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):

And by number of lawyers:

Let the (analysis) games begin!

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.

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?

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 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.

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"

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.

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.

I haven't written about IT lately, but do not infer that I doubt or gainsay its bedrock role in our lives and work; it is as essential as air and sunlight.   But since "Adam Smith, Esq." is not a tech-centric site (there are many amply capable incumbents in that area, such as Jeff Beard, Ron Friedman, and Dennis Kennedy), I only focus on IT when there's management-side news.

And there is:  CIO Magazine has come up with the "IT Value Matrix," after 18 months of collaborative effort, as a tool to let IT stop being defensive about what it costs the firm and go on the offense by articulating the value it provides.    This is how it works:

"The matrix identifies approximately 130 components, grouped under three key practice areas—stakeholder alignment, communication and the CIO role. It’s organized for drilling down from general to specific. For example, to achieve stakeholder alignment, CIOs need both knowledge and action. To learn what type of knowledge, you drill down one level and find four types: stakeholder analysis, political and cultural issues, technology trends and business dynamics."

You can order a poster-sized copy of it here ($14.99 for shipping/handling).

In tandem with the Matrix, the CIO executive council developed "Seven Keys to IT Leadership," which are estimable:

The principles are as follows (emphasis supplied):

1] The primary goal of IT is to align with major enterprise objectives. Every initiative must be clearly tied in a provable way to business value.

2] Because all major business initiatives are dependent upon technology, the CIO must have a voice at the table at which key business decisions are made.

3] The CIO is responsible for understanding a business’s complexities, influencing peers and presenting technology strategy in terms the business can understand.

4] Technology leaders are agents of change. Transition is our stable state.

5] Communication and relationship building are as important to IT leadership as technology skills are.

6] Successful technology leadership must strike a balance between competing forces: short-term versus long-term, technology versus business focus, leading versus enabling.

7] The CIO is responsible for cultivating technology leadership at all levels.

My favorite of these is #3:  In fact, I would re-rank it as #1.   Prerequisite to the CIO doing anything else whatsoever is understanding the business of a law firm, and describing technology in business, not tech, terminology.

In short, one of the clearer manifesto's of how IT can fit within an organization and be appreciated for what it does.

Try some yourself.

The Irish Bishop George Berkeley (1561—1626) famously asked, " "If a tree falls in the forest and no one hears it, does it make a sound?"  As a metaphysical question having to do with fundamental questions of epistemology, it remains debatable today.  I cite it for another reason.

David Maister, who is without peer in this generation among observers of the law firm scene, and a consummately insightful analyst, commenter, consultant, and author, has published a piece in the April 2006 American Lawyer (which, faithful to its Paleolithic approach to the Web, doesn't deign to offer it online), "Are Law Firms Manageable," which Must Be Read.   (David just released it on his website, which enables me to link to it.)

David was gracious enough to favor me with an advance copy of his piece before TAL was even published, so I've had the luxury of being able to reflect on it.  Suffice to say I needed time to collect my thoughts.

I propose to summarize and mildly elaborate upon David's critique, and then to advance my own response.

I will tell you, gentle reader, that I have rarely embarked upon an essay on "Adam Smith, Esq." with such a strong feeling of obligation to and trepidation about the managerial endeavor we're all engaged in, to what David's cri de coeur means, and to whether I can point a way out of the cave.

David starts with a bang, and doesn't let up:

"After spending 25 years saying that all professions are similar and can learn from each other, I’m now ready to make a concession: Law firms are different.

"The ways of thinking and behaving that help lawyers excel in their profession may be the very things that limit what they can achieve as firms. Management challenges occur not in spite of lawyers’ intelligence and training, but because of them."

I read this piece as a bedrock challenge by David to David—in other words, a questioning of the essential premise of the endeavor he and I are each engaged in, devoting ourselves to the ever-increasing professionalization of the management of law firms.  His answer to the question posed in his title is, "No—law firms (as currently constituted) are not manageable."

I think an enormous oak may have just fallen in the forest.  Who's listening?

