Who's On Your "Red Team?"

According to a McKinsey study, in the corporate world, for every five attempts to enter a new market, four fail and only one succeeds.

And this isn't limited to startups or novice businesses; it includes very sophisticated firms. For example?

Anheuser-Busch tried to diversify into snack foods. Not, you might think, such a stretch. Distribution channels for beer and snacks are similar; advertising venues are nearly identical; the target market is indistinguishable; impulse point-of-purchase displays are mirror images; even shelf lives and production facilities are, in many ways, complementary.

But what they didn't count on was the ferocious counterattack from Frito-Lay, who saw their fundamental franchise being assaulted. The result: "Eagle" snacks (the Anheuser-Busch brand) is no more.  (In a move combining equal measures of rationality and humiliation, Anheuser Busch sold a number of plants that made Eagle snacks to Frito-Lay.)

Corporations launch forays into new markets all the time, be they geographic, brand or line extensions, or "next door" like beer into snacks. And there's a reasonable amount of management literature out there about the odds of success and "best practices." Can we learn something? And hopefully improve upon the 80% failure/20% success rate? Let's see.

To begin with, what's the real problem? Here are the basic dimensions which need to be working in your favor if you want to launch into a new market successfully:

• Timing. Never underestimate this. Human nature is always subject to the temptation to buy at the top when all is palmy and sell at the bottom when all is dire. How many firms went piling into Silicon Valley shortly before the dot-com bust? And how many are piling into Dubai, Abu Dhabi, and Qatar now that "sovereign wealth" is the new mantra? Not all will come to tears, by any means, but it's worth thinking a minute or two about what seems to be terribly out of favor and asking searching questions about why and how long that might be.
  
  
• "Scale relative to the competition," in McKinsey speak: Meaning simply whether you can enter with anything resembling critical mass and, if not, how long it will take you to get there and how much it will cost in the interim. Law firms are famously allergic to long-term investments, because they have to be funded out of current (after-tax) income. But if you're not serious about invading, say, New York, or London, or Abu Dhabi, best not try.
  
  
• Whether the new market complements your existing strengths. This may sound obvious, but it's shocking how often it's honored in the breach. It might make sense, for interest, for Texas-based energy firms to launch in Moscow or Kazakhstan, or for Silicon Valley firms to launch in Austin, Texas or the Research Triangle Park area, but how much sense does it make for everyone and his brother to think, just on general principles, that they need to be dragon slayers in core capital markets practices in New York?

But if these preconditions for success are so obvious, why do we see such a high failure rate?

Attribute it to cognitive biases, which McKinsey describes as "systematic errors in the way executives process information."  For example:

• Believing the potential market is bigger than it is;
• Failing to consider the certitude that rivals will respond; and/or
• Relying heavily or exclusively on "inside" views and opinions rather than trying to develop an untainted, outside perpsective premised on the track record of similar attempted market penetrations.

The last one is the most interesting, so let's dwell on that.

Begin by trying to assemble some examples of similar attempted market penetrations by other firms in the past.  Whether you choose to characterize this as the grandiloquent "reference class" is up to you but that's what MBA's call it—just so you can defend yourself at the conference table. Once you have your precedents assembled—something you should be quite comfortable with—bring in a "Red Team" to play the role of devil's advocate, seeking out flaws in your analysis, anticipating potential competitive responses, coldly gauging the investment required and the time frame, and, in general, seeking to avoid the myopic but all too human tendency to seek out confirming data and ignore or discount contradictory information or analyses.  (The term "Red Team" comes from CIA parlance, standing for the team designed to attack the strategy of the good guys, the "Blue Team.")

Again, rehearse in your planning the key indicators of success or failure in entering a new market:

• The size you will enter with, compared to "minimum efficient scale," or breakeven capability.  If you plan to enter at a scale assuring you will lose money for awhile, just make sure you know what you're getting into.
• How related the market is to your exisiting core competence.  (See above re piling into New York's capital markets.)
• The timing, or order, of your entry.  This can of course cut both ways depending on the savviness of you and your competitors at exploiting the new market.  In some cases, first movers by rights out to have a clear advantage, but a corollary phenomenon is that of the "optimistic martyrs" who fall in the face of more experienced players who diversify later.
• The life cycle of the market.  You might assume that some markets are evergreen, and some may be, but to tear an example out of recent headlines, are you tempted to plant a flag in Abu Dhabi (say) to snag a share of the "sovereign wealth" investment frenzy?  First of all, you will scarcely be alone, as some high-profile firms have already announced this year that they will be opening up there.   But it's not just firms leaping off the starting line more or less in tandem with you; consider that some Magic Circle firms have been there a quarter century. 

It's hard to overemphasize the need for cold-blooded, disinterested analysis of the opportunity and how it matches up against your firm's current competencies.    This comes hard up against some intrinsic human tendencies:

By and large, we're optimists.  We tend to gravitate towards the positive outcome rather than the negative one, to buy stock rather than to short it, to assume that what we paid was fair and the asset we acquired can only appreciate in value. 

Another flaw in our thinking is the power of "anchoring," or of giving undue weight to the first price, the first growth rate, the first level of investment that is mentioned.  Professionals are not immune.  McKinsey reports a study which distributed ten-page booklets on houses to residential real estate brokers, detailing prices and characteristics of comparable houses in the area.  The brokers visited each "comp" as well as the house in question, and were asked to select an appropriate asking price.  Unbeknownst to the brokers, the listing prices for the key house had been randomly assigned over a range of plus or minus 11% from the true listing price.    These bogus listing prices strongly affected the brokers' estimates—and even when they were told about the set-up, they denied that the "anchor" had any impact on them. 

Can you avoid these "cognitive biases?" 

Yes, with analytic rigor and a scrupulous insistence that the "Red Team" be taken seriously.  But never lose your sense of optimism.  Optimists may not always be right, but pessimists never change things for the better.

But What Do Clients Really Think?

This past Thursday morning at the offices of White & Case, I had the opportunity to participate in presenting the results of a survey of how professional service firms (primarily law  firms) set strategy.  Held under the auspices of the Managing Partners' Forum, of which I am now the New York regional director, the 8:00 am — 10:00 am meeting addressed such issues as:

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

Which brings us to our topic for today:  Cognitive dissonance, or, to be more specific, our profession's truly impressive talent at suppressing same even when the internally inconsistent positions are being enunciated by the same people in the course of the same survey.

But let's back up and start with some of the survey results. 

 Over 100 individuals responded to the survey, 40% of whom were the managing partner of their firm and another 47% of whom were a senior partner or the business-side Executive Director, COO, or CFO.  Nearly 60% were from firms with more than 250 fee-earning professionals, and another 31% were from firms of between 51 and 250 fee-earners.

Asked what their most pressing strategic challenge was, nearly 80% cited "increasing client demands and downward pressure on fees."  Another 70+% said essentially the same thing, with a different spin:  "Increasing levels of competition within the profession."  So I take that as the most salient description of the environment these firms are trying to address through their strategic planning process.

Next, we asked how much of strategy is actually executed:  Here, about 40% of North America-based firms happily replied "most of it."  But 20% also replied somewhat cryptically "as much as we required," and nearly another 40% candidly reported "less than we would have liked."  A follow-up asked how satisfied they were with achieving pre-determined strategic goals: roughly 2/3rd's reported "satisfied" or "very satisfied," but 1/3rd chose "dissatisfied."

Bear with me through a couple of more data-points and then we get to the good stuff.

Asked about strategy's effectiveness in "creating meaningful differentiation from competitors," well over 50% said they were "dissatisfied," and less than 10% reported they were "very satisfied."

On the seemingly positive side, however, over 75% reported they were "satisfied" or "very satisfied" with getting the firm's employees to "buy into" the plan, and essentially the same figures held true when asked about partners' buy-in (vs. employees).

 But strategy should not exist in a vacuum, right?  So we also asked about people's satisfaction levels with its impact on two key financial metrics:

• "dissatisfied" or "very dissatisfied" with its impact on top-line revenues:  Almost exactly 50%
• the same, with respect to profits:  About 40%.

Finally, the bottom line question:  How satisfied were people with their strategy's impact on "improving client satisfaction with the firm?"  Over 75% reported "satisfied" and another  10% "very satisfied."  No one chose "very dissatisfied."

Where, then, does this leave us?

With, I submit, a severe disconnect between our optimistic (delusional?) belief that our strategic process is "improving client satisfaction" and the overwhelming number of us who report that "increasing client demands" is primary among the pressures on our firms.

For another perspective on this same disconnect, I commend to you the 18th Annual General Counsel Survey from Inside Counsel magazine (July 2007), which opens with the observation that there is a "collision" at hand in form of "law firms under pressure to make more money butt[ing] up against general counsel locked into budgets that won't bend."  Here's the table that sums it up, to my mind, which is the "overall" law firm report card as viewed by the 862 in-house counsel and 135 firm attorneys responding:

Disconnects are also apparent on specific components of client service.  For example, on the question whether service levels have improved over the past five years:

• 68% of law firms say yes, but only 29% of in-house counsel
• 15% of law firms say no improvement, but 35% of in-house counsel.

"Most law firms pad their bills:"

• 39% of in-house counsel agree, 24% are unsure
• 72% of law firm respondents disagree, 18% unsure.

"Law firms are actively seeking out ways to reduce the costs of their services:"

• 70% of in-house counsel disagree, 19% unsure
• 56% of law firm respondents agree, 20% unsure.

"Law firms make too much money:"

• 38% of in-house counsel agree, 40% unsure
• 76% of law firm respondents disagree, 15% unsure.

Finally, 77% of inhouse counsel say they're under strong pressure to reduce spending on outside counsel, but only a third of them believe that law firms understand this constraint.

Is there hope for bridging this divide?

I think so, and I'm going to suggest it comes from as old-fashioned a source as there is in our profession, from a value that must, or should, date to the first days when it ever began dawning on people that this thing called lawyering might be tantamount to a profession.

To approach that conclusion, here's the last data I'll present from the Inside Counsel survey, namely hiring criteria for selecting outside counsel, ranked in order:

1. Quality of work/Responsiveness (tie)
2. Creative solutions
3. Billing rates
4. Providing preventive counseling
5. Multiple practice areas
6. Alternative fee arrangements
7. Diversity/National reach (tie)

Setting aside rates and alternative fee arrangements, which speak to pure economics and not service levels, and also setting aside practice area and national reach, which are typically irrelevant from the perspective of an inhouse lawyer hiring a firm to help with Matter X today—by hypothesis they handle the practice area in question and have the geographic reach required—the list reduces to:  Quality, Responsiveness, Creativity, and Preventive (read: holistic) counseling.

What do those boil down to?

Supreme levels of client service and consummate professionalism.  Sound familiar?  Wasn't this what you signed up for when you first became enamored of the profession?  Isn't this what you find most fulfilling today?  Don't your most admired colleagues aspire to precisely the same?

Wherein, then, lies the problem?  Why do we think we're doing so well promoting client service and clients think we're doing so poorly?

Communications, of course, is the answer; we're not communicating very well at all, which is a rather appalling failing considering how verbal and articulate we all presume ourselves to be.  It may be that we're not communicating on the frequency or wavelength clients are listening in on or want to pick up on.  If so, the answer may be that our firms need to invest more in client relationship development.  (This is different than traditional marketing.)

Does your firm have a Client Relationship Director?  Should you?

You Can Be Comfortable Or You Can Be...

What do the stories "Qualcomm Meets a Stern Judge" and "Banking Giant Pioneers Adviser League Table" have in common?

The first is about Southern District of California U.S. Magistrate Judge Barbara Major coming out swinging against lawyers involved in the by-now famous and tremendous discovery fiasco by Qualcomm, involving its failure to turn over hundreds of thousands of documents to Broadcom.  Among other things, Major had this to say:

• [This constitutes] "gross misconduct on a massive scale"
• "If there isn't some kind of sanction, there's no deterrence. How can this possibly be tolerated in the age of digital evidence?"
• [Absent an explanation,] "the inference is that Qualcomm intentionally decided not to search for these documents"
• And my own personal favorite:  "At best, the documents reveal a massive responsibility deflection and an incredible breakdown in communication of leadership between [the] client, the attorneys and among their counsel."

Henceforth whenever anything goes wrong hereabouts I intend to ascribe it to a "massive responsibility deflection."

She reserved a ruling on sanctions just as, apparently, Qualcomm has reserved deciding whether some malpractice litigation might be in order.

Now, I don't know what the real story is at the bottom of this all but unbelievable imbroglio, but one of the smartest observers I know of this scene proposed to me that it was a foreseeable breakdown "where everyone's responsibility is no one's responsibility."   He may be right; and people may be suffering severe court sanctions, at the very least, as a consequence.

The second story reports:

"Banking giant UBS has launched a radical review of its global legal advisers in an attempt to slash costs and become one of the first top financial institutions to formally grade law firm performance.

"The review, UBS’ first in five years, is set to shrink the bank’s cross-border panel. [...] The Swiss-based bank said the move is in response to increasing legal bills which now account for 1% of UBS’ total annual revenues." 

Now, 1% of UBS' revenue ~ US$400-million.  To put this in perspective, if you or I could start a firm today dedicated solely and exclusively to UBS' total legal spend, our firm would be around #65 on the AmLaw 100.

And there's more:  For several  months, at least 100 of UBS' in-house counsel have been scoring outside firms on a 1 to 5 scale across seven criteria including speed, quality, and cost.  As UBS' GC, Peter Kurer, put it in what would be pluperfectly obvious in any other relationship, "the bank's legal bills were too large not to be analysed and that it was important that both firms and clients take steps to improve efficiency."  Once the point scoring system accumulates sufficient data, it will begin to come into play in determining which firms stay on the panel and which are invited off. 

Now, what do these two pieces have in common?

The clarion call embedded within each demanding highly professionalized and full-time management of critical activitiess within your firm:

• Qualcomm's "massive responsibility deflection" calls for your firm to have a dedicated General Counsel.
• UBS's tightening up of its panel criteria and partial quantification of the basis for selection calls for your firm to have a vibrant and energetic partnership among your CFO,  your Director of Client Relations (you have such a person, of course, do you not?), and key relationship partners to the client, all in service of delivering not just legal services of impeccable quality but client service of impeccable quality.

If you are still enamored of the antique notion that talented and whip-smart lawyers can handle all these challenges in their "spare time," when they're not serving clients, be prepared to find yourself on the wrong side of an angry US Magistrate Judge, or of a calculating and determined General Counsel with a budget sizable enough to vault one of  your competitors into an altogether different league, leaving you proud, comfortable, and irrelevant.

Proskauer Offers Us Everything We Need to Know About International Litigation

On Monday of this week Proskauer Rose published something brand-new online.  

I use "brand new" advisedly.  I would be the first to confess I may have missed something like it beforehand (and if you're aware of any analogs, please let me know), but what they published is:

• remarkably ambitious,
• truly practical and useful,
• without precedent online or off, and
• the end result of an impressive investment of time and resources by the firm.

"It" is Proskauer on International Litigation and Arbitration:  Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes, an e-book, with all that implies—you can search it, download it, email links or excerpts, copy and paste, etc.  And, of course, from Proskauer's end, they can (and vow to)  update it. 

What is "new" about this?

More on that anon.  But first, I learned most of what you're about to hear about this from Louis Solomon, the Proskauer partner who had the gleam of the idea behind the e-book in his mind 21 months ago, and who I was able to spend some time with to get the background for the story.  (He reports that he was aided immeasurably by Jennifer Scullion, a senior counsel at Proskauer.)

Louis has been doing international litigation for a long time—starting about 25 years ago when Pepsico (Proskauer's client) wanted to terminate an intransigent bottler in Taiwan.  The longer he's been doing it, the more he had come to realize that there's not much written about the rules of the road for international litigation:  Certainly nothing comprehensive, nothing by way of a "practical treatise."

So he decided to get the Proskauer Litigation Department to write the treatise, and began with a one-page outline; the first meeting attracted all of six people.

As they set out, a key decision upfront was write it with a decidedly practical bent:  "We discouraged footnotes and multiple case citations; but we still wanted it to be comprehensive."  So, for example, how do you actually obtain jurisdiction over a foreign entity or in a foreign court?  How do you actually enforce a foreign judgment?  And how do you do everything that comes in between those two end-points?  The result is a  28-chapter e-volume with nearly 50 Proskauer lawyers as contributors.  (Lou contributed four of the chapters himself and edited the rest.)

What types of "practical" questions?  Well, for example, did you know (I did not) that inhouse counsel in France aren't considered counsel, so no attorney-client privilege attaches to their communications?  Or, that patent examiners working for a manufacturer in Sweden are likewise deemed outside the scope of privilege—but if a US challenger sues to invalidate a patent their internal communications are presumptively privileged?  (Can you say, "asymmetrical playing field?")

There are a litany of other areas where, as Lou charmingly puts it, "the law is quirky."   Examples?  At least in the 2nd Circuit, which of course covers our home town of New York, foreign litigants can come to the US and take discovery in aid of their overseas matters without regard to the "relevance" requirement of Federal Rule of Civil Procedure §26(b)(1).   No, the 2nd Circuit has not "interpreted away" that requirement, at least not on its face; it has instead decided that since 28 USC §1782, "Assistance to foreign and international tribunals and to litigants before such tribunals," does not contain an express relevance requirement, none obtains.  Quirky indeed.

Here's how Proskauer introduces the volume:

"Commerce in today’s world pays little heed to traditional geographic boundaries. Manufacturing, marketing, and distribution routinely criss-cross the globe. The Internet has all but obliterated historical national and state borders. These realities -- especially given overlapping, diverging, or converging regulatory regimes -- have led to a vast increase in the number and complexity of international or cross-border litigations, arbitrations, and regulatory investigations or proceedings.

"Cross-border business and regulatory disputes present unique challenges. Yet there does not exist for the client or practitioner any comprehensive treatment of the issues arising in managing, resolving, and avoiding controversies affecting multiple jurisdictions.

"Our objective here is to fill that gap by providing that essential reference guide. Proskauer has a long and extraordinary history in international practice. The specific contributing authors to this Guide, members of Proskauer’s Litigation and Dispute Resolution Department and International Practice Group, have helped shape the very law and practice in the topics treated.

"Our aim is not towards the bookish or academic. We have tried to write a resolutely practical guide, emphasizing the concrete and strategic over the theoretical, the lore as well as the law, the unique opportunities presented by international matters as well as the challenges. We intend to maintain this Guide as a timely compendium of current best practices as well as our most creative approaches to tackling new developments.

"We are publishing this Guide in e-Book format, over the Internet, for ready access and for ease of updating as the law evolves in this dynamic area. For this project to succeed and meet the needs of our clients, though, it must be interactive. Please, direct questions, comments, or reactions to any of our authors, to our Editor, Jennifer R. Scullion, or to the Editor-in-Chief, Louis M. Solomon. We look forward to hearing from you.

