Legal Week sounds the alarm about the coming of the "procurement professionals" to the selection and hiring of outside counsel, and predicts, based upon their impact in other sectors:

• at least a 15% reduction in fees;
• greater objectivity in the selection process (less value put on "networking");
• more rigorous performance measures;
• formalized contracts and agreements throughout the relationship, starting with RFP's; and
• performance-based remuneration.

Appalling?  Surely so, from the traditionalists' perspective, but I'd like to suggest another way of approaching what to many will seem a skunk at the garden party.

Let me lay the groundwork for what I'm about to recommend by flatly predicting that the involvement of "procurement professionals"—if not formally, then the toolkits and mind sets they advance—is not only here to stay, it will only grow.

Why?   Econ. 101:  There's simply too much money at stake.

And the Econ. 101 "Competition Made Me Do It" Corollary:  As soon as a Fortune 500 company adopts procurement professionals for its legal spending decisions, any serious competitor of that company is going to have to look at doing the same.

Legal Week offers three tactics for dealing with this:

1. "Prevention is better than a cure."  In other words, forestall having the selection process captured by the procurement professional, by appealing to senior executives' visions and ambitions, and the (invaluable) contribution your firm makes to the realization of those ambitions.
2. Embrace commoditization:  If you can build the IT systems, and install new assumptions about hiring and training associates and para-professional staff, you could conceivably become the procurement professional's "go-to" firm.  More on this below.
3. Hope it will all go away, and in the meantime meet them on their own terms.

(3) is obviously not advisable; it's surrender without a fight.

(1) is ideal if you can pull it off, and certainly entails the least disruption to existing relationships, practices, and assumptions.  In this sense it's also the most familiar and comfortable.

I might add that there's truly something to be said for the sense of reassurance, confidence, and trust that comes with a long-standing relationship with a close advisor.  And that it is precisely under these conditions that you can and should be "reassuringly expensive."    No one would engage a procurement professional to select a cardiac surgeon, and the depth of expertise, wisdom, and instinctive good judgment that one achieves only after years of practice have no price.

Consider a story I heard earlier this week from the managing partner at an AmLaw 25 firm:  A client had inquired to a department chair at the firm about a sensitive, complex, and nuanced matter, at the intersection of law, ethics, and the client's reputational capital, and in the course of a meeting lasting less than an hour came to a complete understanding of the ramifications of their situation, and the options going forward, and had put in place a concrete plan of action.

The firm delivered a bill for $10,000, which the client's law department promptly and happily approved; but when it arrived at accounting to be paid, it was rejected for want of itemized specificity.   Ultimately, things were resolved in the law firm's favor, but does anyone doubt for a moment that a bill for the exact same amount, generated by three low-level associates arduously itemizing time, would have sailed through accounting?  Despite the utter disconnect in "value received" by the client?

[This also reminds me of my favorite, true, headhunter's story:   A firm retained a headhunter to find, vet, recommend, and place a lateral partner in a hotly competitive and arcane practice area.  Forty-eight hours later the headhunter introduced a candidate who breezed through the interview process and was hired within weeks.  "For services rendered:  $100,000."  The managing partner—a different one!—sputtered that the recruiter had taken so little time that the charge should be reduced.  Replied the recruiter, who did collect the full amount, "You hired me to save time."]

Now let's get to the interesting choice:  (2), "embracing commoditization."

Here one can do no better than to study at the feet of Tony Williams, who wrote late last year about precisely this:

"There is often a degree of unreality in a law firm’s approach to the commoditisation of legal services. The first approach is denial: ‘No, of course we do not do that sort of work, but firm X does.’ The second answer is: ‘Yes — but we do very little, although it is useful for training our junior lawyers or trainees.’ The third answer is: ‘We do not do much now but we anticipate more of our work becoming commoditised and do not know how to cope with it.’"

I—with Tony—am here to tell you:  (1)  denial is becoming an increasingly untenable attitude to adopt towards commoditization; and (2) it's actually nothing to be afraid of, but rather a phenomenon to be embraced by forward-looking firms with new tools and techniques that can both delight their clients and continue the happy ever-upward march of profitability.

Why is denial untenable?  Consider the moves by "thought leader" corporations such as DuPont, GE, and Motorola to streamline, outsource, and rationalize their legal spending. 

This toothpaste is not going back in the tube.

Perhaps most dramatic of all will be—I predict—the surprisingly rapid development of brand-new business models delivering baseline legal services in the UK following implementation of the Clementi Commission's report and the subsequent enabling White Paper.

In a nutshell, as I've noted previously, the Clementi reforms will permit wholesale ownership of legal practices by non-lawyers.  If you reflect on this for five seconds or more, the implications become clear:

• "Non-lawyers" is a large enough category to embrace public and private companies, the public at large (can you say, "IPO"?), private equity funds, etc.
• These types of owners bring with them intrinsic access to great amounts of capital.
• "Capital is [almost] irrelevant to law firms—and is certainly not a meaningful restraint," you say.  True enough, for the AmLaw 200 and the UK 50 as they exist today, but access to tremendous amounts of capital permits creation of hitherto unprecedented types of legal practice.  Imagine an "H&R Block Law," or a "Wal-Mart Law," or a "Citigroup Law," and you begin to be able to envision the possibilities
• New, strongly branded legal service providers, using state-of-the-art technology, sophisticated advertising and marketing campaigns, will presumably begin to serving Mr. & Mrs. Consumer, with real estate closings, routine tax advice and business formation, divorces, estates, and trusts.
• But how long will it be before they begin creeping into small business services?
• And then larger business services, working their way inevitably up the learning curve, using proven systems and processes that guarantee the client:
  • A known result
  • At a fixed price.

This is actually both more and less than a "prediction:"  It is simply a description of how competitive marketplaces work.

What's the bottom line?

Change is afoot. 

Firms that seize the once-in-a-generation opportunity to truly understand ("grok," as they say), the change that clients are going to impose on our industry will emerge more client-focused, stronger, and more profitable, than those that lag behind or engage in comfortable denial for too long. Tony Williams nicely states the alternative to change: "You can do nothing — but only if you intend to retire within the next five years."

I know it's hard.  So I will offer my favorite quote on how difficult change is, from the always-masterful Machiavelli:

“There is nothing more difficult to carry out, or more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by an old order, and only lukewarm defenders in all those who would profit by a new order. This arises partly from the incredulity of mankind, who do not believe in anything new until they have had actual experience of it.”

What alternative do you propose for your firm?

This is McKinsey's analysis of "The Vanishing Middle"—here, the phenomenon across 25 product categories ranging from mobile phones to banking, appliances to apparel, that both premium and no-frills products grow at the expense of middle-of-the-road offerings. 

This works itself out in different ways in different industries. 

In some cases—think cellphones, banking, apparel, beer—there is growth both at the high- and the low- ends, as the middle empties out (the "hourglass" model).  In other industries—airlines, PC desktops and servers, groceries at retail—there is primarily a move to the no-frills/value end (the "pear" model).   And in yet a third sector there's general migration to the high end—coffee machines, MP3 players [read: the iPod], digital cameras, razors, wine (the "palm tree" model).

Each syndrome comes with its own set of, as McKinsey might well put it, threats and opportunities.  In hourglass-land, you need a well-defined value brand, or a  premium brand, or both.  Nokia, notably, does both in the cellphone/handset market.   In pear-land, you need to ruthlessly wring costs out as fast as you can—and it better be faster than your competition.  Think Dell, Wal-Mart. 

Finally, in palm-tree-land, you can justify a premium only through relentless innovation (I, too, am looking at Gillette's new 5-blade "Fusion" razor, having already been led down the path of the Atra, Sensor, and Mach3) or through an emotional connection (back to the iPod).