The problems are four-fold.  Lawyers have:

• problems with trust;
• difficulties with ideology, values, and principles;
• surpassing levels of professional detachment; and
• "unusual approaches" to making decisions.

Trust

Partners "vigorously defend their rights to autonomy and individualism, well beyond what is common in other professions," and are "professional skeptics" to boot.  They bring these attitudes towards their own relationships with their partners, not just to client matters analytically dissected at arm's length.  The consequences of operating in a chronic environment of "low trust" are various, none pretty.

One of David's most telling quotes comes from a former managing partner who seems utterly sympathetic to the problems "low trust" engenders:

“It’s not that I don’t trust my partners. They’re good people, mostly. It’s that I don’t want to have to trust them. Why give up any degree of control over your own affairs if you don’t have to?”

Reading this, we not only understand it, we even feel sympathetic and our instinctive reaction may well be to agree:  Why, indeed, "give up any degree of control?"

But there's control and then there's control.  The sonata form "controls."  The 26.2-mile length of the marathon "controls."  The Constitution "controls."  For that matter, the institution of marriage "controls."  I don't know about you, but I embrace all four of these controlling environments.

But seeing any form of control as an incursion on almighty autonomy means:

• joint teamwork initiatives will be implemented poorly if at all;
• in an internal firm environment of competition rather than collaboration, no one will make the smallest sacrifice for the good of the firm;
• ceding any degree of authority to firm leadership is resisted so virulently as to incapacitate decision-making;
• committee-proliferation goes on steroids, which not only traduces the true meaning of "democracy," but invites everyone to take their eyes off the ball of truly productive work;
• and, as David writes, "Most important, absence of trust may be a significant contributing factor to the extremely short-term orientations of many law firms"—because partners are highly skeptical the firm will value any investment they make in its future success.

The upshot?  This "selfish and self-serving, even narcissistic" focus squanders the firm's resources, disserves clients, and diminishes profitability.

It gets worse.

Skepticism about firm-wide values and principles

Take a look at these articulated principles from a well-known professional service firm:

“Our clients’ interests always come first; if we serve our clients well, our own success will follow” and “We have no room for those who put their personal interests ahead of the interests of the firm and its clients.”

Could your firm embrace those?  Does it?  In particular, look at the second one:  "We have no room..."  Does that apply to your $2- to $20-million/year rainmakers?  Yes or no? 

Quiz-time over:  These principles are from Goldman-Sachs. 

David puts it thus:

"Law firms appear unable to achieve this level of ideological consistency. They will buy into principles—firms can have very high ideals as long as they remain ideals—but they have difficulty with the concept of enforcement."

Could or would the rainmaker be disciplined, meet "the enforcer," as it were, on issues of associate training and development, collaboration, quality of client service?  To ask the question is, in almost all firms, to know the answer. 

But try this trivial thought experiment:  What if the rainmaker's entire book of business were abruptly merged or bankrupted out of existence, and he/she were reduced to pleading for service-partner work they were no good at because they'd never done it?  Would the firm suddenly be at a loss for "enforcement" mechanisms vis-a-vis performance?

Without enforcement, there are of course no standards.  David believes firms take the process-centric, bureaucratic way out:

"Law firms have a proliferating plethora of rules, not functioning principles, because they don’t or won’t trust that their partners will adhere to the values, standards, and principles that they agreed upon. So firms end up with a mishmash of bureaucratic red tape in the hope that mandatory processes will achieve compliance when adherence to common values does not."

Which sounds a lot like FASB's GAAP rules, or the Internal Revenue Code; and we all know you can drive 18-wheelers through those, as they become Biblical in length.

But try evading the import of these 21 words:   “We have no room for those who put their personal interests ahead of the interests of the firm and its clients.”

Professional detachment

We are trained to be dispassionate, to park our personalities at the door (even, to use the arresting metaphor of one partner, hanging one's personality on the back of the office door for the day along with the jacket, to be donned again only when it's time to go home).   The hyper-objectivity this attitude brings with it is the antithesis of teamwork, mutual support and reinforcement, coaching, trust, and mutual growth.

