Going Two-Tier? Not So Fast

Thinking of going to a two-tier (equity and non-equity) partnership?  Or of increasing the non-equity ranks if (like 80% of the AmLaw 100) you're already two-tier?

I'm here to counsel extreme skepticism.  And I'm tempted to be even more absolutist:  Don't do it.

At least, that is, if the economics of the situation govern your decision.  Because—let me hasten to add—there are many perfectly praiseworthy and legitimate non-economic reasons to do so, including:

• Being able to retain valuable practitioners and producers—good citizens, if you will—who just don't quite cut it when it comes to joining the equity ranks.
• Providing an alternative career path, attractive in and of itself, for those who would prefer to avoid the ceaseless pressure of high billable hours and high expectations for business development that come with the equity partner pay grade.
• Creating a niche where practitioners with a peculiar, intrinsically valuable but somewhat arcane, specialty can be placed so as to remain available as needed.

And there's actually a fourth reason to introduce a non-equity tier which does not harm and may demonstrably benefit your firm's economics, as long as you're disciplined about it (as firms such as Kirkland & Ellis are):

• Introducing a non-equity, time-limited, period of, say, five years, between being a senior associate and a full equity junior partner, with these conditions:
  • To all appearances to the outside world, the non-equity partners appear to be, simply, partners;
  • They have access to all of the business development tools any partner would have;
  • They have a finite period of time to demonstrate—or not—that, armed with these competitive assets, they can indeed generate business;
  • Internally, they have the opportunity to demonstrate their leadership, team-building, and project management skills (with all of the implied authority that comes from being a "partner"); but lastly
  • Ascension to the ranks of non-equity does not entitle people to an indefinite stay conditioned only on good behavior:  Rather, it starts a second shot-clock running, during the pendency of which they must demonstrate the qualities expected of a full equity partner, or else be excused.
  • Oh, and if you think this is inhumane or too "tough" on general principles, I remind you to think of it from the perspective of the non-equity partner who's about to be shown the door:  Would you rather be job-seeking as a "partner" at Kirkland & Ellis or as a 9th-year associate at Davis Polk?

Now, why am I so skeptical about the supposed beneficent economics of non-equities?  Haven't we all been told for the past 20+ years, by consultants who shall remain nameless, that introducing a non-equity tier can improve your performance by boosting leverage and allowing you to retain proven and productive talent? 

Would the world were so simple.

As it turns out, what comes with introducing a non-equity tier is a subtly changed dynamic in the incentive set facing your talent.  Firms with a single-tier partnership attract the true Type A's:  Those of us who have never finished anywhere but at the top of a class and have no intention of starting to do otherwise.  But the two-tier firms hold out a veiled alternative:  If you keep your nose clean and work (reasonably but not insanely) hard, you might find yourself taking home (say)  $400,000 per year, adjusted for inflation, for the duration.   And you won't have to kill yourself in either billable hours or business generation.

I guarantee you plenty of people walking outside your windows right now would jump at that offer.

And my hunch is that, over time, that changes, ever so slightly, the composition of the people who put your firm into their consideration set.

But don't take my word for it.

Let's look at the numbers.  Fortunately, the just-released 2008 AmLaw 100 give us plenty of numbers, and I've been analyzing them off and on for the last few days.    Let's start with some correlation coefficients.

 (Correlation coefficients, for those of you who skipped statistics, are a mathematical measure of the strength and direction [positive or negative] of a relationship between two variables.   To use simple examples, red hair is correlated with green eyes; being of Asian extraction is negatively correlated with blond hair; and for people from birth to about age 16, age is highly correlated with height and weight.    Correlation coefficients can range in value from +1.0 to -1.0 and, in general, a correlation coefficient of +1.0 implies perfect correlation (being a resident of New York City correlates perfectly with being a resident of New York State); 0.0 implies no discernible relationship; and -1.0 implies no correlation whatsoever—or, in other words, that the presence of one connotes the absence of the other.   Correlation does not, please note, imply causation.) 

So here we have a few numbers.  Many of the figures are available in the AmLaw 100 directly as reported whereas others I calculated.  For example, what I call the "Non-Equity Partner Ratio" is simply (the total number of non-equity partners) divided by (the total number of equity partners).  For a single-tier firm, it's therefore 0 and for a firm with more non-equity than equity partners it exceeds 100%.

• Correlation between Non-Equity Partner Ratio and Revenue per Lawyer:  -0.4254
• Correlation between Non-Equity Partner Ratio and Profit Margin:  -0.7102
• And lastly, Correlation between Non-Equity Partner Ratio and Profits per Partner:  -0.4189

In other words, the higher your firm's proportion of non-equity partners, the lower your:

• Revenue per lawyer
• Profit margin, and
• Profits per Partner.

Here's another way of looking at it.  We know that Revenue per Lawyer and PPP are highly correlated (+0.8923 by my calculations), so I segmented the AmLaw 100 into five cohorts according to the proportion of Non-Equity Partners:

What's going on here?

I've already mentioned my theory that it makes your firm more attractive to those who aren't at the absolute top of the alpha-competitive distribution, but there are also concrete reasons to think that non-equity partners are: (a) getting more numerous, not less; and (b) constitute the most expensive tranche of leverage you have onboard.

This chart shows the breakdown, from 2000 to 2006, of all lawyers in AmLaw firms who are not equity partners.  The large red bars are of course associates and the two small grey bars are, per the survey's methodology (don't ask me!) "other non-equity lawyer" (darker grey) and "non-equity partners" (lighter grey).  The moral is very clear:  Associates are a shrinking component of the ranks of lawyers that give you leverage.  The problem with this is that associates are the cheapest form of leverage, and non-equity partners the most expensive form.

But wait, it gets worse.

Not only are non-equity lawyers the most expensive, they're the least hard-working.  Take a look:

On both charts ("higher" and "lower" profit firms) the two cohorts of lawyers that bill the fewest hours per year are "income partner" and "other non-equity lawyer."  Associates, not surprisingly, bill the most (the 3rd bar on each chart) and equity partners come in a close second (the 1st bars).  To summarize, then:  (1) There are more non-equity lawyers, as a proportion of headcount, than ever; (2) they're the most expensive cohort other than equity partners; and (3) they're the least productive.

So I ask you:  Are you still thinking of going two-tier, or going "more so" if you already are? 

There may be meet and right reasons to do so for the sake of specific individuals, for the sake of  your firm's "culture," or to preserve domestic tranquility, but if you're doing it because people who ought to know better have told you it will help your leverage, increase revenues, boost profitability, and help you retain highly productive people, I have just one question for you:

Can we talk?

"The Future of the Global Law Firm"--Installment #2 (Fall 2009?)

Here are just a few of the early reviews of the Georgetown Law Symposium on "The Future of the Global Law Firm:"

• “Extraordinarily well done.  Interesting people and good stuff.”
  
• “I thoroughly enjoyed the conference.  It was stimulating, informative, taught me much and yet left me looking for more.  Just the right balance.”
  
• “The format of quick fire 10 minute talks by people that really knew what they were talking about and had something to say is a much better format than the usual 45 minute slot to each speaker which is more common.”
• "Excellent:  A good mix of academics and real world, and I also found the ‘We don't have all the answers’ tone refreshing.”
• “It’s difficult to pull out the highs because there were so many; the content of everything said and discussed was spot on and very high quality. …  All in all, a triumph for Georgetown, and for [the organizers, Mitt, Larry, and Bruce].  I can’t wait for the next installment!”

Based on this type of feedback, plus innumerable conversations and emails, we are happy to report that the conference seems to have been a hands-down success.  If you weren't able to attend—or if you were and are wondering whether we have any plans to follow up—I have good news. 

