Just within the past 48 hours we've had Justin Scheck of The Recorder (here, on law.com) write under the headline, "Prominent Corporate Lawyers Didn't Stop Shady Options Deals," and again (here, on law.com), with Petra Pasternak, "[Larry] Sonsini on Board[s] of Several Companies With Dubious Stock Awards."   The bill of particulars is now familiar:

• In 1998, Amylin Pharmaceuticals awarded options five times; three of those five dates represented 90-day lows.
• The odds of this happening "are roughly one in 22,000," according to the suddenly acknowledged expert on these matters, Erik Lie, professor at the University of Iowa Business School.
• We are then told, the writer clearly evincing a heavy heart, that these "louche pay practices at Valley startups...also raise difficult questions about what name-brand Valley lawyers...knew -- or should have known -- in their roles as directors."  (Singled out by name are Larry Sonsini of WSG&R, Bob Gunderson of Gunderson-Dettmer, Mario Rosati of WSG&R, and James Gaither of Cooley.)

Then, the other shoe drops, at least momentarily, and the usual caveats about "it's too early to tell" are issued:  The last word, however, goes to Bill Lerach, who virtually advertises his services for hire:

"They're allowed to delegate responsibility to committees, but that's only an interim delegation. It's not an abdication," he said. "If a board wants to close their eyes and rubber-stamp what a committee does, then they'll have to pay the consequences. Of course, in the real world, that's what usually happens."

In the second story, we see LSI Logic, Echelon Corp., and Lattice Semiconductor—at each of which Sonsini was a board member—granting options at "unusual" times of year, or where they were "oddly timed," or "at exceptionally low [stock price] levels." We are also edified to learn that "like so many other tech firms, Echelon -- at least in hindsight -- was much overvalued in 2000," and that (I quote in full for a reason):

"The planned distribution to [Echelon] directors in 2000 also fell on what turned out to be a fortuitous day. The annual meeting in 2000 was April 27, when the stock was trading at $31.44, near its low.

"Had executives received their options in late June of 2000 -- as they had the previous two years -- they would have received them when the stock was trading at $62, near its high.

"But later that year, the company reported to the SEC that it had chosen to award the executive grants on April 27 -- the same day as the board had met -- allowing the executives to purchase shares at the lower level.

"In no other year did the board line up the award date for executives with the date for board members."

So, as long as we're talking about Echelon, a computer peripheral manufacturer (NASDAQ symbol: ELON), let's look at how the specifically cited grant (April 27, 2000) fared.  The grant was for 100,000 shares at a strike price of $30.25, with the first 25% vesting on April 27, 2001, and 1/48th of the remainder vesting at the end of each full month thereafter.  How great a deal was this?

As you can see, the stock never even recovered to $30.25 by the time the options vested, and the entire award was -- "with hindsight" -- utterly worthless.

This brings us to the fresh breath of sanity visited upon this sorry non-scandal by Holman Jenkins of the WSJ, who writes today about the accounting fiction at the heart of all this.  Here's the nut of it:  Kip Hagopian, a venture capitalist who has gotten notables such as Milton Friedman, Harry Markowitz, Paul O'Neill, and George Schultz (with 26 others) to sign a call for ending the expensing of stock options, published in the current issue of Berkeley's Haas Business School California Management Review.  Again, bear with me because it stands quoting the abstract in full:

Point of View: Expensing Employee Stock Options Is Improper Accounting

Kip Hagopian

In December 2004, the Financial Accounting Standards Board (FASB) adopted a new standard of accounting for employee stock options (ESOs). This standard, entitled, Statement of Financial Accounting Standards 123R, requires that ESOs be valued at the date of grant and expensed over the vesting period of the options. The signatories to this position paper strongly oppose this revision to GAAP because they believe that the expensing of ESOs is improper accounting that will result in the serious impairment of the financial statements of companies that are users of broad-based option plans. The case against expensing ESOs can be summed up in six simple statements: an ESO is a “gain-sharing instrument” in which shareholders agree to share their gains (stock appreciation), if any, with employees; a gain-sharing instrument, by its nature, has no accounting cost unless and until there is a gain to be shared; the cost of a gain-sharing instrument must be located on the books of the party that reaps the gain; in the case of an ESO, the gain is reaped by shareholders and not by the enterprise; the cost of the ESO, therefore, is borne by the shareholders; this cost to shareholders (which, not coincidentally, exactly equals the employee’s post-tax profit) is already properly accounted for under the treasury stock method of accounting (described in FAS 128, entitled, “Earnings per Share”) as a transfer of value from shareholders to employee option holders; and neither the grant nor the vesting of an ESO meets the standard accounting definition of an expense. These six statements lead to the conclusion that an ESO, while it may have an economic cost to shareholders, is not an expense of the entity that grants it.

For those of you remaining in the audience, the bottom line is that granting options is a transfer outside the operating business itself (whose performance should be reflected in the P&L), from the owners of the business to the employees. No asset passes through the business.

Why, then, are we now learning that so many prominent lawyers were involved?  They were "involved" in the same sense accountants and managers and even printers were involved:  They were simply there.  Faced with an impenetrable, nonsensical rule—that options must be expensed if priced in the money but not expensed if priced at the market as of the grant date—hundreds and hundreds of companies chose to ignore the nonsense and instead do this:

"Why companies might wish to issue "in the money" options rather than take potluck on the stock price on whatever day the complicated paperwork happened to be finished is not hard to fathom. It is, after all, the irreducible role of management to seek to control things, including the value of inducements dangled before employees."

We borrow both from Machiavelli and from Harvard Business School's Working Knowledge, which has a piece contrasting the antipodal approaches of basketball coaches Bobby Knight, the hot-tempered, iron-willed disciplinarian of half-day drills in defensive fundamentals, now at Texas Tech and famously fired from Indiana after a long career for grabbing a student, clutching another player by the neck, and throwing a folding chair across the court in anger at a perceived bad call, with Mike Kryzyweski, a/k/a Coach K, at Duke, who's all about positive reinforcement, warm communication, and caring:  "It's about the heart, it's about family, it's about seeing the good in people."

So which works better?

The short answer is both:  Or, rather, either, since no individual can doppel-gang between the two.  Pick one or the other.

Great, you say; so how do you pick?

Obviously, much depends on the environment in which you're trying to coach lead.   At the head of a law firm partnership, throwing chairs, and the command and control mentality in general, will get you thrown—out.  But to understand your preferred style as a leader means understanding more about yourself, for starters.   How do you stack up on these criteria?

