"Think Different?" Who, Me?

Consider your reactions to these three hypothetical scenarios:

• In light of slack demand, BMW announces a combination of price cuts, rebates, and financing incentives that would save you 15%. More or less likely to visit a dealer?
• The Dow Jones Industrials are down 15% year to date. More or less likely to add stocks to your portfolio?
• Reflecting softened deal flow in their area of expertise, a boutique firm that would be a nice fit with your firm announces revenue down 15% year over year. More or less likely to invite their managing partner to dinner?

Of course all three scenarios are structurally all but indistinguishable. So why would your instinct be to run to the BMW dealer, hold your fire on further stock investments, and postpone the dinner invitation for another few quarters to see what happens?

The good news, such as it is, is that if those are your reactions, you're in ample company. Actually, the first two scenarios—the "15% off sale" on BMW's and on stocks are by now a classic example of the irrationality of homo economicus. We love getting a deal on goods and services (and new homes, anyone??), but when investments are "on sale," we run for the hills.

But here at "Adam Smith, Esq.," we don't cover BMW's or the stock market, so let's focus on scenario #3.

Fortunately, yesterday morning's New York Times published a piece, "Mergers in a Time of Bears," speaking to #3. It describes a study published in this month's Academy of Management Journal (evidently unavailable online) which it summarizes thus:

"Most mergers fail.

"If that’s not a bona fide fact, plenty of smart people think it is. McKinsey & Company says it’s true. Harvard, too. Booz Allen Hamilton, KPMG, A. T. Kearney — the list goes on. If a deal enriches an acquirer’s shareholders, the statistics say, it is probably an accident.

"But a new study puts a twist on the conventional wisdom. It’s not that all deals fail. It’s just that timing appears to be everything. Deals made at the very beginning of a merger cycle regularly succeed. It’s the rest that fall flat."

The statistical analysis behind this provocative (but intuitively attractive) proposition must remain opaque, not only because the primary source seems unavailable, but because, as theTimes describes the methodology somewhat unhelpfully: "The professors measured the acquirers’ stock appreciation or deprecation by using a fancy calculation of what they call “abnormal returns,” which examined share prices five days before the announcement of the acquisition and prices 15 days later. The math is complicated, but they say the “abnormal return” is predictive of stock performance in the future."

Be that as it may, and taking the good professors at their word, what's really going on here?

My emphatic diagnosis of what is not going on here is "Think Different." What is going on here is the herd mentality affecting behavior and decision-making at the highest level. And we are reminded that that is no way to outperform the market. "Baron Philippe de Rothschild, ever an opportunist, is said to have advised, 'Buy when there’s blood in the streets.'" Warren Buffett has clearly subscribed to this advice, if not to its precise expression at the hands of Baron Rothschild.

The moral of this to me is clear: Being a victim of bandwagon effects is no way to exercise leadership and in spades it is no way to steal a march on your competitors. I assume you all noticed that Latham announced last week the simultaneous opening of three new offices in the Middle East (in Dubai, Abu Dhabi, and Doha). This is not shrinking-violet behavior, and it's not batten-down-the-hatches behavior. In my opinion, it's straight out of the Corporate Finance 101 playbook: Increase portfolio diversity, reduce Beta, maintain returns.

But you have to be willing to diversify. Buy more stocks. Schedule dinner with that managing partner. Or, as the Times less circumspectly puts it, "C.E.O.’s should stop being such scaredy-cats. While everyone else is battening down the hatches, go make a deal."

Out of the Mouths of Children

"You're too smart for your own good."  How quickly we dismiss that snide accusation as revealing the ignorance and probably the intransigent know-nothingness of the accuser.  But could there be a grain of truth in there?

If you believe in the "curse of knowledge," a phrase apparently invented in a  1989 paper published in The Journal of Political Economy, we may in fact on occasion know a subject too well:  Too well, that is, to be able to think creatively or in an innovative fashion about it.    According to this article in the Sunday NYT business section, it takes thinking unlike that of those trained in the particular discipline at issue to generate innovative approaches.  Andy Grove sums it up nicely, capturing the tyranny of conformity to the common wisdom:  "When everybody knows that something is so, it means that nobody knows nothin'."

Personalizing this phenomenon to our profession, I'll take the liberty of renaming it the "curse of expertise," because, after all, don't we all consider ourselves experts in our chosen domains? (I sometimes presume I'm an expert in the domain of "the economics of law firms," as "Adam Smith, Esq." is notably subtitled, but I try to catch myself before I go too far down that road—and you should call me on it if you think I have.)

The "curse of expertise" can condemn us to recite what we're comfortable with, to feel altogether too smug about our familiarity with the landscape, and to unconsciously disarm our mental defenses against cant, or worse--to arm to the hilt our mental defenses against unconventional thinking.   It can also lead to thinking and behaving only for the benefit of  those presumably already initiated into the particular inner circle of expertise:  The author offers this wonderful example:

"I have a DVD remote control with 52 buttons on it, and every one of them is there because some engineer along the line knew how to use that button and believed I would want to use it, too," Mr. Heath says. "People who design products are experts cursed by their knowledge, and they can’t imagine what it’s like to be as ignorant as the rest of us."

