Does that sound like the proper introduction for an AmLaw 30 Firm Chair to use for an article with the theme, as he says farther on, that "I expect law firms to change more in the next five years than they have in the last 30 years?"   The author is Ralph Baxter of Orrick, the frogs he was thinking about are the metaphorical ones who will leap out of boiling water but succumb to the same hot water if gradual heat is applied, and the article is here.

Not to be oblique about it, but Ralph thinks law firms are the frogs experiencing the gradual heat, who have not leapt out of the pot because "the simple fact [is] that they have not had to."  In marked contrast, our corporate clients have had to be more nimble, finding ways to deliver more value to their increasingly globalized clients through (a) using technology to improve productivity and service quality; (b) developing new services and appurtenant pricing models; and (c) adapting to the changing work force through more flexible and creative hiring and professional development tactics.

I won't summarize Ralph's article for you—just go read it yourself—but I will supplement his thinking by reporting on a one-on-one conversation I had with him at Orrick's offices here in New York last week.

Many if not most of you are probably familiar with the growth trajectory of Orrick under Ralph's tenure—a roughly 1,000% growth in revenue, for starters—and we have all seen formerly regional or city-specific firms break out of their home territories and become national and even international powerhouses during the past 20 years.   If you doubt me, ask yourself whether you still assume these firms are provincially limited to these cities:  Foley & Lardner/Milwaukee; Jones Day/Cleveland; K&L Gates/Pittsburgh; Reed Smith/Pittsburgh.

But the question I had for Ralph was, understandable as it might be for those other firms to see the need to bust out of their frankly sclerotic local economies, what was so bad about San Francisco when he assumed the lead at Orrick?  Whence the sense of urgency to expand beyond the familiar base of a then-and-now healthy region?

"I told my partners, the night I was elected to lead the firm, that what they had voted for and what they were going to get was change."  Even if Orrick's position as the go-to municipal finance firm was solid as a rock, Ralph aspired to more. I asked him why, where his drive came from, and he paused, looked at the ceiling and shrugged: "I guess I've always been ambitious; I wanted to be student council president in high school."  So, for Orrick, Ralph wanted a larger stage to play on than that of the Bay Area.

"But," Ralph added, "something David Gergen said [giving the keynote at the Law Firm Leaders Forum in San Francisco the week before, which Orrick had sponsored in conjunction with Hildebrandt] struck me about the critical ingredients of leadership, and it was this:  His first prerequisite for leadership was 'ambition,' but it was ambition for the team, not ambition for oneself.

"The other thing about change?  It seems to make most people deeply uncomfortable:  You know, 'things seem to be going OK, and I'm not dead yet!  So far so good.' But I relish change, I really do.  I think most people, and especially most lawyers, don't."

I asked about how he had grown into the managing partner/firm chair role, and specifically what he did more of and what he did less of than, say, five years ago.

"Terrific question; never thought about it." (Pause.) "OK, I do less day to day management/administrative stuff, and much more communicating."

His pointing up the importance of communication reminded me of a piece of managerial wisdom that I've always valued, albeit having come from an improbable source. So I asked if he knew about the famous Washington political columnist Walter Lippman's advice to Presidents about press conferences, namely to hold one once a month, with no agenda and no time limit? 

No, he said, so I explained Lippman's thinking:  The idea was to instill policy discipline in the cabinet.  If anything and everything could come up in the unscripted press conference, the President had to be briefed on, and concur with, the policy positions of Treasury, State, Defense, etc.—and all those departments and more had to be sure they had defensible, supportable, credible positions across the board.  Even if the press conferences never occurred, the discipline they would instill was invaluable.

I observed that most managing partners have almost no staff to help them discharge their duties, and he responded that he'd actually become increasingly attuned to the need for a strong group to help him accomplish what he aspired to do.  "I've learned, and the group has gotten better and better as we've re-aligned people to fit what actually needs to be done." 

That is exceptionally unusual among law firms—no solitary "I can do it all" figure at the top—but if you're into process (as any good lawyer will be), you intuitively  understand the result of having talented senior staff.  They get things done that you can't do yourself.  They follow through on initiatives you launch.  They get back to people.  They don't let things fall through the cracks.  They return emails and phone calls, delegate whenever possible and escalate when unavoidable.   They work while you sleep.

I asked Ralph for his views on the mergers trend in our industry: Has it peaked, just gotten started, or something else altogether?

Attuned to the possible overtones his reply might have with respect to the recently and conspicuously cancelled Dewey/Orrick merger plans, he began undefensively by admitting that mergers between proud and autonomous law firms with decades of history were intrinsically complex. 

But on the larger question of the merger trend within the industry—accelerating, decelerating, or none of the above—his view is that M&A is here to stay; there's no a priori reason to think it will drastically pick up or fall off.  And he does emphatically predict that we will see mergers of "strength and strength:"  Two firms, neither of which has to merge, but which choose to in order to create a platform neither could achieve alone in such short order.

It seems indisputable that US firms have had better success launching offices in the UK than UK firms have had launching offices here. Why did he think that was?

First of all, he said, don't underestimate the amount US firms have had to "invest" (or if you prefer, the less euphemistic "lose") to get their London beach-heads up and running.  "We've lost money there to begin with, I think everyone's lost money there to begin with, but we've lost less and less every year, and many firms are finally making money now.   As for the UK firms not having had great success here, I think their compensation systems, which skew towards lockstep, aren't ideal for penetrating new markets; you need better incentives for sticking your neck out.  But I think they'll make it here sooner than some people expect.

"As for Orrick's commitment to London, you have to realize you're in it for the long haul.  You do need to make the investment, and be prepared to stick with it, or else you're not serious about it."

Is Orrick in a "war for talent?"  Absolutely.  And Orrick isn't competing just against other law firms, it's competing against investment banks, management consultancies, private equity and hedge funds, all of which can pay multiples of what even the most astutely-run law firms can pay. 

I noticed that Ralph had a copy of this post of mine in front of him, as he pointed to it and observed that the "hostilities" of the latest associate salary spike to $160,000 for first-years was very much a challenge to firms just shy of the top tier. They would have to swallow hard before matching—or not match.    It's yet one more pressure point on those firms.

Finally, what did he see, if he'd thought about it, life for him would hold after Orrick?  "Something interesting!  I'll never be done; I'll never quit.  I'm too curious; you seem to be as well."

I started this piece by saying that almost all of us are familiar with the trajectory of Orrick over the past 15 years, and we understand it at an intellectual, financial, quantitative, and rational level; one week ago at this time I certainly shared that understanding. 