We definitely plan a follow-on event, tentatively targeted for the fall of 2009.  As those of you who've been involved in organizing events like this will understand, coordinating people from around the globe to commit to a certain place and time requires long-lead planning.  Further, we anticipate and hope that by the fall of 2009 further developments "on the ground" will help inform the structure and content of the "The Future of the Global Law Firm II."

So stay tuned for further developments on this front.  You know where to look for breaking news about "GLF II"—right here, of course, on "Adam Smith, Esq."

And thanks again to all who participated and all who attended.

Georgetown Conference on the Future of the Global Law Firm: First-Hand Report

I'm back from the two-day "Future of the Global Law Firm" symposium at Georgetown Law School, which was organized by Prof. Mitt Regan of Georgetown, Prof. Larry Ribstein of the University of Illinois, and myself. You may read other coverage of this elsewhere, as in attendance were Aric Press of The American Lawyer, Leigh Jones of The National Law Journal, David Lat of AboveTheLaw, and other reporters.

But herewith the "Adam Smith, Esq." report:

We had about 130 attendees, roughly one-quarter academics and legal scholars and three-quarters practitioners and senior law firm leaders, from the US, the UK, Canada, and Australia. Seven panels over the course of Thursday and Friday through lunch tackled:

• The emerging dynamics of global competition.
• Ownership and capital structure, including the possibility and the desirability of outside (that is, non-lawyer) investment in law firms.
• Ethics and professional values.
• Perspectives from corporate law and finance.
• Organizational and cultural dynamics, and
• Lessons from other professional service firms.

Among those attending were:

• Ralph Baxter, CEO of Orrick, who delivered the keynote Friday morning
• Ted Burke, CEO of Freshfields, who delivered the keynote Thursday morning
• Stuart Popham, senior partner of Clifford Chance, who spoke after dinner on Thursday
• Practitioner/panelists included:
  • Richard L. Weisman, Partner;former Managing Partner, China offices, Baker &
    McKenzie
  • Mark Kirsch, Chair of Global Litigation and Dispute Resolution, Clifford Chance
    
  • Stephen Denyer, International Development Partner, Allen & Overy
  • Andrew Grech, Managing Director, Slater & Gordon
  • Steven Mark, Legal Services Commissioner, New South Wales, Australia
  • Osama Rahman, Ministry of Justice, United Kingdom
  • Yours Truly
  • Anthony Davis, Lawyers for the Profession Practice Group, Hinshaw & CulbertsonLLP
  • Steven Krane, Chair, Law Firm Practice Group, Proskauer Rose;Chair, American Bar
    Association Standing Committee on Ethics and Professional Responsibility
  • JeffreyHaidet, Chairman, McKenna Long & Aldridge
  • William Perlstein, Co-Managing Partner, WilmerHale
  • Lee Miller, Joint Chief Executive Officer, DLA Piper
  • James Jones, Senior Vice-President, Hildebrandt International
  • Christopher Simmons, Managing Partner, Washington Metro Market,
    PricewaterhouseCoopers
  • Ward Bower, Principal, Altman Weil, Inc.
    
• Academics who presented papers included:
  • Peter Sherer, Professor, Haskayne School of Business, University of Calgary, Predicting
    the Future of Large US Corporate Law Firms: AmLaw 2025
  • Stephen Mayson, Professor, Legal Services Policy Institute, College of Law of England
    and Wales, London, Global Law Firms: A Strategy Looking for a Market?
  • Laurel Terry, Professor, Penn State Dickinson School of Law, The EU’s Professional
    Services Competition Initiative: Is the EU Very Far Behind Australia and the UK With
    Respect to Publicly Traded Law Firms?
  • Christine Parker, Professor, University of Melbourne Law School, Australia, Peering
    Over the Ethical Precipice: Incorporation, Listing, and the Ethical Responsibilities of
    Law Firms
  • Elizabeth Chambliss, Professor, New York Law School, Law Firm General Counsel: The
    Paradox of Institutional Success?
  • John Flood, Professor, University of Westminster School of Law, Future Directions in
    the UK Legal Profession: Life After the Legal Services Act 2007
  • Larry Ribstein, Professor, University of Illinois School of Law, The Law Firm as Firm
  • Gordon Smith, Professor, J. Reuben Clark Law School, Brigham Young University,
    Form, Function, and Fiduciary Law
  • Timothy Morris, Professor and Director, Clifford Chance Centre for the Management of
    Professional Service Firms, Said Business School, University of Oxford, Navigating the
    Process of Innovation in Professional Service Firms
  • William Henderson, Professor, Indiana University School of Law, Are We Selling Results
    or Resumes? The Underexplored Linkage Between Human Resource Strategies and
    Firm-Specific Capital
  • Andrew von Nordenflycht, Professor, Segal Graduate School of Business, Simon Fraser
    University, The Demise of Professional Partnership? The Emergence and Diffusion of
    Publicly-Traded Professional Service Firms
  • Roy Suddaby, Professor, University of Alberta, School of Business, Post-
    Professionalism: How Multidisciplinary Accounting Firms are Reshaping Professional
    Institutions

If I were rationed to just one word to encapsulate the conference's theme, it would be: Change.

Lawyers are notoriously poor at coping with change: Indeed, recent psychological research indicates that change is not just hard, but actually causes physical and mental discomfort. (One managing partner recounted being faced with a near insurrection among half a dozen partners when he had the temerity to relocate their Washington, DC office by all of one short city block. I must confess that that may set a new bar for resistance to change.)

Yet change is in our futures, like it or not. More than once the observation was made that from the invention of the Cravath System around the turn of the 20th Century through about 1985, the profession looked remarkably stable, but that the last 20 years have seen revolutionary changes and the next decade promises further departures at least as radical as those we've just experienced.

Among the overall trends driving change are

• Segmentatation, meaning the increasing gap between firms able to win the highest-level, most complex work for the most demanding (and price-insensitive) clients, and other firms forced to compete on the basis of price and increasingly high client expectations for service quality, responsiveness, and consistency. Once price becomes a material part of a client's selection criteria, unfortunately, firms have put one foot on an escalator that goes in only one direction. And segmentation is driving the evolution of our industry not just at the top, in AmLaw 25 land, but at every level of the industry, including regional firms, boutiques, and even "the 22 lawyer firm in Vienna, Virginia."
• Globalization. It's no longer the exceptional corporation that has substantial business abroad, it's the exceptional corporation that doesn't. This trend is not going to reverse or decelerate. 20 years ago the percentage of lawyers working at NLJ 250 firms who were in overseas offices was just a few percent. Today it's nearly 17% and grew 11% in just the last year alone.
• Consolidation. 20 years ago the AmLaw 50 accounted for about 6% of all private, for-profit law firm revenue in the US. Today they capture over 25% of that revenue.

Other themes?

Scarcely a panelist failed to mention—or concentrate on—the "war for talent" and the challenges posed to the traditional law firm career ladder by Gen Y. (Yes, the usual caveats were added about how it can be misleading to generalize about an age cohort, since individual differences always outweigh broad demographic brush-strokes, but the point is universally acknowledged nevertheless.)

A particularly painful reality on this landscape is that, for about the past 30 years, essentially 50% of law school graduates have been women, yet throughout most of that time span, the number of female partners in the AmLaw 100 has hovered at a fairly constant 15-18%. Finally, I believe, firms are going to face up to the reality that they need to take fresh approaches to the dilemma created by the fact that the prime child-bearing and family-starting years happen to coincide quite nicely with the path-to-partnership tournament years. Proposals for innovative "off-ramp" and "on-ramp" programs were floated, some potentially in conjunction with forward-looking law schools (like Georgetown) to "de-couple" those time frames.