Our DVD remote has 59 buttons; I just counted.

Separately, but also in the Sunday Business section, the always-wonderful Peter Bernstein, an economic historian par excellence, tells an amusing tale on himself dating back 50 years to New Year's Day,  1958, when he was invited to speak at the Harmonie Club here in Manhattan to offer his views on the economic outlook for the coming year.  (If you're not familiar with Bernstein's work, by the way, you're in for a real treat:  His 1998 Against the Gods:  The Remarkable Story of Risk is, alone, enough to cement any one man's reputation as an insightful and gifted raconteur.)

But back in 1958 he utterly botched his forecast by, in his coinage, "postcasting—extrapolating past experience instead of seeking change in future experience."  Considering the bad economic news headlining the end of 1957 (unemployment up by 50%, the stock market down nearly 15%, industrial production down, etc.), he as a child of the Great Depression forecast gloom and doom.

In fact, the country was on the verge of an historic transformation in the dynamism of the economy, as reflected in a sea change in the valuation of the stock market:    By the end of 1958, stocks had risen so much that the dividend yield on common stocks would fall below the yield on long-term Treasuries.  It has, of course, never since reversed that relationship.  Talk about faith in the future....

What did he miss? 

It's very hard for human beings to recognize truly changed environments.  So, today, as we gape slackjawed (yours truly included) at the wreckage of the sub-prime/credit crunch, our surprise at the mess, and the as yet uncharted magnitude of the mess, is directly traceable to our not recognizing, starting 18 months ago or so, that things were changing.  

Inflation, particularly in the bizarrely mis-named and fundamentally conceptually baffling so-called "non-core" components of food and energy, was rising.  Productivity increases were losing momentum.   Housing prices were, lo and behold, not appreciating or even starting to slip.  Mortgage delinquencies were rising.

But, blinded by the strong run of prosperity from 2002 to 2007, we assumed the Fed could do no wrong, that home prices would continue to climb to the sky, that unemployment would remain at historically low levels, that the stock market would continue its snorting bull ascent as far as the eye could see, etc., etc.

Putting these two stories together should inspire you to:

• Every once in awhile, abandon your comfortable byways of thinking.
• Invite some perfect ignoramuses in and try to explain why you're doing what you're doing; let them ask the brilliantly innocent questions children tend to ask.  ("What's a CDO, Daddy?   No, I mean really, what's in there and why would you want to buy or sell one?")
• Be, not too smart for your own good, but too foolish.  For your own good.

A Conversation with Marianne Short, Managing Partner of Dorsey & Whitney

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

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

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

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

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

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

Here's what I learned.

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

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

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

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

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

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

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

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

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

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

How will she know if these efforts are paying off?

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

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

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

A Conversation with Andrew Grech, Managing Partner of the World's First Publicly Traded Law Firm

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

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

The IPO Itself, and the Immediate Aftermath

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

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

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

Obligations to Clients vs. Obligations to Investors

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

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

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

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

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

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

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

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

The Purposes of the Listing

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

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

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

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

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

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

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

The IPO Process:  Harder than Expected or Easier?

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

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

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

What are the benefits?

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

How was the IPO priced?

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

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

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

The Post-IPO Firm Culture

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

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

For example?

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

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

Any last thoughts?

The Benefits of Non-Lawyer Regulators

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

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

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

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

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

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

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

"Managing Partners' Forum:" Now Launching in the US

I'm pleased to announce that I'm now the US director of the Strategy Panel of the UK-based Managing Partners' Forum.  My co-directors are Andrew Hedley of Hedley Consulting (London) and Rob Millard of Edge International (Bahamas). 

What does this mean?

"MPF" was founded in London in 1995 and is currently chaired by Nigel Knowles of DLA Piper.  MPF is widely recognized as the leading association in the UK for professional firm leaders and their management teams.   (MPF membership is open not only to law firms, but to accounting and other professional services firms as well.)  Its mission is to promote excellence in management through, among other things, awards and other recognition for internal management expertise.  If you're US-based and not familiar with the MPF, you may be forgiven; it is just launching its US presence, so I am particularly pleased to be in on the ground floor of its efforts here.

A primary activity of the  MPF is to conduct regular—typically six times a year—surveys on topics of interest to its members.  From the invitation to participate in the study:  "Our recently formed Strategy Panel consists of managing partners and CEOs at professional firms interested in strategy. The inaugural survey focuses on the process by which strategic decisions are taken at professional firms worldwide. It can be completed by anyone on the management team in any firm and should take no more than 10 to 15 minutes. Anonymity is guaranteed."

Here is the outline of the first, and current, strategy panel survey:

"Our July 2007 survey on the strategy setting process at professional service firms covers:

• Attitudes towards strategic planning
• Responsibility for formulating strategy
• Sources of data used when formulating strategy
• Tools used in formulating strategy
• Assessment of opportunities and threats facing firms
• Frequency, duration and time horizons when formulating strategy
• Overall satisfaction with the outcome"

After the survey results are compiled, a breakfast meeting is held to present the findings and have a roundtable discussion. Participating in the surveys, and attending the meetings, is free; the MPF collects its revenue from membership fees but not from charging for admission to events.