Of note is McKinsey's observation that there are "significant variations" in how the polarization phenomenon plays itself out from category to category, and that "the pattern of polarization does not lie in a category's DNA," but rather is a dynamic process profoundly affected by how service providers stretch what they offer to take advantage of the perceived evolution of customer demand.  (And of course, what's offered feeds back into demand:  Would I imagine I needed a five-blade razor if the Fusion had never gone on sale?)

There are two points here:

• "Polarized," or "vanishing middle," markets are widespread; indeed, they may well be more common than the classically conceived ski slope model.
• They do not arise, nor do they evolve, in a vacuum.  Firms can have an impact, and the strategies and approaches firms adopt to both respond to, and educate and entice, their customers can be the difference between Dell and Tandy, Toyota and GM, or Wal-Mart and Sears.

Is your firm truly catering to your clientele's sweet spot? 

How well do you understand their concept of "compelling value for the money?"  Are you trying to be a Dell and a Lexus at the same time? 

And lastly, assuming you want to live at the top left of McKinsey's "polarization" chart, are you providing the intellectual innovation, the emotional connection to your clients, and the level of service above reproach, that it takes to command a seat at that table?

Thursday, April 6, I'll be participating in Indiana University Law School's "Globalization Conference," organized by my good friend Prof. William Henderson.  From the summary of the symposium:

"Much has been written on the process of globalization and its effects on international and individual state law. The impact of globalization on the legal profession has received far less systematic attention, despite a universal recognition that the practice of law and the economic and personal lives of lawyers may be on the brink of profound transformation.

"The purpose of this unique symposium is to initiate dialogue about how globalization is fundamentally changing the work lives and professional opportunities of lawyers in the U.S. and abroad. Prominent figures in the global legal industry will explore various interrelated themes on the issues facing legal profession, including law firm strategy, the relevance of geography, the lawmaking role of transnational lawyers, and how cultural norms affect or shape our perceptions of ethical lawyering. The program will include presentation of scholarly papers and responses by symposium participants."

Some of those participating include R. Bruce McLean, Chairman of Akin-Gump, Patrick McKenna of Edge International, Larry Ribstein. and yours truly.

You can register here ($50 for IU alumni, $100 for everyone else) and find out how to get to Bloomington here.   Earn CLE credit (woooheee!).

Having been to Bloomington previously and enjoyed the Law School's hospitality, I can report that it is a quintessential Midwestern college town, with the brick sidewalks, shady avenues, frat-house row, and surfeit of used bookstores that are de rigueur. 

David Maister, who knows his way across the management/leadership landscape so much better than almost anyone else that he seems to have been GPS-enabled while the rest of us were relying on 15thC. parchment maps, has taken off from my post of a few days ago about leadership.   Here he is getting warmed up:

"I keep getting asked about this topic, so here goes my ten cents worth. I think more rubbish has been written about ‘leadership’ than almost any other business topic. A lot of it is patently false, and even more of it is dangerous."

And I bet you didn't know that "manager" derives from medieval French or Italian meaning, roughly, "holder of the horses," while "leader" is of Chaucerian-era origins and means one who chose the expedition's route, a model "that won't work," David states flatly.

Enough; just go read the whole thing right now.

When I wrote about the Baker-Robbins/LegalWorks KM conference, I purposely left out the most impressive application/presentation of them all:  Morrison & Foerster's Oz Benamram discussing "AnswerBase," the firm's new KM system which will be rolling out next month.

AnswerBase is the fruit of over two years of labor, and is, in my humble opinion, a revolutionary approach to KM.  Oz was kind enough to give me a one-on-one guided tour in his office two weeks ago, and what I have to say will draw from both his presentation to the KM conference and to our private meeting.   Suffice to say that neither Oz nor I am aware of any other firm taking the Morrison & Foerster approach at the moment, but when I asked Oz who else might adopt it once they see it, his response was "Everyone will, within two years."

 Read on.

At the outset of their redesign of the Morrison & Foerster KM system starting two years ago, Oz and the team went back to first principles.  These were their guiding stars:

• We need "federated search" to search across the many disparate databases which all contain information potentially germane to a lawyer confronting a new task, including:
  • the matter tracking/management system;
  • the client/CRM databases;
  • the financial/accounting/time-keeping and billing databases;
  • personnel information on individuals within the firm;
  • the document management system;
  • the email database; and last but not least
  • the firm's own internal "Knowledge Exchange" system, a continuously-upgraded and dynamic compilation of (manually managed) model documents and templates.
• To use precedents effectively, attorneys need context: who worked on the transaction, what industry was it for, the timing, etc.
• Often the most expeditious way to gain expertise is...by talking to an expert:  This implies that the system must excel at identifying people who have worked on similar matters in the past, and preferably a lot of them.
• Finally, lawyers won't use anything that's not drop-dead simple.  Extremely comprehensive and nuanced search tools may be fine for grad students, but lawyers want something resembling Google or Yahoo.

Perhaps not surprisingly, when they went out into the marketplace of "federated search" vendors to evaluate products, they ran into the realization that while everyone could do 80% (sometimes a different 80%) of what they were seeking, no one could do it all.  Products that excelled at extracting meta-data to identify entities to a transaction, for example, fell down on their relevance-ranking engines, so that the "best" documents did not always appear at or near the top.  Similarly, products that were strong on identifying individuals with relevant experience mis-categorized documents.

At this point, the team was in a bit of a quandary—until Oz happened to attend an "enterprise search" technology conference where some e-commerce vendors were making presentations.

When you or I think of e-commerce, we tend to think of Wal-Mart, Home Depot, Barnes & Noble, not the AmLaw 50.

But Oz's insight was that e-commerce platforms have several built-in capabilities that more conventional engines used to power legal KM systems may lack:

• they are "scalable" beyond belief;
• they make allowance for misspellings, imprecise phraseology, etc.;
• at least with the best-of-breed, they avoid the classic search failure mode I refer to as "all or nothing"—where the answer to your search is either "Search returned no results" or "Showing 1-10 of 2,409"
• they "hate" to come up empty-handed, so are configured to provide near misses and close neighbors rather than "Try Again."  (For example, if you were searching for a 2005 black Honda Accord coupe with a 6-speed manual, and there were none in stock, it might return a 2004 fitting those specs, or a four-door sedan, or a red one, and ask you which criteria were most important to you so it could re-order and refine the results.)
• perhaps most compellingly, they come ready-made with the ability to conduct "faceted search," a term perhaps more readily understood by example than strict definition.  "Faceted search" simply means the ability to categorize the answer set of a search by relevant characteristics.  Endeca, a leading vendor in this area, with clients including Barnes & Noble, Boston Scientific, Circuit City, CompUSA, Home Depot, IBM, the Library of Congress, NASA, Patagonia, Putnam Investments, and Wal-Mart, provides this example after one has searched for "Lego's" at eToys:

Although difficult to make out, you can see that of the "172 results" returned, it invites you to recategorize them (left-hand column) by Age, Gender, Price, Category, Character, etc.  In law-firm-land, the equivalent is offering to recategorize the results of a KM search by client, industry, type of transaction, jurisdiction, office where it was managed, responsible attorneys, date, or even the identity of the law firm on the other side.

Even given the inspiration of Endeca and the e-commerce model, Oz and his team ultimately settled on the proven platform provided by Recommind, which has worked with such name-brand firms as Cleary-Gottlieb, Cooley Godward, DLA Piper, Paul-Hastings, and Shearman & Sterling.

Finally, the Morrison & Foerster system obviously "knows who you are" when you're conducting a search, and adjusts its relevancy rankings accordingly, giving greater prominence to matters arising in your office or your department, or for clients you've worked for. Moreover, it knows how much you've worked on similar matters (say, an antitrust deal) and if you're new, or rusty, it will put training videos higher up in the search-return results.

If Oz is even one-quarter right that "everyone will be doing this in two years," KM professionals have a busy 2006-2007 in front of them.