• Do you believe, left to their own devices, people will:
  • get by, slide along, do the minimum, perform only when they're being watched; or
  • perform because they're self-motivated, and have an innate drive to want to do their best?
• Do you think it's more important to establish clear criteria for performance, set formulae, and reward people accordingly?  Or to get obstacles out of people's way and set high goals while maintaining standards?
• Most important, are you flexible (and discerning) enough to respond to the situation in the moment and not apply your own ready-made, comfortable, template to everyone and everything?  This means being astute to the colleague who needs more structure, the one who needs more support, the one who needs more specificity, the one who needs more inspiration.

Above all, it means knowing what  your firm values:  Its culture.  You should be be able to repeat in your sleep what requires utter clarity in hiring and recruiting conversations:  "Don't come here if you're not into teamwork and collaboration."  Or:  "Don't come here if you're not a self-starter; nobody's going to pat you on the back except yourself."

Finally, since Job 1 of a leader is communication, be prepared to use all three of Aristotle's classic elements of rhetoric:

• Logos, or logic, appealing to people's sense of what is rational.
• Pathos, or emotions, tugging on people's heartstrings.  And
• Ethos, or ethics, making an argument based on what's right, true, and inspirational.

Now it's your turn:  Just do it.

Using as a "hook" the dismissal of Tom Cruise from Paramount Pictures by Sumner Redstone, today's NYT has a piece in the Business Section (also here for those of you not members of the obnoxious "Times Select"), "A Big Star May Not a Profitable Movie Make," serving as a potted introduction to the sub-specialty of the study of income distributions often referred to as "Superstar Economics."

Most familiar in the worlds of sport and entertainment, it's a well-known phenomenon, and one that economists over the past 20 years or so have devoted some effort to quantifying.  For example, the Princeton economist Alan Krueger found that from 1983 to 2003, the share of concert revenue taken by the top 5% of stars increased from 62% to 84%.  Michael Jordan's impact on basketball viewership—which, since his retirement, could be characterized as "live by the sword, die by the sword," from the perspective of the  NBA—is well known.

But the question the economists and profit-maximizing businesspeople should want the answer to remains this:  Assuming we grant that (usually, most of the time, under general circumstances, etc., etc.) superstars bring in more revenue, does that make the venture more profitable?  Or, do expenses associated with the superstar, primarily his/her own remuneration, capture essentially all the added value they bring, leaving no extra profit for the business?

In law firm land, the issue is what we pay laterals:  In terms of guarantees, up-front bonuses, etc.  By and large, are marquee laterals a good investment for firms, or not?  Do laterals (both individuals and practice groups) add to the recruiting firm's overall profitability, or do they tend to capture the capitalized value of their future revenue streams for themselves?  Do we have enough data to make any convincing generalizations?

About a week ago, a partner in an AmLaw 10 actually posed this question to me in an email, and I had occasion to pursue it with two economics professors, one at Northwestern's Kellogg Business School, and one at Chicago's Business School.   Essentially, one responded that while it was "a VERY interesting question, I don't have the answer to it," and the other, "Good question.  I am afraid that my data don't let me investigate it."

But even if they didn't have sufficient data to nail the answer, we engaged in a highly informative colloquy, referencing among others the Scottish economist David Ricardo (1772—1823), who made a fortune as a stockbroker and loan broker (dying worth over $100-million in today's dollars) after his family disinherited him for marrying outside the Jewish faith.  Coming to economics only in his 30's, after having read The Wealth of Nations, he's best known for his theory of comparative advantage, the basis for every sane economist's core belief in free trade.  ("Comparative advantage," while a wondrous concept, is a bit far afield from our discussion today to go into; but we may some day.)

The other seminal notion Ricardo gets credit for is the somewhat obscurely, or misleadingly, named "theory of rents."  In economics lingo, "rents" are simply above-normal returns, having no necessary connection whatsoever to landlords and tenants, and Ricardo's theory helps explain who "captures" the above-normal return.  (Ricardo simply happened to develop the notion in the context of what farmland would rent for.)   The theory is simple:  Since a bushel of wheat sells for the same price whether it comes from productive fields or unproductive fields, tenant farmers will be willing to pay more to rent an acre of a productive field than they'll pay for an acre of an unproductive field.  (Think:  Law firms will pay more for a rainmaker than a grinder.)

But Ricardo's insight was that the benefit of the supra-normal productive land is not captured by the farmer, but by the landowner.  A rational landowner, free to rent his land to any one of a plethora of potential farmers, will choose the farmer willing to pay the most—and "the most" in this circumstance means about one cent less than the value of the increased productivity to the farmer.   Here's how one of my professor-correspondents put it:

"Ricardo's dictum that rents tend to flow to those with the scarce resources seems applicable. If I am a superstar lawyer, economist, or baseball player, there will be competition for my services and this competition will lead me to appropriate most of the proceeds associated with my production. Law firms might be able to assess these proceeds better than most other firms, but regardless they shouldn't expect to collect much value from bringing in a superstar lawyer who has other, equally good alternatives...."

Absent data, this is more by way of surmise than definitive answer, but I'd be interested in any readers' experiences in this area; I'll report (with or without attribution, as you prefer) anything I learn.  Yes, I know that "three anecdotes are not data," but it appears as if the definitive data-set in this area may not yet exist, so let's get by on what we've got.

Finally, the Chicago economist Sherwin Rosen wrote a paper over twenty years ago called simply "The Economics of Superstars," which has many pregnant observations, including these:

• Economists have known at least since the days of the famous Italian Vilfredo Pareto that the curve of income distribution has a very very long right-hand "tail:"  In other words, if you skiied down the curve of income distribution from its peak at the median,  you would have a short steep descent to the left (all income below the 50th percentile) and a very long gradual slope to its right (income above the 50th percentile).
• To the extent promotion by, or distribution through, mass media is germane to earnings in a given sector, the odds of superstars emerging is reinforced.  Consider:  While there were surely hundreds and hundreds of comedians making a living in the US during the vaudeville era, how many Jerry Seinfelds are there today? 
• Sports, as noted, are another arena providing fertile ground for superstars.  Rosen claims that " The top five money winners on the pro golf tour have annual stroke averages that are less than 5 percent lower than the fiftieth or sixtieth ranking players, yet they earn four or five times as much money."  And a pitcher who can win 20 games in a season is paid far more than what two 10-game winners will earn.
• Another critical factor tending to the emergence of superstars hits home:  They will emerge where "poor talent is an inadequate substitute for superior talent."  (To economists, "substitute" has technical meaning:  It conveys that X is a reasonable substitution for Y, depriving the consumer of no significant value, as coffee might be for tea, or a bagel for a muffin.)  Here, Rosen brings the point to us directly:  "A company engaged in a $30 million treble-damages lawsuit is rash to scrimp on the legal talent it engages. Stockholders and directors would look askance at hiring mediocre talents under those circumstances."

