Washington-based Howrey (630 lawyers) just announced, as reported on law.com, that they are ditching lockstep compensation for associates effective in January 2008. Although the report is a bit sketchy on details, the key elements of the initiative appear to be:

• Starting first-years at "market rate" (Howrey's at $160,000 now).
• After first year, instituting a series of "levels" through which associates would advance based not on seniority but rather on personal evaluations of performance and experience. Subjective? Sounds like. (I prefer to think of it as judgment.) A better approximation of reality than lockstep? Without a doubt.
• Each level would contain a salary range approximately centered on "market," but with some associates paid more and others less.
• According to Henry Bunsow, managing partner of northern California for Howrey, "The goal is not to have associates make less than their counterparts at other firms." He adds, showing a fine appreciation of marketplace dynamics: "If poor performers can get a better deal somewhere else, that may be a marketplace reality -- we would hope that this system wouldn't promote that."

And the firm appears committed to the initiative. For example, one express result of the "performance/experience" evaluative criteria is that partnership tracks could well become shorter for some and longer for others.

Also, each associate will be assigned to partners responsible for their development, exposure to appropriate new responsibilities in areas such as writing, discovery, trial preparation, and client presentation skills, and of course the evaluations, and one full-time staff person will be responsible for monitoring the program and keeping tabs on associates' perceptions.

Finally, billing rates for each associate will reflect their performance/experience ratings, with higher performers billed out at higher rates.

All in all, this reaction probably sums up the reception the non-lockstep plan is getting: "To say it's a bold move would be an understatement," said William Nason, a recruiter with San Diego-based Watanabe Nason Schwartz & Lippman. Matthew Larrabee, chair of Heller Ehrman, is also quoted as taking a cautious approach, allowing as how even though firms may begin to get more creative with associate compensation, "it can be difficult to buck the market trend of lockstep."

But how difficult might it really be? For every perverse situation where an underperformer can arbitrage the system and get a raise by going to a market/lockstep firm, one can hope there will be more situations where high performers could reverse-arbitrage the system and get a raise by going to Howrey. And, if you add in the expected half-life of those two hypothetical lateral associates at each of their new firms, it's perfectly reasonable to expect the dud will be out long before the ace. Over time, associates might begin to sort themselves out by a performance yardstick. Could this be the start of—imagine!—compensation actually having at least some marginal relation to competence?

That appears to be precisely what some reacting to the news seem to be afraid of. Consider this comment on the story, from over at the WSJ Law Blog, as follows:

"Firms paying associates based on merits is all fine and well. The question gets more complicated, however, from a client’s perspective. Presumably, the associate who is paid less will have a lower billable rate than one who is paid more. If this is the case, although the nickel-and-dime client might be pleased, the more serious client will naturally ask: Why am I getting the bottom-feeder associate? Thus, staffing cases will become an issue down the road."

Wait just a minute: Since when should clients pay the same for the dud as for the ace? Yet that's just what this interlocutor seems to recommend.

Furthermore, there's a hairball of confusion in pitting "the nickel-and-dime client" against "the more serious client." Putting aside the implication that clients who want to squeeze their law firms don't have ample opportunity to do so under the current system, why should one assume the "more serious" client would tolerate "the bottom-feeder?" Presumably, this client is "more serious" because there's more at stake. Unless the law firm seriously misapprehends how the client perceives the gravity of their matter (which of course is another topic entirely), the last thing the firm would want to do would be to staff the matter with sub-par performers.

Here's what it boils down to for my money:

• Howrey's initiative is one of the first serious stabs to get away from the transparent fiction that all X-year associates are alike.
• As Bunsow puts it, "no business in this country would run themselves that way." (If I have a chance to interview him, I plan to ask if he's implying that other law firms are not businesslike. On second thought,...)
• This is one of the more meaningful attempts to tie cost of service to value to client: The more skilled the associate (at level X), the more you pay—and the more the associate is actually capable of doing. And finally, Bunsow sums it up best:
• "Our goal is to [1] attract and keep the best people, to [2] compensate them for what they're worth and to [3] justify their cost to the clients, because we think clients are willing to pay for high-quality legal services."

[1] is all about winning the war for talent, by putting your firm's money where its mouth is.

[2] means you understand your associates are not fungible—an extraordinary leap of faith for some, no doubt—and, again, are prepared to act on that reality.

Finally, [3] means you are unapologetic about what it costs to deliver impeccable quality.

The only thing that shocks me about this thunderbolt is how immediate, and visceral, was the resistance. Are we truly such slaves to a century-old system, the "Cravath system," showing greater signs of superannuation with each passing year?

Update 7:00 pm, 29 June:

Henry Bunsow was courteous enough to phone, in response to an email from me, and I learned these additional nuggets:

• The initiative, "as all things new in law firms," he drily editorialized, was prompted by clients. In one particularly telling anecdote, a GC called to ask why the billing rate of a particular associate had jumped in one month by $25 for the same work on the same matter. "Uh, because he passed an anniversary at the firm," Bunsow observed, seemed a lame response.
• Howrey is not doing this in some sub silentio or backhanded attempt to cut associate compensation expenditures overall; to the contrary, Bunsow firmly anticipates the firm will spend more, not less, on associates, as they endeavor more aggressively to keep the high-performers.
• To the question of whether other firms will follow Howrey's suit, I'm sure his answer would be: If and only if clients insist.

I, for one, will be watching this very closely.

Here on "Adam Smith, Esq." I've been writing about the possibility of outside investors in law firms—and even IPO's of firms—starting in December 2004. For the full roster, see that piece, plus:

• How to Change Everything/December 2004
• Shearman & Sterling's IPO/May 2005
• Non-Lawyer Partners Post-Clementi/June 2005
• Publicly Traded Law Firms: The Starter's Pistol Has Fired/June 2005
• Clementi Reforms Progress/October 2005
• "The Innovator's Dilemma" Strikes Again/April 2006
• Who? Me Innovate?/January 2007
• It's Happening Sooner Than You Think/January 2007, and
• Publicly Traded Law Firms in the US? Georgetown Law Symposium/April 2007

Now it's time to stop talking about it hypothetically and starting talking about what a firm might actually need to do in preparation for opening itself to the capital markets.

