"Social Network Analysis" Release 2.0

I've written before about "social networks," and  how they can be far more important than any relationships specified on your firm's organizational charts, but "social network analysis" (SNA) is still an emerging field, with its concomitant skeptics.  (What is SNA in a nutshell, for those not in on the prior discussions?  It's the creation of network maps analyzing how people in your firm really communicate, through email traffic patterns, for example, and can be deeply revealing.)

First-generation SNA diagnosed who were hubs of information flow, who were peripheral, and who were cross-functional nodes—say, someone who's totally wired into both your M&A group and your project finance group.  All very interesting, you say; but what's in it for my firm?

A truism is that we live in a knowledge economy, and that managing (read:  encouraging) collaboration among professionals is one of the few enduring bases for competitive distinction.  In one 2005 survey, more than 80% of senior executives said effective coordination across service, functional, and geographic lines was crucial to growth. 

And SNA could actually provide insight into who were the "go-to" people in your firm, and could help you diagnose syndromes such as:

• The hyper-connected person who might at first glance appear to be an invaluable connector, but who in fact was a completely overloaded bottleneck.
• The peripheral person out of the flow who adtually provided unique insights drawn from his arcane area of expertise.
• The "bridge" between two otherwise unconnected areas of the firm whose deep ties into two worlds yielded indispensable assets of "know-who" unavailable otherwise, but whose time spent cultivating his two networks appeared superficially unproductive.

And so on; but what benefits to the bottom, or the top, line does all this provide?

The answer is that we now have second-generation SNA, which attempts to answer that very question.

And if you foresaw McKinsey's fingerprints on this, right again.  This new piece extends first-generation SNA, which focused on individual effectiveness, to second-generation SNA, which attempts to focus on relationships that can create the greatest economic value. 

Back to first principles.  How do you develop an SNA map to begin with?  Actually, it's pretty straightforward. 

"Options for obtaining the necessary information include tracking e-mail, observing employees, using existing data (such as time [records] and [client billing] codes), and administering short questionnaires. Organizations mapping their decision-making processes might ask their employees, "Whom do you ask for advice before making an important decision?" Others targeting innovation might ask, "With whom are you most likely to discuss a new idea?" Questions are posed bidirectionally: if Joe says he was helpful to Jane, but she says she doesn't know him, his claim is disregarded."

As the authors say, "So far, so familiar." But the payoff comes when you move from mapping the network to "quantifying the benefits and cots of collaboration."

Swell; but what does that mean? 

Past approaches to improving collaboration among dispersed professionals have usually employed blunt instruments to make communication easier and improve connectivity in general.  The problem has been taking a diffuse rather than a focused approach:

"It's also possible to promote specific interactions that help generate revenue and boost productivity. Targeted action is dramatically more effective than promoting connectivity indiscriminately, which typically burdens already-overloaded employees and yields network diseconomies. A more informed network perspective helps companies to identify the few critical points where improved connectivity creates economic value by cutting through business unit and functional silos, physical distance, organizational hierarchies, and a scarcity of expertise."

Consider this case from a global consulting firm that used SNA to investigate the sales efforts of some 80 of its partners. The classic approach had simply looked at individual revenue production (sound familiar?). But with SNA, they identified two other crucial categories of behavior:

• Partners supporting collaborative efforts (joint sales calls, sharing expertise) were 10 in number, but they generated 60% of the group's revenue; the top 5 generated 38%.
• An entirely separate subset were "expertise contributors," helping colleagues save time and generate higher-quality work; here again they were highly concentrated, with the top 10 responsible for 48% of the value generated through time savings and the top 5 adding 32%.

Result?  The end of "a long-simmering disagreement about dual career paths for partners." 

Or take this example, from a global financial services organization, a close cousin to the larger law firms:

"After recognizing that a set of key brokers occupied central positions in the network, for instance, the company realized that connecting all of these people with each other and with just one person on the network's fringe would yield $140,000 a year in savings within business units and $865,000 across them. Facilitating these interactions would be far less costly than buying the group another unused collaborative tool or holding an off-site meeting."

The need to maintain and reinforce your firm's competitive distinction has never been more pressing, and genuine, meaningful collaboration among your high-priced, high-talent professionals is essential to that end.

Thanks to SNA 2.0, we are learning how to be smarter about it.  Installing Lotus "Notes" on every desk and hoping for the best may have been last decade's answer to enhancing connectivity, but now we are beginning to have a handle on how to strengthen connections with a rifle and not a shotgun.

Sailor or Mountaineer?

In a first, the legendary David Maister hosts this week's BlawgReview, which I bring to your attention for the eclecticism of David's selections.

He does mention an "Adam Smith, Esq." piece reviewing "A Curmudgeon's Guide to the Practice of Law," and endorses my recommendation that Managing Partners should make their firms buy copies for all junior associates (and maybe just plain all lawyers, period).

David also turns up a piece I'd missed, countering the work-life balance lobby, which celebrates lawyers who thrive under pressure that would be "injurious or even fatal" to others.

Finally, he cites as "post of the week" a piece taking off from this Financial Times story mulling over the baffling contradiction between how sailors at sea behave when they learn of another ship or colleague in distress—namely, drop everything, including forfeiting races mid-course, to go to their aid—vs. how mountaineers behave when they see a fellow climber struggling (ignore them utterly, to the extreme of leaving them to die when trivial exertion could have saved them). 

Richard Branson is a sailor, Donald Trump a mountaineer.  Which are you?

Hate Surprises? Think Again

Are you a vigilant or an operational leader? 

You may already intuit the difference, but it bears discussing, since our friends at Wharton have written about four leadership traits that count:

• External focus
• Conceptual ability
• Organizational role, and
• Time horizon

They cite Richard Branson as a paradigm of "external focus," listening widely to an array of diverse perspectives and sources from outside their industry (and just what "industry" is Branson/Virgin in, again?).

Meanwhile, "conceptual ability" is dimensionalized as the ability to probe for "second order effects," or what I have previously described as dynamic, not static, analysis.  This simply means asking the basic question, "And then what?"   For example, if you introduce "business intelligence" software to your firm (a/k/a profitability analysis, at least as a first cut), and you find out that some rainmakers are actually not so profitable, the first thing that happens is that you worry profoundly about how to break the news.  And the fact is:  There is no good way to break that news, either to the rainmaker, your executive committee, or the partnership as a whole (choosing your poison, as it were).

