The 2006 AmLaw 100: Another Performance Metric

Herewith our last two charts of the weekend.

First, we have the cumulative "market share" (revenue) of the AmLaw 100 in rank order, showing that the top 28 or so firms have 50% of the market.   Antitrust 101 tells us this is a very fragmented industry, still—especially when you add in the fact that we're only talking about the AmLaw 100.  On the other hand, the market for corporate legal services from the Fortune 500/1000 is arguably a distinctive market in its own right, so we may be justified in excluding all the law firms in the country and the world. 

Still, no reputable economist believes any single firm has any market power until concentration levels reach something like a handful of firms controlling 50+% of the market.  No matter how rapidly consolidation may be proceeding, we're not at risk of that during the working careers of  most of us.

Now let's look at something else—another "performance" metric.

This bar chart shows, for each and every firm, the extent to which its share of total AmLaw 100 revenue exceeds or falls short of its share of total AmLaw 100 lawyers (headcount).  For example, if your firm has 2.00% of total AmLaw 100 revenue and 2.00% of total AmLaw 100 lawyers, your score on this chart is 0—you're right on the X axis. 

On the other hand, if you have 3% of revenue and only 1.5% of lawyers (cf. Skadden, more or less), your score will be +100%; 1% of revenue and 2% of lawyers, -100%, and so forth.  First the chart, then the call-outs:

 

Since this is wickedly difficult to read at the resolution required to make it fit into a typical browser window, let me read off the firms that I've labeled, in order left to right, first above the line:

• Skadden
• Latham
• Weil-Gotshal
• Kirkland & Ellis
• Sullivan & Cromwell (the highest single bar of all)
• Shearman & Sterling
• Cleary Gottlieb
• Gibson Dunn
• Simpson Thacher (Cleary, Gibson, and Simpson are bunched immediately adjacent to each other)
• Davis Polk
• Paul-Weiss
• Cravath, and
• Wachtell

Now, the same exercise for the labeled firms below the line (and to all those readers with loved ones in these firms, all I can say is that I'm only the messenger):

• Baker & McKenzie
• Jones Day
• White & Case
• Holland & Knight, and
• Wilson Elser

Let me conclude with this:  The most fascinating thing about this table to me is not that it should be read to mean all the firms above the line are doing brilliantly and those below are suffering.   Not at all.  What it means to me is that firms above and below the line have drastically different strategies and market positionings.  Just as Tiffany can co-exist with Zales, each profitable and sustainable for the presumed long run, so may be the case in our industry.

 But it does bring to mind the most shop-worn high school yearbook entry of all time:  "Know thyself."

In closing, a word of thanks to my (prefers-to-remain-anonymous) friend, a former banking executive who is embarked on becoming a student of the legal industry, who was extremely helpful in generating ideas for this analysis.

The 2006 AmLaw 100: More Fun With Numbers

Here at "Adam Smith, Esq.," the release of the annual AmLaw 100 feels a bit like Super Bowl weekend; there are lots of stories to report.  Fortunately, here in virtual space, we have unlimited newsprint and ink.

Here are a few more ways to slice the data.

First, let's look at the biggest gainers and losers in terms of the number of slots by which firms rose or fell vis-a-vis last year. Of course, not all gains or losses of "one unit" of rank in the AmLaw are equal. For example, to jump four slots from #87 to #83 requires an additional $9-million revenue; but to jump from #8 to #4 requires an additional $306-million, or about 34 times as much in absolute terms.  Nevertheless, since all firms are by definition ranked shoulder-by-shoulder with their peer group in terms of revenue, the numbers are somewhat revealing.  And of course the standard disclaimer:  Most of the biggest gains came through merger or sizable lateral partner acquisitions.

Here's how it looks in a distribution curve:

Between the green lines are all the firms that ended 2005 within 10 slots of where they were in 2004; the orange bounds mark those firms within 5 slots, and the red bounds those within 2 slots.  If you ask me, this looks like a relatively stable distribution if it were a long period (say, five or ten years).

But if you replay this videotape every year for a decade, you will end up with a radically different array of firms. Regular readers know I incline to that view already, and I may be adopting it ever-more-firmly. Incumbents have no pre-ordained right to pride of place. En garde.

So: Forthwith to the table itself, where we name names:

2005	2004	Change	Firm
74	117	43	Edwards Angell
80	102	22	Dickstein Shapiro
10	25	15	Piper Rudnick
34	49	15	Ropes & Gray
53	67	14	Goodwin Procter
83	97	14	Troutman Sanders
89	103	14	Kramer Levin
30	42	12	Pillsbury Winthrop
29	40	11	Dechert
45	55	10	Kirkpatrick & Lockhart
97	107	10	Sutherland Asbill
51	60	9	LeBoeuf, Lamb
81	88	7	Wilson Elser
92	99	7	Faegre & Benson
77	83	6	Sheppard, Mullin
90	96	6	Pepper Hamilton
42	46	4	Cadwalader
47	51	4	Proskauer Rose
78	82	4	Steptoe & Johnson
12	15	3	Greenberg Traurig
25	28	3	Foley & Lardner
75	78	3	Thelen Reid
84	87	3	Fish & Richardson
86	89	3	Venable
100	103	3	Hughes Hubbard
22	24	2	Morrison & Foerster
41	43	2	Milbank, Tweed
67	69	2	Seyfarth Shaw
72	74	2	Jenner & Block
2	3	1	Latham & Watkins
7	8	1	Weil, Gotshal
15	16	1	O’Melveny & Myers
63	64	1	Covington & Burling
71	72	1	Duane Morris
1	1	0	Skadden
4	4	0	Jones Day
5	5	0	Sidley Austin
6	6	0	White & Case
9	9	0	Kirkland & Ellis
48	48	0	Sonnenschein
54	54	0	Wilson Sonsini
59	59	0	Fried, Frank
61	61	0	Howrey
66	66	0	Seyfarth Shaw
70	70	0	Cooley Godward
76	76	0	Blank Rome
79	79	0	Stroock & Stroock
91	91	0	Mintz, Levin
3	2	-1	Baker & McKenzie
8	7	-1	Mayer, Brown
11	10	-1	Sullivan & Cromwell
18	17	-1	Cleary Gottlieb
19	18	-1	Gibson, Dunn
20	19	-1	Simpson Thacher
21	20	-1	Hogan & Hartson
23	22	-1	Paul, Hastings
27	26	-1	Bingham McCutchen
28	27	-1	Holland & Knight
56	55	-1	Bryan Cave
69	68	-1	Perkins Coie
99	98	-1	Cozen O’Connor
13	11	-2	Shearman & Sterling
14	12	-2	Wilmer Cutler
16	14	-2	Morgan, Lewis
31	29	-2	Winston & Strawn
32	30	-2	Paul, Weiss
33	31	-2	Reed Smith
35	33	-2	Orrick
38	36	-2	King & Spalding
39	37	-2	Vinson & Elkins
43	41	-2	Hunton & Williams
64	62	-2	Nixon Peabody
65	63	-2	McGuireWoods
73	71	-2	Baker & Hostetler
82	80	-2	Kilpatrick Stockton
88	86	-2	Finnegan, Henderson
24	21	-3	Akin Gump
26	23	-3	Davis Polk
37	34	-3	Debevoise & Plimpton
40	37	-3	Cravath
49	46	-3	Willkie Farr
55	52	-3	Squire, Sanders
60	57	-3	Katten Muchin
68	65	-3	Dorsey & Whitney
17	13	-4	McDermott Will
36	32	-4	Fulbright & Jaworski
62	58	-4	Kaye Scholer
96	92	-4	Drinker Biddle
97	93	-4	Patton Boggs
49	44	-5	Wachtell
58	53	-5	Dewey Ballantine
95	90	-5	Andrews Kurth
87	81	-6	Womble Carlyle
46	39	-7	Arnold & Porter
52	45	-7	Baker Botts
57	50	-7	Alston & Bird
43	35	-8	Heller Ehrman
94	85	-9	Cahill Gordon
85	75	-10	Shook, Hardy
92	77	-15	Chadbourne & Parke

No, we're not done yet.

Next, try this:  Let's rank all the firms in order by the percentage by which their revenue per lawyer is greater or less than the average revenue per lawyer.  In other words, if your firm's revenue per lawyer were $725,634, you would be precisely average.  To the extent your firm's revenue per lawyer exceeds or falls short of that number, we can generate a percentage variation.

This is, roughly speaking, a measure of how effectively firms use lawyers to generate revenue compared to the average effectiveness across the AmLaw 100.

As they say , "let's go to the videotape!"  And it's no surprise as to who's #1:

Firm	% Variance
Wachtell	230.00%
Sullivan & Cromwell	124.13%
Cravath	76.40%
Davis Polk	57.48%
Simpson Thacher	54.85%
Paul, Weiss	42.10%
Gibson, Dunn	39.30%
Milbank, Tweed	38.37%
Skadden	37.30%
Shearman & Sterling	36.66%
Kirkland & Ellis	35.99%
Weil, Gotshal	31.41%
Cadwalader	29.50%
Debevoise & Plimpton	27.46%
Cleary Gottlieb	25.73%
Cahill Gordon	24.25%
Fried, Frank	22.71%
Latham & Watkins	20.53%
Seyfarth Shaw	19.24%
Willkie Farr	18.31%
Finnegan, Henderson	16.92%
Wilmer Cutler	16.51%
Ropes & Gray	15.81%
O’Melveny & Myers	13.97%
Arnold & Porter	12.35%
Fish & Richardson	11.01%
Heller Ehrman	10.95%
Kaye Scholer	10.57%
Kramer Levin	10.25%
Vinson & Elkins	8.97%
Bingham McCutchen	8.96%
Dickstein Shapiro	7.86%
Dewey Ballantine	7.75%
Stroock & Stroock	7.74%
Akin Gump	7.26%
Covington & Burling	6.66%
McDermott Will	6.56%
Sidley Austin	6.53%
Orrick	5.60%
Paul, Hastings	5.53%
Wilson Sonsini	3.61%
Steptoe & Johnson	3.56%
Mayer, Brown	3.33%
Goodwin Procter	3.23%
Hughes Hubbard	2.89%
Proskauer Rose	2.62%
Morrison & Foerster	1.26%
Hogan & Hartson	1.22%
Jenner & Block	0.82%
Cooley Godward	-0.56%
LeBoeuf, Lamb	-0.92%
Winston & Strawn	-1.14%
Howrey	-1.87%
Sheppard, Mullin	-2.20%
Thelen Reid	-2.27%
Dechert	-3.38%
Baker Botts	-4.04%
Foley & Lardner	-5.68%
Morgan, Lewis	-5.72%
Piper Rudnick	-5.82%
King & Spalding	-6.09%
Sonnenschein	-6.74%
Katten Muchin	-7.69%
Pillsbury Winthrop	-8.23%
Greenberg Traurig	-11.11%
Fulbright & Jaworski	-13.43%
Chadbourne & Parke	-14.06%
Reed Smith	-15.09%
Squire, Sanders	-16.91%
Andrews Kurth	-17.09%
Jones Day	-17.09%
Nixon Peabody	-17.25%
White & Case	-17.35%
Alston & Bird	-17.65%
Pepper Hamilton	-17.74%
Hunton & Williams	-17.97%
Sutherland Asbill	-18.20%
Duane Morris	-18.30%
Venable	-18.91%
Mintz, Levin	-18.94%
Edwards Angell	-20.87%
Perkins Coie	-21.04%
Blank Rome	-21.67%
Dorsey & Whitney	-22.04%
Kirkpatrick & Lockhart	-22.78%
Patton Boggs	-23.71%
Kilpatrick Stockton	-24.13%
Drinker Biddle	-24.68%
Bryan Cave	-25.08%
Seyfarth Shaw	-26.74%
Shook, Hardy	-28.02%
Faegre & Benson	-29.56%
McGuireWoods	-30.28%
Holland & Knight	-31.39%
Troutman Sanders	-31.51%
Womble Carlyle	-35.05%
Baker & Hostetler	-35.31%
Cozen O’Connor	-36.96%
Baker & McKenzie	-37.56%
Wilson Elser	-54.77%