Rodney Satterwhite, McGuire-Woods; Browning Marean, DLA Piper

The critical flaw in using KM as a profit-maximizing tool is the billable hour; simply put, the more efficient a law firm is, the less revenue per matter.

Can more responsive client service (through KM) make a difference in marketing and business retention? Yes, but it's not measurable; there is no ROI calculation possible. So are there other justifications available? Do you ask for ROI from the library?

One benefit mentioned was associate morale-boosting, which was almost hooted down. "You mean your firm has associate morale?" "I wasn't saying it was good."

What about cutting write offs? According to both Rod and Browning, this was the single most demonstrable benefit of KM. Kingsley Martin raised the point that to the extent firms change the partner compensation system to reward profitability rather than simple hours billed, this would provide an indirect support for KM. The objection was raised that lawyers aren't familiar with accounting and financial analysis and would find the metric of profitability opaque.

Rod posits that:

• KM will always make lawyers more efficient
• You cannot change that reality
• So the answer is...?
  • change the pricing model
  • which will happen only given incessant client pressure
• "Alternative Fee Arrangements" will continue to erode the billable hour slowly based on corporate America's preference for certitude
  • taking on a significant enough basket of cases (e.g., all of Wal-Mart's employment discrimination cases in the Southeast for 3 years) should enable astute firms to make reasonable actuarial predictions and offer (more or less, subject to amendment for the out-of-control, runaway cases) a fixed fee to handle that work.

Browning posits that while you cannot handle an entire litigation matter under a fixed fee, you may be able to offer a fixed fee for certain components of litigation--e.g., drafting a motion, taking a deposition. Rod also offers the example of an unnamed McGuire-Woods client that has nationwide arbitrations with disgruntled employees, and says they can predict what 95% of those cases will cost; but admits it took over a year to develop enough statistics to determine the right price point.

Rod also recommends the simplicity of "blended rates," using the example of: Associate @ $200/hour, Partner @ $450/hour, and blended rate of $300--obviously, the more hours of associate time that can be sold @ $300 instead of @ $200, the better. On the other hand, GC's and corporate counsel know this game, and some in the room said they'd fired firms who abused it. Rod points out further that the more robust your KM system, the more you can get actual high-quality work out of associates and avoid client blow-back.

Several in the audience noted that strong KM systems could help associate retention and morale and even help attack the under-representation of women in senior ranks—to the extent they reduce pressure to generate maximum billable hours above all else.

Pure fixed fees are still inordinately hard to do, was the consensus.

Rod next suggests a "performance holdback" scenario, whereby the client receives a discounted rate and also holds back a portion of payments due, but then is invited in its discretion to offer a performance bonus at the end of the engagement.

Conclusion: To the extent alternative fee arrangements are going to grow their "market share" (on which there seemed to be consensus, albeit no real consensus over the speed of their adoption), firms need to be prepared and to have strong KM processes in place—or else they won't be able to respond to RFP's, etc., requiring alternative fees.

Finally, one audience member said he saw a "potential train wreck" between the inexorable pressure to keep PPP increasing and nearly exclusive reliance on the billable hour methodology. He posited that you can only increase (a) annual billable hours; (b) rates; and (c) associate leverage for so long, and when those revenue-drivers run out of running room, alternative fee arrangements would look attractive to law firms themselves—not just clients—and that would at last accelerate the erosion of the billable hour model.

Having been tagged by both David Maister and Robert Millard, the handwriting is on the wall: I can't hide, and I've never been one to run. So you are about to experience an extraordinarily atypical entry on "Adam Smith, Esq.," which is not now, and never has been, about me.

Four jobs I've had:

• caddy (one summer)
• research assistant (as a 3L) to constitutional law professor Paul Brest, later Dean of Stanford Law School
• founder and CEO of a dot-com (intended to bring the Fortune 1000 and the AmLaw 200 together for spontaneous and serendipitous "expertise discovery"—essentially meant as a massive online legal KM application)
• strategic and economic consultant to law firms

Four movies I can watch over and over

• The Godfather (I, II, & III)
• Star Wars
• The Hunt for Red October
• 2001: A Space Odyssey

Four TV shows I love to watch

• The NewsHour with Jim Lehrer (PBS)
• Charlie Rose (if and only if he's not interviewing movie celebrities)
• Monday Night Football
• NOVA

Four places I’ve been on vacation

• Bologna/Milan/Rome/Venice
• Florence/Siena/Assisi/Ravello
• Positano/Capri/Amalfi/Ravenna
• Palermo/Agrigento/Erice/Catania/Siracusa

Yes, you detect a pattern.

Four tunes that play through my head

• The Siegfried Idyll from Wagner's Ring Cycle
• Le Donne e Mobile from Verdi's Rigoletto
• "Private Dancer," Tina Turner
• "London Calling," The Clash

Four favorite dishes

• cheese, olives, bread, red wine: the Four Major Food Groups
• risotto
• home-made parmesan/rosemary/sun-dried tomato focaccia
• inky black coffee and an honest-to-God New York bagel with nova and a schmear

Four books I really love

• The Great Gatsby, F. Scott Fitzgerald
• The Selfish Gene, Richard Dawkins
• Harry Potter: All of it
• [An Inquiry into the Nature and Causes of] The Wealth of Nations, Adam Smith (yes, seriously)

Four places I’d rather be

• London, Hong Kong, or Rome
• Running a full loop of Central Park
• Most any world-class university town: Ann Arbor, Cambridge, Palo Alto, Princeton
• Seated in the third row, center, of the balcony of the Metropolitan Opera as the house lights go down

But seriously, David M. nailed it: Home on the Upper West Side.

Four bloggers I’m tagging

• Bruce Marcus
• Malcolm Ryder
• Ernie Svenson
• The Wired GC

And there you have this most out-of-the-ordinary entry on "Adam Smith, Esq."

Tomorrow I'm giving a presentation to the New Jersey Area regional meeting of the International Legal Technology Association (ILTA) on "Leadership Principles for Technology Managers."

Topics I'll address include:

• What Leadership is Not (hint: it's not about being a slave to your Blackberry, pager, IM, and SMS)
• What Leadership Is:
  • Vision:  Having one that is credible, tangible, and  distinct
  • And the creating the environment that lets people actually get there (hint:  it's not about command and control)
  • Keeping your eye ceaselessly on the future
• Communication, which means:
  • Being fluent in the language of finance, which is what the business world speaks
  • Managing expectations, and tamping down unrealistic hopes
  • Avoiding the trap of being caught up in conversations about "governance"—deliver results, not reports, and avoid the inward focus governance assumes
  • Talk about problems solved, not technology.  And above all
  • Be Brief!
• Why Change is the Hardest Challenge of all
  • With a nod to Machiavelli:

    “There is nothing more difficult to carry out, or more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by an old order, and only lukewarm defenders in all those who would profit by a new order. This arises partly from the incredulity of mankind, who do not believe in anything new until they have had actual experience of it.”

  And I'll close by differentiating between "implementers," "managers," and "leaders."

This graphic uses the metaphor of A City:

• Implementers worry about "capability:"  They're focused on the pavement.
• Managers worry about "viability:"  They're focused on the layout of the street grid.
• Leaders worry about "culture:"  They're focused on The Vision For The City.

Implementers and Managers have to agree on Requirements:  Which and How

Managers and Leaders have to agree on Objectives:  When and Why

And in the process of managing change, Leaders focus on The Market, and what signals it's giving out about the need for change, while Managers focus on the Leaders.

I doubt I need point out to any of my readers the front-page story in today's Sunday New York Times' Business Section (above the fold, even!) headlined, "Up the Down Staircase:  Why Do So Few Women Reach the Top of Big Law Firms," but in case you missed it, here it is.

And here's my Letter to the Editor in response.