But if you move to "dynamic" rather than "static" analysis of what will happen—meaning that you foresee, and act upon, the question, "And then what?"—you can make lemonade.  View  your new-found intelligence as a powerful learning tool to enhance future performance, not a cudgel to punish heretofore-unsuspected inefficiency.

Back to "conceptual ability" and second order effects:  We'll make it concrete.  When Sarbanes-Oxley passed, did you foresee an upswing in "private equity" work?  Do you have a "de-listing" practitioner?  Have you been following the relative market share of the American and the European markets in IPO's since then?  And if you bet on something you thought was going to come to pass, which didn't (for example, piling into Northern California in 2000), do you distinguish between well-intentioned and credible, and reactive and doomed, failures?

Next up is time horizon, and Wharton discusses the example of Ford, a train wreck (along with GM and Chrysler, of course) 30 years in the making.  Merely the latest in an enervating and what I predict will be ultimately fatal string of body blows to the US auto industry, at least as we currently know it, was Ford's failure to wean itself from its addiction to pickups and SUV's as profitability drivers.  Sure, for Ford trucks are addictive:  They're good at building them and they were highly profitable.  But the days of $30/barrel oil are history.

Of course, the real problem with Detroit does go back 30 years, over which period their behavior has epitomized what Einstein (perhaps apocryphally) defined as insanity:  "Doing the same thing again and again and expecting it to turn out differently."  And what has Detroit been doing?  Building sluggish, wallowing rustbuckets to quality standards defined in the former Soviet Union.  Meanwhile, compare Toyota, which is not only better prepared than any automotive company for the end of $30/barrel oil, but relentlessly pushes ahead (for proof, read yesterday's WSJ's article, "Toyota to Detroit:  We Will Bury You.").

Three more examples of what "vision" can mean and where it can come from, all the way from a receptionist at a Dutch pharmceutical company to Bill Gates:

• At Organon, the Dutch drugmaker, a secretary checking in subjects in a blind clinical trial of an antihistamine noticed that some patients seemed exceptionally cheerful, which she duly reported.  Upon further investigation—authorized and funded by senior management, it's important to note—they found out that the "antihistamine" chemical compound, while ineffective as such, was actually a nice anti-depressant.  Moral:  Listen to your secretaries and receptionists.  You might learn which clients are at risk, and which ones love you, for starters.
  
• Novozymes, a Danish firm which is a leader in industrial enzymes (and you thought "Adam Smith, Esq." was only about law firms!) discovered that a few grams of an enzyme could substitute for the loads of pumice stone customarily used to "stone-wash" jeans—at a fraction of the wear and tear on the washing machines.  The conventional wisdom was that "stone-washed" meant "stone-washed," and no other firm explored alternatives.
  
• Finally, the Bill Gates story:  Looking at Google's website a few years ago, he noticed job postings for positions having nothing to do with Google's business model as everyone understood it at the time.  And although Gates decided this was an early warning sign of Google's greater ambitions, and although he alerted Microsoft lieutenants to his thoughts, nothing came of it.  One can wonder if the world would be saying not, "I Google'd Bruce," but instead, "I Gates'd Bruce."

Last, we have the cautionary tale of applying "operational" savvy when what's called for is "visionary" perspective.  Wharton cites the experience of Coke and Pepsi in India last August when a news report broke that the country's Center for Science and the Environment had found that their beverages contained 24 times the safe limits for pesticides.   Both companies view India, not wrongly, as a crucial emerging market, with $1.6-billion/year in soft drinks sales (Coke has a 60% market share).

How would you react?

If  your answer is to form task forces, review the technical, legal, and PR issues, and commission lab tests, go to the back of the class (even though that's precisely what Coke and Pepsi did).

The challenge is not technical, chemical, or operational:  It's cultural, and it's an issue of leadership.  The facts constitute an open invitation to anti-Americanism and/or anti-capitalism and/or anti-globalization, as well as to ecological self-righteousness, and appeals to the virtues of local, low-tech, home-grown values.  Coke and Pepsi, in other words, did not have an "operational" problem; they had a massive cultural challenge.

"Vigilance" means looking for facts that do not fit your conventional wisdom.  Here's how our Wharton friends put it (emphasis supplied):

"Not surprisingly, when "we started asking investment managers, mainly in hedge funds, how they decide which companies to invest in, their response was they avoid leaders who act as operating managers, and instead focus on leaders who have the ability to find a situation where there is significant unrealized value, and then go after it.

"The special challenge for leaders is to ask questions, and more generally to create enterprises that exhibit the requisite level of curiosity about the internal and external environment, say Day and Schoemaker. This raises issues beyond leadership alone, adds Schoemaker, "such as what kind of strategic planning process is used, how well information is shared across organizational boundaries, how knowledge is tracked and managed, and whether there is a deep culture of debate and inquiry. Leaders have a habit of asking questions -- 'What happened last month that is unusual, what surprised you, what are you puzzled about?' -- that can lead to unexpected results, like the discovery of Organon's anti-depression drug."

What surprised you last month? 

The State of US Firms in London

In the current issue of Legal Week, you can find both a breathless and statistics-distorting lead editorial, which I commend immediately to your e-dustbin (71% is "almost three-quarters," while 61% is "well under two-thirds"—how about the simpler truth that they're 10 percentage points, or about one part in seven, apart?), but you can also find the illuminating and well-reported underlying piece that portrays the state of US firms in the UK (read: London) ca. 2006.

I bring it to your attention primarily for the time-honored truths the story embodies, albeit unarticulated as such. 

Over 60 US firms have set up a meaningful shop in London, and according to the Legal Week survey, two-thirds report that more than half their work there comes from UK clients, as opposed to servicing US clients on transatlantic issues.  The real question is whether this is true (Legal Week, not shockingly, contends it's not), and the strategic issue is nicely summarized in this anonymous quote:

"There is a real danger for firms that follow the argument that ‘if we build it, they will come’," warns the London managing partner of one leading US firm. "You have to think very carefully about how you can fulfil an area not already being filled by a UK firm and [identify] where there is a real need for people to come in.

"I am sure every firm has thought through its own strategy very thoroughly, but I am in no doubt that targeting your practice is the way to go. You move outside the areas for which there is real demand among clients at your peril."

