CIO Magazine recently announced its 20th Annual CIO100 Awards, recognizing 100 CIOs deemed most  effective at transforming their firms through IT innovation .    The winners included CIOs from Bryan Cave, Foley & Lardner, Goodwin Procter, King & Spalding, and K&L Gates.

Notably, K&L Gates also captured one of the five "Plus One" awards, for Business Innovation.  (The four other firms taking home Plus One Awards were: Hilton Hotels for customer satisfaction, Johnson & Johnson Pharmaceutical Research and Development for competitive advantage, Marriott International for security excellence and Merrill Lynch for improved productivity.)  Notably, K&L Gates had an earlier 3-years-in-a-row run of CIO 100 Awards, from 2002 through 2004.  All in all, I thought something noteworthy might be going on in the IT arena at K&L Gates..

Accordingly, a few days ago I had a chance to catch up with Steve Agnoli, CIO of K&L/Gates, to learn about the background to the awards and explore how K&L Gates approaches IT in general.

Here's what I learned.

Steve arrived a little over nine years ago, at the then Kirkpatrick & Lockhart, and was the first CIO the firm had.  Why hire a CIO then?

"The firm had decided to move forward with a more aggressive growth strategy, and they realized that entailed building out their IT systems and the marketing infrastructure." 

Steve had never worked at a law firm before, but when friends asked him why he'd want to go to a law firm, his response was:  "Why wouldn't I?  It's a business like any other.  It has to get IT done right; it realizes IT is a key component of the business, with internal and external impacts."  And today does he still feel that way?  "Absolutely:  The whole firm feels that way, not just the IT department."

Not surprisingly, once Steve arrived his first order of business was getting the infrastructure right and making it scalable and reliable.  "That's always the key thing."  But once that's under control, you have the freedom to take a more outward-facing approach.  If Steve could describe the overall trajectory of his time at K&L Gates, it's been from "plumbing" and nuts and bolts initially, towards a more client-oriented focus in recent years.

And the "Business Innovation" CIO Plus One award?  "It was for our Legal Information System and our extranets.  LIS is a reusable infrastructure component, or application, which we can roll out across different industries and practice areas.  The goal of LIS is to provide a forum for K&L Gates lawyers' commentary and insights into cases, statutes, regulatory developments, and so forth, which we present alongside the primary sources.  The idea is to provide a 'one stop shop' for clients with legal issues in that area.  It's not just the raw material, it's our opinion, interpretation, and commentary."

I note that K&L Gates has been, shall we say, active in mergers, and ask Steve about their strategy for integrating systems across formerly separate firms post-merger.

The key, he says, is that they started preparing a long time ago for integrating combinations of firms.   Essential to the processs is to standardize:  Standard technology, standard procedures, standard processes, and a standard platform.  The pieces of that platform are:

• A Microsoft-based infrastructure
• Windows XP clients
• Lenovo brand PC's everywhere
• A consistent image on all PC's
• Servers that are all the same:  Same brand, same OS's, same patch levels
• Microsoft Exchange email
• A single provider of WAN hardware
• Similar equipment across all offices to provide WAN and LAN connectivity
• BlackBerry's as a default smartphone device (although they will support Windows Mobile units on request).

In other words, as Steve puts it, a "very boring" philosophy of equipment and infrastructure.  "Why learn two things when you can learn one?" 

Understandably, there are times immediately post-merger when hardware will not be standardized, but integration is accelerated by insisting on a standard user interface "on top" regardless of hardware differences "underneath."   For example, Steve notes, take phones:  With the Preston Gates & Ellis combination, PG&E used Cisco VOIP hardware and K & L used Siemens.  Nevertheless, on the day the merger became effective, dialing the prefix "101" got you the Seattle office no matter what equipment you were on.

Similarly, the website, attorney and professional staff bios, email addresses, stationery, billing templates, etc., are all standardized and consistent on day one post-merger.

So that's Phase One of merger integration.

Phase Two is integrating the key infrastructure itself:  WAN and network connectivity, key business processes and applications, HR, finance, time & billing, document management, litigation support, backup/disaster recovery, etc.  Phase Two, interestingly enough, commences before the merger is formally consummated and continues well after. 

Since Phase Two is largely inward-looking, there's more flexibility in timing.  For  Phase One, by contrast, the firm's self-imposed and self-enforced deadline is that the standardized user interface be in place the morning after the merger takes effect.

Phase Three is integrating the application inventory.  Ultimately, the goal is complete standardization across the entire firm regardless of office and regardless of user.

What other initiatives are on his plate?

Consolidated data centers is #1, he replies.  The firm is consolidating key computing infrastructure in primary and secondary facilities in a few regions around the world including the US, Europe, and later, the Far East.  Consolidation is "not just good IT hygiene," Steve opines, "but it serves the goal of freeing staff to serve our lawyers and their clients and spend a lot less time on just 'keeping the trains running on time.'"

I ask Steve who he reports to, and he gives me the right answer:  He reports to Pete Kalis, Chairman of the firm.  Why, Steve asks, is that the right answer?  In my experience, I relate, CIO's, be they in law firms or corporations, who report to the CEO or Chairman, have the proverbial "seat at the table," whereas those who report to the CFO, COO, or Executive Director, are viewed as well-paid plumbers, responsible for a utility like electricity or a dial tone, but not strategic partners in the firm's success.

While we're on this topic, Steve elaborates that the management committee has been "very supportive" of IT initiatives.  The firm "recognizes and offers sponsorship of IT.  Two things have to come together to enable IT to have a lasting competitive impact.  First, the actual ability to implement important initiatives, but equally important, the willingness of the firm to let it be done." 

What's the hardest part of your job, and what's the most rewarding?

Hardest is recruiting talent—"especially to a law firm.  People know that there are extremely high customer-service level expectations, at all times and at all levels, even in the back room."  Recruiting talent is an ongoing struggle, one that seems to be more of a challenge all the time.  Steve belongs to a Pittsburgh area council of CIO's from companies ranging from about $100-million to $5-billion in revenue, and at the most recent meeting everyone reported recruitment and retention of talent was their single biggest challenge.

The second challenge is staying relevant from a business perspective:  "Being more than a utility or a service provider—being a true client partner."  And third is obvious:  Scale.  As the firm grows, there's "a simple issue of magnitude."

The most rewarding?

Taking IT out of the back room and into the front office, all while supporting growth.  It may be challenging to retain people, but it's immensely rewarding to be viewed as a key part of the business.

So?  Take one energetic and disciplined CIO, add deep and enduring management support, sprinkle with clients willing to appreciate technology initiatives by their law firm, and, with luck and perseverance over a course of several years, you win a CIO100 award.  "Plus One."

These make for high-quality headlines, and those who are unprepared may indeed suffer (was the dot-com bust that long ago?),  but for the far-sighted and the nimble, all will be well.  There might even be an opportunity to "buy on the dip."  More in a moment, but first here are the stories, first up "Law firms hit by market turmoil" in the redoubtable FT, and second "With dip in economy, are associate layoffs on the horizon?" in The Legal Intelligencer. 

On our shores, the "associate layoffs" article speculates on whether firms focusing on financings and securitization will find their ranks of associates bloated.  (As an aside, please note the slightly imperious tone, focusing only on associates, and not on such unmentionables as de-equitized partners.)  By and large, firms that are not concentrated in securitization find the layoff predictions eminently plausible, and firms that have active securitization practices point to workouts, bankruptcies, and restructurings.   In what industries?  Why, in industries such as subprime lending whose obligations were securitized, of course!

Pete Kalis, Chairman of K&L/Gates, wisely preaches the virtues of diversified practice:  "Where I came from, you learned at an early age when you buy bar stools, the more legs the better."  And indeed, one of his partners has already been named examiner in the bankruptcy of subprime lender New Century Financial. 

Consultants and recruiters find it equally implausible there will be widespread bloodshed. 

"Firms are at a war for talent and often can't find enough corporate attorneys.

"I can't even imagine a firm laying off an M&A lawyer," [California-based consultant Peter] Zeughauser said. "It's beyond comprehension."

"A mergers and acquisitions practice is the most profitable, the most difficult to build and "you just don't let go of that talent in a downturn," he said.

"Mark Jungers, a recruiter with Major Lindsey & Africa in Chicago, said he has been hearing firms talk about the possibility of layoffs and there is a concern. He hasn't, however, heard any of his large-firm clients seeing a decline in work.