New York City, September 2007

To get a real flavor of how comprehensive the volume is, I'll list just a very few of its 28 chapter headings:

• Securing US Jurisdiction
• The Role of Comity
• Choice of Law
• Discovery Abroad for US Proceedings
• Discovery in the US In Aid of Proceedings Outside US
• Privilege Issues
• Cross-Border Legal Ethics
• Extraterritorial Application of US Laws (Employment and Securities Laws)

You get the idea.  But, as Lou observes, "today there's no such thing as a small litigation—not with e-discovery."  So comprehensiveness is not really negotiable.

If you're like me, right about now you're wondering how on earth Lou was able to marshal the substantial resources to make this happen—and on top of that to persuade risk-averse lawyers to publish it online as an e-book free to all comers.

First, he argued the internal benefits for the firm:

• Clients need practical, real-time advice;
• Proskauer lawyers need to write more (Lou and I both subscribe to the belief that you probably don't fully comprehend something until you have to write about it);
• International practice is an area where Proskauer has genuine depth of expertise;
• Senior and junior lawyers need more opportunities to work together; and
• The project could foster the development of mentor/protege relationships.

Second, he argued the external/reputational benefits for the firm:

• Merely by producing this Proskauer would be seen as strongly capable in this area;
• By offering valuable intellectual property for free, Proskauer predisposes prospective clients to come back for more (why does Zabar's give free samples of cheese?);
• Most importantly, Lou told me with no small degree of passion that a key goal of the project was, and is, to "contribute to the debate, to participate in the dialogue."  How so?  "International litigation presents  courts all the time with issues and decisions where the law is, to put it charitably, not fully formed.  Courts struggle with this; they sometimes don't know how to approach an issue.  We wanted to suggest ways to think about these things.  In my experience, courts will never ever penalize a lawyer for taking a view in an unsettled area of law;  you're allowed to have an intelligent opinion.  Lawyers are allowed to further the profession without running afoul of judges."

What about the objection that this stuff is our bread and butter—how can we give it away?? Lou's answer, as mine would be, is that in fact no potential case or controversy in the real world is so simple that simply referring to a treatise will suffice to guide your action.  Or that if your question really is that simple, Proskauer wouldn't charge you for answering it anyway, particularly if the answer can be as short and sweet as "See Chapter 6."

Once the project got underway, the support by the firm itself was astounding, even inspirational, reports Lou.  He estimates that an average author devoted north of 100 hours to writing his or her contribution, and while segments came from nearly every corner of the litigation department, two chapters were also  prepared by the corporate department, on—what else?—avoiding litigation.  

"Nearly 50 authors @ roughly 100 hours apiece!?," you're thinking?  That's right; I told you this was a serious undertaking by the firm.   Although they did not track time to the 0.1 of an hour (Lou didn't track his own time at all, in fact), Lou reports that his "best estimate is that the firm has made a several million dollar investment, closer to mid-seven figures than low-seven figures."

Is this a model for the practice of law in the 21st Century?  Emphatically so, I believe. 

But be  forewarned:  Before attempting this at your firm, understand that to do this is a professional exercise at the highest level of ambition.  It's crystal clear to me from talking with Lou that it's also a labor of love (or, it had better be).  He confessed that he and Jennifer made people go back and hone their language "again and again; there was scrupulous editing and constant re-working."  And I believe it shows. 

Now that it's online, you be the judge; see for yourself.

Update (5 Oct, 6:00 pm). When I originally spoke with Lou, I asked what clients' reactions had been like and he replied that it was so new there essentially hadn't been time for any reaction. 

Well, here's the first report.  I'm not at liberty to identify the client, but suffice to say it's one of the largest multinational corporations in the world, in a business that affects all of us every day.  This comes from a senior in-house counsel and was entirely unsolicited:

"have skimmed through your guide.  it is terrific!  i think it's well done, great for issue spotting, well written, well organized, user friendly, etc. quite a lot of work, i cannot imagine how you fit it in!

"i have circulated it to my intl division colleagues and have forwarded it to a litigation dept colleague who has been dealing w some intl investigations/litigations. i'm sure she'll forward it within the lit department (and they may very well have been sent an announcement directly)"

So, for all the managing partners and practice group leaders who might still be rolling your eyes at the multi-million dollar investment Proskauer made in this guide, I have a question for you:  "What price client loyalty on that order?"  Put differently, how likely do you think it that that multinational will start giving its international litigation to a firm other than Proskauer?

Your Most Pressing Strategic Issues--According to You

The annual "Adam Smith, Esq." Reader Survey is actively in progress, and I sincerely urge those of you who haven't taken the two to three minutes it takes to complete it to do so right now. 

The point of the survey?  Two-fold:  I want to learn more about you, so as to better tailor the content of the site to your interests, and you get to tell me both what recommendations you'd offer me and, perhaps more importantly from your perspective, what the most pressing/important strategic, business, or financial issue facing you or your firm is.  Let your voice be heard; take the survey now.

Meanwhile, an interim report on what we've heard on precisely that last question, which reads verbatim thus:  "The most pressing/frustrating strategic, financial, or business issue facing me/my firm is."  Herewith follows a distillation of what you've been telling me.

Associate retention is a tremendous challenge for many of you.  Comments include (all exact quotes):

• associate compensation:  lockstep or merit?
• the position of associates in BigLaw, of course
• insane associate salaries
• and many many others who just said "associate retention" and left it at that.

This has been an issue I've devoted extensive—but perhaps still insufficient—attention to on "Adam Smith, Esq.," and I'll vow to do even more about it.  Fair warning:  I have no snappy answers on this one.  To a large extent we are facing a collision between an irresistible force and an immovable object whose constituent components are attitudinal, generational, and financial, and which is perhaps not susceptible of an enduring resolution absent a re-examination of underlying business models.   In short, this has been long in gestation and may be long in solution.

The War for Talent  is an ongoing challenge, perhaps more pressing now than ever.  Comments included "Finding and attracting top-level talent to a small boutique firm," and "attracting talent at the salary levels our firm pays."

Knowledge Management was mentioned by a large number of you, as something that firms have to do well but that very few in fact are managing to accomplish.  Technology and upgrades of same were a close second in this area.

Business development and marketing are perennial points of pain, and "some things never change."   The only fault with the bromide that "some things never change" is that in this case it's false:  This is getting worse.   Here are some more direct quotes:

• Business Development. Almost all law firm management issues are ultimately directed toward growing the top line (associate retention, training, marketing, strategy, etc.) It would be good to hear about this at both the individual level (aside from the standard cliches of "write articles, give speeches, network, and ask for business from all your friends," what other business development strategies do partners use) and at the firm level (what steps have been taken by national firms such as Latham and Kirkland to become more prominent and self-sustaining; how do firms organize and manage their practices and partners to maximize business opportunity).
• Continual pressure on fees and use of procurement.
• The pressure from clients for ever more efficient, lower price, better quality services compounded by the impact of procurement officers who don't understand and show little inclination to want to learn.

Just last week I learned of a Fortune 100 company whose panel for evaluating outside counsel consists of three people:  An associate general counsel and—two purchasing managers.  This is indeed only getting worse, and I'll try to bring back tales from the field that may be helpful to more of you.

The Hollow Middle haunts some of you. Faithful readers of "Adam Smith, Esq." will know what the hollow middle refers to, but for those who don't a quick refresher.  An increasingly prevalent industry structure sees firms migrating both to the high end, high-value, premium quality level, and to the no-frills, low-end, commodity level, with little comfortable territory remaining inbetween.   For example:

• Cars:  Toyota, Honda, Nissan, Chevy vs. Lexus, Audi, Mercedes, BMW, Ferrari, Porsche
• All wine/beer/spirits:  Budweiser vs. micro-brews, generic vodka vs. single-malt Scotch, magnum generic "chardonnay" vs. subscriber-only "Screaming Eagle"
• Financial services:  No-fee free checking for life  from Wachovia vs. private wealth management from US Trust.

And you get the idea.  My hypothesis is that our market is going in the same direction.  Here are some verbatim comments reflecting that same point of view:

• What happens to mid-sized firms in Europe - will they disappear over the next ten to fifteen years as a result of the inflow of US and UK firms? What should our US strategy be, with many former sources of referrals now setting up shop next door? And if mid-tier firms are to stay, what will their role be?
• The polarization of the market (the shrinking middle with more and more work being classified commodity/low fee or bet-the-company/high fee
• "Mid-Market Mush" or "why bother with a platform that's mediocre?"  Our practice group is very strong and we're not sure whether we should be a boutique or stay in the firm.

Since this is already a theme I have been sounding for some time, expect to see more coverage of it here as its impact spreads.

Finally, we have what emerged as the most important concern of yours by far—head and shoulders above anything else I've mentioned until now.  And that is:

Management.   Law firms are intrinsically complex to manage, and you are painfully aware of that.  (Indeed, the truth of that observation might be said to be one of the foundational reasons why "Adam Smith, Esq." exists.)   The theme that emerges is that lawyers just plain are not predisposed to cooperating in the management imperative.  

Aside from seeming to have been inoculated with some vaccine that provides lifelong resistance to management in general, the presumed structure of rewards for partners today—divvying up all the profits at the end of the year and leaving the firm's balance sheet essentially back at zero —works strongly against investment, a long-term outlook, or a strategic perspective. 

Here are some of your comments and worries:

• Ineffective management. Rainmakers are not always the best communicators or managers
• 1. Lack of firm leadership; 2. Partner apathy in "running a business" beyond simply collecting a bonus; 3. Lack of strategic planning
• Persuading lawyers to understand that hiring a consultant is not (always) an admission of failure, but can be a way of creating / seizing an opportunity
• Transition from older partners to younger partners and division of income amongst the same.
• Continuing to find ways to motivate all of our partners and to have them recognize we're all in a state of continuous change.
• Firms competing in a global economy. Firms realizing they have to act more like corporate America
• The lack of real understanding as to how law firm organisations need to change to get the best out of people; the impact of globalisation on law firms.
  [And finally, perhaps my favorite:]
• Balancing the desire to grow as a firm versus the desire not to change. Our firm is looking to grow, and most everyone supports the notion, so long as nothing changes for the individual.

Much food for thought.  One implication is clear: I shall never lack for topics to discuss here on "Adam Smith, Esq." 

Your comments have been remarkably candid, serious-minded, insightful, and just plain human. 

As I've written before in various contexts, I believe our profession is currently undergoing a sea change in the structure and composition of the industry that will transform it in ways that will endure for essentially the remaining working careers of most of us. 

You have, if anything, confirmed the strains, pressures, and uncertainties of being in the center of this rapid transition.   The settled certainties of our parents' world are indeed long gone.

Having some inexplicable instincts alerting me to this coming vortex many years ago, I continue to find it fascinating beyond measure.   Please continue to share your thoughts with me, either through the Survey or, more directly, by email.

How Close to Your Clients Dare You Get?

Now that marketing has become an ingrained function at firms and no longer either an exotic foreign import or an isolated archipelago, it might be time to re-examine how the world's most sophisticated marketing organizations—consumer packaged goods companies—are re-inventing marketing in the 21st Century.

Booz Allen & Hamilton's strategy + business  has just such an article, The New Complete Marketer. 

Given that we're temporarily in the land of consumers, let me first provide their bullet points and then attempt to translate them into our world.  Based on Booz Allen's research, five themes emerged identifying characteristics of the best CMOs. (OK, they actually list six themes, but one of them, about partnering with a multi-media savvy ad agency, is a bit off point for us.) Quoting, they:

• Put the consumer at the heart of marketing
• Make marketing accountable
• Embrace the challenges of new media
• Recognize the new organizational imperative
• Remain adaptable

Swell.  Now let's interpret what this means for law firms.

Clients first

Focusing on clients means viewing the service your firm provides from their perspective and ensuring it's aligned with what they really anticipate, need, and expect from a premier law firm.  At Procter & Gamble, it means getting into laundry rooms at customers' homes and "really, really hitting on that [the information gleaned]," says Jim Stengel, P&G Global Marketing Officer.  At FedEx it means that a key part of marketing's job is “speaking up on the customer's behalf and ensuring that what we have to say is taken seriously,” according to Mike Glenn, executive vice president of market development and corporate communications.

This isn't necessarily easy.  Even at P&G, once again known as a nimble organization after a decade or so in the doldrums of comfortable market leadership, "it took nearly a decade to reposition to reposition the client at the heart of our business."

But we're starting.  More and more firms—particularly the ones that have a tradition of innovative approaches to their business—are launching "client relationship" programs, distinct from conventional marketing efforts. 

Accountable Marketing

The ROI of marketing has long been a thorny issue and I confidently predict it will remain so for at least the rest of the careers of most of you reading this. Booz Allen found that 90% of its marketing respondents identified it as "a major challenge, and the leading factor, by more than a two-to-one margin, that brings marketers under increased pressure from management."

So there is no magic bullet.

But that's not to say judgment cannot be exercised and inferences drawn.  I suggest you approach evaluating marketing's impact in two ways:  First, are prospective clients more predisposed towards your firm than they seem to have been in the past?  And second, how do existing clients evaluate their satisfaction with your service?

The first—prospects' predisposition—speaks to your firm's overall reputation in the marketplace, which is or ought to be influenced by your overall marketing efforts.  Recently The Wall Street Journal had a rather devastating article (devastating, at least, if you live in Detroit) detailing that fully 54% of US car buyers would not consider a domestic car.  (22% would not consider an import, and the remainder would consider both.)    Detroit finally realizes, as Rick Wagoner of GM put it, that "just building a great product and putting it out there isn't enough." 

If you're building a great product and no one is paying attention, you need marketing to change perceptions.

Second, how existing clients view your firm is less the purview of marketing than, I suggest, client relations.  That's why this emerging specialty should be on your radar if it's not already.

The Challenges of New Media

In consumer packaged goods land, new media can mean SMS'ing from your cellphone the secret code that changes the Times Square billboard display.

That's not what we're talking about.

But we are talking about finding your clients where they really are—be it on the online home page of The Wall Street Journal or in the shuttle lounges at Reagan National, LaGuardia, and Boston Logan.   And, increasingly, it could be communicating with them through the medium of a firm-sponsored blog on issues of specific interest to them.  If you try this, my advice is:

• Keep it highly focused:  Inbound project finance to China, for example, not "your corporate practice."
• Edit it with a very light touch.  It must have a tone of voice, a true character, and not be a PR or jargon-laden mouthpiece.  Hypocrisy will be detected in a heartbeat.
• Encourage feedback and even push-back; freely acknowledge corrections; respond promptly to inquiries.

Does all of this sound high-maintenance?  Well, yes, it is; but the potential connections you make can be invaluable.  Just don't go into it underestimating the demands for regular maintenance and feeding of the beast going forward.

Organizational Imperatives

Primarily, this means that marketing can no longer be an island.  To paraphrase Richard Nixon about Keynesians, "we're all marketers now."  If marketing is just viewed as "help with the RFP" or "get closer to the client" support, you're wasting their time and talents and you should face the fact that you probably in your heart of hearts don't believe in any of this and just want to be left alone to practice law. 

That's a fine and worthy choice.  Just don't expect to build, or sustain, a great firm down that path.

So what does it mean to "embed" marketing in the firm?

Booz Allen probably describes it best (emphasis supplied):

"Marketing does much better when it's incorporated into the greater business, say these thought-leading CMOs [from P&G, Yahoo, and Foster's beer]. It can drive growth more quickly if it is fully integrated with the different functions, and it can do so in a way that previous CMOs never realized was possible. For a CMO to be fully effective, all of senior management must have clarity about the marketing mission. The high degree of turnover in marketing leadership — and, indeed, among the subjects interviewed in this book — demonstrates the fragility of that shared understanding. "

Remain Adaptable

It's a truism that the market environment is ceaselessly changing and our firms must adapt to it—just ask a private equity hotshot how the world changed over this past summer in the wake of the subprime meltdown's spreading fear, uncertainty, and doubt throughout worldwide credit markets.  But that type of adaptation is fundamentally uninteresting:  It's reactive and dictated by external events.

The interesting type of adaptability is that we initiate from within our firms, sensing the beginnings of a shift in the market winds, being attuned to clients' emerging needs, or—better yet—to needs they haven't even been able to articulate.

Is it realistic, or even desirable, for your marketing or client relationship people to have a voice in charting the course of the services your firm provides?

I believe that, if you think those folks truly understand your clients' desires for service (and if they don't understand, we need to have a different conversation), then  you'd be crazy not to take advantage of that perspective.  This example, of the evolution of P&G's famous Pampers brand, may seem beside the point to law firms, but I believe there's a serious message about the discipline of drilling down from a superficial, appearances-mostly, view of what clients want to a far more fundamental understanding of what they're truly concerned about, what motivates them to action, and how you can demonstrate that you profoundly "get it":

"Several years ago, Procter & Gamble’s disposable diaper division was organized around the science of fluid absorption. “We had an entire R&D organization focused on fluid absorption, its speed, [its effect on] skin health, and so on,” explains Jim Stengel. The most important question on the table for P&G’s diaper scientists was, How can we make diapers stay drier longer? Yet under the tutelage of marketing leaders like Stengel, the company realized that the primary value it offered to parents wasn’t technological — it wasn’t limited to dryness or containment. Consumers were looking to Procter & Gamble for improvements in the overall development and health of babies. “That creates all sorts of new needs,” he says. “Babies wear a diaper 24/7 for almost three years…. But when you ask, ‘How do we know we’re better for a baby’s development than our competitors?’ — that means your competitive set changes, your market share changes, what you’re looking for in your equity changes.” The R&D lab and marketing team had been close before; now they became inseparable as they tackled innovative approaches to diaper fit and feel. And with a question on the table about baby development, the brand began a new round of market growth."

I leave the analogies to your practice and your clients to your own insight into their industries and the strategic, financial, and marketplace challenges they're facing.  

But if nothing else, you should take away this lesson:  Your firm does not provide "collateralized debt obligation" structures, or "employment litigation defense" or "executive compensation counsel."   

If you're good, you provide insight into the evolving landscape of your clients' businesses, and the legal architecture—always informed by strategy—best suited to your clients' posture tomorrow.

The Care & Feeding of Your CMO

"CEOs and board members, who have been pushing Chief Marketing Officers hard for growth and for more effective marketing efforts, are frustrated by the difficulty of finding chief marketers with the full range of necessary skills. Turnover rates for CMOs are therefore high relative to those of their C-level peers, and CMOs are in short supply. (Just ask any executive recruiter about the number of difficult CMO searches he or she has under way.)"

So observes McKinsey in The evolving role of the CMO, but I suggest if you substitute "managing partner and executive committee" for "CEO and board members"  you'd have an accurate description of the law firm landscape in this precinct at the moment.