This issue—the relative paucity of women in senior positions at large firms—is one that, I will now share with you, has troubled me for some time.  But dwelling on "troublesome" issues, unless I have something concrete to recommend, is not the stock in trade of "Adam Smith, Esq."  Nevertheless, it's klieg-light clear that the under-representation of women in the partner ranks of AmLaw 200 firms has for many years now not been the simple issue of the "pipeline."

My best guess at the explanation appears in my letter to the editor (noted above). 

What are your theories?

As I've mentioned, I'll be teaching the core/required course, "Strategic Technology & Innovation" at SUNY/Stony Brook's MBA program for law firm leaders.  The program starts the last week of April—in just a few weeks—but my course doesn't start until late August.  

The course will be presented from a strategic as opposed to an operational or technical perspective, with an emphasis on how technology can support the fundamental activities sophisticated law firms engage in, both: (a) to make the work the firm must perform more efficient, productive, and cost-effective; and (b) to provide a competitive distinction for the firm in the eyes of its attorneys, its clients, and other pertinent audiences (such as potential clients and recruits).

The course proceeds from the philosophy that technology is essentially a tool, albeit a complex one, and is aimed at law firm executives outside the IT department itself.   The students are expected to be predominantly in positions such as Executive Director, Chief Operating Officer, Chief Financial Officer, Chief Marketing Officer, etc.—and are not expected to be managing partners or lawyer/members of the executive committee of their firm.

I'm in the process of developing a syllabus for the course, and also fleshing out its actual content.  So far, the topics I plan to address include:

• A brief overview of the history of IT in law firms, and the current state of the art:  extranets, "deal rooms," 24/7 connectivity, security, and internal collaborative tools.
• "Client-facing" systems including CRM.
• Knowledge Management: (a) approaches, techniques, why and how KM is an essential strategic resource and capability for a law firm, as well as (b) why KM is an immense cultural challenge.
• Business intelligence, competitive intelligence, and profitability analysis:  staffing, billing, and project management issues.
• Leadership and management issues for CIO's and other senior IT personnel:  justifying costs, translating IT-speak into lawyer-speak, "getting a seat at the table," managing expectations, etc.   And lastly
• The Future:  automated document production, intelligent search; off-shoring; blogs, wikis, and RSS.

 Here's my request:  To all CIO's and others with opinions about these issues, please contact me with suggestions for ways to approach this material, suggestions for entirely different/other topics to cover, reading material for the syllabus, and whatever horror stories, revealing anecdotes, or seat-of-the-pants guidance you're in a position to give.

I thank you in advance for your thoughts.

Two weeks ago I posed the question, "Is there a natural limit to the size of global law firms?," and I invited you all to vote on various possible answers starting with "No; like global accounting firms and banks, they can grow to the sky," through "Yes; at some point the proliferation of conflicts will become insuperable," and " Yes; it will simply become impossible to manage such complex enterprises," and so forth.

I want to recap the results and offer some thoughts, but first I want to blend this discussion thread with another one that—I was about to say I "launched," but it's actually been more or less in continuous session—is about the analogy, or lack thereof, between the emerging structure of the legal industry, and the structure of the financial services industry. 

In this I am greatly aided by a reader who is something of a student of the banking industry, who writes as follows:

 Although consolidation has begun in the legal industry, there’s not much of it yet and I think it will be very significant if it’s anything like what happened in banking.  I do not know how many firms there are in total in the US now compared to 5, 10 and 15 years ago but I will try to find this out. I know there are about 1 million attorneys.

I know that the banking industry generated about $100 to 120 BILLION in profits in 2005.  I do not know the comparative number for all law firms in the US. Do you?  I know I can calculate it for the top 200 firms and that would probably be close.

I do have some statistics from the banking industry on the number of banks over a 20 year period:

1975                                                          18,769

1984                                                          14,483

1995                                                              9,941

1998                                                              8,817

2000                               8,357

2005                               7,600 

So, in the 30 years from 75 to 05 there was a 60% reduction in banks, and in the 10 years from 95 to 05 there was a reduction of 24%.

When you google “consolidation in the US banking industry”, there are a slew of references but when you google the same thing for the legal profession or law firms, there’s almost nothing.

Anyway, what we saw in the banking industry was what we discussed yesterday: a few major international global consumer players like Citi, HSBC, RBS, some national/regional players like B of A, JPM Chase, Wachovia etc, some large specialists like Goldman Sachs, some local community banks and lots of small specialist boutiques, but very few medium/small banks that can be all things to all people.  What is interesting is that technology spending has been financed by consolidation savings.  The railroads were all going to the same place and they were getting too expensive to run, so they had to eliminate duplicated railroads e.g. Chemical, Chase, Manufacturers Hanover, JP Morgan all consolidated now as JPM Chase and of course now including Bank One to expand the footprint into more states.

This same thing will probably happen in the legal industry.  It's interesting to see on the one hand that a firm like Baker and McKenzie, the largest firm in terms of size is towards the bottom of the AmLaw 100 in terms of profitability per partner. Also, I see M&A activity lower down the ranks of law firms e.g. Bingham McCutchen, one of the firms you directed me to.  I would not be surprised to see firms like this doing “mergers of equals” with other similar sized firms with key competitive advantages and quickly jumping up the ranks. I see these firms eliminating redundancy in overhead, jettisoning under performing partners and investing in state of the art technologies, client service, knowledge management etc. and changing the game entirely.  I don’t understand why this is not happening yet.  Mergers of equals do not cost money. Admittedly, they can be ugly and disruptive but that’s what had to happen in the banking industry.   Those that could not see it or resisted change got eaten.

How many law firms do you think can see this coming?

I told you he had something to contribute to the dialogue.

In terms of his final point—the relative paucity of "mergers of equals"—this is something I plan to write about further, so I shan't pursue it now other than to say that the concept of "equals" is more complex and nuanced in law-firm-land than it perhaps is in banking-land.  One of the very few possible examples I can think of recently is Wilmer-Cutler/Hale & Dorr.

On to the poll!  Here are the results:

Apologies for the scale; permit me to help decode.   Over 150 votes were recorded, with fully 41% (63 total) electing "the proliferation of conflicts will become insuperable."  Only 15 votes (10%) went to "they can grow to the sky."

Interestingly, every other reason but one that I put on offer as creating a ceiling on a global firm's growth received more votes than "they can grow to the sky."   Specifically:

• it will simply become impossible to manage such complex enterprises:  25 votes, or 16%
• differences in profitability between practice  groups will be fatal:  21, or 14%
• differences in profitability across geographies will be fatal:  14, or 9%

I also give you all great credit for optimism:  Only 3% voted for the limit being "only if a firm collapses in a spectacular implosion."  Finley-Kumble, we hardly knew ye.

My own view?  I think the limitation will prove to be the quality of management.  In other words, firms blessed with exceptionally capable management will not face insuperable limits; but they will need, like GE, to have as a core competence the ability to develop and train leaders—and if they're really like GE they'll operate as a law firm management finishing school, generating a surfeit internally, and watching their alumni populate the AmLaw 50.

Conflicts?  I admit this is a tough one.  The key to dealing with is being candid about the firm's global footprint and its potential implications with clients up-front.  And reminding them and reminding them.  No, this isn't a bulletproof solution (there's no such thing), but it will help greatly with the close calls.

Oh, and profitability differences?  Manage them.  They are essentially inevitable, so dealing with them is a fundamental part of your job description at one of these firms.

Now, do we have any nominees for firms that enjoy exceptionally gifted management?