"There still aren't enough corporate associates to satisfy firm needs and transactional practices are still working hard, he said."

Whoever you choose to believe, it's safe to say that the forecast for securitization work is "partly cloudy, with a chance of rain."  Whether you're of a mind to focus on the partly sunny implicit in partly cloudy, or the chance of rain, you probably don't want to go on a structured finance hiring spree right about now. 

But given normal attrition rates (we're talking about associates, by hypothesis), if it takes a year for the unemployment-pig to work its way through the snake of the financial services sector to law firms, you may have little to worry about.  If you find yourself too heavily staffed a year hence, you have both a risk-averse and a more entrepreneurial option.  The risk-averse choice is simply to tighten the screws on performance evaluations and temporarily boost your "attrition" numbers.

The entrepreneurial option is much more fun, as is usually the case, at least if it works out.  That is to "buy on the dip," acquiring talent that may be suddenly on the street through no fault of their own, recognizing that as a financial invention securitization is here to stay in spades, and all that a downturn means is that the market will come back bigger and stronger, and with more investor and lender protections (meaning more clauses and covenants to be written and tested) than ever.

The FT piece is more thoughtful.

It starts with this inarguable proposition:

"The British legal industry's financial success is founded on the soaring international mergers and acquisitions market, although top firms argue that their expertise in areas such as financial restructuring will make them resilient in tougher economic conditions."

Some buyout firms have definitely put out a "gone fishing" sign, as Chris Bown, co-head of the international private equity group at Freshfields, puts it.  But it's worth reminding the hand-wringers that this follows one of the single greatest quarters of LBO and private equity activity in history.  A calmer perspective, which happens to be mine, is offered by Mark Campbell, global head of finance at Clifford Chance, who reports dispassionately:

"The position at the moment is that the froth there has disappeared.  The question is whether that market will return to some semblance of normality in September and October, or whether there will be a longer period of waiting."

Incidentally, Mr. Campbell also echoes my observation that, to the extent the market comes back revivified, albeit with more complex structures (no more "covenant lite" deals), lawyers should thrive.  After all, don't the websites of every self-respecting firm vow that they work only on the most "complex" transactions known to mankind?

Bottom line:   The firms that have actually built many-legged bar stools will do fine, and the adroit and nimble among them will capitalize on the opportunity to do more than fine and to pick up, for example, a 16%+ equity interest in Countrywide Financial at a recent historic low (cf. Bank of America).   Firms overzealous in the pursuit of the latest new new thing will come to a hard stop. 

And maybe, seven or eight years from now, we will have internalized the lessons of the dot-com subprime meltdown and be smarter about our own portfolio of industry-sector bets.

I learned mid-afternoon today that LeBoeuf and Dewey Ballantine are apparently in advanced merger talks, as reported subsequently in The Wall Street Journal.  The rumor is that a formal announcement could come as early as Monday.  My take?

Initially, the financial metrics are almost astonishingly well-matched.  From the 2006 AmLaw 100 rankings (the most recent):

• Dewey's PPP is $1.450-million and LeBoeuf's $1.425-million
• As tellingly to my mind, Dewey's revenue/lawyer is $820,000 and LeBoeuf's $800,000.
• LeBoeuf is #45 on the AmLaw 100 with revenue of $513.5-million
• Dewey is #62 with revenue of $408.5-million
• The pro forma combination would have revenue of $922.0-million, tying it exactly for #12 with Morgan Lewis, behind DLA at $1.016-billion and ahead of Sullivan & Cromwell at $900-million

Both are obviously highly New York-centric, but also both come with very strong offices in London.    The pro forma combined firm would have one of the largest New York and London offices of any US firm:

• New York:  Dewey (300) + LeBoeuf (250) = 550
• London:  Dewey (40) + LeBoeuf (130) = 170

What neither firm has in any remotely meaningful fashion is an Asian presence;  each has nothing beyond a tiny outpost in Beijing.

Now, my "real" take:  This is a merger that could make tremendous sense for both firms. 

Not to put too fine a point on it, but both firms are in similar boxes.  That box, with apologies to my home town, is overwhelming New York-centricity.  As a global capital market center, New York's pre-eminence is threatened as it never has been in the lifetime of those practicing today.  This is a combination of globalization in general (when there are international alternatives, there are international alternatives); the impact of Sarbanes-Oxley, real and perceived; the omnipresent plaintiffs' securities bar in the US; and the overhang of the "Spitzer Effect."  If a city set out on a conscious program to position itself as friendly to global capital formation, it's safe none of these phenomena would be on its agenda.

Is this an immediate threat?  Far from it.  Senior partners at both firms have nothing in the least to worry about.

Is it a longer-term threat?  Unless structural changes occur—meaning selective regulatory rollbacks here, or spasms of regulatory overkill abroad—I fear that it is.  Were I a young partner at either firm, the question top of mind, if not on my lips, would be, "So, what's the plan?"

Interestingly, both firms have been conspicuously adding high-profile laterals over the course of the first half of this year.  I wasn't sure why LeBoeuf was doing so, but we may now have the answer. 

As for Dewey, why they were doing so is simple:  To recover from the badly bloodied nose—and unprecedented partner attrition—they sustained in their first real encounter with globalization, to wit their unconsummated merger talks with Orrick late last year.  An unusual "show of strength" may have been perceived as needed, at Dewey, to recover stature.

Would Orrick have been, in hindsight, the better deal for Dewey?   Reality not being susceptible to double-blind experiments, the short answer is of course that we shall never know.  But it would have been a culturally fascinating, economically robust, and geographically potent, combination. 

Orrick/Dewey would have been a true experiment in creating a 21st Century law firm. 

LeBoeuf/Dewey is very much birds of a feather, and a bet on the belief that there's strength in numbers.  

Your view of its prospects of success may depend, I suspect, on your view of the importance of a firm's ability to change over time as economic and sociopolitical centers of gravity migrate.  Whether the merger talks come to fruition or otherwise, this is a resounding sign of the increasing pressures of globalization.

As we've learned from once-great American corporations ranging from Sears to US Steel to AT&T to GM, there is no entitlement to incumbency.

A few days ago after reading about Working Mother magazine's recognition of programs in diversity and work/life balance, I had a chance to catch up with the Managing Partner of Dorsey & Whitney, Marianne Short. 

Now, the list of "Best Law Firms for Women 2007" numbers 50:

• Alston & Bird, Atlanta, GA
• Armstrong Teasdale, St. Louis, MO
• Arnold & Porter, Washington, DC
• Baker & Daniels, Indianapolis, IN
• Baker & McKenzie, Chicago, IL
• Bingham McCutchen, Boston, MA
• Blackwell Sanders, Kansas City, MO
• Bryan Cave, St. Louis, MO
• Chapman and Cutler, Chicago, IL
• Covington & Burling, Washington, DC
• Cravath, Swaine & Moore, New York, NY
• Debevoise & Plimpton, New York, NY
• Dickstein Shapiro, Washington, DC
• DLA Piper US, New York, NY
• Dorsey & Whitney, Minneapolis, MN
• Duane Morris, Philadelphia, PA
• Eckert Seamans Cherin & Mellott, Pittsburgh, PA
• Farella Braun + Martel, San Francisco, CA
• Foley & Lardner, Milwaukee, WI
• Folger Levin & Kahn, San Francisco, CA
• Gibbons P.C., Newark, NJ
• Heller Ehrman, San Francisco, CA
• Hogan & Hartson, Washington, DC
• Holland & Knight, New York, NY
• Howrey, Washington, DC
• Hunton & Williams, Richmond, VA
• Ice Miller, Indianapolis, IN
• Katten Muchin Rosenman, Chicago, IL
• King & Spalding, Atlanta, GA
• Kirkland & Ellis, Chicago, IL
• Kirkpatrick & Lockhart Preston Gates Ellis, Pittsburgh, PA
• Kramer Levin Naftalis & Frankel, New York, NY
• Manatt, Phelps & Phillips, Los Angeles, CA
• Mayer, Brown, Rowe & Maw, Chicago, IL
• McDermott Will & Emery, Chicago, IL
• McGuireWoods, Richmond, VA
• Miller & Chevalier Chartered, Washington, DC
• Mintz Levin Cohn Ferris Glovsky and Popeo, Boston, MA
• Morrison & Foerster, San Francisco, CA
• Orrick, Herrington & Sutcliffe, New York, NY
• Patton Boggs, Washington, DC
• Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY
• Pillsbury Winthrop Shaw Pittman, New York, NY
• Reed Smith, Pittsburgh, PA
• Sidley Austin, Chicago, IL
• Skadden, Arps, Slate, Meagher & Flom, New York, NY
• Sonnenschein Nath & Rosenthal, Chicago, IL
• White & Case, New York, NY
• WilmerHale, Washington, DC
• Womble Carlyle Sandridge & Rice, Winston-Salem, NC

So why did I want to talk to Marianne?   Pretty simple, actually:  Of the 50 firms, Dorsey is the only one that is both in the AmLaw 100 and which is led by a woman.

