In Search of Execution (And, Happy Thanksgiving)

Twenty-six years ago Tom Peters and Robert Waterman published In Search of Excellence, and to some extent the genre of writing for business managers hasn't been the same since.  If for no other reason, it's worth taking a moment to revisit Peters' thoughts on the current state of the art of management, as the FT recently did in its weekly "Lunch with the FT" feature. 

But first, if you haven't read "Search," you might yet give it thought:

"When people think about the great management blockbusters, this is the text they have in mind. Search made the business book news. It has sold more than 10m copies and is still the model to which many business authors – whether they realise it or not – aspire. It also launched Peters on the path to global, jet-setting guru-dom."

Peters himself, however, will have none of his elevation to "guru:"

Few, however, have criticised what he does for a living as ferociously as Peters himself. “I say to people, ‘You got a bad deal, paying money to see me,’” he tells me. “I have utterly nothing new to say. I am simply going to remind you of what you’ve known since the age of 22 and in the heat of battle you forgot. You’d have to be one of those television preachers to believe that you’re going to work with a group of 500 people and change their lives. First of all, most of them agree with you. You’re not going to pay £1,000 [a head] to go and see someone if you think the guy’s a jerk."

Self-effacing as he may be, Peters has some deeply contrarian opinions.  For starters, don't kid yourself that you have it harder than your predecessors or that 21st-Century life is markedly more complex than things were in the past:

Is management getting harder? “No,” he replies firmly – and in defiance of the conventional wisdom. But what about all that new technology, the end of deference, the increased pace of life, and the heightened expectations of employees? Doesn’t that all make management harder?

On the whole, Peters thinks not. We exaggerate the extent of change, he feels. It is the arrogance of modernity to believe that we face unique and unprecedented challenges.   [Putting it in perspective,] my mom died two years ago a month short of her 96th birthday, which means that she lived through the arrival of long-distance telephones, automobiles, airplanes, jet airplanes, a man on the Moon, the great Depression, world war one, world war two, the cold war, Vietnam, Iraq one, Iraq two, [so don't kid yourself].

I beg to differ.  I believe the complexities of the challenges facing law firms today actually are unprecedented.  Here's a very short bill of particulars:

• No longer are all your partners within one timezone, let alone one zipcode. 
• Clients are more sophisticated (read: more demanding). 
• The war for talent, both raw recruits and laterals, has never been more intense. 
• Technology, a major blessing but with a correlative curse, has pushed "work/life balance" to the breaking point for many individuals.
• Transparency of financial performance, and pressure for ever-escalating numbers, seems to reach new annual highs.
• And perhaps putting a nice exclamation point on our landscape, Gary Hamel, merely "the world's most influential business thinker" according to The Wall Street Journal, has pithily described the world today as "less benign" than ever.

But speaking of war, which we were a moment ago, Peters served two tours of duty in Vietnam as a combat engineer building bridges for the Marines, and in a revealing passage, he says that much of what he learned about management came from the diametrically opposed styles of his two commanding officers.

I’m not exaggerating but I really spent the next 40 years of my life writing about Dick Anderson. He was a guy who believed that young men aged 23 needed a chance to express themselves. He believed that [writing] reports was incidental but that building stuff for your customers, typically the Marine Corps, was what you were there for.

“On tour two I had a naval academy graduate who would rather have produced an excellent report about things we hadn’t built than a lousy report about things we had. One guy wanted you to do something, the other guy wanted you to write reports. It was the best management training that one could possibly have had. Do what Dick did and avoid what Dan did – there’s the book ... it’s a very short book!”

What strikes me as most revealing about this remark is that it has nothing to do with strategy, it has entirely to do with execution.  And this from a pair of McKinsey consultants (Waterman, his co-author, being the other).

Peters confirms which side of the strategy/execution chalkline  he's on:

[T]he book did not have an easy birth. Its breezy tone did not play well with earnest colleagues at The Firm, as its authors were to find out. “There’s no way to describe the viciousness with which Bob and I were attacked within McKinsey,” Peters says. “This was not the Holy Writ. It was the intellectual challenge to what McKinsey stood for at the time.

“To some extent what Waterman and I were looking at was the business of ‘execution’, and execution is fundamentally a management thing. We were saying, ‘If you can execute well, it doesn’t matter what the hell the strategy is. The doing is what counts.’ But this was when ‘strategy’ was at its apex. We were pushing back."

Peters subscribes with a vengeance to school of relentless execution, and also to the not-inconsequential  role of luck.  He ironically describes his own good fortune:  “I was born in 1942, in the US. I was protestant. I had relatively intelligent parents and I was white – that’s the first 99.9 per cent of it. Hard work may have done the rest."  And "Search" itself?  "A decent book with perfect timing."