But I now understand at a visceral level how the dynamic interaction of Ralph Baxter's personality and vision, and Orrick, have combined to create a new platform in 2007 which would be unrecognizable, and unimaginable, to an observer in San Francisco in 1989.

The question I couldn't ask, because there's no one yet to ask it of, is how to follow Ralph's act.

Update: 4 April 2007:

A reader who is General Counsel at a Fortune 500 company writes:

“As the old saying goes, "I may be crazy, but I'm not alone".  I agree with Ralph that firms have not changed because they have not been forced to. That’s not surprising because, as lawyers, they are inherently and highly resistant to change.  In addition, most firm structures simply get in the way of such necessary change because, at least in part, they are essentially built on rewards for inefficiency. 

"Firms, despite being billed as LLP's or professional corporations, retain the essential character of collections of individual contributors -- these might best be thought of as hotels where similarly inclined itinerants stay. 

"As individual contributors, partners stay as long as they like the mint on the pillow and they leave when some new property appears more attractive.  Perhaps most distressing, however, is the observation about newbie lawyers.  If law firms are in a war for talent, they aren't asking their clients if it's a war worth fighting.  While I'm certainly prone to hyperbole, I can't imagine a first year associate in the world that is worth $160K/yr to a corporate client. 

"So long as the firms insist on trying to pass those costs on to the client, then we have a very real interest in the unreasonableness of those costs.  These are unilateral costs incurred and accepted by the firms -- that unilateral decision to increase costs justifies neither rate increases nor other forms of cost pass through. 

"That being said, we in the in-house community do have an interest in the long term sustainability and therefore the ultimate profitability of our law firm service providers.  As such, we need to instead work with our firm to reduce their costs of providing services while sustaining profitability.  That means stopping the focus on top line revenue growth and instead focusing on profitability. 

"With that in mind, firms might think twice about increasing their cost structures through unilateral decision.  Perhaps the ultimate answer is in working together to change attorney licensing requirements.  Before we start paying associates outrageous sums perhaps we should send them to a "farm team" (the legal equivalent to residencies or apprenticeships) to see if they've got the right stuff to be useful counselors as opposed to body count to feed the billable hour machine.”

My thoughts?

I think our General Counsel friend is, in truth, exercised about junior-associate billing rates and not about their salaries: At least that's what I'd be exercised about were I he. After all, it's not his job to run Orrick, and if Orrick thinks going to $160K for first-years is in its rational self-interest, it's entitled to make that decision and live with the consequences.

This is how rational consumers behave: If I were in the market for a BMW (which I'm not), I wouldn't care how much BMW paid its factory workers, or its CEO, for that matter. I would care whether, on the whole, I perceived the BMW model I was eyeing delivered compelling value for its price.

But his other point, that clients and law firms should work together to figure out how to ensure they indeed deliver "compelling value for price" is one I heartily endorse. And, I intuit that he's thinking of fixed fees, not the billable hour. I particularly appreciate his point about having a long-run interest in firms’ financial health.  Whenever lawyers tell me that if they shifted to fixed fees clients would cut their margins to zero I tell them that no sane company wants its key suppliers to go bankrupt.  They act as if  such a thought had never crossed their minds.

A couple of weeks ago, I asked you whether profits per partner were the proper measure of firm success, borrowing from and building on the thinking of Guy Beringer, a senior partner at Allen & Overy.  In that piece I included a poll, and enough results are now in to report back on what you said.  Here are the results:

Bottom line:  Only 20% of you voted in favor of PPP in any form, whereas 80% of you rejected it.

Specifically, with the question being "Is PEP A Proper Measure of Success?:"

• At the extremes, a mere 9% voted for "Of course; the goal of any firm is to maximize shareholder value, and PEP is our equivalent"
• But at the other extreme, more than 5 times as many of you—49%—voted for "Absolutely not:  Guy is right, and the Emperor has no clothes."
• 6% voted for "Yes, it's the key, although there are other measures."
• 4% chose "Yes, nothing will ever be sexier,"
• And a very lonely 1%—representing a single vote—selected "Yes: I believe it's accurate and highly informative."
• 11% gave what could be characterized as the most tepid of responses, which I still read as a rejection of PEP in principle:  "The question is irrelevant; it's too entrenched to be challenged."
• 19% said its day has come and gone:  "At one point it was informative, but it's outlived its usefulness."

And where do I come down?  Were I forced to choose a single response to the poll, it would be "Absolutely not..." 

At a somewhat more nuanced level, it's not mine to gainsay that PEP is indeed sexy, that it tells part of the very important story of how a firm is doing in rewarding its owners ("shareholders"), and that it can be a potent advertisement for attracting laterals.

But as I said in the original piece, it shares all the vices and defects of quarterly earnings reports in corporate land, and then some.

It's extraordinarily manipulable, with caustic consequences for firms willing to hack away at the denominator without taking steps that would lead to sustainable growth in the numerator.

Somewhat akin to the US News & World Report college rankings, its unintended consequences have grown monstrously and now completely subsume its original usefulness.

Most important, it's just plain inadequate as a measure of the fundamental underlying economic health of a firm.  Far more revealing, in my mind, would be a more extended time-series (three to five years) of growth in gross revenue, or revenue per lawyer.

And for those of you carrying the torch for PEP, and now on the four to one losing end of this vote, I commend to you the immortal words of the late politician Mo Udall (1922—1998) who, upon finishing second in his fifth presidential primary in a row, opined:  "The people have spoken.  The bastards."

I'm not in a position to offer faux wisdom on China-business or China-business demand for legal services, but fortunately I don't have to because McKinsey has surveyed hundreds of C-level executives in Asia and has some numbers to report. With the caveat that surveys can be only as good as the enlightened self-interest of those agreeing to respond, I thought you'd appreciate the results as some are especially counterintuitive.

Understanding that this survey covered only executies in companies already doing business in Asia, two key data-points struck me off the bat:

• Almost 40% report they do no business in China at all; and
• Another one-third say their revenue would be unaffected if China's growth rate dropped to zero.

Here are some other top-line items:

• Half of the total sample say they earn some revenue in China, but among $1-billion+ firms it rises to two-thirds.
• But there's a big difference between "earning revenue" and operating:  Only 14% of respondents own a manufacturing plant, service facility, or retail store in China.
• But/and 90% expect to be doing business in China in some form within five years.

Competition from China-based companies? Aside from the obvious labor-cost advantage, they are frankly not seen as formidable:  In production/manufacturing, 27% deem them stronger or overwhelmingly stronger, but in services only 11% say the same (indeed, 27% in service-land say their Chinese competition is weak).

What could go wrong?