But the overall tone of the symposium was the simultaneous thrust of excitement and challenge balanced against the uncertain and the unknown.

Would outside equity ownership be a boon or a curse?

Why exactly do law firms need capital? Aren't we labor-intensive businesses, not capital intensive (A: As currently conceived, we are. But why is the current static model necessarily the model for a dynamic future?)

What has been the history of other professional service firms that have invited outside investors?

Will outsourcing and globalization in general (permitting work to be done in the lowest-cost jurisdiction, be that IT and HR support, or paralegal or e-discovery services) supplant the model of teams of extremely high-priced and highly educated professionals operating out of Class AAA space in the center of the world's financial capitals?

Will we lose the partnership ethos? (Laura Empson of Cass Business School gave a particularly nice presentation on this at lunchtime Thursday, positing that useful ways of thinking about partnership might be as analogous to The Three Musketeers, to Henry V's famous "band of brothers" speech before the Battle of Agincourt, to a buccaneer pirate ship, or, at last, to "Gone With the Wind.")

Can the partnership ethos survive outside the legal form of a partnership? (Yes, seemed to be the consensus--albeit challenging to do so.)

Would outside ownership actually threaten ethical behavior in law firms? In this connection, three salient points were made:

• We see no evidence of publicly owned companies in other industries behaving unethically as a pattern: No airlines cutting corners on safety, no pharmaceutical companies cavalier about product tampering, and, to be sure, no one questioning Goldman Sachs' advice since their IPO.
• Could the pressure to achieve profits from passive, minority-interest outside shareholders possibly be greater than the competitive pressures to achieve maximum PPP from the press, and to retain and attract talented partners?
• And lastly, note this well: In the famous flameouts of Enron, Worldcom, et al., the "whistleblowers" with integrity were inside the corporations, not in external auditing or law firms. If anything, this data point suggests that professionals in publicly held firms do not surrender their ethical obligations at the door.

Should we be optimistic about the overall global demand for law? I believe we should. After all, don't globalizing corporations require more, not less, legal advice? (As strange as it may seem to say, could we need, in a word, more lawyers?) The "rule of law" is not, after all, self-executing.

Clients are becoming more demanding, to be sure, but it's misapprehending the situation to think it's all about fees or price; rather, it's about actually comprehending the clients' businesses. In a sense, isn't this development "back to the future," back to a day when lawyers intimately knew their clients and were institutionally close to them in ways that are unusual today? More than a few name-brand law firms, according to their managing partners, are investing more in institutionalizing the client relationship than they are in any other recent initiative, even to the point of creating a "client relationship" dimension as a third organizational dimensional matrix on top of the familiar two of practice groups and geographical footprint.

The value of human capital--the "war for talent" again--has never been higher. But it's now beyond partners and associates to non-lawyer staff and C-suite executives. Among all these groups, lawyers included, it's no longer enough to be merely technically excellent. Today's clients and today's environment call for people with high levels of "emotional intelligence" and right-brain capabilities. If this is right, we need to re-think the ideal profile of a partner (and I believe strongly that it's right).

Also, if we value human capital, what's to fear from "outsourcing?" Isn't that just another way of saving a generation of associates from the equivalent of being consigned to working in the textile mills of e-discovery? (Whenever politicians rail against NAFTA or other free trade agreements, I always wonder which voters are out there desperately hoping their children have the opportunity to grow up and go to work in a textile mill.) Perhaps young associates should be exposed to one and only one tour of duty in e-discovery, but we know for a fact that too much of that is why on average they leave after 2.5-3.0 years. Wouldn't you?

Finally, as to the future, my own belief is that assuming the Legal Services Act comes into effect as currently scheduled in the UK, the inevitable flow of money from some firms that will take advantage of outside investment (and there will be some firms) will sluice into the US. Trying to stop the flow through prohibition and regulation will only lead to feckless, disruptive, and pointless excursions into attempted micro-management of global law firms' capital structure, an effort unrealistic at its core and doomed to swift failure. If you doubt money's vibrant ability to find its own level, I have three words for you: "campaign finance reform."

At the point where bar associations here, sclerotic and paleolithic as they are, are forced to confront a new marketplace reality, they will actually have no alternative but to respond in ways that recognize and accommodate that reality, and to get over their hundred years' war against genuine competition in the profession. And, it is my devout hope, they will awaken to the need for a "level playing field" in our global economy.

On this point, the insanity of firms' being potentially subject to 51 different jurisdictional bar authorities in the United States was, without exception, roundly denounced. GE (for example) gets to choose whether it wishes to be incorporated in Connecticut, New York, California, Delaware, or somewhere else entirely. Why shouldn't Latham have the same choice?

The conversation on this topic, brief as it was, focused on acknowledging the blisteringly obvious antique anomaly of "presence-based" regulation. The only interesting note to add is that corporate clients would presumably be roundly in favor of unitary law firm bar regulation since it would at once obviate the need to hire duplicative local counsel in jurisdictions far and wide for no commercial, economic, or strategic purpose.

Do we have all the answers?

I've never been at a conference before where so many readily admitted to so few answers. But that's the way entrepreneurship and innovation proceed. Not by knowing to a fare-thee-well what all will work, by specifying it exhaustively in advance, but by experimenting. New businesses are not created by figuring out in advance every possible contingency that could go wrong and only launching then; they're created by the "ready, fire, aim," mindset. Or, as I said in a prior life as CEO of a dot-com, "mid-course corrections are my middle name."

In my own presentation, I took issue with the assumption that our industry is not capital-intensive by opining that that's static, not dynamic, thinking, constituting a great failure of imagination. And by analogy I used evolution's famous "Cambrian Explosion" (great video courtesy of WGBH here) . If you're not familiar with this, the story is simple:

• For the first 3-1/2 billion of the Earth's 4-billion years, all nature knew how to produce were single-celled organisms: Algae, fungi, protozoa, etc.
• Then, from about 530-580-million years ago, evolution came upon and exploited the miraculous invention of multi-cellular organisms.
• Every single order of Animalia that exists today was invented during the Cambrian explosion.
• There were a huge number of dead ends, wrong turns, mistaken detours, and fundamentally bad designs (creatures with five eyes)
• But there was a never-before-or-since efflorescence of innovation including such truly useful structures as eyes, ears, scent, and four limbs. (Four limbs, if you're interested in mobility, are Truly Useful. There's a reason cars have four wheels.)

Do we know where it's all going, or where, as some linear extrapolations had it, where we'll be in 2025 as an industry? Not on your life.

But could you or I imagine such a conference even as recently as three years ago? Not I.

Hope to see you three years hence at the next conference.

Updates:  29 April 2008

Two addenda which have come in since I originally published this.  The first is an article, which is self-explanatory, and the second is an incisive comment by the General Counsel of a Fortune 500.

Second, we have our astute GC's thoughts:

"Bruce -- Sounds like an interesting conference.  It's a shame that in-house counsel appear to be poorly represented – after all, we are the reason for existence of most private practice counsel (and ultimately the source of revenue to support the legal education system).  Those attending have a high degree of interest in maintenance of the current extremely profitable and robust status quo as opposed to being agents for change.  The in-house community needs legal service providers as we simply cannot in-source all our work.  As such we need our law firms to be profitable.  We can move to a world where law firms are merely suppliers or one where they are partners and accept risk and reward in exchange for value -- but in either case, change must occur.  That change must take place at the law schools which need to train and produce counselors not lawyers (i.e., more focus on practical delivery of real world legal services) and at the law firms that must change their economic model to focus on profits through cost reductions as opposed to top line revenue growth.  We simply must begin a dialogue to focus on value -- and that means achieving the business client's objectives effectively and efficiently.  Generally speaking, clients are not interested in winning cases or answering interesting questions of law -- we are interested in reaching our business objectives profitably and with a focus on compliance and stakeholder value.  If there is indeed a war for talent, I do not believe it's a war that clients are asking law firms to fight, much less are willing to pay for.”

