Announcing "BlawgWorld 2006: Capital of Ideas"

With pride I would like to announce the release this morning of "BlawgWorld 2006," the first in what is promised to be an annual series of "e-books" comprising the best of the blawgosphere, brought to you by our friends at TechnoLawyer.  In their own words:

"According to various studies, approximately 80,000 new blogs launch every day, including dozens of legal blogs (blawgs). No one knows how many blawgs exist, but whatever the number, monitoring them would amount to a full-time job.

"For this reason, we've published BlawgWorld 2006: Capital of Big Ideas, a TechnoLawyer eBook designed to take you on a journey through 51 of the most influential blawgs.

"You cannot buy a copy of BlawgWorld 2006. It's free, but available exclusively to TechnoLawyer members. To receive your free copy, please use the form on this page."

The inaugural issue contains "best of" posts from 51 separate blawgs, and I am honored that the "sampler" from "Adam Smith, Esq." was chosen as the illustrative post featured on the BlawgWorld 2006 home page.

I encourage you all to take a look; clearly a lot of hard work has gone into this endeavor.  And in the true original spirit of the 'Net, it is, I repeat, completely free.

Unfortunately, I cannot offer all of you the free drinks I and other contributors will be enjoying tonight courtesy of TechnoLawyer to celebrate the launch of BlawgWorld 2006.  But if you're ever looking for a snappy bar in Tribeca, check out "Brandy Library," where we'll be congregating tonight.

Drucker on Feeding Problems & Starving Opportunities

Can you stand another dose of Peter Drucker?  I just about always can, and in The Wall Street Journal's feature, the legacy of Drucker (in his own words), they feature this gem dating from its pages in 1993:  "The Five Deadly Sins of Management."  (The highlighting in the article is mine.) To wit:

• Pursuing maximum profits by premium pricing:  This was almost the downfall of Xerox, and of GM (more than once)
• Pricing a new product at "what the market will bear"—rather than at a more modest price designed to maximize the size of the market and erect a barrier to rapid entry by competitors.  This "creates risk-free opportunity for the competition," and is how the unnamed US company that invented the fax machine bumbled, letting the Japanese price their machines 40% lower and capture, in very short order, 99.9% of the market.
• "Cost-driven pricing" rather than "price-driven costing."  This is the reason there is no American consumer-electronics industry and why there may be no German luxury-car industry if Toyota (Lexus), Honda (Acura), and Nissan (Infiniti) stay the course.  [Can you say "billable hour?"—anyone?] 
• "Slaughtering tomorrow's opportunity on the altar of yesterday."  Did you know that IBM PC salespeople were forbidden (that's worth saying again, forbidden) from calling on mainframe clients?  Not only did this not help the mainframe business, it kneecapped IBM's PC business—while broadcasting the message, "Send In the Clones" and ultimately of course it helped leave IBM with no PC division at all today.   And finally, my favorite:
• "Feeding problems and starving opportunities."  What on earth can Drucker mean by this?  What manager in his right mind...[sputter, sputter]?  But ask yourself Drucker's question:  "What are your top-performing people assigned to?"  And how often will the answer be:  To our problems.   As for opportunities, "they are left to fend for themselves."

Focus particularly on the fifth.  At the risk of stating the obvious (and even Drucker insists that "everything I have been saying in this article has been known for generations"), the best your firm can achieve by solving problems is containing damage.  Only in opportunities is there promise of growth and new energy.  And don't they deserve your best people?

 

Michael Lewis Explains It All

And now a moment to reflect—with sincere earnestness—on  what makes it all worthwhile.  

The text for this post comes, coincidentally, from an interview with Michael Lewis (an author so talented that, as they say, his shopping list makes gripping reading), who Bill Henderson and I just discussed last week. 

Lewis's first book, "Liar's Poker" (see the interview for dust-jacket images and Amazon links) covered Salomon Brothers at its apogee as bond-trading leviathan (the era, in the caustically incorrect phrase, of "big swinging d***'s");  his second, "The New New Thing," Jim Clark and Netscape at its apogee; and his third of course was "Moneyball" profiling Billy Beane, the nonconformist general manager of the Oakland Athletics who discarded the received wisdom of baseball scouting tradition and instead embraced a statistical, quantitatively-driven analysis of players that produced championship teams with rock-bottom payrolls. 

The natural question that occurs is, of course, why Lewis chose these three so disparate topics; what on earth do they have in common that tantalized him?  Here's Lewis' explanation (emphasis supplied):

ML: The only necessary ingredient for a book to work is for me to feel passionate about the material. I have to feel so enthusiastic about it that I can persuade others to feel the same. As a magazine writer, I get paid to dip my toe into new waters. So, for every book I write, I seriously consider as many as nine other options. The books are the subjects that truly hold my interest.

[Interviewer]: So you've written about bond trading, the internet, sports. Across those, what common trait makes people successful? More importantly, what makes them happy?

ML: These industries all employ high price people. They are talent with a "capital T". Every manager will tell you their most important assets walk out the door every night.

While there's no definitive answer, there's one trait that goes under-mentioned...a capacity for wonder and interest. You look at Jim Merriweather at Solomon, Jim Clark in Silicon Valley, or Billy Beane in baseball. Their great successes began with curiosity and openness. You may know everything, but it's what you learn after you know everything that's most important.