• Rising income inequality, 40%
• Poor or arbitrary enforcement of commercial laws and regulations, 26%
• Shortage of talent, 21%
• Weak financial institutions, 20%
• Official corruption, 19%
• And a variety of environmental factors were also cited, although they were deemed of less importance.  For the record, they included pollution (63%), shortages of clean water (20%), and the threat of pandemics (15%).

So, will China overcome these problems?  Again, this advice may be worth what McKinsey paid for it, but at least these executives were marginally confident. However, compare their confidence in China to their confidence in India, facing similar challenges.

• Very/somewhat likely they will address these issues successfully in the next five years:
  • China 47%
  • India 69%
• Somewhat/very unlikely they'll succeed:
  • China 27%
  • India 18%

Finally, the critical areas for investment in China were deemed to be infrastructure and logistics (72%) and education and training (70%).  Nothing else came close (for example, health care and social security were at 30%, combined).

Where does this leave us?  First of all, with a very uncharacteristic piece on "Adam Smith, Esq.," but I think it's germane to your challenges because everyone is talking—and many are acting—as if China really matters, and here are at least a few data points worth pondering:  This is a small attempt to shed light on what your clients are thinking about China.

But the other reason it's germane ties back into a theme I hope you're familiar with if you've spent any time here:  I don't believe in one or two great big strategic bets.  I believe in a diversified portfolio of strategic bets. Put some of your chips on a bunch of different hands, not all of your chips on one or two big hands. 

Today everybody thinks China is the big hand.  (If you don't think that's the received wisdom, go back to the first line of this piece; you knew how to finish the sentence, didn't you?) Understand: I'm not saying it's not.

I'm saying committing to China will require a sustained, expensive, investment over time. Like your London office; remember how many years of losses you incurred there (or may still be incurring) before emerging into the clearing in the forest? China may be similar, only massively larger, farther away, and wholly free of Anglo-Saxon tradition. En garde.

Specifically, in The Effort Effect, Stanford psychology professor Carol Dweck elaborates on the initially counter-intuitive notion that it's precisely the brightest and most gifted who can be most prone to fall short in the longer run.   The Stanford Magazine piece is derived from Prof. Dweck's new book, Mindset: The New Psychology of Success, and its premise is this:

"Through more than three decades of systematic research, she has been figuring out answers to why some people achieve their potential while equally talented others don't—why some become Muhammad Ali and others Mike Tyson. The key, she found, isn't ability; it's whether you look at ability as something inherent that needs to be demonstrated or as something that can be developed."

She calls this the "fixed" vs. "growth" mindset.

Subscribers to the "fixed" school of thought believe that intelligence (including the all-important "emotional intelligence") is static more or less as of birth, whereas believers in the "growth" school think intelligence can be nurtured and developed.   This leads to a cascade of attitudinal differences:

• Fixed:
  • Desire to look smart
  • Fostering a tendency to avoid challenges
  • And/or give up easily in the face of obstacles
  • Since effort is fruitless or worse (implicating one as lacking innate talent)
  • Highly allergic to absorbing useful critical feedback, and
  • Threatened by the success of others
• Growth:
  • Desire to learn
  • Embracing challenges
  • Persistent in the face of setbacks
  • View effort as the path to mastery
  • Learn, readily, from constructive criticism
  • Find inspirational lessons in the success of others.

The bottom line?  The fixed/deterministic view of things can cause people to withdraw at every less-than-triumphant encounter with the world, whereas the growth/learning view can lead to greater emotional maturity and sense of mastery.  Here's a neat diagram compressing this. 

Great, you're saying, and while it might apply to raising your kids (see Dweck's sidebar on just that topic), where are we going with this in law firm land?

Consider this key precis of Dweck's hypothesis, and read it with an eye towards associate mentoring or junior-partner development:

"Common sense suggests that ability inspires self-confidence. And it does for a while—so long as the going is easy. But setbacks change everything. Dweck realized—and, with colleague Elaine Elliott soon demonstrated—that the difference lay in the kids' goals. “The mastery-oriented children are really hell-bent on learning something,” Dweck says, and “learning goals” inspire a different chain of thoughts and behaviors than “performance goals.”

"Students for whom performance is paramount want to look smart even if it means not learning a thing in the process. For them, each task is a challenge to their self-image, and each setback becomes a personal threat."

Have you seen the associate or young partner for whom "each setback becomes a personal threat?"  Yeah, I thought so.

The good news is that shifting from the "fixed" to the "growth" mindset can be learned.

It is emphatically not the case that talent can take you all the way, without sustained effort.   Instilling people with that ethic is actually a profound way to develop emotional maturity.  If I believed my capabilities were set in stone, or more precisely in neurons, dendrites and axons, as of a few decades ago, my ambition would be denatured, my curiosity stultified, and my aspirations brought rudely back to earth. 

It applies to Managing Partners as well:

"Leaders, too, can benefit from Dweck's work, says Robert Sternberg, PhD '75, Tufts University's dean of the School of Arts and Sciences. Sternberg, a past president of the American Psychological Association, says that excessive concern with looking smart keeps you from making bold, visionary moves. “If you're afraid of making mistakes, you'll never learn on the job, and your whole approach becomes defensive: ‘I have to make sure I don't screw up.'”

So go ahead: Dare to screw up.

If you don't know the following story about John Chambers, CEO of Cisco, you should.  Cisco is, among other things, a famously successfully acquisition machine:  When they set their sights on a company they want to take over, they almost invariably do so efficiently, effectively, and with near-immediate returns to the bottom line.   But not every time.

So when Chambers was asked recently why a particular acquisition had disappointed expectations, he replied that 5 out of 6 had surpassed expectations, the one in question being #6. 

But was he saying that in a defensive, self-congratulatory mode?  If you think so, you'll be disabused by the next words out of his lips:  "That means we're being too risk-averse.  Five out of six is too conservative; I aim for seven out of ten."

What are you aiming for?   And are you afraid to tackle challenges you're not positive you can conquer?

Nalebuff has also taken himself out of the ivory tower, so to speak, in his consulting work to Fortune 500 firms.  As explained in this "Strategy + Business" article ("Strategy + Business" is Booz Allen's thinking publication):

"Then, while consulting to Fortune 500 companies in the mid-1990s, Nalebuff developed his method for applying game theory in business decisions. The process begins with writing down and categorizing all the elements of a game: the players, the rules (e.g., laws and government regulations), people's perceptions, the boundaries of the game (the market), and the linkages among all the elements.

"With that level of detail in hand, the player then spells out the consequences of a change to any of the elements. The approach helps CEOs make better strategic moves by offering a more complete picture of the consequences of their decisions. More importantly, says Nalebuff, it can help leaders understand the games of their industry well enough to reframe the business.