Yet as the world of business and of law moves faster and faster, firms need to emulate basketball teams or jazz ensembles more than they need to emulate a deployment of salesmen on commission assigned to a new territory, where only the most "productive," in-your-face individuals will make the cut. 

More to the point:  Ours is an industry of elevator assets, and partner and associate mobility has never been higher.  (As a disciple of Adam Smith, I celebrate this—but I also know it is not without consequence.)  If all that holds your firm together is a series of metrics and rewards, have you the remotest degree of confidence that someone down the block or across the country won't come up with a more attractive set of equations?  Or that a critical group of partners of like mind won't start a new firm in their own image?  Where are you then?

And if you think it never happens at gilt-edge firms, I have two words for you:  Boies-Schiller.

Approaches to decision making

As I've written elsewhere, lawyers tend to approach new initiatives not with the open-mindedness and even wonderment of businesspeople, but with profound skepticism and pessimism.  David puts it this way:

"In other businesses, innovative thinking and action are considered a primary requirement for success. Companies eagerly search for strategic ideas and initiatives that their competitors have not discovered.

"Lawyers are usually different. Presented with a new business idea, the first thing they ask is, “Which other law firms are doing this?” "

Just today I received an email from a senior partner at an AmLaw 100 firm who was curious about the time commitment involved in being Managing Partner.  Rather than ask, "what would you recommend?," or "what factors go into estimating what the commitment would be?," or "my estimate is X; am I being realistic?," he asked, "Do you know where I might discover what the typical practice is in firms [of our size]?" (emphasis supplied)

Worse, lawyers' risk-aversion conditions them to find fault, to focus on the remote contingencies, to display their intellect by propounding counter-examples and hypothetical, vastly improbable what-if's.  What could be further from the approach of an entrepreneur founding a new business, or businesspeople exploring a joint venture? 

We lawyers assume that even a proposed solution to a problem could cause dangerous instability (and the problem can't be so bad as long as everyone else is suffering from it), while the businesspeople approach with delight novel solutions to problems that, with the most brilliant product and service innovations, people don't even know they have.  (Who needs:  A $4.25 cappuccino served with mood lighting and couches?  A five-bladed razor?  Overnight delivery?)

Permit David to summarize:  "As long as we are no worse than anyone else, we don’t need to change! It’s hardly a recipe for a strategic advantage."

What's to be done?

I would be the last to gainsay that despite this audacious and insightful litany of dysfunction, law firms are doing rather splendidly.  From the perspective of any partner at a healthy AmLaw 100 firm, "if it ain't broke,...."  Indeed, David cheekily acknowledges that lawyers' greatest ally in the face of this dysfunction is themselves:  "The greatest advantage lawyers have is that they compete only with other lawyers."

Nor am I remotely tempted to deny that the vast majority of firms have hit upon a business model that produces jaw-dropping gross profit margins:  Simply work everyone to near-exhaustion, pinch pennies, and turn a cold eye to whether people enjoy their work lives.   As David puts it, "“Let’s succeed by working more hours with ever-decreasing amounts of support” is not the most sophisticated piece of business thinking"—nor, I would add, an indefinitely sustainable one.

This is not the world we imagine ourselves in, of accomplished and urbane professionals in high-rent midtown aeries in the world's crossroads of global finance, but "bands of warlords, each with his or her followers, ruling over a group of cowed citizens and acting in temporary alliance—until a better opportunity comes along."

But I do have a thought, foreshadowed earlier.

Stop verifying, start trusting

The missing ingredient in this Dante-esque vision of law firm life is one simple, invaluable, and alas highly perishable virtue:  Trust.

The problem with developing trust, of course, is that it takes time.  There are no shortcuts.  A steady, reliable, sustained set of repeated interactions between people who not only know they have a present together but fully anticipate they'll have a future together is what it takes to establish trust.

