Earlier this month, I wrote a column "about wringing our hands" (its actual title was How High Quality Are Your Lawyers?  And How Can You Tell?) and I've just received a most thoughtful email from Alec Guettel, one of the co-founders of Axiom Legal, which is extensively discussed in the earlier piece. 

I want to share it with you, but first permit me a few observations. 

Essentially, Alec recaps Axiom's experience in measuring the quality of lawyers--at least as perceived by clients--and provides some refreshingly concrete suggestions, based on hard-earned experience, about how to secure meaningful client feedback.  These valuable observations speak for themselves.

But Alec also takes a roundhouse swing at the famous profits per partner "success metric," which he says "continues to amaze and entertain us.  Increasingly, it seems to be the only metric that matters to firms [even though it] is almost perfectly cross-aligned with the clients' interests." 

Is this actually correct? 

Hasn't PPP become, in some ways, everyone's favorite new whipping boy?  Alec argues that PPP can "basically" be increased by raising rates, raising hours billed per attorney, raising leverage, or cutting costs (which, he says, "we have yet to witness in a meaningful way from top firms").  Are those the only, or the "basic," ways to raise PPP? 

More to the point, what's so bad about PPP, anyway?  The poliltically correct gang is warring with the economic gang, and I wonder whose side you come out on.  Whichever side it is, thanks to Alec for lobbing in the question.

Dear Bruce –

Thanks for what you’re doing with "Adam Smith, Esq." – really interesting and really necessary. 

I was pleased to see your recent post on the failure among clients to measure the quality of legal work they are receiving and the failure among law firms to measure client satisfaction.  You could not be more right that this is a. lacking and b. critical to the improved function of the legal services market.

This is a topic we’ve invested a lot of time and energy thinking about at Axiom so, for what it’s worth, I thought I’d share some of our views.  We’d love to help you catalyze a broader discussion in this area.

After trying some less structured approaches with mixed results (read: abject failure), we began to insist at the outset of our relationships with new clients on a highly structured series of feedback sessions at specified points in each engagement.  These meetings are always in person (otherwise they get cancelled) and after some experimenting, we’ve begun to schedule them for only 10-15 minutes.  This has increased our clients’ enthusiasm for the meetings and forced all the parties into having very focused, prepared, surprisingly productive conversations.  In specified meetings during the process, we have a quantitative review where we walk the client through a survey about technical legal skills, business counsel, responsiveness etc.  We don’t send these quantitative questionnaires to the clients – again, because they’d never get around to filling them out – we walk them through the questions and record the answers.

This process yields superb feedback for our individual attorneys and for Axiom as a firm, and provides a relatively objective measure for performance evaluation and compensation of our people.  As a next step, we’re looking at ways to provide transparency to future clients about the performance of individual Axiom attorneys on prior engagements and about the firm as a whole. 

These lines of thinking have also generated a separate internal discussion about the whole notion of “profits per partner” as a success metric.  The level of importance and pride assigned to the P3 metric by traditional law firms continues to amaze and entertain us.  Increasingly, it seems to be the only metric that matters to firms - a very  public, highly scrutinized measure of success of firm management and overall status.  Even where individual partners care about more than the size of their paycheck, they have to manage toward that number because it’s become shorthand for the quality of the firm.

The problem, of course, is that P3 is almost perfectly cross-aligned with the clients’ interests.

There are four basic ways to increase profits per partner. Three of them put the firm in direct conflict with their clients’ goals and the fourth has been neglected:

• Firms can increase rates, which we have seen plenty of in recent years and is self-evidently a negative for clients.
• Firms can increase hours billed per person, which is bad for associates and bad for clients as they result in lawyers who are unhappy, overworked and moving between firms at an alarming rate.
• Firms can increase their leverage (number of associates per partner). This is destructive in countless ways, including deterioration of work quality and the quality of life of the partners themselves, which exacerbates rising attrition among associates (who wants to be a partner these days?).
• The fourth solution is to cut costs, which is a solution we have yet to witness in a meaningful way from top firms. In fact, costs have increased as lawyer salaries have escalated. Ironically, this is the only one of the four approaches that is, on balance, good for clients.

 

In contrast to profits per partner, we’ve been developing an alternative metric based on the percentage of the client’s overall legal spend that Axiom constitutes year-over-year.  This provides client-favorable motivation in both the numerator and the denominator.  In the numerator, we are motivated to win “market share” within existing clients.  In our view, this is the most reliable expression of a client’s level of satisfaction (though we also ask them to rate us, as outlined above).  In the denominator, we are motivated to reduce our clients’ overall legal spend, which has resulted in our doing free consulting on best practices and recommending a range of solutions that have nothing to do with Axiom.   (Note: one could argue that the numerator provides an incentive for us to raise rates, but we think that’s outweighed by the primary focus on winning “market share” within the client.)

Finally, I wanted to draw readers’ attention to the comments you quoted from Jeff Carr, GC of EMC.  The system he reports combining performance feedback and performance compensation is in our view close to ideal.  We’ve proposed a similar approach to a few clients but have never succeeded in getting a performance compensation system adopted.  Carr’s comments are inspiration to try again, and I encourage other legal service providers to do the same.

We all appreciate the work you’re doing to highlight this issue via your publication and look forward to continuing the discussion. Thanks for being a catalyst for these conversations!

Best regards,
Alec
_____________________________
axiom
law redefined

alec guettel
23 austin friars
london EC2N 2QP UK

What sinister environment is being described here?  The accounting department at Enron?  A major firm in the midst of a humiliating e-discovery meltdown?  People at the heart of the UBS tax fraud/evasion probe?

None of the above:  The answer is summer associate programs at AmLaw firms.

We are graced with this insight today courtesy of The National Law Journal. 

The bill of particulars?

• "Everything is free. The atmosphere is higher class than anything we are used to, and the pressure to attend every event, including the after-parties, is significant." 
  • This from an unnamed summer associate at an unnamed firm—suffering mightily from the expectation to attend high class events.
• "Summer associates report an atmosphere that seems to condone inappropriate comments and sexual overtures. Consider, for example, the married partner with children who was overheard at one event asking a young woman what her dating age range was." 
  • I would submit that whatever "her dating age range" is, the partner has demonstrated he's far too juvenile to fall into it.
• "Law firms further contribute to the problem by sending inconsistent messages."
  • And this would be a first in the American workplace?

Altogether predictably, the advice for remedying this is the nanny state's first line of defense:  "Zero tolerance." 

"One suggestion is to develop clear rules for personal conduct and communicate them not only to the summers but to associates and partners, making it clear that everyone will be held accountable for a zero-tolerance policy. Zero tolerance needs a safe haven for communicating concern and the assignment of more than one person to whom a summer associate can confide."

Finally, we are advised that "Law firms could derive a significant competitive advantage by transferring the enormous resources from late-night parties to programs providing creative training and mentoring."

Where to begin?

Could we revisit the balance between investing in associate recruiting and investing in associate mentoring?  I know firms are doing that constantly.  Frankly, they're complementary, not conflicting.  But that's merely a numbers game, and the tenor of the article has nothing to do with numbers.

Actually, this reminds me of nothing so much as the history of instituting risk management and loss prevention programs at firms.  Back in the dark days, when every partner was a cowboy, conflicts checks were cursory, work went loosely supervised, "best practices" was a phrase the future would invent, and, not surprisingly, claims against firms occurred with some predicctable frequency.  Think of it as the equivalent of the open bar summer associate parties, only grafted into the mindset of the 1950's and 1960's.

In the next phase of loss prevention, firms embarked on serious-minded, admirable, and largely effective efforts to institute policies and procedures.  Conflicts checks were institutionalized, new matter opening procedures got teeth, work was formally reviewed.  Now entrants to the bar are at least being carded and reminded not to proposition anyone (be they opposite or same sex, and emotionally older or younger).  But of course, human nature being what it is, not all misbehavior disappears.  And firms still buy E&O insurance.

Which roughly takes us to today:  Policies and procedures are great, and yes, I imagine most firms would say they enforce them with "zero tolerance"—certainly for egregious, intentional, or repeated violations, if not for inadvertent, trivial, and sincerely regretted infractions.