As for the relative paucity of inhouse counsel, guilty as charged.  As one of the organizers of the conference, all I can offer in mitigation is that we wanted law firm leaders to feel free to speak openly about their appetite for change and we perhaps assumed a little too casually that the presence of a large representation of GC's would make people feel defensive or guarded.  A senior representative of the ACCA was there, however, and made some of the very points advanced by our GC friend here.

I'll continue to update this as additional commentary comes in.

Diversity, the Billable Hour, & Other Challenges

First comes an FT story on clients demanding more "diversity" in City firms, then a followup letter attributing high female turnover to late night hours, next a WSJ Law Blog piece on how to keep female talent on the partnership track (featuring insights from WilmerHale and Cleary), a Working Mother story called "Young, Gifted, and Leaving" about law firm associates, and finally a lead editorial by the President of the California State Bar on "Escaping the billable hours trap."

Journalists like to say that three anecdotes constitute a trend, but here we have not three but five noteworthy articles telling us that what we're doing is essentially unsustainable. Are you paying attention?

The facts are pretty straightforward. For about the past three decades, women have constituted 50% or slightly more of law school graduates, yet they're still only about 17% of BigLaw partners. It can no longer be argued that they only need time to get through the pipeline; that argument exhausted itself about 20 years ago, and essentially nothing meaningful in the female partnership statistics has changed. Whatever we are doing and have been doing is not working if greater representation of women as partners is the goal. As the well-known joke sometimes attributed to Einstein has it, a working definition of insanity is to keep doing the same thing the same way and expect a different result. We need different results.

How big is the problem? Or is it even a problem? After all, law firms are hardly suffering, and PPP numbers continue (at least through the last reporting period....) to keep growing at double-digit rates.

But the question is not whether firms are profitable on the current model; the question is whether they could do better by deciding to seriously address the problem of sacrificing such an enormous proportion of their talent pool for no evident business reason. The question, in other words, is one of opportunity costs. By doing nothing to address staggering female attrition rates, what are firms losing? Some statistics.

"The number of young female associates leaving law firms hit a record high over the past five years—with an average annual attrition rate of 19 percent, according to the National Association for Law Placement (NALP) Foundation. Not surprisingly, the higher a law firm's required number of billable hours, the higher its associate attrition rate, according to a 2006 survey by the Bar Association of San Francisco. And many of these departing associates leave for good—some 31 percent, a recent survey by MIT Workplace Center reveals. Beyond bleeding firms of top talent, this loss can affect the bottom line: Each associate who walks takes along about $300,000 in lost training and recruitment costs. A 15 percent departure rate may siphon off an average of $12 million each year from a large firm, estimates Paula Patton, CEO and president of the NALP Foundation."

Taking this beyond "diversity"

Are there plausible ways to address the female attrition rate—and the overall associate attrition rate? Are there things we're doing wrong which are kneecapping our performance as consummately professional organizations delivering superb client service, as economic engines of profit generation, and as profoundly rewarding places to work?

Yes.

But only so long as you're willing to tilt at windmills, and the windfall (pun intended) du jour is the billable hour. No matter how many stakes have been aimed at its heart, none have been driven home true.

I can't say I'm surprised. For law firms, it's cost-plus pricing: A great deal! You literally cannot lose money on that economic model. Indeed, you can produce super-normal profit margins. And for clients, it's also weirdly bulletproof. "For services rendered...." followed by a six-figure number, unitemized, is tough for the green eyeshade crowd to digest.

You may know and I may know that figure is (a) entirely appropriate; (b) thoroughly earned; (c) probably understated vs what the law firm could have charged and gotten away with, but how do you "defend" it? Billable hours are defensible in the same way parking tickets are defensible. We know what the rules are: Never mind that the rules may be fundamentally nonsensical, you can't argue with City Hall.

And what is wrong with the billable hour?

Don't take my word for it, take a page from Jeff Bleich, president of the State Bar of California:

"This mission — ensuring access and justice by all means possible — is what attracted me to the bar. It is also what makes me think we need to re-examine a practice that is threatening the capacity of lawyers to serve the public effectively: billable hours. We all know about the lifestyle burden that billable hours places on lawyers. But on a deeper level, a billable hours system is corrupting to our profession in both obvious and more subtle ways. One of the important challenges of the next generation of lawyers and bar leaders will be to find a way out of the billable hour trap."

And permit me to go on by excerpting what he says in relatively full part. These are important words.

"The destruction brought by billable hours can be subtler in that it affects not merely the cost and efficiency of our work, but the quality of our profession as a whole. Firms now have only three ways to make more money — work longer hours, increase the number of lawyers or raise rates. Predictably, in a profit-maximizing system, firms have been doing all three. Instead of working 1,700 hours a year as lawyers did in the 1970s, today, new lawyers typically bill around 2,100 hours. Those additional hours come out of two places — evenings and weekends. That means less sleep, fewer outside interests, less commitment to loved ones and the crumbling of a decent life.

"Lawyers feel guilty about doing the very things that we should do to achieve access and justice — such as pro bono work for those in need or service to the community. Instead new lawyers come to view themselves as people who merely rent out their brains for a certain price per hour. And they and their work are degraded by the experience.

"The trend towards putting lots of lawyers on cases just compounds this. Young lawyers have fewer client contacts, less ownership of a case and fewer opportunities to actually solve a problem. As they advance, they aren’t asking the questions that will allow them to one day lead their firms and the profession: what experience am I getting, what sorts of colleagues are we developing, what is our culture and philosophy? Instead they think more and more about profit targets, hours targets and what their exit strategy is.

"An entire generation of lawyers has come to believe that their worth as a lawyer is measured not in how they solve problems but in how many hours they need to work. Not surprisingly, this has not made them better problem solvers.

"I realize that strong economic forces will continue to favor billable hours, and if a better and equally lucrative alternative existed, it would have been adopted by now. So this will not be an easy problem to solve. But we will eventually reach the outer limits of human endurance and the upper reaches of client tolerance, and if we do not begin addressing the issues now, it will be too late when we do. There are alternatives to billable hours, such as fixed fee arrangements with negotiated bonuses based on performance.

"The point though is not any one solution. The point is that as a profession, we need to start finding billing methods that will reduce distrust and damage to our client relationships, that will refocus young lawyers on being problem-solvers again, and that will remind us of — rather than distract us from — why we are lawyers in the first place."

Finally, there may be some good news.

WilmerHale's Bill Perlstein (and potentially some other firm leaders) have some innovative ideas about how to keep female, and male, associates on the partnership track through different approaches than the century-old Cravath system's 7-9 year up or out model. There do, indeed, have to be other ways.

This is a profound long-term challenge to our profession, and no one has all the answers.

What are your thoughts?

Update: Monday 28 April. A reader writes:

I enjoyed your piece very much because it hits home for me quite directly from both the female perspective as well as the billable hour one. In the last two weeks, I left my partner position at a large law firm in Chicago where I had been for more than 14 years to join some like-minded billable hour dissidents in the new litigation venture Valorem Law Group (www.valoremlaw.com). Having co-founded and co-chaired the women's initiative at my previous firm (incidentally, named one of the 100 Best Companies for Working Mothers in 2007) and co-founded a recent organization in Chicago called the "Coalition of Women's Initiatives in Law Firms," I am quite aware of the negative impact that the billable hour model has, not only on clients who want their work done quickly, efficiently and with good results, but also on attorneys who are creative, efficient and thrive on collaboration -- all things that the billable hour model hinders.