While the half-life of CMOs at law firms had been notoriously short, a glimmer of improvement appeared to be on the horizon in the last few years as firms became more comfortable with the marketing function, and as CMOs imported from other industries got their sea legs and began to understand how to apply their own form of professional discipline to our idiosyncratic industry. 

This "meeting of the minds" between senior firm management and CMOs has so far been a two-way street, with CMOs in law firms acclimatizing themselves to the law firm environment, and executive committees realizing marketing is an indispensable component of a high-performing firm.

Now, let's up the volume.

Two trends that are playing out in the consumer sector (as McKinsey reports) are finding their analogs or mirror images in law-firm land.  The first trend is the increasing reliance of consumers on the Internet to research everything from cars to electronics to prescription drugs online before making a purchase.  And "research" online, need I remind you, includes unvarnished opinions from untraditional sources as well as consumer manufacturing and packaged goods' companies' classic push marketing efforts.  Your firm's reputation is no longer yours to control.  (Well, it never really was, but the velocity of potential commentary has increased dramatically.)

The second trend is even more germane to our industry:  One of the most powerful components of fallout from increased access to information is to accelerate the trend—seen across a myriad of industries—towards a bifurcated industrial structure, with a low end and a high end, but very little middle.   As McKinsey puts it:

"But the change in consumer buying habits is broader. The proliferation of distribution touch points and the more rapid growth of the low and high ends of the market at the expense of the middle are forcing marketers to take low-cost, time-saving, “facts-only” sales approaches and, at the same time, higher-value, more service-oriented approaches."

To paraphrase, clients' law firm selection process has changed.  You can offer them two value propositions:  The "low-cost, time-saving," direct, commodity approach, or the "higher-value, more service-oriented" track.   Beware being neither.

But to get back to marketing:  What does the increasing availability of information, from traditional and unconventional sources, mean for a law firm trying to manage its reputation? 

Traditionally, there has been a divide between marketing, focused on customers; public relations, targeting the press; and, where needed, regulatory affairs, targeting state or other regulatory bodies with jurisdiction over a firm or influence over its activities.  And, traditionally, these functions reported to different people or were independent in how they acted and didn't necessarily communicate about or coordinate their efforts.

This must change.  Increasingly, all intersect with each other and require an integrated response.

Where, you may be asking right about now, are the partners in all of this?

They're at the heart of it. 

First, by embodying and exemplifying the principles, reputation, and values of the firm, and projecting those characteristics every hour of the day with every client and prospect, every associate, staff member, and potential lateral.

Second, by being the living, breathing manifestation of the firm as you strive to win new business and to cement connections with current clients.   The firm can spend itself blue in the face on marketing efforts, but, if the partners cannot deliver the professional, intellectual, and empathetic human connections required to persuade a client to entrust an engagement to the firm, all is for naught.

And what can the firm chair or managing partner and the senior firm leadership do to advance the marketing cause?

• Make sure you truly and deeply understand how clients and prospects view your firm.  The image you're trying to project may not accord with the perception being received.  Understand what influencers, traditional and otherwise, may be saying about your firm, and bring them to the table.  It perhaps cannot be said too often that the primary task of firm leadership is to communicate—to internal and external constituencies.
  
• Ensure the CMO is connected to the people who matter within your firm.  Make sure the CMO is included whenever senior firm leadership comes together.  After all, they can't project a progressive and accurate image of your firm unless they're getting today's news.
  
• Lastly and most importantly, think through the marketing effort with the CMO.  As McKinsey puts it, be a "thought partner."  If you truly want your marketing organization to mirror the excellence of your firm, your CMO—and more importantly, the audiences your marketing department is addressing—deserve no less.

Managing Global Client Relationships

I've been friends with the folks at the London-based "Managing Partners' Forum" for a couple of years, and tomorrow morning I'll be speaking at their event, "Managing Clients Across Borders," here at Clifford Chance's offices on West 52nd Street.

I've put together a summary-level presentation of my thoughts on the topic—my co-presenter, Peter Chaffetz of Clifford Chance and I are limited to half an hour altogether—but if you're interested, take a look.

Needless to add, I'd be happy to discuss my thinking on this key challenge for our industry as we move forward into the 21st Century.

"New Delivery Mechanisms That Will Be Highly Disruptive"--Clayton Christensen Is Talking To You

Mark Chandler, a Senior Vice President and the Secretary and General Counsel of Cisco, gave a speech last week in San Diego at the Northwestern School of Law's 34th Annual Securities Regulation Institute, which has been getting a fair amount of play online, and deservedly so.

Called "The State of Technology in the Law," it's actually far far more than that; it's his vision of how our industry will be transformed by technology—and client demands—as the 21st Century unfolds:  Indeed, as some of us who hope to have decades left on our career will experience ourselves.

I'm quite confident I've never used the phrase "must-read" on "Adam Smith, Esq.," but this is my first nominee.  I'll attempt to highlight some of his key points and give you my take on them; but you should, to be sure, read it all.

Chandler frames his talk thus:

"I offer you three questions for our discussion today.
"First, how is technology driving change in knowledge-based industries?
"Second, what are the key areas of vulnerability in the legal services business to these technological changes?
"And third, what will it take to succeed in this changed environment?"

"Letters from law firms telling me how much billing rates are going up next year are therefore totally irrelevant to me, or as we say in Silicon Valley, orthogonal to my concerns. Think about it: not one of the CIOs of your firms expects to get a letter from Cisco explaining how much more our products will cost next year. And not one of our suppliers comes to us to tell us how much their prices will go up next year. So from my perspective, I don't care what billing rates are. I care about productivity and outputs."

You may think this is spoken like a procurement manager in disguise, but he's barely getting started.   The transformation of our industry is a subset of the transformation of access to information, which is moving from centralized, command-and-control hierarchical dispensers of content, to zero-marginal-cost transmission and duplication.  (What did in Tower Records?i ITunes and Kazaa; and recording industry revenue is down 25% in the last 5 years.)

Michael Spence, co-winner of the 2001 Nobel Prize in Economics, has said that the worldwide networking  of computers is the most important development in economic history since the opening of the trade routes between Europe and Asia in the late Middle Ages.  Why?  Because it changes where and how people can work.  And Chandler reels off a litany of Old World entities built on the information-is-scarce paradigm, suddenly made obsolete by information-is-free upstarts:

• Encyclopedia Britannica vs. Wikipedia
• Frommers and Fodors vs. ePinions and TripAdvisor
• Corner bookstores vs. Amazon
• Newspapers vs. eBay and craigslist

And then he turns to law-firm-land, meaning to question #2, "key areas of vulnerability."

The heart of the matter is that devil with nine (or ninety) lives:  The Billable Hour.  "Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour."

And while the Baby Boomers may have bought into the model of toiling ceaselessly for a decade or so in an attempt to win the tournament for a chance at toiling ceaselessly for a few more decades, today's associates aren't buying it:  Associate attrition rates are 20%/year and higher, and Chandler adds that "The chairman of one firm told me that only people in their 50s and 60s are willing to put in long hours these days, that associates regularly turn down the chance to work on major deals if it interferes with social plans or a vacation."

This, may I hasten to add, is not the associates' problem:  It's your problem.

Would you rather bemoan it?  Fine:  Be my guest.  Denial is always a superb adaptive strategy.

But as Chandler puts it: 

"Upending one's life to support inefficient means of communication, driven by a billable hour system, to maintain a relatively slim chance of making partner, just doesn't cut it. And when the next generation heads for the exits, it's a sign of a business model under stress."

"Under stress" happens to be my own nominee for best single turn of phrase in the entire piece.

Here on "Adam Smith, Esq.," and in my life in the real world, I devote a fair amount of attention to knowledge management:  It is, I believe, at the very core of a high-performance firm, living at the intersection of professional development, marketing, and client service.  A firm with a frustrating or ineffective KM system is at a serious competitive disadvantage.

But KM can be a double-edged sword, as Chandler astutely observes.

His problem is that clients cannot benefit from firms' KM systems without going through the tollgate of the hourly billing model:  "The legal industry has spent millions on IT to up speed access to information. But the only way I can get that information is through an individual billing me by the hour."  Chandler is fed up, and he's not going to take it any more.

The issue is that the gatekeeper, the one-on-one relationship of client and lawyer, is profoundly obsolete:

"My contention is that the very source of success for firms today – the ability to manage client access to information and require clients to use bespoke 1:1 systems – will be the source of failure in the future.

"So my answer to question number two is that the greatest vulnerability of the legal industry today is a failure to make information more accessible to clients, to drive models based on value and efficiency. The present system is leading to unhappy lawyers and unhappy clients. The center will not hold."

Chandler foresees a world with law firms sorting themselves into a "dumb-bell" distribution:  At one end, a group who are able to commoditize and standardize services to manage costs and ensure predictability, "where very good is good enough."  And at the other end, providers of top-notch bespoke services.  Rare will be the firm that can pull off both.

Don't count Chandler an ingrate.  He understands the integral role of outside counsel, and proudly (and rightly) cites Cisco's record of "no records with its stock options, minimal comments on our 10-Ks, and only one piece of litigation listed in the last 10-Q, and that one has subsequently been resolved."  He's proud of our profession.

But:  New technology has resulted in new business realities.  Clients are demanding greater value.  Associates are demanding greater engagement. 

As tempting as denial may be, I for one do not believe it's an equilibrium solution.  Personally, I don't even believe it's remotely tempting—not in the least.

Let me propose a vision for a law firm that Chandler would hire, and hire enthusiastically:

• A powerful and supple knowledge management system is its key competitive weapon.
• The firm is not afraid—indeed, it trumpets—sharing this system with key clients (obviously, within the bounds of confidentiality, privilege, etc., etc.).
• Lawyers are freed to work on truly higher-value work.
• For which they bill based on a measure of value-received instead of by "cost of production," a/k/a the billable hour.

What does this accomplish?

• It aligns the firm's economic interests with its clients'.
• It separates the firm from the pack, which means
• The firm can (honestly, truly, deeply) tell its clients that it understands what they've been through in terms of
  • down-sizing
  • outsourcing
  • streamlining
• And that it's doing the same things its clients have been doing.

Let's face it:  Corporate America (corporate-world, for that matter) has gone through the looking-glass of rationalizing every process they execute into as streamlined, efficient, and cost-effective a posture as they can possibly imagine; and they're still challenging costs every day.  Law firms haven't even thought about it.

But the Mark Chandlers of the world are telling us that we'd better start reading from the same playbook they've been using for a decade or more.

Is this the opportunity of a generation, or what? 

Imagine if your firm was not pushed kicking and screaming into this absolutely positively inevitable future, but if it led the way?  What competitive distinction would that be for you?  How enduring would the advantage to your reputation be?

I was discussing Chandler's piece with a good friend a few nights ago, a fellow who works for an AmLaw 50 in a senior managerial slot, and his reaction was:  "I wish we had more clients like that; imagine what we could do for them."  He's ever so right.

You read it here first.

Update: Feb. 13:

Doug Caddell, CIO of Foley and Lardner, and a friend, writes as follows and asks me to include this as a comment. If you don't know Doug, yes, he's droll.

I generally agree with the above comments of Mark Chandler, GC of Cisco. However, I do take exception with one statement in particular.

Mark says, "Letters from law firms telling me how much billing rates are going up next year are therefore totally irrelevant to me, or as we say in Silicon Valley, orthogonal to my concerns. Think about it: not one of the CIOs of your firms expects to get a letter from Cisco explaining how much more our products will cost next year."

I thought about it: I don't know about my peers, but I receive a "letter" from Cisco every year informing me of my increased cost of doing business with Cisco. While these "letters" are not printed on stationary, the do arrive on Cicso invoice "letterhead". And each year the topic has been price increases. This is especially true with Cisco Smart Net, their maintenance "insurance" on routers, switches, etc. What used to be reasonable has gone the way of first year associate salaries. So much that we now only put critical gear on Smart Net, and "self-insure" the rest.

I'm waiting for this year's letter from Cisco. But, I don't need to open it to know what it says.

Doug Caddell, CIO Foley & Lardner LLP

Marco Antonio P. Goncalves writes me from Rio de Janeiro with these thoughts:

"Bruce, congratulations on the post. The subject is really interesting and has lots in common with something I wrote in a book on legal marketing that I'm co-authoring with another Brazilian legal marketing consultant. The book is not yet finished, but I try to explain the increase need by companies to look up to law firms that operate like them, like a business, as "corporate mirroring" (I believe this is the best translation from the Portuguese term I have used). In other words, companies want to see them reflected in the law firms they do business with. If they don't get this "reflection", they will simply look for another law firm who does."

Marco raises an insightful point: As the pressure relentlessly increases on Fortune 1000 GC's to operate their departments more and more the way marketing, manufacturing, finance, etc., operate—like a business—GC's and their teams will naturally look more and more for law firms that follow the same philosophy. The question is not whether your firm will get there, but when: And I invoke the bromide (in this case, truthful): "Lead, follow, or get out of the way."

Your Firm's 21st Century Chief Marketing Officer

One of the topics I'd like to devote more time to here on "Adam Smith, Esq." is marketing and business development.  It matters.  It's harder than it looks.  Some people seem preternaturally gifted at it and others seem to have no clue, and what distinguishes them is mysterious.  In short, it's intrinsically interesting.

So why don't I have more to say about it?  One reason is that so much of it—at least how it works in our profession—is one-on-one human interaction and relationships and there's simply not much, intelligent and memorable and insightful, that you can say about that.  It would almost be like offering marriage advice:  It really really depends, and without knowing all the gory details I have nothing to say. 

Another reason, more important, is that great marketing is an astuteful exercise in divining, distilling, and describing the essential distinction of your firm.  In the field of professional services, this is exceptionally hard work, and very few firms seem, based on my observation, to be able to pull it off; many seem to be essentially variations on a theme to the effect of, "we have great lawyers," "we do great work," "we're really really client-centric and responsive."

This takes us to the topic du jour.  Last week I had the opportunity to interview Dave Egan, Chief Marketing Officer at Reed Smith.  Dave has had an unusual career trajectory, in that he spent 20 years at a leading advertising agency before moving into law-firm-land with no prior experience in the industry.  But as you'll see, that makes more sense than may first appear to the eye.  I hope you find the summary of my conversation with Dave enlightening.

Dave joined Ketchum Advertising in Pittsburgh out of college and, as noted, spent 20 years there, starting as a junior account executive and ending as President of the Pittsburgh office.  Clients ranged across a broad array of industries from consumer packaged goods and manufacturing to professional sports marketing.  After 20 years, Ketchum was taken over by Omnicom and Dave started became President of a start-up broadcasting company.  

When he sought advice on how to exit his new firm from his long-time friend at Reed Smith, Greg Jordan, the conversation took an unexpected turn as Greg had just assumed the chairmanship of Reed Smith and was seeking to build a team of top C-level executives.  In a word, Greg asked Dave if he'd be interested in becoming the firm's CMO. 

Initially, Dave was highly skeptical given the, shall we say, checkered track record of CMO's at law firms at that time (that time being 2002), but a series of conversations with senior management at Reed Smith convinced him that the firm was serious about a professional, respected, integral-to-the-firm, marketing effort.

At Reed Smith, Dave reports to Greg Jordan and Michael Pollack, Director of Strategy, and in turn is responsible for branding and communications, business development across the firm (including the US, the UK, and the Mideast), and new initiative called "clients and markets" intended to understand the firm's clients better and anticipate their changing needs.  This includes team-based approaches to the firm's top 40 or so most strategic clients, as well as client interviews (in person for the most important clients, and online surveys for another 1,000/year), and finally a "Director of General Counsel Relations," Marti Candiello, who is responsible for communicating with key clients and ensuring relations are strong (and fixing them if they aren't).

I asked Dave what had been easier and what had been harder than he anticipated.   Easier:

• The bromide about "herding cats" was not as true as he'd feared; he's found that, particularly with senior-level people, they're bright, collegial, and exceptionally easy to work with.
• Fascinatingly, he believes that the characteristics of high-performing lawyers (bright, opinionated, outspoken, and generally of the view that they could do your job at least as well as you if they had any interest in it) are extremely similar to those of "creative's" in the advertising industry, and thus that his experience handling and managing creative's was an invaluable piece of his background.
• Another dimension of his advertising firm experience that bore one-to-one correspondence with his role at Reed Smith was his account management background.  (For those of you unacquainted with the lingo, "account management" is the function within agencies of managing the relationship with the client, coordinating the activities of the creative, research, and media departments, and essentially developing the core strategy of each marketing campaign.)  Dave reported that this had equipped him surprisingly well for dealing with his "clients" at Reed Smith:  The partners at the firm and their clients.
• The intellectual level of discourse at law firms is far higher than at ad agencies; you can assume that essentially everyone in sight is bright, analytic, and articulate.

Harder:

• Holding on to good people.  This surprised me, so I asked Dave to elaborate:  He reported that as marketing is increasingly perceived as a peer-group, eye-level, professional discipline and function within law firms, on a par with finance and IT, the demand for qualified and competent professionals exceeds the supply.  This puts pressure on recruitment and retention.  I took this report "from the trenches" as a leading indicator of how marketing is and will be viewed by forward-looking firms, and infinitely more credible than any breast-beating screeds by "it's all marketing, all the time" apologists, believers, and zealots.

While Dave is responsible for "integrated" marketing for Reed Smith, meaning:

• advertising
• public relations
• events
• direct mail and one-on-one meetings
• CRM, or customer relationship management,
• and business development,

he reported that the most critical communications platform by far for the firm was its website. Somewhat surprised at the fervency of his endorsement of our medium (but, between you and me, deeply pleased), I asked Dave why he felt that was so, and he replied that while he loved and was a big believer in advertising, the audience Reed Smith wants to reach is hard to find in substantial concentrations in conventional media, and, more importantly, inherently skeptical and critical.   So the "one-way" monologue of traditional advertising is less effective (because less meaningful to the audience) than the two-way interactivity of the website.  Which, of course, is precisely why you're reading "Adam Smith, Esq." on-screen instead of receiving it monthly in the mail.

Clearly, the challenges ahead for Dave and his team, and Reed Smith overall, are daunting:  The Richards Butler (London) merger was just formalized as of 1 January, and the merger with 140-lawyer Chicago-based Sachnoff & Weaver is due to be finalized in March (having been formally approved by both partnerships late last year).  In his time at Reed Smith, the firm has gone from being a well-regarded mid-Atlantic firm with strong Pittsburgh roots and some financial-services expertise to a truly international firm with a serious footprint in global cities (NYC, London).

My takeaway:

• Twenty years (15? 25?—pick your number) after law firms realized marketing was something corporate America takes for granted as an essential core competence, they're finally getting serious about walking the walk.
• A career in advertising agencies is not a bad background, at all, for a law firm CMO—and a smarter, savvier, and more astute choice by far than what your average linear-thinking headhunter would recommend:  Someone who's already CMO at a smaller law firm (yawn).
• The challenge of marketing sophisticated professional services calls for senior-level marketing pro's at the top of their game, who can go toe-to-toe with your most critical (shall I say acerbic?) partners and stand their ground.

