Commodization: Threat or Menace?

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. 

Consider Cisco's building a web application to enable its managers to walk through garden-variety employment law questions online, with the content and "intellectual property" behind the scenes provided by Eversheds.  Consider Forrester Research's report that 12,000 US legal jobs had already moved to low-cost areas such as India and Eastern Europe, and predicting the number would triple to 39,000 in 2010 and then double again to 79,000 in 2015.

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?

"The Vanishing Middle"

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?

Indiana University Law School's Symposium on Globalization

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. 

Maister On Why "Leadership" Won't Work

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.

Morrison & Foerster's "AnswerBase" KM Initiative: Learning from Wal-Mart

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.

The Baker-Robbins/LegalWorks KM Forum

Knowledge Counsel Forum, Westin Times Square, March 23--24, 2006

Sponsored by Baker Robbins and West Legalworks

I attended this conference and want to report on it. I don't plan to cover this as a court reporter or even as a conventional journalist on a story, but rather intend to highlight notable observations, insights, and trends.

Panel I: The Future of KM in Law Firms

Sally Gonzalez, Baker-Robbins; Kingsley Martin, Thomson-Elite, Risa Schwartz, Wilson-Sonsini

Moderator: Eugene Stein, White & Case

At WSG&R, the KM system "pushes" information out to partners and associates when a new matter is opened, a la McKinsey. Currently done manually; aspire to doing it automatically. For partners, they might get names of colleagues who'd recently worked on similar deals, as well as "comparable's" in terms of fees, hours, etc. Meanwhile, associates get related documents.

Going forward:

• Bring the right people to the table (don't forget secretaries)
• Identify pain points and business needs
• Design systems in conformity with existing processes
• Embed KM staffers in practice groups.

At White & Case, they decided to look outside the legal industry for ideas, and immediately realized the model of the publishing industry was analogous to a law firm: Paralegal's are researchers, fact-checkers; junior lawyers are the writers and researchers; senior lawyers and junior partners are the editors; senior partners are editors-in-chief and relationship officers. This helped them with the "how."

As to the "what," W&C looked at medicine; in particular, when doctors write a prescription in an electronic-record-enabled environment, the system can automatically check for best practices, contra-indications, etc. One consequence was to reorganize so that everyone who touches a document—including KM, the library, paralegal's, secretaries, and IT—work together.

Sally Gonzalez points out that one reason the medical profession can share knowledge is because there is a universal, well-recognized, taxonomy running into the tens of thousands of entries (all the checkboxes on the invoice when you leave). No such analogue in the legal community.

Sally would like to see an "insightful convergence" between the UK and the US approaches; not that the US should ape the UK, but the UK could learn some things from the US. US firms have "PSL envy," which stems from a fundamental misunderstanding of how the UK system works. First, UK does not remotely have the same commercial legal publishing industry the US has--so to the extent the UK PSL's are just generating internal equivalents of what you can buy off the shelf in the US, it would be crazy to emulate them. Second, until very very recently, UK law students were not trained to do any research at all; they were presented with briefing books compiled by others. And finally, changes in UK regulations are typically shrouded in secrecy until they're announced as a fait accompli.

Sally predicts the conference will spend 80% of its time talking about technology, but it should only be about 30% (despite technology's sexiness and allure!). The non-technology issues are harder to talk about, but far more critical.

Another of Sally's hobby horses is "Information Architecture:" What are the core business processes your firm as a whole needs to excel at to thrive in the market? Then: What information do the lawyers need to drive through those processes?

Kingsley Martin opens with KM mantras:

• KM is not about technology
• It is about people
• KM focuses on process
• KM works best by stealth
• KM works best by passive, invisible technology behind the scenes
• KM must organize external as well as internal information

Prediction: The challenges of KM will in large part be solved through technology.

Holy Grail: Connect the dots of (a) documents; (b) people and organizations; and (c) clients and industries.

Distinguish between matter-centric info: System data and bibliographic data come from the system, and are extremely reliable

Vs: Practice-centric info, using information extraction to capture procedural, subject matter, and jurisdictional information. Believe it or not, automated info extraction is far more precise than hiring domain experts to do it. Of course, while they can capture all the related doc's, they can't tell you which is best--that's where PSL's and other humans come in.

Panel II: The Evolving KM Organization in Law Firms and Corporate Law Departments

Robert Dinerstein, UBS Investment Bank; Christian Liipfert, BP America; Risa Schwartz, WSGR

Biggest challenge for UBS' KM efforts is not technological but cultural: Old habits die hard, and people will change how they behave only if the new system is decisively perceived as easier and better, and not just the effort of a small group of people to advance an idea that is untested, untried, and unproved.

Other anecdotal observations about KM in the corporate law department environment:

• Dinerstein was struck by the extent of resources devoted to KM by Magic Circle UK firms.
• He believes a new form of partnering between clients and law firms lies in using this resource, as it's simply infeasible to expect a corporate law department to investment similar resources.
• The business case for KM in the corporate legal department is simple: Cost savings. Dinerstein believes the investment in KM will be repaid multiple times in outside counsel savings.

March 24

KM as A Profit-Maximizing Tool

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.

Barnes & Noble: 1:00 pm

Tag-Team (Nailed Twice!)

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."

Leadership for IT Managers

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.

When The New York Times Speaks, It's Reality

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?

Calling All CIO's

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.

Is There a Size Limit to Global Firms? The People Have Spoken

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?

Do As They Say...

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.

SUNY/Stony Brook's MBA for Law Firm Leaders Launches Next Month

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.

Announcing "This Month's Best of 'Adam Smith, Esq.'" Newsletter

Announcing something new and different on "Adam Smith, Esq.:"  A free monthly email newsletter delivering "This Month's Best of 'Adam Smith, Esq.'"  fresh to your inbox at the end of each month.

The newsletter will consist of links to, and concise, pithy summaries of a few of the more trenchant, widely-read, controversial, or just plain entertaining entries of the past month (in your humble editor's opinion). Suitable for sharing with friends, and guaranteed to be family-friendly.

You can sign up for it in the right-hand column (scroll down a bit—and you folks on RSS feeds, pay a visit to the site itself) under the cunning heading, "Subscribe to the free monthly email newsletter...."

I do ask for a bit of info about you, the better to keep building the "Adam Smith, Esq." community, but if you think for a second that I would share one byte of that with anyone else, well, all I can say is I'd have to be well and truly off my med's to have the thought cross my mind.  Don't even think about it; won't happen.

The first e-issue will be out after the end of March. 

I hope you all enjoy!

Lessons from Capital One & North Fork

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?

The London-Based "PM Forum" and Blogs as Professional Communities

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."

A word about the PM Forum itself:  If you're unfamiliar with it, it's a tremendous resource which every serious marketing professional should know about: 

"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!)

Think Management Doesn't Matter? Think Again

When it comes to law firm financial performance, there's a fatalistic school of thought which more or less adopts the following position: 

"Profitability all depends on matters outside the firm's immediate control, starting with the basics such as:

• whether it's a New York powerhouse or a regional player;
• its mix of practices, and specifically the proportion of its business where price is not much of an object;
• the leverage intrinsic to its strongest departments;

and other things management can't do much about, certainly not in a time-frame measured in less than a decade.  So a firm's profits really depend on those 'built-in' factors and management can at best tweak at the margins."

Now, as loyal readers know, I'm a subscriber to the "people make the times" not "the times make people" theory of history (and of law firm  management), so this fatalistic view has always irritated and aroused me, but like the grain of sand that irritates the oyster, it's taken me awhile to lay down a pearlescent intellectual coating to rebut it.   Riding to my aid is McKinsey.

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.