This all begs the question of equity, does it not?  Indeed, as Rosen so concluded over 20 years ago:

"Is all this fair? Probably not, Few people grow to be seven feet tall, never mind with the agility of a cat. Fair or not, it is the necessary and natural outcome of the unusual technology with which we now live. The distribution of rewards would look much different if modern technology did not admit such large economies of scale, but it is by no means obvious that society as a whole would be better off without it.

"The sums earned by first- and second-rank stars today are sources of envy and disgust in some quarters and give rise to mumblings about crass commercialism and the evils of cutthroat competition. In my view, a more balanced perspective is possible once one understands how technologies that sustain such sums have at the same time reduced the relevant real pr ice and cost of these services to consumers to remarkably small proportions compared with earlier days.

"Bringing back the good old days of restrictive reserve clauses and stock-company movie star contract systems surely would reduce the incomes of those stars. It just as surely would simply transfer the gains to club owners and producers because it would do nothing to eliminate the fundamental sources that support them. Because of the technology and the demand, the money is there; the only question is how is it to be divided up."

"How it is to be divided up" is precisely Ricardo's question.

You've got one week left!  Don't forget to take the "Adam Smith, Esq." Reader Survey, and enter your name in a random drawing for a $200 AMEX gift check.  (Why?  Because I want you to participate, is why.)

It takes 3—5 minutes, even if you dawdle.

• I'll review a book that has at least a tangential relationship to the fundamental subject of our conversation at "Adam Smith, Esq.," although I reserve the right to push our mental boundaries a bit farther afield.   Primarily, I envision covering books on (non-academic) economics, on prominent figures in the law or pieces of legal history, and also the occasional volume that just begs for wider attention.  Reader nominations for books I might review are more than welcome, but as always I reserve the right to choose what I'll write about and, as they say, "the decision of the judges is final."
• The reviews will be archived, cunningly enough, under the new "Book Reviews (Monthly)" category.
• I have zero financial interest in promoting any of the books I'll be selecting, and neither my choice of books to cover nor what I have to say is remotely for sale.  I may seek a sponsor of this feature, but even if I do they will have no influence over the selection of books or, needless to say, the content of my reviews.
• A quick synopsis of each month's book review will appear as well in the monthy e-newsletter—yet another reason to sign up if you haven't already.

So, without further preface, to this month's review.

"Spoiling for a Fight:  The Rise of Eliot Spitzer," by Brooke Masters, is this month's subject. 

Who is Brooke Masters?  According to the dust jacket:

"Brooke Masters is a staff writer for The Washington Post, based in New York, where she writes about financial services and white-collar crime. She has reported on the trials of Martha Stewart, Frank Quattrone, and Bernard Ebbers. In her sixteen years at the Post, she has also covered criminal justice, education, and politics. A graduate of Harvard University and the London School of Economics, she lives in Mamaroneck, New York, with her husband and two children."

Brooke Masters is also the quintessentially even-handed, reportorial, journalistic author:  Even-handed to a fault.  Indeed, the book's greatest failing is that she never draws her own conclusions about Spitzer; the typical reader will probably come away with precisely the view of Spitzer that they started with, an abdication of the author's prerogative to offer a reasoned opinion on a topic they have presumably become intimately familiar with.

But back to Spitzer:  In 2003, Stephen Cutler, then head of the SEC's Enforcement Division, offered a roast of Spitzer, quoting from an email Spitzer purportedly sent to the Almighty:  "Dear God," he began, "it's my understanding that you are everywhere, including, apparently, the State of New York.  As I read the Stamp Act of 1785, you are subject to regulation and taxation by the state of New York."

The barb scores two points:  Spitzer has a preternaturally broad view of his powers, and often relies on dusty and obscure statutes to achieve his ends (most famously, New York State's amazingly capacious 1921 Martin Act, an all-purpose anti-fraud enactment). 

Since the odds are staggering, barring some inconceivable meltdown between now and November, that Spitzer will be the next Governor of my home state of New York, it would be nice to learn who he really is.  Is he, on the one hand, a crusader who has stepped into a regulatory vacuum to uphold the rights of consumers and investors or, as detractors would have it, an overzealous and arrogant bully with a personal agenda that tramples the rights of defendants—and who is famously unsuccessful whenever he actually has to go to court, as opposed to conducting his prosecutions by press release and showboating press conferences?  Good question.  While it may be unfair for Masters to duck the question, I can sympathize from one perspective, at least:  When if Spitzer becomes Governor, he'll have to face a milieu completely and utterly different than any one he seems to have inhabited heretofore, meaning balanced budgets and legislative compromise.

Masters begins with what you discover is one of the best parts of the entire book:  Spitzer's upbringing.  His father, the son of an Austrian Jewish immigrant, was a self-made real estate millionaire, and Eliot and his two siblings grew up in the affluent Riverdale section of the Bronx (in the eyes of some, a spiritual annex of the Upper West Side), enrolled in private schools and submersed in progressive politics.  As a teenager, his reading tastes embraced Foreign Affairs, but not Playboy.   What life must have been like in Chez Spitzer growing up is perhaps best captured by a Princeton classmate of Spitzer's who later recounted that he had never studied as hard for a Princeton exam as he had for "dinner with the Spitzers." 

After Princeton and Harvard Law, he joined the office of Manhattan District Attorney Robert Morgenthau, and his appetite for the prosecutor's zealous reformist life was born.   And he takes to it like a true natural.

Fabulously revealing was his keynote speech before Instituional Investor magazine's annual awards dinner for top research analysts in November, 2001 at the Ritz-Carlton in Battery Park, just as the scale of the spectacular dot-com implosion was becoming clear.   Preparing for the speech, his office spent weeks compiling every buy or sell recommendation is sued by the analysts to be honored and built a database to determine how individual i nvestors would have fared by following every one.  You can imagine the result.