But one more ingredient is still missing, and it's the ineffable one that cannot be instilled no matter how many all-hands emails go out and no matter how many trainers are brought in to conduct "risk management awareness" sessions.

The ingredient is a combination of emotional maturity and culture:  The potent combination of knowing in your heart of hearts that "that's not the way things are done around here" and the wisdom and perspective to follow through on those core values in moments of darkest and deepest temptation. 

So, no, it's not about the "zero tolerance" police, whose guiding assumption is that people are children whose knuckles need to be regularly rapped.  It's not about workshops and HR guidelines, and it's not about "a safe haven for communicating concern."  It's about knowing you're in an adult environment, believing you have earned the right to be there and belong there, and living up to the implicit promise you have made to your colleagues and to your firm (and to yourself).

Update (24 July 2008).  A regular reader writes:

Hubba, hubba, Bruce! 

I won't comment on the apparent horrors that young adults who graduated from college a year or two ago are encountering when forced to participate in many high-level social events in the presence of alcoholic beverages.  What a shocker that must be. 

But I am clear about one thing:  Being asked your dating age range is simply a question that may or may not deserve an answer. 

Fielding such a question may even feel awkward or difficult and could require finesse.  But that's life -- sometimes awkward or difficult and sometimes eased with a little charm. 

Speaking just for myself, I long for a sense of balance and a little grace and humor, now gone, in these conversations and recall with nostalgia the sign that once hung on the back of my office door in the early 1990s:  "Sexual harassment will not be tolerated here.  But it will be graded." 

Ann Lee Gibson
www.annleegibson.com

As facetious as the sign on the back of the door was meant to be, doesn't it express a core human truth?  There are pitches and there are come-on's, in life and in business, and then there are pitches and come-on's.  Adults can tell the difference, even if the nanny police cannot.

I recently had the chance to sit down with Jay Zimmerman, Chairman of Bingham, to discuss the changes he's seen over his career, and to talk about the future of the legal industry and Bingham. Herewith a synopsis.

Jay (Harvard, Harvard Law) started his career in New York at Debevoise, but within a couple of years moved to Boston and joined what was then Bingham, Dana, and Gould. Making partner in 1986, he relocated with his family the following year to London to manage what was just about then the tiniest office imaginable for Bingham--one partner and one associate--and ended up staying seven years. (Since Jay’s transatlantic stint, the London office has grown to 45 lawyers, focused on financial restructuring and financial regulatory practices.) Enjoying the quintessential ex-pat experience, Jay got to the point where he never expected to return. But of course he did, to lasting effect.

"Are you sorry in any way that you left London? Obviously there's a school of thought that London has or will overtake New York as a financial capital."

"Well, I wouldn't write New York's obituary quite yet!" Nor, he volunteers, would he worry about the "New York elite" firms who haven't yet invaded London to a material degree. They have the resources and the will to do so when they see fit, he opines. "It's a problem lots of firms would like to have."

The firm he returned to relied on Bank of Boston (founded in 1784) for fully one-third of its business, and the comfortable relationship engendered complacency (my reading, although Jay would probably be more politic). Sure enough, in the recession of the early 1990's the Bank was challenged: Its share price hit a low of $3. In 1996 (we now know) it was to merge with BayBanks, then to be acquired in short order by Fleet (1999) and finally by Bank of America (2005).

Although Jay and his partners had no inkling of that subsequent history, it was clear that with such extraordinary over-reliance on one key client, and with essentially all of its 200 lawyers based in Boston, Bingham had what was not exactly a business model for durability in a world of change.

In 1994, Jay was elected Chairman and embarked on nothing less than a concerted transformation of Bingham, with no fewer than nine mergers since 1997, and the following results:

Increasing the number of offices from one with three small satellites to 13, across the globe;

• Quadrupling its size and then some to nearly 1,000 lawyers;
• Growing revenue eight-fold; and
• Increasing revenue per lawyer from about a third of a million dollars per year to nearly $1-million.

Last year was Bingham’s best on the financial front. As for 2008, Jay reports that the firm is experiencing an even stronger first half compared to last.

How did Jay do this? As he observed drily, "fear is a great motivator."

Other firms have tried to move from a metropolitan or regional base to a national and even international platform, with varying degrees of success. How has Bingham done it?

"Well, for starters, Boston was, second to New York, perhaps the most sophisticated and highest-rate legal market in the domestic US. If you want to try to build a global firm, it helps to begin in what's a relatively high-end home market.

"LA has produced some absolutely terrific firms, Latham, Gibson Dunn, etc., but when you think about it the LA market itself is an uncommon place for very high-end law firms to come from: It's not a powerful financial capital, it doesn't have a lot of Fortune 500 headquarters, and its industries are widely dispersed. But then again, when you look at where other nationally prominent firms have come from (the Midwest, for example, and I say that as a St. Louis native), Boston wasn't the worst place to start."

It's clear to me, I observe, that Jay personally has been a large part of the driving force behind Bingham's decade of expansion. "How do you deal with the challenge of leading notoriously autonomous and independent-minded lawyers? Obviously this is a challenge for any managing partner or Chairman, but when you embark on a course of, essentially, transformation of the firm—not a 'steady as she goes' strategy—you've really upped the ante."

"It's probably a cliché, but it's communicate, communicate, communicate. I'm constantly traveling—in fact I just got back from London and Tokyo—and I meet and talk with as many partners, associates, and staff as I possibly can. I do videotapes. [There's a nice sampling on the firm's website—Bruce] In fact I just did a videotape for the summer associates, who are just starting. But there's no question it's a challenge. You need to be out in front of your partners, but not too far out in front."

And the message is?

"The message is two-fold:

"Number one, this firm is ambitious, and our lawyers need to be ambitious. They need to understand that. When I talk to people we're thinking of recruiting, I try to get a sense of their level of ambition. People want to fit in, and we as a firm want them to fit in. So ambition is part of what we're all about.

"Number two, we love change. You don't hear that often from a law firm, but the fact is that the status quo is good for incumbents, and we're not an incumbent. In change we have opportunity; in stasis we don't. So people here need to be prepared to embrace change."

I observe that law firms can be fragile institutions. Is that something he worries about?

"Of course. We're all here voluntarily. And when you're in the business of assembling a bunch of highly talented people, one of the consequences is that those people have options. The only reason they come back up in the elevator in the morning is because you've presented them with, and continue to present them with, an attractive career proposition. But yes, I pay a huge amount of attention to that. It goes back to communication, and to having people here who fit in and want to fit in."

Is "work-life balance" part of that equation? Part of the task of retaining talent? And how different is "Gen Y?"

"Well, they're really hugely different. The original IBM PC was introduced in 1981 and our new associates were born after that. They've grown up digital; it's not news. But I don't think the term ‘work-life balance’ is helpful, descriptive, or informative. If you're going to make it here, you need to be committed. What has changed is that commitment takes a different form. When I started at Debevoise, it was all about 'face time.' You needed to be seen in your office at 7 or 8 or 10 pm, and the same on Saturday mornings. But today of course you can work from pretty much anywhere—so long as you do the work.

"But again, the commitment hasn't changed. Look at young investment bankers starting out. They get told, 'Look, you're going to make a lot of money, but you need to be on call 24/7. We're not going to need you 24/7, but you need to be on call.' For our associates, what I tell them is that it's all about realism. If they're realistic about the commitment this profession demands—as well as the rewards, intellectual, professional, and otherwise, that it can provide—then they'll be fine. If they're not realistic, they're in for a rude awakening."

I ask if he's familiar with the industry structure I call the "hollow middle," where consumers gravitate toward either the high-end, high-quality providers, or the mass market, value providers, but not in meaningful numbers to any middle-market providers. This industry structure is remarkably common and seems to be stable—an "equilibrium," as economists would put it. For example (think about whether these don't represent your own buying patterns):

• Apparel (you want Armani or Gap)
• Cars (BMW, Lexus, Mercedes, or Toyota and Honda)
• Alcoholic beverages: Beer, wine, and liquor (fill in the blank)
• Groceries (Roquefort or a dozen eggs)
• Financial services (free checking for life or Bessemer Trust)
• Etc.