"Super Bowl Weekend?" Indeed.  Plan on coming back for more here on "Adam Smith, Esq."  We haven't run out of ink yet.

The 2006 AmLaw 100: Ranked by Revenue per Lawyer

Today we have the AmLaw 100 ranked by Revenue per Lawyer, one of my favorite metrics.  Why one of my favorites?  First of all, it provides insight into the extent to which a firm actually achieves the Holy Grail sought by all—to do a larger proportion of "premium," money-is-no-object, work.  Everyone claims to be focused on that magical realm, but the  numbers don't lie. 

And speaking of "numbers not lying," that's the second reason this is one of my favorite metrics:  It's a lot harder to game total revenue and number of lawyers than it is to game profitability.  This strikes me as a pretty hard number, all things considered.

So what do we see?  Some firms clearly fall into the territory of [Revenue per Lawyer] ~ {[average hourly rate] x 2,000}, which reveals a lot.  At the other extreme, the New York "bulge bracket" firms (Cravath, Davis Polk, Paul-Weiss, Simpson Thacher, Sullivan & Cromwell) generate over $1-million/year in revenue per lawyer, which means they're by no means charging it all on the clock.

And then of course there's the predictable, perennial, stand-out #1 leader, Wachtell, at nearly $2.4-million on this metric, over 47% higher than the second-place firm, Sullivan & Cromwell, at $1.63-million.

Only eight firms in total are over $1-million on this score, although Skadden and Shearman & Sterling missed that arbitrary cutoff by less than $10,000 (I rounded the numbers to the nearest $1,000 in the table that follows).

Bringing up the rear is Wilson Elser at $329,000, and smack at the median point is LeBoeuf Lamb at $719,000. 

The most interesting point to me?  The relative flatness of the distribution from #10 to #90.  Sure, it covers a range of $500,000 to $1,000,000, but the steep parts of the curve are at the beginning and the end.  Moral of the story:  It's very very hard to excel, and by the same token you probably need to be doing a number of things very poorly to end up on the dog-house tail.

Keep reading to see the whole chart. 

And later this weekend, I promise further analysis from a friend who is a retired finance executive of a major US bank, now a student of the legal industry, who sees some parallels between our industry and banking, so plan to stop back at "Adam Smith, Esq."