Before Marianne and I spoke, I had sketched out a few questions (which I shared with her in advance) including:

• What particular initiatives did the firm undertake to accommodate working mothers that are different from or in addition to initiatives it might already have undertaken for “work/life balance” in general?
• Aside from the social, ethical, and other moral/human reasons for such an initiative, what are the business benefits to the firm?  To its clients?
• Did the firm already have in place any policies regarding flex-time, sabbaticals, job sharing, etc.?  If so, why were these inadequate for working mothers?
• Has there been any push-back from  female lawyers who are either childless or who choose not to take advantage of working mother programs, or from male lawyers?

Here's what I learned.

The first thing she reported is that the working mothers/work-life balance initiative has been something the firm has been working on for decades, starting in the 1970's when they drafted their first parental leave guidelines. 

In 1993 Dorsey lawyers participated in a mentoring program for  women, followed by offsite retreats dedicated to networking among women in   1997, and in  2004 a formal task force was created to address flexible work arrangements.

Men, to be sure, can take advantage of exactly the same  programs; indeed, anyone, with or without children, can use flex-time to, say, care for aging parents.  The program has worked particularly well with younger lawyers who grew up computer-literate and can operate independently and professionally from home or elsewhere.  Said Marianne:  "I don't look at it as only women of childbearing age."  The initiative is potentially for the benefit of almost everyone, particularly as two-earner households become ubiquitous. 

What about pushback, I ask:  Has there been any quiet resistance from those on a more traditional track?  "Zero," she replied.   Two expectations are now in play where only one used to be.  The old, and still current, expectation was that you would be readily available to clients no matter what.  The new, and added, expectation is that you can be available from wherever you want to be.  Compromising the quality of work or client service is non-negotiable and always has been, but the ability to work from wherever is new. 

No face-time in the office required?  "No, huge change from when I was an associate.  If a senior person was going to be in on Saturday morning, you were going to be in on Saturday morning; that expectation doesn't exist any more.  The biggest change from the 1970's and 1980's is a complete embrace of different ways of getting work done.  It's the quality and timeliness of work, not the individual lawyer's presence, that counts."

So, fine, all this makes us feel virtuous and flexible and enlightened, but what are the business benefits to the firm and its clients?

"Remember that a large part of what lawyers, especially partners, need to focus on is not just grinding the work out but business development.  That means being active in your community, doing pro bono, serving on boards.  Sure, at the start of one's career there's a certain inevitable and even welcome discipline to learning the craft, but once you have accomplished that, having simple human experiences, reaching out and talking with other people, makes you stronger and helps you build  your business."

In other words, she doesn't see the firm "accommodating" to new expectations; she sees it as "appreciating" the new expectations, which is in every sense good for the firm's business. 

And, the firm is making significant investments in recruitment, retention, training, and mentoring—the "care and feeding" of the next generation.  I mention that one observation I hear repeatedly from managing partners is that, if you truly want a collaborative firm culture, there's no substitute for spending the money to put people on airplanes and get them together in offsite's at nice hotels.  To get away from, as one put it, the "name tag syndrome" at partner meetings.   She agrees emphatically, applying the same "it's an investment not an expense" philosophy to associate training:  "If you believe in your firm's pipeline of talent development, this is a good business model." 

I ask about external pressures, from clients or even courts, for diversity efforts, and she says it's not only an increasing external demand, but a smart internal way to assemble teams.  Marianne's a trial lawyer, and she observes that "when I argue a case to a judge or a jury, I appreciate all perspectives and comments from a diverse trial team, which help me prepare for the little surprises encountered in court."    And, in any event, the drive for diversity has become a non-issue, at least internally to the firm.  "Even if someone doesn't want to get it at first, all they need to hear is that one major client wants it, and that's the end of the conversation." 

How will she know if these efforts are paying off?

She doesn't have an isolated anecdote to tell or a stem-winding paragraph stolen from a campaign stump speech to offer, she has a fact:

• Five years ago, in 2002, 28% of the 5th through 7th year associates were women.
• Today, in 2007, the percentage of the 5th through 7th year associates who are women is 50%.

To me, that's a powerful number.   Maybe you can get there from here.

I've written previously about "The World's First Publicly Traded Law Firm"—Slater & Gordon of Australia—and also about "Seven Perspectives on Law Firms' Going Public". For those in the audience who are securities lawyers, as am I, you might find the prospectus fascinating; I know I did. For the rest of you, please take our word for it.

This evening I had a chance to talk with Andrew Grech, Managing Director of the firm, who's based in Melbourne. (Well, it was this evening for me in New York, but for Andrew it was tomorrow morning.) Here's what I learned.

The IPO Itself, and the Immediate Aftermath

I started by asking what the IPO had done to the firm, and he replied that he'd anticipated much more disruption, "but there's been less." Most of what it adds to the firm has been a greater degree of focus, which is good for the business. And all in all, it has "not been too onerous."

More focus? Well, yes, for example, Slater & Gordon has had an active mergers and acquisitions program; during the past six or seven years, they've done 10 deals. As a private company, you try to be rigorous, but there is nothing comparable to the due diligence you undertake with public investors—"it has truly gone up a notch." This is surely beneficial because you're paying attention to a new class of stakeholders with more business-like expectations. But that said, "it's been evolution, not revolution; the cultural changes are subtle."

Still, he's found himself reassured that there's no fundamental conflict between the values of the organization and the responsibilities of being a public company. (This was one of the key issues I intended to ask him about, and he volunteered it unprompted before I could get to it: This I took as a good sign.)

Obligations to Clients vs. Obligations to Investors

I note that one of the obstacles people here in the US express towards public ownership of law firms is that it would somehow compromise client confidentiality and attorney-client privilege. I ask if that was envisioned as a potential problem, and how they protect client confidentiality while at the same time needing to provide financial and operational transparency to investors.

He responds immediately that it was potentially a problem, and one that Slater & Gordon addressed starting about two years before the IPO with the Australian Stock Exchange and with the Australian equivalent of our SEC (the regulatory body for public companies). They raised it explicitly in their first rounds of meetings with regulators: How to balance duties to the court and to clients with obligations to investors.

Ultimately, they negotiated an arrangement with the regulatory authorities which permitted them to state unequivocally in the prospectus that client interests would come first. According to Andrew, two years before the IPO, they started thinking deeply about these issues. Interestingly, he says the regulators of legal practices viewed their role not as approving or disapproving the concept of a law firm going public, but rather as educating the firm on its obligations and understanding what the implications would be for investors. 

As Andrew puts it, "There was no seal of approval, but the consultative process gave us a good understanding of the areas of concern and what would need to be addressed."

From the firm's perspective, "there was no uncertainty for us as lawyers which came first [clients or investors], but we needed to convince institutional investors that their best long-run interest would be served if we continued to put clients first." 

And who are those investors? "About 80% of our shares are owned by fund managers. We’ve been gratified by the support we’ve received from the best of Australia’s institutional investors."

I note that the prospectus discloses that the partners in the firm can sell out their entire ownership on a 20%/year formula until, after 5 years, they are free to own no interest in the firm. There appear to be no limits on non-partner ownership after that. Am I reading this right?

“We expect that employee shareholders will retain a majority and if not a controlling interest for the foreseeable future however we have had to accept that being a public company raised the potential for external shareholders to have a controlling interest”.

The Purposes of the Listing

"That said, the important thing I have to emphasize is that the listing was not an end in itself. The point of the listing was to give the firm a platform for growth, so that we could provide professional staff a ramp for the development of their careers and their total remuneration."

Explain? Our professional staff, says Andrew, is looking for a long-term commitment, reciprocally, from and to the firm. With a public listing, he says, we were able to obtain access to the capital we need for long-term growth, which provides a credible and rewarding future for professional staff, especially the younger ones. Without access to a long-term equity asset, there was tremendous tension between senior partners with ownership interests and associates with no immediate ownership prospects.