Jay thinks it may hold lessons for the legal industry. And we know where he wants Bingham to be.

I realize that I don’t have a firm grasp on Bingham’s international strategy, so I pose the question bluntly: “Tell me what it is.”

Jay says he likes to use the phrase “global relevance.” By that he means Bingham attempts to offer a practice focused on one of their core strengths, which is global restructuring and financial regulatory work. They strive to offer this in London, in Tokyo, and increasingly in Hong Kong. “There are a lot of opportunities out there which are very real—they’re just not opportunities for us.” In other words, Bingham doesn’t need to have a dozen offices across the EU, or any offices in mainland China until the financial systems there mature a bit more.

“What makes this strategy work for you?”

“Well, first of all, there are spinoff benefits to other practice areas, including litigation, corporate, and finance work itself. But secondly, we’re benefitting—as we have in other areas—from changes and even relative turmoil in the markets. I’ll give you an example. Ten years ago in London everything having to do with restructuring distressed companies or distressed assets primarily involved banks: They had extended the credit, their covenants that were being violated, and they were in the driver’s seat. Since we didn’t have old-line relationships with those banks, we didn’t have the connections necessary to attract that kind of work.
“But today lenders are all over the lot: They’re hedge funds, maybe private equity, other sources of capital, and bondholders are no longer passive—they’re aggressive. This gives us many points of entry, and they’re not all the traditional institutional players. As I’ve said before, it’s a different world, and that creates opportunity for us.”

And what of the future?

“We believe that as globalization accelerates and the world becomes a more complex place, there will be increasing demand—both in absolute terms and across geographical regions—for sophisticated restructuring capabilities, again, with all the financial regulatory authority interfacing that goes with it. We don’t think this practice focus is at any risk of obsolescence.”

Regular readers will know that one of the “evergreen” topics here at "Adam Smith, Esq." is what can possibly explain the fact that for the past 30 years essentially 50% of law school graduates have been women and for almost the same period of time only about 15% of BigLaw partners have been women. Neither number is budging. Why, I ask Jay, is this?

“As a father of two grown daughters, I think about this often, so I’d like to take some time to share my thoughts on this. The unfortunate reality of today is that you can’t defy gravity, but I am optimistic things will change.   By ‘you can’t defy gravity’ I mean that graduates of our elite law schools, for the most part, marry people with equally promising career prospects. So you have all these couples composed of a pair of high-achieving people starting off.

"When it comes time to have a family, it often makes economic sense—putting aside any emotional issues—for one spouse -- and it is usually the woman -- to focus on raising the kids. If you assume that many of these couples are in a position to live on one income, it’s probably not so surprising what we see happening in the workplace.

"This scenario is not unique to law firms. We need to do a better job as a society to ensure that there are equal opportunities for women to pursue their career ambitions -- and not be automatically placed in a position of choosing between starting a family or building a successful career. Ultimately what we can do, and I do believe that we do this at Bingham, is to provide the opportunity for all our lawyers -- men and women -- to succeed.

"For women, we encourage flex- and part-time schedules. It is not uncommon for us to elect women partners who are or have been part-time. We provide an environment where women are encouraged and are given every opportunity to succeed. Our efforts have not gone unnoticed internally as well as externally. We’re consistently noted for our positive and supportive work environment by FORTUNE in its ‘100 Best Places to Work For’ issue (for five straight years), and by Working Mother and several regional publications where we have offices."

As we're preparing to adjourn, Jay recommends to me a Harvard Business Review article that has been influential in his thinking, "Strategy as Active Waiting" [only available for a fee, but I've bought it and look for a column about it here soon]. The concept is essentially:

• Keep your priorities clear, but your roadmap fuzzy;
• Test the future; examine your assumptions; keep an eye on the horizon;
• While you're watching, keep the pressure on your day to day competitiveness; don't let up; and
• When you see an opportunity opening up, focus on it with urgency.

As I’m about to get up, Jay asks abruptly if I think leaders can be made.

“No, I don’t,” I say. “You can ‘make’ managers, and you can expose people with leadership potential to career-broadening environments (say, sending them to Hong Kong for 3 years), but no, I don’t believe you can ‘make’ a leader out of whole cloth.”
“I agree; nope, you can’t.” (I’m relieved to have provided the right answer.)

There's little doubt Jay has managed Bingham with urgency and focus. The challenge—scarcely unique to Bingham—is now maintaining their strategic focus as they expand internationally. And besting the hollow middle.

My friend Prof. Bill Henderson of Indiana University School of Law has just published a highly significant column titled "How the 'Cravath System' Created the Bi-Modal Distribution." At least one blog ("MoneyLaw") has already deemed it "The blog post of the year;" be that as it may, it's worthy of the attention of any serious student of our profession.

The "bi-modal distribution" Bill discusses is that of salaries of starting lawyers, which for the Class of 2006 looks like this (all diagrams courtesy of Bill):

This is unlike any normal labor market salary distribution I've ever seen. Yes, to be sure, there are the "winner take all" labor (read: talent) marketplaces in industries such as professional sports, celebrity entertainment, and CEO compensation, but those are sui generis for reasons we all understand. What I mean is this is unlike any normal labor market involving tens of thousands of people and not just a handful of superstars.

Even more intriguingly, this is a recent development. Things were not always thus. Here are the graphs for 1991, 1996, and 2000 (the Internet boom, you will fondly recall):

How does Bill explain this? Here's the heart of his theory:

"What are the market forces that have created this peculiar salary structure? In my working paper, "Are We Selling Results or Résumés?: The Underexplored Linkage Between Human Resource Systems and Firm-Specific Capital," I posit that the runaway $160K mode is a confluence of two factors: (1) the continued growth in the corporate legal services market, primarily due to the growing scale and scope of transnational corporate activity; and (2) law firms' nearly universal adherence to the "Cravath system," which purports to hire the best graduates from the best law schools and provide them with the best training."

To understand Bill's thinking there is of course no substitute for reading the primary text, but I'll outline it for you briefly:

• 30, 40, and 50 years ago, firms that were the predecessors of today's AmLaw 100 hewed to the totemic "Cravath system" in ways unimaginable today. For example, a researcher found that in the early 1960's 73% of the lawyers in "law firms" (not solo practice) in Detroit came from Harvard, Yale, Columbia, Chicago, and Michigan law schools.
• The expectation/need of paying top "going rate" salaries to recruit people of that caliber became ingrained in law firm practice and behavior and partner expectations (or, as Bill puts it, "partners remained psychologically wedded to their own perceptions of eliteness."
• This model is becoming increasingly unsustainable.

I have my own take on Bill's fascinating data, which I first posited well over a year ago: The bimodal distribution of starting lawyer salaries is not, economically speaking, an equilibrium condition. It will change.

The last great associate salary spike, from $125Kto $160K, took place roughly 18 months ago when times were flush. Even then, some firms began panting at the effort to keep up. (Recall that the instigator of that spike was Simpson Thacher, which didn't have to raise its resting pulse to manage the spike.)

The next spike—I won't predict when it will be but I will predict it will be to $200K—will leave a lot of firms crying "Uncle." They will stop struggling to keep up with the receding red lights moving on down the highway. And it will be economically rational, geographically defensible, and culturally unifying.

Does it strike you (as it does me) that the noise level surrounding "innovation" in law firms is reaching crescendo proportions? Just in the last few months, I've written about Legal OnRamp, Allen & Overy's mini-conference on innovation here in New York, Eversheds' 21st Century Law Firm survey, Altman Weil's Legal Transformation Study, different ways of measuring lawyers' quality, the FT's expanding its "Innovative Law Firms" awards to the US next year, whether GC's really want change, how J+J innovates, NovusLaw, Axiom Legal, the potential impact of the Legal Services Act in the UK, etc., etc. It's enough to make one's head hurt--or to make you cry "uncle" and decide to stick with the tried and true model of business as usual unless and until the roof falls in.