I'd like to start by stepping back and asking whether most law firms, on the current model, are prepared to actually take rational advantage of a sudden influx of capital. My answer is that most are not—and not for intellectual or analytic reasons, but for cultural ones.

For as long as anyone has conceived of the profession as being simultaneously a business, lawyers' remuneration has come in only one form: Ordinary income. There has been no such thing as equity accumulation in a firm, stock options, etc. (Indeed, this is one often-overlooked financial incentive for associates to look longingly at investment banking, private equity, management consulting, and in-house positions: All those firms can offer not just nice incomes but the possibility of true wealth creation as well.)

Today of course the measuring rod for law firm financial performance is seen as Profits Per Partner. (I believe this is a superficial, manipulable, and readily misleading metric, but that's a discussion for another day; the reality is that today it's what everyone looks at.) As the ever-escalating race to achieve higher and higher PPP plays itself out—justified, if one chooses to be charitable, by the war for talent—lawyers have become even more addicted to high annual incomes. I fear that altogether too few think in terms of an alternative to eye-popping income, namely capital accumulation.

The problem is deeply rooted.

At least in part, it stems from partners' wearing three hats simultaneously, and scarcely ever imagining there's an economic distinction among the three. Partners are at once:

• Workers, billing hours and producing legal "output," whose value as such is what the firm would have to pay a non-equity partner to perform the equivalent work.
• Managers, performing all the socially desirable and civic-spirited duties required to keep an enormously complex enterprise functioning smoothly, from recruiting and mentoring associates to serving on practice management teams, writing and speaking, and cultivating new business. Their value in this role requires a somewhat more impressionistic and softer calculus, but it is at the very least what you'd have to pay non-lawyer executives to accomplish the same tasks. And lastly:
• Owners/investors, meaning the residual claimants on the firm's economic value once all expenses attributable to operations, investment, and financing activities have been paid.

The problem is rooted not only in the minds of partners, but in the very way almost every firm that I'm familiar with does its cost accounting, whether it's to determine the profitability of a single matter or to produce the annual ur-number, Annual Profit. The cost accounting convention I'm referring to is the one which treats the work equity partners perform throughout the year as essentially free—on the premise that their only "cost" is what they will have taken home by the end of the year in terms of their share of profit. But this, of course, merely repeats the fallacy of conflating the three hats into one.

I believe a more conceptually correct system would price the contribution of equity partners as above, with explicit costs for their role as workers and as managers. The result would be to produce a more realistic view (more comparable to firms in all other sectors of the economy, at least) of a law firm's profits from the perspective of a potential non-equity partner investor.

Why do I dwell on what seems a green-eye-shade quibble?

Because if firms are to understand and prepare for the implications of having significant outside capital available, they need to let go of the income-is-God mindset. Partners will have to accept—nay, embrace—lower incomes (and horrors, lower reported PPP) in the expectation that the earnings the firm retains for current and future investment will reward them handsomely, through their ownership stake, in the long run. Today partners simply have no expectation of a capital return on their years of service to the firm, as one has never existed. But the possibility of investments that grow the future value of the firm as a firm must change that expectation.

This is not actually an economic problem, but it could be a cultural doozy.

Let me introduce another twist.

Historically, law firms have been anything but capital intensive. Certainly if one's mental model is the closely-knit, single-city/single-office firm, most capital demands could almost be satisfied from the petty cash account, or certainly from very low-tech forms of financing, mostly through that exotic vehicle called a lease.

Today, although not all firms recognize it equally, the world is a very different place. IT was the first area to conspicuously start absorbing capital, and there are no signs that it's done. Indeed, to sophisticated clients a sophisticated IT infrastructure is simply a given. Building practice areas, and establishing the right global geographic footprint, are also not for the capital-challenged. One hears so many estimates that I'm tempted to throw darts, but the treasure that has been spent by US firms setting themselves up in London, and UK firms setting themselves up here, is immense, even for the largest firms on both sides of the pond. (One published report has it that a Magic Circle firm lost £70-million over five years in establishing its New York practice.)

Such is today's economic reality, however.

Now let's add back the cultural dimension: We have the intergenerational issue. Senior partners, who may be expected to have disproportionate voting control, are neither used to an environment requiring extensive long-term investment nor do they expect to be around long enough to see it bear fruit. Moreover, the ranks of the senior partners—certainly these days—know the answer to the famous question, "Are you better off today than you were four years ago?" Which leads directly to "Tell me again what's wrong with this?"

Meanwhile, junior partners expect the global business environment will demand committed, long-term investments to meet the competition, and are largely of the reasonable view that firms forswearing those investments will be the ones who will not be around forever. (I put aside junior partners who anticipate leaving the firm laterally before the investment might bear fruit, but their ranks, however small, certainly do not rank long-run considerations foremost.)

So we have in many firms a sort of gridlock.

I hasten to add that if your economic world revolves around this year's ordinary income and nothing but this year's ordinary income, this is understandable if not excusable. But: If we add in the prospect of an additional component of capital appreciation from now until retirement and beyond, the incentives change, and they change in a way that should encourage dedicated long-term investment. To be sure, the risk preferences of junior and senior partners may still diverge somewhat, but the threshold issue of whether the firm qua firm deserves a sustained capital commitment should be taken off the table.