Without over simplifying it, as a working mother of 3 who was determined to work more productively in order to enjoy a balanced home life, I would venture to say that the billable hour model disproportionately (but not exclusively) impacts women, as any value measured by the commodity of already-stretched-too-thin time is going to favor those who have more of it -- and that is not typically women.

Our experience at Valorem and the widespread feedback we've received so far from clients and other attorneys tells us we are on the right track, both for clients and for the industry as a whole. As you would say, we are "tilting windmills." Stay tuned to see how the wind continues to blow.

Why KM Matters. With Soundtrack.

Here at "Adam Smith, Esq." I've written about Knowledge Management a fair amount, since it's my belief that knowledge is what law firms sell.

But despite the (I believe) inarguable centrality of KM to what we do, there are three enormous problems with it:

• Too many lawyers don't understand why it's of value to them, or, more precisely, why the return they could get out of it would exceed the investment they'd have to put into it.  (Never mind the threat of "giving away" your core professional asset—what you know.)
• Too many technologists and IT types don't understand how lawyers work, and end up creating shockingly powerful but essentially useless applications.
• And even the most powerful and user-friendly system requires constant care and feeding because legal learning is in a state of constant flux:  In a sense, pure white ignorance beats obsolete and mistaken knowledge.

Because some of these obstacles are a blend of the intellectual and the emotional, a brief foray, presented in video, yields two of the best visceral explanations of why Knowledge Management matters.  

With a big fat hat tip to Matthew Parsons and Neil Richards of Knowledge Thoughts, then, our first (2:21 running time, sponsor's logo at the very end):

And our second (5:29 run time, academic credit and "CC" license at the end):

Enjoy.

And reflect.

Shea Stadium Is Named For...?

The American Lawyer today takes note of the last opening day of the season of baseball's New York Mets to take place at their home stadium since 1964, Shea Stadium.

It was simpler days when Shea opened, and days when a mere lawyer-cum-power broker could actually end up with his name on a stadium. (The new Mets stadium, now under construction a parking lot away, will be known as the denatured, mispelled, and potentially transitory "Citi Field," after the bank.)

I write to summarize the type of lawyer Bill Shea was, and also as a tardy way to memorialize, in brief form, my own short years at Shea & Gould as an associate in the 1980's.

The story of Shea and his stadium began when the Brooklyn Dodgers and the New York Giants both left for California after the 1957 season, and New York became bereft of a National League club. Shea thought that baseball was a sort of social glue holding together different classes across the city ("What am I going to talk to my doorman about now?!") and he resolved to do something about it.

But, as well-connected as Shea was, he couldn't persuade any National League franchise city to cede a team to New York, nor could he persuade the league to open a new expansion franchise for New York.

So he turned to Plan B.

With Branch Rickey as his ally (the former Dodgers executive famous, among other things, for breaking the color barrier by signing Jackie Robinson) Shea formed the "Continental League," immediately granting a franchise to New York and reaching out to Florida, Minnesota, and Texas, among other places, to seed new franchises. He was calling the National League's bluff, and the National League blinked.

So were born the New York Metropolitans, with their signature colors of Dodgers blue and Giants orange.

But that's not why I'm writing about Bill Shea.

He's a model of a law firm leader the mold for which may have been permanently broken.

I won't talk about his technical expertise, which certainly entitled him to the platform he ultimately enjoyed, but he was actually a gifted banking lawyer. Beside the point. His genius lay elsewhere. Simply put, he knew everyone. The stories are legion about his Rolodex, but I'll add only one small one of my own.

Early in my days at Shea & Gould, I was assigned a very short and limited task: Try to find an interpretation of a particular Hawaiian tax statute that would be more rather than less favorable to our client. The diligent but unskilled associate that I was, I came up with an array of inconclusive regulations, letters, and tangentially related cases, and went back to the partner somewhat disconsolate with the miserable fruits of my labors. His immediate response was, "Let's go see Bill!"

We walked into his office, described the dilemma very briefly, and without saying a single word to us, he yelled over the intercom to his assistant, "Get me Inouye!"

Probem solved; Inouye is the senior US Senator from Hawaii.

But a few last thoughts on Bill as leader of a law firm:

"When I was a fourth-year associate, [Shea] and Milton Gould lent me and my wife money to make a down payment on our first home," says [Richard] Spinogatti, who was in the U.S. Army Reserve at the time [and who's now a senior counsel at Proskauer Rose]. "It was an interest-free loan made out of their pockets—not from the firm—and they did that for a lot of people.

“Bill was a bear of a man with bright blue eyes, and while he could appear gruff and rough, he had an absolute heart of gold,' he says. 'He would always listen to anybody’s problems and deal with them as his own.'"

In retrospect, it came as no surprise to me--although I had left and was only a lowly associate when I did leave--that very shortly after Shea's ultimate retirement the firm imploded.

Is there still room for such law firm leaders?

Yes, of course; we are minting them every day, if we care to notice, and if we care to cultivate them and let them thrive with all their idiosyncrasies. Which of Shea's winning characteristics bear attending to? His office door was always open, to the high and the low alike. The Spinogatti story alone demonstrates it was not an empty gesture. And when he exercised his power on your behalf, it was his personal touch, not a favor bestowed from the firm's resources at no risk or expense to him. From a business perspective, he realized that combining his infinite Rolodex with Milton Gould's celebrated courtroom talents could be the basis for a powerful firm. And he proceeded to build a firm that was a great New York institution in its day.

It's a tragedy it couldn't survive his and Milton Gould's retirement. Is there a moral in that? Not having been privy to the inner circle, I hesitate to draw one with any degree of confidence. But to all appearances, the Harvard Business School case that has not been written about Shea & Gould, but could be, might be titled "Failure of Succession Planning". When the benevolent rulers must retire, who of their stature is in line to take their place?

I choose to focus on the institution they built while they were in charge. You could do worse than to aspire to what they achieved.

Slaughters vs. Clifford Chance vs. Networks

The Times (UK) asks today, "Slaughter & May v Clifford Chance:  Who is pursuing the best route?"

The article puts head-to-head two concepts of what makes for a great and powerful law firm:  World-leading profits per partner, on one hand, vs. a truly global footprint and powerful international capability, on the other.  At over £2-million/year in partner profits, Slaughters is up where the air is very thin indeed—indeed, if you believe The Lawyer's latest rankings of the Top 50 US firms, one and only one firm is in that same troposphere, the usual suspect, Wachtell. 

But if what you care about is multinational local law capability, Clifford Chance is your horse.  In fact, in the past ten years Slaughters closed offices in New York and Singapore, leaving outside London only Hong Kong and Brussels.  It serves clients abroad through the familiar network of "best friends," and its friends are not only that but are highly ranked firms each in their own right:

• Bredin Prat in France,
• Hengeler Mueller in Germany,
• Bonelli Erede Pappalardo in Italy, and
• Uria Menendez in Spain.

We'll get back to Slaughters vs. CC in a moment, but first let's juxtapose that network of friends with thoughts from this piece courtesy of The Lawyer about "European unions." Citing Eversheds, Pinsent Masons, and CMS Cameron McKenna, the article posits that "With networks, national firms have found they can leapfrog City rivals with their own European offices, only without the hassle and expense of launching on the continent." Sounds a bit too glib to me, but let's entertain the hypothesis for moment.

Because, you see, we actually have not two models but three: Slaughters, CC, and the Networks. (You object that Slaughters is actually a Network, albeit perhaps a granddaddy of them all? I demur. Slaughters is Slaughters with or without its network: Eversheds, Pinsents, and CMS are far less interesting without their networks--and none of them is Slaughters.)