As for happiness, it comes from thinking your job has a purpose. The scarcest resource in the world is purpose. People who have purpose, other than money or social position, tend to be much happier.

Lewis has said it all, hasn't he?  About why we get up in the morning with energy and passion, why we've chosen the paths we have, why we inhabit the professional and personal ecosystems we do. 

Or, as Buddha allegedly said:  “Your work is to discover your work and then with all your heart put yourself to it.”

For those of you who may not have "discovered" your work yet, all I can say from across the perspective-chasm of one who has is, "Keep seeking."  There is no higher reward than finding it; and your heart will then need not be "put to it," but will race to pursue it.

A Little Humor Never Hurts

And I quote from today's "BlawgReview #34" hosted by Douglas Sorocco of PHOSITA fame ("phosita" stands for "persons having ordinary skill in the art," which in turn is part of the standard for granting or denying a patent—the subject invention must be "nonobvious" to the hypothetical PHOSITA):

"I really feel bad about putting the Adam Smith, Esq. blog in the ‘terrorism-like’ section, but since I am a small firm kinda guy, anything that has to do with the AmLaw 100 and especially about the fact that “two tier” partnership firms have lower profits per partner is automatically a “terrorism-like” subject. Sorry, Bruce!"

Hey, Doug, it's OK:  I consider this a distinguished first for "Adam Smith, Esq."

And it contains a seed of wisdom:   For all the rigor, seriousness, and energy with which I pursue analyzing the strategy and behavior of "BigLaw," it never hurts to be reminded to bring your sense of humor to the table.

Going Two-Tier: Will the Real Rationale Please Stand Up?

In the continuing—and to-be-continued for quite some time, judging by the rate comments are com ing in—discussion about the virtues and vices of firms switching to a two-tier partnership model, here's one more data point.  The results of the poll I launched about 10 days ago:

Here's what we see:  The most popular response, by a reasonable margin, was "to retain valuable associates we would otherwise have had to lose."  Second to that is an arguably related purpose, "to provide a period to additionally evaluate people."   These two together captured 58% of all votes, whereas "to increase profits per partner" received only 13%, and actually tied with "to provide an alternative 'lifestyle' career track."

Now, the question is whether we're witnessing revisionist history in action, or whether our respondents are being perfectly candid and all the posturing by the consulting industry about how going two-tier would boost PPP was smoke and mirrors:  Smoke and mirrors, I might add, which our readers saw right through if these responses are accurate about firms' actual motivations at the time of the switch.

Option A:  Revisionist History.  This would posit that the popularity of the rationale "to increase PPP" at the time of switching to two-tier status was real.  But now that we know that such a switch, in and of itself, does no such thing, rather than eat crow people are simply positing that different factors were at work. 

Option B:  People Are Truthful.  This would posit that the readers of "Adam Smith, Esq." are responding accurately to the poll and that boosting PPP as a rationale was, at the very least, grossly oversold by the consultants.  Firms that switched did so primarily for the utterly defensible and arguably humane reason of providing a way to "keep valued associates."

I lean rather strongly towards Option B.  Not only do I have a pronounced preference for believing the "Adam Smith, Esq." community is by default truthful, I also, following Occam's Razor, prefer the simpler to the more baroque explanation.

So what does this tell us?  By and large, it supports Prof. Bill Henderson's theory that one primary reason firms shifted to two-tier status was to keep rainmakers happy (and on-board) by concentrating voting and economic power in the partnership in their hands, while also retaining enough competent, senior-level lawyers to actually get the firm's work done.  The motivation for the shift, in other words, was more qualitative than quantitative.

That is to say, two-tier firms enjoy the ability to offer productive, profitable senior attorneys a career track that may constitute a long-run stable equilibrium choice both for those lawyers and the firms.  In a single-tier firm, those same lawyers (who by hypothesis are not rainmakers) would be shown the door.

 

SUNY/Stony Brook's "Executive MBA for Law Firm Leaders"

I am delighted to be able to break the news to readers of "Adam Smith, Esq." that SUNY/Stony Brook will be offering a first-of-its-kind Executive MBA for Law Firm Leaders, with courses commencing  this coming April, 2006 for the first class of 25.  What's this about?  Here's the premise, as articulated by William Turner, Dean of the College of Business: 

"New York is the law firm capital of the United States. Eighty four of the nations 100 largest law firms have offices in New York City.

"As their work forces and revenues grow, law firms are revising the way they run their businesses. Management structures are becoming more centralized, specialized, and sophisticated.  [...]

"There is a growing recognition that traditional management principles may not always apply in a law firm setting. But until now, business schools have not addressed the skills and organizational challenges necessary for managers to be successful in this unique setting."

The Executive MBA program will be limited to an initial incoming class of 25 students, each of whom must be sponsored by the law firm they work for (which must also agree to pay the full tuition for the program).  It consists of:

• 11 required "core" courses in areas such as leadership, communications and organizational behavior, finance, human resources, managerial economics, marketing, operations management, technology & innovation, and strategy.