This brings us to the nasty question of whether firms' managements are actually equipped to handle long-term investments. Ask yourself whether you and your colleagues have all the skills you need to feel comfortable shepherding investments through their life-cycles:

• Imagining;
• Rank-evaluating;
• Launching;
• Monitoring;
• Fine-tuning; and
• Harvesting

By and large, the management challenges for law firms to date have centered on issues such as talent, recruitment, professional excellence, and optimal utilization of resources—not on hands-on management of long-term investments designed to change the way the firm does business. How often have you heard about—or witnessed—projects launched with great fervor and fanfare only to die on the vine, neglected, in the face of pressure from clients for service and from colleagues for billable output?

When imagining a world wherein law firms have access to the capital markets pari passu with corporations, the first objection is usually that they have no need for capital in their businesses and, if one gets to a second objection, it's that lawyers are earning handsome incomes, thank you very much, so what would an equity "kicker" add?

Both are nonsense. Today's global firms require far more capital than can be raised by docking the partners' draw periodically or negotiating a line of credit with the Citigroup Private Bank—and even if the latter could suffice, can't we all be a tad more imaginative here? As for the need for an equity kicker on the compensation platter, the key point is not that lawyers "need" more money, it's that an equity component would fundamentally change the incentive set.

The bigger concern, I predict, is that if law firms open the door to capital infusions, be it through public or private offerings, they will find themselves ill-equipped on day one to manage the largesse.

A useful starting point is Legal Week's recap of its annual Strategic Technology Forum, held this year (hard duty no doubt) at Portugal's Penha Longa resort. The "keynote," if you will, was an hour-long video of the UK IT consultant Richard Susskind interviewing three high-profile managing partners: David Morley of Allen & Overy, Neville Eisenberg of Berwin Leighton Paisner, and Tony Angel of Linklaters. What did we learn?

Without IT, globalization would stop dead in its tracks. For example, at Linklaters (and this is becoming increasingly common), any lawyer anywhere in the world can access their own desktop, with all the systems they'd have at the office, securely.

A&O has developed a centralized information repository named, somewhat menacingly, "Omnia," that gives lawyers access to one virtual file wherever they are and whatever they're working on.

IT increasingly participates in new business pitches. According to Eisenberg, senior IT staff have helped BLP win some critical assignments, while Morley makes the same point in the obverse, noting that law firms are increasingly expected by clients and staff to be at the cutting edge of technology. “If you are not at the leading edge, clients will begin to melt away from you.”

For all the copious amounts of ink that have been spilled on the topic, it remains true that there's a generational shift underway as each new crop of lawyers arrives more and more familiar with technology. Eisenberg put it this way: “As you go down the generations, the dialogue between technologists and other professionals gets better.” The payoff is that having a greater proportion of lawyers who understand technology means teamwork between IT, knowledge management and lawyers improves.

Moreover, it's not just a better or deeper facility with current law firm technology—it's pushing the frontiers into technology that's novel (certainly for law firms). For example, I've been talking about the intrinsic fit between what lawyers do (collaborate on written materials) and wikis for a few years now, but at last it's actually being embraced:

"We are seeing a step change here, the full implications of which we will not know for a while,” predicted Angel. Morley agreed, adding that changes to the way people collaborate will be profound. A&O has been promoting wikis on the firm’s intranet for a some time — a move that has sparked informal communication with clients that has gone down well on both sides. “There is a very intuitive feel to this — the technology is less clunky and it is more obvious what to do,” said Morley. With clients increasingly demanding that their advisers share their knowledge with them, the use of wikis in this way seems set to explode in popularity.

The increasing embrace of IT, and its true embedding within the essence of what firms do, comes, I hasten to add, with one enormous challenge which no one to my knowledge has yet answered in a satisfactory way that might yield a long-term equilibrium solution: That challenge is commoditization.

Its sources are various, but primary among them:

• In the online world, we increasingly expect information to be free; why should clients expect otherwise from their law firm?
• Technology fuels arms races: If it is true that "among UK firms, however, there are a number of examples where firms have generated revenue through subscription-based, lawyer-light projects," then how long will it be before those services begin to invade practices higher up the value chain?

My view is more sanguine, primarily because I believe the phrase "commoditization" is flung around far too loosely and generates free-floating fear divorced from real-world implications. I'm closer to the position articulated by David Jabbari, Allen & Overy's head of knowledge management, who believes that “Clearly, any information that can be commoditised is going to be, and will be free,” but who also pointed out that we've known for a hundred years, since Henry Ford introduced the assembly line, how to efficiently build a car, and yet the auto industry is one of the most hotly competitive and least "commoditized" around.

Taking a more recent example, in concept few consumer electronics goods are more generic in nature than an MP3 player, but the iPod has turned the category on its head. Ultimately, the march of technology cannot—and should not—be resisted. Neil Attree, Beachcroft's head of IT, gets it right:

“If a piece of technology makes the kind of work you are going to do easier and better, then go for it. It is the packaging and the end product that matters, and that comes down to quality assurance.”

Meanwhile, over at The New York Times, the University of Chicago Graduate Business School economics professor Austin Goolsbee writes that "the US has kept the productivity playing field tilted to its advantage" through superior deployment of IT and its beneficent effect on productivity.   He's not writing in the abstract, but reporting the results of a new study coming out of the Center for Economic Performance at the London School of Economics. 

The context is, as usual, globalization and its discontents, and the question posed is whether the US will be able to succeed in an open world market or whether the feared competitive advantages of other nations would erode the US standard of living. 

Now, as a general matter, economists (and I subscribe to this as well) believe in the theory of "convergence," which is a rather grand name for the common-sensical notion that since it's easier to copy something someone else came up with than to innovate on your own, eventually the laggards will tend to catch up with the leaders.  The practical consequence of this is that the growth rate of the "laggards" may temporarily exceed that of the leaders, only to inevitably slow down once they catch up.

This brings us back to IT.

The London School of Economics study that Goolsbee discusses, “Americans Do I.T. Better: U.S. Multinationals and the Productivity Miracle,” asks an intriguing question.  Granted that there was a spike in US productivity in the late 1990's thanks to our rapid adoption of IT and the astonishing decline in costs of technology (30%/year by some accounts), why was—or was that?—unique to the US?