In other words, try hard and then try some more.  Many many things may not be within your control—today seemingly more than ever, Peters' protestations to the contrary notwithstanding—but one thing is within your control:  How hard you work and how much you  get done. 

Having the energy, the imagination, and the sheer intellect to tackle today's escalating challenges—with, I should mention, impeccable integrity—is perhaps the single greatest thing we have to be thankful for today.

What's Your Time Horizon?

Time to take stock.  This dratted credit crunch has now celebrated, if that's the word, its first birthday, and there is no clarity about when it may end.  What's a law firm to do?

If you believe McKinsey, and if you believe that where investment bankers go, law firms will follow, the answer is:   Look to the emerging markets.

Relying on the results of the McKinsey "Global Capital Markets Survey," which purports to forecast estimates of investment banking revenue for the years 2007 to 2010, the message is that:

• Emerging Asia,
• Emerging Europe,
• The Middle East, and
• Latin America

will probably show absolute revenue growth over the next three years and under what they call "all likely outcomes," emerging markets' share of global revenues will "jump sharply."  Here's the soundbite:

Collectively, indeed, revenues from investment-banking and capital market activities in these regions are projected to match those in North America by 2010; in 2006, before the credit crunch, they amounted to less than half. A case, perhaps, for referring to “emerged” rather than emerging markets in the future?

Uncertainties, to be sure, abound.  Primary factors determining when the credit crunch may ease include the overall macroeconomic prospects for growth in the US and developed economies; investors' behavior--simply put, when and to what extent confidence comes back; regulators' behavior (do they over-react and clamp down in market-suppressing ways); and of course the grand-daddy unknowable of them all, namely when the credit and liquidity lockup will start melting as the lending institutions in the economy begin to see clarity about the future and are able to restore their balance sheets to health.

But back to the emerging markets.

Why are they so attractive at this juncture in the economic cycle? For one thing, as McKinsey alluded to above ("emerged" vs. "emerging"), they're already getting sophisticated (emphasis supplied):

First, their macroeconomic environment remains comparatively benign, even if talk of a complete “decoupling” of their economies from those of the United States and Western Europe was premature. Although, if trade flows with the West do suffer, regional demand for oil and commodities, growing intra- and interregional trade flows (especially within Asia and between it and the Middle East), and huge infrastructure-investment programs will continue to underpin growth.

Second, a new breed of global corporate players, notably in countries such as China, India, and the United Arab Emirates (UAE), now demands the sort of sophisticated investment-banking services [and concomitant legal services] previously reserved for large Western multinationals. This new group thus represents an increasingly attractive fee pool.

Add to that that they're less exposed to the infamous credit crunch. For example, if writedowns is your blunt-instrument measure of exposure, investment banks have written down only about 7% of their revenues from emerging markets as opposed to three times that--21%--on a global basis.

Two other reinforcing trends are in play. First, certainly in Asia, economies are growing, pure and simple, on their own. That just increases the stock of financial instruments and their tradability. But second, as Asia becomes increasingly integrated with the global economy, inbound and outbound investment will increase, and it will take increasingly sophisticated forms. For "sophistication," substitute "lawyer-heavy," and you have a reason to take this region more seriously.

Do you have to be there?

I believe you do. But let McKinsey speak to this:

Asian markets are fast becoming as demanding and sophisticated as markets in Europe and the United States. Clients have developed a taste for complex financial products and demand good local service; domestic competitors are ramping up their skills and opening their checkbooks to attract international talent.

An onshore presence in emerging Asian markets, meanwhile, is becoming critical. The old model of the suitcase banker operating from hubs such as Singapore and Hong Kong will fail to satisfy clients and regulators seeking a true commitment to the local market.

I've observed before that in America the first "real" question people ask a new acquaintance is, "What do you do?" In the UK it's "Where did you go to school?" And in China it's "Where are you from?"

Not to be cute, but if this is remotely correct (and I've reality-tested it with numerous people in all three areas), you really need to be on the ground in Asia to manage inbound or outbound investments more than you need to be on the ground in (say) Silicon Valley to manage a high-tech IPO or Brussels to handle an EU regulatory matter.

So much for Asia. What about Eastern Europe?

In a nutshell, McKinsey sees overall annual GDP growth from 7% (in their "darker" scenario) to an astonishing 19% in their "more benign" scenario. I'll take some of that, thank you very much.