Your resolution might be to take another look at your marketing effort; mine shall certainly be to write more about this once-neglected dimension of our industry.

The 18th Century Is Alive & Well in New York

A few months ago an online flurry of commentary erupted over proposed amendments to the rules that govern lawyer advertising in New York.   Among other things, the proposals would define the term "advertisement" extremely broadly as any public communication made "by . . . a lawyer . . . about a lawyer."    Interestingly, it explicitly includes all online communications, including websites, emails, and instant messaging.  There is no requirement that the speech be commercial or related to the lawyer's practice.

The rules also require that every time a site (such as "Adam Smith, Esq.") is modified—every time I publish a new piece, presumably—it must be printed out in hard copy, stored for one year, and an additional copy mailed to the New York attorney disciplinary committee for its records.  As if this weren't antedeluvian enough, the site would have to be branded with the words "Attorney Advertising" in a font at least as large as the largest font on the page (so, about 60 points to match the banner title).

There are also draconian restrictions on TV and print advertisements, which fortunately don't concern me, but which would be laughable if they weren't so bizarre:  No client testimonials; no images of judges, courtrooms, or courthouses; no use of "nicknames, moniker, motto, or trade name[s]"; and God forbid nothing "about results the lawyer can achieve [or] statements describing or characterizing the quality of the lawyer's or law firm's services."

After you've picked yourself up off the floor at the news that 18th-Century thinking is alive and well (and pre-Bill of Rights 18th-Century thinking, at that), you might take a look at my letter offering comments on the proposal.  Comments close November 15, and should be addressed to:

Michael Colodner, Esq.
Counsel
Office of Court Administration
25 Beaver Street
New York, New York 10004

We shall see whether sanity, or medievalism, triumphs in New York.

Update:  Thursday November 9, 9:10 am

Charlie Green, co-author with David Maister of "The Trusted Advisor", is, I'm pleased to report, a regular reader of "Adam Smith, Esq.," and he wrote concerning this piece as follows:

Wow.

(And here I thought the 18th Century was the age of enlightenment, ha ha).

Your comments are well-taken (and well-written). But what I find even more interesting are the implicit assumptions I read into the proposal. In particular, it seems to me the legal profession has a profoundly arrogant view of its clients.

What I see as implicit in advocating such wide-reaching proposals are the ideas that
a. people are incapable of judging legal performance,
b. lawyers are inherently out for no good unless they are restrained,
c. "selling" is a dark art that is inherently manipulative, and
d. when said dark art is in the hands of said evil lawyers, clients are at huge risk.

Leaving aside the temptation to make jokes based on point b., all of them reflect a view that lawyers have huge influence and clients must be protected from information about them--for their own good, I'm sure.

What little faith in the market for services! Somehow people navigate the waters of auto and life insurance; figure out how to express preferences for physicians; manage to hire accountants, and choose spiritual advisors. But an MD is not considered a requirement to select a doctor; lack of a CPA doesn't keep us from making intelligent assumptions about accountants. In fact, it is precisely our content ignorance as clients which makes us want to hire an expert; if we knew enough to technically evaluate them, we wouldn't need them in the first place.

This is why a market in free speech, aka sales, is so helpful in selecting professionals. What makes lawyers think that open dialogue, the presentation of the equivalent of "bedside manner," or the opportunity to see and experience a lawyer as a working human being is somehow a negative? It is, to the contrary, precisely how most of us would prefer to choose a lawyer.

Good practitioners these days are a million miles away from the hustler peddler cartoonish caricatures of old. Clients are perfectly capable of making intelligent, nuanced decisions based on complex assessments of trust, the lawyer�s ability to comprehend the clients' problems, and ability to manage client expectations while navigating the legal world.

Why deny clients the ability to make up their own mind? Arrogance, no matter what the dressed-up, snooty motives of "it's for their own good," is arrogance nonetheless.

Clients just want to be free to choose.

First of all, Charlie:  Thanks for your insights.

And I emphatically chime in:  The fundamental philosophical fault with the Neanderthal attitudes so conspicuously on display at the New York State lawyer disciplinary authority is profound distrust of both lawyers and clients, and a lowest-common-denominator assumption that, left to their own devices, these p eople will do self-destructive things. If that's  your approach—what I like to call, "managing for failure"—then disarming everyone in the room is indeed logical.

"Clients just want to be free to choose," indeed.  Informed, knowledgeable, rational choice.  Can't we all just be adults here?

A Pop Quiz for Your CMO

My friend Rich Gary has an enlightening column in the current issue of Law Firm Inc. in which he addresses "Ten Questions CMO's Must Be Ready to Answer."

If all CMO's came to the table prepared to respond to these as thoughtfully and thoroughly as Rich suggests they should, I suspect the job-tenure half-life of CMO's would immediately double or triple.

Rich seats CMO's squarely at the table.  He insists:  "Don't be afraid to speak up. You're a member of the firm's senior management team, and your opinion should be sought and valued on key issues."  Even if it means telling the managing partner that the firm offers no compelling value to clients! 

Rich also endorses a practice I see spreading, recently, among the more enlightened firms I work with: Client service teams. Client service teams form and re-form on the fly as a client's portfolio of legal needs changes. Your CMO should never miss a client service team meeting.

Most importantly, Rich approaches the CMO's job from a perspective deeply rooted in firm strategy, and the financial and economic realities of its practice areas, its approach to client relations, and even—critically—its partner compensation system.  Not that Rich recommends incorporating the CMO's evaluations of partners into the compensation calculation, but that he clarifies the essential connection between the inputs into setting compensation and the predictable outputs in terms of partner behavior.  Any CMO who does not understand the dynamics at play will be in a poor position to do their job.

Lastly, Rich reminds us that no matter  how professional, dedicated, creative, energetic, and visionary a CMO may be, all is for naught without the solid backing of the partnership:

"You must earn the confidence and respect of the partnership and be able to work with the partners in every office and practice area, whether they actively support the firm's marketing efforts or not. It's impossible to overstate the importance of this responsibility."

Ultimately, managing partners get the C-level executives they deserve.  Those who strengthen and grow their firms are astute at selecting talented people, putting them in fertile soil, and getting out of the way.

Show Me, Don't Tell Me

In Trust-Based Selling, Charles Green (who co-authored The Trusted Advisor with David Maister), titles Chapter 7 (pp. 70—74), "Sell by Doing, Not by Telling," and relates the following story:

The "Chief Counsel of a Fortune 50 company" needed to hire outside counsel for a critical project.  Starting with a dozen firms, they narrowed the selection to three finalists, each of whom they invited in for a 90-minute presentation:  "The first two were very good; they had solid expertise, industry knowledge, and had done their homework.  Then came firm three."

They said:  "Look, we only have 90 minutes with you.  We can do our standard capabilities presentation—which we're happy to do, by the way—or we can try something different.  We'd like to suggest that we get started on the project with you right here, right now.  After 85 minutes, we'll stop, and you'll have first-hand experience of what it's actually like to work with us."

Agreeing to the exercise, what do you suppose the corporate team found? 

Competence, to be sure:  That much was "quickly clear."  But here's the valuable, differentiating part:

"As we worked with them, we got to know them better; instead of giving answers to questions, we had a dialogue. [...]  They came to listen and to work, and to show their smarts in real time, on our issues, not to report on theirs.  You just felt you could trust them."

What firm three was up to (and yes, for the record, they won the assignment hands-down) was capitalizing on the fact that buying a complex service involves two steps, which are too often confused:  First is screening and only then is selection. 

Screening is fairly mechanical, and done at a distance:  It's establishing that your firm has the "table stakes" to play.  Here, reputation within the industry, a personal recommendation from a well-placed individual, or even a highly informative and intuitively navigable website may be all you need to get to the next round.

But once you're in front of the potential client, you're into selection, which operates under different psychological rules:  They already assume you can get the job done from a technical and professional perspective, now it's time for you to demonstrate ("doing not telling") how you would apply your skills to the potential client's specific issues. 

Until you reach the selection stage, your expertise is, to be sure, germane, but it's also abstract.  "German engineering" is one thing; a test drive is another.  Offer the potential client a test drive.  Demonstrate that you're willing to stick your neck out, take a risk that they might not like what you can actually do, and take a chance on collaboration.  Make the abstract tangible.

We are all tempted, in offering our services, to over-rate the importance of expertise.  After all, we've all made tremendous investments in training, professional development, mastery of our micro-practice specialties, and so on.  And we've been rewarded for our deep grasp of technical fundamentals.

Reinforcing our temptation to focus on degrees, credentials, and past triumphs is, often, the potential client themselves, who—even if they're not sure how to evaluate the answers—will often ask technical questions because they think they "should," that it's the responsible way to make a decision.

But it's really about trust, about rapport, about establishing a relationship grounded in jointly exploring solutions to the issues at hand.  And the quality of your performance in that context is not any thing you can assert; it's something you can only display.

So next time, be firm three.  What do you have to be afraid of?

Let's Assume Everyone Here's an Adult...

One of the topics most regularly (should I say, "compulsively?") bruited about, with far and away the least actual impact on anything to show for it, is "alternative billing," also known as anything but the billable hour.

I have my own theories as to why the billable hour endures despite condemnation from high and low—for example, the ABA's famous 2001-2002 "Billable Hours Report" opens with "It has become increasingly clear that many of the legal profession’s contemporary woes intersect at the billable hour," and continues more or less in that vein for 90 pages.   Primary among the life-support mechanisms for the billable hour (duly noted in the ABA Report) are that it lets law firms make a lot of money, and that it's well-suited to lawyers' inherent risk-averse nature.

But my favorite theory is actually a bit different:  We all know the political folk wisdom that "you can't beat somebody with nobody," and I believe that pretty much all of the commonly proposed alternatives to the almighty billable hour amount to "nobody."

There has not, in other words, been a logically persuasive, economically sustainable, mutually-agreeable (between client and law firm) alternative.

I'd now like to float one, which I'll call the McKinsey Billing Model because—you guessed it—it's patterned on how McKinsey bills.

First, I'll describe the essential elements, or components, and then I'll walk through how it works in practice.

Components:

• No one at McKinsey has an hourly billable rate.
• Everyone does have a "per diem" rate, but it's not disclosed outside the firm or to clients, even upon request.
• Projects are generally assessed in terms of how many months they will take, and whether they're appropriate for a "small team," a "medium team," or a "big team."
• A "small team" might typically consist of, say, 20% of a senior partner, 50% of a junior partner, 100% of an associate, and 100% of two analysts.
• Virtually without regard to the scope or substance of a project, McKinsey assumes that the team will call on colleagues who are not team members for an additional 20% of what they need (based on specific industry, substantive, or client knowledge, of course).
• Teams are assigned monthly price tags:  A "medium team," e.g., might cost $350,000 per month.

How it actually does (should) work:

When a client asks McKinsey for help on something, McKinsey assesses the challenge and responds (hypothetically):  "Great; that will take a small team four months, so expect it to cost $880,000."  The client decides whether that's a valuable economic proposition, and assuming they give the green light, McKinsey goes to work.

One of three things now happens:

• It indeed takes a small team four months, and the analysis/report/recommendation is delivered as promised.
• It turns out to be simpler than McKinsey thought, so they report after two months, "We think we're done; we'd like to show you what we have, and if you agree, we've stopped the clock."
• It turns out to be more complex than McKinsey thought, so they report after (say) two months, "There's more to this than first appeared (if we're to deal with it in a fashion commensurate with our standards), and we now think it will take the team eight months.  Would you like us to proceed, or to call it off?"

Under all these scenarios, McKinsey comes away fine (as they deserve to), assuming only that they can price their services rationally—and since they've been doing this for over 75 years, I think that's a safe assumption.

Likewise, I believe the client comes away fine.  In scenario #1, they get exactly what they bargained for; in scenario #2, they get "more" than what they bargained for (and are likely to be an even more loyal McKinsey client given McKinsey's non-self-interested candor); in scenario #3, they learn something about the complexity of their issues and, whether they stop or whether they proceed, they have the satisfaction and confidence of knowing they posed a non-trivial question.

What courageous law firm might adopt this billing model?  The obvious answer is:    No one, not any time soon.  Why not?  It is eminently sane and reasonable; it presumes only that your client has an appreciation for, and can rationally assess for themselves, what is value for money, and it treats all concerned as adults.   But no law firm of any size (that I'm aware of—please pipe up if you know something) is doing it.  And since a lawyer's response to a novel proposal is, "Who else is doing it?," it may take another generation or so.

Unless:   Unless lawyers want to change.

Why would they?  Only because, of course, it might be in their interest to do so.  And I predict that the billable hour gravy train may be running out of running room.  After all, you cannot increase forever:

• total annual billable hour expectations
• hourly rates
• leverage ratios of associates to partners, or
• hours consumed by projects, cases, and transactions your firm has done before many many times.

If, then, firms cannot forever play the game of increasing revenue through increasing all the metrics orbiting around the billable-hour model, they may have to find another way.  

You could always hire McKinsey to figure out what that other way might look like.

"The Innovator's Dilemma" Strikes Again?

In the classic "The Innovator's Dilemma," Clayton Christensen analyzed how companies at the top of their game, with brilliant and successful products, and focused on their core clients, could be undercut and eventually dethroned by small, pesky start-ups with demonstrably inferior technology.  No less than Andy Grove had this to say:

"This book addresses a tough problem that most successful companies will face eventually. It's lucid, analytical-and scary."

If you haven't read it, first of all, shame on you, but second of all, here's Christensen's key insight: Market-leading, highly-functioning firms that are (rightly) focused on their best clients will ignore newly introduced "disruptive" technologies which typically begin life cheaper, smaller, and easier to use—but far less capable—than the market leader's offerings.  The leader's best clients know and appreciate the fully-featured products they buy, and have no use for what the inferior upstart sells. Meanwhile, senior and middle management of the market-leading firm has no incentive to adopt the new, inferior technology either, since (a) their best clients have rejected it; and (b) at least initially, the market niche is so small it would contribute negligibly to the firm's growth, and could even dilute profitability (cheaper generally being associated with lower-margin).

We all know what happens next:  The emerging technology matures quickly, becomes competitively capable, and the market-leading incumbent is caught flat-footed.  If Christensen's book has been consistently criticized for anything, it's that he doesn't have much to say about what the market leader could do differently to avoid being dethroned—which I interpret not as a failing of Christensen but as a reflection of how intrinsically difficult it is for the market leader in such a situation:  Revolutionizing themselves to meet the threat on its own terms means taking their focus off their best clients and investing in somewhat unproven, low-margin products with an uncertain future.

What has this to with "the economics of law firms?"  Legal Week reports:

"Some of the fastest-growing, most innovative firms in the UK are found not within the confines of the City [of London] but out in the regions. Here, unencumbered by the tradition, expectation and expense of running a London operation, they have succeeded in building up legal businesses whose capacity for growth may soon see them encroaching on their capital equivalents� territories."

And what have these firms in common?

"Change.  As businesses which have come a long way in a comparatively short time, they are used to embracing it as a constant."

One could argue that the impending Clementi Commission reforms give UK firms greater incentive to innovate (or greater fear if they don't) than their less immediately challenged US brethren, but the firms Legal Week discusses don't sound fearful and don't sound bashful.  A partner at Liverpool-based Silverbeck-Rymer (no, I hadn't heard of it either—but for a taste of something "completely different," check out their website) says:

"The companies outside the profession currently being touted as potential providers of legal services are in a position to provide a much slicker service at a much reduced cost. If law firms are to survive they must embrace change or face extinction"

Incidentally, Silverbeck-Rymer has all of four partners and revenue of £16.4-million (about $29-million), so don't be too hasty to scoff at their business model.

What are the "business models" of these firms in general?

• Heavy investments in IT to propel efficiency.
• A strong culture of client-service orientation, including call-tracking and case management systems:  "anything focused on keeping the client happy," as one managing partner puts it.
• A "virtuous circle" whereby the investment in efficient, standardized systems and a stable workforce lead to satisfied clients receptive to cross-selling, which increases profitability and enables more aggressive investments in IT and marketing.

Now for the most disruptive innovation of all:  Discarding the partner-manager model entirely.

Drastic?  Not to Tim Hastings, chief executive of Midlands-based firm Nelsons, who says bluntly (emphasis supplied):

"We found many years ago that the pace of change in today�s business world is too rapid to suit the partner-manager model. It simply took too long to make a decision.

"A corporate-style model, however, allows us to emulate successful non-legal businesses. Most big companies have been built up by delivering consistent, high-quality products to their customers. This can be applied to legal services too, which is why we need a [corporate-style] decision-making process."

Is this starting to sound familiar?  Innovation arises from small, regional upstarts who offer inferior services ("standardized," "commoditized," not bespoke) at a lower—and fixed!—price.

Granted, UK firms staring down the barrel of Clementi may have little choice; but those like Nelsons and Sylverbeck-Rymer who enthusiastically embrace change may be showing us all a model for the future.  Win, lose, or draw, they're doing what Christensen found so threatening to incumbents:  Breeding new ideas, experimenting with different processes, and using their rapid growth to invest in more of the same.

"Know Your Client"

How well does your firm know its clients?  More pointedly:   How richly, truly, deeply does your firm understand your clients' attitudes towards your firm at large, the services you provide, and the individuals who provide it?

Even if your firm is in the vanguard (and saying that this practice puts your firm in the vanguard could itself be the subject of an essay on the dismaying backwardness of our beloved profession), and undertakes more or less formal client surveys, there can be a grave disconnect between what clients tell you and their true attitudes. 

If you don't believe me, believe Bain & Co., which reports that over 80% of clients who fired a professional service firm gave the firm positive reviews the last time they were asked.  (Alternatively, just hark back to the last time a boyfriend or girlfriend walked out on you, and you hadn't seen it coming.)

What's to be done? 

Permit me to introduce you to "Relationship Audits & Management" (RAM), a UK/US firm with an effective methodology to get "under the skin" of a relationship in ways that a questionnaire—even one conducted by an objective third-party—never will.  (The problems with questionnaires are two-fold:  You only get answers to what you ask, and you can't be confident the most telling issues are addressed.)

My own introduction to RAM came through Eversheds, which, along with Addleshaw-Goddard, has engaged them for the past 3-1/2 years to help get to the bottom of key client relationships.  (Eversheds has used the RAM methodology with clients accounting for 40—50% of its revenue.)  In an interview with Geoff Harrison, previously a partner specializing in UK and EU competition law, and now the "Client Relationship Manager" at Eversheds, I learned why Eversheds engaged RAM to begin with, what they'd learned, and what advice Geoff might offer other firms contemplating a similar program.