Came the event, and Spitzer waded right in: 

"When measured by the performance of their stock recommendations, only one of this year's fifty-one first-team all-stars included in the study ranked first in their sector...  More than 40% of this year's first-team all-stars did not perform as well as the average analyst for their sector."

As things went downhill from there, more than one guest departed muttering things along the lines of "I'm not going to sit here and listen to this s---."

He may have bearded the lion in its own den, so to speak, but at least you can say this for him:  He had the goods.

This may, indeed, be the source of Spitzer's evident political appeal.  People seem to sense that he stands for something he believes in, and that, whatever his shortcomings, he doesn't vacillate and doesn't lack vision. 

Is Spitzer in the tradition of Louis Brandeis, or of Teddy Roosevelt and other turn of the century trust-busters who were Republicans, and presumably pro-business in their hearts?  Is he trying to save capitalism from itself?  Masters points out that Spitzer has written in The New Republic that the future of the Democratic Party depends on its ability "to promote government as a supporter of free markets, not simply a check on them," and that Spitzer describes himself as a "pragmatic liberal" or "progressive—by which I mean an effort to create opportunity within the market environment."

Spitzer keeps a framed photo of TR in his office, and when asked why, responds:  "I invoke him for the notion that capitalists understand when the market needs to be tamed."

Fascinating, brilliant, intense, and driven:  Precisely the ingredients for saints, and for madmen.

Eversheds has announced that it will be outsourcing almost 100 of its IT staff, "the bulk of its IT function," before the end of the year; those affected include the IT helpdesk, infrastructure teams, and IT training specialists. 

According to Legal Week:

"UK managing partner Bryan Hughes told Legal Week: "We want to do more than just keep the lights on. We are not a specialist IT firm and we have not got infinite resources [so] we could never be at the cutting edge of legal technology — but with an outside provider, we can."

"The shake-up follows a review of Eversheds’ IT function by newly-installed director Malcolm Simms, who joined the national firm last year from Disney, and makes Eversheds the first major UK law firm to outsource one of its core support divisions."

Hughes is surely right; IT support is not something Eversheds has any comparative advantage in providing, and they're best off leaving it to the experts.

Of course, in the US one of the more famous outsourcing strategies has been that of Orrick with its Global Operations Center in Wheeling, West Virginia. 

This has led me to wonder what other firms might be doing, or contemplating, on this score.

Coincidentally, I'm currently working on a study of "best practices" and benchmarking among major North American law firms on the topic of how they handle their HR, administrative, and professional support functions—as well as how they handle the always-delicate tension between being lean and efficient, and delivering top-notch client and internal service.

To gather some data around the issue of benchmarks and best practices, I've put up an online survey, which I invite all of you familiar with how your firm is organized on the professional support staff side to take. 

What's in it for you?  Simple:  If you complete the survey, you can request a copy of the report I'll be writing summarizing the results—in other words, your own handy "Adam Smith, Esq."-generated paper enabling you to see how your firm stacks up.   But only if you take the survey.

It will be up through Labor Day and a bit beyond, but jump while you're thinking about it.  Again, the survey is here.  Thanks.

Now, for the sad news from Coudert. Letters reportedly went out to all the firm's former partners informing them that they would not be getting any of their capital back—which could represent a hit of as much as $350,000 for some partners. As the cheeky UK site, "Roll On Friday" illustrated the story:

Don't forget to vote!

Available here, its theme is "celebrating innovation in the practice of law," and contains contributions by, among others:

• David Maister
• Patrick McKenna
• Gerry Riskin

and yours truly.

David profiles Exemplar Law, a nonconformist startup law firm if ever there were one, which I've written about as well, and which::

• refuses to bill by the hour, instituting fixed fees only;
• interviews 300 applications for every lawyer it hires (interviews, not reading applications);
• requires business degrees or experience from lawyer-candidates;
• offerings clients a "satisfaction guarantee;" and
• invokes a "No Grinch" approach, meaning you cannot buy your way into Exemplar Law with a book of business; teamwork is the order of the day.

David closes with eight trenchant questions about Exemplar, including "If you were a client, would you hire them?"  "If you were a competitor, what would you worry about?"  "If you were an experienced partner, would you join Exemplar?" and "If you wanted Exemplar to succeed, what piece of advice would you offer?"

Silvia Coulter writes on "Innovation in Leadership," and reprises that it all begins at the top:  "The managing partner facilitates the breaking down of barriers across the firm’s management team. Her actions set the stage for the success of the professional team, the innovative undertakings they produce, and ultimately, the firm."  And if you have a different kind of managing partner?  "Yet in many firms, we still see partners undermining the professional team, and managing partners succumbing to strong voices and individuals who think only of themselves. Innovation stops dead in its tracks; the rhythm goes flat and the firm takes a step backwards."

  My piece, on Reed Smith's and DLA Piper's alliances with Wharton and Harvard Business School, begins:

"When invited to write about “innovation” among large law firms, one’s immediate temptation might be to ask for a different assignment—one with a
real, not an imaginary, subject matter."

To read the rest, you'll just have to go there (it's at pages 16 through 25).

Next in the publication is Patrick McKenna, with "The Road to Innovation:  Ten implementable steps to enhancing innovation in your firm."   Here are my favorites:

• "Invest a portion of your management time living in the future."  Devote at least 25% of your time in meetings not to the present but to ideas for changing and improving things.
• "Steal the best ideas from other professions."  Brainstorm with clients, academics, and researchers; I guarantee they'll have a different perspective.
• "Champion your internal entreprenurs."  Change isn't always top-down.  As Patrick puts it:  "One of my most startling discoveries has been this: innovations do not usually come about because of any direction, intervention or incentive provided by your management committee. They came about largely from, as Peter Drucker first expressed, “having a mono-maniac with a mission!”"

It's no longer "lead, follow, or get out of the way:"  It's "lead, or get blown away."

Merrilyn Astin Tarlton, Simon Chester, Matt Homann, Dennis Kennedy & Dan Pinnington populate a roundtable that considers:

• billing
• client relations
• management
• marketing, and
• talent recruitment

All I can say on this is, will the billable hour ever die?

Finally, my friend Gerry Riskin wraps things up with this challenge (emphasis supplied): 

"The birth of innovation must follow the death of perfection.The legal profession is all about perfection—perfection is a legal deity, and to speak against it is heresy! Legal agreements are never completed, after all— they just reach the stage where clients are allowed to sign them."