Slaughters would and does argue that its ability to provide absolutely top-notch service (advising 29 of the FTSE 100, more than any other City firm) is its trump card, and that having local law capability elsewhere is irrelevant in terms of why clients initially come to it--or, if relevant, that the top-quality "best friends" serves that need. CC would argue that corporate clients expect a seamless service delivery experience across all offices of their chosen law firms, and that only its footprint realistically matches that of its global clients.

Here's the issue as described by those on the front lines:

"The one-stop shops have a very powerful weapon, [Tim] Clark [retiring as senior partner at Slaughters] suggests: their brand. “This helps them to appear to the outside world as having a uniformity of approach and quality that is the same as their London office. Because that’s not necessarily the case, it allows us to compete very effectively.”

"[Guy] Morton [joint senior partner of Freshfields] counters by arguing that “the disadvantages of relying on a non-integrated network will become more pressing as clients become more truly international and more used to going to a single firm for multijurisdictional work”. There will not be a sudden implosion of the Slaughter and May model, he suggests, but the Freshfields model will gradually gain competitive advantage."

Both of course ignore the Network model. The truth is that there is no unitary "Network model:" There's a spectrum. At one end is CMS, where the firms are tightly integrated on virtually every dimension short of sharing profits. At the other end is a Nabarro, an Addleshaws, or a Berwin Leighton Paisner where relations are diplomatic and friendly but not exclusive or necessarily oriented towards closer and closer integration down the road.

Even Eversheds noted that its network partners wouldn't always jump when clients called until Eversheds landed Tyco as a major client and got the troops' attention. And other affiliations are at even more developmental stages: Addleshaws recently added the ability to do joint billing, and the service was considered noteworthy enough to merit coverage in the article. Other astonishing developments? Co-branded websites and integrated marketing materials! What next? A common currency?

Seriously, the point of a network is nothing other than seamless client service. The goal is not to create an organizational superstructure worthy of study in a business school case, but simply to deliver impeccable legal advice to clients who need cross-border integrated service and are indifferent to the letterhead of the person they're dealing with at the moment--provided only the prerequisite baselines of quality, timeliness, and consistency. Ideally, the client should see no difference whatsoever between the responsiveness of a "network" office and the responsiveness of one of the UK firm's own domestic branch offices.

Are these sustainable equilibria?

At fear of inspiring emails from those begging to differ (actually, bring it on), I believe loose, permeable, and utterly flexible networks are not much stronger than the tissuepaper uniting them. It seems less than dating, much less going steady and much much less than living together or getting married (merging). Not be flip about it, but more akin to what today's young adults categorize as "friends with benefits." Eminently flexible, eminently exit-able.

With commitments should come consequences, and without consequences there seems no real commitment.

Are there, still, "benefits?" Surely so, to clients and to the firms involved on both sides. The "referring" or hub firms gain needed expertise on the ground without the requirement to invest over a period of years or decades with uncertain results. The "referred" or spoke firms gain business they wouldn't necessarily otherwise obtain, and the hope of more in future. That, after all, is why these networks are so common. If they were pure and simple examples of market failure, they would cease to exist.

But we're not about whether they can or do work; we're about whether they're optimal, and I cannot believe in the long run they are. There are too many countervailing incentives, too much room for co-opting competition, too many reasons (economic and cultural) for impromptu alliances to fade away and disintegrate. A temporary solution, and an understandable ad hoc response to global clients and non-global law firms, but a response for the ages? I doubt it.

But this brings us back to the Slaughters vs. CC debate.

Building either firm is an astonishing achievement. With Slaughters, the ££ speak for themselves. With CC, the shockingly powerful network on the ground speaks for itself.

My question is whether in the next 10 years we shall see emergence of a firm that combines both: World-beating profitability, which reflects superb quality of talent and corresponding high-end premium work entrusted by the world's top clients; and a global network second to none, with robust Anglo-Saxon and local law capability worldwide.

Now that would be a firm to be part of—or to envy.

Global Management: Central or Local?

"Multilocal?"

That's the new McKinsey coinage intended to lend new intellectual luster and heft to the perennial management-theoretical challenge of how to manage multinational firms. No matter how familiar the business issues, now is probably an especially timely moment to revisit them, given the strenuous economic environment. In good times, suboptimal management can be overlooked; but at times like this there is no room for slack in the rigging.

Here, then, the familiar landscape:

• geographic or product area focus?
• heavily centralized or with greater local customization?
• capitalizing on cross-border synergies or maximizing local, country-specific practices?

The fundamental challenge is to capture the greatest value from local practices while also benefiting from the value of an international platform and brand.

This is not an a abstract exercise; it is deeply ingrained with, and commences from, where your firm actually produces value. If, for example, you're a capital markets-centric New York and London powerhouse, a centralized and more or less top-down approach may be ideal. To the extent you have other offices, they may be more branches of convenience than full service local outposts in their own right. Conversely, if your firm has a more widely diversified portfolio of local practices (say, energy in Moscow, IP in Milan, project finance in Dubai, startup financing in Eastern Europe, etc.) then headquarters needs to "get out of the way" of these country-specific profit centers.

So far, these elements of strategy may appear relatively self-evident, but the devil is typically in the execution. If the goal is maximizing cross-border value, here are three barriers on that front:

• Lack of awareness. Is anyone actually responsible for identifying cross-border opportunities? Or is it all ad hoc and hit or miss?
• Motivation. What value has management placed on collaboration? Is it an element in the determination of compensation? Are local fiefdoms jealous of sharing their clientele and/or expertise? Again, does the compensation calculation reward multi-office collaboration or implicitly penalize it through ossified origination and billing credits?
• Poor execution. This can stem from things as simple as language and cultural differences, but more fundamentally the threat to seamless execution is murky accountability and the absence of a champion promoting multi-office teamwork.

Consider some partial measures--short of centralized mandates--to facilitate more "natural" and instinctive collaboration. Such as?

• Sharing best practices, deal templates, and the like.
• Rotating and "seconding" people among offices.
• Creating a firm "university" (or utilizing one of the many many business schools eager to do it for you) to bring leaders together and engage them in creative problem-solving.
• Geographic--read: regional--clustering. There's probably a sweet spot between total centralization and pure local autonomy that can achieve several objectives:
  • integrate similar practices across countries
  • avoid duplication
  • manage the performance of the firm across several countries in a more coherent fashion, and
  • economize on travel expenses.

None of these suggestions and recommendations are earth-shattering, but cumulatively they serve as a virtuous reminder that global firms face a continuum of choice over how centralized or how locally autonomous they choose to make their management.

And especially in our industry, where local jurisdictional, substantive law, regulatory and licensing issues are so much more critical to what we do than (say) different packaging preferences might be to a consumer goods firm, it's important to try to strike the right balance between capitalizing on local law capability while maintaining the "one-firm firm" strength of a global platform able to seamlessly serve our equally global clients. A light hand on the reins.

Georgetown Law Conference on The Future of the Global Law Firm

In less than three weeks, on Thursday and Friday April 17 and 18, the Georgetown Law School Center for the Study of the Legal Profession will host the symposium, "The Future of the Global Law Firm." The Symposium will be at the Law School (a few blocks from the Capitol in Washington, DC) and a wide and distinguished array of managing partners, other practitioners, and academics will be in attendance, from the US, the UK, Canada, and Australia.

It's not too late to register, and I urge those of you with an interest in this subject to do so. Attendance is free.

Partly that's because I ended up instigating this conference with what I thought was an innocent email about a year ago, but mostly it's of course because of the depth of the content and the quality and credentials of those who will be on panels at the symposium and in attendance.

The registration form is here, and the final schedule is here. 

Among the other topics which will be discussed are:

• The emerging dynamics of global competition.
  