• With additional coursework and terms-in-residence (in London) permitting elective concentrations in business management, human resources, marketing, or technology.
• The program extends for the usual two full years of an MBA degree, from April 2006 through March 2008.
• Classes are held for four-hour periods on Friday afternoons and Saturday mornings at SUNY/Stony Brook's Manhattan facility on Park Avenue South at 28th Street.

Some of the faculty include people you have decidedly heard of, including:

• David Barnard, former managing partner of Linklaters North America
• J. Speed Carroll, formerly worldiwde managing partner of Cleary-Gottlieb
• Chris Conroy, director of finance at Simpson-Thacher for 21 years
• Gary Fiebert, executive director of Schulte Roth & Zabel
• Art Gurwitz, executive director of Proskauer (and formerly of Sulivan & Cromwell)
• Jim Lantonio, executive director of Milbank (and formerly at Sidley-Austin and Covington & Burling)
• and others of their caliber.

The Advisory Board is equally distinguished (Rodgin Cohen of Sullivan & Cromwell), M. Frederic (Rick) Evans of Debevoise, Mel Immergut of Milbank, Valerie Jacob of Fried-Frank, Robert Link of Cadwalader, Daniel Neff of Wachtell, Barry Ostrager of Simpson-Thacher, William Perlstein of Wilmer-Hale, and Earle Yaffa of Skadden, just to name a few).

Why is this so exciting?

• It's timely.
• It's in the best possible (US) city for a ground-breaking program such as this.
• Whereas individual law firms have struck deals with business schools before to offer truncated executive education programs (Reed Smith with Wharton, DLA Piper with Harvard, as previously noted here), this is the first time a business school has recognized the need and formalized a law-firm-centric Executive MBA track.

And—saving my favorite for last—I am pleased, flattered, and humbled to report that I have been asked, and have agreed with alacrity, to teach the core course in "Technology & Innovative Practices."   Readers of "Adam Smith, Esq." will, I promise, get regular updates as the program launches, and as my participation evolves.

In the meantime, all you CIO's and CTO's out there:  What do you consider required reading for someone in your position?  Let's start compiling the syllabus together.

 

Happy Thanksgiving

...From the Upper West Side.  (The night-before balloon-inflating beats the parade itself, for our money.)

 

Two-Tiers Increase PPP? A "Moneyball" Analogy from Prof. Henderson

I had an interesting conversation with Prof. Bill Henderson, who recently authored an empirical study of single-tier versus two-tier partnerships in the AmLaw 200.   I summarized his presentation in an earlier post.  Essentially, Bill's paper found that:

• two-tier firms experienced lower profits per partner than single-tier firms, adjusting for all pertinent variables, in all market segments;
• two-tier firms nevertheless had higher leverage; and
• two-tier firms were less "prestigious" (based on Vault surveys) than single-tier.

Bill is willing (indeed, eager, to hear him tell it) to have the thrust of his paper scrutinized by AmLaw 200 lawyers.  Yet, Bill reports that many of the skeptical comments he's received from lawyers are at odds with what the data actually shows. 

This is where it gets interesting:  “To what extent,” Bill asked me, “Is my interpretation of this data a law firm analogue to Moneyball?”

For those of you who don’t follow baseball (which I don't, really, until September), or who don't follow the writings of Michael Lewis (which I do, passionately), Moneyball is the title of a renowned book by Michael Lewis that chronicled how Billy Beane, the general manager of the Oakland Athletics, used detailed statistical analysis to identify inefficiencies in the market for baseball talent.   Specifically, Moneyball elaborates on how Beane decided that certain factors major league teams typically paid very very good money for, based on scouting reports and other traditional information sources, were simply not cost-justified based on how players with those attributes performed.

In other words, Beane identified a disconnect between the conventional wisdom and what the statistics on player performance actually showed.  As a result, he was able to assemble consistently winning Oakland A's teams for years on a relative shoestring budget.

Beane's reward?  Scouts, other team managers, the baseball press, and other baseball insiders sneered at Beane’s numbers-driven approach even after the A’s fielded a championship caliber team on one-third the budget of their large market rivals.  (Lewis discusses the Billy Beane story in this excellent NPR interview.)  The scouts et al. couldn't contradict Beane's data (baseball, as we know, is as data-intensive a sport as there is); they could just denigrate his approach, without offering an alternative approach of their own consistent with the same data.

The advantage of statistical modeling (a technique that is utterly mainstream in finance and biomedicine) is that we can go beyond well-reasoned theories—the lawyer’s greatest strength—into the realm of falsifiable hypothesis.

Here is a simple example.  Bill asks, “What are the determinants of a firm having one versus two or more partnership tracks?”  Using multivariate regression to predict the tier structure, Bill includes four variables (i.e., possible determinants) in his model:

1. Percentage of lawyers in New York .  Single-tier status may be influenced by cultural factors that are more common in New York. After all, New York still has a disproportionately large concentration of single-tier firms.
2. Firm size.  As a firm gets bigger, a two-tier structure can improve the monitoring of nonequity partners and reduce admission mistakes into the equity tier.
3. Profitability.  Lower PPP presumably puts pressure on the firm to limit the number of equity partners, thus necessitating a non-equity track.
4. Prestige.  Firms with lower indices of prestige have a harder time (a) attracting clients based on firm reputation, (b) and recruiting capable associates and laterals. A nonequity tier can thus reduce harmful attrition and consolidate the power of rainmakers—who might otherwise leave the firm.