The meeting to present the results of our first survey is tentatively scheduled for Thursday, October 11th, here in New York.   If you'd like more info about the MPF and what would be entailed for your firm to join, check out their basic information page, or else just let me know of your interest..  It would be delightful if we could meet on October 11. 

The FT's Second Annual "Innovative Law Firms" Awards

The FT is out with its second annual "Innovative Lawyers" Survey and much has changed since I reported on the original survey a year ago.  Primarily, the survey is far more ambitious in scope this year:

"The 2006 report covered only UK lawyers working in private practice. This year the scope has been broadened to cover mainland European law firms, in-house lawyers working in European companies, lawyers in the UK’s public sector, the UK Bar, US law firms operating in Europe and individual legal innovators. In addition, we looked at the UK judiciary to see if there are any judges changing the mould or standing out for their innovative work."

Here's the entire list; the top 5 firms are:

• Allen & Overy
• Clifford Chance
• Linklaters
• Eversheds
• Wragge & Co.

Among US-rooted firms, the only ones represented are:

• DLA Piper (#6)
• Latham (#10)
• Baker & McKenzie (#20)
• White & Case (#24)
• Dechert (#42)
• Skadden (#43), and
• Greenberg Traurig (#48)s

The top-line findings are hard to argue with, but worth summarizing since it is, after all, the Authority of the FT now underscoring what many of us already believed:

"The UK legal profession is more advanced than its mainland European counterparts: law firms are moving from being professional organisations to legal businesses. This sometimes controversial shift has been going on for more than a decade in the UK, but it is still in its infancy in mainland Europe. [...]

"The research for the FT Innovative Lawyers report also showed the cultural differences between US and UK law firms. In general, US law firms tend to be more lightly managed than their UK counterparts. Typically they are more akin to traditional models of law firm partnership, and they are largely organised as a group of individual partners running their own practices. Along with UK firms such as Slaughter and May, these US firms tend to focus their energies more on legal innovation than on the way in which they do business. [...]

"Another facet of the legal world that still shows no sign of radical change [besides the ongoing struggle for diversity] is the way in which law firms bill their clients. As in last year’s report, Billing & Fees was the least subscribed category. The hegemony of the hourly rate remains – although there were some notable exceptions of firms willing to share risk with their clients, or – as in the case of Norton Rose – to introduce third party funding to foot litigation bills.

"Lawyers in every branch of the profession are beginning to look forward and outward. Even the UK Bar, often described as “Dickensian”, is showing signs of a willingness to change traditional ways of working. Commonplace now are transparent bills, marketing and an ethos of client service."

So. to the awards:  What did these firms actually do  to garner awards?

The sheer variety is what's most impressive to my eye.  Linklaters came up with a way of helping finance vaccination programs overseen by the World Health Organisation and Unicef, among others, under which $1-billion of bonds have been issued and another $3-billion are expected to be issued over the next few years.  (The World Bank acts as treasury manager for the issues.)   Clifford Chance took on climate change by attempting to do for carbon and emissions trading what Michael Milken and Drexel did for junk bonds:  Standardize the disclosure and documentation to make the market more liquid.  CC also claims to have invented the world's first convertible Islamic bond, consistent with Sharia law. 

As for individuals, we have some truly impressive souls.  Mahnaz Malik, age all of  28, graduated in law from Cambridge in 1998 and is now tri-qualified to practice in England & Wales, New York, and Pakistan.   While at Simmons & Simmons—which she left 18 months ago to serve as a full-time advisor to governments on their relations with NGO's—she set up a  program to provide legal representation to children "detained in appalling conditions" in Pakistani jails; it now represents 92% of the children in Lahore jails.  Oh, and did I mention that she's published two novels and made a film?

Then we have Jim Rice, a  securitization partner at Linklaters, who spear-headed the global vaccination initiative noted above, and has a track record of inspiring teams of young lawyers pursuing ambitious pro bono projects.

Or Chris Perrin, the general counsel of Clifford Chance, who is a thought leader in the ever-more-important area of conflicts, now chair of a working committee to draft new conflicts rules for England and Wales.

Lastly, one of my perennial favorites, Tony Angel, managing partner of Linklaters since 1998, who the FT calls "a visionary and strategist in a sector that is not known for sophisticated management. He was one of the first law firm managers to take the job seriously," and rebuffs criticism that he has turned the firm into a corporation:  Rather, he insists, the partnership ethos is alive and well within a smoothly functioning and profitable environment.

Speaking of management, there's a separate category of awards for that, as well as for IT, HR, and client service.

Management

Regular readers know that I think benchmarking is a merely the starting line at best and a tar-pit of assured mediocrity for the vision-impaired at worst.  So I thoroughly endorse the piece on management:

"“Are we normal?” Law firms are always asking me this question. When I assure them that their organisational and interpersonal challenges are fairly typical of firms in their sector, they seem relieved. But they are missing the point. Being “normal” is not enough. To achieve competitive advantage these firms must aspire to being abnormal – in a good way.

"Very few of the submissions in the management category this year could be described as genuinely innovative (click here for rankings). Most clients would be unimpressed if they ever read their law firms’ submissions in this category. What feels radical and innovative to a law firm may seem like standard management practice to their corporate clients."