In The Wisdom of Crowds, Jim Surowiecki points out that the earliest bands of merchants succeeded precisely by exploiting this bedrock principle of human nature.   Quakers, anathema to both the Catholic Church and the Church of England, were forced by necessity to trade, bargain, and conduct business among themselves.  Knowing that essentially anyone you did business with today stood a good chance of doing business with you again tomorrow gave you every incentive for honesty, fair dealing, and even minor pieces of altruistic conduct ("keep the change;" "no charge for shipping").

The fascinating bit of history is what happened next:  Once Quakers had a reputation among themselves for being fair-minded and trustworthy merchants, other groups were willing to deal with them on equally upright and high principles.

Could a similar evolution take place in law-firm-land?

I believe it could.  What we need are one, or a handful, of exemplar firms, which will doubtless be led by exceptional individuals of uncompromised vision ("people make the times; the times don't make the people") such as Jay Zimmerman of Bingham McCutchen today or Clint Stevenson of Latham 20 years ago (who a commenter called "Latham's Paul Cravath").

Am I not assuming that a gifted clairvoyant would need a firm-size critical mass of like-minded...lawyers?!  Indeed so. 

But I have profound hope, and it comes from what I know of myself and some kindred souls I've met in my career.   My "response" to David, then, comes from the heart far more than from the head:  My bedrock belief is that there are more than enough lawyers out there who are, as I am:

• deeply inquisitive
• risk-taking, open-minded, and eager to experiment
• trusting (by default—until crossed)
• instinctively dissatisfied with a static status quo, and
• unwilling to settle for unimaginative, brute-force business models.

My answer to David's question, then, is:  "Most law firms are, on the present model, not manageable; but it doesn't have to be (and, stronger claim, should not be) that way." 

Back at you, David.

And welcome to the blogosphere; can it have been only two months since you started?

For any of you out there who haven't stopped by David's site, don't waste another moment. Yet another inspiring example of how the blogosphere beats the Mainstream Media for timeliness, precision, trenchancy, insight, and unparalleled expertise—in a walk.

I happen to agree that there's ample justification for paying associates handsomely:  Either on the grounds of Gregory Mankiw's "efficient wage theory," or else on my personal theory, which is that (a) paying people richly, and (b) expecting them to work like dogs in exchange, is the perfect introduction to what the life of a partner is like.  Consider it akin to an 8 to 10-year hazing process; I predict that those who emerge alive and kicking at the other end of this funnel will indeed be partnership material.

It is my loss that I never met Clint, and at this point the best all of us can do is to pause a moment and consider his legacy.  As the Latham memorial puts it: 

"Clint was long recognized within the profession as one of the great law firm leaders. He was at the forefront of the movement that transformed firms such as ours from local firms into major national and international institutions. Equally important to the Latham family, Clint was instrumental in creating and nurturing the internal management systems and firm culture that have made Latham & Watkins unique among law firms. He also was a great lawyer, a trusted advisor to clients, and a true gentleman. Clint retired from the partnership in December 1993, leaving a tremendous legacy to all of us."

Clint joined Latham out of Harvard Law School in 1950, and during his 22-year tenure as Managing Partner (1967—1989), the firm grew from 34 lawyers in LA to 360 lawyers in LA, Orange County, Washington, DC, San Diego, Chicago, and New York.  

That achievement might be enough for most mortals, but Clint's legacy cannot be quantitatively grasped.  Key to his vision was a leadership style that was both strikingly inclusive—imagine putting associates on the committee that recommends associates for admission to partnership!—and radical among other elite law firm leaders.   Not the finger-in-the-air conformist:  "I had a lot of ideas that I wanted to do in the firm -- some of them different from what law firms were doing as far as I could see," Clint told The American Lawyer in 1986.

Those of you who've followed "Adam Smith, Esq." for any period of time know that I'm a staunch advocate of "individuals make the times, the times don't make individuals" (e.g., "The Power of One," and "Who Will Be Your Successor?").   So to my mind the Clint Stevenson story is worth studying.

Essential to his vision, drawing from his undergraduate sports experience, was instilling the notion and the practice of teamwork across the firm.  That, and a sense of ownership of the firm shared by everyone from senior partners to newly-arrived associates, propelled Latham to where it is today. 