The only trouble with this area, for law firm land (as opposed to investment banking land), is that the primary source of increased fee revenue McKinsey foresees has almost all to do with sales and trading: "In the future, we believe, growth will probably shift from foreign exchange to interest- and equity-based derivatives, among other products."

And the Mideast?

No surprises here: Investment banks are redeploying more and more professionals from New York and London to the region:

The oil-rich states of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE—are generating wealth at levels not seen since the 1980s. High oil prices have triggered an unprecedented wave of investment, including a huge pipeline of industrial and large-scale infrastructure projects, such as Saudi Arabia’s new “economic cities.” By some accounts, the GCC will have invested around $3 trillion in the region by 2020.

Can you afford to miss this?

That is for your firm to call, including your partners' appetite for risk and their willingness to endure a period of potentially protracted investment, but the historic shift of momentum seems clear:

Emerging markets now have a rare window of opportunity to catch up with the rest of the world, not least because they don’t have to mitigate the mess created by current market dislocation in the West.

Here we have, in other words, the flip-side of the credit market and liquidity freeze.

Stung (perhaps severely?) by that meltdown? Here (the good news) is an enormous, far more durable, opportunity. But (the bad news) if you are still bleeding from overexposure to the frozen credit markets, you may not be in a position to make the requisite investments half a world away.

Don't ever again think that managing a law firm is an exercise in quarter to quarter or year to year performance.

The transition from "emerging" to "emerged" will take a few decades. You need to have the same time horizon.

Update:  Mon 1 Sept.

The September issue of The American Lawyer (published online today) has a lead story, "No More Pure Plays," attempting to apply lessons learned by law firms sideswiped (or worse:  see Brobeck) by the dot-com meltdown in 2000—2001 to today's market where securitization and structured finance have experienced a similar sickening sensation of the trap door opening beneath them.

The first thing to be said about these types of market tops is simply this:  "In hindsight, the folly of it all seems obvious. But here we are again."

And, as Stephen Neal, managing partner of Cooley Godward Kronish from early 2001 through today puts it with commendable clarity:  "In retrospect you might say [the growth] was a mistake, but we didn't know at the time how long this market would last. At the time it was almost irresistible."

The "almost irresistible" comment brings to mind the business classic, The Innovator's Dilemma, where Prof. Clayton Christensen of Harvard Business School set out a coherent, compelling, and historically astute view of just how the most powerful incumbents in any given industry are precisely the firms most vulnerable to maverick upstarts with what appear at first glance to be second- or third-tier offerings of no conceivable utility to the incumbents' core customers.  While it might seem intuitive that the most knowledgeable, most strongly capitalized, most sophisticated firms in an industry would be theones most capable of exploiting innovations "in their own backyard," as it were, Christensen demonstrates precisely the opposite is more common.  Incumbents suffer from:

• Being excessively loyal to their core, established clients (yes, even client loyalty can be pushed too far, when it becomes a limitation rather than a strength);
• Focusing on continuous incremental improvements to their existing product or service offerings, while being blind to "disruptive" innovations; and finally and most tellingly of all
• Being unable to abandon extremely profitable existing lines of business to take a chance on an unproven innovation whose value will only be known in some indeterminate future time.

It's the final point that Mr. Neal is echoing, and it's the seductive power of any boom:  When the getting is good, the getting is very good indeed.  (Or, as The Onion recently facetiously headlined, "Americans Reeling from Housing Meltdown Seek Next Bubble to Invest In.")  Some of the key Silicon Valley firms grew as follows—and this doesn't include all the firms from elsewhere in the country that starting piling willy-nilly into Northern California just as the window was about to slam shut on their fingers:

• Cooley added 300 lawyers in a 12 to 18 month period;
• Wilson Sonsini went from 550 to 812; and
• Brobeck from 540 to 724.

Even at that torrid pace (let's not even think about quality control, shall we not?), "'We turned away nine out of ten pieces of business--maybe more,' said Mark Tanoury, who then headed Cooley's business group, in 2000."

Still, the article finds reason for optimism this time around, at least as compared to the carnage at the start of this decade.  Why?  Primarily because the NY-centric firms that doubled down on securitization have been far quicker to wield the "scythe" with associates.  To this day, Wilson Sonsini has never publicly admitted that it laid off associates, although, mirabile dictu, its headcount shrank from 812 in 2000 to 540 in 2004, and the beginning of the end of Brobeck, at least as the received wisdom has it, came when Tower Snow refused to lay off associates. 

The article gives, indeed, the last word to Mr. Snow:  "History shows that those who are overconfident or arrogant tend not to do well when the environment changes." Ironic, and prescient, words indeed.