Eversheds takes first place for introducing "a sea change" in how partner compensation is calculated: 

"Eversheds has abandoned lockstep altogether but has done so in a particularly creative way. It has used the new method of partner remuneration as an opportunity to define and embed the most valuable elements of the firm’s strategy and the partnership’s ethos. In other performance-­ related pay schemes, an individual partner’s profit share is based entirely on retrospective performance. Eversheds’ scheme also takes account of expected future performance, recognising and rewarding an individual’s commitment to modify or fundamentally change behaviours in support of five defined criteria (of which only one is profit)."

To my mind, nothing, absolutely nothing, is more important to enlisting "hearts and minds" support for different behaviors than to embed rewards for the desired behaviors, and penalties for the same-old-same-old behaviors, into the compensation system. 

IT

Many of the entries here were of the to-be-expected variety.  For example, DLA Piper  allows clients to post advertising material for clearance by their lawyers; Baker & McKenzie has an IP database repository with, they claim, more than a quarter of a million trademark records under management; Mills & Reeve offers a free online healthcare law resource; Linklaters created a leveraged term sheet generator to cut production time from eight hours to 30 minutes; Simmons & Simmons offers an online age discrimination training guide; and Clifford Chance has a reasonably mature suite of online services now being used by over 20,000 people in 270+ organizations in 50 countries and eight languages.

But then we had the truly innovative.  Number one here is the creation of Derek Southall, a partner and head of strategic development at Wragge & Co., who has come up with a partly automated and partly human (with four IT specialists) system to advise clients on their own internal IT infrastructure needs.    One reason it wins?  This client quote says it all:

"Ian Leedham, senior counsel for the National Grid and an enthusiastic supporter of the Wragge & Co initiative, agrees. He points out that Mr Southall’s strength is that he was a lawyer before he became an IT expert: “This means that he really understands what the business needs.”"

90% of lawyer/IT miscommunication could be eliminated, I've often felt, if you can find one key person who truly understands what both sides of the table are talking about.  There's no substitute, here, for having a former or current practicing lawyer who's at least reasonably, if not intimately, conversant with IT. 

Human Resources

The adage that "people are our most valuable asset" is, as we know, honored too often in the breach.  This observation sums up the disconnect:  "“In a lot of firms, there is a reticence on the part of partners to engage staff in discussions in early stages of their careers,” says [David Miles, a partner at BDO Stoy Hayward, an accounting firm]. “For firms that do start engaging associates at an earlier stage, it actually forces them to identify what they are looking for in terms of making partner. But firms are only just waking up to the fact that they need to do that.”

Ashurst and Allen & Overy, among others, have taken the remarkably common-sensical step of compensating associates   not based on years post-graduation, but on actual competence, skills, personal attributes, and behavior.   Cobbetts has established a "leadership development center" focused on a two-day off-site program in which partners explore different business-focused activities designed to identify their relative strengths and weaknesses.

Latham, characteristically, has come up with one of the more "differentiating" programs of all—and one, of course, which is blindingly obvious in hindsight.  Rather than relying on the ad hoc approach, often dependent on chance hallway encounters, of finding associates on their way out posts in-house, Latham has formalized it to  include partners, departing associates, and firm alumni, all run through the firm's intranet.   Why on earth wouldn't your firm do that?  We all know that happy alumni can become your best clients.

While you're at it, don't ignore staff.   If your firm is roughly typical, you have at least as many staff as you do fee-earning lawyers; to ignore them could be crippling and is certainly morale-sapping.  This doesn't have to be expensive; the most popular benefit is career development programs—which, need I remind you, actually make them more valuable employees?

Client Relations

I've saved one of my favorites for last.   Impeccable legal expertise is now taken for granted; but clients want more.  The trend, roughly, is from detached advisor to business partner.    Critically, this has to go beyond online tools such as client relationship management systems, or KM systems with expertise-finding capability embedded.  The goal is to fundamentally change the way lawyers think about clients before, during, and after engagements.

For example?  At Addleshaw Goddard, 40 or so client relationship partners and their client relationship team members are being trained in business analysis tools at Cranfield School of Management—with a view towards enlightening them as to how the client might actually be thinking about their businesses. 

Wragge & Co. did something more innovative:  It offers free counsel to companies struggling to consolidate and downsize their "panels."  Or, as they slyly put it, "we became poacher turned gamekeeper."  The advice  covers the waterfront, from whether a panel is advisable in the first place to what criteria should be applied, how to handle firms' tenders, and how to get panel members to obey the ground rules.

But Linklaters wins for "the shift in approach with potentially the farthest-reaching consequences for the legal industry."  They fielded a pitch team for a global corporation's work outside the US that was made up of two lawyers—and one client relationship manager and one IT specialist.    We can end with no more apt tale than this:

"The firm says: “The client relationship manager and the managing relationship partner in charge of the team were something of a double act, which was unconventional by industry standards, yet highly effective. There were some conversations which Linde needed to have with a lawyer and other conversations which were easier with a senior person outside the legal team.”

"Should this become standard practice, and be taken up by other firms, it would truly be an innovation that could revolutionise the way law firms deal with their clients. It might also be part of a wider trend towards senior non-lawyers having greater power, and more exposure to clients, within law firms. And that is uncharted water for the legal world."