My friend reports:  "I remember in the 80's (Clint and I overlapped only by a few years), even a lateral associate hire in NY required an interview in LA."

Clint was a nonconformist in other ways (which, by the way, won Latham accolades from authorities such as the [MIT] Sloan Management Review as "best managed law firm").   For a not-trivial example, he instituted 15-year strategic plans.  His from 1986 projected 1,035 lawyers in the firm in 2001—which was off by about 10.

Again, from my friend's perspective, who saw it from the inside, you gain an inkling of the indelible mark Clint left:

"What drew me to Latham was its clear vision of what it wanted to be and where it wanted to go. Very few firms have that. In addition, Latham had a clear plan.  Not only did management have at that time rolling 5 year plan and a 15 year projection, but it shared those plans with every partner and every associate. These were detailed, numerical projections on the number of lawyers, recruitment class sizes, number of partners, etc. At our annual firm business meeting, these plans would be discussed and actively debated by associates as well as the partners. Clint created a tradition where associates are involved in every major committee that runs this firm other than the executive committee.

"How many firms have a detailed 15 year projection? How many firms checked to see how they did after 15 years? Finally, how many of those projections turned out to be right? Last year, AmLaw wrote an article about our NY office's success. It came out with four reasons for that success. Personally, I disagree. There was one reason, and one reason only - Latham had a strategic vision and a plan and we were competing against firms that did not."

If your firm is in the "not" camp, it still may not be too late.  But Clint was there 40 years ago.

"Lawyers and innovation are not words that people automatically put together," is how the FT starts its announcement of the launch of a ranking of the most innovative law firms, and individual lawyers, co-sponsored by the accountancy BDO Stoy Hayward and managed by RSG Consulting, a new firm to me identified as "a legal research company."

Why this?  Why now?  As the FT explains it, the world is changing:

• "Before 2000, no law firm could claim to be genuinely global."   Did you notice that's no longer so?
• Clients are becoming savvier and more demanding about fees and firm selection.
• The Clementi Commission has set the stage for what I believe will be law-firm-land's equivalent of the "Cambrian Explosion."
• "Deliver[ing] the law and deliver[ing] it competently" are merely, as they should be, table stakes; clients are demanding more.
• Top law firms are rethinking aspects of the traditional partnership model and looking at management techniques of large corporations.

And, most simply, the existing array of awards for innovation in business have heretofore simply ignored law firms; the FT plans to fill this gap.

Here are the submission guidelines.  The categories are:

• value for money
• billing
• client service
• management
• use of technology
• legal expertise/strategy
• HR/employee relations
• pro bono/corporate social responsibility (CSR)
• general/open, and
• individual lawyers.

Submissions should be no longer than 1,000 words and are due 5:30 pm Friday, May 5.  Let the games begin.

Stephen Bainbridge jokes to his wife that his latest column at the highly idiosyncratic site, "Tech Central Station" "guarantees that I will never be President of Harvard."

The column, titled "Legal Sex Tournaments," applies the familiar notion of viewing the path to partnership as a "promotion tournament," where the outcome is determined by ranking associate performance relative to one another, with the highest-ranking promoted.   (The use of the "tournament" metaphor has been around for quite awhile, but received its most visible boost with Marc Galanter and Tom Palay's 1991 publication of "Tournament of Lawyers.")

Wait a minute, you say?  You just saw a word on "Adam Smith, Esq." that has never appeared before (that would be "sex," for those of you who haven't been paying attention) and I'm moving right along without even alluding to what it's doing here?

No, not exactly.  The selection of that word was of course Prof. Bainbridge's, not mine, and I suppose the column would more accurately be titled "Legal Gender Tournaments," but in it Prof. Bainbridge undertakes a deadly serious enterprise, namely to come up with an explanation for the desperately lagging representation of women in BigLaw partnerships.

This gap is so wide that there's even an entire "Project for Attorney Retention" dedicated to closing it, which reports on its home page the eyecatching statistic that if you extrapolate the rate at which women increased their representation in the partnership ranks from 1996 (14.2%) to 2005 (17.2%), 50/50 parity will arrive in—2115.