Remarkably, prestige, as measure by the Vault rankings, was the only variable that emerged as a statistically significant predictor of tier structure (and it is highly statistically significant—less than a 1 in 20,000 chance that the pattern occurred by random chance).  The other three theories had NO empirical support.

So are most lawyers like the disbelieving scouts in Moneyball?  In the Adam Smith poll on switching to two-tiers, the most common reason for switching to two-tiers is “To retain valuable associates we would otherwise have had to lose.” 

But what’s driving this perception?  Prestigious single-tier firms, like Cravath or Sullivan & Cromwell or Covington & Burling, are—to judge by their behavior—unconcerned about this cost.  To the contrary!  Another of Bill's findings is that, at a very high level of statistical significance, every rating of "associate satisfaction" (likelihood of staying two years, "family friendliness" of the firm, transparency of firm finances, communications with partners, straight talk about career prospects) is strongly negatively correlated with profits per partner. 

Or, as one of my correspondents succinctly put it:  "The more I'd like to be partner at firm X, the less I could stand being an associate there."  Precisely.

So why does any associate put up with this?  In hopes of winning the partnership "tournament" in a very prestigious firm.  In contrast, a less prestigious firm may need a non-equity tier to mitigate harmful attrition.  The non-equity tier provides more of a "lifestyle" choice to associates who would wash out of single-tier firms on quality or productivity grounds, or who simply don't have the client-development skills needed in any AmLaw 200 firm.  Why don't firms solve the attrition problem simply by promoting all excellent technicians to equity partner?  Obviously, because that would upset the firm’s financial ratios and impair the loyalty of its rainmakers. 

Citing these dynamics, Bill claims that non-prestigious single-tier firms are “inherently unstable,” and thus Bill believes that his theory explains the massive migration to the two-tier format over the last two decades.  (In 1985, essentially the entire AmLaw 100 was single-tier; today, 80% of the [expanded] AmLaw 200 is two-tier.)

So we return to the Moneyball question:  If you agree with Bill's theory, let me know.  If you disagree, also let me know—but tell me what your alternative theory is for the two-tier migration, and, most importantly, make it comport with the existing data. Professor Henderson is more than willing to test any alternatives.

 

Rent, Buy, or ....?

For inhouse legal departments and general counsel, the primary and eternal question is whether to rent or buy:  That is, whether to hire outside counsel for matter X (renting) or whether to staff up internally (buying).

Having supervised the annual budgeting process for a large (250 staffers) inhouse legal department, I can tell you that the financial side of the company will be allergic to increasing "fixed" costs (hiring/buying), but far less hostile to increasing "variable" costs (renting/going outside), even if the year-after-year level of those "variable" costs is utterly predictable—making them, to my mind, "variable" only in the most Pecksneffian of senses.

How about a third alternative?  That's precisely what the global investment bank ABN Amro has found, in league with Clifford Chance.  ABN Amro has engaged Clifford Chance (at its New York, London, and Hong Kong offices) to train inhouse ABN Amro lawyers in derivatives—a red-hot practice area where experts are hard to find.  Consider the consequences:

• In-house lawyers, notoriously promotion-challenged, will potentially gain new career opportunities.
• Does Clifford Chance sacrifice the opportunity to do derivatives work ABN Amro will soon be able to handle internally?  Perhaps, but only at the thinnest of the margin—and do they create in the process a firmer-than-ever bond with ABN Amro?  If I ran Clifford Chance's derivatives practice, I'd jump at this.
• Why haven't other inhouse departments pursued such initiatives?  Chalk it up to a failure of imagination.

So consider not-renting and not-buying:  Teach, instead.

Even the normally tart and acerbic Catrin Griffiths seems to approve.

Can You Still Survive Without a Corporate Managerial Approach?

Justin North of Baker Robbins & Co. reports at Legal Week the results of an informal survey of CIO's at major law firms asking them to assess what had changed over the past five years and what new developments would dominate the next five.  The firm consensus is that CIO's must view themselves as—and be viewed by their colleagues in senior firm management as—true strategic partners.

How long did you think it would be before you ever saw an observation (emphasis supplied) like this?:

Chris White, director of information technology at Ashurst ... suggests that any successful manager within a legal environment must realise that law firms have evolved into large-scale global businesses and, as a result, have positioned themselves in the last five years to be managed as such.

"They can no longer survive without using corporate styles of management," he says.

Evidence for this is in the CIOs' pedigrees:  A majority of CIO's at the UK's top ten firms arrived as "law firm virgins" from careers at the executive level in corporations. 

And, vs. five years ago, their job responsibility is no longer "fire-fighting" since baseline legal technology (e.g., document management and financial reporting) is increasingly commoditized and standardized. This frees them to be think strategically about using IT to competitively differentiate their firms.

The bottom line?

"A true professional CIO is first and foremost a senior business leader, who simply happens to be in charge of technology, rather than a technology leader in charge of a business unit."

True of your firm?  If  not now, when?