To try to answer this, the authors ask an ingenious question:  Was there any evidence that the American advantage with information technology transfers to locations outside the United States?  "If American companies turn computers into productivity better than anyone else, can businesses in Britain do the same when they are taken over by Americans?"  After all, the price of IT assets fell precisely as fast in Europe as it did in the US, and it was just as readily available for sale.  Yet there was no EU productivity miracle in the 1990's.

Here's the Abstract of the paper:

"The US has experienced a sustained increase in productivity growth since the mid-1990s, particularly in sectors that intensively use information technologies (IT). This has not occurred in Europe. If the US “productivity miracle” is due to a natural advantage of being located in the US then we would not expect to see any evidence of it for US establishments located abroad. This paper shows in fact that US multinationals operating in the UK do have higher productivity than non-US multinationals in the UK, and this is primarily due to the higher productivity of their IT. Furthermore, establishments that are taken over by US multinationals increase the productivity of their IT, whereas observationally identical establishments taken over by non-US multinationals do not. One explanation for these patterns is that US firms are organized in a way that allows them to use new technologies more efficiently."

As an example, Wal-Mart acquired the "middling fourth" supermarket chain in Britain, Asda, in 1999, after which it proceeded to grow smartly and is now #2. As tough as it can be to compete on a global stage, somehow the US seems more flexible and effective at adjusting as the landscape shifts. It's become a truism to observe that the rate of economic and technological change is accelerating. If you believe that (with exceptions, I do), then selection pressure will be exerted in favor of the more nimble and adaptable. Goolsbee concludes, tongue only half in cheek, with "something most Americans clearly understand: The world economy may be tough on your industry but look on the bright side: you could be French."

We need not endorse the notion of US IT triumphalism to conclude that IT, properly understood and deployed, can provide competitive advantage for individual firms.

This in turn brings us to a more strategic perspective on IT and its role in a firm. Here, the challenge is for the CIO to move the IT planning horizon from a single year to a multi-year perspective, and to move the focus of IT strategy from "supplier" to the firm to "alignment" with the firm to "competitive differentiator" of the firm. According to a Spring 2007 McKinsey survey of senior IT executives in North America, the basics are largely in place for IT to assume a truly strategic role. Whether they're actually taking advantage of that opportunity appears a closer question.

First, the good news:

• 83% say their company's IT strategy is developed collaboratively with business leaders.
• CIO's are visible: 44% report directly to the CEO and another 42% (making 86% in total) report to the COO or CFO.

And the not so good news:

• Only 43% say they are very or extremely effective at identifying areas where IT can add the most value.
• A mere 34% say they are more effective in introducing new technologies than their competitors, and an almost equal 29% admit they are "not at all" better than their competitors in innovation.

This, then, leaves us with something of a paradox:

• Leaders at the Legal Week technology summit underscored the critical role IT has to play in the 21st Century;
• The Americans Do IT Better study provided further ammunition, if any were needed, to the belief that IT can be a competitive differentiator; and
• McKinsey's survey tells us that CIO's by and large have the proverbial seat at the table—but that they're not exploiting it as effectively as they could.

I choose to view this not as a failing but as an opportunity.

The most forward-thinking proponents of Knowledge Management within firms are beginning to move the function from support of the firm's practice to support of the firm's strategy. The first—practice support—involves hygienic expertise in such things as sophisticated document management, "enterprise" (firm-wide) search, and cutting edge technological tools. But the latter—strategic business support—can bolster client-company and industry awareness, business development efforts, and client relations. It turns KM from inward and lawyer-facing to outward and client-facing.

One powerful way to open up your firm's KM function to clients is to introduce internally accessible and (carefully selected) client-accessible blogs and wikis, as is being done at Allen & Overy. These dynamic online fora can provide meeting places for practitioners with shared professional interests to virtually assemble and exchange viewpoints on the meaning of new developments in their area of expertise. If your firm has professional support lawyers, as the more sophisticated UK firms do, those PSL's can take a lead in such fora and move from a role of research and marshaller of precedent to analyst and provider of business and legal insight.

This moves the KM function from "on call" delivery of static repositories of information to interactive fora where opinions and perspectives can be cultivated and evolve. And this comes naturally to lawyers: How many times have you seen even the most senior people (especially the most senior people) drop whatever pressing matter they're pursuing to engage in a free-wheeling discussion of some new development whose immediate implications are difficult to discern?

If the leadership of your firm, from the chair or managing partner on down, endorses these social and professional experiments, imagine how far they could go. Ultimately, the goal is to unlock the expertise, both tacit and explicit, within your firm in transparent ways that clients will come to see as defining your true competitive distinction.

This is not your father's IT. And it's not a "commodity."

But McKinsey, in "Better Strategy through Organizational Design," argues that "most leaders overlook a golden opportunity to create a durable competitive advantage and generate high returns for less money and with less risk: making organizational design the heart of strategy."   What do they mean by this?  Here's how they frame the problem:

"It's time for executives to recognize the strategic need to develop organizational capabilities that help companies thrive no matter what conditions they meet.

"Modern corporations are massive, complex, dynamic ecosystems. In many of them, organizational inertia is considerable. Organizational-design work is hard and time consuming, and any meaningful change usually involves difficult personality issues and corporate politics. No surprise, then, that rather than tackle internal organizational issues to boost the performance of companies, many CEOs typically opt for the ad hoc structural change, the big acquisition, or a focus on where and how to compete.

"They would be better off focusing on organizational design. Our research convinces us that in the digital age, there is no better use of a CEO's time and energy than making organizations work better."

[...]

"Modernizing organizational designs for a 21st-century business environment can trump the gains generated by other, more traditional strategic initiatives. The work often takes years of sustained effort to put in place but pays off by creating competitive advantages that rivals can't copy easily. Strategic-minded executives may not be able to control the weather, but they can design a ship and equip it with a crew that can navigate the ocean under all weather conditions."