But I choose to give the last word to Chris White, chairman of Cadwalader, who told The Wall Street Journal last month: 

"There was a bubble, we rode that bubble, it contracted, and we adjusted. Even knowing what I know now, I wouldn't have changed a thing,"

The cynics in the audience may judge that chutzpah of the highest order.  But I for one see it differently, and give Mr. White great credit for a shockingly salubrious spasm of candor. 

Now the only question will be whether their "adjustments" have been rapid and strong enough. 

A Conversation with Jay Zimmerman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And the message is?

"The message is two-fold:

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

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

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

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

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

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

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

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

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

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

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

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

“What makes this strategy work for you?”

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

And what of the future?

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

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

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

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

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

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

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

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

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

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

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

How High Quality Are Your Lawyers? (How Can You Tell?)

This is a column about wringing our hands.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now we're getting somewhere.

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

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

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

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

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

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

Here's a screenshot of the evaluation form:

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

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

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

But wait, there's more. 

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

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

And the Firm will:

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

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

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

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

Enough with the hand-wringing already.

A Conversation with Allen Fagin

Last week I had the opportunity to sit down with Allen Fagin, Chairman of Proskauer Rose. Allen is Columbia BA summa cum laude, and Harvard Law JD cum laude at the same time he earned an MPP from Harvard's JFK School of Government. He's worked at Proskauer for his entire career, and comes from the Labor and Employment Law Department where he was co-Chair.

With Allen, I wanted to hear about the state of Proskauer, his views on the recent past and potential near-term future of the industry, and to explore what he thinks are important changes in our industry.

I started by noting that both he and his immediate predecessor as Chairman, Alan Jaffe, came from the employment department and that to many people Proskauer has a reputation first and foremost as an outstanding labor law firm.

"Our labor and employment practice is extraordinary," he responded, "with a truly world-class brand.  But that practice accounts for less than 20% of our lawyers and revenues.  What the market is now recognizing is all the other things we do equally well."

Allen made clear that a strategic priority for the firm is the growth of its corporate practice, which has seen its revenues increase by $100-million over the past three years. He also reminded me that only three firms in the recently released AmLaw 100 increased their Revenue per Lawyer (a favorite statistic of Allen's, as it is of mine) by more than 15%: Wachtell, Debevoise, and Proskauer (+16%). That increase was almost entirely accounted for by the corporate practice.

Allen said it point-blank: "The whole thrust of our growth has been to build out the corporate practice."

Does that explain your recent opening of a London office?

Yes, that was "following our clients." It's following the practice areas we have in some measure of strength here in New York that can be bolstered by a presence in London:

• private equity, hedge funds, and alternative investments in general;
• finance; and
• mid-market M&A.

What, I asked, was "mid-market" M&A? He replied with bemused candor that it's whatever people say it is, but roughly from deals valued at $100-million to $1-billion or more. Very much in the eye of the beholder.

Is M&A being driven more "strategically," by corporations interested in acquiring capability and integrating, today, as opposed to six months to a year ago when it was more about financial engineering? "Absolutely; and those who can pay cash are the ones where you know the deals will happen."

Proskauer recently opened an office in Sao Paolo, Brazil, I observe; what's that about?

"It's about our Latin America corporate practice; it's almost exclusively outbound work. We don't practice Brazilian law. At the moment it's a small office, and it will remain small, but we find it valuable to have boots on the ground down there." So there's money in Latin America? "Absolutely."

Switching gears a bit, I ask Allen to describe in his own words the "State of the Firm."

"It's healthy, strong, and growing. But don't take my word for it: We just reported our 16th year in a row of higher PPP, and last year [2007] our year-over-year increase in total revenue was +22% and our increase in PPP was +18%: RPL was +16%" [as noted].

Without prompting, Allen continued: "The real question is the same question that any firm that intends to stay in the serious group of 20 to 40 firms (maybe 40 is too high) that will be left standing when the dust settles: How do we ensure we're one of that group?"

And here's where Allen really began to warm to the topic of our conversation.

"There's a critical tension between balancing growth and development, on the one hand, as against stability and the maintenance of values, on the other. That might be my single biggest challenge as Chairman."

What are you proudest of, then, in your tenure as Chairman to date?

"I'm most proud of being able to see the firm grow without sacrificing our values." How do you do that? "It's a constant effort to communicate, of course, talking to everyone in the firm about what we're trying to accomplish in terms of marrying the past and the future."

"You know, you can read any number of articles in the legal press about law firms adopting a more corporate business model. But I'm old-fashioned. I believe law firms need to be partnerships. We need to be partnerships, but we need to do so without sacrificing efficiency, nimbleness, competitiveness, and a sense of collective destiny. This is part of the challenge."