Need I add that I agree?

Aside from the obligatory excursion into lateral movements, and who scored which marquee name—Lovells to Weil-Gotshal, Lovells to Dechert, Lovells to Latham & Watkins, Linklaters to Kirkland & Ellis, Allen & Overy to Kirkland & Ellis, Allen & Overy to Simpson-Thacher, Allen & Overy to Skadden, Allen & Overy to Sullivan & Cromwell, Shearman & Sterling to Hogan & Hartson, Shearman & Sterling to Skadden, etc. (think of Legal Week, in this regard, as a mongrel cross between Fortune and People)—we actually have an interesting picture drawn of one of the most competitive legal marketplaces, for both talent and clients, on the globe. 

I glean these highlights from the piece:

• Far more partners are moving laterally from London/City firms to US-based firms than vice versa.  Legal Week posits that this is partly the result of "continued managerial ruthlessness on display at some traditional City leaders," but I'm skeptical that that thesis explains very much.  Why?  The implication is that the weaker partners are being culled by the City firms, but why then would US firms want them?  As a default assumption—meaning until presented with evidence to the contrary—I would imagine it's the stronger, not the weaker, partners who are both in a position to move and who the US firms would welcome.
• Essentially all the US firms anticipate further substantial growth in London—and soon.  80% predict double-digit percentage growth this year, and an amazing one in eight predicts expanding by 50% or more.
• Despite those ambitions, the growth plans are targeted, focused on growing existing practice areas (which means, almost across the board, corporate, finance, and M&A—not litigation or other areas).  In other words, or so we may at least hope, the expansion plans are grounded in a strategic rationale, not a blunt-instrument "bigger is better" approach.
• In one of the surest signs of an enduring commitment to a serious London presence, half the US firms now hire trainees there.  As one unnamed US firm partner puts it, "cherry-picking a few stars to get you going" can only take you so far.  Indeed.

The acid test of success will come, I believe, when US firms start growing, and making, their own partners in London.  At that point we'll be able to say the firms have truly taken root there.

The first half of the report (Akin Gump through Morrison & Foerster) is here.  Bizarrely, the second half is nowhere to be found.

"A Curmudgeon's Guide to the Law" by Mark Herrmann

Mark Herrmann, a partner in Jones Day's Cleveland office (and, notably, a Princeton grad), has published "The Curmudgeon's Guide to Practicing Law" (ABA Publishing: 2006), a copy of which he sent me, inscribed "To the Managing Partners' Curmudgeon."

That gives you the flavor of this absolutely addictive, unputdown-able book. 

"Curmudgeon's Guide" pulls off—with great elan—a technique that many writers attempt, only to crash and burn in the face of its extraordinary degree of difficulty.  That technique is to deliver deadly accurate truths veiled in laugh-out-loud humor.  Although Mark can of course take no personal credit for the foreword, it aptly sets the tone for what's to follow by opening with a juxtaposition of these two quotes:

• "The life of the law has not been logic:  it has been experience."  (Oliver Wendell Holmes, Jr.)
• "Experience is the name everyone gives to their mistakes."  (Oscar Wilde)

Just how deadly are the truths delivered?  Suffice to say:  When I was halfway through the book, I emailed Mark to tell him that had I read it as a first-year associate, "it might well have changed my career"—I might have had a prayer of figuring out what it was really all about, in other words.

Because "Curmudgeon's Guide" is, at least on its face, addressed to associates starting out, you might think it beneath you, or at least behind you:  But not so fast.  Not only does it include a chapter about arguing an appeal (when was the last time a junior associate at an AmLaw firm did that?), but it tells truths that are so timeless you would be well advised to keep it in your right desktop drawer, no matter how senior you are.

For example?

A theme—perhaps the theme—of the book is stiff-backed, utterly unyielding, rigorous insistence on excellence in your work.  To open the chapter, "How to Fail as an Associate," Curmudgeon tells the story of an aide to then-Secretary of Defense Robert McNamara who delivered a memo.  Two weeks later McNamara summoend the aide to his office and asked, "Is this the best you can do?"  Both chastened and motivated, the aide spent another week working on the new version. Two days after he delivered it to McNamara, the call came:  "Is this really the best you can do?"

Working furiously all weekend, the aide polished the draft until it glittered and returned it to McNamara Monday morning.  That afternoon came the call:  "Do you really mean to say that this is the best you can do?"  The aide had had it:  "Yes, that's the best I can do!  That's the best I can do!  What do you want out of me?!"

McNamara:  "OK, now I'll read it."

Curmudgeon says this is "a joke.  Sort of." 

His point is, of course, is that there is no such thing as a "draft."   Or at least, not a draft you share with anyone other than, maybe, possibly, just on a dare, your office-mate or spouse.  His reaction to getting something marked "DRAFT," so that the author can disavow it if challenged? 

"Keep it.  Stuff it.  I don't need garbage with an apology.  I need answers.  Someone has to figure out the answer.  Someone has to take responsibility for the answer."

And there's this:  "I have one secret to share with you.  No one has ever failed to make partner at this firm by being too conscientious."

Wondering how to write, as an associate or otherwise?  Wondering how to discuss a case?

On writing, we have nine rules plus the uber-rule, which is "it is your obligation to follow these rules.  It is not my obligation to find your mistakes and fix them."  Here are two of the rules:

• "Write in short sentences.  If a sentence runs on for more than three and a half typed lines, break the sentence in half.  Make it two sentences."
• "Start each paragraph with a topic sentence.  This is important.  Few people do it.  You will do it.  If you don't know what a topic sentence is, look it up.  Now."

Or how to discuss a case:  There is one and only one way to do so.

• Somebody sued somebody for something.
• The trial court held something (held:  not discussed or analyzed or believed).
• The appellate court held something (ordinarily, it affirmed, reversed, vacated, or remanded).
• Now, you can say whatever you want about the case.

And Curmudgeon's shrewd tactical advice about his favorite kind of case to cite?  It's a case where the trial court did what his adversary is asking this court to do, and the appellate court reversed.  Judges hate to get reversed.  Res ipsa loquitur.

If you haven't already resolved to read the book, there's more:  For one, an entire chapter devoted to "The Curmudgeon's Law Dictionary," with entries such as:  "Federal common law: The body of law eliminated by the Supreme Court in Erie v. Tompkins, which currently controls the outcome of many lawsuits."