Part of what they have to say is predictable, and amounts to what I file under sound management hygiene.  For example:

• Eliminate silo's and fiefdoms
• Undo needless complexity in organizational structure
• Focus on metrics that actually mean something, such as revenue per lawyer or profit per employee (that last is in itself worthy of a separate article here on "Adam Smith, Esq.," which I hereby promise is in the works)
• Increase the odds of productive encounters between lawyers—hold more retreats, make sure associates are at least periodically included, and bite the bullet on the expense of flying people in from various places around the globe—your investment in your partners' actually knowing each other (minimizing the name tag syndrome) will pay off in spades.

But then there are the research findings that focus on how to create wealth from talent, which is, after all, the only card we can play in law-firm land.   In management consultant speak, this is how McKinsey puts it (and mind you they are not talking about law firms or professional services firms: they're talking about broad-brush corporate land):

"Talent is the scarce resource because it is the ultimate generator of the intangibles that drive the creation of wealth in the digital age. Winning companies are those that can increase their profit per employee by mobilizing labor, capital, and mind power into profitable institutional skills, intellectual property, networks, and brands. The returns to companies that can accomplish all this are extremely attractive because intangibles now confer enormous scale and scope advantages. Furthermore, intangibles represent unique assets for the individual companies in possession of them—that is, they are unique in supply—so they can create “natural monopolies,” which are difficult for other companies to replicate."

How can organizational structure promote or defeat these inarguable goals?

The first imperative is fostering collaboration across the firm.  In small teams (they mention basketball and its scoring credit for "assists"), this comes naturally; it's human nature.  But in globally distributed firms, you need incentives and an infrastructure—this means technology—to make it possible, to make it desirable, and to make it rewarded. 

Does this mean abandoning a firm-wide vision, a firm-wide culture, a firm-wide consensus identity?  Au contraire.  Those values need to be communicated and reinforced relentlessly (OK, continually) from the top, enforcing tandards surrounding critical behavior patterns such as adherence to cultural norms and loyalty to the "one-firm firm" ethos. 

Once that's in place, encourage the spontaneous emergence of "communities of practice," groups that, through sharing common client, industry, practice expertise, or intellectual interests, coalesce to form powerful groups far over-shadowing any organizational chart diagrams. 

For example?  What if your firm has a corporate governance advisory group and a white collar crime defense group?   Shouldn't they be talking?   One about how to stay out of trouble and the other about how people do in fact get into trouble?

Facilitate collaboration.  Get them together at retreats; and see what happens.   Your lawyers are: (a) intellectually curious; (b) professionally competitive; (c) constantly striving for excellence; and (d) motivated to serve their clients in ever-better fashion.

You won't have to work that hard to make the chemistry happen.  

But: It will not "spontaneously" happen.

Think of ways to foster serendipitous encounters.  In a global firm, a photo on your internal portal or an "expert" revealed through your KM system is a grown-up Facebook connection.  But your partner that you met in New York (or London, or Hong Kong) at a firm event where you had a drink together last year is a human being you can confidently entrust with one of your key clients.

Talent is all we have to offer our clients, and the only way we can create wealth for them and for us. Make it easier to offer more of it.

If you are fascinated as I am by the congeries of issues lying at the intersection of the "partnership ethos" and "corporate-like management," then you need to be familiar with the work of Dr. Laura Empson, as highlighted in Aric Press's recent "In-House" column for The American Lawyer.

Aric calls the just-released book which Laura edited, Managing the Modern Law Firm, a "valuable new collection of essays" that constitutes where "we all [should] start" in thinking about these issues. (Disclosure: I've met Laura and her publisher, Oxford University Press, sent me a reviewer's copy of the book.)

I just learned that Laura has moved from the University of Oxford’s Saïd Business School, where she was Director of the Clifford Chance Centre for the Management of Professional Service Firms, to Cass Business School, in the City of London, where she has joined the Faculty of Management as Professor in the Management of Professional Service Firms.

Lest you fear that Laura's approach might be too "academic," you should know that she began her career as an investment banker in the City and experienced the Big Bang first-hand. If you suspect that might have given her a keen curiosity about, and perspective on, how global professional service firms respond to change, you're absolutely right.

I've been friends with the folks at the London-based "Managing Partners' Forum" for a couple of years, and tomorrow morning I'll be speaking at their event, "Managing Clients Across Borders," here at Clifford Chance's offices on West 52nd Street.

I've put together a summary-level presentation of my thoughts on the topic—my co-presenter, Peter Chaffetz of Clifford Chance and I are limited to half an hour altogether—but if you're interested, take a look.

Needless to add, I'd be happy to discuss my thinking on this key challenge for our industry as we move forward into the 21st Century.

Marking the 10th anniversary of the merger that created CMS Cameron McKenna, Managing Partner Dick Tyler has a piece in Legal Week reflecting on the past 10 years and the future.  As he describes his goal for the article:

"What has the profession as a whole had to tackle during this past decade? And what are the challenges and opportunities that lie ahead?"

His key observation, in answering the question about what lies ahead, is to cast it in terms of culture.  First, with a nod to the past, he acknowledges that both of the two firms that came together to form CMS Cameron McKenna at once ceased to exist.  And as for that:

"Of course, there are fond memories of the original firms, but the firm that exists today bears little resemblance to either. Such is evolution: the capacity to change is a critical component of survival and success."

Among the changes he cites in the past decade:

• The growth in economic strength of the EU, and the aid and comfort Sarbanes-Oxley has given to EU capital formation vs. US capital formation.
• The growth in starting associate salaries, from £34,000 10 years ago to almost double that, £64,000, today, which he drolly notes is "ahead of increases in charge-out rates." 
• Pressure on profitability from:
  • Decreased utilization, laid at the door of "work/life balance"
  • Rising costs for IT, center city occupancy costs, training, and the aforementioned salary costs
• But one change we have not seen is change in the composition of the top 15 firms in The City.   This, he predicts, will not repeat in the next 10 years—we will see major change, because the incumbents are susceptible to competition from "high-quality, cost-effective alternatives."  You read it here first.