I ask about a topic on which an enormous amount of ink has been spilled: The intertwined issues of associate attrition, the "war for talent," and the much bruited new expectations of Gen Y. "Is this really different," I ask, "than when you were an associate?"

"Yes, it's different; Gen Y is different. It's real." Allen observes that the number of law school graduates have increased perhaps 8% over the past decade, and that the number of top students from the top schools who want to go to the top firms has decreased. This double whammy explains, to him, in Econ 101 supply and demand terms, why associate salaries are as high as they are. [Editor's note: I thoroughly concur.]

Compounding this problem is that the cost of attrition--whatever it actually is, he says, implying healthy skepticism about the often quoted and glib numbers of two years worth of salary, $500,000, etc.--has most assuredly gone up. The only way to deal with it, he said, is through scrupulous attention: "It's a much more difficult retention problem, the issues are more nuanced, and it has made us all think more critically about this."

I ask if he thinks the classic recruiting model of hiring the top X% of students from the top Y law schools still makes sense, and he proceeds to outline Proskauer's and his own vision of what I have called "Associate Moneyball," wherein firms would attempt to determine what characteristics of law students, aside from class rank and name-brand of school, actually correlate with successful and enduring careers. He related the experiment of attempting to always hire the student who was first in the graduating class at Brooklyn Law School's night program: "Now that person, I have to believe, has fire in the belly. And after all, it's all to do with:

• intensity of effort;
• dedication to the quality of the work product;
• and caring for the client."

I cannot disagree.

Proskauer, I note, has a long history of contributing leaders to New York bar associations, and of pro bono work. Where, I ask, did that come from? (Here, Allen became especially animated and fervent.)

"History; it's imbued in our culture." The firm has a long tradition of public service, and it tends in a way to feed on itself. Someone who's chairman of a committee will recommend a colleague to be a member, and soon that colleague will become a more senior member, and so on and so on. But in terms of our pro bono program, we've really tried to formalize and institutionalize it in important ways:

• We have more meaningful partnerships with designated organizations in the community that we therefore get to know better.
• We've coordinated our firm-wide charitable giving program with the pro bono commitments we've made and with the targeted organizations; and
• We've expanded beyond the traditional bastion of pro bono work--litigation--to more transactional and corporate type work including, specifically, counseling on corporate governance.

What all this adds up to is that we get more associates involved, and involved at a higher level of intensity. We can, as it were, "adopt" community organizations and this gives lawyers across all our practice groups the opportunity to serve.

Finally, at an organizational/executional level, we have converted "pro bono" into a practice group in its own right, just like any other, which means that it comes with all the operational and institutional procedures of any other practice group--things like the assignments system, looking to fill holes in experience, and so forth.

As I said, Allen is fervent on this topic.

Also noteworthy is that prominently displayed on their reception area coffee tables are copies of their report on pro bono work, "Break/Through: 2007 Pro Bono Review," a handsome and high-quality brochure with a foreword by Allen that opens with the words, "For many people who face complex legal challenges, it's difficult even to get a break..." Interestingly, the typical self-congratulatory firm annual reports were nowhere to be seen.

Have you policed your reception area lately?

But I digress.

What would your advice be to new associates, I asked.

"It's too late!" (laughing out loud).

Well, then, to college grads contemplating law school?

"Obviously, friends ask me to talk to their kids all the time, and what I say is to talk to as many young associates as you can, so that you really, deeply, understand what you're getting into."

My final question has to do with the unexpected.

What, looking back over the past 10 or 15 years, has been the biggest surprise to you?

Allen thinks, visibly, and there is a long silence. Finally he says:

"The resilience of the billable hour. Ten years ago I would have told you it would be dead, today I will tell you it should be dead, and ten years from now I imagine I'll be telling you it should be dead. It's inexplicable."

"But second [and this is entirely unprompted], equating the compensation of attorneys with their year of graduation from law school." Do you mean '"associate lockstep?" Hasn't Howrey experimented with changing that? "Yes, I do mean 'associate lockstep,' but it's so hard to get away from it." He elaborates that it makes no sense to clients, it doesn't resemble what's done in any other remotely modern industry, and it's intrinsically at odds with the meritocracy that elite law firms hold themselves out to be.

And with that we adjourned.

Broadly speaking (gross generalization coming up), managing partners are selected for the force of their personality or the force of their intellect. True, there are the extraordinarily gifted few who combine both, but they're as rare as Lincolns among American Presidents.