Or, the Curmudgeon on clients.  "What industry are we in?  Wrong.  We are not in the legal industry, we are in the service industry.  When we work with clients, we try to do just one thing:  Make their lives easy."

Now, do you understand why I say that had I read this as a first-year, "I might have had a prayer of figuring out what it was all about?"  Thus my strong recommendation to Managing Partners and Hiring Partners in the audience:  Buy your associates this book.  (I'm not shilling for Mark; all proceeds go to Jones Day.)

Finally, after a section on building your practice, which involves extensive exhortations to publish, write, and speak, Curmudgeon closes on his last, truest, note, hypothesizing that he could write a book called The Curmudgeon's Guide to Practicing Law, but that it would be worth "nothing" to him, since it would lure no clients and royalties would go to his firm.  But he might write that book, not because it would be profitable, not because it would be right, but for essentially no reason at all:  As a labor of love.

It shows.

"IT" Is A Portfolio

Is IT capable of providing a sustainable competitive advantage, as it has for American Airlines, Dell Computer, FedEx, and Wal-Mart, or is it a necessary—but not distinguishing—function that should be managed to operate smoothly at minimal cost (like word-processing, or accounts payable)?

This is actually an enormously controversial question.  Famously, Nicholas Carr published "Does IT Matter?" three years ago, arguing that IT had become a commodity like electricity:  Necessary to get work done, but providing a competitive advantage for no one.  If you adopt Carr's view, other recommendations follow:

• IT becomes more of a threat than an opportunity, in the sense that "bad" IT or unavailable IT (your email servers crash, your backup site is compromised)  is more serious than incremental improvements to IT (WiFi in more conference rooms);
• You should be a "fast follower" rather than a leader in innovation—pioneers get arrows in their backs, and copycats reap the same benefits at a fraction of the cost; and
• Enhancements to IT are essentially steps up the arms'-race ladder:  Nobody comes out ahead, everybody spends more and has more throw-weight, only to stay even with the competition..

I would propose a more nuanced view.  IT is neither sinkhole nor savior, but, as we learn in law school, the answer to the question "Does IT Matter?" depends on why you're asking.

McKinsey chimes in, (also here), and the key insight I want to share is that "IT" is not an undifferentiated mass, a homogenous blob of spending. 

Consider it, instead, a portfolio of investments.

This is what we know about portfolios:

• Their composition derives entirely from your firm's investment objectives:  Are you trying to merely defend your niche, invest in rapid growth and aggressively gain market share, or enter new markets entirely? 
• Depending on your answer to that question, your portfolio of IT investments will typically build on a base of relatively conservative, risk-averse incremental improvement, or
• You'll place a few bets on buying, or developing, more cutting-edge ways of doing what you're already doing, or
• You'll experiment with things you don't do at all, today.

The other thing we know about portfolios is that over time, they change; and your IT spending profile should change as your firm's strategy evolves.  Ideally, you'll go from new initiative to consolidation, to capitalizing upon sudden market opportunity, to deepening bench strength, to...  You get the idea.

Evalute your IT investment portfolio in terms of its proportionate contribution to what McKinsey calls:

• Staying in the race
• Winning the race
• Changing the game

Think of staying in the race as Treasury bills:  Preservation of capital, and market share.  Winning the race are your growth and small-cap stocks:  Bets on some uncertainties, but most of which, history instructs, will pan out overall.

And changing the game?  Venture capital.

Venture capital investments, as we all know, strike out far far more often than they hit it out of the park.  But the overall return to a diversified portfolio of VC investments can be supra-normal.  The key is discipline, and when you ask your IT department to incubate some blue-sky projects as if they were VC-backed, you need to be prepared to abandon certainty, abandon perfection, and abandon predictability. 

One of two things will happen:

• They and you will try, fail, refine, prove the concept, refine, deliver an emphatic result, and deploy; or
• They and you will try, fail, refine, fail again, rethink, fail again, and move on.

I don't believe there's a third possibility. 

Are you ready to think of your IT investment as a portfolio and not an undifferentiated line item?

Who Are You?: Results of the Reader Survey

As I reported a couple of days ago, the results of the Reader Survey are in, and I want to share with you some of the highlights. 

First of all, I'm deeply gratified by the many of you who took the time to fill out the su rvey:  Fully 260 of you responded, a very robust number.  I'm also pleased to report that the survey achieved its primary goal, yielding a tremendous amount of insight into:

• who you are;
• what you're interested in getting from "Adam Smith, Esq.;" and
• what concerns are at the forefront for you and/or your firms.

I hope to be able to capitalize on your comments and observations to make "Adam Smith, Esq." even more valuable, pertinent, and thought-provoking.  (As you see, I've already acted on the observation some offered that the previous design of the site could be difficult to read to some eyes.  If any of you have other specific suggestions about the "look and feel," please let me know.)

But to the survey:  Let's start with who you are.

• Not surprisingly, 72% of readers work in law firms.
• 21% of readers are partners, and of these:
  • 5% are Managing Partners or Chairs of their firm;
  • 4% are on their firm's Executive Committee; and
  • the remaining 12% are "rank and file" partners.
• More than 60% of you work in AmLaw 200 firms, and 32% of you in AmLaw 50 firms.
• It looks as though many of you "have a life"—over 60% of you report traveling internationally for leisure in the past year.
• And you're a tech-savvy crowd:  Over one-third of you read "Adam Smith, Esq." by RSS feed.  I'm happy to report that, counting this group (who technically do not "visit" the site), the average monthly page views of "Adam Smith, Esq." are now just north of 250,000.

Many of you also took the time to provide thoughtful, truly useful comments and observations about the site.  (My crack Marketing Director, who has seen her share of surveys over the past 25 years, tells me that the extent and depth of response was most unusual—you all are a "hot bench.")  Of course, I'm delighted and gratified by the many compliments ("unique," "thoughtful and erudite," "spot on," "very out of the box,") etc., but of even more value to me—and hopefully to you, going forward—were suggestions for slightly different emphases or approaches to my subject matter. 

(Digression that's not really a digression:  I've served over ten years as President of our Upper West Side co-op [86 apartments, a 1903 building, 7 full-time staff] and often in my role as leader of the co-op I find myself impelled to remind people that while good news is all fine and dandy, it will take care of itself:  What I really need to hear, ASAP, is the raw and unfiltered bad news—then at least I have a fighting chance of doing something about it.  I've often thought too many managers get into trouble by ignoring this principle.)