Law.com's "Legal Blog Watch" caught the announcement of the monthly "Adam Smith, Esq." newsletter and sums it up in words I can't improve upon:

Adam Smith, Esq. to your in-box

Bruce MacEwen is kicking off a monthly newsletter that highlights some of his best posts from Adam Smith, Esq., and it's free. Why do I bring you this news? Because from where I sit, several things are clear:

• Lawyers like "push" technologies (e-mail newsletters, RSS, etc ...).
• Bruce is a prolific poster on his blog, which is a must-read for partners and those aspiring everywhere.
• Because of above item, No. 2, Bruce has so much analysis that it's hard to keep up with it all, thus making a newsletter particularly useful.

Sign up!

What more can I say?  Take their advice.

Reminder & Update:  The SUNY/Stony Brook MBA Program exclusively for law firm managers is starting the last week of April.  I'm a faculty member, teaching the core (a/k/a required) course, "Strategic Technology & Innovation," and we have an utterly distinguished Advisory Board and a convenient midtown Manhattan location.  (OK, so it's convenient to me, and to your firm if and only if you have senior business-side people in New York.)

Here's what it's about in a nutshell, from the program description:

"Stony Brook’s MBA, with its focus on law firm managers, is the first program of its kind in the United States.  It takes a real-world approach including the use of adjunct faculty members who have top reputations for their work in or with law firms. The program features classroom sessions that are informative, stimulating, and embrace a number of learning techniques. Professors will explain basic principles and guest lecturers will provide “from the frontlines” perspectives and insights."

My take?  It promises to be an unprecedented, rigorous immersion into what senior "business side" law firm leaders—Executive Directors, COO's, CFO's, et al.—need to know to do their jobs on a par with their counterparts in peer-group organizations in corporate America. 

If your firm has a qualified candidate, it's not too late to apply.   Feel free to contact the Dean of the Graduate School of Business, William (Bill) Turner, and tell him I sent you.

One of my near-bedrock beliefs is that we're living through a period when the structure of the legal industry is morphing before our eyes, setting up what I believe will be a future pattern that may well endure for decades.   Most recently, I wrote about this in "It's 2015:   Do You Know Where the AmLaw 25 Are?"  (And if you want a far earlier discussion, over a year old, check this out.)

So what, again, is that emerging structure going to look like? 

First, permit me to observe as an economist that the taxonomy of stable, durable industry structures is not infinite—not every structure that can be imagined exists.  Some of the more fascinating industries, from a structural perspective, are:

• airlines, with very high fixed and very low marginal costs, and classically perishable inventory;
• utilities, again with very high fixed generation-and-distribution-infrastructure costs and very low marginal costs of delivering an additional kilowatt or BTU—at least until generating capacity utilization begins to approach its maximum, when the least efficient plants must be brought online, suggesting in the future an increasingly flexible and time-sensitive component to pricing; and
• retailing, dominated both by enormous integrated chains (Wal-Mart, Target, Federated, Safeway, Home Depot, Staples, etc.) and mom & pop's (your drycleaner, deli, coffee shop, shoe repair) with little inbetween.

But we don't work in any of those industries.

The model I want to suggest—and this is entirely by way of "thinking out loud," so I welcome reader feedback even more exceedingly than is the normal case—is that of financial services.

Consider the vast landscape of retail and investment banking, credit cards, securities broker-dealers, mutual fund complexes, and investment managers and hedge funds.  We see essentially clusters of institutions at both ends of the size spectrum:  Goldman Sachs, Citigroup, Bank of America as global, dominant institutions with awesome balance sheets and oceanic cash flows; and Lazard-Freres, JP Morgan private banking, and two guys in Greenwich with a hedge fund at the opposite end, deploying the primary asset of sheer intellectual firepower.

There are many virtues to this industry structure.  On one hand, the Fortune 500 and FTSE 100 can find their "peer group," ready to serve their international needs with apposite financial and human resources; and on the other hand the Park Avenue widow can get her dog walked by her private banker's admin.

The pending acquisition of North Fork Bancorp by Capital One underscores the power of this structure.  To be sure, there were highly deal-specific circumstances powering that agreement, but the trend in financial services across the board is for regional and mid-market players like North Fork to disappear. 

In this case, North Fork had a problem which for Capital One was an opportunity.   The economic model of banking, since the Medici's if not earlier, is the simple one of borrowing cheaply and short-term from depositors and lending dearly and long-term to mortgagors et al. 

As The Wall Street Journal put it:  "Like other regional banks, North Fork has been grappling with a flat or inverted yield curve, resulting in narrower difference between long-term and short-term interest rates. That creates a difficult situation for the banking business, which borrows money at short-term rates and lends it at long-term rates -- typically making a profit on the spread between the two."  And as John Kanas, North Fork's CEO, said:  "In the current economic environment, it is hard to imagine that yield curve will improve any time soon."  In other words, regional banks' basic economic model is broken.

But in the hands of Capital One, North Fork's deposit assets can be lent out not at low long-term mortgage rates but at high credit-card interest rates—and Capital One gets to pay lower interest for those assets than if it had to go to the potentially volatile commercial paper or corporate debt markets.

Back to the analogy for law-firm-land: 

• The Magic Circle, the New York "bulge bracket" firms, and the US' other emerging international powerhouses (Baker & McKenzie, Jones Day, Latham, White & Case, et al.) will have global footprints and scalable teams to serve their corporate peers.
• The Boies-Schiller's and Quinn-Emanuel's of the world will serve their niche, boutique markets.  And:
• The future of regional, mid-size, full-service firms does not seem bright; it's unclear what their natural client base is.

In other words, if you're A Player, why go to North Fork when you could go to BofA.  Likewise, if you're seeking truly personalized, one-on-one counsel, why go to North Fork when you can go to JP Morgan Private Banking.  Even if you're in the middle—say, you or me—why go to North Fork when next week you might be in California or London and wouldn't mind the familiar, fee-free, Citigroup ATM logo on every other corner?

How do you see this playing out?

Nadia Cristina, Managing Editor of London-based pm magazine, who was gracious enough to agree to an interview when I was over there last fall, just forwarded one of the fruits of that meeting to me, an article I co-authored with Bruce Marcus titled "Blogs—The new community of interests."   The thrust of the article is simple:

"The power of blogs derives from their online essence: available and update-able 24/7, with global reach, they are tailor-made for targeting narrow and usually passionate niche interests.  They rapidly reach an audience of participants that would be completely impractical to reach in the offline world, thereby constituting a collective intelligence of enormous professional value."

"The PM Forum is a 4,000 strong regionally-based members' association, formed in 1996, dedicated to raising the standards of professional services marketing and to enhancing the credibility of marketers working in professional service firms worldwide."

So enjoy the article, and explore PM Forum.  (Thanks again, Nadia!)

Last year McKinsey and the Centre for Economic Performance, at the London School of Economics, looked at the "relationship between management and performance in more than 700 midsize manufacturing companies in France, Germany, the United Kingdom, and the United States." 

Granted, these were manufacturing companies, a far cry from professional service firms, but part of the rationale for studying the quality of management in the manufacturing sector is that there are well-recognized, generally-proven "best practices" in manufacturing, such as lean production methods, setting targets and tracking outcomes.  Thus it was less controversial, and generated more comparable rankings across firms, to grade the quality of management.

And the bottom line? 

Not only does the quality of management matter, it matters a lot:

"Managers are more important than the industry sector in which a company competes, the regulatory environment that constrains it, or the country where it operates. In other words, managers are more important to how a company is managed than business lines, government policy, or geography."

Substitute "practice areas" for "business lines," and you begin to get a sense of the power of the McKinsey results.   It's almost shocking:  "Managers are more important than the industry sector in which a company competes."

McKinsey graded 18 different dimensions of management quality on 1 to 5 scales (5 the best), and then averaged all 18 scores to produce one "Management Quality" number for each of the 700 firms.  They then ran those quality numbers against an animal called "Total Factor Productivity," or TFP, which they define as follows:

"TFP is an efficiency measure capturing the impact of all the elements that contribute to a company's output growth but are not explicitly stated as factors of production (unlike capital and hours worked, for example). In other words, TFP is a grab bag for the unexplained elements—such as technology, luck, public infrastructure, and, not least, management techniques—that affect productivity."