Allen is understated, low-key, speaks very softly, and is one of the most truly thoughtful people I've recently met. Lawyers, we of all people, should appreciate the supreme value of analytic rigor and acuity. In fact, the intensity of his thoughtfulness borders on the shocking. We long ago got used to not expecting thoughtfulness in public discourse, and that expectation may, alas, be infiltrating our expectations in private discourse. A few minutes with Allen would disabuse you of your cynicism.

"Innovation in Legal Services" Sponsored by Allen & Overy

I was invited to attend a presentation on "Innovation in Legal Service Delivery" last Wednesday at Allen & Overy's New York offices, where the conversation was kicked off by four speakers:

• Ward Bower of Altman-Weil discussing their Legal Transformation Study;
• Rosemary Martin, newly minted General Counsel of the Practical Law Company and as of two weeks ago General Counsel of Reuters;
• Paul Lippe, CEO of Legal OnRamp; and
• Michael Will, partner, Derivative Services LLP.

Unfortunately, the only public coverage the event has gotten to date focused on the common wisdom that law firms are allergic to innovation ("Innovate or Die Still the Message to Law Firms" is the headline of the piece), that they're "conservative to a fault," and "slow to embrace change."

What's wrong with that?  Simply that it misconstrued not only the creative and diverse approaches of the four panelists on the program, but most importantly did not comment upon or reveal the tonality and purpose of the event, which were exploratory, open-minded, inquiring, and refreshingly prepared to admit the speakers (and the questioners) didn't have all the answers.

Where to start? 

I suppose as good a place as any is to go right back to the mainstream media, where, it bears reminding, Allen & Overy won the Financial Times annual award last year as "The law's best and boldest innovator."  (I understand this FT competition will be broadening its reach to include a separate US category this year; that should be interesting....)

Another starting place might be to reflect on the conversation about the billable hour, regular scourge of those evangelizing for innovation.  What struck me about this part of the conversation was that the law firms seemed weirdly less wed to it than the clients.  After all, how is a GC necessarily to defend a bill to the CFO for $850,000 "for services rendered."  One imagines the conversation if it went well:  "Why not $750,000?!"  And if it went badly:  "You were trying to save money?!  This was a million-dollar-plus case!"  But on the billable hour model, with activities itemized down to the 1/10th of an hour for the paralegals at the document warehouse, the GC is bulletproof.  "Well, yes, you see, but the work was actually done, to the tune of $902,347.25"

Yet another might be to look at the actual framework of the Altman-Weil sponsored Legal Transformation Study, which looks out to the year 2020 and projects four potential scenarios, based on your view of whether legal service delivery will become more aggregated or more disaggregated, and on whether regulation will become heavier and more intense or looser and more laissez-faire.  This produces the following 2 x 2 matrix:

The dimensions are "aggregated/disaggregated" across the horizontal axis from left to right, and "highly regulated/laissez faire" down the vertical axis from top to bottom. 

None of these four scenarios is meant to represent an exclusive view of the truth, as combinations and permutations may be (according to your view) the most realistic.  Similarly, none is meant as a "prediction."  Rather, scenarios are tools for critical thinking about how your firm (your practice group, your office, your own book of business) may fare in the future depending on what you think is plausible as the industry evolves.  Here are the four quadrants in summary form:

• Mega Mania
  • Consolidation
  • A conflicts-prone world
  • A traditional model dominated by giants
  • Client loyalty is low, frustration high
• Expertopia
  • Rise in litigation
  • Expertise at a premium
  • Numerous niche players driven by regulatory breakup of large providers
• E-Marketplace
  • Major economic downturn leads to deregulation and harmonization to spur growth
  • Flurry of new providers
  • Commoditzation
• Techno-Law
  • Peaceful world dominated by desire to enhance trade relations
  • Harmonious regulatory systems offering "lawyers in a box"
  • Clients demanding interoperable technology to pare costs
  • Global sourcing

Again, none of these, nor all of them together, is meant to be a blueprint for the future; they are meant to spur reflection, analysis, and strategic agility and nimbleness.  Take issue with them as you will, but do not take issue with the reality that the status quo is not an option.

Meanwhile, Rosemary of the Practical Law Company talked about her background of a dozen years at Rowe & Mawe followed by nearly a dozen more at Reuters, and her conviction that outfits such as the Practical Law Company are preparing the way for how law will be practiced in the 21st Century.  Hers was not a message of "innovate or die," it was more a message of, "look around and see how the other departments of corporations have been transformed.  And dare to think you might take a page from their books."

Rarely recently have I sat in a room with as many senior, high-caliber inhouse and law firm practitioners discussing openly their thoughts, their suggestions, their speculations, their doubts, their hopes and their fears for how our industry may evolve.  That leads me to my own devout hope, which is how to continue to advance this conversation.