It was not, he insists, growth for growth's sake. "We're not megalomaniacs," he jokes.

He goes on to explain with a bit more detail the difference between the market for "private client" law in Australia (individuals, particularly individuals with tort claims) vs. the market for corporate law. He believes the private law market is in for a long-run secular trend of consolidation among law firms. (Parenthetically, he notes that Australia has 11,000 law firms for a population of 23-million; this alone tells you that many are solo or duo shops.)

How was the capital structure determined before the IPO? I ask whether the model was essentially that partners owned equity proportionate to their capital contributions. Andrew doesn't say whether that's exactly the approach that was taken (and here, a firm like Slater & Gordon may be the exception). But he makes it clear that in a firm with a business model such as theirs, where conditional fees are (or are not) collected after the investment of potentially large amounts in uncertain matters; senior partners had quite substantial amounts of personal capital contributed.

He adds that, in effect, the firm had re-invested profits year after year into working capital; to accomplish this, partners had to agree to withdraw less than they possibly could at year-end. This obviously contrasts markedly to the standard model where partners "strip-mine" the firm of cash at the end of every fiscal year.

But, Andrew avers, Slater & Gordon's personal representation business model does not make its need for capital unique: "All large practices have substantial capital requirements, for investments in IT, in growth, in lateral recruitment, etc." For his partners at Slater & Gordon, their view of the world is very much that "I'm committed to the best interests of all, not just what I can extract at year-end. We're trying to create a legacy."

The IPO Process:  Harder than Expected or Easier?

I ask what about the IPO process was easier, and what was harder, than he expected.

Easier: As it unfolded, it went smoothly. An IPO essentially takes a six-month window, during which everything went smoothly. He expected more bumps in the road: "More problems, more cost over-runs," but there were very few. He credits this to the firm's "excellent" underwriters, Austock Corporate Finance, a firm that specializes in small to mid-size companies.

Harder: He underestimated the amount of time that would be required to deal with staff internally. Although he and his partners thought they had prepared the staff well, all the media publicity spotlighting the wealth creation opportunities for the selling partners threatened to create a misperception about what had gone into creating that opportunity. It turned out to be important to put the amounts the selling partners would realize into context, and to explain how it reflected the results of their years of contributing funds they could have otherwise drawn from the firm into its retained earnings, its reinvested capital, and its expansion.

What are the benefits?

"Well, start with a much higher level of financial literacy among the professionals and staff —this was an unanticipated but highly beneficial consequence of the IPO."

How was the IPO priced?

"Well, there were no comparables; not really. We and our underwriters did look at other professional service firms, and there was much scuttlebutt in the media beforehand about how it might be overpriced or underpriced, but in the event, of course, we floated at a fair discount to what the market perceived as fair value."

Are you sorry you "left money on the table?"

"Oh, no, not at all; I'm very glad we left money on the table; that's important for investors and staff and professionals to have faith in the value of the offering."

The Post-IPO Firm Culture

Has there been any change in the culture of the firm post-IPO?

"It's too early to say. But I think there are some perceivable benefits."

For example?

"Well, our commercial practices in Melbourne, Brisbane, and Sydney are at different stages of evolution and maturity; some are stronger than others. So, before the IPO, there was an incentive for the stronger areas to concentrate their efforts on their own practices; but after the IPO, we were able to create collective performance rights across the commercial practice so that now it's all for one and one for all."

Similarly, Andrew explains, the firm can create "key performance indicators" in non-dollars-and-cents areas such as HR, marketing, knowledge management, and professional development, and anticipate that those KPI's will be tied to long-term equity price appreciation: Efforts that, overall, contribute to the intellectual and professional capability of the firm can be rewarded in a way that 's not possible what everything is distributed at the end of each fiscal year.

Any last thoughts?

The Benefits of Non-Lawyer Regulators

"In terms of conflicts, lawyers have proven they're very good at dealing with conflicts—there is nothing about being public that changes that at all. What’s important is that we recognize the potential for conflicts and make sure we have policy and processes in place to manage risk in this area”.

"One reason the standing of the legal profession has diminished in the public's eyes is that conflicts have not been dealt with openly. Where lawyers regulate themselves, it's an environment that invites suspicion.

"What has changed is that we now have independent outside regulators (sure, some are lawyers by training, but they're not operating as the bar council), and where outside regulators demand and operate with transparency, I believe we will benefit as a profession”.

"This has been a substantial contributor to the improvement in client satisfaction levels in the past 20 years.

"Now, understand, my views are probably not the views of the majority of the profession. In particular, smaller firms may lack the resources we have to deal with regulatory authorities. But all in all, independent regulation of the profession has been a success in Australia – what's needed now is to complete the process of harmonizing laws in each of our jurisdictions."

Andrew will be at the Georgetown University Law School conference next April discussing "The Future of the Global Law Firm" that you should have read about before here in the pages of "Adam Smith, Esq.," and I look forward to meeting him then.

You can download a nicely formatted and very printer-friendly copy of this interview here. 

Now, Warren Buffett might take exception to this, at least if you take him at face value when he says that he'll take a decent company in a great industry over a great company in a lousy industry any time.  And, of course, he penned this memorable indictment of the airline industry in his 1992 shareholders' letter:

"Similarly, business growth, per se, tells us little about value. It's true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners."

But back to our professor.

He's Richard Rumelt, who holds the Harry and Elsa Kunin Chair in Business and Society at the Anderson School of Management at UCLA.  And the occasion for this is his talk with McKinsey.

The question that kicks things off, for this "strategy's strategist," is what precisely is wrong with the strategic planning process in corporate America today.  Surveys show increasing levels of dissatisfaction with the entire exercise.

Rumelt's response is that what passes for strategic planning is often just three- to five-year resource allocation planning.  As an example, he cites a (hypothetical) growing retail chain that needs to plan store locations, construction budgets, permitting processes, hiring needs, etc., some years into the future.  But to say that its resulting budgetary resource allocations amount to "strategy" is a misnomer and worse.

Strategy, then, is?  "A pathway to substantially higher performance."  And, according to Rumelt, there are only two ways to get there.  The first is to invent or innovate your way to success.  "Unfortunately, you can't count on that."

The other is to "exploit some change in your environment" (he cites consumer tastes, technology, laws, or competitive behavior) "and ride that change with quickness and skill.  This second path is how most successful companies make it."

Great; so how do you identify changes?

As they say in Italy, "stai attento."  This most closely translates to "be careful," but I prefer its implied meaning of "pay attention."   Now, it's not your job to be gazing at the horizon, trying to foresee changes?  Fine.  Then appoint a few people to do it.   Some key partners, to be sure, but also consider deputizing senior people in IT, in finance, in marketing, and even in HR to spend part of their time blue-skying trends and potential developments, and reaching out to thought leaders in their areas to see what developments might be in the pipeline that could represent either a threat or an opportunity for your firm.

Rumelt cites the example of 3G wireless networks enabling streaming video over cellphones, but he immediately questions whether that opportunity is being over-hyped.  He wonders if a GPS-enabled, location-centric search function combined with voice recognition might not be a superior app.

The point is not that he's right or the streaming-video crowd is right, but the point is this, about strategic thinking:

"Now, speculative judgments like these are the essence of strategic thinking, and they can be the starting points for taking a position. Can you predict clearly which positions will pay off? Not easily. If we could actually calculate the financial implications of such choices, we wouldn't have to think strategically; we would just run spreadsheets. Strategic thinking is essentially a substitute for having clear connections between the positions we take and their economic outcomes.

"Strategic thinking helps us take positions in a world that is confusing and uncertain. You can't get rid of ambiguity and uncertainty—they are the flip side of opportunity. If you want certainty and clarity, wait for others to take a position and see how they do. Then you'll know what works, but it will be too late to profit from the knowledge."

To go after changes, you have to "take a predatory posture."  Rumelt had the chance, in the mid-1990's, to interview a cross-section of senior executives in the global electronics industry, and he asked what seems a fairly simple question:  Who was the leader in their market and how did they get there?  And, what is your own firm's strategy?

He reports that, consistently, executives told him the leader in their industry sector jumped through a window of opportunity that had opened (if not the first to jump through, the most acrobatic, if you will).

But here comes the shocking disconnect:  When asked what their firms' strategies were, not a single one responded that it was looking for the next window of opportunity. 

"I heard a lot about doorknob polishing. They were doing 360-degree feedback, forming alliances, outsourcing, cutting costs, and so on. None of them even mentioned taking a good position quickly when the industry changes."