Tempting, indeed.

But part of the genius of capitalism is that standing still means losing ground. So if "innovation" is here to stay, perhaps it's time to take a page from a firm that's almost by definition a genius at innovation: Pixar.

Our good friends at McKinsey provide the helpful background in "Innovation Lessons from Pixar Director Brad Bird."

Let's start with where innovation comes from: Unexpected places (they cite the Wright Brothers, "bicycle mechanics," as the fathers of heavier-than-air flight, and the muscle-bound Pentagon as the inventor of the Internet). Bird, whose name may not be household, has won Academy Awards for best animated feature for The Incredibles and Ratatouille. What are some of the ingredients of "innovation," as he sees it?

"Bird discussed the importance, in his work, of pushing teams beyond their comfort zones, encouraging dissent, and building morale. He also explained the value of “black sheep”—restless contributors with unconventional ideas. Although stimulating the creativity of animators might seem very different from developing new product ideas or technology breakthroughs, Bird’s anecdotes should stir the imagination of innovation-minded executives in any industry."

An initial insight of Bird's is the peril of complacency. When he arrived at Pixar, they had recently released three animation blockbusters: Toy Story, A Bug's Life, and Toy Story 2. And Steve Jobs said "the only thing we're afraid of is complacency." Given a mandate to change things, Bird proposed what was to become The Incredibles. Bear with the slightly technical background to get to the organizational point:

"The Incredibles was everything that computer-generated animation had trouble doing. It had human characters, it had hair, it had water, it had fire, it had a massive number of sets. The creative heads were excited about the idea of the film, but once I showed story reels of exactly what I wanted, the technical teams turned white. They took one look and thought, “This will take ten years and cost $500 million. How are we possibly going to do this?”

"So I said, “Give us the black sheep. I want artists who are frustrated. I want the ones who have another way of doing things that nobody’s listening to. Give us all the guys who are probably headed out the door.” A lot of them were malcontents because they saw different ways of doing things, but there was little opportunity to try them, since the established way was working very, very well.

"We gave the black sheep a chance to prove their theories, and we changed the way a number of things are done here. For less money per minute than was spent on the previous film, Finding Nemo, we did a movie that had three times the number of sets and had everything that was hard to do. All this because the heads of Pixar gave us leave to try crazy ideas."

Around this time you're doubtless thinking, "Black sheep? Crazy ideas? Guys headed out the door? Hand the car keys to them?"

Bear with me.

One of Bird's key insights is that innovation can result from not having to hold every single aspect of every single project to the same (unattainable) degree of superbness. It's unattainable, you understand, on the assumption that you want to get the project out the door before it's overtaken by events. Here's how Bird puts it in Animation Land:

"There are purists in computer graphics who are brilliant but don’t have the urgency about budgets and scheduling that responsible filmmakers do. [...] I’d say, “Look, I don’t have to do the water through a computer simulation program. If we can’t get a program to work, I’m perfectly content to film a splash in a swimming pool and just composite the water in.” This absolutely horrified them. Or I’d say, “You can build a flying saucer, or you can take a pie plate and fling it across the screen. If the audience only sees the pie plate very briefly and you throw it just right, they will buy it as a flying saucer.”

"I never did film the pool splash or throw the pie plate, but talking this way helped everyone understand that we didn’t have to make something that would work from every angle. Not all shots are created equal. Certain shots need to be perfect, others need to be very good, and there are some that only need to be good enough to not break the spell."

Admit it: Isn't it true that "not all shots are created equal" and that not all aspects of a deal's documentation are created equal? What if "good enough to not break the spell" were deemed an appropriate quality level for some types of documentation?

But let's pursue innovation a bit more deeply. Where, again, should you look for it? Let's back away from the notion that it's the crazy people and explore what Bird is really saying:

"Q: Do angry people—malcontents, in your words—make for better innovation? Can you be innovative and also happy?

"A: I would say that involved people make for better innovation. Passionate involvement can make you happy, sometimes, and miserable other times. You want people to be involved and engaged. Involved people can be quiet, loud, or anything in-between—what they have in common is a restless, probing nature: “I want to get to the problem. There’s something I want to do.” If you had thermal glasses, you could see heat coming off them."

And of course there's another angle to motivation and involvement, which is morale. To paraphrase the bumper sticker about education, if you think building morale is expensive, try the cost of dispirited professionals:

"In my experience, the thing that has the most significant impact on a movie’s budget—but never shows up in a budget—is morale. If you have low morale, for every $1 you spend, you get about 25 cents of value. If you have high morale, for every $1 you spend, you get about $3 of value. Companies should pay much more attention to morale."

How do you help make all this happen?

I'm not a fan of architecture as a cure-all (which runs the risk of letting management think the space will do their work for them), but there is surely something to be said for throwing people into situations where they're likely to run into colleagues they wouldn't ordinarily encounter. You may draw the line at the bathrooms, and the atrium isn't feasible in Class A Capital Markets office space, but consider what you could learn from this:

"Then there’s our building. Steve Jobs basically designed this building. In the center, he created this big atrium area, which seems initially like a waste of space. The reason he did it was that everybody goes off and works in their individual areas. People who work on software code are here, people who animate are there, and people who do designs are over there. Steve put the mailboxes, the meetings rooms, the cafeteria, and, most insidiously and brilliantly, the bathrooms in the center—which initially drove us crazy—so that you run into everybody during the course of a day. He realized that when people run into each other, when they make eye contact, things happen. So he made it impossible for you not to run into the rest of the company."

Do your litigators run into your transactional people? Do your M&A people run into your project finance people? For heaven's sake,do paralegals run into partners?

All is not necessarily rosy on the innovation campaign front, of course: You can have innovation destroyers, starting with passive-aggressive people "who don't show their colors in the group but then get behind the scenes and peck away; they're poisonous."

Most importantly, the greatest innovators are the perpetual students, the people for whom curiosity is a disease, who can never be satisfied simply by duplicating what they did last time around. Bird talks about meeting some of the legendary Disney animators when he was a teenager:

"I met a lot of the great old master animators. Their worst animation was 1,000 times better than this new director’s best, yet they would get to the end of a film and say, “I just started to feel like I was understanding the character, and I want to go back and do the whole thing over. Can’t wait for next time!” They were masters of the form, but they had the attitude of a student. This guy taking over the studio had only done a few pieces of pretty good animation, and he was totally satisfied. Could not have been less inspiring."

So the question for your firm might be: Are your lawyers inspired to perpetually learn? Do they wish they could go back and do the deal again, litigate the case again, knowing what they know now? Are they passionate about applying what they've learned to the next client and the next engagement? Are they, essentially, never satisfied?

If so, you're on the road to having an innovative firm.

I've been increasingly mystified, now bordering on troubled, by a new case of "the dog that didn't bark."  Here's my question:  Given that we've been slogging through this subprime/Alt-A/Bear Stearns/Freddie & Fannie financial quicksand for a solid year, where is all the restructuring and insolvency work?

Just a few days ago The Times (UK)  reported:

"The huge increase in the number of empty retail premises in central Southampton dominated the regional television news on the South Coast on Monday. The next morning a headline in The Times business pages cautioned: “Disastrous reports now pour in from every sector.”

"In other words, the parlous state of the economy is now top of everyone's agenda. So that is the bad news but, by the same token, are the good times starting to roll once again for the insolvency and corporate recovery lawyers around the City?

"Strangely enough the answer is “no”. A straw poll of a cross-section of City law firms with strong insolvency practices produced a remarkably consistent result. “It's extraordinarily quiet - it's actually rather spooky. We seem to be in a strange twilight zone,” Stephen Gale, head of corporate recovery at Herbert Smith, said."

Likewise, The American Lawyer reported a few days ago:

"Since the economic downturn hit about a year ago, lawyers lamenting the decline in deal-making have been waiting for an expected spike in bankruptcy work. So far, they've been mostly disappointed."

(To be sure, the piece goes on to notice signs of "hope"—using that term advisedly—in the restructuring pipeline at Weil Gotshal.)