But as noted, his key observation, one that suffuses his observations, is about culture (emphasis supplied):

"The key lesson over the past 10 years has been that the most important aspect of growing a law firm is growing the culture. Culture means reputation, and reputations are hard to build and easy to lose. It is the culture that adds value to the services that Camerons provides to its clients, and gives it the distinctive and competitive edge. There may not be a finite limit to how big law firms can become, but there is a finite speed at which they can grow, particularly if they are focusing on maintaining and developing a culture."

Why is culture so important?

If you wish your firm to represent a distinct and compelling proposition for clients, it is all about culture, and, as Tyler puts it, "that is increasingly the ground where I see the battle for leadership in the legal sector being fought."  And he makes no bones about his core conviction that leadership matters. 

The need for effective and far-sighted leadership has changed during the past 10 years:  It's gone from nice-to-have to essential.  If you could hope that "steady at the helm" might do ten years ago, today that's a choice reserved for the dilettante.   

Tyler concludes by citing Napoleon's maxim that "a leader is a dealer in hope."  What do you hope?  What do you envision?

Bloomberg News ran a story yesterday headlined "Slater & Gordon Lifts Curtain on Global Law Firms Going Public," which features excerpts from interviews with seven people, including yours truly, offering their views on what the implications might ultimately be for US firms. In the order in which they appear in the article:

• "If the English firms can sell stakes in their law firms publicly, that will then give them an advantage,'' said Ralph Baxter, the chief executive officer of the 924-attorney San Francisco-based firm Orrick, Herrington & Sutcliffe. ``If the rules were to change, we would then examine what's in our best interest to do.'
• "Among the top 10 issues that I worry about, that's not in the top 100,'' said H. Rodgin Cohen, the chairman of New York's Sullivan & Cromwell.
• Like law firms, investment banks resisted going public, said Charles Geisst, the author of "100 Years of Wall Street.''
  "They were hesitant; it took awhile,'' Geisst, a professor at Manhattan College in Riverdale, New York, said of the investment banks. "Law firms could go public for the same reason that the investment banks had to go public. The number of the transactions were increasing and it required them to have more capital and the partners couldn't provide it.''
• Said Jeremy Black, associate partner in the professional practices group at Deloitte & Touche in London, "Firms are quite interested in it. There are certain firms that are further down the track.''
• Another Australian firm, Perth-based Integrated Legal Holdings Ltd., intends to set a schedule for their IPO in the next few weeks, said Brett Davies, a partner at ILH, in an e- mail. ILH has been approached by 89 law firms, most with a range of eight to 32 partners, to discuss mergers, he said. "I'm surprised the USA is so far behind the times,'' Davies said in the e-mail. "We are going there next,'' Davies said of the U.K. "Then we are coming to the USA. Get ready. There are a lot of opportunities in the USA for our business model.''
• Stock sales might force lawyers to put shareholders above clients and create conflicts between the attorney-client privilege and Securities and Exchange Commission disclosure requirements. "It's a perpetual conflict, at least potentially, with non- lawyers controlling a law firm,'' said Steven Krane, the chair of the American Bar Association's ethics committee and a partner at New York's Proskauer Rose. "There's very little interest in changing the rules.''
• New York legal consultant Bruce MacEwen said that if U.K. firms begin going public, U.S. firms may push for similar changes "within two to three years. You will see pressure here in the U.S. for the regulators to permit it,'' said MacEwen, who is also editor of the Adam Smith Esq. Web site that focuses on the issue of law firm economics.

Who do you think is closest to the truth here—understanding that all of us are looking into the future?

The outlier among the commenters is clearly Steve Krane (said without criticism, but merely characterizing the remarks: I know Steve and have spoken on panels with him) . In particular, does Steve's concern about a collision between attorney-client privilege and SEC disclosure requirements make sense? I must confess I see it as more an imaginary than a real issue. After all, public companies protect trade secrets and proprietary information all day every day without running afoul of 10-K regulations. If Coca-Cola were considering going public today, would its legal counsel advise that doing so might jeopardize the secrecy of The Formula?

Steve's second observation is that "there's very little interest in changing the rules," but based on remarks from Australian, UK, and US observers, there's quite a bit of interest in changing the rules.

What are your thoughts on this? Let me know.

Rodgin Cohen and I were also interviewed on Bloomberg TV for a companion piece, which I'll feature here subsequently if I can get a suitable digital file version.

From an interview in The New York Times on June 9 with Jeffrey Immelt, CEO of GE:

"At one point in our conversation, I asked Immelt how he balanced the need to be building consensus with the need to make a firm decision and, in effect, show who’s boss. It struck me as a tricky issue, and it was clearly one he had thought about a lot.

“When you run General Electric,” he said, “there are 7 to 12 times a year when you have to say, ‘you’re doing it my way.’ If you do it 18 times, the good people will leave. If you do it 3 times, the company falls apart. You want a team of leaders who are self-confident. But in the end it is not a democracy. There has to be clarity about decisions.”

Consider as well this quote of Immelt's, spoken nearly six years ago when he first assumed the position of CEO: He observed that his predecessor, Jack Welch, had made G.E. “faster-moving and more entrepreneurial. But it doesn’t have the heart it needs, and it doesn’t have the context it needs. That is what I want to do in the next 20 years.”

"Heart." "Context." A 20-year perspective. Most of all, the confidence—the reporter describes Immelt as "comfortable in his own skin"—to know how often to insist on doing it your way and when instead to bend to the forces of prevailing opinion.

I submit that these ingredients are, if not the entire template, essential perspectives for a Managing Partner.