• Ownership and capital structure, including the possibility and the desirability of outside (that is, non-lawyer) investment in law firms.
• Ethics and professional values.
• Perspectives from corporate law and finance.
• Organizational and cultural dynamics, and
• Lessons from other professional service firms.

The symposium will conclude at lunch on Friday with a panel on the globalization of routine legal work, a/k/a outsourcing.

The impetus for the Symposium is this:

The Center has published an article in The Georgetown Journal of Legal Ethics (21 Geo. J. Legal Ethics 61 [2008]) which discusses whether ethics rules in the United States should be changed to permit law firms to raise money from outside equity investors. The aim of the paper is to stimulate discussion of the potential effects of pending legislation in the United Kingdom that would permit law firms to become publicly-traded enterprises.

The UK legislation is expected to go into effect next year. "This reform could have profound effects on global law practice, and raise fundamental questions about the basic identity of the legal profession," said Center Co-Director Mitt Regan, a Professor at Georgetown who teaches courses on ethics, law firms and the legal profession. "Surprisingly, there has been little public discussion on this side of the Atlantic of the potentially significant impact of this development. We're trying to get that discussion started." At a minimum, he noted, law firms with offices in London will need to consider how to structure their practices so that the UK legislation does not cause the firm to be in violation of ethics rules in this country.

The paper consists of correspondence among Professor Regan; Bruce MacEwen, an expert on law firm economics and editor of the online publication Adam Smith, Esq.; and Professor Larry Ribstein of the University of Illinois Law School, an expert on partnership law. Current ethics rules in every state forbid any non-lawyers from having an ownership interest in a law firm. Beginning with an inquiry by Mr. MacEwen, the participants in the exchange first discuss whether these rules would permit firms to sell financial instruments such as derivatives whose value is based on the firms' profitability. The discussants then move on to the broader subject of the arguments for and against allowing firms to raise money in the stock market.

Mr. MacEwen and Professor Ribstein generally support permitting firms to attract equity investors. Professor Regan is more ambivalent, but says that participating in the exchange made him appreciate that the question is far closer than most people realize.

Again, I invite you to look at the agenda for the Symposium, which promises to be fascinating.

Most important, I hope to see you there! Please shoot me an email if you plan to attend.

"Measuring Law Firm Success:" The Law Society Picks Up the Baton

The attentive among you may recall that I was in London last November where, among other things, I was pleased and flattered to have been asked by Guy Beringer of Allen & Overy to participate in a panel hosted at A&O's Bishopsgate headquarters on "Measuring Law Firm Success."  That discussion, and that topic, have now been handed over to The Law Society of England & Wales, where they recently launched coverage of the event that I was able to participate in as well as ongoing efforts.   They describe it thus:

"The Law Society is taking forward an initiative to explore ways of measuring the success of law firms. The initiative will look beyond the blunt instrument of profit per equity partner to the longer-term sustainability of firms, including business strategy, client care, employee engagement, innovation, social capital and efficiency.

"Our initiative is prompted by a significant and innovative project launched by Allen & Overy during 2007, and follows their request that the Society takes the project profession-wide. We are grateful for the opportunity to do so. "

Now available online are a summary of the seminar held at A&O, and the presentation I gave. 

I would be interested in any thoughts or opinions this prompts.

Hard Economics & Associate Lockstep

No question is posed to me more frequently these days than, "What does this economic environment mean for law firms?"

To which the only sensible answer is, "It's way too soon to predict anything for sure, but each firm's own situation is sure to differ."    Indeed, it's true that we've seen layoffs at Cadwalader, Clifford Chance, Thacher Profitt, and as of yesterday Thelen Reid, as noted on the WSJ Law Blog.  Yet I've also had conversations with managing partners who tell me that the first quarter of 2008 is shaping up to be as strong as any last year.  So what's going on?

I've written about this environment before, and recently, as in:

• "Prospects for 2008"
• "Think Different.  Who, Me?"
• "Don't (Only) Sweat the Small Stuff"
• "Glass Not Half Full"
• "A Contrarian Bounce?", and
• "The Upcoming Banana?"

If I had to summarize where I stand, I'll reiterate that at this stage in the cycle I remain a "worried optimist."

But since loudly and confidently declaring one's economic predictions is essentially a mug's game (as the joke has it, "you could lay all the economists in the world end to end and they wouldn't reach a conclusion"), the real question is, What should you do?

I have a thought:  Let's re-examine associate lockstep.

Again, this is not the first time I've written about this; in "Fealty to Anachronisms," I reported last June on Howrey's ditching associate lockstep.  But it's time to revisit the issue.

To begin, it helps to step back and take a deep breath before we ask probing questions about a custom we take so very much for granted—one which has been ingrained as a core element of the "Cravath System" dating back to the turn of the prior century.

But if you look at our industry's practice of compensating associates from the perspective of corporate America—or even from the perspective of the putative "man in the street"—I'm put in mind of nothing so much as the New York Times music critic reviewing an early Verdi opera with an especially preposterous plot:  "If I tried to explain to you why Ernani kills himself, we'd be here all week and at the end you wouldn't believe me anyway."

Isn't that about right?  How on earth is it that we've brainwashed ourselves to believe  associate lockstep makes sense?

I submit that in no other business does compensation turn almost solely on year of graduation or year of admission to the profession.  Are we right and the rest of the for-profit economy wrong?  If you're with me at least to this point, now is the opportunity of an economic cycle to re-examine this hoary tradition.

The moment's propitious because, regardless of one's views of the health of our revenue streams going forward, savvy attention to cost is always a virtue, and given the recent spike in associate salary "going rates," real money is at stake.  (I might add that clients appear irrationally anything but exuberant about the associate salary spike.  This may make zero sense economically but it seems to clients to make great sense psychologically.  Ignore it at your peril.)

How then might you wean your firm away from associate lockstep?  Start by taking a page from the playbook of firms, such as Howrey and notably Latham, that have done it already.  Some ideas:

• Create "bands" rather than "years," and group associates past the first or second year into perhaps three such bands of seniority.
• Within each band, which would have a minimum, median, and maximum salary range, determine the place of individual associates based on 360° assessments.
• Permit, indeed encourage, deviations from seniority; that is, after all, what this is all about.  Why not have a third-year who's a superstar earn more than a fifth-year who's hanging on by their fingernails? 
• Deviations from seniority achieve a number of salubrious objectives:
  • They tell the truth to associates about how the firm views their performance;
  • The associate's costs begin to more roughly approximate their value to clients;
  • The firm can more wisely target its scarce salary and bonus dollars to those it wants to keep, now divorced from the artificial constraints of lockstep year-by-year compensation;
  • Billing partners are liberated from the awkward conversations with clients about associates' increased rates; if a client notes that a particular associate's rate has gone up, it's not because another year has ticked over on the calendar, but rather it's because the firm has decided that associate's performance—and value to the client—has increased.

Perilous times are often the most conducive to change.  As a managing partner said to me, "Change is easiest when the house is on fire."  Don't wait for the house to be on fire. 

But explore creative alternatives to business as usual.  Your partners, and your associates, will thank you for it.

Update (24 March):

A 3L at a heavy-duty law school writes (reproduced by permission, but anonymously):

"Hi, I am currently a 3L at [...]. I very much agree that firms should move away from lockstep pay, but I do wonder whether an economic downturn would be a feasible time to do it. I will be starting at a firm in the fall, one of the "bulge bracket" NY firms that you refer to, and it occurs to me that now would not be the time to implement this there. Two of the largest and most profitable practice groups are litigation and M&A (unsurprisingly). I have been told that M&A is fairly cyclical and litigation is mildly counter-cyclical, that the partners are aware of this and that they fully expect hours to fluctuate accordingly. However, the M&A people have been working their tails off for the past few years under lockstep pay. If this program is implemented now, the M&A people will probably resent the fact that it is starting while they have to sit on their hands, rather than in the last few years where they put in superlative hours. Furthermore, lockstep pay helps to avoid causing people to fret about their reduced hours during downturns in business, whereas lockstep pay might cause competition for work that might damage the firm's atmosphere. More generally, how should firms thinking about switching to merit pay deal with fairness between different practice groups that operate according to different business cycles?"