 Contrast this with Rumelt's talk with Steve Jobs a few years later.  Rumelt posed the obvious question:  Despite Apple's remarkable come-back after Jobs' return, the regnant Wintel standard was simply too entrenched for Apple ever to be more than a niche player.  So, Steve, what's the longer-term strategy?  Jobs "0didn't agree or disagree with my assessment of the market. He just smiled and said, “I am going to wait for the next big thing.""

The next big thing, as it turned out, was iTunes and the iPod.  As Rumelt points out, at the time you couldn't pick up a magazine or a newspaper without reading about Napster.  The change, in other words, was hiding in plain sight.

Here comes into play one of Rumelt's key insights:  That innovation usually occurs at the intersection of two otherwise disconnected areas of expertise.  As for the iPod, it was the combination of musical industry expertise (without a vested interest in the incumbents), the Web, and Apple's brilliance at consumer hardware and software.  With another company called Sherline Products that Rumelt mentions, which makes small machine tools going for about $3,000 for model makers, it was the founder's background as both a hobbyist and a professional machinist.

I wish I could lay out more generalizable principles of how to "stai attento" to emerging trends, or how to come up with unorthodox combinations of cross-functional expertise, but strategy doesn't lend itself to that.  Were there a formula, everyone could do it.  Clearly, everyone cannot—or does not.

Rumelt is still willing to take a stab at how to do this.  Asked "how do we know which changes are important and which resources to combine?," here's his thoughtful response (emphasis mine):

"That's a very tough question. It is a key issue—the next frontier. And it is underresearched, underwritten about, and underunderstood. I call it “strategy dynamics.”

"Most of the strategy concepts in use today are static. They explain the stability and sustainability of competitive advantages. Strategy concepts like core competencies, experience curves, market share, entry barriers, scale, corporate culture, and even the idea of “superior resources” are essentially static, telling us why a particular position is defensible—why it holds the high ground.

"If the terrain never changed, that would be the end of the story. High ground is always high, and low ground is always low. But in business, unlike geology, change happens in years rather than millennia. [...]

"Strategy dynamics studies how those changes would shift each dimension of an industry. Would the industry become more concentrated or less? More integrated or less? Would there be more product differentiation or less? More segmentation or less? Given consumer desires and available technologies, how should the industry or business look in, say, ten years? Where are the economic forces trying to take you? Should your strategy ride those forces or fight them?

"There are tools and exercises that help trigger inductive insights about dynamics. One is a list of common biases—the kind of list that helps some people look beyond the standard consensus view of what is happening."

Another useful thought experiment Rumelt discusses is what he calls "value denials."  Value denials are simply products or services that are not offered but that readily could be, and for which clients would clearly pay.  One example is an airline ticket that guarantees your luggage won't be lost.  Not for sale.  But some people would clearly pay for it.  A value denial.

In the music industry, a clear value denial (the industry's own fault, but that's a tale for another day) was the inability to buy the two or three good tracks on a 15-track CD.  iTunes squared that circle. 

What services might your clients be looking for that no firm offers, at any price?  That are simply not on the market?

And, most importantly, how do you explore what those might be?

The answer is both self-evident and plays precisely to the strengths of top-notch law firms:

"A small group of smart people. What else can I say? Doing this kind of work is hard. A strategic insight is essentially the solution to a puzzle. Puzzles are solved by individuals or very tight-knit teams. For that, you need a small group."

And, by the way, he would flatly prohibit PowerPoint.  "People end up with bullet points that contradict one another, and no one notices!  It's simply amazing."  

Instead?  Opt for three coherent paragraphs, "having to link your thoughts, giving reasons and qualifications."  

This writer could not agree more fervently.

But back to law-firm land.

What changes might we see, that an astute firm could capitalize on? 

I'm not charging you McKinsey rates to read this, so the following is worth what you're paying, but here are a few thoughts.  What might you make out of:

• The carbon-footprint consciousness, green awareness revolution?
• The mis-pricing (non-pricing?) of CDO's and other debt instruments in the current sub-prime/hedge fund/private equity backfiring?
• The likelihood (I'm non-partisan, but I think this is the common wisdom) that our next President will not be a Republican?
• The drumbeat of calls for substantial reform of healthcare (even if they are beaten back, as before)?

Those are just ideas, and I haven't deputized any senior partners or C-level executives to scout the horizon.  But be my guest and do so. 

Update from a reader (16 August):

Hey, Bruce,

Great points all.  Your observations seem to underscore the pivotal challenge posed by the fact that law firm management is just not terribly sophisticated (on the whole).  It seems to me that the potential up-sides presented by the nexus of increased global presence, increased firm size (and thus increased profits), the threat of non-US firms getting relative scale and efficiency (technology) advantages through non-lawyer capital, and the slow drip drip increase in acceptance of possible non-lawyer management teams, all point to a true quantum leap in the effectiveness, enjoyment and efficiency in the practice of law.  We’ll see if our profession is up to the mental shifts necessary to get us there.

On that score, it’s all in the perceived interests of individual lawyers taken in the aggregate.  Once that aggregate opinion realizes that true professional management is a necessity (and, also perhaps, the necessity for non-lawyer capital), the pesky little details of making all these changes actually work through the system will happen almost of their own accord (e.g., the seemingly insurmountable prohibitions against Clementi-type reforms).  Mon dieu, if Glass-Steagall (http://en.wikipedia.org/wiki/Glass_Steagal_Act) can go down in flames with not much more than a twitter, we attorneys can get over the porous taboos of lawyers and “the profane” getting together both in terms of management and ownership.

Best regards,

Pete

Update: 23 August 2007. Another reader I hear from regularly writes as follows (with explicit permission to publish her comments here):

Bruce,

Many thanks for your review of UCLA Professor Dick Rumelt’s interview with The McKinsey Quarterly.  It’s a great commentary on how most enterprises confuse “strategy” with “next year’s budget.”  He offers some empirically derived insights about competitive advantages – how to spot them and how to profit from them. 

Another admiring reader also posted a comment expressing appreciation for your commentary on Dr. Rumelt’s work.  He mentioned five factors he thinks have potential upsides for law firms.  Although he didn’t distinguish between the impacts he predicts on most law firms vs.  market-leading firms, I believe that four of those five factors are actually unrelated to (or their impacts are not yet known on) the performances of market-leading firms, to wit:

1.  Increased global presence

Instead of placing offices in many countries around the world, top-flight law firm market leaders generally rely on best-friends relationships with other local market-leading firms.  These market-leading best friends stick with their own core strengths, their own core locales, and their own core client industries, and they trust their best friends to do the same. 

2.  Increased firm size (and thus increased profits)

Actually, law firms’ per equity partner profitability is uncorrelated with lawyer headcount.  The correlation coefficient between these two metrics among Am Law 200 firms’ performances during FY 2006 is an astonishingly low .04, i.e., only 4% of the variance among law firms’ per equity partner profitability can be explained by the variance in lawyer headcounts. 

3.  Non-US firms gaining relative scale and efficiency (technology)

I’m unaware of any demonstration that many law firms, on any sides of the Atlantic or the Pacific, have either the technological or the business process analysis rigor to become scalable in ways that distinguish them from their competition, other than in ways that are available to the entire industry.  “Technology” is a tide that rather quickly lifts all boats.  The few firms that have progressed much beyond off-the-shelf legal technology know who they are, and I don’t want to out them and their competitive advantages here. 

4.  Advantages through non-lawyer capital

What are these undefined sustainable advantages?  A single labor/employment firm in Australia has taken on investors.  Let’s wait and see how that plays out before anointing law-firms-gone-public as the next new multidisciplinary threat.  I’m a skeptic, betting that investors and lawyers will both soon freak out, since their respective DNAs seem highly incompatible and uncombinable.  Opinions of knowledgeable people clearly differ on this subject. 

5.  Acceptance of possible non-lawyer management teams

One well-designed study has found a significant relationship between the number of C-level positions in a law firm and a firm’s ability to avoid complete failure, although this is a far cry from proving that adding more C-level execs improves a firm’s performance.  Nonetheless, I’ll readily stipulate that in 2007 many professional COOs (and other C-level execs) carry weightier portfolios more capably than they did a decade ago.  The real question is whether and when a successful firm chairman or a managing partner might leave one firm to lead another firm. 