Wisdom distilled:  To midwfe innovation, you must slay perfection. Ponder that.

Reminder to my faithful readers:  If you haven't already taken the Reader Survey, please do so.  Why?

• It takes 3 to 5 minutes, even if you get two phone calls while filling it out;
• One lucky respondent will win a $200 AMEX gift check (this is called an "incentive;" economists are fond of incentives); and
• The more readers who respond, the better I'll be able to understand—based on information, not anecdote—what you all truly want and expect from "Adam Smith, Esq."

Thanks again; and look to read about the results here shortly after Labor Day.  (The survey closes at midnight on August 31.)

Law Technology News has a panel—although it actually seems to be a list of isolated commentators, not an interactive group discussion—talking about "how the emergence of business intelligence financial analysis software is going to affect the legal community over the next year?"

Responses range from:  It's great stuff and its use is "likely to increase at a rapid rate" (Robert Meadows, CIO, Heller Ehrman) to "It will make the ordinary practicing lawyer's life in big law firms that can afford the software even more hellish than it is now!" (Martha Fay Africa, Managing Director, Major Lindsey & Africa).  Not unreasonably, each commenter tends to see the impact of BI from his or her own persective.  Thus:

• David Clark, IT Director of the 70-lawyer Jones Waldo Holbrook& McDonough (Salt Lake City), says "it is probably not on the radar like it is for some of the larger firms, but ... [this] will change in the very near future."
• My friend Michael Kraft, founder and GC of Kraft Kennedy & Lesser, Inc. (New York), focuses on how corporate law departments use it to help evaluate outside counsel.
• Larry Bodine, the legal marketing consultant, says "BI software will change law firm marketing at a fundamental level."  And
• Another friend, Judy Flournoy, CIO of Loeb & Loeb (Los Angeles) and President of the International Legal Technology Association, says her firm is evaluating which BI suite to implement but says "they have become a must-have."

Actually, I have another take on BI analysis altogether, and for better or worse I don't see any of the LTN panelists addressing it.

My take is that both the evangelists for, and the denouncers of, BI tools tend to fall into the classic trap of thinking in terms of Static Analysis rather than Dynamic Analysis.  What do I mean by that? 

Suppose a legislature is about to pass a tax increase on a certain behavior: Say, driving across the (currently toll-free) East River bridges into Manhattan. The legislators will predict that the tax increase will raise revenue by $x. But they rarely ask, then what? "What" is that people will change their behavior in light of the new tolls; they'll car-pool, use mass-transit, choose another route into Manhattan, etc., and the revenue raised will be some number < $x.

To generalize, people (non-economists in general, and lawyers in particular) tend to look at the consequences of a change (say, introducing BI tools into an AmLaw firm) in terms of what I think of as one clock cycle; but you have to look at it in terms of repeated, continuing clock cycles.   So the "single clock cycle" school would predict that once BI is introduced, partners whose practices are suddenly cast in an unfavorable shadow will start kicking and screaming about the flaws in the BI analysis, the absence of qualitative factors making it all so one-dimensional and superficial, the value of omitted intangibles, etc.   Sally Gonzalez of Baker Robbins is probably pointing at this phenomenon when she observes that:

"In most cases, BI tools are of limited use because the underlying financial systems often do not contain information on the time and expenses associated with nonbillable activities, such as business development (e.g., meetings and entertainment), developing a proposal, delivering a pitch and closing a deal."

The single clock cycle school will predict that BI will meet a steep, perhaps insurmountable, wall of resistance from anyone whose ox is gored.

But the multiple clock cycle school (that would be me) will come up with a different view.  Yes indeed, BI will tend to identify winners and losers in its own terms when first introduced:  The more profitable and less profitable practice groups, offices, clients, matters, and even individual lawyers.  But the game has just begun.  The astute firm—starting with the Managing Partner, but essentially including the COO or Executive Director, the CFO, and practice group leaders—will use the BI results not as an end of semester report card but as a start of semester learning tool and coach's clipboard. 

Look, no one wants to end up on the short end of the BI stick:  Certainly not the aggressive, hyper-competitive, chronically over-achieving people in your firm!  And that's not what it should be used for.  Instead, it should be used to help teach the laggards what the leaders seem to know (or at least show them how the leaders seem to behave).  Use BI to demonstrate that there are smart and not-smart ways to staff matters; smart and not-smart ways to accomodate client pressures for lower fees or discounts; and smart and non-smart ways to determine what's working and what's not in terms of career and professional development, and marketing analyses.

Ultimately, those opposing the adoption of BI are adopting the position:  "Don't tell me what I might not want to hear."  Those urging BI's adoption must understand the bedrock reality of that fear, and move beyond it by reassuring people that BI is not to condemn the bottom X%, but to help everyone start migrating their practice towards the performance of the top A%.

That takes more than one clock cycle.

My good friend and colleague Patrick McKenna just released a new e-book, "The First 100 Days:  Transitioning a New Managing Partner," which is available for free download and reading here, using the nifty "Nxtbook" publishing platform.  Both Ernie the Attorney and David Maister, as well as others I've surely misseed, have already taken heed.

The book is both short, and terrific—an easy on line read in one sitting, even for someone who has long believed that "the paperless office" would as a minimal prerequisite require the banishment of all computers from the workplace—anything much longer than one scrollable screen sparks the irresistible reflex to hit the "Print" button.  

I don't want to steal Patrick's thunder, but in an email to me today he urged me to spread the word, so I'll offer enough to, I hope, whet your appetite for the whole thing.

The entire monograph consists of about a dozen pages of Patrick's distilled wisdom on "The First 100 Days," followed by another dozen pages of invaluable observations from Managing Partner's themselves, all in response to Patrick's asking them where he'd run off the rails in his advice.  (The answer:   Nowhere that you'd notice.)

First, the essence of Patrick's advice for you, the Newly Minted Managing Partner:

1. Begin Before The Handoff (during the countdown before you officially take office)

• Position yourself as a leader who is eager to listen to the opinions of your peers.
• Build a working relationship with the departing Managing Partner.
• Create constructive dialogue with key thought leaders and power brokers within your firm.
• Tie up loose ends with key clients.
• Try to deal with sensitive problems before you take office.

2. Plug Your Gaps

• Figure out what you need to know and learn it as rapidly as you can.
• Establish your advice network.