2005 Rank	2004 Rank	Firm	2005 Gross Revenue	Change From 2004	Lawyers	Revenue per Lawyer
49	44	Wachtell	$443,000,000	2.80%	185	$2,395,000
11	10	Sullivan & Cromwell	$875,000,000	5.00%	538	$1,627,000
40	37	Cravath	$500,500,000	10.00%	391	$1,281,000
26	23	Davis Polk	$604,500,000	0.00%	529	$1,143,000
20	19	Simpson Thacher	$727,000,000	5.20%	647	$1,124,000
32	30	Paul, Weiss	$563,000,000	11.70%	546	$1,032,000
19	18	Gibson, Dunn	$746,000,000	7.60%	738	$1,011,000
41	43	Milbank, Tweed	$496,000,000	14.90%	494	$1,005,000
1	1	Skadden	$1,610,000,000	11.80%	1,616	$997,000
13	11	Shearman & Sterling	$835,000,000	7.70%	842	$992,000
9	9	Kirkland & Ellis	$970,000,000	16.20%	983	$987,000
7	8	Weil, Gotshal	$1,016,500,000	11.90%	1,066	$954,000
42	46	Cadwalader	$483,000,000	16.10%	514	$940,000
37	34	Debevoise & Plimpton	$535,500,000	11.90%	579	$925,000
18	17	Cleary Gottlieb	$760,000,000	9.40%	833	$913,000
94	85	Cahill Gordon	$229,000,000	0.90%	254	$902,000
59	59	Fried, Frank	$390,000,000	8.60%	438	$891,000
2	3	Latham & Watkins	$1,412,500,000	17.10%	1,615	$875,000
67	69	Seyfarth Shaw	$321,000,000	9.90%	371	$866,000
49	46	Willkie Farr	$443,000,000	6.50%	516	$859,000
88	86	Finnegan, Henderson	$235,000,000	4.70%	277	$849,000
14	12	Wilmer Cutler	$815,000,000	8.60%	964	$846,000
34	49	Ropes & Gray	$558,000,000	37.90%	664	$841,000
15	16	O’Melveny & Myers	$808,000,000	15.90%	977	$828,000
46	39	Arnold & Porter	$465,500,000	2.50%	571	$816,000
43	35	Heller Ehrman	$475,000,000	0.60%	590	$806,000
84	87	Fish & Richardson	$246,500,000	9.80%	306	$806,000
62	58	Kaye Scholer	$383,500,000	5.90%	478	$803,000
89	103	Kramer Levin	$232,000,000	18.40%	290	$800,000
27	26	Bingham McCutchen	$593,000,000	4.90%	750	$791,000
39	37	Vinson & Elkins	$510,000,000	12.10%	645	$791,000
80	102	Dickstein Shapiro	$257,500,000	30.70%	329	$783,000
58	53	Dewey Ballantine	$392,500,000	3.20%	502	$782,000
79	79	Stroock & Stroock	$258,000,000	8.40%	330	$782,000
24	21	Akin Gump	$618,000,000	1.00%	794	$779,000
5	5	Sidley Austin	$1,124,000,000	9.20%	1,454	$774,000
17	13	McDermott Will	$799,500,000	7.30%	1,034	$774,000
63	64	Covington & Burling	$380,000,000	12.60%	491	$774,000
35	33	Orrick	$554,000,000	14.50%	723	$767,000
23	22	Paul, Hastings	$667,000,000	9.50%	871	$766,000
54	54	Wilson Sonsini	$412,000,000	9.10%	548	$752,000
78	82	Steptoe & Johnson	$258,500,000	11.20%	344	$752,000
8	7	Mayer, Brown	$980,000,000	7.60%	1,307	$750,000
53	67	Goodwin Procter	$415,000,000	37.20%	554	$750,000
100	103	Hughes Hubbard	$218,000,000	11.20%	292	$747,000
47	51	Proskauer Rose	$453,500,000	14.80%	609	$745,000
21	20	Hogan & Hartson	$700,000,000	11.10%	953	$735,000
22	24	Morrison & Foerster	$687,000,000	15.90%	935	$735,000
72	74	Jenner & Block	$287,500,000	13.40%	393	$732,000
70	70	Cooley Godward	$298,000,000	3.10%	413	$722,000
51	60	LeBoeuf, Lamb	$440,000,000	23.40%	612	$719,000
31	29	Winston & Strawn	$571,000,000	10.60%	796	$718,000
61	61	Howrey	$384,500,000	9.20%	540	$713,000
75	78	Thelen Reid	$278,000,000	15.80%	392	$710,000
77	83	Sheppard, Mullin	$264,000,000	14.80%	372	$710,000
29	40	Dechert	$577,000,000	30.70%	823	$702,000
52	45	Baker Botts	$434,500,000	3.50%	624	$697,000
16	14	Morgan, Lewis	$804,500,000	11.20%	1,176	$685,000
25	28	Foley & Lardner	$610,500,000	12.50%	892	$685,000
10	25	Piper Rudnick	$890,500,000	–	1,303	$684,000
38	36	King & Spalding	$514,500,000	5.80%	755	$682,000
48	48	Sonnenschein	$448,000,000	9.00%	662	$677,000
60	57	Katten Muchin	$386,500,000	5.00%	577	$670,000
30	42	Pillsbury Winthrop	$574,000,000	32.70%	862	$666,000
12	15	Greenberg Traurig	$860,500,000	20.90%	1,334	$646,000
36	32	Fulbright & Jaworski	$539,000,000	9.70%	858	$629,000
92	77	Chadbourne & Parke	$229,500,000	-4.80%	368	$624,000
33	31	Reed Smith	$562,500,000	11.70%	913	$617,000
55	52	Squire, Sanders	$410,000,000	4.20%	680	$603,000
4	4	Jones Day	$1,285,000,000	8.00%	2,136	$602,000
95	90	Andrews Kurth	$225,000,000	3.70%	374	$602,000
64	62	Nixon Peabody	$373,500,000	7.30%	622	$601,000
6	6	White & Case	$1,046,000,000	9.80%	1,744	$600,000
57	50	Alston & Bird	$395,000,000	-1.60%	661	$598,000
90	96	Pepper Hamilton	$231,000,000	10.30%	387	$597,000
43	41	Hunton & Williams	$475,000,000	8.00%	798	$596,000
97	107	Sutherland Asbill	$222,000,000	18.40%	374	$594,000
71	72	Duane Morris	$290,500,000	10.00%	490	$593,000
86	89	Venable	$239,500,000	8.10%	407	$589,000
91	91	Mintz, Levin	$230,000,000	6.20%	391	$589,000
74	117	Edwards Angell	$278,500,000	–	485	$575,000
69	68	Perkins Coie	$318,000,000	7.10%	555	$573,000
76	76	Blank Rome	$266,000,000	7.50%	468	$569,000
68	65	Dorsey & Whitney	$318,500,000	-3.50%	563	$566,000
45	55	Kirkpatrick & Lockhart	$469,000,000	25.90%	837	$561,000
97	93	Patton Boggs	$222,000,000	4.20%	401	$554,000
82	80	Kilpatrick Stockton	$250,500,000	6.10%	455	$551,000
96	92	Drinker Biddle	$223,000,000	4.40%	408	$547,000
56	55	Bryan Cave	$398,500,000	7.00%	733	$544,000
66	66	Seyfarth Shaw	$336,500,000	7.50%	633	$532,000
85	75	Shook, Hardy	$246,000,000	-2.60%	471	$523,000
92	99	Faegre & Benson	$229,500,000	12.20%	449	$512,000
65	63	McGuireWoods	$341,000,000	-0.90%	674	$506,000
28	27	Holland & Knight	$581,500,000	5.50%	1,168	$498,000
83	97	Troutman Sanders	$249,000,000	20.60%	501	$498,000
87	81	Womble Carlyle	$238,000,000	2.10%	505	$472,000
73	71	Baker & Hostetler	$284,000,000	0.00%	605	$470,000
99	98	Cozen O’Connor	$220,500,000	7.30%	482	$458,000
3	2	Baker & McKenzie	$1,352,000,000	10.10%	2,984	$454,000
81	88	Wilson Elser	$255,000,000	14.90%	777	$329,000

 

The 2006 AmLaw 100

The AmLaw 100 for 2005 is out.