But this doesn't answer the fundamental question:  With so many economic indicators down, and the supply of the water of economic life, credit, essentially shut down since last fall, why no more firm failures? 

My theory:  We're in the land of the walking dead.

And only the unprecedented lending and financing practices of the most recent period have enabled these zombie companies to forestall their imminent demise.    I don't believe creditors are being more "humane," forbearing, or patient than in past downturns, and I don't believe debtors are being more creative, quick on the trigger, or resourceful in conserving cash and staving off the day of reckoning than before.

I believe that the prevalence of "covenant light" deals is having this unintended consequence:  With fewer covenants, fewer firms are in violation.  Some will be in violation later, and some will only surrender when they flat run out of cash.

For an inside look at the latter situation, consider the bizarro case of Steve & Barry's, as recounted in the WSJ "based on interviews with current and former employees, including senior executives."  (As a privately held company, Steve & Barry's is required to disclose very little, and the more temperate Journal uses the term "most unusual blowup" as opposed to "bizarro.")

Start with the dog not barking:  "The 276-store chain [was] regarded just weeks ago as one of America's fastest-growing retailers."  In other words, very little warning.

Next, let's review the financial engineering Steve & Barry's performed on itself.   To understand the dynamics of this particular Erector Set, a brief excursion into the sui generis economics of retail malls is required.  In Mall Land, anchor tenants such as major department stores—or Steve & Barry's—are viewed as the marquee names that attract shoppers and traffic and feed all the little stores.  Indeed, non-anchor tenants typically receive a meaningful discount in their rent if an anchor spot becomes vacant. 

Conversely, given the parlous state of the department store industry, companies that can fill an anchor spot are in an exceedingly strong bargaining position.  According to Frank Natanek, President of Cullinan Properties, Ltd., a large mall owner:

"Because Steve & Barry's was often the only retailer willing to occupy large, vacant stores, it didn't often budge on its demands. "They go into a market and say, 'This is what we're going to pay...There's not a lot of negotiation.""

And what Steve & Barry's negotiated for were multimillion-dollar upfront tenant "allowances" paid by mall owners for—so the kabuki dance had it—improvements to the leasehold.  Here are the numbers:

"For the 2003 fiscal year, which ended Jan. 31, 2004, when Steve & Barry's had 31 stores, tenant-improvement payments totaled $17.5 million, according to documents reviewed by The Wall Street Journal. The payments jumped to $58.6 million the next year, the documents say. The peak came in the 2006 fiscal year, when the company received $122.3 million in payments, but spent only about $59 million to build out new stores, leaving about $63 million in unused cash, the documents indicate. From fiscal years 2004 to 2007, the company received $380 million of payments."

Can we now see the freight train coming at us down this tunnel?

As mall owners began having their own problems, they encountered more and more difficulty in making, and honoring, promises to Steve & Barry's for upfront improvement allowances—which, as we've seen, Steve & Barry's was not using exclusively for improvements, but largely to dress up cash-flow.  And as the pace of new store openings at Steve & Barry's slowed, two nasty realities intersected:  Inventory purchased in anticipation of new store openings sat warehoused and unsold, and the cash infusions typically generated by new store openings slowed. 

What evidently happened last week was simple:  Cash run through, lights out.

Interestingly, in what seems a tossed-off aside, the article notes casually that "Earlier this year, the company defaulted on its $200 million credit facility with its main lender, the commercial-lending unit of General Electric Co."  But that is the sum and substance of any allusion to defaults or covenants.

Is this, then, the "new normal?"  Does it take flat running out of cash to trigger restructuring and insolvency?

If so, we probably won't have to wait too much longer for the bankruptcy pipeline to begin to fill.  Which will be good news for firms with these practices—or with underutilized M&A lawyers who can be retooled into restructuring practitioners.   And lest we forget, the sooner we can lance these boils, the sooner the economy itself can regain its footing.

Here's an addendum to the coverage I gave to Eversheds' Report on The Law Firm of the 21st Century, as well as to the story I published last month on the conference held here in New York sponsored by Eversheds.  This email came in over the weekend from RSG Consulting. 

If you're not familiar with RSG, you're almost surely familiar with their work.  Perhaps their most high-profile work is as research partner (now for the third year) to the FT's annual "Innovative Lawyers Report." Next year they will be expanding the report to benchmark US firms. 

Dear Bruce,

As the research consultancy, which designed and conducted the 100 interviews for the 21st Century Eversheds report, we wanted to add our thoughts, if we may.

The most interesting revelation emerging from our research is the gap between client expectations and law firms’ performance. A general counsel at a FTSE250 company said, “Law firms at the moment get the benefit of clients not taking a standardized approach to tackling issues. There aren’t many other areas that have escaped so miraculously from significant re-engineering. GCs only have themselves to blame. There has not been a consistent call anywhere for the legal profession to rethink the provision of services to business. It’s a medieval guild. “

That’s a powerful client who knows the symptoms and has produced a diagnosis for what might be called ‘Big Law Malaise’. The general counsel of a Fortune 100 company felt that the lack of forward thinking amongst big law firms would soon end: “At what point in history was the horse and trap most successful? About the time Henry Ford released Model T.“

Is the stage set for radical change? Not even the impending recession will really affect the prosperity of the biggest firms or alter their behaviour. But we do see evidence from another research project we designed, the Financial Times Innovative Lawyers Report, that law firms are gradually re-engineering themselves.

Last year, the UK’s top ten firms earned combined revenues of 6.3billion. Some of this revenue was ploughed back, in the case of Allen & Overy, into an innovation panel with a two million pound budget. Innovations submitted from other firms ranged from non-lawyer project managers to partnerships with third parties to both enhance their client service offering and their roles as responsible businesses.

This year, the innovations are more client-focused and consciously add value. Some are even positively imaginative!

Big law firms are broad churches; they are homes to both great experts and commoditisers. Some high priests pursue the new in legal expertise as if their livelihoods depend on it (they often do) whilst triumphantly resisting any other form of change. Meanwhile, those in the next office devote considerable intellectual and financial capital to the next generation of IT-based systems that will deliver tomorrow’s legal advice quicker and more efficiently.

In other words, great change and great stasis can co-exist – as they have done in the history of many a service industry. But law firms who understand themselves and who are willing to adapt to changing business conditions will close that gap between them and their clients.

Congratulations on a fascinating e-resource,

RSG Consulting

My take on this?

His core observation that large law firms are "broad churches" with room for many approaches to client service is surely correct.   The truly high end, "bespoke" client matters will always go to the Magic Circle, the New York elite, and their equivalents (Latham, etc.), and that is a tried and true model that has worked for a century or more. 

The challenge will, as always, be on the more routine, "commodity" type work.   Specifically, it will be whether those firms—or others, perhaps, that specialize on doing little else—will be able to design and deliver compelling value through the innovative use of IT combined with creative fee arrangements.  People have a tendency to look down on this work and this segment of the market as second tier, ever so slightly "slumming," and not where the excitement and challenge are.

I beg to differ.

If anything, figuring out how to profitably deliver these more routinized—but essential—legal services to the FTSE 100 and the Fortune 500 is the territory that's uncharted.  Marty Lipton presenting a seven-figure bill "for professional services rendered" is at this point an old game that everyone understands.  Few if any people really understand the new market.  Which means mistakes will be made and experiments will fail.  That's what experiments are for, you know; just don't run the failed experiment a second time.  Here, and not in the "premium, price-insensitive, high-end work," is where innovation in new business models will occur.

Richard Turnor, a partner in the Private Client Group at Allen & Overy, has penned for Managing Partner Magazine one of the more thoughtful pieces on the implications of the Legal Services Act in the UK.   In particular, he asks the same question I've been asking for some time: 

"After ‘Big Bang’, many, if not most, of the historic financial institutions in the City of London disappeared – replaced by the global giants that feature so prominently in today’s reports of turmoil in the financial markets. Will the Legal Services Act have a similar effect on the law firms of today?"