Back to Prof. Bainbridge:  He finds a potential explanatory candidate for the gap in women's comparative risk-aversion vis-a-vis men.   Any number of studies in behavioral economics and kindred fields have demonstrated that men are more competitive, more aggressive, and just plain more prone to take risks than women.  For example, even controlling for the usual suspects such as age, education, wealth, etc., men are more likely than women to:

• hold financial portfolios with riskier assets;
• smoke;
• skip putting on the seat belt;
• skip blood pressure and dental checkups;
• speed, and get caught for speeding, while driving;
• work in dangerous, accident-prone occupations.

Fascinatingly, and of  greatest relevance to the "competitiveness gap" between the genders, Bainbridge picks up a National Bureau of Economic Research study from February of this year which found as follows:

"[T]he authors put 80 paid volunteers through a series of short tasks compensated either on a competitive winner-take-all or on a non-competitive piecework basis. In each trial, groups of four participants, always two women and two men, were given the job of finding the correct sum for as many sets of five two-digit numbers as they could in five minutes. The payment for the first task was awarded on a non-competitive basis by paying a piece rate of 50 cents for each correct answer. Payment for the second task was a competitive winner-take-all "tournament." Losers received nothing and the person in each group with the largest number of correct answers was awarded $2 per correct answer. For the third task, participants chose either piecework payment or the tournament compensation.

"Men and women answered the same number of problems correctly under both compensation systems. But when allowed to choose compensation rates for the third task, 75 percent of the men chose tournament compensation while only 35 percent of the women did so."

The NBER study's authors conclude:

"[T]here are "large gender differences in the propensity to choose competitive environments" and this needs to be taken into account in understanding why women are under-represented in many fields of work."

Is there any silver lining to this?  (Short of re-wiring what several millenia of evolution have apparently left us with, that is?)

One answer is to provide a "non-tournament" track, of course.

But it sounds as though The Revolution will come only when the non-tournament track is the only track.  Want to bet on seeing that within my or your working lifetimes?   I'd as soon put my money on someone, as they say out West, "who only brung his fists to a gunfight."

And I guess this post means I'm out of the running for President of Harvard, as well.

Globalization of the Legal Profession

Indiana University School of Law/Bloomington
Thursday, April 6, 2006: 8:30am—5:00 pm

As noted, I attended this conference this past week, and I wanted to summarize a few of the highlights of the presentations.

Chris McKenna of the Clifford Chance Center for the Management of Professional Service Firms, Said College of Business, Oxford University reviewed the globalization of the profession from 1950 to 2000, and noted that the "internationalization" of law firms means, at this point, New York and London. 

As an interesting historic footnote, Chris reminded us that from the 19th Century into the 20th, Paris and London vied for power as the financial capital of the world.   (Both Coudert and Cleary-Gottlieb, international pioneers, first set up overseas in Paris, not London.)  And as recently as the 1960's and 1970's, New York firms looking overseas first opened in Paris, only later in London.

Why did Paris lose out to London and New York? 

It now seems obvious to say it's because Paris fell behind in the race to be a pre-eminent financial center, but Chris posited the reason for that failure was the Civil Law—as opposed to the common law—tradition.   Common law permits lawyers (and businespeople) to be far more creative, designing innovative business structures and financial instruments never contemplated by cookie-cutter statutes and legislative mandates.

Chris also presented an interesting empirical finding: The financial performance of law firms that go overseas is an inverted U-curve: It takes a fair amount of investment to go overseas to begin with, so it's not very profitable to begin with (cf. experience of US firms in China so far); likewise, if you overextend (think Coudert), you can spread yourself too thin and run into difficulties with too-disparate profitability between international offices.

Giles Pugh, Professional Services Consulting, London, chimed in that the dominant form of "international" business law today is New York law, conducted in English, and asked whether the European or the US model for global law firms will succeed in the longer run, and described a world of three primary business models for international firms:

Three models:

April 5, 2006

April 4, 2006

April 1, 2006