In a law firm, think of TFP as a stand-in for everything that is not explained by changes in billable hours and rates, headcount and realization, investments in IT infrastructure, etc.  TFP is the "secret sauce" that reveals how well your firm is doing on the intangibles that don't appear on your P&L or balance sheet:  Professional development, work-life balance and a feeling of autonomy, respect among colleagues, willing collaboration and knowledge sharing, etc. 

Though this chart is a little small, it shows the impact of increasing the management quality score by one point.  Let me point out the top center comparison in particular, "Market share growth"—indexed to a constant score of 100 before the one-point gain, it jumps to 171 with a single point gain in  management quality.

Note a somewhat mysterious point that's pregnant within this data:  In an era of globalization, there are no good-management secrets.  As McKinsey puts it: 

"In sector after sector, best practices emerge in operations, sales and marketing, service delivery, and elsewhere. Under the pressure of competition, companies pay close attention to the improvements that rivals make and rapidly adopt their ideas. Pioneers of best practices thus gain only a short-term advantage. [...]  If effective management and good performance are tightly linked, how do so many badly managed companies survive? It is a question that has long baffled researchers."

Their answer, something of a temporization but something as well of an empirically justified observation, is that poorly managed firms manage to hang on because they exist in market niches relatively protected from competition, and in that state "can survive for years."

Conversely, the more competitive the landscape and, interestingly enough, the younger the firm, the better management practices were. 

Back in law-firm-land, I would argue the most competitive landscape is among the AmLaw 50, which have experienced rather remarkable turnover and ranking-shifts during the past 10 years compared to almost any conceivable prior decade.   And firms newer to the AmLaw 50 are not, I think it is safe to say without exception are not, old-line long-established firms.

A final insight from McKinsey may tie this back into the managerial and governance structures of the newer firms:  McKinsey did a country comparison of the quality of management in general in the US, the UK, France, and Germany, and the US came out on top (highest proportion of well-managed companies).  Why?  "Female managers and decentralized decision-making are more common than [in the other countries]" and the study also found that more female managers correlated with decision-making being delegated further down in the ranks, giving employees a greater sense of autonomy.

Fatalists despair!  And, those of you sniff and scoff at the impact visionary and inspired management can have, shed your cynicism.  People matter.  Management matters.  Insist your firm get its share.

Don't forget to vote!

In 2004 James Surowiecki, a business columnist with The New Yorker, published the well-received The Wisdom of Crowds, which explored (and celebrated) the phenomenon of "collective intelligence," whereby the consensus forecast of a number of lay people was almost invariably superior to the individual forecasts of experts and guru's in the field. 

With Oscar season freshly behind us, we have just had another annual chance to see this phenomenon at work thanks to Michael Mauboussin, a strategist at Legg Mason and since 1993 an adjunct professor at Columbia Business School.  Each year he asks his students to name the Academy Award winners in 12 categories, including some rather obscure such as best film editing.  And this year, as every year, the consensus was more accurate than any single individual, correctly selecting 9 of the 12 actual winners—even though his business students are anything but Hollywood insiders.  By contrast, the average individual's success rate?  Only 4.1 of the 12.

So: All very interesting, but a big so what, right?

I actually believe there's something quite tangible, and potent, here.  "Collective intelligence" has succeeded at everything from predicting the location of a sunken Navy sub (to within a few hundred yards) to forecasting when particular products would actually be launched (internally at Google).

There's even a company that sells software enabling you to easiliy set up "prediction markets," and their clients include Abbott Labs, Corning, Lilly, Siemens, and Dentsu (Japan's largest ad agency).  As the company, NewsFutures, says:

"Here's how it works: You define the outcomes for which you would like reliable estimates. Then you invite people with relevant knowledge to trade "virtual" stock based on their confidence in each outcome. The result is a trading price that tracks the consensus opinion. Because the market is online, it involves any number of participants, from anywhere, at any time."

What could a law firm do with this?

Try, for example, asking all your attorneys—even include, for the wildest and craziest among you, your clients—things like:

• which practice areas should we invest more in, and which less?
• do we have an office in a city with poor prospects, or lack an office in a city with outstanding prospects?
• which competitor do we need to worry about the most vis-a-vis (say) our M&A practice?
• who's going to win the contested election for managing partner? (Ooops—did I say that?)

The point is simply this:  The assembled expertise of your executive committee or practice group heads may not be—indeed, if you buy the notion of "collective intelligence," almost surely will not be—your most valuable resource for insight about the future.  

This exists; it's for real; it's available now.  What have you got to lose?

This is a fascinating question.  So, after a relative drought of pieces on law firm marketing, we have our second in one week.

My immediate response is:  Most firms are probably clueless about this.  (And if someone out there really is doing empirically-driven marketing, please raise your hand; I would be delighted to give you the recognition you deserve [unless you would deem it be revealing a competitive advantage, in which case we can talk not-for-attribution].)

All the activities the reader cites contribute to "name recognition" for a law firm, but the actual "sale" (read: engagements to handle a piece of litigation, a corporate transaction, a tax problem, etc.) only occurs when the client has the precise need, i.e., is at the point of pain.   No one in the history of the world ever woke up and said, "What I need today is to buy myself a really good contract...."

The marketing of all sorts of other goods and services can often generate induced demand, simply by providing information about the features and benefits of a product.   For example, a really good campaign could get me thinking about moving up to a Nikon digital SLR when my film Nikon still has many miles left on it, but you would never achieve anything remotely similar with a law firm's campaign.

To be sure, it's possible (although I would wager very uncommon) for a corporate lawyer to generate demand for, say, a review of corporate governance structures and policies at a client; but in general matrimonial lawyers don't generate divorces, white-collar crime lawyers don't generate securities fraud, and tax lawyers don't generate IRS audits.  In this sense, then, all the marketing in the world can't generate a "sale" for a law firm.   First, the client has to have the need.

But, as the marketers in the audience are starting to protest, can't the right marketing campaign achieve the holy grail of "differentiation?"

I'm here to tell you I think not.

Let me step back:  Your firm can be "differentiated" in clients' eyes—and remember it's only the eyes of the clients that matter, not those of you and your partners—only if it stands for one consistent value, commonly thought of or referred to as its "brand."  [ Note:  Do not confuse "name recognition" for a "brand"—Martha Stewart has had very high name recognition for quite some time, but the value of the Martha Stewart brand has swung from the heights to the abyss and now maybe back.]

A "brand," in turn, is simply a promise:  A promise of consistency, of a certain set of nearly immutable qualities that remains the same each time you come back.  So every can of Coke is alike, every tube of Crest satisfies whatever it is in you that you like about Crest, and every BMW occupies the high-performance rung in its vehicle class. 

But even though one of the most recognizable names in law-firm land is Skadden, every client interaction with a Skadden lawyer (or Clifford Chance, or Jacoby & Myers, for that matter) is different from every other client interaction with other Skadden lawyers, or that same Skadden lawyer on a different matter or a different day of the week.

In other words, law firms, even the mighty Skadden, cannot "promise" consistency.   Thus they can't really have a brand that stands for anything in particular, and so they can't be meaningfully differentiated from their competitive set.

Understand what I'm not saying:  I'm not saying that firms can't have reputations for being particularly expert in specific areas. Weil-Gotshal may be the go-to firm for big-ticket bankruptcies, Schulte-Roth for private equity, Sullivan & Cromwell for commercial bank regulation, etc. 

That still doesn't mean the aura of those practice groups rubs off on completely unrelated practice groups within those exact same firms.   In other words, if you're Fidelity or Vanguard and will never have anything to do with private equity, does anything still make Schulte-Roth distinctive to you? I think not.