“‘Philosophers have only interpreted the world. The point, however, is to change it,'” Nalebuff says. “Karl Marx said that, and I am probably one of the few professors who still quote Marx, but he had a point: The action is in changing games rather than playing games.”

But the real value of his approach is in what I promised to attempt at the outset: Concrete techniques for applying some of the insights of game theory to actual business decision-making. Here they are:

• Imagine you have all the power and money in the world.  When looking at a problem, imagine there are no constraints.  Silence your internal editor, silence the scold that keeps piping up with negativity, and imagine you could supply your client (your partner, your practice group) exactly what they want. He uses the example of Donald Trump getting wrong-number calls from an automated fax machine in his hotel room at 2:00 in the morning.  Donald would hire an apprentice to answer the phone.  Your lower-cost solution might be to route all calls directly to voicemail without ringing. 
  
  I'll give you a more real-life example I heard about today from the GC of a Fortune 50 company:  Pretend a client in the midst of an M&A deal is facing a Hart-Scott-Rodino "second request," which would be painfully time-consuming and might even derail the deal.  You tell them your firm can proceed on two tracks at once:  Use your $700/hour partners with expertise in this area and contacts at the DOJ to argue why the second request is unnecessary, and also deploy a platoon of associates and paralegals to begin the document review just in case.  Since yours is a premium firm, the document review won't be cheap, either.
  
  The client balks at the price.
  
  Try this: Disaggregate the associates' document review from the partners' DOJ arguments. Charge full freight (or full freight plus) for the partners who actually do have the irreplaceable expertise, but outsource the document review to Bangalore or to West Virginia.
  
  Just a thought.
  
• Second, re-examine incentives.  I promise you will find some that are poorly designed, and should be corrected.  This can require creativity, but it will be rewarded in spades.  Nalebuff's example here is the deadly business model Blockbuster Video first inflicted upon itself:  Buying videotapes from the studies at $99/copy, meaning its breakeven was 50 rentals per tape.  Result:  No stock, dissatisfied customers, Blockbuster version 1.0 on the ropes.  The "incentive change?"  Negotiate a deal to pay only $10/tape, but share $1.00/rental with the studios.  Result:  Blockbuster 2.0 could offer ample inventory, no late fees, far higher customer satisfaction and profits.
  
• Three:  Perform the thought experiment of turning things upside down.    His example here is Priceline, which asked why airlines and hotels should be able to set their prices and wondered what would happen if buyers could set the prices.  Result:  A $1+-billion company.
  
  Trust me, this is one thought experiment not mentioned by Booz Allen, but it's one of my own, and one of my favorites:  How different do you think the world would look if the odds were 50/50 that the man or the woman would be the one to end up pregnant?  The repercussions would of course extend from pre-pre-K to the boardrooms of the Fortune 500 and the AmLaw 200.
  
• Four:  (Less germane to law-land, frankly, but let's indulge the fellow)  Ask yourself where else a product, a service, or an idea might work—particularly if the first rollout is less than world-beating.  He doesn't offer this example, and I'm making it up, but suppose your firm has developed a conflicts-checking system at no small expense that's actually very good at uncovering relationships between your lawyers and potential engagements.  What if you turned that on its head and adapted it to uncover relationships between your associates and specific areas of expertise they should have by year X but in fact don't?  Wouldn't that change your assignment system? 
  
  The point is to re-use, re-imagine, and re-envision assets you already have in place.

Let me conclude with a (literally) bet-the-company technique Nalebuff used when negotiating with seed money investors in "Honest Tea:"

"The formula with which Nalebuff and Goldman capitalized the company was pure game theory. Normally, startups have to gin up a valuation for a company that doesn't yet exist. “Rather than try to defend something that we pulled out of thin air, we created a valuation that was based on our subsequent performance,” Nalebuff says.

"The early investors came in with a zero pre-money valuation, but the founders got warrants at two times, three times, and five times valuations. Once the stock price doubled, the initial investors would be diluted. Once they had tripled their money, they would get diluted again. They would be diluted one more time when they had received five times their money. Nalebuff had created a contingent valuation. The effective initial valuation ultimately depended on how well Honest Tea did.

“The game theory lesson here is that when two sides disagree about something, rather than try to convince the other side that you are right, agree to a bet,” Nalebuff says. “If we did as well as we hoped or expected, then our initial valuation would prove to be high. But if not, then we would not dilute the initial investors.”

Remember that lesson from game theory next time you're counseling a start-up on valuation.

Earlier, I wrote about the 12th annual "Law Firm Leaders Forum" held in San Francisco last week, which I was able to attend as a guest of Orrick, Herrington & Sutcliffe, whose Chairman & CEO, Ralph Baxter, has been a sponsor of the event from the beginning.   (Thanks to all the folks at Orrick who made my attendance possible; you know who you are.)

Now I'd like to offer a brief recap of some of the highlights of the event:  You can find the agenda in my earlier piece.

On the first panel, looking at our industry five years hence, Brad Hildebrandt opined that while the world was enjoying a growing middle class, less poverty, more demand for goods and services—all of which drive demand for legal services—the industry is due for a "correction" and a slowdown in the growth in PPP we've been seeing lately.

Dan DiPietro of Citigroup's Private Bank described himself as "an optimist who worries a lot" and proceeded to declare that "firms' business model is tired, old, and not working for a lot of firms."  Why?  Clients have more clout than ever; mobility is at unprecedented levels; and the half-life of high-value work is decreasing.  Internally, we have four generations of lawyers in our firms, who don't see eye to eye on many significant issues.  Finally, there are increasing "corporatization" pressures, and this is a challenge which "no one has figured out."

Aric Press noted that, as the Baby Boom generation starts exiting into retirement, fewer and fewer people are willing to work 2,600 hours per year. He also observed that changes in rankings among law firms take place very very slowly:  "There is nothing harder to do than for a firm to change its relative status."

Ralph Baxter thought that segmentation is the key to understanding our industry today, but strongly averred that if your firm is not doing the highest value work, "you are not failing." The moral as Ralph sees it that you must choose high-value or mid-market, which bring with them radically different economic models, but both are viable.  Just make sure you pick one or the other; no firm can succeed at doing both.

Other observations from this panel and others follow. 

For a number of reasons, I choose to decline to divulge the identities of who advocated which view.  (And no, you won't be able to find out by emailing me, either, so don't even try.)

A primary reason is that the participants have not authorized me to do so.  A secondary reason is that this is intended as a wide-open, "think out loud," debate-provoking piece and I don't want to issue the slightest invitation to dismiss or discount or, conversely, to support or lend credibility to, any of the following thoughts based on what you think you might know about their proponent.  Third, I hope to prevent reprisals.  (Just kidding!)