3. Establish Performance Standards

• Negotiate your specific metrics for success.

4. Seize Your Day

• Pay attention to personal habits.
• Make symbolic gestures.
• Convey basic information.

5. Set Your Agenda

• Identify your one burning imperative.
• Get critical partner buy-in.
• Develop an action plan to implement your initiative.
• Launch a pilot project.

6. Exploit Early Successes

• Identify something that would not have happened had it not been for your burning imperative.

Next, and equally fascinating, is what the Managing Partners themselves have to say.  Here's my subjective sampling:

• "Personally, I enjoy the ability to float an idea, secure reactions, and decide what to do on a collaborative basis.  That was very easy when I was Deputy Managing Partner.  Shortly after becoming MP, I realized that many people in the firm, including even close friends and trusted advisers, were being considerably more deferential than they had been in the past. 
  I also realized that some things I said rather casually, on an exploratory basis, were being taken far more seriously than I intended--sometimes as an edict.  You have to make your colleagues and support team very comfortable that you welcome differing views and even dissent in discussions and policy formulation--understand that, once we set the policy, we all support it."--Michael Nannes, Dickstein Shapiro, Washington, DC
  
  
• "If one has never been a manager of a law firm it is amazing how much you don't know.  You can intellectually understand the five levers of profitability, but it takes a long time to understand how those levers act in different practice groups in different circumstances, and how they can be manipulated to create seemingly good PPP numbers that in fact are not healthy.  It takes a long time to understand the personalities of partners and PGL's, and how they affect the operations of the firm.  It takes a long time to understand the benchmarking, both objective and subjective, of your firm against peers.  It takes a long time to understand how to sell lateral partners and how to separate the good ones from the bad.  It takes a long time to know when you are being rolled by your partners and wehn you are not.  I could go on. [...]
  
  "I would encourage a new MP to reach out to experienced MP's of other firms and ask for help.  They are always glad to do it, and I have developed a core of close relationships as a result.  They are an excellent source of knowledge about new developments and new ideas.
  
  "I would emphasize how important it is to be prepared to live wtih and facilitate compromise. New leaders often think they can make great changes just by having the will to do it (I certainly did). Unfortunately, when your inventory can walk out the door, compromise becomes the name of the game."--Francis Millone, Milbank Tweed, New York
  
  
• "A lack of strength in finances/accounting will likely be common for new managing partners given the normal undergraduate tracks to law school and the utter failure of most law schools to discuss, at any level, the business operations of being in law.  In this area, I have spent a lot of time with our Executive Director being schooled on the finances."--Stephen Plunkett, Rider Bennett, Minneapolis
  
  
• "Law firm managers are a confident lot, but they usually have little background to run a  large business--they have no academic training as managers, and their instincts as lawyers usually are more of an impediment to success.  So, in my view, new managing partners should begin with the humble recognition that they are not terribly well qualified for the job."--John Montgomery, Ropes & Gray, Boston.

Here's my takeaway: (a) Nannes drives home the recognition that when you go from partner, PGL, or even Deputy MP, your voice goes from acoustic to 24/7 all-news cable; whatever you say will be heard resoundingly. (b) Millone makes it clear how much one has to learn as a new MP, and how humble one must be about grand schemes and visions; without the sincere, consistent, heartfelt buy-in of your partners, you may as well be forging plans with your dog. (c) Plunkett and Montgomery both underline one of my favorite themes, that law school (i) utterly and completely short-changes students on the business side of life; and (ii) that indeed many of the skills drilled into one there (issue-spotting, precedent-worshiping, micro-analyzing) do one an enormous disservice if one is later in a leadership position at a firm.

So, if a tour of duty as a Managing Partner is on your horizon, either distant, indistinct, and as vaporous as a dream, or if it's beckoning as clearly as F. Scott Fitzgerald's green light at the end of the dock in The Great Gatsby, you need to read this. 

And if you don't know Patrick, you should. 

On the first question, we have "Six Ways to Build Trust in Negotiations" from Harvard Business School's "Working Knowledge."  To affirmatively build trust:

• Speak the other party's language.  This is more than knowing the jargon of an industry, although it surely includes that as a baseline minimum.  (The article recounts the sorry tale of a technology consulting firm invited to bid on re-working an airline's ticketing process who didn't know that in airline-land a "lift" means a paper ticket—and who had to ask what it was.  Game over. 
  
  But more fundamentally, if you haven't taken the time to demonstrate familiarity with the other side's culture, history, and perspective, how committed to the mutual engagement are they going to think you are? 
  
• Manage your own reputation.  One can hope that if you and the other party know each other already, that this is taken care of.  And if it's "taken care of" in the sense that your own reputation is in tatters with them, you probably have another priority than worrying about this impending negotiation.  The interesting case is where you're relative strangers:  How do you pre-manage your reputation then?  Case studies of what you've accomplished in similar situations go a long way; so do testimonials from third parties widely seen as objective.  The point is not to assume that because you know how good you've been in the past, they will too.
  
• Be prepared to be dependent.  Psychologically, it's awkward for many of us to admit we're dependent on someone else.  Let go of that; dare to let the other party know that you're relying on them for a reciprocal dialogue by which you can achieve your own goals, as well as furthering theirs.  The courage to display a little vulnerability can in and of itself promote trust.
  
• Consider unilateral concessions.  Not on the ultimate issues, of course, but in order to demonstrate that you value the relationship itself, consider it a friendly one, and that you expect it to endure over time.   The trick to a "unilateral concession" is that it have asymmetric value:  It needs to be relatively inconsequential for you to offer but of real value to the other side.   Whether there's such an opportunity is of course highly "fact specific," as they say, but be on the lookout and seize the chance if it should arise. 
  
  While we're on concessions, something virtually all articles on negotiation agree on is this: 
  
• Label your concessions as such.  Won't the other side obviously know it's a concession?  Objectively, perhaps; but psychologically, parties in a negotiation are often (even unconsciously) ready to ignore, discount, or devalue the other side's concessions because it relieves them of the social and moral expectation of reciprocity.   An "unrequited concession," in turn, can cause the first mover to retreat into resentment and a vow to pursue only hardball tactics going forward.  To help ward this off, explain how what you're giving up is really a  meaningful sacrifice.
  