But looking at these examples reveals something else: What clients want when they're in the market for a law firm is the capability that speaks most directly to their legal need du jour.

The only reason the articles, golf outings, fancy dinners, speaking engagements, etc., have any value is because they all amount to opportunities to show the client (you can't tell them—that's an exercise in futility if not self-inflicted humiliation) that you understand their business and the legal environment in which they function.  In other words, they are efforts to demonstrate that what you offer could be, at the right time and place, germane to the client's legal needs.

The trenchant and always-reliable Bruce Marcus has written about this, more than once.   The heart of the matter is this:

"The truth is, you probably can’t specifically articulate what you think you know to be better about you or your firm, because without tangible evidence, there’s no way to be credible.  You can’t say, “We do better briefs and write better contracts,” or “We do better audits,” or “We’re better litigators.”

"You can’t say these things because they’re outrageous and self-serving statements. Because you can’t prove it, in most cases.  Because the Canons of Ethics won’t let you. And for most clients, because the real difference between one professional and another is not what you think it is – it’s what the client thinks it is."

Essentially, the goal of all the marketing tools we started with—the articles, the golf games and dinners, the speeches—is to create opportunities, through action not assertion, to demonstrate to the client that your firm stands ready to be truly useful when legal needs arise.

Marketing, in other words, gets you a seat at the consideration table.  But you and your partners still have to "close the sale" in person.

And there won't be any "differentiation" or "branding" pixie dust in the room with you.

Don't forget to vote!

Azim Premji, who created Wipro, is the wealthiest man in India. 

A few nights ago he was interviewed on the "Charlie Rose" show and to listen to him even for a few moments was to understand how Wipro came to have one of the most distinctive—and credible—corporate value statements I've ever read.

While he had many provocative things to say about the U.S.'s relative decline in science and engineering (and he's a Stanford EE—he loves the U.S.), our post-9/11 immigration restrictions, and India's role in the 21st Century economy, the remark that bears sharing with the readers of "Adam Smith, Esq." was his response to this question from Charlie: 

Q.:  "What are you most afraid of?"

A.:  "Complacency.  Complacency within my own organization.

"It is human nature to assume that current success will lead to future success.

"But it is not so."

I've talked before about how hard it is for firms, even (particularly?) those seemingly at the top of their game, to address the need for a coherent strategy.   Premji is upping the ante. 

David Maister reports on his frequent experience that, after an extended engagement with a firm seeking to move from "mere" profitability to the genuine status of "trusted advisor," he will distribute anonymous voting machines at the final meeting of the partnership to review the plans, and will ask how many believe the firm really will implement the new strategy, will follow through.  And, no surprise, in the "overwhelming majority" of cases the solid consensus is that the firm will not.  (David describes the same syndrome at greater length and depth in "Strategy & The Fat Smoker.")

Meanwhile, The Lawyer, fresh off reporting stellar results for the top 20 U.S. firms in 2005, warns in "US booming - but for how long?":  "In other words, the battle for the premium rate work is only going to get tougher in 2006. It starts now."

Are you ready?  If Premji knew your firm from the inside, what would he say?

It's official, according to The Lawyer:  For Skadden and six other firms, 2005 was indeed, as Skadden's New York-based M&A partner Tom Kennedy put it, "a very good year." 

For the first time ever, seven US firms topped $1.0-billion in revenue, Skadden first among this august pack at $1.58B, and Weil-Gotshal at $1.00B (the suspiciously round number doubtless making some wonder if they've been taking accounting lessons from Jack Welch (and see this), but at "Adam Smith, Esq." we tend to take these reports at face value absent insider info to the contrary—which we utterly lack here).  Here's the breakdown of the top 20 US firms by revenue:

The indubitable Financial Times, which has always covered law-land better than the WSJ, also has the story.

As you can see, more than half recorded revenue jumps in the double-digit percentages, and PPP increases were even better.

More impressive still?  What I call the "Complexity Quotient" of managing a sophisticated professional services firm.  According to my friends in management-consulting ranks, the rule of thumb they employ when estimated the challenges facing leaders of a professional services firm as contrasted to those facing management of a retail, manufacturing, or construction firm (say) is that $1.00 of professional service revenue is 5 times more complicated than $1.00 of garden-variety revenue. 

Which means Skadden isn't strictly comparable to a $1.5-billion/year "regular economy" firm, but rather to a $7.5-billion/year firm in more conventional sectors.  This would make them, by revenue, one-quarter the size of Intel, or nearly as large as the domestic video-game industry.

Which leads those of a contrarian frame of mind (moi?!) to pose the following question to you, smart and savvy readers:

Rules of the poll road:

• I will leave it up for about 10 days.
• Multiple answers are permitted, but we trust your discretion in keeping them internally consistent.
• You'll read all about the results right here, so stay tuned.

In the meantime, my kudos to Earle Yaffa.

Yesterday's half-hour "Coast to Coast" legal talk radio show is now up at the Legal Talk Network.

I'm on it as a guest on the subject of "Big Firms--Big Business," along with Eric Sinrod of Duane Morris' San Francisco office.   The hosts, as always, are my fellow law.com bloggers and good friends J. Craig Williams and Bob Ambrogi.  Take a listen!

In my last post, I referred somewhat obliquely to "long-term threats to the privileged positions" of firms, pointedly including large and prosperous firms (not just the struggling, the stragglers, and the stagnant).  What exactly might those threats be?

Hildebrandt and the Citigroup private bank, in their annual year-end wrap of 2005, point towards many of the answers.  I've taken the liberty of highlighting the subjects I find most noteworthy, and since it's always easier to cite the prognostications of others as a premise to advancing one's own opinion, I intend to do so liberally. 

First of all, despite 2005 showing healthy growth over 2004 in both revenue and profits per equity partner, the rate slowed appreciably from the CAGR (compound annual growth rate) of the 2000—2004 period.  Nor do Hildebrandt and Citigroup view this as a temporary aberration:  "Notwithstanding the solid economic performance of most firms, there were signs in 2005 of growing pressures on the bottom line."

The most unsettling such "pressure" is the finding that, among the 30 most profitable firms in the country, realization rates actually declined—and among other firms they were at best flat.  Declining realization is symptomatic of firms' over-reaching in billing and/or of clients' pushing back harder:   Choose your poison, but neither of those is an auspicious leading indicator of financial performance in 2006.  Indeed, I view declining realization as virtually synonymous with restive clients or substandard work:  Either or both would be alarming.

Second, M&A among US law firms (not to be confused with M&A/deal work done by law firms!) accelerated dramatically.  While there were only two more completed acquisitions in 2005 than in the prior year (49 vs. 47), the attention-getting figure is that the average size of the "acquired" firm more than doubled, from 30 lawyers to 67.

Third (and this is where it gets really interesting), "analysis shows that the profits per equity partner of the 30 most profitable firms in the US are more than double those of other firms," and that the gap is widening as the leaders pull away from the pack (emphasis supplied).  Hildebrandt and Citigroup conclude—prematurely, in my view—that firms that have not already broken into the top economic tier "are highly unlikely to do so."

To be precise, our disagreement is one of shading and nuance, not one of black and white.   I believe firms with a potent, well-defined strategy, led by tenacious and determined management, can still excel no matter where they rank today.  (And the converse is true, as we have witnessed with the demise of several storied names.) 

But for most firms watching the leading pack accelerate into the distance, the observation is surely true that presuming and proclaiming that they'll catch up is unrealistic and only results in discontent within the partnership when the improbable prediction continually fails to come true.   These firms need to take a long, hard look in the mirror:

"There is an economic ladder in the legal market that has many rungs; finding the right one for a particular firm requires strategic focus and a healthy dose of realism."