To begin with, Eversheds was attracted to RAM because its methodology goes beyond mere client "satisfaction" to unearth the real level of emotional commitment on the client's part.  Consider this map:

This delineates four zones into which clients can fall, depending on what their opinion is of your firm and what their intentions are:

• Rejection (low opinion, intending to act on it), a/k/a "Renegades"
• Apathy (low opinion, indifferent)
• Satisfied (high opinion, indifferent)
• Committed (high opinion, want to share that with others), a/k/a "Apostles"

RAM can not only tell you how your clients are arrayed across this mental map, but why.  For example, at Eversheds, one "aha!" moment came when they discovered that while the general counsel at Client X had a perfectly favorable opinion of the firm, his heir apparent had an "oil and water" relationship with some Eversheds lawyers and couldn't wait to steer the work elsewhere.

Innovative?  To be sure.  Too revolutionary or threatening?  That, frankly, depends on your firm.

I would not recommend RAM or its methodology to a firm not prepared, at all levels of the partnership and among associates, to embrace the news it might very well deliver.  Eversheds was fortunate in having a culture that conceives of its business as one of client service and actively sought to become closer to clients as service providers and not just as impeccably qualified and trained counselors and technicians. 

Moreover, Eversheds partners reacted to the inevitable, occasional, low grades by "trying to put negatives right rather than becoming defensive," as Geoff reports.   Prior to learning what RAM is capable of teaching you, be deadly certain your partners would by and large react the same way.

How did Eversheds surmount initial skepticism and resistance?  First of all, the firm's "buy-in" came from the top.   Nor did it hurt that excellence in client service is decidedly a factor in remuneration:  At compensation-time, The Executive Committee is presented both with the "forensic" results of a client relationship audit (the data) and with an informed narrative evaluation of what the results really mean in context.   How big a factor is this?  Geoff says only, "there's more to do on this score."

Nevertheless, the process got off the ground by recognizing that RAM's methodology could not just enable Eversheds to "play defense" and perhaps retain some business it might unwittingly be at risk of losing, but that it could affirmatively help generate new and additional business:

• From solidly established, core clients with whom "it would be remiss" not to pay the attention a RAM audit involves.
• From another group of clients who, while they seemed to be "a good fit," were perhaps not favoring Eversheds with as large a "share of spend" as they might.
• And from a third group of clients viewed as being of strategic importance to Eversheds, regardless of fee income—clients with whom Eversheds sought to cultivate a deeper relationship.

And how has it gone?  Hasn't the involvement of Eversheds partners in the process come at the price of forfeiting otherwise-billable time?  Isn't there an "opportunity cost" to all this?

Yes, but Geoff reports that it's more than offset by the benefits of deeper and stronger client bonds.  For example, another early "aha" moment came at the outset of discussions with a particular client, when the Eversheds partner was explaining why Eversheds cared enough to want to formally assess the client relationship, and the first thing the client said was, “until you came here today, I didn’t know I was that important.”  Eversheds had simply not made it obvious to the client that they were deeply valued.

Another "happy surprise" you might find is that if the client is of the view that your team is doing a splendid job, and offers nothing but high praise, don't change things. 

For more about Eversheds' experience, you can watch a brief video of Geoff Harrison talking about their experience (click on his image—5.5 MB file, so don't try this from any bandwidth-challenged device):

One other thought of mine: In our era of M&A and lateral practice group moves, imagine if you could employ the RAM methodology as part of your advance due diligence to help assess whether those boatloads of clients promised to be coming over with your shiny new hires were, in fact, joined at the hip to your optimistic potential hires. Just a thought.

If you're intrigued by what RAM might be able to do for you, let me know, or get in touch directly with Carey Evans of  RAM.

Associate Salaries: The Great Debate

By now a fair amount of blawgosphere ink has already been spilled on Cameron Stracher's Op-Ed in today's WSJ, "Cut My Salary, Please!" arguing, essentially, that the recent round of associate pay hikes (from $125,000 to $145,000 for first-year's) "should [leave] young associates trembling," because "their lives are about to get much worse."   Gerry Riskin writes that money will never buy the firm motivation or the associate happiness. Professor Bainbridge takes this angle:

"To make us care, Stracher has to make one of two possible moves. First, he could argue that there's something morally problematic about wealth. Second, he could argue that high associate salaries and partner draws have negative externalities for society. In his op-ed, Stracher makes the second move."

"But what about market competition? Why don't clients, especially big corporate clients with in- house counsel, compete down rates, force efficient settlements? I'm sure that Bruce has an explanation -- indeed may have given one. But here's a couple of my own ideas for starters."

One of Larry's more perceptive and telling points is that, since ethical rules in the US require that owners of law firms be licensed lawyers, the owners have an incentive to "over-recommend" consumption of legal services in lieu of other viable substitutes:

"[L]awyers, would want to maximize customers' use of legal services by either performing excessive amounts of legal services or under-recommending such related nonlegal services as accounting and finance. By contrast, non-lawyer managers of firms that offer nonlegal as well as legal services would have an incentive to maximize overall profits rather than the portion of profits produced by lawyers."

"Higher salaries have forced firms to look for new ways to increase revenues. One obvious solution is to throw more lawyers on a case, and to be more aggressive about litigating and challenging small matters that might otherwise go uncontested. [...]  Firms are lawyering matters to death, and killing their associates in the process. It didn't used to be this way."

The problem with Stracher's observation—and the way in which he misses the fundamental economic rationale that Larry fingers—is that law firms presumably always want to increase revenues, and if they could just "throw more lawyers on a case" and pay associates coolie wages, they'd be more profitable still.  There's no solid connection, in other words, between associate wages and the staffing levels clients will accept.  (Indeed, clients would tell you there's an inverse relation, at least between acceptable staffing levels and associates' hourly rates.)

And a brief correction on Stracher's comment that: "A young lawyer who bills 2,200 hours at $250 per hour generates $550,000 for the firm, only $145,000 of which pays his salary."  Actually, by the time you figure in actual realization rates on those 2,200 hours, taxes, bonuses, benefits, and indirect administrative costs ranging from Park Avenue rents and E&O insurance to the IT infrastructure, I would be shocked if the typical first-year wasn't a meaningful cash drain to the firm.

But we still haven't answered the fundamental question Stracher's piece, which is every bit as entertaining as it is economically fallacious, implicitly poses.  To wit:  "Just why are associates paid so much?"  Read on.

I'll start by turning to "efficiency-wage theory," the novel insight of which is that paying higher wages, even above-market wages, will be profitable if it makes workers disproportionately productive.  These are the plausible mechanisms whereby that might be true (and on efficiency-wage theory in general, see, e.g., N. Gregory Mankiw, Principles of Economics (Harvard University Press:  1998) at pp. 578—583):

• Higher wages reduce turnover.   Employees are more or less continuously evaluating alternative job options.   While it may seem implausible that someone would abandon a firm, clients, and colleagues for, say, a 7% bump (from $135,000 to $145,000, e.g.), if other work factors are less than ideal, that could be the tipping factor. 
  
  Moreover, consider the repercussions from the firm's perspective of not matching "the going rate:"  Immediate, and not-unjustifiable, suspicion in the marketplace that the firm is no longer First Tier.  As a former AmLaw 50 managing partner put it to me in an email today:

  "Firms are rational enterprises, even if they occasionally seem not to be. They pay the going rate because they have to. Frankly, associate compensation is one of the easiest issues a firm has to address. There aren't many choices."

• Better-paid workers have an incentive to work harder.  This works in two dimensions:  The person earning "above-market" wages knows they're likely to take a hit if they lose their job, so they are motivated not to shirk, and the firm knows that for the premium they're paying they can get dedicated workers, so they're quicker to pull the trigger on mediocre performers.
  
• Lastly, there's an indisputable link between pay and worker quality, and top-tier law firms know this very well.  To understand how this works, consider Stracher's hypothetical (and "stark raving mad," in the words of another correspondent of mine today) suggestion that firms cut associate salaries 50%—to $72,500. 
  
  The instantaneous, powerful, and irreversible consequence of this would be that all the Harvard, Yale, and Stanford Law grads, who can command far more than $72,500 at investment banks, management consultancies, and even enlightened in-house departments (GE comes to mind) would decamp en masse from BigLaw, leaving firms to pick through the ranks of the bottom half of the class at regional and local law schools.
  
  Imagine clients' reaction to that phenomenon playing itself out....

Finally, permit me to suggest a few cultural, non-economic, angles to this story.

First of all, wages are notoriously "sticky downward:"  That is to say, unless you're an about-to-be laid-off employee of bankrupt  Delphi, you will not take a cut in pay, period, full stop.  This doesn't entirely explain why the going rate is $145,000, but it explains why it will not drop now that it is $145,000.

Second, my hypothesis is that there's less than meets the eye to the fact that every leading firm bumped up the rates this year.  I've believed for some time that while firms may have been toeing the starting-salary line at $125,000, bonuses were growing; and I predict that now that a $20,000 component of bonuses has been relabeled salary, bonuses will immediately shrink.  In other words, this is probably less of a pop than it appears.

Third is what I call the "Parris Island" phenomenon:  Partners expecting 2,000 or 2,200 hours/year out of associates have no sympathy for whiners—after all, they lived through it themselves.  Emotionally and psychologically then, expecting partners to enter a realistic dialogue about cutting pay in exchange for cutting hours is a delusion.  It's your turn now, buddy.

Finally, there may be an entirely appropriate, fitting, and survivability-testing aspect to paying people a lot and asking them to work like crazy: That's exactly what partners' lives are. If you don't take to it as an associate, you won't as a partner. Firms could be cannier than we give them credit for.

So will we see the end of this in our working lifetime?  For my money, scarcely a chance.

And for yours?

"The Vanishing Middle"

This is McKinsey's analysis of "The Vanishing Middle"—here, the phenomenon across 25 product categories ranging from mobile phones to banking, appliances to apparel, that both premium and no-frills products grow at the expense of middle-of-the-road offerings. 

This works itself out in different ways in different industries. 

In some cases—think cellphones, banking, apparel, beer—there is growth both at the high- and the low- ends, as the middle empties out (the "hourglass" model).  In other industries—airlines, PC desktops and servers, groceries at retail—there is primarily a move to the no-frills/value end (the "pear" model).   And in yet a third sector there's general migration to the high end—coffee machines, MP3 players [read: the iPod], digital cameras, razors, wine (the "palm tree" model).

Each syndrome comes with its own set of, as McKinsey might well put it, threats and opportunities.  In hourglass-land, you need a well-defined value brand, or a  premium brand, or both.  Nokia, notably, does both in the cellphone/handset market.   In pear-land, you need to ruthlessly wring costs out as fast as you can—and it better be faster than your competition.  Think Dell, Wal-Mart. 

Finally, in palm-tree-land, you can justify a premium only through relentless innovation (I, too, am looking at Gillette's new 5-blade "Fusion" razor, having already been led down the path of the Atra, Sensor, and Mach3) or through an emotional connection (back to the iPod).

Of note is McKinsey's observation that there are "significant variations" in how the polarization phenomenon plays itself out from category to category, and that "the pattern of polarization does not lie in a category's DNA," but rather is a dynamic process profoundly affected by how service providers stretch what they offer to take advantage of the perceived evolution of customer demand.  (And of course, what's offered feeds back into demand:  Would I imagine I needed a five-blade razor if the Fusion had never gone on sale?)

There are two points here:

• "Polarized," or "vanishing middle," markets are widespread; indeed, they may well be more common than the classically conceived ski slope model.
• They do not arise, nor do they evolve, in a vacuum.  Firms can have an impact, and the strategies and approaches firms adopt to both respond to, and educate and entice, their customers can be the difference between Dell and Tandy, Toyota and GM, or Wal-Mart and Sears.

Is your firm truly catering to your clientele's sweet spot? 

How well do you understand their concept of "compelling value for the money?"  Are you trying to be a Dell and a Lexus at the same time? 

And lastly, assuming you want to live at the top left of McKinsey's "polarization" chart, are you providing the intellectual innovation, the emotional connection to your clients, and the level of service above reproach, that it takes to command a seat at that table?

SUNY/Stony Brook's MBA for Law Firm Leaders Launches Next Month

Reminder & Update:  The SUNY/Stony Brook MBA Program exclusively for law firm managers is starting the last week of April.  I'm a faculty member, teaching the core (a/k/a required) course, "Strategic Technology & Innovation," and we have an utterly distinguished Advisory Board and a convenient midtown Manhattan location.  (OK, so it's convenient to me, and to your firm if and only if you have senior business-side people in New York.)

Here's what it's about in a nutshell, from the program description:

"Stony Brook�s MBA, with its focus on law firm managers, is the first program of its kind in the United States.  It takes a real-world approach including the use of adjunct faculty members who have top reputations for their work in or with law firms. The program features classroom sessions that are informative, stimulating, and embrace a number of learning techniques. Professors will explain basic principles and guest lecturers will provide �from the frontlines� perspectives and insights."

My take?  It promises to be an unprecedented, rigorous immersion into what senior "business side" law firm leaders—Executive Directors, COO's, CFO's, et al.—need to know to do their jobs on a par with their counterparts in peer-group organizations in corporate America. 

If your firm has a qualified candidate, it's not too late to apply.   Feel free to contact the Dean of the Graduate School of Business, William (Bill) Turner, and tell him I sent you.

The London-Based "PM Forum" and Blogs as Professional Communities

Nadia Cristina, Managing Editor of London-based pm magazine, who was gracious enough to agree to an interview when I was over there last fall, just forwarded one of the fruits of that meeting to me, an article I co-authored with Bruce Marcus titled "Blogs—The new community of interests."   The thrust of the article is simple:

"The power of blogs derives from their online essence: available and update-able 24/7, with global reach, they are tailor-made for targeting narrow and usually passionate niche interests.  They rapidly reach an audience of participants that would be completely impractical to reach in the offline world, thereby constituting a collective intelligence of enormous professional value."

"The PM Forum is a 4,000 strong regionally-based members' association, formed in 1996, dedicated to raising the standards of professional services marketing and to enhancing the credibility of marketers working in professional service firms worldwide."

So enjoy the article, and explore PM Forum.  (Thanks again, Nadia!)

"What Differentiates Our Firm Is..." [Nothing]

A reader (partner in an AmLaw 10 firm) writes:

"Most businesses know their leading indicators of sales. For example, if the company increases the number of sales calls in January, there will be more sales in April.

"Has anyone analyzed empirically what the leading indicators of sales are for AmLaw 200 law firms? Do the indicators include ads in the trade press? Fancy dinners with potential clients? Rounds of golf with potential clients? Publishing articles in legal or trade journals? Giving speeches? Winning jury trials? Closing big deals?

"It strikes me that law firms have very little idea of what business development activities they really want to encourage among their lawyers and so take a scattershot approach to the effort.

"Has anyone thought intelligently about this?"

This is a fascinating question.  So, after a relative drought of pieces on law firm marketing, we have our second in one week.

My immediate response is:  Most firms are probably clueless about this.  (And if someone out there really is doing empirically-driven marketing, please raise your hand; I would be delighted to give you the recognition you deserve [unless you would deem it be revealing a competitive advantage, in which case we can talk not-for-attribution].)

All the activities the reader cites contribute to "name recognition" for a law firm, but the actual "sale" (read: engagements to handle a piece of litigation, a corporate transaction, a tax problem, etc.) only occurs when the client has the precise need, i.e., is at the point of pain.   No one in the history of the world ever woke up and said, "What I need today is to buy myself a really good contract...."

The marketing of all sorts of other goods and services can often generate induced demand, simply by providing information about the features and benefits of a product.   For example, a really good campaign could get me thinking about moving up to a Nikon digital SLR when my film Nikon still has many miles left on it, but you would never achieve anything remotely similar with a law firm's campaign.

To be sure, it's possible (although I would wager very uncommon) for a corporate lawyer to generate demand for, say, a review of corporate governance structures and policies at a client; but in general matrimonial lawyers don't generate divorces, white-collar crime lawyers don't generate securities fraud, and tax lawyers don't generate IRS audits.  In this sense, then, all the marketing in the world can't generate a "sale" for a law firm.   First, the client has to have the need.

But, as the marketers in the audience are starting to protest, can't the right marketing campaign achieve the holy grail of "differentiation?"

I'm here to tell you I think not.

Let me step back:  Your firm can be "differentiated" in clients' eyes—and remember it's only the eyes of the clients that matter, not those of you and your partners—only if it stands for one consistent value, commonly thought of or referred to as its "brand."  [ Note:  Do not confuse "name recognition" for a "brand"—Martha Stewart has had very high name recognition for quite some time, but the value of the Martha Stewart brand has swung from the heights to the abyss and now maybe back.]

A "brand," in turn, is simply a promise:  A promise of consistency, of a certain set of nearly immutable qualities that remains the same each time you come back.  So every can of Coke is alike, every tube of Crest satisfies whatever it is in you that you like about Crest, and every BMW occupies the high-performance rung in its vehicle class. 

But even though one of the most recognizable names in law-firm land is Skadden, every client interaction with a Skadden lawyer (or Clifford Chance, or Jacoby & Myers, for that matter) is different from every other client interaction with other Skadden lawyers, or that same Skadden lawyer on a different matter or a different day of the week.

In other words, law firms, even the mighty Skadden, cannot "promise" consistency.   Thus they can't really have a brand that stands for anything in particular, and so they can't be meaningfully differentiated from their competitive set.

Understand what I'm not saying:  I'm not saying that firms can't have reputations for being particularly expert in specific areas. Weil-Gotshal may be the go-to firm for big-ticket bankruptcies, Schulte-Roth for private equity, Sullivan & Cromwell for commercial bank regulation, etc. 

That still doesn't mean the aura of those practice groups rubs off on completely unrelated practice groups within those exact same firms.   In other words, if you're Fidelity or Vanguard and will never have anything to do with private equity, does anything still make Schulte-Roth distinctive to you? I think not.

But looking at these examples reveals something else: What clients want when they're in the market for a law firm is the capability that speaks most directly to their legal need du jour.

The only reason the articles, golf outings, fancy dinners, speaking engagements, etc., have any value is because they all amount to opportunities to show the client (you can't tell them—that's an exercise in futility if not self-inflicted humiliation) that you understand their business and the legal environment in which they function.  In other words, they are efforts to demonstrate that what you offer could be, at the right time and place, germane to the client's legal needs.

The trenchant and always-reliable Bruce Marcus has written about this, more than once.   The heart of the matter is this:

"The truth is, you probably can�t specifically articulate what you think you know to be better about you or your firm, because without tangible evidence, there�s no way to be credible.  You can�t say, �We do better briefs and write better contracts,� or �We do better audits,� or �We�re better litigators.�

"You can�t say these things because they�re outrageous and self-serving statements. Because you can�t prove it, in most cases.  Because the Canons of Ethics won�t let you. And for most clients, because the real difference between one professional and another is not what you think it is � it�s what the client thinks it is."

Essentially, the goal of all the marketing tools we started with—the articles, the golf games and dinners, the speeches—is to create opportunities, through action not assertion, to demonstrate to the client that your firm stands ready to be truly useful when legal needs arise.