So forthwith, some of the more noteworthy assertions

• It's hard to be a national firm without some global capability.
• UK firms are a real competitive threat.
• "CEO" as a title is inherently problematic.
• De-equitisation of partners is one of the most caustic steps a firm can take; we will see a blow-up of an entire firm resulting from this.
• In 10 years but probably not 5, we will see a managing partner who is a non-lawyer.
• More and more firms will engage the likes of McKinsey to do soup-to-nuts strategic reviews.
• The billable hour is not dead.
• The billable hour is dead:  Knowledge management will wipe it out, as corporate clients increasingly demand that their key firms expose their internal KM systems to the client.
• In less than 5 years, a name-brand UK firm will go public through an IPO.
• In less than 5 years, New York first-year associates will be at $250,000
• In retrospect, we will view the period immediately past as a high-water mark in mergers among law firms.
• There will be many more law firm failures.
• There will be some law firm mergers at the high end of the market between two strong firms neither of whom needs to merge.
• The key to the future is how much growth there will be in China:  "No one knows."
• "This panel on the future is incredibly pessimistic."
• "This panel on the future should see things growing to the sky; the demand for legal services far exceeds the supply."
• Our basic business model has been broken for years:  Top partners are underpaid and young associates are overpaid--but we can't seem to disaggregate them.
• The key to increased profitability will be the ability to cut costs but not cut hourly rates.
• You cannot apply what you thought you knew about running an old sty le law firm to a global $1-billion+ business.
• We never advertise, we never recruit, we never go on-campus; everyone who comes to us comes by word of mouth.
• We have 45 partners in a 60-lawyer firm; my ideal firm would be 50 partners and 0 associates.
• The leverage model is utterly inconsistent with quality.
• [Also banging on the leverage model:]  With lots of leverage, there's absolutely no incentive to mentor associates, which means that the people doing the work are unqualified.
• No billable hours, ever:  Not just in not charging clients by the hour, but people inside the firm don't even know what their hours are.
• Zero origination credits; every client is a client of the firm.
• We use technology to give lawyers their lives back; it's all about what work you do.  We put zero value on face time, zero.
• No meetings in our firm:  Ever.
• Law school is deplorably unhelpful in developing team skills.
• The defining characteristics of leadership are:
  • Ambition
  • Vision
  • Character (those being non-negotiable), and optionally
  • Adaptability
• 50% of the characteristics of great leaders are universal; 40% are industry-specific; 10% are firm-specific.
• The new generation of lawyers (Millenials, a/k/a Gen Y) are all about "work/life balance," or trying to have it all.
• Millenials want constant feedback, a highly structured environment (not "sink or swim") and are intolerant of drudgery
• They have far less focus on a long-term career commitment to the firm
• But are at least as smart, and far more worldly (study abroad, living abroad, etc.) than previous generations.
• One technique for dealing with this is simply to wait until 4th or 5th year and then among the survivors begin to instill a sense of learned professionalism, your obligation to colleagues, and your role in and commitment to the firm.
• "Strategy" means being the very best at what you do and not trying to do anything else
• Among other things, this means that if there is no one suitable for partner in any given year, no one will be made partner
• We see absolutely no need for an office outside [our home financial capital]; you can buy an awful lot of air tickets for the price of an office.
• Asia is staggeringly important, but China and India are two very different stories
• In 1987 there were no private practice lawyers in China; now there are 100,000
• The only area in our firm which has absolutely zero budgetary constraints is recruiting
• Our "Chief Talent Officer" is the second most highly-paid non-lawyer in our firm (after the COO/Executive Director) and the third most highly-paid reports to the CTO
• There will be a ground-breaking US/UK merger in the next 5 years; it's surprising there has not been one already
• Re outsourcing: Why hasn't there been more of it, is the interesting question, not whether firms will come around at all.
• Corporations, investment banks, ad agencies, etc., are all heavily committed to outsourcing, with no noticeable compromise in quality or responsiveness
• If you want to practice at the very high end of the profession, you must:
  • hire absolutely the best
  • train and mentor
  • be as cost-effective as possible, a nd
  • out-source everything that absolutely positively does not have to be done face-to-face with a lawyer in Class A+ downtown real estate

There you have it.

As always, I welcome your thoughts, feedback, enlightened commentary, and slings and arrows.  But for once, I'm only the messenger.

Guy Beringer, a senior partner at Allen & Overy and someone you should be acquainted with if you want to follow the leading thinkers about the future of our profession, has written a thoughtful and desperately overdue piece on "Profit per equity partner as a measure of success," which will soon be published in the FT, in which he argues it is anything but a proper measure because:

• "it ignores the two audiences that determine the success or failure of a law firm: its clients and its people"
• "it tells you almost nothing about the underlying performance of a firm in terms of efficiency and sustainable profitability"
• " it is out of touch with a world which increasingly requires a demonstrable level of corporate responsibility" and
• " it is a calculation in which both the numerator and the denominator have become more impressionist than real."

Bill of particulars duly read, let's discuss this for a moment before expressing a view.

Guy is surely right—the only shocking aspect to my mind is how long it has taken someone to say it—that PEP has nothing remotely flattering to say to clients or to everyone in the firm who doesn't happen to be at or above the publicly stated PEP figure in year-end earnings.  To clients, it reinforces the already toxic message that we're a navel-gazing people, ignorant of their true business challenges and hostile to educating ourselves about them.  This is, as Guy drily puts it, "not a wise position to adopt."

To our staff, associates, non-equity partners, and partner below the mystical PEP, it's profoundly insulting.  To potential lateral recruits, it can represent a chimerical goal which, when unrecognized in reality, causes hostility and sharp questions rather than fostering collegiality and enthusiasm.

From an economic and financial perspective, PEP is a consummately manipulable figure, even more slithery than a public corporation's quarterly earnings releases, but the hyping of which (as with quarterly earnings) can lead to a variety of antisocial behaviors with toxic unintended consequences. 

Again from a financial perspective, the chief failing of PEP (and quarterly earnings) is that they are potent distractions—alike to clients, potential recruits, and the firm itself—from the ingredients that lead to long-term healthy growth.  Consider that investment in professional development, a more robust and powerful IT infrastructure and a rich and deep KM platform, and strategic investment in new geographic and practice group extensions, all subtract from PEP.   Does that then recommend PEP to you?

Guy's last point, and perhaps the only one of his four which has been adequately, nay excessively, bruited about whenever PEP comes up, is that the two key figures, profits, and number of equity partners, are exceedingly malleable.  In London, so he reports, the number of equity and non-equity partners firms report often does not sum to the number of total partners they report.  Here in the US, the treatment of unfunded pension obligations is a favorite parking place for expenses one would prefer not to recognize in the current period. 

