to distinguish it from the property- and contract-based models of firms and markets. Its central characteristic is that groups of individuals successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals, rather than either market prices or managerial commands.

"The paper also explains why this mode has systematic advantages over markets and managerial hierarchies when the object of production is information or culture, and where the capital investment necessary for production-computers and communications capabilities is widely distributed instead of concentrated. In particular, this mode of production is better than firms and markets for two reasons. First, it is better at identifying and assigning human capital to information and cultural production processes. In this regard, peer-production has an advantage in what I call "information opportunity cost." That is, it loses less information about who the best person for a given job might be than do either of the other two organizational modes."

(The title is something of an in-joke premised on my candidate for the single most influential economic paper of all time, written by Nobel laureate Ronald Coase, his 1937 essay "The Nature of the Firm," clocking in at all of 14 pages written in pellucid English—need I add I commend it to you?.) 

Back to KM in a law firm. 

The incentive for lawyers to put their expertise on display?  Not "market prices or managerial commands," but "a diverse cluster of motivational drives and social signals."  Precisely. 

And the single biggest "instant win" a KM system can provide?  Identifying "who the best person for a given job might be." 

How do we, then, actually get it done?  The foundational building-blocks of such "peer production" today are the emerging generation of Net technologies including file-sharing, blogs, wikis, and social networking sites such as Tribe or Meetup Inc.    Tim O'Reilly, the famous tech book publisher, characterizes the common theme of these tools with a felicitous phrase:  They share "an architecture of participation."

So:  Motivated professionals responding to social signals adopt tools designed to facilitate participation, and "peer production" takes over from there.  Will there actually come a day when the economist's arsenal of explanatory models puts that concept on a peer with the centuries-old pillars of The Firm and The Market?   Read Benkler.  I'm finding myself persuaded.

Fail to Align Profit Expectations at Your Peril

I wrote a few days ago about "the cautionary tale of Coudert," but with more background emerging from Legal Week's excellent coverage, some additional insight into the firm's truly alarming predicament is possible.

Let me preface all I'm about to say by repeating that I have good friends at the firm (albeit no inside information), and that it thus pains me to dwell on what by any lights is now a firm in distress.  But I'm a big believer in the value of "lessons learned," and hope that some beneficial ones might be extracted even now, before the next chapter on Coudert is written.

Tim Newbold, the Legal Week reporter, sets the proper overall tone when he concludes:  "Coudert’s current predicament is particularly poignant given the fact that it did so much to blaze the [international] trail."  That predicament dates to Coudert's expansion efforts on continental Europe in the 1990's. 

What went wrong?  Fundamentally—and we have seen this happen before—both the profit capability, and the expectations, of its US and European practices began to diverge, now with potentially lethal results.  While the US chafed at Europe's lower profits dragging down the mean, Europe's view was that the US had reneged on promises of investment, which would have brought them up to par.  It matters not who was right; what does matter is it went unresolved.

Now, as a strategic matter, the firm faces a difficult cross-roads.  It's safe to say most analysts view a merger as ultimately the best, or only, salvation for Coudert, but at the moment they're in a defensive, underperforming crouch:   Not the stance from which to execute a merger-from-strength.   If a merger is to be more than a distress sale, Coudert needs to take the time to restore its attractiveness—by, I would recommend, focusing on its strong Asian network and the indispensable New York office.  But time is a luxury they may not have a lot of. 

In short, they need to merge because they're weakened, but because they're weakened merger prospects are unattractive.  My choice?  Go for broke (perhaps literally) and try to rebuild on your own.

As I said, there is no schadenfreude for me in this sad tale.  But there is at least one key lesson:  When it comes to reconciling different profit expectations, you cannot survive half-pregnant.  Make a choice; bite the bullet; become, perhaps, a different firm.  But a healthy one.

"Managing Partner Magazine" Anybody Know This Pub?

"Managing Partner Magazine?"  Calling all readers who may be familiar with this publication, which I have seen occasionally but perhaps not often enough, or not enough of—primarily because their website appears to hide all the good stuff. 

But past the spam filter arrived this afternoon a promotion to subscribe (reproduced verbatim in the extended portion of this post).  Any advice from any of you who know the publication?  Worth it?  Too pricey?  On a scale of 1 to 10, it's a [_____]?  As always, bruce at adamsmithesq dot com is happy to hear from you.

From: dsmallwood [dsmallwood@ark-group.com]
Sent: Thursday, June 9, 2005 2:10 PM
To: bmacewen@nyc.rr.com
Subject: Important Changes to Managing Partner Magazine