Marketing, in other words, gets you a seat at the consideration table.  But you and your partners still have to "close the sale" in person.

And there won't be any "differentiation" or "branding" pixie dust in the room with you.

All Marketing Generalizations Are Obvious

I've long believed that marketing is harder than it looks, and for those of you reading this who are marketing professionals, suffice to say you have my deepest sympathy, respect, and affection.   (Readers who know me personally also know that I'm married to a senior advertising/marketing executive, so the "respect and affection" come from the heart.)

Despite all the stereotypes about wacky, non-conformist, fun-hound marketing people, yours is often not a path trod gaily.  Which brings me to:  What do I mean by "harder than it looks?"

Simply that the most brilliant campaigns often look blindingly obvious in hindsight.   Take the iconic Miller Lite campaign:  "Tastes great, less filling."  You could have thought of that, right?  Well, not so fast.  I once was acquainted with some of the people who produced that campaign and it was the product of blood, tears, and sweat, as they essentially had to  perform a perceptual lobotomy on a category (light, a/k/a low-calorie, beer) that was conventionally seen as the tasteless, pallid, low-octane choice of simps.

Marketing—and its most high-visibility component, advertising—can suffer the same unwarranted and unfair critique that the cliche has people throwing at abstract painting:  "I could have done that!"   And it's certainly true that there are few hard and fast rules of marketing, which is all about credibility, perception, positioning, esteem, and attitudes:  In other words, all about intangibles.

Some of the conventional advice about marketing isn't much better.  I'll never forget the moment in marketing class when I was studying for my MBA at NYU when the professor announced with severe gravity one of the most important principles of marketing:  "Make it easy for your customer to do business with you."

And for this I'm paying how much in tuition?

You now know as well why I write quite infrequently at "Adam Smith, Esq." about marketing.  There are few valid generalizations about it that aren't pluperfectly obvious to anyone who's thought about it even briefly, and "Adam Smith, Esq." is not about reciting obvious generalizations.

So today I'm not here to give you generalizations; I'm here to give you three specifics.  These are three things your firm can actually do.

• Free days at the client.  Take the lead partner, or better yet the whole team, working with a client and extend this offer:  "We'll spend a day or two—you tell us how long and set the schedule and agenda—at your offices meeting and talking with whomever you select, at no charge.  We want to get to know and really understand your business better and we're confident this would be a valuable investment of our time.  So you tell us who we're going to be meeting (it doesn't have to be, and indeed shouldn't be, limited to in-house counsel) and we'll show up with an open mind and a blank notebook."
  
  If this doesn't return multiples upon multiples of the cost of the billable time sacrificed, I would be stunned.
  
  
• McKinsey's 100-day rule.  I get no credit for this one, but it's brilliant, and brilliantly simple.   McKinsey has a list of firms it would like to work for, and any time one of them gets a new CEO, it waits one hundred days and then calls upon them to hear about what they've discovered and what their priorities are going to be for change and growth going forward.  Implicit is of course, "and we can help."  Why 100 days?  Because it's long enough to figure out what needs to be done but too soon to figure out how one's actually going to accomplish it.
  
  So henceforth the same 100-day rule should apply at your firm, but for "CEO" substitute "CEO or GC."
  
  
• The figure-skating judge analogy.  Next time your firm is competing for a significant piece of business, either in a formal review or otherwise, pretend it's an Olympic figure-skating competition.  Getting 9.7's across the board for competence, experience, depth of bench, etc., may sound great but they won't get you the gold:  They're table stakes.   To get the gold you truly have to stand out.
  
  Make sure your team understands it needs some 10's in this league. And to help focus their attention, remind them that actually there will be no silver or bronze; the second and third-place firms will go home completely empty-handed.

So good luck and Godspeed with these.  And let me know how they work for your firm.

It's 2015: Do You Know Where the AmLaw 25 Are?

What will the structure of the global legal marketplace look like in, say, 2015? 

Before you exclaim either, "Who on earth knows?" or "What a silly thing to speculate about!," permit me to draw your attention to the duel, or at least face-off, in the November 2005 and February 2006 issues of The American Lawyer between the UK legal consultants Partha Bose ("The Tragic Circle") and Tony Williams ("The Empire Strikes Back").  [I know Tony personally, but not Partha.]

The debate in a nutshell can be framed as Partha's belief that "Europe's lawyers and law firms are in the midst of a structural shift that will make many of their products and services obsolete," primarily because in any industry with structural overcapacity, those with inefficient structures and outdated approaches will be eliminated—as opposed to Tony's belief that, partly because "U.K. firms are light-years ahead of U.S. firms when it comes to institutionalizing their client base," they will be more than amply able to compete and emerge as winners, to wit, to be among "the top international law firms for major cross-border and domestic M&A, capital markets, and complex litigation worldwide."  Tony adds, with bravado, "Let the battle commence."

Partha first.

Partha's key argument is that the key European and Asian markets "where the British law firms have reigned are stagnating-and even contracting."  That stagnation results from:

• US firms' ability to cherry-pick the biggest and most lucrative European M&A work.
• The commoditization of new equity and debt issuance.
• The failure—which some would surely count a divine beneficence—of US-style litigation to catch on in Europe, thus depriving firms of an enormous cash cow enjoyed, as it were, by US practices.
• The virtual absence, Parmalat excepted, of headline-making European corporate meltdowns (again, a blessing when I'm wearing my economist's hat, but a deprivation of fat Chapter 11, corporate-governance, and even white collar crime fees when I'm wearing my legal analyst's hat).
• And clients' alleged preference for "U.S.-style legal structures and documentation."

The only escape from this dismal prospect, Partha allows, is for firms to remain, or morph into, one of five categories—which on inspection are actually only three, as the population of the other two turns out to be the null set.  

• "Simply the best:"  Sure, nice work if you can get it.  Think Slaughter & May, Cravath, Davis Polk.   But how, pray tell, if one is not already in this empyrean, does one ascend?
• "Focused firms," a/k/a boutiques.  For example, litigation only, or regional powerhouses, or deep industry specialists.  A perfectly defensible and even comfortable niche to defend, but not, shall we say, feasible for the AmLaw 25 or the UK 10.
• "Low cost providers."  See above.
  
  and our two null sets:
  
• "Distinctive firms:"  Of which he fails to cite a single living, breathing example, either US or UK-based.  Calling it "the holy grail of competitive success," it somewhat tautologically is described as "whatever they do, they do it in a fashion that very few can imitate."  What I'm about to say is a theory I'm toying with, and haven't reached any intellectual equilibrium yet as to whether I endorse it or not, but try this hypothesis on for size:  The almost insurmountable difficulty of establishing a solid reputation as a truly "distinctive" law firm reflects the intrinsic inability of clients to accurately and consistently assess the quality of legal services.  In other words, a firm that wants to lay a (credible, ownable) claim to being "distinctive" can only do so by appearing that way to clients, and, since clients have the devil of a time evaluating the quality of their lawyers' performances, the predicate can never be laid effectively or in a widespread fashion—widespread enough to become recognized as a true marketplace positioning, that is.  As I said for now, only a theory.   Your thoughts?  Managing partners?   General Counsels?  Chief Marketing Officers?  Anyone else who's thought about this?
  
  And lastly:
  
• "Rule breakers:"  Here he cites as examples eBay, Google, and FedEx, which created entire industries after their own business model.  In law firm land, the best he can do is Wachtell, for the poison pill.  I'd be more willing to buy it if (a)  the poison pill weren't approaching 30 years old, and (b) some other truly memorable legal innovation could be pointed to in the interim.

Partha sees two other threats to the competitive vigor of UK/European firms.   The first is "merely" economic, the second reputational.

On economics, US firms simply pay partners and associates far more richly than UK firms.  Add to that a critical factor that many Americans overlook—but which the Brits certainly do not!—which is that in the UK careers end at much earlier ages than here, depriving partners of a decade or more of "climax phase" income, compared to their US counterparts.

The reputational issue is at least as potent:  As Partha puts it:

"European firms haven't grasped one other reality. For many U.S. lawyers, joining a European firm generally does not enhance their street cred. In the United States, most of these firms have little, if any, brand value; don't get the most exciting (and complicated) work; don't attract the best talent; can't place their lawyers into high-profile roles at, say, the Securities and Exchange Commission or the U.S. Department of Justice; and aren't as profitable as many top U.S. firms."

Despite my taking exception to much of what he's written hitherto in the piece, here he's surely on to something.  This is an enormous barrier to entry of the UK/European firms into the US.

Whether his insight can bear the weight he proceeds to lay on to it I cannot say, lacking the under-the-hood view to have an opinion on the matter, but Partha proceeds to claim that UK/European firms manage essentially oblivious to their own reputations and intangible assets, and that they concentrate myopically on operating metrics such as capacity utilization.  

If this further assertion is correct, we will indeed witness a race to the bottom as firms promiscuously offer 20-30% discounts to qualify for a beauty contest, toss on another 10% to win selection to the panel, and a few more percent to get the bills finally paid—all the while uncomprehending about what clients want and what value they actually place on it. 

Bleak House, indeed.

Tony Williams takes what can only be described as a cheerier view.   While conceding much of the factual prologue to Partha's argument, Tony draws strikingly different conclusions about the armaments UK firms bring to the challenge of creating globally dominant firms.    (Tony concedes, for example, that the US home market is vastly larger than the UK market, and points out with nice empiricism that AmLaw firm #200 [Lathrop & Gage] would place 44th on The Lawyer UK 50; similarly, 50 AmLaw firms generated profits per partner of $1-million or more, but only 12 UK firms.)

Of far greater strategic importance for the future trajectories of US and UK firms, Tony points out, was a nearly across-the-board "strategic error" committed by US firms (and specifically New York firms) in the 1980's:   The 1986 "Big Bang" in London abolished restrictions and opened up the markets to international capital.  US investment banks piled into London in a big way; US law firms did not.

Meanwhile, UK firms were, perforce, looking abroad.  While some expanded overzealously in hindsight, opening in marginal locations, those lessons of enthusiasm or ignorance have been learned, and far more gimlet-eyed metrics are now applied to foreign operations.  Tony believes this has positioned them well for three reasons:

• UK firms have a strong presence where it matters—e.g., Hong Kong, Paris, Frankfurt, and essentially every  important global financial center with the conspicuous exception of New York.
• A "new breed of law firm management" is bringing more businesslike, profit-minded approaches to the large firms' operations.
• And the international expansion build-out has been "bought and paid for;" profits going forward will be income, not return of capital.

While Tony readily concedes UK firms have not penetrated New York in a meaningful way—the elephant in the living room to many, which he is happy to point to—he makes an intriguing, somewhat converse, assertion:  That for all the ostensible success of US firms opening in London, "probably 90%" are losing money, and that the landscape as a whole reflects nothing remotely like true financial success.

Indeed:  Tony asserts that US firms' forays into London have, over the past ten years, cost them "in excess of $1-billion"!   How could this massive amount have gone missing, as it were?  Primarily through firms' failing to recognize the "all-in" costs of being in London, by, e.g., neglecting to properly allocate firm-wide overhead expenses such as training and IT, taking rent-free periods up-front rather than amortizing them over the lease's life, and, perhaps most important, failing to acknowledge the opportunity costs of moving productive US partners to London where they have to start over scrambling for work.

Assuming Tony's even half right, why and how could the US firms' have lost their collective heads?  He nominates four candidates, and I concur:

• A shocking proportion of US firms have no idea what they're trying to accomplish in London and why they're there in the first place.
• The easy, and false, assumption is that US-based clients will naturally shower the US firm's London office with work—ignoring the long-standing relationships that client already has with eminently competent UK firms.
• The difficulty, and protracted nature, of getting value from a lateral hire in London, where clients are institutionalized property of a firm, not a lone ranger.
• And the predictable failure to truly connect the London outpost into the firm's network:  A silo in a distant land separated by too many timezones, where they drive on the wrong side of the road, don't use US$'s, and speak in dialect.

Finally, two fundamental structural aspects of the New York/London marketplaces are acting to inhibit an aggressive invasion by the Americans.  One is quite new and, while potent at the moment, does not constitute a long-term barrier to entry.  The other is deeply problematic.

The first is the increasing attractiveness of the London capital markets vis-a-vis New York.  London's market share of international equity offerings is increasing, and New York's declining, because of the increased regulatory burdens in the US (read:  Sarbanes-Oxley) and the all-too-real risk of litigation.  This development gives an advantage to the Magic Circle and other London incumbents, to the short-run exclusion of their US competition.  Of course, like all such developments, it can be overcome by tenacity and flexibility; but there's no question that in London for now at least, it's score one for the home team.

The second issue begs of an easy solution.  Simply put, the world-class New York firms have it too good.  New York is too rich, their practices too successful, the profits too astronomical.   Tony may exaggerate when he says that at the top end of the New York market, firms "can sit back and wait for clients in crisis to come to them," but he's not far wrong.

Or, consider this jaw-dropping anecdote: 

"I remember being told in 1998, by a very senior partner in a major New York firm, "Everything that is innovative in legal services originates in New York. To operate outside New York is dilutive of quality and profitability. We will not do it." Apart from saying, "Have a nice day," I had no immediate response."

And what, you are asking yourself, is wrong with this picture?

Complacency!

Perhaps worse than complacency is the undeniable whiff of arrogance, with its traveling partner Lost Opportunities.  Particularly when combined with the equation of "outside New York" with "dilutive of profitability," we are staring at a profound barrier to serious, sustained, and substantial investment abroad.

So back to 2015.  Where will we be? 

Tony—and I agree with him foursquare on this—assays a landscape that looks like this:

• Clifford Chance, having reformed its US and international operations, will focus intently on growing profitability and—with or without another US merger—will stand out as one of the handful of truly top-tier international firms.
• Slaughter and May, Wachtell, Cravath, and perhaps a few others, will continue to generate astonishing financial performance as boutiques.
• Allen & Overy, Freshfields, and Linklaters lack critical US depth, and a game-changing merger with a top-tier New York firm looks increasingly unlikely.  They have one of the tougher strategic hands to play.
• The very success of the creme of New York firms on their home turf will seriously inhibit their overseas expansion and, if the US continues to be compromised in its historic comparative global advantage in capital formation, they could be looking at some surprisingly unhappy choices.
• The AmLaw 25 will be transformed, with a handful of truly dominant 1,000-lawyer-plus firms emerging with profits per partner comfortably north of $1-million/year, and a powerful geographic footprint based on the three legs of New York, California, and Washington, DC.

As Tony says, let the games begin.   This ride could get even more exciting.

What P&G Teaches

One of the most interesting major corporate CEO's on my radar is A.G. Lafley of Procter & Gamble.  He, as the famous phrase has it, "think[s] different."

Exhibit A is a low-profile piece from The Wall Street Journal this past week headlined, "Rewarding Competitors Over Collaborators No Longer Makes Sense."   In its legendary heyday during the 1950's and 1960's, P&G's famous brand management system was second to none. 

MBA's from name-brand schools in grey flannel suits would take the fruits of P&G's world-class research labs (this is no joke—P&G products, from Crest to Tide to Pampers, were materially technologically superior to their rivals upon market introduction, and strove to maintain their functional-benefit leadership) and market them through the mass media of the day, such as soap operas.

The dark side of brand management, and brand managers, is that they traditionally were rotated out of their jobs every two to three years, their future position dependent upon their brand's performance under their brief stewardship, with the perverse consequence of encouraging efforts at short-term market-share boosts such as coupons and promotions. 

While these shenanigans might polish the manager's resume at the time, the standing joke was that such efforts "can rent market share, but they can't buy it."  Nevertheless, the P&G "brand manager as king" culture meant that the ambitious were judged on their track records vis-a-vis their peer group and not on long-term brand-building.  The internal logic was ineluctable, even if the larger message to P&G should have been "be careful what you wish for."

Come we now to this:

"Managers have been raised on the mantra that to advance they must outperform fellow managers. Those who wrest the most productivity from employees and get the best financial results are generally rewarded with raises and promotions.

" But that formula is out of date, and adhering to it can undermine corporate goals."

And the corporation being cited?  P&G.  Not only P&G but Cisco:  Collaboration is good for business, says Diane Adams, vice president, human resources, worldwide sales, "dramatically improving productivity and helping us to grow."

Or Boeing, whose bet-the-company project of this decade is the development and launch of the 787 "Dreamliner."  Rather than entrusting it to a C-suite executive teamed with, maybe, an engineer, as in the past, here's the new model:

"Mike Bair heads the development team of its new 787 aircraft model, which is due to come into service in 2008. The job involves working with thousands of Boeing employees and nearly 100 global suppliers.

"Mr. Bair says his experience as a Boeing salesman to American Airlines in the 1990s helped prepare him for his current job. Then, he had just two direct reports, so rather than order a staff to perform specific duties, "I had to convince people across the company to do things to satisfy the customer," he says.

"As head of the 787 team, he has scoured the globe for suppliers to do a variety of design and engineering work Boeing used to do itself. He found some of them in the U.S. and others in Europe, Japan and Korea."

And back to P&G:  What, exactly, are the benefits of this "collaboration?"  Not fuzzy-mushy caucus-to-consensus.  Not let-a-million-viewpoints-bloom.  No.  Rather, hard-headed debate and hammering things out, the refining of strategies, plans, approaches, and techniques on the hot forge of different ideas freely expressed.

Lafley pointedly insists on dissent, indeed makes it a formal requirement of decision-making:

"Before he makes a decision or sets a new strategy, "he always asks managers to give him two different approaches and present the pros and cons of each,...  And at meetings, A.G. says, 'Before you jump in and inject your own point of view, make sure you listen and truly understand the other's point of view.'"

We're not done with Lafley and P&G.

According to McKinsey,  he has orchestrated one of the most seminal changes in P&G history in his relatively brief five years there.  And not by calling for radical shakeups or restructurings, and not by sounding alarmist calls about  how revenue, profits, market share, this, that, or the other needed to be shocked out of their comfort zones and doubled, tripled, or exponentially whatever'ed.

For starters, Lafley agrees with Lou Gerstner (IBM) that strategic visions can be a distraction, and so has simply never offered one.  He also agrees with Larry Bossidy (Honeywell) that it's all about execution, but also knows that exhorting great execution is feckless.  Rather, one needs to put in place:

• a disciplined strategy
• a structure that supports that strategy
• systems enabling a large and distributed firm to work together
• a culture of "winning" and
• inspirational leadership.

Brilliant execution will then follow.

What did Lafley inherit five years ago?  Essentially, a by-the-numbers, incremental-gain culture:  Grow market share 1-4% this year, take out a weak competitor, grab their market, keep up the pressure, re-invest, extend a brand, grab more territory, lather, rinse, repeat.  The only problem with this is it can lead to a culture of "complacency," not "winning." 

Let's bring this home to law-firm land.  What would a Lafley look like for your firm?