Likewise, the unseemly and radical pressure to pick up partners like pawns and move them to the non-equity squares on the chessboard is, I would argue, the single most divisive and destructive unintended-consequence of the widespread focus on PEP calculations. 

Guy's piece has already secured him at least one rejoinder, and others will surely follow. 

The question his piece prompts of course is, if not PEP, then what?  Guy suggests the smart, but qualitative not quantitative, dispersion chart of plotting firms across two axes, one of which is client satisfaction and the other of which is internal lawyer and staff motivation.  Hard to argue with, and I would heartily endorse it for your firm as an exercise in longitudinal tracking of success or incipient disappointment, but terribly difficult to compare across firms thanks to its fundamentally subjective orientation.

Other purely financial metrics could include:

• revenue per lawyer
• profits per lawyer
• one-, three-, five-, or ten-year growth in revenue or profit
• definition and specification of a "peer group" (segmenting the industry is what this means) and tracking relative performance among that set over time
• percentage of revenue accounted for by clients who've been with the firm for more than five, ten, or twenty years (a strong-client-relations proxy)
• percentage of revenue accounted for by clients who've been with the firm for less than five, ten, or twenty years (a new-business-generating proxy)
• etc.

Please tell me if you have other or better ideas; those I've just listed are meant to be purely suggestive, even evocative, and each has its (fairly obvious) plusses and minuses.

Guy does not ask, so I will, if it's too late to get the PEP monkey off our backs—assuming you'd like to.

First, for many firms, PEP occupies a central strategic position in attracting laterals. If you believe, as do I, that a if not the primary arena of competition between firms takes place in the fight to attract talented laterals, then it's hard to beat a robust PEP number as giving a firm credibility that its financials are attractive. For firms (and potential laterals) who subscribe to this view, PEP ain't broke and shouldn't be fixed.

My rejoinder to this is that, for all the reasons Guy and I have enumerated, a high PEP is not an indicator of strong underlying financial strength. Perhaps if and when more of our colleagues have a firmer grasp of fundamental economics this view will carry the day. As of now, true as I believe it to be, I fear its doubters will outnumber its followers.

But let's assume you'd like your firm to try to escape the arms race surrounding PEP. Could you, as Google famously did vis-a-vis quarterly earnings even before it went public, "just say no?" Could you refuse to play the game?

First, let's define what I'm proposing. I am not counseling you to be a refusenik—to tell The American Lawyer to go away when their scribes come around to gather their annual PEP data. For one thing, I count Aric Press a friend, and for another, the old advice remains sage not to pick a fight with people who buy their ink by the barrel (or I suppose, in the case of publishers like myself, their server storage by the gigabyte).

But try this thought experiment: What if your firm were to announce, a la Google, that it had decided the perpetual PEP race was uninformative, even toxic to performance, and that while you would continue to go along with providing the requisite data, you did not believe PEP had any validity as a way of measuring the financial health or attractiveness of your firm and you henceforth would not be raising a finger to goose that number one way or another? Would it simply be too lonely to go out on that limb?

What if you, then, could enlist a few of your peers to do the same thing, in a simultaneous announcement?

Still too risky, too radical? Still afraid you'd be knee-capping your firm in the tournament for laterals? Then one last suggestion: As Cesar Alvarez of Greenberg Traurig says, "Actually, people really don't care about PEP: They care about profit per me." Isn't that pitch the only one your firm can credibly make to a potential lateral, and the only one the lateral is truly going to listen to?

In the meantime, here's your chance to weigh in:  Results to be reported in future.  Please vote.

Thanks to the usual suspects at McKinsey, we now have some preliminary indications.  Yes, it's true that they can generate outsize returns, and yes, it's also true that they do it by behaving in ways public companies don't.  But the devil fascination is in the details, and I'd like to discuss their practices.  As you read this, think "merger."  Specifically, think how you'd manage a firm or large practice group you might acquire.

Last time I checked, your firm wasn't publicly listed.  So might it not be time to take a page, as it were, from private equity?

First, let's define "outperformance."  Since McKinsey was interested in what differentiators lie behind superior performance, their sample set was"skewed toward the better deals by the better firms."   More broadly, they found that three-quarters of all private equity firms "perform no better than the stock market over time [but that] the top 25% outperform...by a considerable margin--and persistently."

So let's cut to the chase.

They examined 60 deals completed by 12 "top-half" private equity firms, and examined the returns on those deals compared to a comparable investment in publicly traded equities.  Here were the key differentiators:

• Before the deal, winning private equity firms conducted "deep research" into the target.
• After acquisition, they exert powerful ownership control over management, which just starts with high levels of performance-related compensation to align managers' interests with that of owners.
• Compared to poorer performing private equity firms, and in stark contrast to public companies with diffuse shareholder ownership, imperial CEOs, and nonexecutive directors who have no research staff, no budget for outside consultants, and access only to the information management cares to provide, activist private equity firms devoted at least half their time to the company, usually at its headquarters, for the first three months after the deal.  Less active investors spent only 15% of their time doing the same.
• Active investors had "teams of analysts;" less active ones worked alone.
• Active investors formulated their own hypotheses about what needed to happen to release, or discover, value in the target firm (educated guesses they had formed during the pre-acquisition due diligence process), while less active (shall we say "passive"?) investors tended to review and comment upon proposals made by incumbent management.
• Active investors got to know individuals in senior management early on, and made needed replacements quickly and expeditiously; passive investors ultimately made some replacements as well, but "usually much later."
• Finally, active managers looked at operational indicators to measure performance (which more closely track plans for actual changes in the way the business runs), while more passive managers stuck with traditional financial measures, which may not be tailored to the firm and may not have quick response times—may, in other words, be lagging not leading indicators.

If you're starting to see a theme here, McKinsey does as well (emphasis supplied): 

"In our view, this active assertion of ownership is the crucial difference between the best private equity firms' concept of good governance and the one put into practice by public companies and less successful private equity firms."

First, contrary to popular belief, private equity's most potent weapon is not financial re-engineering or mere price arbitrage, it's what McKinsey dubs "governance arbitrage," extracting value from firms whose owners and managers are misaligned.  Fascinatingly, McKinsey sees this as such an enormous opportunity "that private equity is likely to maintain, and perhaps to expand, its presence as a parallel system to established public markets. It would revert to marginal status only if the governance of public companies improved dramatically."

Elsewhere in the article, McKinsey discusses the how the interplay between private equity and public ownership may play out over the coming decade or longer, and while many of their observations are intrinsically interesting, their lessons for brilliance in executing law firm M&A are less obvious.