That said, many of your suggestions have given me much to chew on.  For example:

• "I wish you had more stuff.  I'm a bit disappointed when I come by and nothing new has been added. [...]  Maybe once a week you could provide links to articles you're reading, without commentary:  A 'what I'm reading' post would be nice."
• "This is not a criticism.  Your work seems to focus on the largest, elite, law firms.  There are a huge number of boutiques or specialty firms that practice at a very high level and are very profitable.  I think they often have interesting lessons about focused strategies and different problems; perhaps more occasional coverage of these types of firms would be of interest to your readers."
• "More empirics."
• "Great job overall.  Please cover a single issue in depth periodically, e.g., revenue growth...."
• "I would like to hear your views on legal consultants and how they have shaped the market."

Again, thanks to one and all for participating!  I learned a great deal, and the strong response was very gratifying.

---

The last word comes from my stalwart Marketing Director, who insists (and I dare not cross her) that I mention in closing that the "Adam Smith, Esq." audience, i.e., you, is very attractive to marketers seeking to reach the cream of the AmLaw 200 (not to mention that you're an affluent crowd).  If you have any suggestions for her, please drop her an email.  Advertising is one obvious way that I can defray the costs of "Adam Smith, Esq." and help ensure the continued viability of the site.

Orrick, Meet Dewey: Dewey, Meet Orrick. Shall We Dance?

It's not our wont to try to "cover" late-breaking news—that's not an arena where I care to compete, nor is it why I think you come to "Adam Smith, Esq."—but just as every rule has exceptions, so today's word of merger talks (confirmed by both firms' Managing Partners) between Orrick and Dewey Ballantine provokes a few observations.

The headline: The common wisdom that elite New York firms will never merge is now obsolete.

The finances: Bode remarkably well for the merger actually happening, and, more important, actually succeeding.  Profits per equity partner are for all practical purposes indistinguishable ($1.23-million at Dewey, $1.24-million at Orrick, per The American Lawyer) and the much-harder-to-fudge and, I believe, more telling figure on a number of scores, revenue per lawyer, is also identical ($780,000 at Dewey, $765,000 at Orrick).

The practices:  Are highly complementary.  At least since being counsel for the Golden Gate Bridge construction bonds, Orrick has been a go-to firm in municipal finance, and, more recently, mortgage-backed and asset-backed securities.  Dewey, as befits an NYC firm, deals from strength in representing investment banks, M&A, and counsel to investment advisors.  While this doesn't mean there will be no client conflicts to be ironed out, it's hard to imagine there being a deal-breaker among them.

The geographic footprint:  Again, all indications seem go.  Consider the four primary loci of economic activity in the world:

• New York:  The combination would have what can only be called a "powerhouse" office of 500 lawyers:  300 from Dewey and 200 from Orrick (NYC already being its largest single office).
• California:  Orrick, needless to say, has deep bench strength here (over 400 lawyers on the Coast) while Dewey has heretofore had no meaningful presence.  A critical-mass California presence being indispensable to a serious global firm, Dewey gains on this score while Orrick helps lead from its strength.
• London:  According to The Lawyer (UK), Dewey's office generated £20.3m in revenue in 2005, while Orrick's office was not in the top 30, at £13m.  But Orrick's pickup of most of Coudert/London is not reflected in those figures, and again, the combination of the two will be very strong.
• Asia:  Orrick, we all know, acquired much of the crown jewels of Coudert/Asia, and in the 21st Century an Asian presence is non-negotiable.

The non-equity partner issue:  Per The American Lawyer, as of late 2005 Orrick had 149 equity partners and 130 non-equity partners last year, or a 1.1:1 ratio.  Dewey had 110 equity partners and 25 non-equity partners, or a 4.4:1 ratio (and, I'd wager, the Dewey non-equity partners are there because they serve niche practice areas whereas most of the Orrick non-equity's are there because they're good people the firm wants to keep on general principles). But this is not in my opinion a deal-breaker:  Accomodations for the greater good can  and will be made.

Bottom line:  This deal makes eminent sense.  Whether or not it  happens—two very strong-willed individuals, Morton Pierce and Ralph Baxter, are, after all, on center stage, which means it ain't over 'til it's over—I stand by my headline:  The received wisdom that no elite New York firm will ever merge is dead. 

Was that nostrum, then, misguided from the beginning?  Yes and no, depending on one's time-frame.  In the less-than-10-year time frame, there's nothing remotely wrong with the elite NYC firms' models that needs to change.  And if  many senior partners' careers will conclude within or shortly after that time-frame, "don't fix what ain't broken."  But farther out, I question the primacy and supremacy of the NYC elite if they remain bound essentially to this island, privileged though their positions be. 

Dewey may be the first, or it may not happen after all, but either way I believe the received wisdom is dead. Long live the received wisdom.

Design Matters

Your eyes do not deceive you; we're experimenting with a slightly more evolved look for "Adam Smith, Esq."  While the banner/logo is sacrosanct (indeed, it's pending registration as a federal trademark), one of the comments that came through from more than one of you in the "Reader Survey" was that to some eyes and on some monitors the site was difficult to read.

Since just about the farthest thing from my mind is putting anyone off when it comes to "Adam Smith, Esq.," some tweaking seemed in order.  And I reserve the right to tweak some more; the banner, however, is safe and sound.

9.11.06

Around the corner and two blocks up, in Riverside Park, is New York City's Firemen's Memorial, dedicated in 1913 and, according to the Parks Department's site, "one of the most impressive monuments in New York City."

For those of you who may not be quite as familiar with New York, this provides the context:

"Riverside Drive stretches along Riverside Park and the Hudson River from West 72nd Street to Dyckman Street. When New York started expanding northward, the City acquired land, in 1866-67, for a park and scenic drive between the Hudson River Railroad and the rocky bluffs along the river. The original 1875 plan, by Frederick Law Olmsted, the co-designer of Central Park, called for a park with a picturesque drive winding along the natural contours of the land. Twenty-five years later, the result was an English-style rustic park and a formal tree-lined boulevard.