One of more insightful remarks came from Paul Lippe of Legal OnRamp, who said that he believed there were "immensely strong pockets of innovation" in law firms, driven by individuals with vision and a commitment to their idea of a different future, but that "law firms have no way of institutionalizing those visions," and thus they tend to wither away after the spearheading individual departs.  Corporate America, you may have observed—at least the best of it, places like Google and Intel and the new HP—have ways of nurturing and spreading these individual pockets of innovative excellence.  But I fear our colleague's remark was true, that we have no such practices.

About this time you may be saying to yourself, "Sure, and I've heard all this innovation stuff discussed for the last 10 and 20 years and I'll hear it for the next 10 or 20."  That, permit me to suggest, is the problem.  That's the problem our faithful American Lawyer reporter succumbed to in trying to cover the event, and I admit it can be all too appealing to fall prey to a type of intellectual exhaustion, a feeling that all the energy has been drained out of the issue of "innovation" in legal services.

But I have news for you:  No one in this room on this evening believed that.  To those of us there, innovation is a vital, demanding, pressing challenge.  On the demand side, clients are increasingly seeking alternatives to the billable hour and annual 6—8% increases in fees, while on the supply side, associates are increasingly unwilling to stomach annual increases in billable hour expectations for episodic starting salary bumps. 

Actually, I believe the attitude of "I've heard this already" is just fine.  For 90% of firms. 

But 10% will change, and that 10% will explore alternatives, some successful and some failures.  The failures we can chalk up to Darwinism (and failures need not be fatal), and the successes we can chalk up to Darwinism.   If there are tremendous successes, however, the logic of the competitive marketplace tells us something else: Best be a fast follower.

So I ask you, dear reader:  How shall we continue these discussions? Are they best conducted in law firm-sponsored colloquies such as this?   Under the auspices of a legal publication such as The American Lawyer?  At dispassionate fora and conferences put together by and hosted at a law school?  What are your thoughts?  Let me know.

Or else, adopt the tone of the press coverage and decide it's ten years on and "still the [same old same old] message."

"CSO's?"

Does your firm have a "Chief Strategy Officer?" Thinking about it? Tried it and didn't like it?

Well, apropos the news a couple of weeks ago that Cravath has a first ever director of strategic planning, we thought it would be timely to review what's known about "CSO's." But first, a word to the wise: Do not assume that Cravath's move is one to emulate in all respects. When Legal Week got in touch with Cravath to learn more, this was their report:

"We figured the firm would be happy to talk about the new hire and share some details on Johnston's charge going forward. When we reached presiding partner Evan Chesler by phone, he dismissed our interest in the comings and goings of what he calls “administrative people”. Johnston is "a very nice guy", says Chesler, though he didn't recall his new strategist's title.

"This is just a support job to help us out in our work," says Chesler, who explained that a group of nine Cravath partners, which he chairs, will continue to formulate firm strategy. "The strategy is entirely set by the partners of the firm," he insists."

And there's more:

"[Johnston will be] gathering information, doing the staff work, the kind of stuff that any committee would have a person doing the staff work for," says Chesler. "We have a very busy administrative staff [and] people were simply overburdened by trying to do that in their spare time."

Despite the addition, Chesler says Cravath's strategy is the same as it has always been: to remain the country's best law firm.

"That was the strategy, by the way, when I got here 33 years ago," Chesler adds. "So I don’t want to see a headline that says that we just came up with that idea."

But this is actually a piece about firms that are serious about CSO's, so let's pick up where we left off. [Full disclosure: I suspect Cravath is a lot more serious about Bill Johnston's position than they're letting on to the mainstream press, and I'm meeting Bill later this week to check my intuition.]

Let's start with the fact that the position of CSO is new, and therefore undefined. To be more precise, it has various definitions. Trust McKinsey to assemble a roundtable of high-profile CSO's to give their views on what the job entails, how to do it right, and what the payoff might be. The panel included:

• Edward C. Arditte, senior vice president of strategy and investor relations at the multi-industry company Tyco International;
• Marius A. Haas, senior vice president of strategy and corporate development at the technology company HP;
• Dan Simpson, vice president, office of the chairman, at the cleaning-products group Clorox;
• Annabel Spring, managing director in charge of strategy and execution at the investment bank Morgan Stanley; and
• J. F. Van Kerckhove, vice president of corporate strategy at the e-commerce company eBay.