But I can't resist sharing a few:

• They sharply rebuke the conventional wisdom that public company governance has "greatly improved...notably since the cleanups that followed recent high-profile corporate scandals."  Rather, what they say has  happened is that nonexecutive directors of public companies are utterly absorbed and preoccupied by ensuring they don't run afoul of "the growing number of codes and regulations," to the exclusion of strategic reflection on how to create value.
• The incentive structure compels risk-aversion:  Nonexecutive directors stand to lose big if compliance short-circuits, but have little upside for outstanding performance.
• Boards are still kept in the dark.  Only 10% of directors McKinsey polled felt they had a "complete understanding" of the firm's strategy and long-term objectives, whereas more than half described their information about that as "limited" or "none."

Where does this leave us if we're not contemplating a merger or significant lateral group acquisition?  Essentially all of this applies with one-to-one congruence to managing the firm's everyday activities, not to mention its aspirations for the coming decade.  Here is one last piece of learning.

Create an intense, externally focused strategic review

The best private equity firms do this with their acquisition targets; why not do it for yourself?  Look to benchmark your firm against your competitive set as a start; but if you stop with benchmarking, you consign yourself to middle-of-the-pack mediocrity, by hypothesis.

After benchmarking, to see if you're a significant laggard, look to leaders within and outside our industry, to learn from how the best of the best do it.  ("It" can be anything from KM to client relations to word processing and PowerPoint presentation production.)

The last two McKinsey recommendations, having to do with creating "tough but realistic" targets, and linking them to compensation, and with critically evaluating senior managers and pursuing an ongoing search for talent, are behaviors that I presume you're already pursuing, or else have pursued to the point of effective cultural diminishing returns.

So what are we left with?

We can happily take a lesson from private equity:  We're closer to their model already than our public-company clients, and we have the internal brains; critical and analytic firepower; and power at communicating a vision, to follow the game-plan.

Best of all, we have the resources to pay people who share and pursue the vision for their efforts.  Why shouldn't your firm be a model for "the better deals pursued by the better firms?"

Bruce, this is one of the better explanations--along with McKinsey’s original stuff--of what's happening vis a vis private equity and governance.  Interesting to apply it to law firms!
I look forward to hearing others' reactions.  Many thanks.

Grant Aldrich of Professional Services Marketing writes:
Hi Bruce, How do you think this aggressive restructuring and active assertion of ownership would differ in its implementation, from a law firm with a partner management structure as opposed to a firm with a formal executive management team? Grant

My thought, Grant, is that it should not fundamentally differ: But the reality is that the partner-management structure is likely to be less effective than a formal executive management (and full-time management) team. So long as one is a partner with an active practice, clients will always come first (as indeed they must under professional ethics).

Yet another reason, I would aver, to have real executives at the helm.

Is there anything remaining to be said about the Great Associate Salary Spike of 2007, to a starting salary of $160,000 at New York offices of big deal firms? (You might be excused for thinking there's not, if you were to follow every link in this round-up.) Even I addressed the great spike of 2006, from $125,000 to $145,000, at least as to some of its dimensions, last April.

At that time, I asked all of you what you thought about the salary spike, and over 400 of you were kind enough to weigh in:

Since that comes out in mice-type, here's a recap of your answers:

• Yes; the only rational response to competitive forces: 35%
• Yes; required to attract top-tier students:: 22%
• No; it strikes me as collective insanity: 17%
• Yes; required to extract hard work: 12%
• Who knows? We can't control it anyway: 10%
• No; and a 50% cut is overdue: 4%

Here are a few more data points:

• Although firms tend to guard this information, making it difficult to quantify the impact on profitability, we do know that the raise from $145,000 to $160,000 will cost Simpson Thacher $8-million. Since Simpson has about 520 associates, that's $15,385 per head, implying the $15,000 spike for first-years is distributed up the food chain more or less linearly.
• Since Simpson has a little over 150 partners, the average hit to each, at least as a first approximation, will be about $50,000.
• If the effective blended billing rate of associates were $300/hour (across all classes), an additional 50 hours/year/associate would cover the direct costs of the pay raise.
• "Above the Law" covers this topic exhaustively, if not exhaustingly, here, with among other things as many internal firm memos as it's been able to scare up detailing the rise at each firm.

Now for some thoughts and analysis on this.

At a simplistic level, it could be thought of as an exercise in supply and demand. From 1996 to 2006, the number of associates at NLJ 250 firms grew by 76%, while the number of law school graduates increased just 7% (and elite law school graduates even less): We should not be shocked if the price of a relatively-more-scarce commodity has risen. In my view, however, while a germane piece of information, not to mention something intrinsically interesting, that's far too simplistic to take us very far towards actual enlightened understanding of this phenomenon.

Other people (not me) espouse what I refer to as "cost plus" reasoning. This school of thought, advanced primarily by the associates themselves, holds that because every major expense associates bear—exorbitant center-city rents, six-figure law school loans, living the young professional's aspirational lifestyle in general—have advanced at supra-inflationary rates, "it's about time" for salaries to catch up.

Nice try, but it bears only the remotest connection to the way labor markets actually function. If they functioned the way the cost-plus crowd hypothesizes, I could afford my own Gulfstream V, Provence villa, and 5-bedroom penthouse with Central Park views: After all, I just increased my "costs," so the workings of the market would appropriately subsidize me on the wage side, right?

Grasping for an explanation, let's at least listen to what Pete Ruegger (Simpson's chair) had to say about vaulting to the $160,000 hash-mark: It was

• Good PR: "The perception that we're paying attention to compensation for associates will hopefully earn us goodwill,"
• Getting a leg up in the competition for talent in law schools, and
• Aimed at retaining midlevel associates.

The PR angle is probably indisputable, but query what $8-million/year, effectively in perpetuity, could buy in plain old retail-rate PR? And how quickly will the spike itself be forgotten, much less Simpson's not-universally-admired role in kicking it off?

"Getting a leg up" lasted about a nanosecond, as every name-brand firm matched within days if not hours. And again, query whether a key selection criterion should be to prefer the folks who most eagerly follow the money?

Finally, #3, the midlevel attrition issue, begins to make more sense.

Here is where, indeed, I would like to focus the remainder of this piece.

Last weekend I was fortunate enough to be attending an AmLaw 100 firm's annual practice group leaders' retreat, and the topic of a partner/associate generational, or attitudinal, gap came up. (Trust me, this issue is anything but specific to any particular firm; it's ubiquitous across our profession and, for that matter, across corporate land, wherever 20- and 30-somethings and 40- and 50-somethings work under the same roof in a mildly pressurized atmosphere.)