Trusting non-lawyers, indeed!?  Now that is true innovation.

A Conversation with Greg Jordan of Reed Smith

In 1999, Reed Smith's 610 lawyers generated $168-million in revenue, from 14 offices in the Northeast and Mid-Atlantic states.

At the start of 2007, its 1,500 lawyers are on track to do $900-million in revenue, from 21 offices across the US from California to Chicago to New York, and in the UK, the European Continent, and the Mideast.

In early April I had a chance to spend a couple of hours with Greg Jordan, the Firmwide Managing Partner and Chairman, who was elected to that role in 2000, at the start of that period of astonishing growth. Here's what we discussed. 

I started by asking if he had a vision for Reed Smith when he was elected that forecast where the firm is today, or if it has evolved.   He recalled that it was a contested election for managing partner, and that his views were summarized in the "Transition Document," which had six or seven key objectives. 

Primary among them was explaining to the firm why it needed to expand out of the Rust Belt, and how it could do that hand in hand with leveraging its relationships with its best clients. Looking at it again today, he says that the firm has pretty much achieved all of them.   To wit?:

• Establishing critical mass in California
• And in London
• Making serious strides in New York
• Expanding beyond the Pittsburgh center of gravity
• Adopting an international, not regional, outlook
• Improving teamwork and industry focus and getting more "share of wallet" from key clients

I remark that I'd been reading another AmLaw 30's "strategy statement" the day before, and that it sounded remarkably similar:  Go for more high-value, "premium" work, expand your geographic footprint, move from commoditizing to high-end practices, invade the key financial centers with meaningful personnel commitments.  So what made Reed Smith different?

"You're right; you're right!  Strategy is not the hard part.  The art is all in the execution.  The easy part is figuring out what to do; the hardest part is communication and outreach."

• "Do what you say you're going to do
• "Without forcing it
• "Lawyers like evidence
• "So provide it to them; follow closely how what you promised is working out."

Had I to have ended the conversation right there, I feel confident I could report to you this is Greg's philosophy.

What do you mean by "evidence?"

"Let me give you an example:  When we merged with Crosby-Heafey in California [January 2003, picking up a 230-lawyer firm known for its strength in litigation], I told people we would generate additional business that neither of our two firms alone would have gotten.  So we've tracked it.  And last year it was—care to guess?—$60-million. That's $60-million, which was first $10-million, then $20-million, etc., year by year.  10% of last year's revenue.

"Lawyers listen to evidence."

Greg mentions they've done the same on the diversity front, winning the Minority Corporate Counsel Association's Sager Award and becoming one of Sara Lee's top two law firms.

You achieve this by communicating all the time:  Tell people what we're going to do, tell them what we're doing, tell them what we did. 

But let's step back, I say; not every firm, presumably, could do what Reed Smith has done?

"It starts with who you are.  Look at the history of Reed Smith; in the late 19th Century, and continuing perhaps until World War II, we were, as my London partners kid me, the 'Magic Circle' firm in Pittsburgh—and it wasn't a bad place to be that, then.  Reed Smith represented Andrew Carnegie in the deal with J.P. Morgan that created US Steel.  Talk about high-end corporate work (at the time)....   So the first thing is to know who you are.

"Another thing we had going for us, even when I became managing partner in 2000, was our partnership ethos, our sense of teamwork and integrity. But at the same time we did not have any presence in many important markets:  We had no national reputation, let alone an international one, and we had a fundamental problem:

• We were too big to get small
• And too diverse in practice to be a boutique.

"So we had a choice:  We could become a strong, and hopefully durable, regional firm, or we could expand into the major national and international markets.  We decided on Plan B."

And what did that mean for you?  "It meant we had to get into London, California, and New York, and I believed the way to do that was to make the most of our star partners, our best client relationships, to aggressively recruit talent, and above all, to do it fast."

Let's change gears for a minute, I suggest: Let's focus on operations.  It's hard to say that any AmLaw 30 firm is "cheap," given that you face market rates on associate salaries, the non-negotiable requirement to be in Class A+ real estate in major urban centers, etc., but it strikes me that Reed Smith is reasonably economical.

"Here's our basic philosophy," says Greg, becoming animated (even for him):  "We try to figure out what the most powerful market forces are, and own them, not resist them."   Meaning?  "First, take globalization.  Our key clients, banks, pharmaceuticals, financial services, media, are all going global: So our response has to be to be where they are, not to stay in our comfort zone in Pittsburgh.  Second example:  Convergence [of clients' preferred firms into shorter and shorter lists]:  As our clients get bigger and want deeper relations with fewer law firms, we need to win.  And we are: We have fewer and fewer, say, $750,000/year clients, and more situations where that client goes either to $5-million/year or zero."

Can you quantify that?  "Sure:  One particularly large financial services institution recently cut its roster from 300 firms to 10.  We were in the 300 and I'm happy to report we're in the 10.  Here's another number for you:  Our revenue from our top 250 clients went up 400% in the past 5 years."