Fourth, the attitude and perspective of Fortune 1000 General Counsel have changed markedly in just the past five years.  Now, global capability and "critical mass" are seen as essential to even have a seat at the table for many transactions, whereas those characteristics were not high on the priority list in the past.

Corporate counsel are also continuing to winnow their rosters of outside firms, with the average number of firms with whom they do business decreasing and the percentage of total outside fees paid to the top-billing law firms increasing.  Fully 60% of those surveyed say they are actively pursuing this increased "convergence."

Fifth, and next to last, I want to identify two developments that I view conceptually as different sides of the same coin, although Hildebrandt and Citigroup portray them as discrete:  The increased use of contract, or temp, lawyers, and the very different bargain that today's Gen Y associates expect to strike with their firms (different, that is, compared to the "work hard so as to have a shot at partner" bargain of the Gen X'ers and the Boomers).

Why are these connected?  They're both about the war for talent, and they're both about how to supply the bodies needed to do the grunt work if the ready ranks of mid- and senior associates toiling in indentured servitude can no longer be as readily taken for granted.  Interestingly, to keep Gen Y'ers engaged, firms have invested more heavily than ever in professional development programs, including the unprecedented (and deeply admirable) formal law firm/business school partnerships we've seen with the likes of Reed Smith/Wharton, and DLA Piper/Harvard.

Up to this point you may find yourself thinking, "Sure, there are challenges out there, 'twas ever thus, but we've dealt with them before, in the ordinary course as it were, and we'll deal with them now.  What's this 'long-term threat' MacEwen is talking about?"   It's this:

"During the past year, Hildebrandt consultants came across a number of firms that were doing quite well financially, but on many other measures (partner morale, internal trust, teamwork) they were failing and appeared very fragile. ... [T]here have been disturbing signs that a number of well-performing firms may be more fragile than they appear on the surface."

Add to this one of the key findings of a 2004 study of law firm dissolutions, and you may find yourself coming upon a suddenly-sobering perspective. And that finding was? That most firms that dissolve do so in a year when their revenues are at an all-time high.

Citigroup characterizes a firm's financial performance as a lagging indicator of overall health—and only a small minority of law firm failures are attributable to insoluble financial problems.  Most are caused by a collapse of partner confidence: 

"The seeds of collapse are generally sown long in advance of the actual dissolution – in most cases, even long before the firm begins to noticeably decline. It is clear that a firm’s unwillingness or inability to confront tough issues is an overarching reason for failure and one of the primary reasons why partners lose faith in their firm.  Too often, firms recognize their issues, including partner dissatisfaction, but only act after a “catalyst event” takes place. For most, this is too late."

In other words, it's not (primarily) about the money.  People—especially highly motivated, competitive, critical, analytic Type A's—need to feel there's purpose to their work, a vision at the firm, and that they're doing challenging work in a supportive environment that permits them to feel a genuine sense of accomplishment. As they conclude, "Law firm leaders - even leaders of economically successful firms - ignore these realities at their peril."

On reflection, how could it be otherwise?  Although they don't appear on your balance sheet as assets,  people are indeed the only material asset your firm has—everything else is, both in the economic sense and the securities-law sense, "immaterial." Under the calm surface of prosperity, there can be roiling currents.

I've written before with some passion about the need for law firms to think and to act strategically.  The "act" part should follow as the day the night, but of course it's not that simple. 

Why does this matter?  Why is it, in fact, a deadly serious matter for your firm if you are, or aspire to, AmLaw 25 global-footprint membership?

Consider that firms in that stratosphere are, or shortly will be, pretty much billion-dollar-a-year enterprises.  Quick Quiz:

• Q.:  Name two public companies recognizable to Joe Six-Pack whose revenue is just about exactly $1.0-billion/year.
• A.:  JetBlue, and Harley-Davidson.

Now ask yourself what percentage of Joe Sixpack's—or, let me hasten to add, your neighbors, siblings, and even your children—could identify Skadden-Arps, not to mention Baker & McKenzie, Latham, Jones-Day, Sidley, or White & Case?  Yet all are comfortably north of $1-billion/year in revenue.

Add this:  Management consultants typically use a multiplier of 4-6 when comparing the complexity of managing a professional services firm with a typical manufacturing or retailing firm.  In other words, the "Complexity Quotient" of managing your law firm equates to the complexity of running an auto dealer, a construction company, even a pharmaceutical company, that is five times your size in revenue.

So I'll ask again:  You think your firm can do without strategic thinking, and strategic execution?

Nevertheless, my friend Aric Press (always a delight to read for the felicity of his style) writes in this month's American Lawyer that the best-laid strategic plans often lead to naught:

"We all know the drill. First come the memos to the committee, the flow charts, and the Power Point. Then comes the expert advice: the buffed MBA's and the former this and the retired that wheeled in to bless the endeavor. The product of all this effort is duly presented to the partnership. And then what? Too often, as I listened over the last month, the answer was not much."

And that would be why exactly?

As Aric points out, deciding on a strategy entails making choices.   But how many firms like to think of themselves as good at everything?  To all those firms, I say:  "You may have strengths, but by no stretch of the imagination do you have a strategy."   Although Aric doesn't cast the issue quite as I do, he makes the pointed observation that for such a firm to move from the mush positioning of being all things to all people to a distinctive (and credible, ownable) focus requires that partners exhibit a "willingness to be led." Here, of course, he has put his finger on it.

Consider the status quo from the perspective of your typical mid-career partner at an AmLaw 25 firm:  "I'm making [say] $1.5-million/year, and I can expect that to increase comfortably above the rate of inflation for as long as I care to keep working.   Sure, I work hard, and it's true that even equity partnership has lost its bulletproof job security, but I'm good at what I do and I even like most of my partners and clients.  What's wrong with this picture?"

Rob Millard, a partner in Edge International and a friend (we had the distinct pleasure of being able to sit down together twice in the past week in New York, once as he was on his way from Johannesburg to Phoenix, and again on his return), makes the point that it's emotionally difficult—he doesn't say bordering on the impossible, but you can read between the lines—for those in positions of wealth and comfort to embrace change, even to deal with a long-term threat to their privileged position.

"Just like the camel could not pass through “The Needle” [a very narrow gate in the wall of ancient Jerusalem] with its baggage intact, so a strategist cannot embrace new paradigms with the baggage of his or her old thinking intact. The same goes for those that have to execute the strategy. If encumbered by “old thinking,” they simply cannot make the intellectual transition necessary to execute, especially when the old thinking has led to current prosperity and comfort and the change is necessary to address something that is looming in the future rather than causing actual immediate pressure."

Shall we then despair of firms—prosperous, seemingly solid firms, at any rate—ever embracing strategic thinking and strategic execution? 

I for one refuse to: Lawyers (particularly the lawyers we're dissecting here) are among the brightest and most analytic people around.   The consequences of developments that could threaten business as usual can be explored, discussed, debated, and dealt with in forthright and clear-eyed fashion. 

I further believe that most lawyers at the top of their careers devoutly want to build lasting, sustainable firms with impeccable pedigrees, that stand for something tangible and worthy.

Writing about "What it Takes to Be Great," David Maister has this to say:

"First, I don’t think you can create a sustainable, ongoing great firm unless there is a broadly-held sense of stewardship, with each partner or senior officer feeling that they do not own the firm in perpetuity, but hold it in trust to be passed on in better shape to the next generation. Anything other than this culture will fail to build an institution that can live on."

So my question morphs into:  What do you as a partner in your firm (or partner wannabe) hold "in trust?"  If the answer is, "Let me get back to you on that....," your firm is not yet great and it definitely needs a strategy, which is, if I may say so, the firm's equivalent of a soul.

On the other hand, if the answer is, "Can I buy you a drink?  I'm so excited to talk about that!," then you have a strategy in your heart and can articulate it in your mind.

What's your answer?