He begins by reviewing the reasons sophisticated firms might welcome outside investment—embracing the so-called "Alternative Business Structure" model—which include:

• Building their brand;
• Upgrading IT systems and infrastructure in order to compete more cost-effectively in existing markets;
• Financing the development of "know-how" (knowledge management to Yanks) systems and precedent banks;
• Covering investments in penetrating new markets, presumably either practice areas or geographies;
• Using the newly-created market for equity in the firm itself to incentivize non-lawyers in senior positions at the firm, or to buy out underperforming partners, or simply to let current partners monetize a portion of the discounted present value of their anticipated earnings stream.

Usefully, he provides a recap of the regulatory hurdles outside England and Wales.  They are numerous:

• At the moment, Australia is the only other jurisdiction that permits "ABS"'s.
• Scotland is beginning to consider amending its rules to conform them to those in England and Wales, "so as to enjoy a level playing field," but that process is far from complete.
• Spain permits up to 25% non-lawyer ownership since 2006.
• In France and the Netherlands, lawyers cannot share revenue with non-lawyers, making ABS's a non-starter there.
• Germany focuses more on regulation of individual lawyers than on firms' structures, so the jury may be out as to what's ultimately permissible there.
• And finally, of course:

"The US, in particular, would be a problem for international firms with branches in New York and New York lawyer partners. If non-lawyers were admitted as partners, every partner who was a New York lawyer would be in breach of the New York Code of Professional Responsibility and subject to disciplinary action."

Conflicts and client confidentiality, as well, will need to be seriously addressed.  At a bare minimum, there can be not the barest scintilla of a suggestion that outside investors could sway what matters a firm does or does accept, who it does or does not represent.  And client confidentiality must be maintained with the utmost punctilio.    In reality, I view thse problems as far more hypothetical (and even hallucinatory) than real:  What firm in its right mind would compromise on either of these counts one iota?  The damage to reputation would immediate and probably fatal.  Nor, I might add, do we see self-defeating debasing of standards in other industries where public companies are the norm:  Airlines have no interest in accidents and crashes for the same reason that pharmaceutical companies have no interest in adulterated drugs and Goldman Sachs has no interest in shading its advice post-IPO.

But Mr. Turnor rightly fingers a more telling consideration: 

"Firms will also need to convince their own lawyers, and the managers who may be partners from 2009, that an ABS can offer a career as rewarding as a career in a more traditional law firm – despite the fact that future profits will have to be shared with investors. Will the introduction of outside capital, and the opportunity to participate in the equity and make a market in shares, create value and earning power that counterbalances the diluted profit shares of the partners? Why not borrow from a bank instead?"

This, to me, is the heart of the economic debate that must be resolved before ABS's will be attractive to investors—and to existing partners and other stakeholders in conventional law firms. 

Put simply, if the outside capital cannot increase the total profits pie by more than the amount it will be withdrawing for a reasonable return on investment, then the entire exercise should be aborted before birth.  

Unfortunately, we have seen this in some professional service industries before.  Famously, in the 1980's, much of the New York-based advertising industry went public or was acquired by already-public firms.  The sad but typical experience was that senior executives and other favored insiders at the time of sale cashed out their interests to the tune of tens of millions of dollars, but the underlying economics of the ad agency business did not change. 

It still required virtuoso copywriters coming together with inspired art directors under the strategic direction of clear-eyed account management to identify and articulate each client's "unique selling proposition."  The fact that some who had the luck of fantastic timing and were able to exit at the top did not expand the agencies' war chest for recruiting top talent or wooing top accounts.  They were simply one-time monetizing events, with the vast majority of proceeds captured by exiting inside shareholders.

But fortunately, we know this model doesn't work and with luck we won't go down that path again.  (I hate to be the one to break the news to those of you in the audience who are 55—65 and at your career peaks in terms of "points" and so forth....)

Are we getting ahead of ourselves? Will the potential outside capital even be there? I have no doubt it will, and Turnor chimes in: "Lyceum Capital certainly thinks so, and has announced the appointment of a heavy weight team (Tony Williams, Richard Susskind and Paul Hewitt) to advise as it seeks to establish a position in the legal sector." [Disclosure: Tony Williams has been a friend for years and "Adam Smith, Esq." is in a strategic alliance with his consulting firm, Jomati, while I also Richard Susskind a friend.]

So let's assume the money is available, either from private equity or the public markets. What might we confidently predict will happen?

• Certainly, consolidation and potentially "roll-up's" of existing consumer and family-oriented legal services should take place, including practices such as:
  • Routine small scale real estate transactions;
  • Matrimonial law: Pre-nup's, divorces, child custody agreements, separation agreements;
  • Small business law: Incorporations, partnerships, shareholder resolutions, routine contracts, employment issues, general housekeeping;
  • Garden-variety employment disputes: Harassment, unfair terminations, discrimination;
  • Torts and negligence: Personal injury, car accidents, workmen's compensation, occupational hazards, slip and fall, etc.
  • Low-level criminal defense work: Misdemeanors, DWI, and so forth.
• Perhaps the introduction of legal services into the "product mix" of companies with large retail branch/distribution networks where legal advice is not too far afield from what they traditionally provide. Here, I doubt that "Tesco law" will be first (although Tesco is a consummately innovative organization so I could well be wrong). But what about banks or other financial services industry providers. Why wouldn't Bank of America (say) introduce BofA Law, or H&R Block, or Charles Schwab? They have trusted brand names and provide services inarguably relevant to legal advice, already.
• Essentially, any area of law where price, convenience, and baseline reliability are more important considerations than pedigree, impeccable quality, and bespoke services is a candidate for new entrants.

Beyond that?

I'm not an expert on corporate and partnership structures in the UK, but the good Mr. Turnor hypothesizes that outside investors could participate through more traditional law firms structured as LLP's permitting outside investors "in" in the form of a corporation which is a new member of the LLP. Assuming this is structurally correct (and it sounds eminently plausible to me), the next question is what dynamic influence their introduction into the LLP would cause.

Permit me to suggest a few:

• Pressure for more merit-based pay and performance evaluations.
• The expectation of senior non-lawyer staff that they'll be able to participate in the profits and growth of the firm.
• The inexorable introduction of more professional senior "C-suite" executives.
• Greater lateral mobility between firms (yes, I do mean even greater), especially for the newly empowered C-suite executives.
  • Meaning "the rich get richer"--this is part of capitalism's charm.

And overall, the changes will increase the tempo and decrease the cycle time of decisionmaking.

So what's to be done?

Most important of all, it's time to realize that we can't predict what will happen. The only failure that is inexcusable going forward is a failure of imagination. If law firms have never had meaningful access to capital on market terms (true), the challenge is not to think linearly from that world, but to think disruptively about what could happen--what business models could be invented--if capital access opened up. Will there be failures? To be sure. Successes? To be sure.

First, start thinking about these changes now. Once your competitors are not thinking about them but acting on them, the clock will have tolled midnight.

Second, take a hard, unblinking look at your firm's capabilities:

• Its internal strengths and weaknesses;
• Its external threats and opportunities;

and what your partners and partnership are capable of. (Let me add this counsel: Don't underestimate what people are capable of. "Stretch" goals often inspire inspiring behavior.)

But whatever you do, be hard-headed and realistic. Go it alone may not be an option, for example. That you should not take as a counsel of defeat. Rather, pursue that path (whatever path!) from a position of strength, not weakness.

One thing is certain: If "stay the course" seems a comfortable and time-tested strategic plan, that may be a complacent luxury you will soon be unable to afford.

As reported by the FT, the unveiling was yesterday:

Vernon Smith, the George Mason law and economics professor and winner of the 2002 Nobel Prize in economics, and a lifelong Adam Smith admirer, performed the unveiling.  His 2002 Prize was shared 50/50 with Daniel Kahneman of Princeton for their work in "having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty" and ""for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms."  (We call this behavioral economics.)

The statue cost nearly half a million dollars (£250,000), entirely paid for by private subscriptions organized by the Adam Smith Institute.  The Paisley sculptor Sandy Stoddard designed and produced the monument, which shows Smith in academic robes.