The art—and it's surely not science—of being the Managing Partner is far more about culture than it is about economics.  [Permit me to clarify:  Getting the economics right is de rigueur, but it's table stakes; getting the culture right is what you get paid handsomely for.  Analogize it to winning a desirable new client:  You don't win because your lawyers are so talented (in your league, everyone's are); you win because there seems to be a "fit" between the client's firm and yours.]

Now let's break these down a bit.

Heart

Who is your firm?  What animates it?  What makes people want to come into the office in the morning?  What do they believe they are doing if they say they are doing something "for" the firm, or that they do something a certain way because "that's the way we do it around here?" 

What, in short, does your firm stand for and what makes it different?

Can you articulate the answers to these questions?  Can your senior lieutenants?  Can junior associates and staff?  If not, you need to re-examine your "heart" quotient.

Context

Who's your competition?  Are you growing where you want to be?  And are you retrenching where it makes sense to invest less?   What will your key clients' business look like in 5 years or 10?  Are you anticipating changes in their legal portfolios of risk and demand so that your firm will be in as strong a position to serve them tomorrow as you seem to be today? Are you developing lawyers for your firm's tomorrow? And will they have the capabilities you anticipate needing?

Not only are your clients evolving, so are your competitors. Indeed, the Darwinian exigencies of capitalism generally mean that competitive advantages are, if not fleeting, marked with an indelible half-life. Don't assume that today's strong practice areas are impregnable.

Change, of course, is not news; it comes with the territory. But the "change" that counts is not reacting on a hair-trigger to short-term events. Rather, this is where the 20-year perspective comes in: “Investors go through cycles where they don't like conglomerates,” Mr. Immelt said. “But if you want to be a lasting company, you have to know how to be a multibusiness structure. If Google is going to be a 100-year-old company someday, it is going to have to learn to do more than search.”

The 20-Year Perspective

As I mentioned, your firm may be shooting the lights out today in, say, private equity, but don't imagine that you can play that suit forever.   A primary part of your job is positioning the firm to win the next round of tricks, and the round after that.

Another word for this is: Legacy.

What will your legacy be?   

Understand that your legacy cannot be everything you might want, and that, to judge by the models we have from our own Presidents, achievements in one area often seem to come at great cost in others. I am not about to recommend one or two of these as consummately superior—in retrospect, each has remarkable flaws—but consider the alternatives we've experienced.  Which most resembles what you'd like to be remembered for?

Revolutionary, century-changing initiatives—but ones still divisive generations later—a la FDR?  

Steady at the helm Eisenhower?

Vast inchoate promise, to some extent fulfilled by successors, a la JFK? 

Game-changing achievements in one sphere (Civil Rights, the Great Society) at the price of abject failure in others (Vietnam, inflation): LBJ?

A firm pole-star ideology, and a hands-off management style:  Reagan?

Undeniable brilliance and world-class charisma, combined with personally self-indulgent if not self-destructive propensities, a la Clinton?

Whatever your style and predisposition (and you can't change your constitution or temperament), you need to select an over-arching agenda for your tenure, and stick with it. 

Decisiveness

Finally, the most ineffable ingredient: When to put your foot down and tell people we're marching, and when not to. This without question is the subtlest challenge of all.

Instinctively, we recoil at the notion of a command-and-control environment, particularly given the reverence in which we hold the partnership ethos (rightly so). Yet study after study of how teams form, coalesce, and become effective demonstrates that the most in-effective and self-defeating approach to launching a new initiative is to "let a thousand flowers bloom" and seek consensus through opening the floor to all who wish to be heard. That way lies chaos.

Rather, to build a high-performance team requires a clear and concise—this means top-down—statement of the team's objectives, why it's now necessary, the promise of success, and the consequences of failure. This is not the moment for a Quaker meeting.

In Immelt's tenure, that experience came when he introduced the notion of "green" to GE: What they now call their "ecomagination" initiative. Here's how he describes it:

"Hence, his decision, for instance, to stress global infrastructure and health care, both businesses that G.E. knows a great deal about already, and which are growing much faster than the other parts of the world economy. And thus perhaps his most controversial bet: to build a huge business around the environment.

“The first time I brought the idea to the company’s executive council,” he said, “there was rapt silence. Some people saw it as wimpy, caving into the enviros. But I saw that we already had two-thirds of the company working in some way on environmental technology, like water scarcity. And I thought it was worth a swing.”

"The day before I interviewed Mr. Immelt, I saw him speak to a group of G.E. customers. “It was not universally loved by our customers and even less by employees,” he told them, referring to the company’s environmental thrust. “I have made a couple of hundred mistakes in my business life, but this isn’t one of them.” From a standing start, the ecomagination line of General Electric products has become a $10 billion business, a number the company expects to grow to $20 billion within three years."

As I read the subtext of this tale, the moral I derive is that it's not really a "decision" with the all-important quality of "you're doing it my way" unless you are actually swimming upstream. If your "decision" constitutes an endorsement of the status quo or the received wisdom, what can you actually claim to have decided? Put differently, this recalls the story of Lee Iacocca, who, when two lieutenants both agreed with him on something, peremptorily told them, "It looks like I don't need one of you."

If your decisions as Managing Partner surprise no one, confound no one, seem counterintuitive to no one, ask yourself whether you're actually deciding things. If not, you may be the one who's not be needed.

But Mark Dawkins, Managing Partner of Simmons & Simmons, now writes in the UK's Managing Partner magazine that his firm is introducing a new program called the "Career Development Center," which he describes as follows: 

"When each lawyer reaches a certain stage of development (currently set at about four years post-qualification), he or she is invited to our Career Development Centre: an off-site event held for three days, during which each lawyer participates in a series of assessment, training and coaching sessions.

"The purpose of the centre is to conduct a thorough, collaborative review of the lawyers' development and assist in producing a personal-development plan. This plan would typically chart the next two to three years of development; identify types of experience and competence that the individual wishes to acquire; and indicate how it will be acquired. With lawyers at this more advanced stage of development, we often find personal coaching in discrete areas is more valuable than training. Where it is needed we will therefore provide the individual with a coach."