• Explain your demands.   This may be obvious, but be prepared for the likelihood that the other side, particularly if you're relative strangers, may not assume the best about your motives and intentions.  It's a truism that we tend to regard ourselves positively and others with suspicion—at least if we're in potential conflitc with them.  So, for example, if a literary agent tells an author that the commission on international sales is higher than on domestic sales, the agent better immediately explain that it's because she has to split the commission with a foreign agent in the first case and that she actually ends up with less for herself.  While the author's economic circumstance is precisely unchanged, at least he understands the agent's expectation for international sales.

What if trust has been impaired?  Is it terminally damaged goods?

According to three professors of operations, information management, and marketing over at Knowledge@Wharton, not necessarily.  They constructed a little laboratory money game where subjects were given $6 in each of seven rounds of the game and told that they could keep it all, in which case they simply went to the next round with their $6, or else they could give it all away to an unseen co-player (a stooge of the professors) who would receive triple the $6 ($18) and would be at liberty to decide how much, if any, to return to the first player.

At the outset, nearly everyone passed on the $6 and everyone who did was double-crossed, getting nothing in return.   To increase the complexity of things, half the players also got a note from the stooge promising to return $12 next time—upon which they also reneged.

Trust now thoroughly shattered, what happened on the final five rounds was invariant:  If they passed on the $6, they got back $9—an effort to establish a (belated) pattern of trustworthy behavior.  In addition, some of the stooges passed their players a note containing an apology ("I really screwed up.  I shouldn't have done that."), a promise ("I give you my word.  I'll return $9 every round.") or both. 

Fine:  So what did the good professors learn?

Essentially, that untrustworthy behavior is very very bad, but that deception is atrocious. 

In other words, if you're going to disappoint or double-cross somebody, don't lie to them about it on top of things.

Did the apologies do any good?  Actually, "it didn't seem to matter much at all."  The professors hastily add that the specific apology they used in the game might have been at fault for this finding, since it fell short of what other researchers have identified as the five key components of an effective apology.  Since you asked, they are:

• the statement of apology itself; I'm sorry
• remorse; I feel bad
• an offer of restitution
• self-castigation; I was a jerk, and
• a request for forgiveness.

The promise to do better in future, on the other hand, had some measure of traction in helping speed restoration of trust.  The only caution on this score is, of course, not to make promises you can't keep.

But all in all, won't your next negotiation be far simpler and more likely of success if you never open the door to your trustworthiness being doubted in the first place?

Indeed, and Adam Smith would agree.  Earlier this year, HBS' Working Knowledge interviewed a professor who had read "The Theory of Moral Sentiments," not just "The Wealth of Nations," and who had this to say:

"Q: What do you think Adam Smith's advice to business leaders would be concerning corporate ethics given what he writes about trust?

"A: This is a great question. Smith believed that there were certain virtues, such as trust and a concern for fairness, that were vital for the functioning of a market economy. He wrote about trust and reciprocity as critical foundations of the early beginnings of the market, allowing reciprocal gift exchange to emerge, and leading to trade. One might think that the need for trust and trustworthiness diminishes as a market develops, but if anything the opposite is true.

"For example, we trust managers to carry out the interests of shareholders: We can build contracts to align manager incentives with those of shareholders, but we are never able to completely contract on all the things we care about and want to enforce. Implicitly, then, we hold a belief that managers have internalized the values we care about, and trust them to act on those, particularly when they might come in conflict with their own interests.

"There are similarly other professions where individuals are entrusted to serve, like doctors, teachers, auditors, but cannot be monitored fully. We thus rely on these individuals' professionalism and honor (or "enlightened self interest") to carry out their occupations.

"Across organizations, in the marketplace, factors like brand reputation and warranties help facilitate transactions without requiring complete trust. Within organizations, the issue of trust and trustworthiness—of employees to their bosses, of managers to each other and to shareholders—becomes even more important, and even more difficult to replace by market forces or better incentives and contracts.

"Thus, Smith's advice to business leaders would likely be that they should weigh carefully the costs of breaking trust and of risking reputation. The costs of sacrificing ethical standards of conduct are much larger than any individual might imagine, precisely because they decrease trust and can strongly affect organizational and market functioning as a whole."

Further affiant sayeth not.

The service provider I'm using to distribute the newsletter ("Vertical Response") uses "double opt-in" exclusively for all their email distribution lists.

What "double opt-in" means is that you opt in, first, by actually filling out the form and hitting subscribe, and second, by replying to an auto-generated email to you coming from Vertical Response pretty much immediately following your subscription.

The problem is that by looking at the email address list, I can see that many of you (some of whom I am fortunate enough to know personally) never actually replied to the confirmatory email.  This means that, so far as Vertical Response is concerned, you are not on the list.  (They're very disciplined about this—I can't even add you manually, nor can I override your not having confirmed your subscription.)

So: If you "think" you subscribed—and you probably did!—make sure you replied to the confirming email.

The confirming email:

• is from "Adam Smith, Esq."
• with a subject line that reads "Confirm Your Subscription to the "Adam Smith, Esq." Newsletter", and whose body copy reads in its entirety:
• "Thanks for subscribing to the "Adam Smith, Esq." newsletter! To confirm that it was actually you at this email address, please click the following encrypted link to validate your membership:

  http://oi.vresp.com/confirm.html?fid=[special unique autogenerated number]

Since the newsletter covering July will be coming out in the next few days, please don't be left out!

Summon McKinsey.  (The original piece, or try this.)

What do, in their words, the "Habits of the Busiest Acquirers" reveal?  The following "help, but do not guarantee, success:"

• assembling a worldclass M&A team,
• modifying the organizational design of the acquiring company, and
• adding systems to smooth integration

But these amount to the litany of the usual suspects.  If they're not the answer, what does matter, then?

First, a word (actually, quite a bit more than a word) about McKinsey's methodology.  It was typically rigorous.  This is what they did:

"Of the top 75 US companies by market capitalization and the top 75 by revenues as of June 2005, 33 had accumulated at least 30 percent of their market value through acquisitions. The executives most responsible for M&A activity at 20 of those companies agreed to sit down for a rigorous hour-long conversation covering more than 100 questions about the organizations, processes, tools, and metrics used in acquisitions and integration. We then compared the activities of acquirers that were rewarded by the markets—those whose total returns to shareholders exceeded the returns of their peer group from December 1994 to December 2004—with the activities of acquirers that were not rewarded during the same period."

So back to the show:  What exactly did they learn? 

This:  It all gets back to strategy.