From both sides, the attitude of the other is perceived to be highly unattractive:

• Partners think (and I paraphrase, here as below): "Associates make so much ____'ing money, and they think new matters just fall out of the sky. You ask them to work over the weekend and they say they have plans. I never 'had plans' when I was in their position. Who do they think they are?"
• Associates: "Partners make so much ______'ing money, and they want us to do all the work, particularly the scut-work. I never see clients, I never go to court, I never get any real experience, the work is mind-numbing, and they keep tacking on another 50 hours to their 'expectations' almost every year. Besides, everyone knows institutional loyalty died a long time ago; if I don't manage my own career, and try to have some semblance of a life on the side, the firm sure isn't going to do it for me."

I exaggerate slightly, but only slightly, for effect, and of course I generalize. However, the problem with generalizations is precisely that they're usually not too helpful as a guide to action.

So what I'd like to do is suggest that we break associates out into junior, mid-level, and senior, corresponding to years 1 through 3, 4 through 6, and 7 and above.

For junior associates, the spike has the greatest impact, and appeal. It's statistically a truism that they gain the greatest percentage boost by an added $15K in compensation, and the additional money puts yet more yardage between starting out in BigLaw as opposed to pro bono, government, or SmallLaw. In other words, it probably has the greatest impact on behavior among the junior associates.

For mid-level associates, the $15K may constitute a "rough justice" approximation of the value of their contribution, and how it has increased in monetary terms with the rise in rates and billable hours over the past few years. While it's scarcely enough to make anyone in their right mind switch firms (unless there are other serious issues), it may be fair to say the mid-levels have more or less earned it.

For senior associates, there should be far greater variability in individual compensation packages, certainly once year-end bonuses are taken into account. Therefore the additional $15K of nominal salary is probably least meaningful to this group: And it's pretty much too late to even think of jumping to another firm if you're serious-minded about partnership, so its impact on behavior will approach zero.

So what?

I side with where (I think) Aric Press is going in his monthly column in the March 2007 American Lawyer, where he posits that "A more elegant strategy would have been to bundle that money and use it to reward those whom the firms say they'd like to keep a few years longer." By that I presume he means the proven mid-levels.

Were I King, or at least had I been Pete Ruegger this past January, I hope I would have allocated Simpson Thacher's $8-million differently:

• Little or nothing to the juniors, who are unknown quantities and who, after all, just got the $20,000 raise a year ago;
• Little or nothing in salary to the seniors, who are in the best position of any associates to be captains of their own ships, and to whom "pay for performance" is not an oxymoron. The surviving seniors should be rewarded more and more on discretionary bonus and less and less on fixed class/year salaries.
• Finally, most of the investment (80% doesn't sound too high to me) in the mid-levels your firm really wants to keep. Like it or not, they've learned enough to have genuine market value outside your cherished walls, and they've also been around long enough to have been able to experience, at least vicariously, what it could mean to be a partner at your firm. And another thing—they're starting to really perform for your clients.

Before I close, there are two other crazy aunts in the attic who deserve at least a perfunctory hearing.

The first is one I alluded to in saying your mid-levels "have genuine market value." Permit me to define who can pay top dollar for that value: Wall Street.

And today, by "Wall Street," I include Greenwich, Connecticut, global hedge-fund headquarters. At least anecdotally (I have called the recruiter but have not yet spoken to her), a third-year Schulte-Roth associate left for a hedge fund that will be paying him or her nearly $700,000/year. Do the words, "We can't compete with that" come to mind?

Think hedge funds slots like that are extraordinarily rare? Your point is probably well-taken, but what about the legions entering the starting classes at Morgan Stanley, Goldman Sachs, Citigroup, UBS, etc., etc.? Marching shoulder to shoulder with Ivy League MBA's, consider the different trajectories of two mid-levels making, say, $225,000 at your firm. The first one stays another, say, five years as an associate and makes a nice solid increment over inflation every year.

The other decamps for investment banking land and takes an initial compensation hit; but by three years out they've recovered it and then some, and about the time mid-level #1 is coming up for partnership at your firm, they're coming up for a shot at vice president and soon after, managing director. If they make it (there's no assurance mid-level #1 will make partner, either, of course), they'll experience a jump-shift in compensation that will induce whiplash. And by 45 or 50 at the latest they'll be ready to retire and start career #2 (or #3, depending on how you count).

$15,000/year is starting to sound less and less revolutionary all the time.

Let us now visit crazy aunt #2.

There's a reason Simpson initiated the latest round of hostilities, and not a second-tier firm: And make no mistake, hostilities they are.

Why Simpson (or Davis Polk, or Cleary, or Cadwalader, or Latham, or insert-mega-successful firm here) and not someone lower down the food chain? Because the Simpson's of the world can afford it.

The most recent AmLaw 100 report specifies Simpson's revenue as $727-million. By now it's probably closer to $800-million, so the $8-million they just tossed over the transom to the associates is 1% of their revenue, or roughly the amount they'd bring in the door by about lunchtime on January 4th of the new year.

Perhaps a better question than "why did they do it?" would be "was it a major decision for them?," and I would argue it was not. Again: The Simpson's of the world can afford it. At Dewey Ballantine, Mort Pierce reportedly convened the executive committee to "call" Simpson's spike "immediately;" I would infer the decision was made without everyone even having to look up from their BlackBerry's.

But for other firms, the decision to match or lag behind may well have induced some soul-searching. And this is where the "hostilities" start to gain traction.

The new line in associate salary sand is yet another financial pressure point on many firms, and further evidence of the emerging gap between firms truly in the first rank and those slowly being left behind.

Update:
This came in the form of an email to me from an AmLaw 50 partner who requested anonymity:

I've been a fan of your website for awhile now. Thanks for the great work. It’s a definite 'must read' for any lawyer who considers him or herself an owner (or potential owner) of their law firm.

From my perspective, the greatest truth is in your last two sentences. The best explanation I believe for the first year pay raise is that the 'bulge bracket' capital markets firms are acting to increase the cost of competition for other firms (like an airline that cuts prices to/from a city when a new competitor enters the market). While you note that 1st yr's compensation as a percentage of profits per partner are at a 15 year low for the AmLaw 100, if you took that compensation and compared it to the distribution within the AmLaw 100 I suspect you'd get a very different answer for the law firms along the flat part of the PPEP distribution curve. As you say, just more pressure on the gap.

It will be interesting to see how this plays out over the next few years. I wonder if law firm business models will eventually start to mirror the model of the national accounting practices (many fewer national firms where each firm internalizes a two tier structure with 'local' and a 'national' offices).

Bruce again: Is he right to imply that there's increasing pressure on the one-size-fits-all national associate/partner model? If so, what alternative organizational structures would be optimal?