The impetus for this initiative?  Precisely the problem I described in the opening: We as an industry recognize in an intellectual fashion that our principal asset is the knowledge and experience in the brains of our lawyers, and that managing it should therefore be a business priority. However, as Dawkins puts it, we have been "neglecting the development of wider business skills, and often failing to provide lawyers with any real sense of a structure to their careers to fill the ever-growing gap between qualification as a solicitor and partnership."

He suggests a more complex career path than the linear, bifurcated associate/partner dichotomy.  As Dawkins puts it, "three stages of progression (trainee, associate and partner) is not many in a career that may span 40 years."

What, then, is Simmons & Simmons doing?

Essentially, they are changing the One Gate tournament model of admission to partnership (or not)—the Ur-Judgment on one's career and professional value—into a series of expectations, tailored to what stage one is transiting through in one's career.    So they establish expectations about professional skill sets, ability to relate to and cultivate clients, financial and technological acumen, awareness of economic and business factors, and softer skills such as leadership and communication.

The second prong of their initiative is cultivating more flexible career paths per se—"less conventional options," as Dawkins puts it.

For example?

The chance to take "beach time" between large, intensive work on deals.  A sabbatical after three or four years to re-group and re-charge.  Fixed-hour working to accomodate family obligations.  A four-day week or a nine-day fortnight.  Understand that Dawkins is no airy dreamer, and he understands a firm's lifeblood is serving its clients.  While he realizes that technology may lessen the need, ultimately, for one key individual to work on a deal start to finish (enabling others to pick up where he/she left off, for example), client expectations are ultimately non-negotiable:

"A law firm is there to serve its clients, and clients typically want the certainty of knowing that their established lawyer, or team of lawyers, will be available for the duration of a transaction. There is also good reason for this. The work that lawyers do is often complex, and the efficiency of a lawyer depends heavily on the accumulated knowledge an individual has acquired of a transaction or a client's affairs over a period of time.

"Thus, a corporate lawyer, working on a set of listing particulars due for publication the next day, is unlikely to endear himself to a client by going home at 5pm just because that is what his working pattern permits him to do. [...]

"In other words, the nature of the work many lawyers do is such that they are not easily interchangeable."

To attempt to balance the preferences of individual lawyers with Simmons & Simmons' needs (and those of its clients), the experiment they are launching is to "engage in a candid dialogue" every 12 months or so about the work-time preferences a lawyer has—starting in about the 4th year.  To the extent possible, the firm then attempts to accomodate a stated preference, for, say, no more than 3 big deals, or fixed-hour expectations, or something else.

The firm protects itself by extending this privilege only to lawyers who have achieved a certain level of competence and respect within the firm, acknowledging that "there will always be a large pool of lawyers who are working conventional patterns [and that] the firm is not obliged to accede to any individual request."

Will it work?

Dawkins, cautious fellow that he seems to be, hedges his bets:

"Of course it is possible we will decide such a scheme is not workable, or that there is not enough demand to make it worthwhile. I hope this is not the conclusion, however."

But who else is even trying such a thing? 

Here's my prediction:  The cognitive dissonance—not to mention the economic cost—of the collision of the four statements with which I opened this piece will demand that firms begin to experiment with alternatives to the "Cravath Model," now a century old.  Early pioneers such as Simmons & Simmons may fail.  Or they may point the way.  In either case, let the laboratory experiments begin.

• Bryan Cave
• Foley & Lardner
• Goodwin Procter
• King & Spalding, and
• K&L Gates

What are the "CIO 100?"  They are the most innovative and effective CIO's, who have had the greatest  positive impact on their organizations.  According to the press release:

“The 2007 CIO 100 award recipients serve as industry role models for business and IT excellence,” said Abbie Lundberg, editor in chief of CIO magazine. “This year's winners demonstrate extraordinary results in a variety of important areas, including business transformation, collaboration, customer innovation and top line contributions.”

Second, we too little appreciate how extraordinarily hard it is for IT to have a meaningful—and creative, differentiating —impact on how we get our jobs done.    Inventing new technological tools—word processing, BlackBerry's—is actually the easy part.  Figuring out how to use them to transform the way we accomplish what we need to do is the hard part.

Lest you doubt the time-lag between technological invention and its having an actual impact on productivity, consider the following lesson from this week's "Undercover Economist" column from The Financial Times (a must-read, by the way).    The columnist is Tim Harford, author of the eponymous book, The Undercover Economist, who deserves the success that Freakonomics has scored, and then some. 

"Electric light bulbs were available by 1879, and there were generating stations in New York and London by 1881. Yet a thoughtful observer in 1900 would have found little evidence that the ”electricity revolution” was making business more efficient.

"Steam-powered manufacturing had linked an entire production line to a single huge steam engine. As a result, factories were stacked on many floors around the central engine, with drive belts all running at the same speed. The flow of work around the factory was governed by the need to put certain machines close to the steam engine, rather than the logic of moving the product from one machine to the next. When electric dynamos were first introduced, the steam engine would be ripped out and the dynamo would replace it. Productivity barely improved.

"Eventually, businesses figured out that factories could be completely redesigned on a single floor; production lines were arranged to enable the smooth flow of materials around the factory. Most importantly, each worker could have his or her own little electric motor, starting it or stopping it at will. The improvements weren't just architectural but social: once the technology allowed workers to make more decisions, they needed more training and different contracts to encourage them to take responsibility."

The lessons are two-fold, I think. 

First, getting IT right is a lot harder than it looks.  Have vision, but also have patience.

Second, understand that it's not only, or even primarily, about IT.  It's about culture, and transforming the way we work.  All IT can do is open the door.  But if we can't see our way past the massive steam engine model, we're wasting our time to replace it with an electric dynamo. 

"Think different?"  Indeed.  At least five of our CIO brethren seem to be doing just that.