"A fashionable address at the turn of the 20th century, Riverside Drive attracted a collection of substantial neoclassical apartment houses and mansions along its eastern side. The Drive’s majestic elevation also made it an impressive location for colossal monuments and institutions, including Grant’s Tomb (1897) and Riverside Church (1930). The Firemen’s Memorial is one of more than a dozen monuments along Riverside Drive, including sculptures of Franz Sigel (1907), Joan of Arc (1915), Samuel Tilden (1926), Lajos Kossuth (1930), and Eleanor Roosevelt (1996)."

As for the monument itself, it's a grand, imposing, and complex assemblage.  Note the reference to horse-drawn fire wagons:

"Though originally intended for the north end of Union Square, the monument was ultimately built on the hillside facing the Hudson River at 100th Street. The memorial comprises a grand staircase (once flanked by ornamental luminaires), a balustraded plaza, a fountain basin, and the central monument. Made of Knoxville marble, the monument is a sarcophagus-like structure with a massive bas-relief of horses drawing an engine to a fire (the original was replaced by a bronze replica in the 1950s); to the south and north are allegorical sculpture groups representing “Duty” and “Sacrifice,” for which the celebrated model Audrey Munson (1891-1996) is said to have posed.

"The memorial exemplifies a classical grandeur that characterized several civic monuments built in New York City from the 1890s to World War I, as part of an effort dubbed the City Beautiful Movement, which was meant to improve the standard of urban public design and achieve an uplifting union of art and architecture. This monument has twice undergone extensive restoration, once in the late 1930s, through a W.P.A.-sponsored conservation program, and more recently through a $2 million city-funded capital project completed in 1992."

Since September 11, 2001, the Fire Department has held annual memorial services there on the anniversary of the event, when its lost 343 firefighters, its worst loss by far on a single day.

"Does IT Matter?" Yes, If You Define Your Terms

In kicking off the core/required course "Strategic Technology & Innovation" that I'm teaching as an adjunct professor at SUNY/Stony Brook's Graduate College of Business—a two-year program leading to an MBA for senior law firm managers (see the SUNY site about the program) —I assigned Nicholas Carr's 2004 book, "Does IT Matter?" and, while I think it clearly does, there's surprisingly little academic literature supporting that view convincingly.

So I was heartened to see this research paper at HBS' Working Knowledge, which examines the return on IT investments at "midsized" corporations, and attempts to come up with an answer to this state of affairs:

"There is considerable confusion among academics and practitioners over how (or if) information technology (IT) impacts corporate performance. Some have stated that IT has become a ubiquitous input, like electricity or railroads, which confers little competitive advantage to a company that employs it. Others have argued that IT is crucial, but failed to find systematic correlations between IT spending and business performance. Others still have claimed that IT is important, but based their arguments on a few, pre-selected examples of outstanding companies, like Dell and FedEx, that have long used information technology as a differentiator. The crucial question has still remained open—can a typical company truly benefit from a focus on information technology to differentiate itself from competitors and achieve business objectives?"

This is precisely the question my students and I have been attempting to address in the MBA program.  What differentiates this study—which, not to hide the ball, concludes that IT does enable profitable growth—is that it doesn't look at macro measures which by and large have proven ambiguous, conflicting, or inherently suspect, but rather it looks at micro measures focusing on exactly what IT can do to improve business processes:

"It is easy to spend a considerable amount of money on technology with very little improvement in the functional capability of the business. In our study, however, we wanted to focus on what IT actually does for a business. To accomplish this, we developed an approach that measures the business capabilities IT can enable. This approach details forty different business scenarios that accurately measure how IT impacts all major areas of the firm: Sales & Marketing; Finance; Operations; Employee Productivity, and IT Infrastructure. Put together, these scenarios provide a comprehensive view of the real impact of IT on firm performance."

They examined 608 "midsized" (100 to 500 employees) product and service firms in the US, Brazil, and Germany, and divided them into quartiles in terms of IT capability.   The bottom line (emphasis supplied) is:

"Our results show a high correlation between IT capability and profitable business growth. Firms that build high capability IT systems grow faster than firms that do not, and do so while increasing both revenue and profits."

Graphically, they separated the firms into quartiles in terms of IT capability, and compared those rankings to the Compound Annual Growth Rate ("CAGR") or revenue for the prior two years; the findings were significant at the 99.9% level.:

The interesting question, of course, is how did they achieve this?  The answer does not lie, as mentioned, in "macro" measures such as total IT spend as a percentage of revenue, or number of PC's per employee; these instruments are far too blunt.  Rather, the researchers focused on nearly 40 highly specific IT-enabled business processes actually put to use at the surveyed firms such as "mobile and remote access to information and processes" (sound like your BlackBerry?).   Conceptually, the ideal IT implementation moves from:

• business strategy (the over-arching goals), to
• business process (the things the firm actually needs to do to pursue those goals), to
• the technology implementation to support that, all culminating in:
• profitable growth.

Among other things, the researchers gave numeric evaluations (1—100 scale) for each of the firms on an "IT Scorecard," evaluating those 40 business processes.  While not all functions were performed in every firm, it's interesting to note that "5 key functional areas" were tested:  Sales and marketing, finance, operations, IT infrastructure, and most notably from our perspective, "empowered professionals."  Specifically scored under that last category were:

• easy to find information
• easy to use information
• easy to coordinate teamwork, and
• easy to communicate.

I doubt many would argue with those four key concepts as covering what sophisticated professionals need IT to deliver for them.

From the professors' perspective, they labeled superior performance on their IT Scorecard as revealing "a high capacity for business process scalability."  What does this mean?  Let me quote the elements that go into their description, and then put it into terms familiar to those of us in law-firm land:

• Improved process knowledge and process standardization, which enables the firm to more easily manage the complexity involved in growth. [Think about repeated "processes" your firm must perform, such as managing discovery in a large litigation:  The better you can understand ("process knowledge") and the more you can routinize ("process standardization") large volumes of discovery, the more large and complex litigations you can handle.]
• Streamlined operations that can grow without significant additions to headcount. [This one is easy:  If your financial systems, for example, can seamlessly accomodate a new office or a new practice group, you're there.]
• Flexibility to take advantage of new opportunities and respond quickly to exogenous changes. [This has to do with much more than IT, starting with the mindset of firm leadership, but an IT infrastructure that can accomodate new opportunities is surely essential to being able to exploit them rapidly and effectively.
• Better visibility into critical business parameters to guide important management decisions.  ["Business intelligence," which explores and exposes how your firm uses resources and creates profits, is what they're talking about here.]