Here are two different slices of the Top Quartile:

By percentage growth in  revenue 2005 vs. 2004 (I actually give you the top 27 since the first two are not meaningful):

2005 Rank	2004 Rank	Firm	2005 Gross Revenue	Change From 2004
10	25	Piper Rudnick	$890,500,000	–
74	117	Edwards Angell	$278,500,000	–
34	49	Ropes & Gray	$558,000,000	37.90%
53	67	Goodwin Procter	$415,000,000	37.20%
30	42	Pillsbury Winthrop	$574,000,000	32.70%
29	40	Dechert	$577,000,000	30.70%
80	102	Dickstein Shapiro	$257,500,000	30.70%
45	55	Kirkpatrick & Lockhart	$469,000,000	25.90%
51	60	LeBoeuf, Lamb	$440,000,000	23.40%
12	15	Greenberg Traurig	$860,500,000	20.90%
83	97	Troutman Sanders	$249,000,000	20.60%
89	103	Kramer Levin	$232,000,000	18.40%
97	107	Sutherland Asbill	$222,000,000	18.40%
2	3	Latham & Watkins	$1,412,500,000	17.10%
9	9	Kirkland & Ellis	$970,000,000	16.20%
42	46	Cadwalader	$483,000,000	16.10%
15	16	O’Melveny & Myers	$808,000,000	15.90%
22	24	Morrison & Foerster	$687,000,000	15.90%
75	78	Thelen Reid	$278,000,000	15.80%
41	43	Milbank, Tweed	$496,000,000	14.90%
81	88	Wilson Elser	$255,000,000	14.90%
47	51	Proskauer Rose	$453,500,000	14.80%
77	83	Sheppard, Mullin	$264,000,000	14.80%
35	33	Orrick	$554,000,000	14.50%
72	74	Jenner & Block	$287,500,000	13.40%
63	64	Covington & Burling	$380,000,000	12.60%
25	28	Foley & Lardner	$610,500,000	12.50%

And by number of lawyers:

2005 Rank	2004 Rank	Firm	2005 Gross Revenue	Change From 2004	Lawyers
3	2	Baker & McKenzie	$1,352,000,000	10.10%	2,984
4	4	Jones Day	$1,285,000,000	8.00%	2,136
6	6	White & Case	$1,046,000,000	9.80%	1,744
1	1	Skadden	$1,610,000,000	11.80%	1,616
2	3	Latham & Watkins	$1,412,500,000	17.10%	1,615
5	5	Sidley Austin	$1,124,000,000	9.20%	1,454
12	15	Greenberg Traurig	$860,500,000	20.90%	1,334
8	7	Mayer, Brown	$980,000,000	7.60%	1,307
10	25	Piper Rudnick	$890,500,000	–	1,303
16	14	Morgan, Lewis	$804,500,000	11.20%	1,176
28	27	Holland & Knight	$581,500,000	5.50%	1,168
7	8	Weil, Gotshal	$1,016,500,000	11.90%	1,066
17	13	McDermott Will	$799,500,000	7.30%	1,034
9	9	Kirkland & Ellis	$970,000,000	16.20%	983
15	16	O’Melveny & Myers	$808,000,000	15.90%	977
14	12	Wilmer Cutler	$815,000,000	8.60%	964
21	20	Hogan & Hartson	$700,000,000	11.10%	953
22	24	Morrison & Foerster	$687,000,000	15.90%	935
33	31	Reed Smith	$562,500,000	11.70%	913
25	28	Foley & Lardner	$610,500,000	12.50%	892
23	22	Paul, Hastings	$667,000,000	9.50%	871
30	42	Pillsbury Winthrop	$574,000,000	32.70%	862
36	32	Fulbright & Jaworski	$539,000,000	9.70%	858
13	11	Shearman & Sterling	$835,000,000	7.70%	842
45	55	Kirkpatrick & Lockhart	$469,000,000	25.90%	837

Let the (analysis) games begin!

Let's Assume Everyone Here's an Adult...

One of the topics most regularly (should I say, "compulsively?") bruited about, with far and away the least actual impact on anything to show for it, is "alternative billing," also known as anything but the billable hour.

I have my own theories as to why the billable hour endures despite condemnation from high and low—for example, the ABA's famous 2001-2002 "Billable Hours Report" opens with "It has become increasingly clear that many of the legal profession’s contemporary woes intersect at the billable hour," and continues more or less in that vein for 90 pages.   Primary among the life-support mechanisms for the billable hour (duly noted in the ABA Report) are that it lets law firms make a lot of money, and that it's well-suited to lawyers' inherent risk-averse nature.

But my favorite theory is actually a bit different:  We all know the political folk wisdom that "you can't beat somebody with nobody," and I believe that pretty much all of the commonly proposed alternatives to the almighty billable hour amount to "nobody."

There has not, in other words, been a logically persuasive, economically sustainable, mutually-agreeable (between client and law firm) alternative.

I'd now like to float one, which I'll call the McKinsey Billing Model because—you guessed it—it's patterned on how McKinsey bills.

First, I'll describe the essential elements, or components, and then I'll walk through how it works in practice.