Starting Salaries and the JD/MBA "Substitution Effect," Revisited

With the news that Sullivan & Cromwell evidently plans not to boost associate bonuses (or salaries) this year, together with some insightful reader commentary on my earlier post about starting salaries, it's time to revisit the topic.

One train of comment suggested that, rather than bumping up associate compensation across the board—and especially rather than bumping it up for first-year's—that firms give raises to classes in their fourth, fifth, and sixth years, when associates are becoming truly productive and profitable.  Mitigate the "salary compression," in other words, that affects the middle associate classes.

Truth be told, I have often scratched my head at why firms aren't already doing precisely this.  Certainly if one believes that an element (not the only one, of course) of compensation should be attributable to one's economic contribution to a firm, this makes self-evident sense.  Young associates are, by and large, money-losers; mid-levels are money-makers.   So why the "compression" our commenter complains about?  My hunch—and if anyone has a better idea, please chime in—is that law firms live with the compression "because they can." 

In other words, they simply do not have to pay mid-level associates any more than they already do.  Those associates have no more-lucrative alternatives (certainly going in-house, except in the most extraordinary dot-com startup spike, will not entail a raise).  Furthermore, the firms have good reason to want senior associates to enjoy a very very material spike in income if they make partner—otherwise, why beat your brains out for eight or nine years?  This in turn puts some soft upper limit on what you can pay the eight- and nine-years, which of course has (negative) trickle-down effects on years four through six.   Assume the "final year" associates (at least the ones the firm wants to keep!) are paid, all in, something approaching $300,000, firms probably want to pay brand-new junior partners at least 150% of that.  If this is seat-of-the-pants right, final year associate pay can't go too much higher in the short run.  QED:  Compression.

Another line of commentary tracked my supposition that some non-trivial proportion of law school candidates had a viable option in pursuing an MBA instead.

By and large, people took mild to strenuous issue with this.

I will start with a personal confession:  I chose law school over business school not because my lifelong aspiration was to practice law for 40 years, but precisely because I fully expected to end up in a business-centric role—and I thought the law degree would be a more rigorous exercise in learning sheer analytic thinking than the MBA.  Now, with both the law degree and 98% of an MBA from NYU (the night program), I can report from my own experience that seems to be the case.  (No offense, MBA's!  Your toolkit is simply different, and largely appropriate to its ends.)

So I am probably at the extreme end of the bell-curve in viewing JD's and MBA's as potential substitutes for one another.

But readers took the time to correct my assumption that most other 24-year-old's would feel the same way I did then.  One pointedly observed that many law students "couldn't hack" the more quantitative MBA programs such as Chicago's or Wharton's.  Others simply took the not-irrational position that people don't choose a graduate degree based on the debt load and starting salary they will have at the other end, but because they want to be a lawyer or businessperson.  Fair enough.

Finally, my friend Ron Friedman wrote to speculate about the relative number of $125,000/year jobs available for starting associates vs. the number of $150,000/year starting jobs at McKinsey, Goldman-Sachs, and their ilk; Ron's intuition was that there are far more of the former.

My intuition is the same.  I would hazard a guess that there aren't more than a few hundred $150K jobs in the country for starting MBA's, but if you do some back-of-the-envelope calculations for NLJ 250 starting jobs, you get something as follows:

• According to this year's NLJ 250, there were 58,805 associates in NLJ firms.
• Let's assume (this is a big assumption) the average tenure of an associate in an NLJ 250 firm is eight years—before they go inhouse, go to a non-NLJ 250 firm, or take up basketweaving.  (I include in this average people who make partner and stay 40 years.)
• This would imply the NLJ 250 need to hire about (58,805 / 8) = 7,250 associates each year.
• Finally, assume 75% of the NLJ 250 pay the $125,000/year "going rate" for first-year's.

So as a very rough approximation, there are (75% x 7,250) = 5,500 such jobs each year.  Surely this is an order of magnitude greater than the number of $150,000/year starting MBA jobs.

Ron and I also speculated on something even more hypothetical:  Law firms currently use law school prestige and class rank as proxies to measure starting-associate "quality."  But of course crummy lawyers come from top-flight schools just as great lawyers come from mediocre schools.  Doesn't this imply there's an opportunity for (NLJ 250) law firms to expand the talent pool from which they draw by dipping deeper into the school/class rankings, paying such hires less than the creme de la creme, and spending more in turn on professional development and tracking?

To pose the question is to answer it:  Of course firms could do this.

Will they?  In Ron's or my lifetime?  Not a chance.

Two-Tier Partnerships: Vote on Why

All of you in two-tier partnership firms:  Remember to vote in the survey about why your firm moved to the two-tier model.  Results in a week or so, and thanks in advance.

Superstars, or How Terrell Owens is Like a Junk Bond

We've all met the "800 pound gorilla" rainmakers who are narcissistic, obnoxious, disruptive (even vicious)—and absolutely brilliant at what they do.   Is mute toleration the only recourse?

Our friends at Wharton suggest firms need to draw the line between behavior that is merely self-absorbed, rude, and off-putting, versus conduct that flouts the organization's values and is actually corrupting.  Why draw the line here?  Shouldn't high performance excuse, if not exactly redeem, virtually any lawful behavior?