While all CSO's agree that the real chief strategy officer is the CEO, from there the consensus seems to dissolve. But given the centrality of the CEO to setting strategy, a close CEO/CSO relationship is a job requirement. You might have an alienated or disaffected CFO or CIO and be able to function, if suboptimally, for awhile, but not so with the CSO role.

Part of the CSO's challenge is to develop strategy in an iterative way between bottom-up and top-down. The goal of this is to build on the collective wisdom, marketplace knowledge, and client savvy of the partners themselves (bottom up) while trying at the same time to attune that wisdom to the competitive realities of the firm's evolving position in the marketplace and where it aspires to be. This quote from the CSO at Morgan Stanley nicely articulates the challenge, and comes from someone in an environment not dissimilar to today's sophisticated global law firms:

"Our role is to get feedback from the business units, overlay the global trends, and make sure that everybody has identified the right issues. We then prioritize the opportunities across the business units and provide a strategic element for that prioritization. Feedback from the business units is also critical for maintaining that entrepreneurial edge. Morgan Stanley is so specialized and yet complex and global, which is hard to balance."

Another aspect of the CSO's role is that it's intrinsically dependent on the state of the market. In plum times, one has the luxury of thinking long-term, being visionary and planning investments. In times like these when the market is tough, it may be more about restructuring and retooling your people and refocusing your practice areas.

How do you ensure that "strategy" has bite, that it actually has an impact?

Probably the most straightforward way is to integrate it with individual evaluations, to make people see how their performance is (or isn't ) aligned with strategy. At numbers-driven companies like HP, this can take on forms that would seem extreme in a law firm, but they exemplify how concretely expectations for implementation of strategy can be tied to a business unit's planning:

"An implementation plan that has clear milestones and owners is a must. Execution sits in the business units. At HP, we won’t make the hand-off until the business owner understands, accepts ownership, and acknowledges the need to deliver. As to the strategic plan as a whole, we’ve gotten a lot more disciplined. Now we can say, “Here are the levers within our plan that we need to execute in order to deliver. We know the plan, the capacity, and what we can do incrementally. If you’re going to show me a number, you’ve got to tell me how you’re going to get there.” Management has changed how people’s performance was going to be measured at a granular level."

Lest all this seem too abstract, think about actively and consciously segregating your practices into three primary business areas each with its own composition of clientele and economic goals:

• Emerging opportunities and markets;
• Mature but healthy and constant practices; and
• Marginally declining areas that nevertheless help generate cash flow.

Invest in each--investments in people, geographies, and managerial talent--appropriately.

Many people confuse strategy with financial planning. Don't be a victim of this. Planning has to do with internal budgeting and resource allocation, but it has little if anything to do with your market, your clients, and why corporations come to your firm vs. another. (At Clorox, they are so disciplined about this segregation of strategy from finance that they don't permit financial perspectives or exhibits in the first rounds of strategy meetings, in order to enforce the disciplined focus on market positioning rather than internal resource allocation.)

What, then, is the value of strategic planning? If your firm is struggling "operationally," the real problem more likely than not can be laid at the door of strategy, as explained by Dan Simpson of Clorox:

"Execution problems are often symptoms of trouble upstream in the strategy-development process—the strategy process has failed to realistically assess current reality, to honestly understand organizational capabilities, to align key players with those who do real work, or, at the end of the day, to create a compelling, externally driven vision of success."

This is wisdom distilled, so let's take a moment to break it down:

• "failed to realistically assess current reality:" Does your firm have a realistic grasp on what it can aspire to be? On how your clients perceive you? On how recruits perceive you? The media?
• "honestly understand organizational capabilities:" What are your lawyers capable of? How ambitious are they? How amenable to change? How prepared to march in a given direction once it's explained to them?
• "to align key players:" Are your 800 pound gorillas on the team and behind the strategy? If not, return to go.
• And "to create a compelling, externally driven vision of success:" Too many firms have "visions" of "success" that are, alas, out of touch with the marketplace. They are inward-looking, not "externally driven." Be brutally honest about this component. The price of losing contact with reality here is exacting.

Finally, let me conclude with the koan with which McKinsey ends, which sums up the intersecting challenges of (a) internal vs. external; (b) short-term vs. long-term; (c) one practice area vs. an other; and (d) upsetting dead orthodoxies vs. staying true to your firm's enduring verities:

"Internally, the toughest issues are exposing orthodoxies that constrain our thinking and options, as well as spreading priorities and resources across time horizons and business unit boundaries. Part of strategy’s role is to define external imperatives at a higher level so that investments spanning different time horizons or organizational units actually reinforce each other."

So do you have a Chief Strategy Officer? Whether you do or whether you don't, your work is cut out for you.

"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.