First, focus.

For P&G, the "core businesses" are "one, two, three, four.  Fabric care, baby care, feminine care, and hair care.  And then you get questions, 'Well, I'm in home care.  Is that a core business?'  'No.'  'What does it have to do to become a core business?' 'It has to be a global leader in its industry.  It has to have the best structural economics in its industry.  It has to be able to grow consistently at a certain rate.'"

Second, you can't micromanage.

Lafley views his role as a coach, but coaching "doesn't mean coddling."  My favorite of all his techniques here is his "not-do list."  We all know people hate to make choices, and believe it's better to have a lot of options, but sometimes extraneous options that have been ruled off the table have a habit of reappearing.  So he maintains a "not-do list," and anyone caught doing it has his budget excised.

Third, and back to the beginning:  Stick to your core.

Lafley started with P&G values and said, "Here's what's not going to change.  This is out purpose:  To improve the everyday lives of people around the world with P&G brands and products that deliver better performance, quality, and value."

On the other hand, "here's the stuff that will change.  Any business that doesn't have a strategy is going to develop one; any business that has a strategy that's not wining in the marketplace is either going to change its strategy or its execution."

So what do we have?

A manager who:

• insists on dissent and debate—he calls it "collaboration"
• yields to no one on the tie between strategy and execution
• reinforces the firm's core values while extending its perimeter to embrace new products, new markets, and new partners.

And who, by the way, took a company whose stock had fallen nearly 50% in the last few months before he took the helm into one that is now at an all-time high.

Stepping Out

"Adam Smith, Esq." is branching out.

Through a happy confluence of inspiration and opportunity, Bruce and the "Adam Smith, Esq." brand are stepping out from behind your screen into the off-line world:

First, I am pleased to announce the kick-off of what I hope will be an on-going series of high-end workshops for senior law firm management.  Working with Rich Gary, former chair of Thelen-Reid, these will feature a small group of attendees delving into strategic business issues that managing partners and their colleagues are wrestling with.   We will hold these workshops in major cities in the US, and they will typically take place over two days, starting with a cocktail reception and dinner on a Wednesday evening and adjourning after lunch Friday.  The workshops will include:

• Three focused modules dealing with important challenges to executives at the top of large and sophisticated law firms, such as "consolidation and globalization," "competitive and business intelligence," "leading change," and "creating a credible, powerful, and distinctive 21st-Century firm."
• The format will include presenting novel and substantial content; engaging the attendees in round-table discussions; "what-if" scenarios and thought experiments, both in break-out groups and as a whole; and learning from and interacting with some of the legal profession's  most prominent thought leaders, who will attend as our guests.

We hope the combination of a small group (no more than 15 attendees) in intimate surroundings, together with challenging thinking and interaction with some of the thinkers at the cutting edge of our profession, will make these workshops distinctive.

For more information, see the link in the left sidebar to "Workshops," or click here.

Second, I am offering "Law Firm Finance 101," 1/2-day seminars that I will conduct at your firm's offices, targeted at small groups of associates (partners invited as well!).  These were partly prompted by the overwhelming reaction to an entry from last September, "Name the Missing Law School Course." 

“Law Firm Finance 101” will enable associates to:

• approach their careers with more awareness of what’s expected of them;
• make a connection between their daily work and the firm’s strategic goals;
• appreciate the firm’s business decisions;
• understand what drives the metrics by which they’ll be evaluated, and
• be more realistic about attorney-client and partner-associate relationships,

all with the goal of making them more valuable to the firm more rapidly.

For more information, see the link in the left sidebar to "Workshops," or click here.

Third, my business manager and I are establishing an on-line research panel and inviting our loyal readers to join.  To ensure objectivity of the research results the panel will generate, we have teamed up with a leading independent, third-party on-line research company, "Affluent-Dynamics."   Fundamentally, the goal of the panel is simple:  To give readers who join the opportunity to have a voice which will be heard and listened to by companies developing products and services you use. 

If you're interested in "having your opinions count" on a variety of business and marketing issues, or if you're merely curious, click on the Affluent Dynamics box.   Membership is free, absolutely confidential, and every time members complete a survey, they receive a minimum of 3,000 frequent flier miles. And by the way, membership is not limited to the U.S.; indeed, non-Americans are more than welcome (the only requirement is English fluency.)

I'll keep a separate link up to the Affluent-Dynamics panel for the next week.

Finally, "Adam Smith, Esq." is accepting advertisements and sponsorships from a select few high-end marketers with products or services presumably of interest to "Adam Smith, Esq." readers.  One example is the ad for Sivin-Tobin Associates, LLC, legal recruiters headquartered here in New York.

The purpose of this program is to help strengthen the long-term viability of "Adam Smith, Esq.," and, I hope, to enable me to invest in developing additional, original content through on-site reporting and research.

That said:  Our marketing and advertising partners will never have the remotest influence on what you read here—and any with the poor judgment to seek it will be summarily, and publicly, dismissed with all the opprobrium the blogosphere can muster.

Anyone interested in discussing the wide array of customized programs—encompassing both online and off-line elements—which my business partner has developed, or who has suggestions or questions, should email Janet Stanton.   Janet is a true pro at what she does, with over 25 years experience in advertising and marketing, working with such household names (and sophisticated marketers) as Procter & Gamble, Colgate-Palmolive, Nortel, Pfizer, Johnson + Johnson, and the US Department of Defense; she has worked at prominent NYC ad agencies including Bates Worldwide, Benton & Bowles, and Grey, as well as being President of a mid-sized agency outside Philadelphia.  If you talk to her, you'll be in good hands.

And editorial questions/suggestions/inquries should, as always, come to me.

I hope you appreciate the reasons behind my expanding what "Adam Smith, Esq." stands for and what it delivers, and I hope you share a small bit of my excitement at these new developments.

New Market Entry & The Cognitive Bias Minefield

Global Expansion Junkies:  I have bad news.  Far too many law firms seem to enjoy expanding for its own sake, in an intellectual vacuum devoid of strategic analysis or rigorous consideration of the implications of growth in both headcount and geographic footprint.

This is not, I am sad to report, a "glass half-full/half-empty" story.  It's more like the strategic consideration glass is 90% empty.

Why do I say this?  Am I being harsh?

Let's put together a confluence of recent pieces to show you why I'm reaching this unhappy conclusion.

First up was The National Law Journal's January 26 piece titled, "U.S. Firms Making Steady, Selective Global Gains," which leads with: "Top U.S. law firms are adding a steadily increasing number of attorneys to their overseas offices, but most are remaining cautious about which cities to choose."  Unfortunately, the assertion that firms are "cautious" and "choos[y]" goes almost thoroughly unsupported in the remainder of the article—with the exception of a handful of firms that are already truly global.  The story, in other words, is not one of "steady" and "selective" global expansion for "top U.S. law firms" across the board.

Instead, one reads about firms going to London almost willy-nilly:  "Everyone's still going to the U.K.; there's [sic] over a hundred U.S. firms there now," according to Ward Bower of Altman-Weil.  To find remarks displaying a slightly more comprehensive reasoning process behind expansion is to find the exception:  "Spain is an increasingly important area in the European market," said John Conroy, the chairman of Baker & McKenzie. "The level of activity and its role in the European Union has gained increased visibility," providing at least a colorable basis for why they've tripled their Madrid headcount since 2000.

Similarly, Duane Wall, the managing partner of White & Case, said the firm is eyeing Spain. "I assume that we will have [an office] in Madrid," Wall said. "We're looking for the right opportunity."

Second, I direct your attention to an interview with Guy Morton, newly minted co-senior partner at Freshfields.  He is doing nothing less than "betting his reputation" on achieving a game-changing merger with a U.S. firm during his term:  "I'd count it a personal failure if the opportunity arises and we let it slip through our own fault."

This is news.

Not since late 2000, when the news broke that Freshfields was exploring possibilities with Debevoise & Plimpton, has there been an indication of such a move.  But far more important than the news per se—which of course is anything but a deal, yet—is the depth and nuance of Morton's (and his colleagues') thinking about the long-term strategic implications of such a move.  He talks with conviction and subtlety about:

• the non-negotiable fact that "quality and culture" cannot be compromised;
• international clients' hunger for such a move;
• the implications for Freshfields' lockstep; and
• the need for congruent financial performance between Freshfields and its future fiancé.

Ted Burke, an American who just moved from running Freshfields' New York office to "chief executive elect" in London, has clearly thought hard about the lockstep issue himself, and calls it "not insurmountable."  Compensation structures, after all, can be changed; "it's not so easy to adapt reputation." 

Both are also attuned to the reality that the question "But what about our lockstep?" is at some fundamental level the wrong focus.

"We're a collection of people who are really interested in questions like that," Morton admits. "But it's not the right focus. The right focus is our clients - making sure we're refining the services we offer so that clients want to give us their business."

Pay heed that under no circumstances can this initiative be characterized as a case of growth for growth's sake.  Late last year, Morton wrote in a 10-page "manifesto" to the partnership that "We face increasing competition from US firms operating from a highly profitable home market. We should work towards a substantial US business in our principal practice areas, if possible through a merger with a high-quality US firm (emphasis mine)."

Translation: Morton has nicely analyzed the structural advantage U.S. firms enjoy by virtue of the sheer size of the U.S. economy compared to the U.K.'s.  (For the record, the figures confirm this:  Fifty AmLaw 200 firms reported profits per partner of over $1-million last year, but only 12 firms in the UK 100 reached that level.)

Now let's bring out the big guns.

In "Beating the Odds in Market Entry," McKinsey reports that "for every successful market entry, about four fail"—largely because of executives' "cognitive biases."  What are these biases?

• That the firm's skills in existing markets are more relevant to the new market than they really are;
• That the potential market is larger than it is; and most tellingly
• That rivals won't respond to the entry move.

Part of what tempts people into these traps is our natural tendency to seek confirmation—in other words, to selectively look for information that confirms our hypothesis.  The best technique for avoiding that is to look outside the firm's four walls: 

"Companies have no reason to repeat the mistakes of others.  Yet they frequently fail to learn from history, because a myopic focus on the market entry decision at hand prevents them from creating a reference class of...similar entry decisions in the past."

The "reference class" helps you understand the interaction of what McKinsey identifies as the six predictors of success in market entry. I'll translate them from biz-consultant speak to law-land vocabulary:

• "Size of entry relative to minimum efficient scale:"  Entering below minimum efficient scale and planning to grow is an exercise in the triumph of hope over experience.  Example:  Setting up a Washington, DC "government affairs" office with a single person.
• "Relatedness of the market entered:"  Private equity and hedge fund practices are highly related to other investment management practices—but not to bankruptcy or litigation.
• "Complementary assets:"  You obviously cannot hope to enter a new market without the core assets required—say, IP expertise if you're expanding into patent prosecutions.  But as important are "complementary" assets such as your firms' reputation for being technology-savvy.
• "Order of entry:"  If you just discovered private equity, you're late to the party; but don't take that as a counsel of despair.  There are such things, as McKinsey felicitously puts it, as "optimistic martyrs," and if your firm has the throw-weight to come in as a "powerful follower," you could still pull it off.
• "Industry life cycle stage:"  Need I remind you how many firms opened up in Silicon Valley in 1999 and 2000?  Nuff said.
• "Degree of inside industry knowledge:"  The more that success depends on possessing 'inside' industry knowledge, the better for incumbents.  If you want to attack a market like this (say, the market for lobbying the FDA or the SEC, where former division chiefs and staffers are indispensable), be prepared for a learning curve.

In my opinion, the most frequently-overlooked aspect of entering a new market is failing to anticipate what existing and potential competitors will do; the world is not a static place. 

Even a competitor as sophisticated as Anheuser-Busch made this mistake when it diversified into snacks foods with its Eagle Brand in 1979.  Initially, it succeeded by staying small and limiting itself to supplying airlines and taverns.  But when it expanded into supermarkets, going head-to-head with Frito-Lay, the competitive counterattack was so fierce Anheuser-Busch was ultimately forced to sell Eagle to P&G. 

What does this remind you of?  It reminds me of firms that acquire expensive lateral practice groups in hotly-contested markets, only to see them slowly disintegrate or leave en masse because of unanticipated reactions by rivals. 

So if there are "one hundred" U.S. firms in the U.K. today, don't automatically extrapolate that to assume there will be two hundred down the road.  If McKinsey has its business  history statistics right, the right number could be twenty.

"Business Intelligence:" What You Don't Know Can Hurt You

As I've written before, "Business Intelligence" is  here to stay.  (And if that's an unfamiliar or unclear term to you, please refer to the earlier post on this, which serves to introduce the field; and no apologies necessary, as the term "BI" is almost perversely non-intuitive to the newcomer.  It only makes sense once one already knows what it means.)

BI 101 to launch this piece:  BI  is not to be confused with "competitive intelligence," which is all about how your firm is perceived in the marketplace vis-a-vis its competition, and about what the competition is up to—both current and potential competition.  BI, rather, is about analyzing the tremendous amounts of raw data spewed out by your firm's various systems. CIO Magazine defines it thus:

"But with Hillman Group's new BI system, curious business executives can query the system themselves and get instant answers about such critical questions as the number of unfilled customer orders, which is tracked by the system in real-time.

"There's just one problem.

"The new system hasn't made the business better�at least not yet�only better informed. That's generally the problem with BI, the umbrella term that refers to a variety of software applications used to analyze an organization's raw data (sales transactions, for example) and extract useful insights from it. Most CIOs still think of it as a reporting and decision support tool."

The CIO case study involves a computer sub-systems manufacturer and a chemical company, but the key realities of BI come through loud and clear:  (1) information is power, so your firm has to be prepared to share that; and (2) knowing that some of your partners manage things better than others cannot be seen as threatening, it must be seen as empowering. The goal is not to rap the poor manager's knuckles, but to show by example how he can emulate the good manager.

In law-firm land, BI can analyze the profitability of entire practice groups, of offices, of clients, of individual lawyers, and of individual matters. Of far greater importance than its ability to write a new gloss on historical experience is its ability to capture "best practices" and, if sensitively and astutely managed, to spread those best practices across the firm.  Who's doing BI?  Firms such as Alston & Bird, Bryan-Cave, and Goodwin-Procter, which I cite for reasons that will become clearer below, but permit me to seed your thinking by observing that all three of these firms place a noteworthy premium on "cultural" considerations.  (A&B, for one, has not landed above all other law firms on Fortune's "Best 100 Places to Work" a few years in a row by accident.)

The key to "second generation" BI is to conceive of it as more than a historical-reporting tool and begin to use it actively as a way to understand how you can do what you're already doing in better ways.  The management literature calls this "best practices" or "process management," but don't let the terms glaze your eyes over.  CIO Magazine, with its understandable CIO-centric perspective, puts it thus:

"Companies that use BI to uncover flawed business processes are in a much better position to successfully compete than those companies that use BI merely to monitor what's happening. Indeed, CIOs who don't use BI to transform business operations put their companies at a disadvantage. For CIOs who have carried out this difficult strategy successfully, there is no looking back."

Or, in plain English:  If you use BI as a rear-view mirror merely to point with delight and view with disdain, don't bother.  Instead, use BI to help you understand, at a fairly profound managerial level, why, for example, two different matters that appeared superficially similar generated remarkably different levels of revenue and profitability for the firm—and how to make the laggard look a lot more like the leader next time around.

Next point:  Does this have to do with technology?  Sure, and so does time-keeping.  The technology behind BI, in other words, should matter not to you.  BI is 1% technology and 99% culture.  BI can improve matter management, client satisfaction, and even professional development (by identifying, for example, associates whose write off rates are especially high or low).  These are things your firm must care about.  (Did I forget to mention profitability?)

As a friend of mine with no little experience in BI implementations in law firms likes to say, BI will only have an impact if your firm has "the will to act."   Do you?

Meet "Bloomberg Law"

Last week I met the head of Bloomberg's relatively new "Law" initiative, aimed at putting $1,500/month Bloomberg terminals on the desks of senior partners and general counsel. 

Before I describe what "Bloomberg Law" is about, I invite you to take a look at their brand-new offices (between 58th and 59th, Third and Lex), which are a visual and experiential delight unmatched since "Star Wars"—with the distinction that these spaces actually function.

As we all know, Bloomberg is already The Name Brand in financial intelligence, with over a quarter of a million subscribers to their core business and financial market information resources.  Bloomberg has also long since gone multimedia, with Bloomberg TV and Radio, a suite of magazines and publishing resources, and, lately, podcasts.  So what does Bloomberg Law offer?:

• a comprehensive set of legal, regulatory, and compliance databases;
• news, both real-time and archival;
• rankings;
• company and biographical information;
• legal research tools; and
• of course, all the rest of Bloomberg's financial news, data, and analytic applications.

The head of Bloomberg Law, Constantin Cotzias (a Brit who practiced at Denton Wilde Sapte and elsewhere) is unapologetic about the price of the terminals and unabashed about the scope of Bloomberg Law's ambitions compared to competitive offerings:  "Well, if you want an Audi, you should buy an Audi, but if you want to go nought-60 in 3 seconds, you really need a Ferrari, don't you?"   So what exactly can this Ferrari do for you?

For the co-chair of Orrick's New York bankruptcy group, Lorraine McGowen, it enables her to research and discover companies potentially on the brink of financial meltdown, identify their bondholders and unsecured creditors, and tailor a custom-made pitch letter drawing from (say) the content of actual loan agreements retrievable online, as well as more sophisticated tools such as "relative value" rankings—Bloomberg's rating of the operational strength of a firm vis-a-vis its peer group.  In keeping with Bloomberg's high-quant-quotient roots, here are some of the tools available to analyze likelihood of default:

"Specify whether you want to solve for the Altman Z-score, the Double Prime Z-score or the Hillegeist Z-score. [Prof. Edward] Altman [of NYU's Stern School of Business] developed his original Z-score for manufacturers. The Double Prime model is more suited to nonmanufacturing companies, while the Hillegeist formula generates a probability of default in addition to the Z-score."

For Brandon Becker, co-chair of the securities regulatory practice at Wilmer-Hale in Washington, it permits him to analyze trading patterns in a security tick-by-tick and view breaking company news surrounding those patterns, as well as to see how other companies in the same industry were trading simultaneously.  Armed with this information, he obviously has a far clearer view of whether insider trading is something to be concerned about.  (Obviously, the same tools arm both plaintiffs' and defense attorneys.)

I intend to stay in close touch with Constantin; for people who need bleeding-edge tools, I for one would put my money on Bloomberg without looking back.

Is Your Firm Organized Around Your Clients or Around Your Firm?

Your firm is dedicated to client service as one of its pre-eminent goals, if not the absolutely highest priority, right?

Not so fast.  Do you have a lawyer serving full-time as "Client Services Advisor," serving as an ombudsman on behalf of the firm's clients and responsible for creating and overseeing more than 60 "client service teams" (and counting)?  Akin-Gump does, in the person of Iris Jones. 