Components:

• No one at McKinsey has an hourly billable rate.
• Everyone does have a "per diem" rate, but it's not disclosed outside the firm or to clients, even upon request.
• Projects are generally assessed in terms of how many months they will take, and whether they're appropriate for a "small team," a "medium team," or a "big team."
• A "small team" might typically consist of, say, 20% of a senior partner, 50% of a junior partner, 100% of an associate, and 100% of two analysts.
• Virtually without regard to the scope or substance of a project, McKinsey assumes that the team will call on colleagues who are not team members for an additional 20% of what they need (based on specific industry, substantive, or client knowledge, of course).
• Teams are assigned monthly price tags:  A "medium team," e.g., might cost $350,000 per month.

How it actually does (should) work:

When a client asks McKinsey for help on something, McKinsey assesses the challenge and responds (hypothetically):  "Great; that will take a small team four months, so expect it to cost $880,000."  The client decides whether that's a valuable economic proposition, and assuming they give the green light, McKinsey goes to work.

One of three things now happens:

• It indeed takes a small team four months, and the analysis/report/recommendation is delivered as promised.
• It turns out to be simpler than McKinsey thought, so they report after two months, "We think we're done; we'd like to show you what we have, and if you agree, we've stopped the clock."
• It turns out to be more complex than McKinsey thought, so they report after (say) two months, "There's more to this than first appeared (if we're to deal with it in a fashion commensurate with our standards), and we now think it will take the team eight months.  Would you like us to proceed, or to call it off?"

Under all these scenarios, McKinsey comes away fine (as they deserve to), assuming only that they can price their services rationally—and since they've been doing this for over 75 years, I think that's a safe assumption.

Likewise, I believe the client comes away fine.  In scenario #1, they get exactly what they bargained for; in scenario #2, they get "more" than what they bargained for (and are likely to be an even more loyal McKinsey client given McKinsey's non-self-interested candor); in scenario #3, they learn something about the complexity of their issues and, whether they stop or whether they proceed, they have the satisfaction and confidence of knowing they posed a non-trivial question.

What courageous law firm might adopt this billing model?  The obvious answer is:    No one, not any time soon.  Why not?  It is eminently sane and reasonable; it presumes only that your client has an appreciation for, and can rationally assess for themselves, what is value for money, and it treats all concerned as adults.   But no law firm of any size (that I'm aware of—please pipe up if you know something) is doing it.  And since a lawyer's response to a novel proposal is, "Who else is doing it?," it may take another generation or so.

Unless:   Unless lawyers want to change.

Why would they?  Only because, of course, it might be in their interest to do so.  And I predict that the billable hour gravy train may be running out of running room.  After all, you cannot increase forever:

• total annual billable hour expectations
• hourly rates
• leverage ratios of associates to partners, or
• hours consumed by projects, cases, and transactions your firm has done before many many times.

If, then, firms cannot forever play the game of increasing revenue through increasing all the metrics orbiting around the billable-hour model, they may have to find another way.  

You could always hire McKinsey to figure out what that other way might look like.

Lessons from Improbable-Land

Here's a success story by any measure:

"It's a profitable formula: [Company X's] 387% return to shareholders over the past five years handily beats almost all other companies in the Standard & Poor's 500-stock index, including New Economy icons Amazon.com, Starbucks, and eBay. And the company has become more profitable as it has grown: Margins, which were 7% in 2000, reached 10% last year.

[...]It has grown into a company with 2005 sales of $12.7 billion, up from $4.6 billion when DiMicco [the new CEO] took over in 2000. Last year net income was $1.3 billion, up from $311 million in 2000."

What do you suppose "Company X" does?  Specialty retailing?  Biotech?  Building tools for e-commerce? 

Company X is Nucor, now the largest steel producer in the U.S.  Even in a sexless industry pronounced dead a couple of decades ago, Nucor excels.  How do they do it?

Business Week has the story, and it's all about employee motivation, founded on "legendary leader F. Kenneth Iverson's radical insight: that employees, even hourly clock-punchers, will make an extraordinary effort if you reward them richly, treat them with respect, and give them real power."  Again, this means truly letting go:  Talk to the line workers, truly listen, take risks on their ideas, and accept the occasional failure.

And it's a two-way street:  Nucor's compensation system is unlike any other in the industry.  Whereas the going rate for an experienced steelworker  is $16 to $21 an hour, base pay at Nucor is closer to $10.  But a bonus system tied to production of defect-free steel can triple the average take-home.   The same holds true for managers, whose salaries are 75% to 90% of market, but who can earn bonuses equal to another 75% to 90% on top of that.    The result is pretty simple:

"In average-to-bad years, we earn less than our peers in other companies. That's supposed to teach us that we don't want to be average or bad. We want to be good," says James M. Coblin, Nucor's vice-president for human resources."

The final, indispensable ingredient is No Hypocrisy From the Top.  The CEO's pay is exactly 23 times that of the average steelworker, compared to average CEO pay of more than 400 times what a factory worker takes home. And the symbolism aligns as well: Fly coach, make your own coffee, put every single employee's name on the cover of the annual report.

Lessons from what should be a dead-on-arrival, Rust Belt antique?  Not only lessons, but if it works with steel mill workers, because they "get it," how likely do you think it is that the cream of the Ivy League and the country's top law schools might also get it?

Equity, Achievement, Camaraderie

"An associate at a major, national firm" wrote recently with this lament:

"Lately, I really have been plagued by how law firms are managed:  I see the inefficiencies and how employees are treated (both at my firm and at other firms), and I can't help but conclude that the Ponzi scheme of partnership and current business practices will come crashing down."

None of this is exactly unheard-of, nor is his itemized bill of particulars including incessant pressure to increase billable hours, having to start projects over from scratch because of a lack of forethought at more senior levels, partners behaving obnoxiously, or an "us vs. them" mentality between associates and partners.