"Third, client pressures on fees.  GC's are on the warpath on costs.  Now, it would be nice and cozy to say, 'I just wish it would all go away.'  But it's not going away.  Instead, we embrace it and ask for more work from precisely those clients.  Sure, some work that goes to the New York 'bulge bracket' law firms ought to go to those firms, and I'm the first to tell clients that.  But there's also a bunch of work that we can do as well as or better than those firms.

"There's also a bunch of work that ought to go to small, regional or local firms, or boutiques.  I can't worry about that; the work goes where it ought to go.  Our response has to be to move up-market.

"Here's the key challenge:  To take this thing that we cannot change and figure out how to drive it to our advantage."

Is it more competitive now then when he took the job, or when he was a young partner?

"I gave a presentation that I called, 'The Good Old Days Weren't So Good.'  In the mid-1980's 24% of Reed Smith's business came from just two clients:  One was a bank that was under siege, and the other was an asbestos manufacturing company that was going to go bankrupt, like it or not.  Plus, we had 90% of our lawyers in one city—Pittsburgh—with a slow economy.  So maybe the good old days weren't really so great."

"But you still have to be true to your heritage.  One thing we have going for us is that we believe in long-term relationships and always have.  When something goes wrong on a case, or a transaction—and they will—if you can draw on a decades-long reservoir of trust and good will, you've got a lot of momentum to get you past the pothole.  That's why I tell everybody who'll listen that it's strong relationships with clients that drive value for them, and for us."

There's a school of thought that changes in law firm rankings occur glacially; if you look at movement in the AmLaw 100, it doesn't appear as dynamic as, say, in the S&P 500 or the Fortune 500.  Can Reed Smith really become a top 10 or 15 firm?

"Great question!  Look at banking.  Did the New York City money center banks look at NCNB in Charlotte 15 or 20 years ago and see a fierce competitor?  Today Bank of America is vying with Citi for most valuable bank in the country, by market cap. Look, we're a business like any other industry; there is no entitlement to incumbency."

Aren't law firms inherently fragile? At least compared to corporations?

"Sure they are; that's why you need a focus on relationships: Build relationships among partners, senior management, associates, staff, and clients. Then when the inevitable rough patch occurs, you have good will you can draw on to get over things. I try to spend a tremendous amount of time with clients and partners.

"For example, Sunday night I leave for London; I'll have two full days there, with our key people and some clients we're trying to build matters up with. Then I take the train to Paris for a day and half: Same drill. Then I fly to Dubai where I'll see, among others, some of our clients. Here's another example: I got up here [to New York] last night on the train from DC. Yesterday morning in DC I spent with key partners, meeting one-on-one. Then I had a client lunch, again just one-on-one. In the afternoon I spent an hour fielding roundtable Q&A's with all the DC associates—completely unscripted. I then gave our DC office pro bono award out, and had dinner with 15 Reed Smith lawyers, partners and associates both."

"My assistant for special projects, Patty Conner, who has an MBA by the way, tries to keep me in what I call—and what I tell our people I want them to do as well—'high impact' mode. What is the highest-impact activity I can be pursuing right now? It might be seeing a client. Or romancing a lateral, it might be talking to the media—you!—it might be making sure the integration of our latest merged-firm is going smoothly, it might be meeting some of my counterparts at other firms. But it has to deliver the most impact then and there."

On your watch, Reed Smith has done a substantial amount of merging with and acquiring other firms, and you've also hired a bunch of laterals. How are the dynamics of each different?

"M&A is what you need to do if you're entering new markets: You need to get credibility fast, and establish a base to work from. Laterals work better where you're building on established strength; it's very very difficult, and in fact we've never done it, to try to build an entirely new practice or open a brand-new office through lateral recruitment alone.

"But once you've picked your merger target and everything has worked out, after you announce the deal, that's when the hard work begins, the work of integration. This is how we do it:

• First, relocate some key Reed Smith partners into the new market, partly as cultural ambassadors, partly to seed the Reed Smith culture in the new location., and partly to show how important the integration is to all of us. That's why Michael Pollack [Director of Strategic Planning and a member of the executive committee] moved to London after the Richards Butler deal.
• Next, you need to hit the ground running operationally: Get the businesses running together as fast as humanly possible. YOu need to make sure that you can take advantage of opportunities that come from things that would not have been available before. Without operational integration, you can't track, or report on these opportunities.
• Third, once you start finding those hitherto-unavailable opportunities, you pound the message home that the combined firm is winning business that neither one alone would have been able to capitalize upon.
• Lastly, by executing on all these things, people begin to "think differently." They feel less and less a legacy of Firm A or Firm B, and more a part of the exciting new Reed Smith. And over time you get new people joining who never were part of either legacy firm, and who have signed on to the dynamism of the new place.

"If you can execute well on all this, the two firms will meld, to the point where it's difficult to find the seam."

Management Team

Very few firms have the pre-meditated depth of management around the managing partner that you do. How did that evolve and what are you trying to accomplish with it?