The problem arises when tolerance of the super-star's holding himself above the rules (it's invariably a "him," isn't it?) clashes with the firm's statements of noble purpose, fairness, and respect for all.   Essentially, tolerating someone (especially a "star"!) who runs roughshod over the firm's protestations of virtuous dealing with its professionals introduces the foul odor of hypocrisy.  Management looks two-faced and their credibility goes into negative territory.  People begin to view the firm as amoral; people are disillusioned; morale drops; performance (remember this was all about performance) suffers.

In other words, it's not just virtuous and ethical to draw the line; it's effective and profitable.

Of course, one never progresses in a day or a week from perfectly acceptable to out-of-control.  The problem is being keen enough to distinguish acceptable-but-crummy behavior that will not get worse from that that will escalate:

"Often the egregious act is a build up from a series of negative behaviors preceding it. [M]any organizations that have problems with stars could benefit from [efforts to] work things out before the behaviors reach a breaking point."

Precisely; and not to be melodramatic about it, but Enron, Tyco, and Worldcom also started out as small beer corner-cutters.

If your firm is serious about teamwork and collaboration, however, "making an example" of a star who has left the reservation may send one of the strongest messages possible.  Which brings us to Terrell Owens' unceremonious de facto departure from the Philadelphia Eagles.  If you talk about teamwork but shower boorish superstars with all the money and glory, you deserve the demoralization you will inspire.

The Optimal Partner Compensation System, Revisited

A recent poll/post about the "optimal" partner compensation system produced interesting—and very mixed, a/k/a divided—results, with the option "there's no such thing" coming in second overall.

Off-line, I had a subsequent conversation with a couple of partners in large firms here in New York about what my views are on the question, and it's worth a moment's elaboration.

Basically, if the question is what partner compensation system is optimal, my answer is:  "It depends."   What it depends upon is where the firm is in its lifecycle or what its strategic objectives are.  I view lockstep/eat-what-you-kill not as dichotomous opposites (though they surely can be, in the pure, extreme cases), but more as a continuum.  Being relatively nearer to or farther from each end encourages different kinds of behavior by partners.

In short, I think "EWYK" is probably where you want to be when the firm is young and growing, and/or when you're entering new markets (London, e.g., for a NYC-based firm).

Conversely, lockstep is right for mature, "climax stage" firms that own a niche and have no reason to make radical changes (the classic example is what I characterize as New York's "bulge bracket" firms such as Cahill-Gordon, Cleary-Gottlieb, Cravath, Davis-Polk, and Simpson-Thacher). 

One of the most "fabulous facts" about any law firm I know is that Davis-Polk has never seen a partner leave to become a partner at another law firm. Can you say "cohesive?"   The primary—but non-negotiable—caveat is that you cannot have a "tolerant" lockstep.  That way lies insanity, as shirkers will freeload and workers will resent it to the point of decamping elsewhere.

Most importantly, use the compensation system to shape the firm culture, rather than letting the firm's culture shape the compensation system. Remember who's driving the bus.

EWYK is good at:  Entrepreneurship (Greenberg Traurig is the poster child of this ethic); entering new markets or practice areas; growth for its own sake; and attracting gorilla laterals.

Lockstep is good at:  Maintaining mature and solid practices; promoting collegiality and collaboration; institutionalizing clients; and avoiding time-consuming and disruptive squabbles over things like origination credits:

If I had to pick one and only one system?

"Modified lockstep," meaning a base of 70-80% of compensation set by lockstep, with room for 20-30% in bonuses or demerits based on outstanding or subpar performance.  Sprinkle in some built-in recognition that some practice specialties are inherently more profitable than others, and that some places in the world are inherently costlier to live in than others.

And one more thing:    No formulas.  Please ensure the acid test, the ultimate determination, turns primarily on the gut feeling that, "Yeah, that sounds right to me."

Why Did You Go Two-Tier, Again?

A recent post that received a fair amount of attention (or notoriety, as you prefer) was that recapping a presentation by Prof. William Henderson of Indiana University School of Law/Bloomington about the relative profitability of firms that converted to two-tier (equity and non-equity) partnership models.

In short, the presentation asserted that, based on the weight of the empirical evidence, firms that had converted to two-tier status had lower profits per partner than single-tier firms, even correcting for market segment, etc.   Putting aside issues (many of which astute readers pointed out) such as the inability to conduct the counter-factual experiment of what would have happened to these firms had they not converted to two-tier (i.e., they might have performed even more poorly), the irony remains that the common wisdom of consultants recommending the conversions and of most firms adopting it was that going two-tier would increase PPP.  At the very least, it seems safe to say that that goal was not achieved.

So here's your opportunity—all of you in two-tier firms, that is—to chime in on why your firm become two-tier.   Rules of the poll:  You may only vote once, but you may select more than one reason for the conversion.

Results to be published in a week to ten days.

What was the primary reason your firm became a two-tier partnership?
	To increase profits per partner.
	To retain valuable associates we would otherwise have had to lose.
	To provide an alternative "lifestyle" career track for those who preferred it.
	To accomodate laterals and/or another firm we acquired.
	To provide a (limited duration) period to additionally evaluate people before up-or-out promotion to full equity status.
	Other.
Free polls from Pollhost.com

 

Posted by Bruce at 3:39 PM | Permalink | Printer-friendly version | Comments (0) | TrackBack

Starting Salary Straws in the Wind?