But what distinguishes this particular chap is that he actually went out and did some research in the management literature and came up with a book I'm about to commend to all of you responsible for managing people (at any level) in your firm:

The three co-authors comprise the founder and Chairman Emeritus of Sirota Consulting, a firm specializing in attitude research and organizational effectiveness, a Senior VP, and their Managing Director and General Counsel; they bring nearly 80 years of combined experience in the field of employee motivation to the book.

But the book is far more than their opinions, however well-informed they might be.  Rather, they "back up their findings with three decades of research reaching out to over 2.5 million employees in 237 private, public and not-for-profit organizations located in 89 countries."  As one reviewer put it, this leads to an analysis that is "sound if at times a bit overwhelming."

Richard Parsons, Chairman and CEO of Time Warner, said this about it:  "If you're looking for proven ways of increasing company performance . . . this book is for you. I recommend it enthusiastically."

So what's it about?  As the dust jacket summarizes it (emphasis original):

"Enthusiastic employees far out-produce and outperform the average workforce: they step up to do the hard, even 'impossible' jobs. They'll rally each others' spirits in even the toughest times. Most people are enthusiastic when they're hired -- hopeful, ready to work hard, eager to contribute. What happens? Management, that's what."

The guiding principle is that enthusiastic, engaged, committed employees are enormously more productive than those who are merely going through the motions or, worse, who are hostile and resentful.   This may seem common sense—as it should—but we know how often it's honored in the breach.

The authors posit that three factors "characterize what the overwhelming majority of workers want:"  Equity, achievement, and camaraderie.

"Equity" essentially means being given a fair shake in terms of compensation and job security, being treated respectfully, and being treated fairly vis-a-vis one's peers.

"Achievement" means being able to take pride in one's accomplishments by doing things that matter and doing them well.  Interestingly, they distinguish between the "turn-on" that comes from genuine achievement, and the lesser (and in some ways, dubious) state of being "happy."  (Not incidentally, David Maister makes this same distinction.)

"Camaraderie" involves have warm, interesting, and cooperative relations with your colleagues in the workplace—including, importantly, your superiors.

I've often noted that human beings have evolved with an exquisitely tuned sensitivity to inequity and unfairness, and nothing will destroy the motivation of of an enthusiastic employee to go above and beyond the job requirements faster than a whiff of injustice.  Injustice breeds anger and resentment which, however irrational the response may be, motivate the aggrieved employee to all sorts of dysfunctional behavior including slacking off and treating colleagues and clients disdainfully.

And how much does it cost you, again, to lose an associate? 

One reviewer went so far as to elevate it to the true pantheon of managerial literature:  "I believe that this book is a useful addition to other research into high-performance organizations, such as Tom Peters & Robert Waterman (In Search of Excellence, 1982), Jim Collins & Jerry Porras (Built to Last, 1994), Jim Collins (Good to Great, 2001)." 

While I'm not prepared to go that far, I do recommend you buy yourself a copy, look it through, and then decide whether every leader in the firm needs one of his or her own.

"The Innovator's Dilemma" Strikes Again?

In the classic "The Innovator's Dilemma," Clayton Christensen analyzed how companies at the top of their game, with brilliant and successful products, and focused on their core clients, could be undercut and eventually dethroned by small, pesky start-ups with demonstrably inferior technology.  No less than Andy Grove had this to say:

"This book addresses a tough problem that most successful companies will face eventually. It's lucid, analytical-and scary."

If you haven't read it, first of all, shame on you, but second of all, here's Christensen's key insight: Market-leading, highly-functioning firms that are (rightly) focused on their best clients will ignore newly introduced "disruptive" technologies which typically begin life cheaper, smaller, and easier to use—but far less capable—than the market leader's offerings.  The leader's best clients know and appreciate the fully-featured products they buy, and have no use for what the inferior upstart sells. Meanwhile, senior and middle management of the market-leading firm has no incentive to adopt the new, inferior technology either, since (a) their best clients have rejected it; and (b) at least initially, the market niche is so small it would contribute negligibly to the firm's growth, and could even dilute profitability (cheaper generally being associated with lower-margin).

We all know what happens next:  The emerging technology matures quickly, becomes competitively capable, and the market-leading incumbent is caught flat-footed.  If Christensen's book has been consistently criticized for anything, it's that he doesn't have much to say about what the market leader could do differently to avoid being dethroned—which I interpret not as a failing of Christensen but as a reflection of how intrinsically difficult it is for the market leader in such a situation:  Revolutionizing themselves to meet the threat on its own terms means taking their focus off their best clients and investing in somewhat unproven, low-margin products with an uncertain future.

What has this to with "the economics of law firms?"  Legal Week reports:

"Some of the fastest-growing, most innovative firms in the UK are found not within the confines of the City [of London] but out in the regions. Here, unencumbered by the tradition, expectation and expense of running a London operation, they have succeeded in building up legal businesses whose capacity for growth may soon see them encroaching on their capital equivalents’ territories."

And what have these firms in common?

"Change.  As businesses which have come a long way in a comparatively short time, they are used to embracing it as a constant."

One could argue that the impending Clementi Commission reforms give UK firms greater incentive to innovate (or greater fear if they don't) than their less immediately challenged US brethren, but the firms Legal Week discusses don't sound fearful and don't sound bashful.  A partner at Liverpool-based Silverbeck-Rymer (no, I hadn't heard of it either—but for a taste of something "completely different," check out their website) says:

"The companies outside the profession currently being touted as potential providers of legal services are in a position to provide a much slicker service at a much reduced cost. If law firms are to survive they must embrace change or face extinction"

while another says "[we] have no God-given right to make money and will have to adapt and innovate to survive."