Where are opportunities within your firm to streamline "business processes" through more intelligent and focused deployment of IT?

All IT Is Not Created Equal

Does this sound like your firm?  IT is managed as one massive homogeneous lump, where the executive committee's key concern seems to be managing (read: reducing) costs. 

Now, reducing costs (or increasing productivity, or mitigating risk) may be fine for "normal" IT operations—what can be characterized as keeping the lights on or having the trains run on time.  But if your IT department is a heads-up organization, and if your senior management appreciates the differentiation IT can, optimally, provide, there may be a better approach.

I call it the "portfolio" approach, and McKinsey analogizes it to venture capital.

Here's what we both mean:  Not all IT investments are equal, just as not all financial investments in a diversified portfolio are equal, and there should be room for different approaches and different evaluative metrics depending on whether the IT project is:

• Infrastructure support and maintenance (think wordprocessing)
• Competitive "must-have's" (think extranets)
• Potential rule-changing applications (say, creating an ability for clients to generate their own standard documents on the fly, online, from your firm's site).

And the evaluative criteria?

• For infrastructure support, simple cost savings or productivity enhancements.  This is rather elementary; it either saves more than it costs, or not.
• For competitive "must-have's," net present value, or NPV.  Slightly more sophisticated, but your HP-12C can calculate it in moments.  The fundamental principle is that you get your money back, taking into account the cost of capital, within a timeframe you consider reasonable.  And finally:
• For potential game-changers, the Venture Capital model:  Would we place a calculated bet on this, knowing that the outcome is highly uncertain? 

The first two are fairly easy, routine matters to manage.  But what about the third?

The key to making the "VC" approach work involves:

• Unreserved endorsement and buy-in from senior management; a willingness and even an enthusiasm for experimenting on high-risk/high-reward initiatives.
• A capable IT department within your firm (be brutally honest about this, and if you don't like the answer you come to, be brutally honest about fixing it).  And
• The willingness to understand that the "VC" model means you will experience both of the following:
  • Test, succeed modestly, refine, test, reinvest, test, succeed quite nicely, deploy; and
  • Test, fail, refine, test, fail, reinvest, test, fail, move on.

Not all IT initiatives are the same.  Buy yourself an IT "portfolio" instead of larding up all on Treasury bills or all on dot-com's.

The "Adam Smith, Esq." Reader Survey: We Have a $200 Winner

From the "Adam Smith, Esq." Readers' Survey—and its $200 AMEX gift check, promised to one lucky winner—we now have news:  We have a winner!

But first, to all readers who took the survey:  Many thanks!  I truly appreciate your taking the time to participate, and, as I said, the first and foremost goal of the survey is to improve "Adam Smith, Esq." based on your feedback, and to make it more trenchant, useful, focused, and helpful.  Again, thanks.

Before identifying our winner, a comment on methodology.  About half of you who took the survey enrolled in the random drawing for the gift check.   To select the winner, I totaled up the number of enrollees and multiplied that by the random number generator (a function in MS Excel, which returns a random number between 0 and 1, to a large number of decimal places), which gave me the winner's rank in the list of enrollees.

And he is:

David Thomas, a senior associate in Wilson-Sonsini's tax practice (specifically, employee benefits and compensation), based in Palo Alto. 

I phoned Dave to let him know the good news, and he reciprocated by sharing with me, and now with you, his thoughts on winning:

"Bruce,

"Although I was happy to fill out your survey simply in appreciation for all of the useful information that I receive from Adam Smith, Esq., I am not about to turn down a prize. I just bought a new house and I am very likely going to use the gift to purchase 1) a garden fountain for my wife, and 2) a Sirius satellite radio for my car and office. On the other hand, the house I just bought was in Palo Alto, CA, so I might just use the gift check to buy groceries.

"Dave Thomas"

Thanks, Dave.  And congratulations from all of us.

"Superstar Economics" & Laterals: Take II

My piece about "Superstar Economics" and laterals has produced an unusually heavy volume of reader response, so it deserves a follow up.  Herewith its desserts:

The original piece, as I hope you recall, posed the question:  Assume for argument's sake that hiring marquee laterals increases your firm's revenue; the more interesting question is whether it increases your profits.  Put slightly differently, the question is whether the increased profitability that (presumably, under normal circumstances, in general) follows increased revenue redounds to the benefit of your firm, or whether its present capitalized value is largely or totally captured by the lateral in up front bonuses, guarantees, etc.

First, some reader responses, then a fascinating Harvard Business Review article forwarded to me by a partner in an AmLaw 10, and last my own take.

Reader #1 (I don't cite everyone, but combine some responses with essentially the same substance that came from multiple correspondents):  "I would argue that a given lateral ought to be worth more to different firms based in part on the firms, not just the lateral. [...]  This goes back to something you have pointed out a number of times, what makes your firm unique?  If your firm has a unique use for this person, then you can get a good deal because other bidders have lower demand."

Without question, this observation is apt and correct.  Firms in different positions will have different preferences, and different demand curves, for particular laterals based on strengths they want to reinforce or weaknesses they want to shore up.  A firm with plenty of grinders may pay more highly for a rainmaker, e.g.  I do not believe, however, that this fundamentally changes the terms of the key question:  Whether the firm, or the lateral, captures the increased profits.  An astute lateral, or one well advised by the many information brokers (recruiters, consultants, their own network, etc.) in the market, will naturally gravitate towards firms willing to pay for the lateral's "highest and best use."

Reader #2 (with 20 years' experience as a legal marketer and business development consultant):  "I observe that most laterals fall below all expectations about their future success. [...]  Firms' due diligence about laterals is incredibly sketchy--as is their due diligence about mergers."  And they elaborate:

"The most disappointing (in terms of revenue generated) laterals are those who come from political circles--meaning those who have spent the majority of their professional lives in political arenas....  Most professional politicians with impressive rolodexes, relationships, and political currency are nervous about translating those assets into dollars, for fear of learning how few dollars those assets might translate into. [...]  The second most disappointing laterals are those who come from in-house circles."