High time for a return visit to Edinburgh.

Our first text, from the Old Testament conventional debate, stems from today's WSJ story on "Axiom Legal," headlined Newcomer Law Firms Are Creating Niches with Blue-Chip Clients, discussing the business model of Axiom and other firms, which is to provide highly credentialed attorneys to corporate law departments on a contract or project basis, typically at savings of 25-50% vs. what an AmLaw 100 firm would charge.   Other components of the model are:

• The lawyers are recruited very very selectively—about 1 in 100 applicants to Axiom gets hired, according to its founder;
• Their pedigrees need to be gilt-edged, with backgrounds from places such as Cravath, Simpson Thacher, and Davis Polk;
• Work is typically performed directly at the client's, or the lawyer's home office, drastically cutting real estate overhead; and
• Axiom lawyers are provided benefits whether or not they're working on a particular engagement, but obviously only get paid for work performed.

Firms such as American Express, Cisco, Deutsche Bank, GE, Goldman Sachs, Morgan Stanley, Sun Microsystems, UBS, and others, have signed up and Axiom's revenue was $39-million 2007 and is "on pace" to be about $66-million this year.  So, yes, it's a real business, even if it will never be an existential threat to BigLaw in the complex deals or litigation.  Stuart Popham of Clifford Chance puts it nicely:  "Clifford Chance has always been at the forefront of developments in the legal world and welcomes innovation, but does not see it as a threat, nor as a challenge."

So what's the problem?  What's the conventional wisdom about this?

For that, we go to the source for the voices of the anonymously-empowered cranky observers who comment over at the WSJ Law Blog.  Herewith a sampling from the piece covering the Axiom story:

• For all the prancing and hot air, they’re still just another temp agency peddling flesh that didn’t cut it on the most grueling track. An unfortunate and painful fact of life is that excellence in the performance of legal services can’t be delivered by dilettantes. People with “other interests” — whether it’s playing with their kids or writing an opera — may very well be healthier and more interesting people than those who wed their souls to the inhuman demands of private law practice. But they are not going to be as good lawyers. There is always a market somewhere for less-than-excellence at a discount price. Temp firms like this one serve it. But please, enough about the “special” quality of their inventory.
  
  
• It is fascinating that, yet again, the perception is voiced that unless one is willing to work ridiculously long hours and bill exorbitant rates, (not to mention in expensive suits and behind mahogany desks) that the resulting work product is not good. Says who?
  
  
• This [article] highlights a mindset in the legal market which consistently causes larger corporations to pay exorbitant premiums for legal services of questionable quality. However, it ignores that “pedigree” and large firm experience are not reliable indicia of quality touches on a demonstrable fact that is largely ignored by the legal market…

  That salient fact being that at most large law firms, in the first several years of practice, the only experience that associates receive is doing work that could be handled by a competent paralegal or secretary. Moreover, in large firms, the billable hour and marketing requirements generally mean that the amount of quality mentorship conducted between senior attorneys and those highly compensated young lawyers who are mostly engaged in doing the work of a clerk typist is minimal.

  By contrast, in a small firm environment, the working relationship between partners and associates tends to be very close, with ample opportunity for supervision and mentoring. Further, opportunities for all manner of legal tasks come to associates much more quickly. The natural consequence is that after six years of practice, an attorney whose lack of pedigree limited her options to small firms is likely to be a much more polished professional with significant amounts of meaningful experience in the actual practice of law. By comparison, after six years in a megafirm, the associate is likely to be paranoid, jittery and harried from the toxic work environment, while having very little meaningful experience in the actual practice of law.

• There certainly are “bet the ranch” matters out there that warrant elite law firms. But 99.99% of what big law firms deliver is overpriced. These guys have identified a nitch [sic: niche] that is waiting to be filled.
  
  
• Axiom’s model works if you assume all Axiom projects will have plenty of lead time for staffing, have discrete start up and wind down dates, will keep the lawyer fully utilized during the project term, won’t morph into additional projects, won’t have intermediate deadlines that require late nights or weekends and won’t require supervision or input from other practice areas. If this was realistic, no one would ever leave big law. It’s the lack of control that causes stress, and once you have all of these variables in play, it’s going to be the same no matter what sign is on the door.

What exactly is problem these commenters—and the existence of Axiom to begin with—are highlighting?

I submit it's an inability, or at least a failure, of clients to measure quality of legal services.  With no real handle on what's extraordinary work, what's acceptable work, and what's unacceptable work, clients buy the "proxy" of prestige firm, law school pedigree, and, yes, high hourly billing rate. 

Axiom is attempting to perform arbitrage on that market by promising the gilt-edged pedigree (erego the 1 in 100 hiring number, which sounds impressive regardless of its statistical integrity), without the prestige firm name and without the eye-opening hourly rates.  As an admirer on general principles of firms that try to find localized market failures and capitalize upon them, I am glad to see Axiom evidently successful and growing. 

On the other hand, it strikes me they have not addressed the core market information failure, which is clients' consistent and nearly universal inability to assay quality of their lawyers.

Back in February, Steven Pearlstein wrote a column called Failure in Need of a Theory in The Washington Post (online version now only available for $$), positing the following:

"I'm wondering if we need a new theory of relativity for economics, where the standard models are unable to explain a growing number of situations where highly competitive markets are delivering less-than-optimal results.
The recent credit bubble is one example of a very big market failure for which we all will pay a serious price. But other, smaller failures also come to mind.
Think of skyrocketing tuitions among elite colleges and universities that spend lavishly on winning sports teams, rock-climbing walls and scholarships for those who don't even need them, all to attract top students.
Or the runaway compensation for chief executives who would be willing to take the job for half of what they are being paid.
Or the ridiculous prices paid for "it" handbags, fancy watches or houses in the Hamptons.
How do we explain why cities are still tripping over themselves to offer subsidies for baseball stadiums and convention centers in the face of overwhelming evidence that these diminish economic efficiency and welfare rather than enhance them?
And how is it rational that first-year associates at top law firms are paid more than federal judges? ...  And how many law firms have sacrificed the quality of their work and the collegiality of their culture to improve their profit-per-partner, the all-important metric in the annual American Lawyer rankings?" [Emphasis supplied]

Mr. Pearlstein fingers the culprit as "relative competition:"

"One thread that runs through all these "market failures" is that they involve a kind of competition in which "winning" is more a relative concept than an absolute one -- that the goal is not so much to maximize profits, income or welfare, as economic models assume, but to beat the competitors. In the process, perfectly rational investors, businesses or consumers wind up doing things that are irrational, leaving them no better off than before.  ...  The desire for ever-bigger homes, ever-fancier gas grilles, ever-more powerful SUVs is based not on some absolute notion of what is good or sufficient, but rather on the relative basis of what everyone else has.  ...  [As] Chuck Prince, the former Citigroup chairman, who famously gave this explanation last July for why Citi was continuing to lend aggressively into what everyone could see was a credit bubble: "As long as the music is playing, you've got to get up and dance.""

Now we're getting somewhere.

AmLaw firms seeking to confirm their prestigious status (or aspiring thereto) cannot compromise on matching the "going rate" for associates, or on the pedigree of law schools they draw their partners and associates from, nor (once the overhead expenses associated with those decisions have been assumed) on their hourly rates.  They can't compromise not because it's purely rational homo economicus behavior:  No, the reason they can't compromise is because none of their peers is compromising.

But we still haven't broken the "quality" code.

Our second text, from The New Testament a Fortune 500 law department, tries to do just that.  In an email I received earlier this week from Jeff Carr, GC of FMC Technologies (granting me permission to share it, by the way), he writes:

"Bruce – interesting exchange on egos’s, capitalism and win ratios as opposed to P3 (profits per partner) data.  Here at FMC Technologies we maintain that the best and most effective way to approach this issue and to align divergent interests with performance and value is to use a performance based pay system.  Nearly 100% of our engagements are on one of two models.  The most simple, and the one that would in our view address your points as well as those of your interlocutor, is the “report card system.”  We directly tie compensation to evaluations – firms receive between 80% and 120% of the amount billed based on how they do on 6 criteria.  Our evaluation form and fee calculator is attached. 