"One of the things I'm good at is knowing my limitations, so I focus on adding complementary skills. The dumbest thing I could do would be to build a team with another 5 or 6 Greg Jordan's. The idea is to broaden, not to heighten, the management team. From the outset of Greg's tenure, the key people have been himself—and he views his leadership style as instinctive, not from training (he's a trial lawyer, not a corporate lawyer). Also key is the highly energetic director of strategic planning, Michael Pollack, who was on the bus from the start. And then Eugene Tillman, Director of Legal Personnel. Eugene brings discipline, consistency, a detail orientation, and the ability to say no. I'm not really much good at any of those things, so he's been a life-saver. Gary Sokulski is the COO, and has done the job of melding together all of the operations, with an eye for detail and execution.

"Rounding out the team is Roger Parker, from Richards Butler, our European & Middle East managing partner; Dave DeNinno, head of the business and regulatory department; and Colleen Davies, head of litigation.

"But there are other people we can move around to do key things when we need them. For instance, Tom McGough is moving to Chicago to help with the post-merger integration there. He was the prior firmwide head of litigation, before Davies. [Tom's pedigree suggests he is up to the job: Princeton undergrad magna cum laude, U.Va. JD, clerk to Rehnquist.]

What do the members of the management team have in common?

"Well, first, they're a team of highly successful practitioners.  Today that's a prerequisite to doing the job; maybe it won't be in the future, but today it's required.

"Second, as I mentioned, they have complementary and not redundant skill-sets.

"Third, the longer we work together as a team, the better we get.  There's a level of consistency and of 'shorthand' that develops.  It just gets better and better.

"Finally, we're avoiding staleness;  we keep trying to add new viewpoints, including adding Parker (from Richards Butler in London) and Davies (from Crosby Heafey in California).   For example, Dave Egan, our Chief Marketing Officer, never worked in a law firm, much less was a lawyer.  So what I discover is that he's the most likely to ask why do we do things this way?  And he's often right that there's no good reason."  [For my profile of Dave, click here.]

"The bottom line on this wealth of talent in the management team is that if I get hit by a bus this afternoon, there's no risk to the firm; things will go on.  We could continue to be innovative and we could continue to pursue our vision."

How has the role of a managing partner changed?  Does your job today resemble what you thought it might be or what went before?

"The mind set before at many law firms was something like this:  Put somebody in the chair for three to six years and just hope he or she doesn't screw things up.  Now it's far more complex, and managing partners tend to have a longer tenure.  That raises the question of how long is too long?

"The answer is not term limits, and it's not when it's someone else's 'time.' The answer lies in how you react to these two questions:  (1)  Do you still have it?  and (2) Are others still willing to listen and follow?  As soon as you can't answer those the right way, time's up."

What do you do more of and what do you do less of than, say, five years ago?

Greg ponders.  "Fundamentally, I think what I do today and what I did when I started as managing partner are identical; but I now do it in a more purified form.  To me, it's all about communication: To partners, clients, laterals, the media.

"And I try to avoid getting bogged down in HR, in IT, in systems integration post-merger, in real estate negotiations.  I have the luxury of being able to truly delegate, and knowing that we have experts on the team who can drive each function."

"One thing that comes with size is the need to be serious about 'high impact.'  I travel 190 days a year, and that's part of it.  Everywhere I go, I try to set an example; it's definitely not what you say, it's what you do."

You seem to be  comfortable with change; hardly any lawyers are.

"I'm very comfortable with change!  The absence of it is very dangerous.  Look, Reed  Smith could have become complacent as King of the Pittsburgh Hill a long time ago, and where would it be today if we'd succumbed to that?  My predecessor, Dan Booker, set us on a path to embrace change and we have continued it. One of the best things that's happened has been change: It forces you to innovate, which is the true driver of capitalism.  [Greg had just read a book review of a new Joseph Schumpeter biography.] 

"Sometimes people will come up to me and ask, plaintively if 'we can't not change just for one quarter?'  And the answer is No, change has to be constant.  I keep working down the list of what has to get done, and by the time you get to the bottom, there are all these new things that have popped up, so you never get to the end of it.

"But the fundamental challenge is the same.  There are two things—aside from the hard work of executing on your strategy—that distinguish the successful firm:

• talent development; and
• honing client relationships

"Nothing else fundamentally matters. And the thing I love most about change?  There's an avalanche of opportunity out there for us:  An avalanche."

Are you happy?

"Oh!  Look:  Most people are happy when:

• they're doing what they like to do,
• when they're good at it, and
• when it's something that needs to be done.

"Put those three together and you've really got it."

Are you proud of what you've achieved?

"Yes, because we've done it as a team.  I'm proud of the team.  It goes throughout the firm, from the executive committee to the junior staff.  You want to know the best thing I get to do every year?  After the year-end results are in, I get to send out a firm-wide email to every single person on staff at Reed Smith, telling them that the firm had a good year and we're appreciative and want to demonstrate that by rewarding them for their role in it.  This year, on top of all the other profit-sharing and bonus programs, it was a $700 bonus for every single staff member—this can cost a lot of money—but it's the single best thing I get to do.  [This is on top of profit-sharing, which goes to all.]

"I've got to tell you, profits per partner figures are one thing, but this is more rewarding.

"And so it goes on.  We're going to keep scrapping our way to the top, scrapping our way to the top.  And we're going to do it as a team, scrapping.  Complacency is death."