Reader #3 (partner in an AmLaw 10):  "I suspect that you are correct: superstars likely do retain the compensation (and thus the value) that they bring to any firm. One appropriate analogy is corporate acquisitions. In most corporate acquisitions, the acquirer will pay a premium for the target, and the target's shareholders often capture most of the value from the acquisition. This is particularly true if there is a bidding war for the target. [...]

"The literature suggests that most acquisitions/mergers fail, and the reason is lack of integration or over-paying for the target. [...]. As with most corporate acquisitions, most lateral partner acquisitions also fail to deliver the expected synergies, and thus do not justify the premium actually paid.

"While there may be a place for lateral recruiting -- filling in practice gaps, creating/maintaining a premier brand image -- firms should not expect to add value to the firm as a whole in that way. Rather, value is added through exceptional focus on developing existing resources -- through training, knowledge management, gaining operational advantages, marketing, etc. There is no silver bullet.

"Also, the separation in pay between stars and everyone else is not limited to the legal world, not to individuals. There is an increasing gap growing between the top 20 law firms (in terms of PPP) and all others. A similar gap is seen in most industries, where a few companies increasingly dominate each market (e.g., Walmart, eBay, Microsoft, etc.). On an individual level, as with "star" partners, the compensation for top managers (e.g., CEOs) has also dramatically outpaced the compensation growth for other employees. This is not always a bad thing -- the market has determined that these individuals are worth $X, and often the company doing the hiring gets talent that delivers value approaching $X. But, as has been noted in the executive compensation area, in many cases the compensation simply results from poor judgment by those doing the hiring (e.g., boards, partners, etc.), in many cases I expect this is because these people are looking for the "silver bullet" (i.e., this one lawyer will save the firm/practice/office; or this one CEO will save this company) rather than invest in long-term operational solutions."

Next up we have the Harvard Business Review article from May 2004, "The Risky Business of Hiring Stars."  In it, three HBS professor investigate the lore surrounding "hiring stars."  Because some of the best available data concerns stock analysts who make Institutional Investor's all-star list (only 5% of all stock analysts), and whose movements from firm to firm are widely tracked, they use that dataset (1988-1996, covering 1,052 individuals across 78 firms).  However, they specifically refer to their findings covering "leading professionals...in law."

Some of their noteworthy conclusions:

• The performance of a star tends to "plunge" after joining a new firm;
• Making matters worse, there is "a sharp decline" in the performance of the group or team the person works with;
• Stars don't stay long, "despite the astronomical salaries firms pay to lure them away from rivals," and
• The Bottom Line:  Firms should focus on "growing talent within the organization and do everything possible to retain the stars they create...Winning [the star wars] could be the worst thing that happens to firms."

What exactly goes wrong?  For starters, the quotidian.  Stars coming into a new environment aren't familiar with the systems and processes they need to get their work done; the learning curve can be steep.   A sustained period of being unproductive should be expected (with frustration building on both sides of the equation). 

Internal networks are also critical to stars' success, and by definition they have none when they arrive. 

Leadership of the department/practice group may also be partly to blame, albeit understandably.  Uncertain whether to cater to the new marquee arrival or to throw redoubled support behind incumbents, there can be a period of indecision and drift.  If this happens, the arrival can feel underappreciated and the incumbents can feel slighted.  But what are the alternatives?  Extend the red carpet to the newcomer and "dis" your loyalists, or put the loyalists first and show a cold shoulder to the newcomer?  No alternative works.

So what's the answer? 

You can hire promising prospects out of top law schools at relatively great price, knowing something on the order of 90% will wash out, because you don't put serious efforts into training and developing them, and because the current economic model of the typical AmLaw 200 firm doesn't support any different outcome.

You can recruit promising candidates from all venues and try to develop some into stars, knowing that you'll lose a fair percentage to rivals.

Or you can recruit the brightest possible people from every possible source (law school graduates and lateral associates), try to develop them into stars, and do everything possible to retain them.

Does this sound surprisingly humane?  Does this sound like astute business?  I'm happy to report that in this case they're one and the same.

Partner Capital Funding: The Results are In

Back on August 20th, I posed the question to you, "How do partners fund their capital contributions to the firm?"  The votes are now in:

So the "winner," by a reasonable margin, is "a portion of my compensation is retained by the firm until I reach the necessary level."  If you combine that with "a portion of my compensation is retained indefinitely," essentially one firm in two uses compensation-retention for capital funding.  Another 42% of firms require partners to cough up the capital themselves, either by arranging a loan on their own or through a program created by the firm.   Finally, somewhat surprisingly, 9% of firms simply do not require partners to contribute capital.

But whatever the policy, every firm has one.

This raises the interesting question:  Which method provides the lowest overall cost of capital for the firm?   I would analyze that as follows:

• Firms that require no partner capital contributions probably have the highest cost of capital; they're on their own to raise the funds in the open market, through banks, credit lines, and presumably lease or other asset financing.
• At first blush, it appears that firms requiring partners to borrow the funds to ante up have the lowest cost of capital—zero.  And indeed that's the case from the firm's sole perspective.  But partners, as owners of the firm, are required in this scenario to go into debt themselves (or to contribute funds they have on hand which they could otherwise invest, which imputes an opportunity cost to the capital contribution, if not an out-of-pocket cash cost).    Hold that thought while we consider the last case:
• Firms that withhold compensation to fund the capital contribution.  Again, it appears from the firm's perspective that the cost of capital is zero, since they're simply retaining funds they'd otherwise hand over to the partners.  But in fact, isn't this essentially technique #2 in substance?

Here's what I mean:  Firms can pay partners more and have the partners bear the expense of funding the requisite capital, or firms can pay partners less to begin with.  Economically, isn't the substance of what happens in either case pretty much the same?  In either case, there's no place the expense of raising capital can come from other than the firm's partners.  Firms that give partner incomes a haircut are probably doing something that ends up from the partner's perspective being little different than if the partner were paid more and simultaneously saddled with a liability they needed to fund individually.

The only question becomes which entity—the individual partners or the firm as a whole —is likely to obtain more favorable terms and pricing in the credit markets.   Dollars to doughnuts, it's going to be the firm, which represents a diversified "portfolio" of risk (the sum of the partners' practices) as opposed to the earnings potential of a single individual.   So the 49% of firms that retain earnings may be marginally better off than the 42% that make the partners ante up.

Comments from the back of the room?