We have over 1000 attorney evaluations in our own database and we are very disciplined in performing the evaluations and delivering the results to the firm – indeed we stack rank our firms with the other firms.  If you want to increase performance and customer satisfaction, all one needs to do is to unleash the competitive instinct of a bunch of smart, overachievers, tell them that they aren’t at the top of the heap compared to our other legal service providers!  Our experience with this system yields demonstrated results – firms are making more than 100% of their invoice (on average) and our total legal costs are static absolutely and down as a percentage of revenue.

If we in-house folks started to aggregate customer focused evaluation data, we would create a very powerful and very real assessment of attorney and firm capability, effectiveness and value."

Here's a screenshot of the evaluation form:

On a 1 to 5 score, from unacceptable through mediocre, good, and very good to excellent, the criteria are:

• Understood client's goals
• Expertise
• Efficiency
• Responsiveness
• Predictive accuracy (about budget and results); and
• Effectiveness.

Then there is the uber-question:  "Would you recommend that we use this attorney/firm for similar work in the future?"

But wait, there's more. 

In its one-page, plain English "Covenant with Counsel," FMC specifies additional conditions and expectations.  Among the more fascinating, FMC will:

• Organize and participate in “after-action” reviews at the conclusion of each matter to help us continuously improve performance
• Be flexible, accommodating and creative in dealing with potential conflict of interest issues that may arise
• Provide training opportunities for your associates through short term secondments or other creative arrangements
• Understand that this relationship is built on mutual trust and that by eschewing a “no stones unturned” approach, we accept some risk.

And the Firm will:

• Bill you fairly and understand that you seek neither education, elegance, new law, nor perfection unless these provide value consistent with your company’s objectives.
• We will always seek simple, effective solutions
• Seek to reduce our costs creatively and constantly and share those savings with  you while also increasing our profitability
• Not ask for blanket conflict waivers and be responsible to bring actual or potential direct, client or issue conflicts to your attention
• Exploit technology to our mutual benefit.

In other words, FMC establishes specific performance criteria for its outside firms, evaluates their adherence to those standards discipline, and rewards firms that excel (and punishes those that fall short) by specifying up front that the final fee may be from 80% to 120% of the estimate.  As Jeff summarizes (my emphasis):

"It's not rocket science, it just takes discipline.  If you pay for hours, you tend to buy hours regardless of quality and effectiveness.  If you reward performance, then your firms will perform."

Start thinking creatively (BigLaw and F500 firms, I'm talking to all of you) about what "quality" in legal services really means.

Enough with the hand-wringing already.

Knowledge @ Wharton has an enlightening interview with William Weldon, CEO of Johnson + Johnson, on the challenges of leadership in a decentralized company.   You may think the scale of J&J (120,000 employees, $61-billion in revenue, operations in dozens upon dozens of countries) means there's no analog between what he does and what you do, but I think his insights into how you manage a fundamentally decentralized organization harbor valuable learning for law firms.  If you're inclined to agree, read on.

First, a word about the analogy between J&J and a large law firm—whether or not you're international.  Your offices, practice groups, and even individual client teams operate with a very high level of autonomy, certainly by the standards of corporate America.  That's why I think it instructive to listen to someone as thoughtful as Weldon talk about leadership in that context, where the sheer fact of J&J's over 200 operating companies means they'll be operating autonomously:  Even if he devoted a full day to each operating company, it would take him the entire year to cycle through all of them before starting over.  Is, then, running such an enormous organization fundamentally impossible or impracticable?  Not at all; he sees advantages to it.

"I think there are pluses and minuses to decentralized and centralized. I think J&J is probably the reference company for being decentralized. There are challenges to it, and that is you may not have as much control as you may have in a centralized company. But the good part of it is that you have wonderful leaders, you have great people that you have a lot of confidence and faith in and they run the businesses.

"If you look at Japan, for example, we have the local management running the companies. They understand the consumer, they understand the people they are dealing with and they understand the government and the needs in the marketplace. Whereas it's very hard to run it from the U.S. and to think that we would know enough to be able to do this. [...] But, with our credo and the value system that we work under, we feel very confident about our leadership and our management -- and you have to have trust and confidence in them.

"I think the other thing that decentralization does is that it gives you a tremendous opportunity to develop people. You give them a lot of opportunity to work in different areas, to work in smaller companies, to make mistakes and to ultimately move to larger companies."

There's much in here.  Listen again:

• You sacrifice control but you gain great people, who develop into leaders, assuming you have "a lot of confidence and faith in them."
• You get your operations closer to the ground, closer to the customer, and for that matter closer to the regulatory authorities.
• But—and this may be challenge #1 for law firm leaders—you have to be realistic about ceding control and realistic about people "making mistakes."  (Don't tell me you never made a mistake in all your career?)

And also listen to what he has to say about mistakes:

"The challenge really... I see it as a great benefit, rather than a challenge. This is because the problem with centralization is if one person makes one mistake, it can cripple the whole organization. This way, you've got wonderful people running businesses. You have to have confidence in them, but you let them run it -- and you don't have to worry about making that one big mistake."

In the current environment, haven't we seen firms that have made "one big mistake?"  Betting bigger and bigger on markets just as they were becoming frothy?   (Or, in the previous dot-com downturn, betting on Northern California at the top.)

Perhaps the supreme and ongoing challenge for J&J is maintaining the pace of innovation.  Law firms don't face this to the same degree, but I believe inventing new legal forms (new types of financing vehicles, for instance, or creative new covenants) is one of the few ways firms have to create an enduring impression in clients' minds that they are not only unlike their peer group but unlike their peer group in a most admirable and "unlawyerly" way:  They're legal entrepreneurs.

How does Weldon describe how J&J pursues innovation?

It starts with decentralization:  "Where decentralization helps in innovation is that it allows different people with different skills, different thoughts, to bring together different products and technologies to satisfy the unmet needs of patients or customers."  Not that it's without its challenges, and they are the familiar ones of expense (which is highly manageable if you believe in this), but more importantly the challenge of getting people to, even briefly, let go of the familiar (emphasis supplied):

"It's the ability to work across the boundaries that really brings true innovation, and is going to take some real breakthroughs and will bring real breakthroughs in the future. But, it also does take some coordination and some sacrifice from the individual. That is the toughest thing, getting people to get outside of the silos that they work in and work across the groups."

Yet isn't this precisely the way innovation works? The most famous legal innovation of the past couple of decades, Marty Lipton's poison pill, arose at the intersection of newfangled, gunslinging, hostile M&A and plain old Delaware corporate law.   Securitization (which will return—make no mistake) was initially a sort of weird child of banking regulatory law and bond indentures sprinkled with pixie dust.

What then might we do?

• Don't be afraid to set people free, even to the point of making mistakes. Even the most quality-obsessed companies in the world (Lexus, for example) recognize that defects are a fact of life.  "Zero defects" is a recipe for paralysis.  The question is not achieving zero but dealing constructively with defects that arise.
• Prod people to get out of their comfort zones and work—at least episodically—with other practice groups or other offices.  Barrels of ink have been spilled on how "Creative Companies" (IDEO, Apple, Google, et al.) ensure that employees run into people outside their group or function all the time—typically with something as simple as architectural design and layout of the offices.  Next time your firm is planning a move, you might interview a designer who has created spaces like these firms have.
• Finally, understand that letting people expand into their own leadership roles will only happen if they have a functioning ethical and professional autopilot.   Recall what Weldon said at the start of his conversation: 
  
  "[B]y being decentralized; what you do lose is control. But, with our credo and the value system that we work under, we feel very confident about our leadership and our management."

The key phrase is "with our credo and value system."  Is that something you can say with equal confidence about your firm?  The Johnson + Johnson Credo (crafted by Robert Wood Johnson in 1943 just before the firm went public) is a vibrant document today.   Whether or not your firm has anything similar written down, do your partners, associates, and staff live your firm's values?

Because if they don't, decentralization is not a workable option for you.