Returning to Dr. Rumelt's work, my own observations of the law firm industry parallel his corporate findings:  Market-leading law firms are sharply distinguished by their abilities to predict quickly and accurately where the next new legal need will appear – at the nexus of business / economic / legal / cultural / political changes.  Lawyers (and marketers) in market-leading firms lean their heads out the windows of their rapidly moving practices, scanning the horizon, searching for early warning signals.  They then quickly position themselves to benefit immediately from imminent changes. 

Not all their predictions come true.  But waiting to see in which direction the law firm herd will lumber next is NOT the way to find a competitive advantage.  Nor is growing ever larger, locating offices in dozens of countries, serving countless client industries, or creating new practice groups with abandon.  More focus, not more bloated diversification, is the path to success for law firms with sufficient self-discipline to recognize and respond to critical emerging legal needs. 

Respectfully,

Ann Lee Gibson

*********

Ann Lee Gibson, Ph.D.
Ann Lee Gibson Consulting
1404 Southern Hills
West Plains, MO  65775
office 417-256-3575
agibson@annleegibson.com
www.annleegibson.com

Thanks, Ann. The jury does remain out on many of these topics, which is wh at makes them so fascinating. I remain more sanguine about public ownership, however. Some firms will get it right, I'm confident.

But, if one believes Wharton Business School's "Leading for the Next Act:  Why CEOs Must Evolve or Step Aside," it's not quite that simple.  According to research conducted by David Nadler, a consultant to boards and senior executives, a CEO's tenure is "a performance with a series of distinct acts.  Each act requires the CEO to lead, think and behave in fundamentally different ways. The successful ones are those who are able to make the transitions."

What does he mean by this?

In corporate-land, many CEOs appear on the scene when a fire needs to be put out.  Their first hurdle, then, is to pass the test of getting the company over that first challenge, be it changing the culture or bringing innovation.  Now comes the problem:

"The problem comes after the CEO solves that first issue; then it is act two and something else is needed, he says. Many CEOs fail because of what Nadler terms "success syndrome, that is, codifying a certain way of doing things, and then charging ahead with the old game plan no matter how the context has changed."

Bad example:  Carly Fiorina, whose 5-1/2 years at Hewlett-Packard Nadler assesses as successful at first, when she had to transform HP, break it static culture, and develop a new strategy through the acquisition of Compaq.  But after that, when her task turned to the more mundane one of execution and integration, she needed to "hunker down" but instead "she continued on the same approach, and the leadership model that had been successful in act one killed her in act two."

Good example:  Stan O'Neal, who took over Merrill Lynch just three months post-9/11, with the firm on the rocks and literally blown out of its World Financial Center headquarters.   In reality, the firm's challenges ran far deeper than those superficial wounds, and threatened the firm's very existence.  (Nadler doesn't explain this, but I will:  The threats to Merrill consisted of discounters like Schwab eating away from the bottom, an increasing sophistication of global investment banking competition at the top, and a somewhat ill-defined brand and value proposition trying with difficulty to bridge the gap between catering to Main Street and Wall Street.)

O'Neal's initial strategy was "demanding, almost brutal at times"; he focused relentlessly on control, discipline and cost. "His feeling was, 'I have to save the company. If I don't do this, we'll be finished and thousands of jobs will be gone.'"

Once that strategy began to kick in and Merrill began to recover, a new game plan was called for.  O'Neal realized this and acted on it. 

O'Neal did something different: He changed his entire executive team, focused on growth and rethought his own leadership style. Today, says Nadler, with Merrill Lynch stock trading at nearly three times the amount it did in 2001, O'Neal is focusing on building up the next generation of leaders.

Here's where  Nadler's research gets interesting.  He asked himself what caused the difference between success and failure and then decided to study failure rather than success—"because success is transient, but failure is reasonably permanent."  (By this he means that one can have success  upon success and be remembered for that, but if your last act—and by the rigors of a competitive talent marketplace it will be your last act—is failure, that's what you'll be remembered for.

Focusing his efforts, Nadler decided that the most fascinating cases were CEOs who came into a job, did well for awhile, but, when circumstances changed, had a hard time adjusting their leadership—had a hard time moving from one act to the next:

"The most 'heartbreaking' kind of failure, says Nadler, is when CEOs try to change but can't. 'We are not infinitely malleable. Asking a person who is 55 to act dramatically differently, and pull it off naturally, is setting a very difficult-to-achieve goal.'" 

Nadler's conclusion is that boards of directors should constantly be alert to whether the CEO-in-place has the attitudes, the disposition, the talents, and the mindset, to lead the organization in the direction it needs to go now, knowing that that direction changes and is cyclic or episodic:

• We merge; we integrate
• We grow; we assimilate
• We retrench; we restore
• We redirect; we consolidate

And so forth. 

But for all of Nadler's research, I found myself unsatisfied with his casual approach to one profound question:   He seems to assume that a CEO (read:  Managing Partner) can succeed only during one time frame addressing one challenge.  The moment times change, one needs to change horses.  As he says, "We are not infinitely malleable. Asking a person who is 55 to act dramatically differently, and pull it off naturally, is setting a very difficult-to-achieve goal."

I could not disagree more strongly.

We live in the age of re-inventing careers.  If Detroit auto workers can retrain themselves as registered nurses (and they are), how hard can it be for the managing partner of a firm to recognize that the challenge has moved from, say, getting the firm's Shanghai office in shape to figuring out how to recruit and retain Gen Y?   Nadler does humanity, and Type A, driven-to-succeed at the top of their game humanity, a shocking disservice.

With one caveat.

You need to listen.  Seriously listen. 

"Active listening" is one of the more depressing cliches to have emerged from the booming self-help industry, but I'll tell you what active listening means to me:  Actively encouraging disagreement.  What is wrong with this picture I've drawn?  What am I missing?  If you were me, what would you do differently?  "Conflict" it's not; "consensus" it's not.  Common sense it might be.

So can you be managing partner through more than a single economic and strategic cycle?  Only if you'll listen.

Update Tues 14 August:  A regular reader writes:

"Bruce, Great post! Thanks for bringing this Wharton resource to all our attention.

I agree that leadership is simply vital to law firms , but I draw a somewhat different conclusion, if I follow your drift.

I tend to agree with Nadler.  Precisely because law firms are going through such gigantic leaps in their understanding of more sophisticated management models, expanding into further and more complex and more challenging markets (geographic, industry and subject-matter area), and in general staring dazedly at the changes in their industry going by at a pace they can scarce keep up with, I believe that a paradigm that encourages short tenures for firm CEOs (MPs) is advisable.

Further, why not also have strong central leadership committees (for example, something akin to a board of directors--some firms have them) whose sole job it would be to identify the most important challenge or small set of challenges that the firm next needs to tackle, and then select either one of their own (or an outside leader) to address it.  Once that issues has been effectively dealt with, I see every reason for that person to pass the baton on.  As Nadler I think rightly points out, it is difficult to one person to work against type--especially when their natural inclination is so successful in one project.  Better to quit while ahead, get back into full-time practice, or, why not??, take the reins on somewhere else.

I personally see great benefit in the rise of a nascent law firm manager class that moves from platform to platform much as corporate CEO's do.

The necessary corollary to this, I believe, would need to be a strong sense of group leadership and ownership by all leadership within the firm, both senior and mid-level.  Only in this way can the firm have the strength of will to identify new challenges, rather than simply resting on laurels, or indeed, approaching new challenges with old thinking.  I heartily recommend the "Bees" post by fellow (and new) blogger Bilinksy at Thoughtful Legal Management.  Adding a dash of "hive-mind"--de-centralized decision-making, can, I think, dynamically interact with an even, and conversely, stronger centralized and powerful chief executive officer.  The two together could help launch law-firms not only to parity in terms of quality of leadership that is found in corporate America, but perhaps even sling-shot beyond it.

One can only hope!!!"

Have a great week!  I can't wait to see your next post.

pete

"Is this any way to recruit associates?" asks a lead story in this month's American Lawyer. 

What is "this way?"   We all know the drill, most of us from both sides of the table: 

• Top law schools orchestrate dances of 20-minute interviews between visiting firm partners and law students;
• questions are kept superficial (one Latham recruit got a steady diet of fantasy football questions);
• grades and class rank are presumed  to be valid proxies for post-employment performance; and, in the event,
• of students offered summer jobs by "big" firms (> 250 lawyers):
  • just 28% accept
  • 40% of whom are gone by their 3rd year, and
  • 62% of whom are gone by their 4th.
• And, according to NALP, half of associate departures are "unwanted" by the firms. 
• Finally, depending on who you believe, replacing a needed associate costs from one to three times their fully loaded annual costs.