Incidentally, Silverbeck-Rymer has all of four partners and revenue of £16.4-million (about $29-million), so don't be too hasty to scoff at their business model.

What are the "business models" of these firms in general?

• Heavy investments in IT to propel efficiency.
• A strong culture of client-service orientation, including call-tracking and case management systems:  "anything focused on keeping the client happy," as one managing partner puts it.
• A "virtuous circle" whereby the investment in efficient, standardized systems and a stable workforce lead to satisfied clients receptive to cross-selling, which increases profitability and enables more aggressive investments in IT and marketing.

Now for the most disruptive innovation of all:  Discarding the partner-manager model entirely.

Drastic?  Not to Tim Hastings, chief executive of Midlands-based firm Nelsons, who says bluntly (emphasis supplied):

"We found many years ago that the pace of change in today’s business world is too rapid to suit the partner-manager model. It simply took too long to make a decision.

"A corporate-style model, however, allows us to emulate successful non-legal businesses. Most big companies have been built up by delivering consistent, high-quality products to their customers. This can be applied to legal services too, which is why we need a [corporate-style] decision-making process."

Is this starting to sound familiar?  Innovation arises from small, regional upstarts who offer inferior services ("standardized," "commoditized," not bespoke) at a lower—and fixed!—price.

Granted, UK firms staring down the barrel of Clementi may have little choice; but those like Nelsons and Sylverbeck-Rymer who enthusiastically embrace change may be showing us all a model for the future.  Win, lose, or draw, they're doing what Christensen found so threatening to incumbents:  Breeding new ideas, experimenting with different processes, and using their rapid growth to invest in more of the same.

"Tacit" Workers of the World, Unite

I've written before about the economic implications of living in a "tacit" industry (as opposed to a "transactional" or a "transformational" one—McKinsey's coinage), but there's more to say. A brief review of the bidding:

• transformational jobs are things like manufacturing, mining, and agriculture—today one job in five, whereas a century ago only one job in five was anything else;
• transactional jobs are things like retail sales, accounting, and banking and brokerage;
• tacit jobs involve "searching, coordinating, and monitoring activities required to exchange goods, services, and information."   For instance?   "Running supply chains, managing the way customers experience products, reviving brands, and negotiating acquisitions." 

Now, in "Competitive Advantage through Better Interactions," McKinsey returns to the topic to address an issue that has vexed everyone from hospital administrators to economics professors, ad agency presidents, and managing partners.

The problem, of course, is that while we know how to juice the productivity of transformational jobs—by and large, throw more capital investment at them—and transactional jobs—by and large, refine business processes through continuous learning—these strategies don't apply to tacit jobs:  "[T]he productivity of marketing managers and lawyers can't be raised by standardizing their work or replacing them with machines."

Worse, there's wild fluctuation and variability in performance, "a sure sign that things could be better."  But systematizing, say, the sales force for a high-tech company, is going to backfire.  What makes a good salesperson is, among other things, a superb understanding of the product and the market, integrity, and a nuanced sensitivity to how people make decisions, learned over time:  None of it susceptible to "process-ization."

Before we get too far ahead of ourselves, one caveat:  The industry you work in does not automatically peg you as falling into any one of these three categories; virtually every industry requires tacit work in some measure.  So, e.g., McKinsey claims that tacit workers are 70% of those in healthcare, 60% in securities firms, and 30% even in utilities.  Here are the overall numbers (% of all jobs, 2004):

Back to variability:  If you define performance variability as the standard deviation of performance divided by the mean level of performance, you get:

• 0.9 for companies with low levels of tacit activities;
• 5.5 in the middle; and
• 9.4 in sectors with high tacit activities.

These numbers have consequences.  Measuring performance by EBITDA per employee in $-thousands, you get this result:  Among freight companies (low), the range was from 7 to 90; among retail banks (medium), from -23 to +332, and among investment banks (high), from -82 to +805.

Now that you're all ready to emulate that (unnamed) investment bank at +805, how do you get there from here?

Let go.

Your job is not to superimpose "connectivity" from the top down, but to set up and maintain an environment that encourages tacit interactions to emerge and flourish.  This means: Facilitating learning, breaking down barriers, providing tools to foster collaboration, and permitting decentralized, front-line innovation and decision making.  And it gets scarier still.

Not only do you need to tear out your micromanagement impulses root and branch, you need to revolutionize your strategic decision making:  Allow "a portfolio of initiatives to emerge from internal and external interactions."  This reprises my thoughts on the spontaneous emergence of robust initiatives if people are allowed to "think out loud" together.

In some ways (and McKinsey acknowledges this), professional service firms are already better than corporate America at assembling ad hoc teams to manage a project to completion, which then spontaneously disassemble and reconfigure in new forms responding to new challenges.  But the question is not whether your law firm is better at this than General Motors, it's whether you're better than your competitive set.

Here's the problem:  "The kind of network buildign that tacit workers must do to boost their effectiveness thrives in a culture built on trust,... that rewards collaboration, dispenses group-based incentives, and measures tacit work by its impact and the relationships that those who engage in it forge."  If you think that describes few law firms today, you took the words out of my mouth.

Moreover, the type of relational and institutional learning that occurs cannot be managed from the top-down.  Indeed, McKinsey even endorses blogs and wikis as having "created new, decentralized, and dynamic approaches to the capture and dissemination of the knowledge critical for tacit interations."

This approach may indeed "upend the greater part of what senior management has learned over the past half century."  But when the facts and the environment change, do you change your approach?  If you do, and you're lucky enough to have cautious and risk-averse competition that does not, you are on your way.