Here are some bad reasons to merge:

• for sheer top-line growth without regard to how it can be capitalized on in future
• to acquire talented individuals
• to forestall a perceived competitor from grabbing the same opportunity
• for operational reasons, such as looking for economies of scale or synergies between offices in the same cities that could be integrated.

And good reasons to merge?:

• to pursue a well thought-out geographic expansion strategy
• to add one or more specific capabilities (practice areas, industry representation, e.g.) that would be more expensive, difficult, and/or time-consuming to grow at home, organically
• to pursue top-line growth through plugging  holes in capabilities that clients are hungry for.

And, did I forget to mention, "Strategy?"

Here's one way of looking at it:  "Rewarded" acquirers in blue, "unrewarded" acquirers in tan.  And in case the image is too small to read, the bars correspond to, in order:

• add capabilites
• expand geographically
• buy growth
• consolidate
• increase scale
• diversify portfolio [of business lin es]
• innovate
• defend business

What else do we learn? 

"The integration phase of an acquisition is often the time when deals go wrong; some studies blame poor integration for up to 70 percent of all failed transactions."

This strikes me as both true and of questionable value if one's looking for guidance.  "True" because we all know in our hearts and minds that post-merger integration can be the great graveyard in the sky of ambitious deals; but of dubious value for guidance because insurmountable "integration" problems can as easily be simply the telltale sign of a poorly conceived transaction to begin with—cultures that will never match, for example, or key financial metrics that are too far afield to ever be peacefully reconciled.

By contrast, here's something you can act on:

"According to one [successful] M&A director, "Our biggest challenge is to make sure that the corporate M&A team and business unit executives work in concert on an acquisition"—an important insight."

"Furthermore, rewarded acquirers were more than twice as likely to involve their business units in acquisitions from start to finish, including origination, due diligence, negotiation, and integration.

"Indeed, while the M&A team's involvement is essential for ensuring that all transactions are pursued rigorously, an M&A team that identifies synergy opportunities without significant participation by the relevant business unit can engender resentment and bring about charges that the team is setting unattainable targets. Many rewarded acquirers therefore say that having business units lead the entire process for a bolt-on acquisition can dramatically improve estimates of synergies—and the likelihood of capturing them."

Finally, here's another curve-ball that reinforces the precise point that the "M&A team" and the "business units [practice leaders]" must be joined at the hip:  It turns out that it matters a lot how well your M&A team leader (your Chief Strategy Officer, anyone??) knows your own firm:

"M&A executives at rewarded acquirers had significantly more experience at their companies, albeit in different roles (Exhibit 2). The fact that an M&A executive at a rewarded acquirer has a deeper knowledge of the culture, people, and capabilities of the company undoubtedly helps the executive to navigate corporate politics and identify targets that truly address a company's needs. It also ensures support from key people in the business units."

So here's my takeaway.  Merge:

• to follow your strategic goals, not to follow operational goals
• to build on your existing strengths, not to shore up your weaknesses
• because the transaction truly fits into your long-term vision for your firm, not because it would kneecap a perceived competitor or grab some talented individuals.

And post-merger, integrate, integrate, integrate:  Not from the top down, but from practice groups up.

Good luck.

Click here to get started.  And best of luck to all on the Amex gift check.

My friend Rich Gary has a valuable piece on Law Firm, Inc. about "managing the unmanageable"—managing lawyers, in other words.   Rich's piece, in turn, builds on David Maister's famous (to my mind, anyway) April essay in The American Lawyer, "The Trouble with Lawyers."  While David had more than one count on his bill of particulars itemizing why lawyers are intrinsically unmanageable, I believe they all stem from a fundamental lack of trust.   Lawyers are:

• deeply invested in maintaining their own autonomy, and (unlike business school students) lack training in teamwork;
• professional skeptics, ready to analyze, critique, and spot flaws at a moment's notice;
• risk-averse and constitutionally indisposed to building on the germ of an imperfect idea (as an entrepreneur would); and
• extremely reluctant to cede power to managers or leaders.

But as I say, I think all these characteristics—which I'm not about to take issue with—can be chalked up to an absence of trust.

That's why Rich's piece is so valuable.

As former chair of an AmLaw 100, Rich has been there, and the tenor of his article is how to incrementally build trust over time through consistent, clearly communicated actions—and the value of "transparency" with critical information.

For example, Rich uses the hypothetical of a firm's CFO telling the COO three months before year-end that revenue will miss projections by 3% and partner incomes will  miss by 10%.  What to do? First of all, of course, stress-test the projections; understand why the CFO has come up with the numbers they have so you don't go off half-cocked.  But assuming the numbers hold up:

"go directly to the managing partner and say, in effect, "We have a problem, and we need to get word out to partners right away." Trust is built through experience."

Another hypothetical of Rich's is hair-raising:  Suppose one of the firm's younger partners fails to appear in court on the first day of a major trial.  What on earth could that have to do with trust?   (Aside from its betrayal by the young partner, that is.)

In a low-trust environment, where there is little or no tolerance for "second chances," the partner would presumably be shown the door at once.  But suppose calling his home reveals that he's been missing for a few days and has in fact checked himself into a residential substance-abuse program—and that it's his first offense.  If you as firm chair are serious about establishing a more trusting environment, you need to use this occasion to show that the firm will treat people with compassion.  So—as soon as you've made sure the trial is covered!—tell the young partner and his family that the firm will support, and indeed require, his completing treatment and staying clean and sober, but that one more offense will be "lights out."

The message?   While a firm and non-negotiable line has been drawn (zero second offenses), you've also demonstrated concern about this individual's welfare and that of his family.  Don't think people won't pick up on it.

Finally, Rich explores the hypothetical of two of the firm's "most valued" sixth-year associates receiving offers from a competitor to join as partners—but under your policy they could not be considered at your firm for at least another year.

Again, in a low-trust environment, this type of situation is exactly what we have policies for:  To remove discretion and enforce uniformity.  In that case, the associates are gone.

But if you're striving to communicate, "We trust each other," you have discretion, because the exercise of your judgment should, as a default position, be trusted.  And if that's the case, you have the freedom to decide whether to extend an offer of early partnership or a promise of partnership one year hence.    Have you thus made an "exception," with no telling who else is next going to ask for what kind of exception?  In a crabbed and narrow (and distrustful) way, it can surely be so construed.  I prefer to believe you've demonstrated discernment, and displayed the firm's commitment to treating people as individuals.   I bet Rich would say the same.