It's Not 1977 Any More: So What Are You Going to Do About It?

It's a rare privilege to see a candid discussion of a major firm's strategy in the press, so I urge you to run to this piece in The New York Law Journal, essentially an interview with Rohan Weerasinghe, Shearman & Sterling's new chairman, about the challenges he faces as S&S starts to pull out of a four-year period of, as Weerasinghe puts it, having "done well but not as well as our peer firms" and calling those years a period "of significant turmoil."   

Weerasinghe, 55, was born in Sri Lanka but has been at S&S for nearly 30 years, arriving in 1977 with his bachelors', law degree, and MBA all from Harvard, and by all accounts has been a gifted strategic thinker from the beginning.   He's going to need every bit of it given the clear challenges facing the firm, but from the evidence of the interview he would probably agree with that observation.  In other words, he's already on his way.

First, let's review the bidding.  In 2000, S&S's PPP of $1.35-million put it solidly in league with its peer group—Davis Polk, Simpson Thacher, Sullivan & Cromwell, et. al.   But 2001 saw a 30% falloff to $980,000, as Wall Street hit a wall and S&S was even forced to lay off 10% of its associates that fall.  In fact, it took until this past year for PPP to resume significant growth, finally topping 2000 for the first time (and up 22% year over year) at $1.4-million.

Nice work if you can get it?  Sure, until you look at the peer set:

And it's not just New York powerhouses that are ahead of S&S in PPP:  Firm #11 on this measure five years ago, it's now tied for #28 with Bingham McCutchen.

What's the problem?  Essentially, S&S is relying on one main practice area while its peers have three.  S&S gets a steady flow of deals from Wall Street, and in public M&A (e.g., representing Boston Scientific in taking over Guidant for $27-billion), but it's severely lagging in litigation and private equity—two areas that helped pull other "bulge bracket" New York firms out of the 2001 swoon.

The other drag on S&S' numbers is actually an opportunity, or rather an investment which should bear future fruit:  Their Asian network is still a money-loser.  (But very profitable operations in the UK and Europe prove that S&S can succeed abroad, if given enough time.)

Now that we've laid the groundwork, what's Weerasinghe's dilemma? 

"But if the challenges facing the firm are clear, how Shearman should deal with them has been a source of controversy -- even acrimony -- among its partners.

"To boost underperforming practices, many partners and ex-partners argue the firm needs to abandon its white-shoe pretensions. They feel the firm should aggressively recruit lateral rainmakers and put a greater emphasis on business development in both partner promotion and compensation.

"Though the firm does not have lockstep compensation, in which partners are paid strictly according to seniority, Shearman maintains a relatively narrow spread of partner compensation. So partners who originate a lot of business are not paid a great deal more than partners who bring in relatively little."

Protecting this stasis is "an old guard" with "a sense of superiority, a sense of manifest destiny," according to a former partner:  "They'll say stupid things like, 'We need to work harder.'"

Aaah, yes indeed, the good old [non-]strategy that if only we work harder—at something that's not working!

Weerasinghe understands he has a culture to change, and in a promising sign made a point of visiting Shearman & Sterling's far-flung offices, meeting partners and associates alike, and admits that some earlier problems were aggravated by decision-making that was perceived as insular and secretive, most notably a "purge" (Weerasinghe won't use the word) of unproductive partners in 2004.

As for the firm's two primary problem areas, the unprofitable Asian network and the weak private equity and litigation practices, Weerasinghe pledges to stay the course or even up the ante in Asia, and sees it as a region of significant opportunity.  On this, he is surely right.  Not every US or UK firm that's on the ground in Asia (or that wants to be) will get it right, and ten years from now I predict the roster of firms there will look quite different than it does today.  But those remaining will be generating outsized profits as the first genuinely new economic superpower in a century emerges—the last one being the US at the turn of the 20th Century.

The key question, then, is not Asia.  Win, lose, or draw in Asia, S&S and every serious-minded firm that aspires to call itself "global" simply has to take a prolonged and disciplined shot at getting Asia right.

Rather, the key question is the issue of attracting top-notch laterals, and adding more flexibility to the "modified lockstep" in place at S&S.

This is the issue on which Weerasinghe may stand or fall as a leader.

I've written about lockstep vs. eat-what-you-kill often before, as for example:

• lessons from Clifford Chance;
• Peter Cornell's (CC again) legacy;
• the "perennial disequilibrium;"
• the "optimal" system;
• how they work out (or don't) in a merger; and
• "what a difference a pond makes."

Weerasinghe surely knows that 2006 is not 1977, and the system of collegial entitlements has, to celebration and lamentation both, passed on to the great beyond.  If S&S is to regain its stature among its peers, I believe a concerted effort to recruit, and to pay for, laterals with practice areas that fit firmly within S&S's existing portfolio, will be its salvation.  Today's marketplace calls for no less.  (Indeed, just last month S&S lost a high-profile five-partner investment management practice to Willkie-Farr; one cannot unilaterally disarm on this battlefield.)

The question, of course, is "the old guard."  If I'm making $1.4-million/year and have spent my entire indentured 30-year (say) career here, and suddenly an arriviste down the hall is making $2.8-million/year, I am going to become truculent at best, and will incite serious rebellion at worst. 

But consider the alternative.

The alternative is not to continue receiving an indefinite annuity, arm-in-arm with your colleagues of long-standing, of $1.4-million/year.  If any firm knows that expectation and model no longer works, it is surely S&S.  Continuing to rely on it means your $1.4-million is going to slowly slide.

Rather, the alternative is to have the genuine and realistic hope and expectation that, in a revived and prosperous firm in the pink of health, you can  confidently continue to receive your  $1.4-million while others around you do—indeed—do better.

Being resentful of your more-successful colleagues is, after all, manifestly unproductive, bordering on the juvenile.  And the fault, or the virtue, is not theirs.

It's simply that the economics of the profession have changed since you started practicing.   Weerasinghe surely knows this.  It shall be an interesting show to revisit from time to time.