Worse, the pressure is intensifying.  According to the National Law Journal's "250" report (ranking the largest 250 US firms by lawyer headcount), the number of associates at those firms has increased 76% over the past decade while the number of law school graduates has gone up just 7%.  Firms are going to more law schools, reaching farther down into the class ranks, or both.  And at the elite schools, firms are simply pushing harder.  Georgetown Law, for example, anticipates a 10% increase in firm interviews this year, and the same again next year.

Need I add that most of this takes place with students fundamentally in the dark about what differentiates one firm from another? 

"[Students] aren't helped much by firm marketing materials, which often say the same thing and make firms indistinguishable from each other. "They all tell you they have great clients, and they work hard but [have] a very collegial atmosphere," says the Stanford student. "It's the same discourse over and over again."

Fine.  Diagnosis is one thing, prescription another.

A few firms are starting to take baby steps away from the blunt hiring instrument of simply trying to recruit students with the highest grades from the best schools, recognizing, as Karen Massa, recruiting director for Orrick, puts it, that you can be a top graduate from a top law school and still be someone "the firm should never have hired in the first place."  The challenge is this: " Was there information that was available in the interview that would have let us know they really weren't a good fit for the practice of law in a big law firm?" Massa says. "Were there questions we could have asked that would have revealed a little more?"

At Orrick, they decided to develop a list of traits that partners and associates would agree were hallmarks of success at the firm—and, through internal focus groups, they ended up with eight, including confidence, adaptability, and problem-solving capability.     In St. Louis, the 75-lawyer litigation boutique Sandberg, Phoenix & von Gontard is pursuing something similar, albeit with a bit more of a point to it.  They use a 40-minute psychological assessment test to gauge attitude and motivation.  Says managing partner John Sandberg:

"The biggest ongoing challenge isn't hiring people bright enough," but finding people with the right temperament. "A good lawyer has to have resilience. Crap happens every day, and you have to be able to work through that."

The structure and purpose of interviews themselves is changing at some firms, as well, as more recruiting efforts start to embrace "behavioral interviewing," which entails more detailed, thought-provoking, and potentially revealing questions.  Traditional interviewing might use questions such as:

• Tell me about yourself.
• Did you enjoy working on law review?
• Why are you interested in our firm?
• Have you thought about what practice area you're interested in?

Behavioral interviewing, by contrast, is premised on the notion that past behavior is the best predictor of future behavior.  So the goal is not just to find out what candidates may have accomplished, but to uncover how—their thought processes and attitudes when confronted with obstacles.  So a behavioral interviewer might ask such things as:

• Give me an example of a time when you had to make a split second decision.
• What is your typical way of dealing with conflict? Give me an example.
• Tell me about a time you were able to successfully deal with another person even when that individual may not have personally liked you (or vice versa).
• Tell me about a difficult decision you've made in the last year.
• Give me an example of a time when something you tried to accomplish and failed.
• Give me an example of when you showed initiative and took the lead.
• Tell me about a recent situation in which you had to deal with a very upset customer or co-worker.
• Give me an example of a time when you motivated others.
• Tell me about a time when you delegated a project effectively.
• Give me an example of a time when you used your fact-finding skills to solve a problem.
• Tell me about a time when you missed an obvious solution to a problem.

Think these are tough?  Corporate America and non-law professional service firms (as well as the Magic Circle in Britain) often use case studies right in the course of the interview to evaluate how candidates think and how they approach problems.  At McKinsey, a typical interviewee will go through at least five hour-long meetings, each including a case study  to be performed on the spot.  Multiple-choice quizzes involving basic logic and math are also employed.  As one British law trainee who'd been through Linklaters' assessment last year put it, "They ask you questions you cannot possibly answer. They want to stretch you and see what you can do."

I would go a step further.

Many of you, I'm sure, have read Michael Lewis' wonderful Moneyball, which recounts the story of the Oakland As' manager, Billy Beane, managing to put together teams that repeatedly got into the postseason despite having one of the smallest payrolls in baseball.  To accomplish this, Beane had to "think different," and he did.  He decided to largely discard conventional scouting wisdom (such as a player's speed in the 40-yard dash, or a pitcher's top fastball velocity) and to try to uncover, instead, characteristics of players that were actually associated with scoring runs and minimizing outs.  Famously, for example, traditional scouts had ignored a batter's ability to generate walks (since they weren't hits, and batters were judged on hitting prowess).  Beane realized that not only did a walk advance the batter to first as surely as a single, but it did so (a) without any possibility of an out accruing on the play; and (b) at maximum expense to the pitcher in terms of adding to the total number of  pitches thrown.

The bottom line was that Beane and the As' could pick up under-appreciated, and underpriced, players, without sacrificing actual performance on the field, by refusing to follow the conventional wisdom and pay (overpay, that is) for players' characteristics that had market value but little intrinsic value.

What if, I wondered, this might be true of hiring associates as well?

Several months ago, I proposed to a few AmLaw 50 firms that we try to develop our own version of "Associate Moneyball," looking through firms' data about associates' backgrounds, who left and how soon, who made partner and who went inhouse, etc., to attempt to derive our own portfolio of characteristics that might predict success in BigLaw—assuming that hiring "the top 10% from the top 10 schools" is an exhausted strategy.  What if, just to make up some hypothetical's, we were to discover that taking one or more years to work between college and law school correlated with lower attrition?  What if coming from inherited wealth correlated with the reverse?  Were JD/MBA's a better or worse bet than plain old JD's?  What if moving across the country from one's home town roots [did/didn't] increase a propensity to stay?  What if...  You get the idea.

This may be one of those potential insights that is simultaneously self-evident once you think of it, immensely desirable of pursuit, and impossible to execute in reality.  Among the obstacles we encountered were anti-discrimination issues (you might want to know the answers to questions you're not allowed to ask), and, perhaps more fundamentally, the difficulty of finding a real "counterfactual group" of law students at these top AmLaw firms who did not come from the top of their classes at the very best schools.    Since the firms weren't hiring sub-median students from sub-median schools, the data as to how those people might stack up doesn't exist—and in all likelihood never will.

Project Associate Moneyball, however, remains deeply intriguing to me, and if anyone has suggestions for how to surmount the practical obstacles to doing serious analysis, please let me know.  One possibility is that subtler patterns could be teased out even from the top students/top schools cohort to suggest ways to recruit more intelligently.  One thing we can be confident of is that there's enough money at stake to make it worthwhile.

In the meantime, you can always tell me about yourself.

Update:  9 August

A regular reader, Pete Smith of BCG Attorney Search, writes:

Bruce,

Thanks for the great post.  I admire your access to firms and I applaud your efforts to and creativity in seeking out criteria that will actually make sense in terms of longer-term retention.

I have a couple of further thoughts:

First, I think the use of psychological profiles for associate (and, for that matter, partner) hiring is a great idea and that it will eventually trickle down as a standard (if never ubiquitous). Funny how the legal industry always seems a constant 15 years behind best business practice (and that's probably charitable!).

Second, however, I think that the use of psychological profiles (and, for that matter, the other criteria that you tentatively advise might be indicative) is going only to add to the complexities of recruiter.  By complexity, I simply mean that firms will add these extra criteria to hiring standards.  Although firms will give lip-service to the possibility of making hires to candidates below their usual academic/school standards, this will not happen (at least, not any faster than they would anyway by virtue of other market factors).

Which brings me to my next point.  I don't think firms will ever be able to leave grades and school ranking behind.  This is because, quite simply, grades are a very good indication of future success, as is school ranking.  There are the obvious reasons, of course.  Good grades in law school mean that a candidate has the "soft" qualities to get her/him to prevail in a 'grade-on-the-curve'. Plus, of course, this necessarily meant success on the LSAT ("scientifically proven" to correlate to bar-passage), success in college and high school as well.  These are all educational and social experiences that are distinct from each other.  Thus, to my mind, law school grades are indicative of alot of success--both academic/professional and social/emotional.  At any rate, one must admit, I believe, that grades at least are pretty closely tied to success in the actual skills that are to be involved in practice.  Conversely, other life experiences can be the result of alot of chance (code word for motivations or circumstances that might have little to do with merit, or at least might have to do with too many other criteria to be relevant).

All this, combined with the fact that the world is constantly shrinking, moving towards a single global pool rather than a series of relatively smaller ponds, mean that firms (and, of course, most importantly, clients) will ask for the best, the brightest, and all the rest---all the rest meaning the right psyche profile and emotional IQ. 