Quick quiz:   Q1:  If you made $125,000 in 2000, how much would you have to make in 2005 to have the same purchasing power (straight CPI adjustment per the Minneapolis Fed)?

A1:  $141,250.

Now add in this observation, from one of the leading law firm recruiters in London (in the context of an analysis of associate attrition rates at the UK's top 50 firms): 

"Candidates are calling the shots again," said [Joanne] Street [of Hays Legal]. "Law firms have to be very careful about looking after their associates because, as confidence in the market picks up, people will start moving around again."

One more data point: 

There is speculation that Cravath, Sullivan & Cromwell, et al., will be paying $30,000 year-end bonuses to first-year's.

Are we in, then for another "ratchet round" of starting salary boosts?   Arguing the case for:

• Just do the math per the Minneapolis Fed; we're overdue.
• As reported yesterday with the NLJ 250 total lawyer headcount at those firms is up 4.4% year over year, its best showing since 2000.  But last time I looked, the elite law schools (Harvard, Stanford, Yale, Columbia, etc.) haven't been boosting their graduate numbers at all.  Increased demand, meet stable supply.
• Starting MBA's from blue-chip schools going to the Goldman-Sachs' and McKinsey's of the world can pull down $150,000/year without blinking—and they only have two years of student loans to pay off, not three.  Smart 24-year-olds are going to figure out this arbitrage and stay away from law school unless something gives.

Arguing the case against:

• Firms have just now finally digested the financial hit they took (and the associate billable-hour expectations boost) imposed on them by the 2000 salary spike; they're too smart to put themselves back behind that same eight-ball again so fast.
• Variable costs (read: bonuses) are always and everywhere preferable to fixed costs (salaries).  So firms will proclaim they are holding the line on salaries while making the adjustment under the covers in bonuses.
• It's just plain irrational for all the name-brand firms to march in lockstep on starting salaries.  After all, what you can get for $125,000 in New York will only cost you $80,000 in San Diego (but it will cost you $123,000 in Hong Kong)—and in general associates' salaries have outpaced inflation over the long run.

Where do I come down on this?  With ambivalence.  Clearly the vast majority of very junior associates are money-losers for their firms, and starting them at (say) $140,000 would only make a bad situation worse.  On the other hand, those associates have options (business school, for one) and the firms do not (no MBA's need apply).  I predict a break in the logjam, accompanied by "Stop me before I kill again" protestations from senior partners. 

Extra-credit bonus quiz:  Q2:  If you made $15,000 in 1968 (the notorious Cravath Spike), how much would you have to make in 2000 to have the same purchasing power?

A2:  Only $74,250.

We have, in short, seen this film before.

Announcing The First Ever "Adam Smith, Esq." Podcast

Bloomberg Radio interviewed me live early yesterday afternoon in connection with the release of the 2005 National Law Journal 250 rankings—and specifically about the reasons behind the 4.4% jump in headcount (the largest year over year increase since 2001).

The interview is brief (less than four minutes), but for all of you whom I've never met, you get to hear me, as it were, in person.

"Client At The Core" by Bruce Marcus & August Aquila

Today I submitted the following book review to my friends at ALM Media. No telling if they'll publish it, but the loyal readers of Adam Smith, Esq. deserve a look no matter what

Full disclosure: I count Bruce Marcus a friend (although I have never met or spoken to August Aquila). Even if I'd never heard of Bruce, the book is still terrific.

---

Think that "marketing is just common sense?" Think again; it's both a discipline and an art. Aquila and Marcus will guide your hand at both.

This book is full of cogent, jargon-free, and street-smart things to say about what it's really like to try to market professional services. An unusual blend of clear and lucidly stated theory about marketing, and real-world insights into obstacles clients can pose—not to mention the high barrier of internal resistance that "professionals" instinctively erect when asked to be marketers—this book belongs on your desk if you're facing the complexities of marketing for a law firm in the 21^st Century.

A major theme of Client at the Core is that as a result of both the increasing importance of technology and the reaction to the corporate and accounting scandals of the past several years, the world lawyers face has changed and so has the way they must practice. Where once the profession was at the core of the practice, now the client is at the core of the practice. We have come a long way from the days of Oliver Wendell Holmes, who (apocryphally or otherwise) is reported to have said that “half the time, the best advice a lawyer can give is to tell his client he’s a damned fool.”

This “client-centric” orientation has both a positive side (delivering compelling value in clients’ eyes) and a negative side (accommodating the client as a default choice), which a clear-eyed law firm leader needs to constantly re-evaluate with discernment and sensitivity to striking the proper balance. The authors provide a roadmap.

Who are Aquila and Marcus?

Aquila was inducted into the Accounting Marketing Association’s Hall of Fame in 2003 and is a leading consultant on M&A and succession planning, primarily in the accounting industry.

Marcus is the author of more than a dozen books and hundreds of articles on marketing, and publishes the Marcus Letter on Professional Services Marketing, with a worldwide readership of nearly 25,000.