He raises an interesting point, one I did not address in this  piece initially, which is why I wanted to append his question and my thoughts.

Which are two:  First, to the extent variable compensation under my hypothetical scheme would include a material component reflecting hours billed, our faithful correspondent is correct that timing issues and practice group cyclicality will all but ensure that someone's ox is gored during the transition from lockstep.   There are ways to solve or at least ameliorate that, of course, and were someone to actually ask me to advise on such a transition, I'm quite certain I would recommend a "glide path" during the transition that would even out any capricious inequity.  After all, everyone knows what's hot and what's not:  You just have to address it as adults.

But second, implicit in his question is the assumption that a large portion of the variability in compensation would reflect the absolute level of billable hours.  I don't know if I implied that in the original piece, but now that the predicate is laid bare, I will plead to only the most tepid endorsement of that assumption.  More precisely, I will endorse the notion that "more hours means more  $$" within the scheme I outlined only with the following understandings:

• There's an important distinction between the workload of a practice area overall and the hours billed by any individual associate.
  • It's unfair to penalize associates for a low overall level of activity in their group—if that's anyone's fault, it's the partners' (or the economy's).
  • Conversely, I believe it's not only fair but the soul of meritocratic capitalism to reward individuals for hours at the right of the bell curve within their group and to ding individuals at the left.
• But the heart of my proposal as I envision it has almost nothing to do with hours and everything to do with professional development and progress along the curve of being a high-performing practitioner.  What I care about are:
  • Pure legal excellence:   Analytic ability, attention to detail while not losing sight of the big picture, an instinct for getting to the core of a matter.
  • Writing and speaking clearly, effectively, and precisely.
  • Being able to team with colleagues within the firm, up, down, and sideways.
  • Client relationship skills—beyond dutifully reporting what clearly has to be reported—extending into the realm of potentially excellent client service overall.

A thought-provoking followup.  Thank you (and you know who you are).

Report From London

Just back from an abbreviated week in London (essentially Tuesday through Thursday).  Herewith a report.

I met with the managing partners of a good half-dozen firms, fairly representative of the marketplace, and unsurprisingly the top question on most minds is what the economic downturn portends.

Unlike most of life, where a bell curve distribution is the best first approximation of almost any sampling, views on this topic are bimodal:  Either people tend to believe things could get quite bad indeed, or else their  firms are having bang-up first quarters here in 2008.  To be sure, those on both ends of this spectrum are hesitant to predict that their gloomy or sunny outlook will endure:  Uncertainty, in spades, is the watchword of the day.  And so I resolved to try to delve into deeper and more enduring questions.

Primary among them are whether London will overtake New York as a global financial capital, and what the prospects are for a major (as in "headline news") US/UK  law firm merger.

In a bit of contrast to last time I was in the City last November, there's a more cautious and less triumphalist air about London attaining supremacy over New York.  (I will resist the temptation to link this, as rich as it is, to the overwhelmingly delightful, gratifying, and juicy self-immolation of Eliot Spitzer, which occurred during my trip.)  Now, the view  seems to coalesce around a consensus that New York and London will always be transatlantic cousins, each with respective styles and strengths and weaknesses, but neither regnant over the other in capital markets.

Interestingly, one lunch I attended featured a speaker (an American by birth but one who has lived in London for 20+ years) who discussed the cultural  differences between doing business in the US  and the UK.  If you will indulge me in a bit of editorial license, these were the highlights of her talk:

She also told the anecdote of a set of deal documents being jointly worked on by a US and a UK firm.  As drafts were updated, the routine became that the US firm would turn on "track changes," insert its revisions, and email it across.  The UK firm, by contrast, would leave the document untouched but return it with a cover memo suggesting editorial revisions.

After a few rounds of this, the US firm piped up with some exasperation that the UK lawyers were requiring double-work:  First, to read the memo and determine the validity of its points, and second to actually make  the changes.   Why not just  make the bloody changes?  And here, of course, we have a cultural misunderstanding:  The UK  lawyers were merely being politely deferential in not assuming they could trespass all over the so-far-agreed-upon document.  The US lawyers were assuming that  efficiency and expediency were the goals. 

Also anecdotally, in the departure  lounge of my return flight, a woman asked me from behind my back, "How are your dachshunds?"  Having succeeded in getting my attention, she turned out to be a former neighbor on the Upper West Side, in a building catty-corner to ours, who had moved a few years  ago to London with her investment banking husband for a tour of duty.  I told her that I hoped she felt as at home in London as in New York—on occasion I'm tempted to envision it as almost the sixth borough of New York—and then I took the opportunity to ask her how she would  compare the two cities, as someone with a ringside seat to each.  She replied that London is like Brooklyn Heights—unmistakably an urban locale with its own indelible identity, but less frenetic and less dense than Manhattan, lower-rise.

As noted, the other enormous question of interest (well, at least to me) was the prospect for a headline merger.   Previously, I must say, this speculation has  tended to be dismissed with suspicious abruptness on both sides of the pond.

This trip  was a bit different.  People were far less dismissive, and many indeed even owned up to the potential strategic and business logic of a hypothetical US/UK (read:  New York/London) merger.  Culture, of course, will always be the obstacle, but the financial misfit that was presumed to exist heretofore may be eroding as practices converge and globalization truly kicks in. 

One point of view I heard in different contexts and expressed in different ways, but pregnant with potential meaning about the market's readiness for a merger, was this:  Some US firms are relatively strong in Asia and some UK firms are relatively strong on the European Continent.  Wouldn't that make for a potentially interesting combination, delivering the three first-world continents, North America (including New York), Europe (including London), and Asia?

But repeatedly, the reservation was voiced that it is so intrinsically difficult to sustain long-run investments in new geographies and practice areas where partners' expectations are to "strip-mine" the firm of cash at the end of every year and even the most visionary managing partners with the greatest commitment to the long term find it almost impossible to orchestrate continuing, loss-producing, investments.

Pop quiz: Q:  What's the one line item that appears on every corporation's balance sheet that I suspect you have never seen on a law firm's?

A:  [tick-tock-tick-tock.....]  Retained earnings.

This still begs the economic question which applies to mergers and long-term investments in new geographies alike:  Why, if the initiative would benefit us all in the long run—better work from happier and more valuable clients, higher profitability, stronger weapons for recruitment and retention—can we not stomach the short-term sacrifice?

I have no answer to this question.

Which makes me optimistic that, during my career, we shall see a transformative merger.

But, you protest, conflicts will become insuperable the larger firms get?   You know as well as anyone that rules are made to evolve and adapt, and with Chris Perrin, the general counsel of Clifford Chance, calling for relief from conflicts just last week, can reform be far behind?  (He would permit sophisticated clients to waive conflicts in any and all circumstances.)

In any event, I predict that I'll be going to London pretty regularly.  Not the worst duty.

Process or Passion?

A major article appears in this month's American Lawyer, penned by Ben Heineman, most famously ex-GC of GE, and David Wilkins, Harvard Law professor. Both are now deeply involved in HLS's Program on the Legal Profession, whose stated mission is "to build bridges between the academy and the profession."

The article, "The Lost Generation?", subtitled "demoralized and dispirited, big-firm associates are defecting in droves. Here's what firms, and their clients, can do about it," is one of which it might be said, "Attention must be paid." Betw