It is just going to get harder and harder to recruit and retain.  Firms will have to sprint to keep in place.

Thanks, Pete.

And another regular reader who prefers anonymity writes:

Bruce, that is just a terrific article about "Associate Moneyball" at your blog! I've always been mystified by law firms' inability to shake themselves of the terrible interviewing and hiring habits surrounding new graduates (and I'm not sure the situation is much better with regard to lateral hires either). I used to make a similar sports comparison with amateur drafts -- if professional sports team drafted collegiate players the way law firms hired new law grads, they'd check the player's height, weight, school and stat line and leave it at that. (I've sometimes wondered what a law firm version of the NFL Draft Combine would look like -- maybe with the way social networking is evolving, we'll see a virtual one someday).

I'm a big fan of Moneyball myself, and I've thought about how its lessons might be applied to the law (a tradition-bound industry if ever there was one). One of the insights I took from Moneyball was the benefit of identifying low-demand assets whose attributes produced value well above their cost. Beane succeeded because he was the only GM seeking out high-OBP players like Scott Hatteberg, and leveraged the low demand. What are the low-demand assets in the law today? Who are the undervalued lawyers who can bring as much as or more to the job than more highly-sought-after (and more expensive) practitioners? The most obvious candidates are  women in their 30s and early 40s (especially moms) -- just as, if not more, talented and driven than the other lawyers (younger women, childless older women, and men) whom firms fall over each other to recruit and retain.

If I were starting a law firm today, I'd zero in on the best women lawyers in this age range whose firms have rejected them because these lawyers don't fit the firms' billing structure. I'd supplement them with dad lawyers who are similarly situated, put a full-time day care center on the ground floor, create a flex-time policy that actually delivers flexible time, replace billable hour targets with sophisticated financial and client satisfaction metrics, and preside over what I expect would be a very happy and financially healthy firm.

Although my reader requested anonymity, I can promise to forward the resumes of any of you who would like to make an overture towards working at his hypothetical firm.

Reader feedback, public or private, is one of the most satisfying aspects of "Adam Smith, Esq.," and I gratefully thank all of you who provide it. 

One of the more practical and truly detail-oriented discussions of "How to improve strategic planning" comes now courtesy of McKinsey. 

We start with the inarguable observation that corporate planners sedulously spend half a year or more collecting financial and operation data, making forecasts, and preparing extensive presentations to the CEO and others, only to see the impact be...well, unimpressive.  Indeed, according to a survey of nearly  800 executives, only 45% they were "satisfied" with the strategic planning process, and only 23% said that major strategic decisions were actually made as a result.

Now, with the usual caveats that nothing can guarantee astute strategic decisions will be made nor that execution will be more comprehensive and robust, here are the five key recommendations for enhancing the effectiveness of the process itself.

Focus on the real issues

Law school and "learning to think like a lawyer" are all about issue-spotting, right, so we should excel at this stuff.  True, to a point.  Our occupational hazard in this area is spotting all the issues—most of which have a vanishingly small chance of materializing or making a dime's worth of difference.  So control yourself:  Focus on what really matters.  (Again, this doesn't guarantee you'll come up with a brilliant solution; as McKinsey observes, the music business has tied itself in knots over digital file-sharing for years and still has to come up with an effective adaptation to this new world.)

There are techniques to help.  One approach is for the managing partner or executive committee to ask practice group leaders to envision how particular economic, legal, or business trends might affect their areas, and how to capitalize upon opportunities or minimize threats. 

Another is to identify a handful of priorities for the coming year (3 to 5 is plenty), debate them at a retreat or off-site, and try to align actual behavior for the coming year with achieving those priorities.  A third is to pose a handful of questions tailored to each practice area, give them a few months to ponder them, and then bring everyone together for brainstorming and—it's to be hoped—productive session of how to meet the challenges.

What type of questions?  Well, just for example:

• If you wanted to double your business in X years, what would it take?  More from existing clients, new business from new clients, or a combination?  How would you achieve that?  Precisely?
• What are our competitors doing that we're not?  Who's taking market share from who?
• Is the strategy you're proposing different from that of our competitors?  Why?  Is that good or bad?
• If you were King, what would you do with the firm?  What would be standing in your way?
• How would you monitor execution of this strategy?

Get the right people in the room

Again, this sounds obvious, no?  But recognize that the "right" people doesn't automatically map one-to-one with the most senior people.  Round up those who have management authority, to be sure (if they're not on board, stop right now), but also include others who may be particularly knowledgeable or influential—including those who may not subscribe to the firm's party line. 

More importantly:  If those who are expected to carry out strategy don't have a hand in developing it, you can predict their low-tide level of engagement.

Finally, don't overlook the most obvious requirement of laying the groundwork for an intelligent discussion of strategy:  Give people the facts. 

Some partners may keep themselves apprised of financial performance metrics—assuming they're available to them.  (They are available to them, aren't they?)  But others may not, or may not feel confident knowing what they should focus on.  So, some weeks in advance of the strategy discussion, provide those attending with key operational information and an outline, if it has been developed, of the key strategic issues on the agenda.  Keep it short:  10 pages beat 25, and if you can't frame the issues in 10 pages, go back to the drafting board.

One planning cycle does not fit all

Fiscal year-end, annual strategic reviews?  For everyone, all the time?

• Do things really change that fast in each of your practice groups?  How high-velocity is the practice, after all?  Sure, Sarbanes-Oxley should have mandated an across-the-board review of  all your securities and corporate governance practices, but how often does a Sarbanes-Oxley come down the pike?
• Second, if you're serious about strategic reviews, and you have large ambitions, it's highly improbable you can implement everything you set forth, mid-course corrections and all, in the space of 12 months.  Eighteen to 36 seems more realistic.  So what's the point of annual?  It borders on the hypocritical.
• Third, consider a default time schedule of every three years or so for each practice group.  This tempo allows senior management to devote truly focused and concentrated attention to the team that's "at bat."  Better yet, you can change the strategic review cycle as needed so that when Sarbanes-Oxley comes along you have room in your mental and physical calendars to attend to the group that's suddenly front and center.

Follow Through With Performance Expectations

The McKinsey survey reports that 45% of strategic plans have no component tracking actual execution, and another 25% say there wasn't even an execution plan to begin with. 

This is obviously insanity, and I'll assume you're smart enough not to proceed down this wayward path.

But what type of performance metrics can we actually put in place?  How do we know if "strategy --> execution?"

The short answer is, "It depends on the strategy," but the real answer is you'll know as soon as you think about it.  For example, assume a strategic initiative is to expand your firm's presence in China.   If so,  you can look to both inputs and outputs to see if you're making progress:

• Inputs:  Are you recruiting the right caliber of talent?  Are you reaching out to current and prospective clients to let them know of your enhanced capabilities?  Are you communicating internally about the opportunities and capabilities the firm is now establishing in China?
• Outputs:  Realistically, expect a lag, perhaps a big one, between inputs and outputs, but start measuring right away in any event.  Are you making any money?  Easier:  Are you collecting any revenue?  Easiest yet:  Are clients kicking the tires?

So you get the idea.  But again, strategy divorced from execution is what John Lennon was talking about.  Devoutly to be avoided.

Tie Compensation to Execution on the Plan

Monitoring results is one thing; paying people for results is another.   The McKinsey survey found that barely one-third of firms tied any component of compensation to performance against the strategic plan.   Typically, rewards are correlated with relatively short-term financial metrics, but any strategic plan worth its salt will extend over a period of years at least.  

We know this makes no sense, fundamentally, but how can we get out from under the need to distribute all available profits to partners at the end of each year?

Let me introduce a perhaps novel notion here:  Deferred compensation.

What if a (meaningful) percentage of partner compensation depended on the firm's progress over a period of years towards its defined strategic objectives?   Would people respond intelligently and even powerfully to those incentives?  My confident belief is that they would.

Should we anticipate resistance?  To be sure, from the usual suspects:  "It can't really be measured."  "It's bound to be subjective."  "How can I be responsible for what everyone else does?"  "You picked the wrong targets to begin with [and/or] your targets were unrealistic and un-meetable."  Etc., etc.

But in our hearts and our heads we know better.  We know who's pulling for the team and who's brushing it off, who's enlisted and engaged in the strategic plan and who's off on their own pursuit of personal glory. 

Serious about strategy?  So are we all.  Now the rubber meets the road.