The authors pose the challenge of professional services marketing upfront, and make it clear how radically it differs from conventional methods of selling a product. “If you sell me a vacuum cleaner, the vacuum cleaner stays and you go. If you sell me a service, you stay to perform that service.” The dilemma gets worse.

For example, whereas you might not be thinking of buying a motorcycle, an effective marketer can plant that seed in your brain; but no one has ever woken up and thought, “What I need today is a really well-drawn contract.” Moreover, when the day comes that a potential client does need a contract, your asserting “our firm writes better contracts” is an utter waste of breath. How, then to distinguish your firm?

Many firms make the mistake of starting with a wish-list of objectives or an inventory of their skills, and then try to map those objectives and skills onto a hypothetical market that may or may not exist. Instead, start with a concrete marketing plan, consisting of: (a) a definition of your target market; (b) a definition of your firm; (c) a definition of the marketing tools you will use; and (d) concrete expectations about how you will manage those tools.

Defining the firm is surely the hardest part. If you run your practice predominantly with the needs of the firm in mind, you are engaging in “an exercise in imminent disaster.” Rather, you must shape your firm to meet the needs of its prospective clientele, which is “an exercise in growth.”

Reflect again for a moment on the book’s title: The single most important message is build a client-centric marketing culture at your firm. As Peter Drucker wrote: “The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.” That culture rests on several supporting legs, including the heartfelt, genuine, and enduring commitment of senior firm management to the marketing effort; an understanding that nonbillable hours spent on marketing are an investment in the future of the firm; and the employment of top-flight marketing professionals within a formal structure at the firm.

Then and only then, with that predicate laid, can you deploy the classic tools of marketing. Helpfully, Aquila & Marcus outline the uses and abuses of these tools, including:

• articles
• the firm brochure
• public relations and dealing with the media
• advertising
• networking
• seminars
• newsletters
• direct mail; and
• the website.

For professionals whose livelihood depends upon effective written and spoken communication, lawyers are, in general, atrocious in dealing with the press. “When in doubt, ‘no comment,’” seems to be the operative mantra, but this approach guarantees that the story reported in the media will omit whose point of view? Yours. Aquila & Marcus specify precisely how lawyers go wrong with the press:

• Reporters can’t be trusted: No, their job is just different than yours. The more often you work with a reporter, the more likely they’ll get it right
• Mergers, moves, and hiring laterals are news: Only to your mother.
• Advertising and PR are the same: They could not be more different: With advertising you pay expressly to put a pre-packaged message out there; with PR, a third party creates the message for free and with minimal input from you.
• Everyone reads the article as closely as you. Not a chance. Unless you “say what you’re going to say, say it, and say what you said,” don’t count on your message surviving translation.

While the first two-thirds of the book is devoted to marketing strategy, tactics, and guidelines, the authors realize that the best-laid plans are for naught if the firm is just paying lip-service to marketing. The patient, in other words, must actually be willing to take the prescription.

So the final third of the book changes gears.

It addresses the overall cultural and managerial mindset, the gestalt, required if the marketing effort is to gain meaningful traction within the firm. What will it take?

• A more corporate managerial model, complete with CEO, CFO, and the equivalent of a board of directors. And while you’re at it, “overturn the anachronism that there is no hospitality in a law firm for a nonlawyer.”
  
  
• Understand that you’re managing knowledge workers, not drones. As the authors put it, your professionals must:
• know what the firm is about—its objectives;
• know how the firm is trying to accomplish those objectives;
• know why, and most importantly
• care why.
  
  
• Recruit and hire the best; provide training immediately; demand the best and be frankly intolerant of the rest; and demonstrate a sincere conviction to performance feedback.
  
  
• Make sure your internal communications are functioning and robust. Don’t assume that just because you sent the memo, everyone actually “got it.”
  
  
• Pay for what you want people to do. Use your compensation system to shape your firm’s culture rather than having your firm’s culture shape your compensation system.
  
  
• If you are serious about providing compelling value to your clients, abandon the billable hour. Heresy, you say? Consider:
• The billable hour begins life with “cost of production,” and is divorced from “value to client.”
• A focus on billable hours rewards individual effort and not collaborative team performance.
• Hourly billing shortchanges investments in the firm itself, including recruitment and development.
• Lastly, it encourages a technician’s mentality, which is a world away from that of an outstanding client service professional.

Finally, one must ask, does all of this sound too mercantile, too expedient, “unprofessional?”

To the contrary: By refocusing firms on the client at the core, Aquila & Marcus restore the missing ingredient lost in preoccupation over trends such as globalization and consolidation, the ever-increasing importance of “profits per partner,” and the regulatory-not-principled approach to firm governance exemplified by Sarbanes-Oxley. They call for a return to the highest standards of the profession:

“What seems to have been lost in recent years is a measure of the independence of the professional that was so powerful in building the professions in at least the first half of the twentieth century. As recent events have shown, it’s been supplanted by accommodation to the clients’ wishes. The culmination of those same practices has been the scandals of the past decade. The firm of the future cannot be built on this foundation—it will not survive. Independence, one way or another, must come back in full force and with integrity, or else chaos will.”

Client at the Core, then, promises to provide a roadmap to the new landscape of law firm marketing. It delivers more: A comprehensive vision of the 21^st Century firm built on integrity and performing to rigorous standards.