Which Managing Partner Do You Most Admire? (And Why)

I just learned the results of a survey distributed last month by Edge International asking law firm leaders two fascinating questions:

• Which law firm Managing Partner/Chair/CEO do you admire most for their leadership? [Outside your own firm.]
• Why does that individual stand out in your mind?

Now, the identities of the "winners" are fascinating in themselves, but far more significant to me is why those individuals were deemed standouts.

The envelope, please:

#1 by a wide margin, receiving 13% of all votes cast, was Bob Dell of Latham & Watkins, who was elected Chairman in 1994 at age 42. On his watch, Latham has grown from 598 lawyers in 11 offices to more than 1,900 lawyers in 24 offices, nearly one-quarter of them in Europe and Asia.

Tied for second with about 6.5% of all votes apiece were Regina Pisa, Chairman and Managing Partner of Goodwin Procter and Lee Miller, Joint Chief Executive Officer of DLA Piper.

Also in the top ten, alphabetically by firm, were:

• Ben F. Johnson, III: Managing Partner, Alston & Bird
• Cesar Alvarez: President & CEO, Greenberg Traurig
• Bob Odle (retired): Managing Partner, Hogan & Hartson
• Patrick McCartan (also retired): Managing Partner, Jones Day
• Ralph Baxter: Chairman & CEO, Orrick
• T. Kennedy Helm, III: Firm Chairman, Stites & Harbison, and
• Keith Vaughan: Chair & Managing Member, Womble Carlyle

Two aspects of this list strike me, one wonderful and one not so. The wonderful characteristic is the extremely broad array of firms represented, from very large (Jones Day, Greenberg Traurig, Orrick) to regional (Stites & Harbison). Clearly one can excel as Managing Partner in a wide array of contexts, and it's gratifying the voters evidently appreciated that.

Not so is that two of top ten are now retired. Combine this with the remarks by Patrick McKenna, an Edge Principal, releasing the results, who said that they received a significant number of emails from people who wanted to respond but didn't know enough of their peers to cast a vote, and you have at least a one-dimensional portrait of a group of law firm leaders who may feel relatively isolated.

But the second question is more powerful: Why did you single out that person for excellence in leadership? If you ever thought the job of the MP was "to first do no harm" and to be a passive caretaker, that's not why these individuals are admired.

• Committed to making change happen
  • Continually pushing the envelope in bringing business principles to the law firm environment
  • The firm appears well run but he knew it needed to change and led the way
  • Insisting on continuous re-invention as the legal cimate changes
  • Driving changes that are "elegant and inspiring"
• Has an ambitious agenda
  • Isn't afraid to fail some of the time; sets high goals
• Handles the tough issues directly
  • Doesn't shrink from tough calls
  • Listens very hard but then takes decisive action
• Aligns people behind his vision for the firm
  • Has mastered the art of building consensus
  • Understands where his partners want to go with the firm and gently guides them to bigger goals
  • Spends a lot of time talking with partners about the firm's future direction
• Maintains core values
  • Has rejuvenated a great firm in danger of getting too comfortable
  • Reaffirms core values that made the firm great
  • Focuses on values

Did you think you'd ever hear people saying of Managing Partners they most admire that, "If you haven't failed, you haven't set your sights high enough?" Digest that.

Ten years ago that criterion for excellence would have been inconceivable. But as they say in New York, "you should live so long." Apparently we have.

Pass the virtual champagne.

A Conversation With Ralph Baxter

"A freezing rain was falling one March afternoon in Tarrytown, New York, and I was thinking about frogs."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Update: 4 April 2007:

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

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

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

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

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

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

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

My thoughts?

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

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

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

A Talk With Pete Kalis of K&L Gates

Last month I had a chance to sit down with Pete Kalis, Chairman and Global Managing Partner of K&L Gates, for nearly two hours—and don't think for a moment that we even scratched the surface of all we wanted to discuss. The pretext for our meeting was the January 1st formal closing of the merger of K&LNG with Preston Gates & Ellis, but our conversation ranged far beyond that.

If you don't know Pete, he comes from the same West Virginia roots as Ralph Baxter of Orrick and Greg Jordan of Reed Smith; there must be something in the water. After getting his BA at West Virginia University, he was a Rhodes Scholar at Oxford, and he pursued that laid-back and unambitious course with a JD at Yale Law, where he was Editor-in-Chief of the Yale Law Journal. Continuing on the same elevated plane, he clerked for the late J. Skelly Wright of the US Court of Appeals for the District of Columbia, followed by clerking for the late Associate Justice Byron White on the Supreme Court.

What did we talk about? Globalization and consolidation, the war for talent, the difficulty of cracking the New York market, and the challenges of managing a global law firm in the 21st Century. For starters.

That said, Pete is as self-deprecating and engaging as they come—until he off-handedly drops a perfectly chiseled insight into the topic at hand with such casualness that you need a moment to comprehend the distilled truth that's just been revealed.

Suffice to say, the meeting was far too rewarding not to write up: So you, Dear Reader, get to be the ex post fly on the wall and read all about it.

Lest you doubt whether it's interesting, early on in our conversation Pete floated this thought experiment:

Q:   How will we know when law firms have truly evolved to the corporate model? 
A:  When they look outside their own four walls for a firm chair.

But as they say, just go read the whole thing.