Swell:  What's a "client service team?," you're asking.

Essentially, it's a tool for formalizing and institutionalizing collaboration among the various lawyers serving Important Client X.   An example will aid understanding even better than a description.  Here's how the "Technology-Copyright-Internet" group works:

"The TCI attorneys participate in client service teams with Akin Gump’s patent attorneys, litigation attorneys and other practice groups. This collaborative commitment to client service enables Akin Gump to assist in providing clients with comprehensive counseling in all areas of IP and overlapping areas of the law."

The goal is to approach the client relationship from the perspective of the client's business (and its concomitant legal needs) rather than from the perspective of the firm's legal expertise (which may or may not be germane to the client's business).    My friend Bruce Marcus also describes this approach.

In practice, what does this really mean? 

• First, as noted, it requires genuine collaboration.  Teams need to be assembled and re-assembled as the client's business and legal posture changes.  Now the team may need some focused litigators; next quarter an offshore tax expert; and the quarter after that an employment maven.  Iris Jones' job is to stay on top of all this and make sure that today's "A Team" doesn't become tomorrow's "Irrelevant Team." 
  Does this mean partners need to "buy in" with their heart and soul?  Check.
  Yes, this can be the hard part:  We all know that collaboration is not in the law school curriculum.  But never underestimate the power of self-interest to trump training.  As one Akin-Gump partner put it:  "In an increasingly competitive environment, the client service team has been invaluable in [strengthening] our relationship."
• Second, it requires plain old information-tracking.  Call it "Client Relationship Management" if you like, but lawyers must have one centralized repository for everything germane about the client's legal needs and the history of its relationship with the firm.  We've all had the experience of phoning (say) the cable company to ask a service-related question or inquire about a bill, only to find ourselves forced to explain everything from square one with a succession of several different people.  As uninspiring as this is with the cable company, it leaves a positively ghastly impression coming from a supposedly sophisticated law firm.
• Lastly, it means the client service team has to have a vision of where the client fits within the firm's strategic plan—a vision which is both clear and nuanced.  Lest I be accused of throwing around the phrase "strategic plan" loosely, I'll try to define it:  "Strategic plan" in the sense I mean it is not the 3- or 5-year document delivered from the mountaintop and promptly shelved for terminal verboseness or immediate irrelevancy (the latter fate being nicely described by the epithet "OBE," or "overtaken by events").  Rather, a strategic plan in this sense is a continuously evolving awareness of the fit between (i) the marketplace's specific demands; (ii) the firm's ability (or short-term lack thereof) to meet those demands; and (iii) how the firm can develop to most closely align its capabilities and offerings with the evolving market.

Note the focus throughout is on "the client" and "the market" rather than "the firm" or "the lawyer."

We have all known in our heads for some time, even if we have not acted on it with our hearts, that excellent legal skills are merely the price of admission in today's globally competitive market.  That means they cannot pretend to be your distinctive calling card; they're table stakes.

What could provide an enduring distinction, on the other hand, is responding to your clients' business (and, as a follow-on thereto, legal) needs with the same alacrity and professional focus the client itself would apply internally.  Client service teams may not be the only route there, but they surely start at the right end of the service spectrum.

Question(s) For Your Firm in 2006

Legal Times is asking, "What Five Questions Will Law Firms Face in 2006?"  I'd like to suggest there's really only one question, and these "five" are each just facets of the same phenomenon.

Their five:

1. More merger mania?
2. Soaring compensation?
3. Billing rates topping out?
4. Further cost cutting?
5. Client relationships more critical still?

Mergers:  Although framed as an across-the-board issue, the fact is that merger activity is highly focused on firms establishing, or beefing up, their beach-heads in just two cities:  Washington, DC, and New York.  I've long been of the view that a Washington presence (which need not be jumbo-sized) is de rigueur for a national firm to be taken seriously.  We simply live in regulatory times, and it's almost irresponsible not to have the ability to join the legislative/administrative conversation at its primary source.   (No, I don't own any property on K Street, but I wish I did!)

New York is likewise critical simply because it's the financial capital of North America, as well as hub to industries ranging from publishing and advertising to fashion and—surprise—law itself.  But unlike DC, mere "presence" doesn't cut it here:  Firms need a critical mass in NYC to make it into the serious consideration set.  What's "critical mass?"  Roughly, north of 125 lawyers.

The biggest challenge is that in both cities, the pickings of merger targets are getting slim.   That's why I predict we'll see more and more smaller-bore mergers where national firms opportunistically pick up relatively little firms that have an attractive specialty.  Just as an example, Seyfarth Shaw picked up a Manhattan-centric real estate firm, Mandel-Resnik (specializing in representing co-op's and condos) as of January 1.   Total haul?  A grand total of seven partners—but arguably (and IMHO) an excellent fit, as real estate is a labor-intensive industry and Seyfarth Shaw is definitely a "go-to" labor law firm. 

Look for more of these rifle-not-shotgun targets.  But do not envision "merger mania" as an undifferentiated nationwide phenomenon.

Compensation:  Obviously, here are two "compensation" markets:  Partners and associates. 

As for associates, I predict we will finally see the pent-up dam burst, so to speak, and starting salaries will get the first bump-up (+$10,000 seems to be the number people are using) since the (in)famous dot-com-driven Gunderson-Dettmer pop to $125,000 in 2000.

The partner compensation market is also bifurcated, if you will, into the equity/non-equity market and the lateral market.  In a coincidence, today we also saw the release of the annual summary of financial results for the Top Ten Bay Area firms, and it tells a tale of high (and unsustainable) rates of growth in the ranks of non-equity partners, and extremely parsimonious additions to, or even subtractions from, the equity ranks.  Just a sampling:

• Morrison & Foerster shifted 50 partners—15% of the entire partnership's ranks—from equity to non-equity.
• At Pillsbury-Winthrop, the firm ended 2005 with 10% fewer equity partners than it began the year, despite absorbing Shaw-Pittman.
• Gibson-Dunn, while LA and not Bay Area-based, switched to a tiered partnership last year.
• Wilson-Sonsini is the only firm on the list that remains "single tier," without non-equity partners.

In other words, non-equity ranks are here to stay, or to grow.

As is activity in the lateral marketplace.  Don't think there's a war for talent?  Well, there is, and it's being fought primarily with the weapon of money.  Attractive laterals are not commodities, and the fight to gain and then retain them only escalated last year. 

Billing Rates:    Pressure from corporate clients to cut legal expenses increased last year and will only continue to rise.   So:

"The string of rapidly escalating billing rates has pretty much run its course," says Bruce McLean, managing partner at Akin Gump Strauss Hauer & Feld. "We're going to have to find different ways to improve profitability."

The problem is that just what those "different ways" are is opaque, at least if firms limit their toolset to fiddling with billing rates. "Alternative fee arrangements?" Mostly imaginary. Or, as John Beisner, DC managing partner at O'Melveny, puts it somewhat drily: "There is a challenge to find ones that are broadly applicable."   In other words, plain old dumb discounting remains the order of the day.

Was I harsh with that "dumb discounting" jibe?  Yes and no.  Yes, I was harsh in that long-term, solid, favored clients deserve recognition of their status, and the clearest recognition is a break on fees.  Plus, the firm enjoys economies with established clients in that there's no new-business-development overhead.  But no, I will stand by it to the extent that just saying, "let me take 10% off—'special for you today!,'" as they say in New York, does not engender loyalty and in fact invites the question:  "If you can make nice money at 10% off, what sucker would ever pay full freight?  [And the next question is:  "How about 20% off?"]

The demise of the billable hour has been foretold so often that we've stopped covering it here; at least until there's some tectonic change in the landscape.  Suffice to say that imagination and innovation will ultimately prevail in billing structures.  We'll know it when we see it.

Costs:  Many strategies avail themselves here, and outsourcing seems to be the favorite son.  Far be it from me to disdain outsourcing—indeed, I've often noted that BigLaw can outsource to the Midwest or the South (internal offices or otherwise) without needing to skip 12 time zones away—but the issue of quality, perceived or actual, remains a live one.  If I'm a Fortune 500 GC hiring Cravath or Wachtel, do you think "outsourcing" is an option?

I would argue that same (correct and legitimate) mindset applies to almost any firm in the AmLaw 50, if not the AmLaw 200.  The back office is one thing, but substantive work?  First thing you know, that GC will say to him/herself:  "I'm not paying firm X 90¢ on the dollar to ship their work to Cleveland; I'll hire another inhouse person for 30¢ on the dollar."  Beware false economies.

The article makes pregnant reference to another potential source of "cost savings," to wit practice specialization.  The somewhat ham-handed attempt to make this point gropes at it obliquely by offering that "par[ing] down practice groups" may be "another option."

What "paring down," a/k/a specialization, means, is simply this:  Become a boutique. 

Client Relationships:  Aaah, at last the heart of the matter, and where all of these questions intersect. 

Think about it:  Mergers are driven by the need to offer a more complete offering to clients; compensation is driven by the war for talent, in order to serve clients; new billing initiatives are 110% driven by clients, not firms; cost-cutting matters only in a world where clients demand value for money.

As it should, it all comes down to clients. 

Which leaves us where? 

I suggest, back in the land of virtuous and vicious cycles.  Strong firms will deepen and extend their client relationships by providing a more compelling array of services from highly talented people priced to yield a compelling value.  Weaker firms will lose cost-conscious clients as their talent pool dwindles, billing models stagnate, and practice group offerings ossify.

It's not five questions, it's one:  How can your firm in 2006 get closer to your clients?

Client Service Orientation: Let's Get Serious

Your firm is dedicated to client service as one of its pre-eminent goals, if not the absolutely highest priority, right?

Not so fast.  Do you have a lawyer serving full-time as "Client Services Advisor," serving as an ombudsman on behalf of the firm's clients and responsible for creating and overseeing more than 60 "client service teams" (and counting)?  Akin-Gump does, in the person of Iris Jones. 

Swell:  What's a "client service team?," you're asking.

Essentially, it's a tool for formalizing and institutionalizing collaboration among the various lawyers serving Important Client X.   An example will aid understanding even better than a description.  Here's how the "Technology-Copyright-Internet" group works:

"The TCI attorneys participate in client service teams with Akin Gump’s patent attorneys, litigation attorneys and other practice groups. This collaborative commitment to client service enables Akin Gump to assist in providing clients with comprehensive counseling in all areas of IP and overlapping areas of the law."

The goal is to approach the client relationship from the perspective of the client's business (and its concomitant legal needs) rather than from the perspective of the firm's legal expertise (which may or may not be germane to the client's business).

In practice, what does this really mean? 

• First, as noted, it requires genuine collaboration.  Teams need to be assembled and re-assembled as the client's business and legal posture changes.  Now the team may need some focused litigators; next quarter an offshore tax expert; and the quarter after that an employment maven.  Iris Jones' job is to stay on top of all this and make sure that today's "A Team" doesn't become tomorrow's "Irrelevant Team." 
  Does this mean partners need to "buy in" with their heart and soul?  Check.
  Yes, this can be the hard part:  We all know that collaboration is not in the law school curriculum.  But never underestimate the power of self-interest to trump training.  As one Akin-Gump partner put it:  "In an increasingly competitive environment, the client service team has been invaluable in [strengthening] our relationship."
• Second, it requires plain old information-tracking.  Call it "Client Relationship Management" if you like, but lawyers must have one centralized repository for everything germane about the client's legal needs and the history of its relationship with the firm.  We've all had the experience of phoning (say) the cable company to ask a service-related question or inquire about a bill, only to find ourselves forced to explain everything from square one with a succession of several different people.  As uninspiring as this is with the cable company, it leaves a positively ghastly impression coming from a supposedly sophisticated law firm.
• Lastly, it means the client service team has to have a vision of where the client fits within the firm's strategic plan—a vision which is both clear and nuanced.  Lest I be accused of throwing around the phrase "strategic plan" loosely, I'll try to define it:  "Strategic plan" in the sense I mean it is not the 3- or 5-year document delivered from the mountaintop and promptly shelved for terminal verboseness or immediate irrelevancy (the latter fate being nicely described by the epithet "OBE," or "overtaken by events").  Rather, a strategic plan in this sense is a continuously evolving awareness of the fit between (i) the marketplace's specific demands; (ii) the firm's ability (or short-term lack thereof) to meet those demands; and (iii) how the firm can develop to most closely align its capabilities and offerings with the evolving market.

Note the focus throughout is on "the clienit" and "the market" rather than "the firm" or "the lawyer."

We have all known in our heads for some time, even if we have not acted on it with our hearts, that excellent legal skills are merely the price of admission in today's globally competitive market.  That means they cannot pretend to be your distinctive calling card; they're table stakes.

What could provide an enduring distinction, on the other hand, is responding to your clients' business (and, as a follow-on thereto, legal) needs with the same alacrity and professional focus the client itself would apply internally.  Client service teams may not be the only route there, but they surely start at the right end of the service spectrum.

Law.com Launches "Career Center" With a Familiar Face

In case you haven't seen the home-page of Law.com today, they are launching their "Career Center":

And this is the article that I'm up there, as it were, alluding to.

Switching to Two-Tier? Right or Wrong, Be Candid

Some reader emails are more provocative than others, and today we have one from the first category.  Actually, we have this from a few days ago and I've been sitting on it while I contemplated how to handle it. 

The sender, writing "on his own time" from a cloaked email account, expressly gave me permission to "do with this what you would like," but also insisted on anonymity based on his ongoing association with an AmLaw 200 firm—indeed, I couldn't reveal his identity if I wanted to since I'm as much in the dark as you, dear readers.

While posting something from an unidentified and unidentifiable source gives me pause, I decided to put excerpts from it up, with my commentary interleaved, since I think it reflects a powerful—though I hope minority—point of view. 

And they're off!

The email refers to my recent post on going two-tier, "Will The Real Rationale Please Stand Up?" and it is essentially an argument that:

"the partnership is an economic beast, and it responds primarily - even exclusively - to economic motives. Regardless of the ex post facto rationalizations that are put into place, I am deeply skeptical of any "human" motivations for something which is most easily characterized as an economic decision."

Our correspondent adduces as evidence the case of a large Texas-based firm:  "The switch from 1-tier to 2-tier partnerships is frequently secret until it is sprung upon the associates - or even the new "partners."" And while he admits that "of course the factors demonstrated in these exchanges may not be replicated elsewhere, we all know that the singular of data is anecdote."

Now it starts to get juicy, and if nothing else this reveals the passions below the surface:

"Several law students who had been summer associates this year noted the contradictory stories told them over the summer by several prominent people in the firm: 'What most people here know... is that they told us clerks a totally different story over the summer. In the partnership retreat they told us that the culture there would never allow a non-equity track. It had been proposed and soundly rejected, never going to happen, no way.  [This from the head of the Dallas office and the recruiting partner.] [...]

"As far as I'm concerned, [the firm] is dishonest and should be avoided."

Assuming these comments honestly reflect the way summer associates felt they had been dealt with, is it simply indefensible for the firm to have acted with apparent dishonesty in their approach to the change?    I think our correspondent gets it about right:   "While it is highly likely that the managing partners were in some way constrained from revealing the impending switch, we all know that there are many ways to give a satisfactory non-responsive answer."

Once the change was out in the open, however, the interesting question becomes how the firm characterized the rationale for it internally.  Again I quote:

"If the reason for the change was, as indicated in the poll, to "retain valuable associates", to "additionally evaluate" people, or to provide for an "alternate lifestyle," any one of those things could have been marketed as the reason for the change.

"While some would be unhappy with the change, others would rationally choose the "lifestyle," or be happy with the additional chance(s) for equity status which the tier-2 status provided. Notice that none of the themes listed above were given any billing at all. This would suggest that those themes are either inapplicable in this case, or that those who are in the trenches would not find them credible."

Whether or not the firm can be accused of botching its efforts to get the word out with a positive thrust, it certainly reaped criticism for the switch. 

But our correspondent makes a more intriguing point, and it relates to "the fact that the non-equity partnership was made universal."

On the premise that "rational action - economics - is about choice, [then] it is believable that some people would opt for tier 2 status for a variety of reasons, be they personal, a lack of other opportunities, a way of preserving some relationships, etc. However, you cannot make a change mandatory and then defend it on the basis that some people might have rationally made that choice."

He believes that the universal, mandatory imposition of the non-equity interregnum prior to consideration for full equity status "indicates that the PPP rationale is correct: People were angry because the "cost" of partnership suddenly went up. [The firm] pulled a bait-and-switch."

Finally, he concludes with another admitted anecdote about an associate at the same firm who landed "a major new client" while still two years away from partnership.  The firm reacted with a "surprise announcement" that they were shortening the partnership track by one year, whereupon the lucky associate made partner six months later (and is still at the firm, apparently).  Quietly, the track was moved back to eight years a bit later.  Obviously, the firm benefited economically from "capturing" the associate with the big client; but shall we draw from such behavior an inference of venality? 

For my money, the most serious charge that can be leveled at such a firm—and stick—is one of hypocrisy and willing denial of or refusal to be remotely self-aware.

But the problem is, in dealing with a partnership where trust is the sine qua non, "hypocrisy" and "denial" can be career-ending injuries.  And certainly our Texas firm has poisoned its own well, at least in the eyes of those quoted here.  While I don't want to invest 100% credibility in anonymous complaints about changes deleterious to the complainer (and some people will of course complain even about salubrious changes—they just can't stand change), this firm is certainly playing with fire not to have a candid, engaged, thoughtful, respectful dialogue internally about such a pivotal decision as introducing a non-equity tier.

Switch or don't switch; just don't prevaricate or contradict yourself.

SUNY/Stony Brook's "Executive MBA for Law Firm Leaders"

I am delighted to be able to break the news to readers of "Adam Smith, Esq." that SUNY/Stony Brook will be offering a first-of-its-kind Executive MBA for Law Firm Leaders, with courses commencing  this coming April, 2006 for the first class of 25.  What's this about?  Here's the premise, as articulated by William Turner, Dean of the College of Business: 

"New York is the law firm capital of the United States. Eighty four of the nations 100 largest law firms have offices in New York City.

"As their work forces and revenues grow, law firms are revising the way they run their businesses. Management structures are becoming more centralized, specialized, and sophisticated.  [...]

"There is a growing recognition that traditional management principles may not always apply in a law firm setting. But until now, business schools have not addressed the skills and organizational challenges necessary for managers to be successful in this unique setting."

The Executive MBA program will be limited to an initial incoming class of 25 students, each of whom must be sponsored by the law firm they work for (which must also agree to pay the full tuition for the program).  It consists of:

• 11 required "core" courses in areas such as leadership, communications and organizational behavior, finance, human resources, managerial economics, marketing, operations management, technology & innovation, and strategy.

• With additional coursework and terms-in-residence (in London) permitting elective concentrations in business management, human resources, marketing, or technology.
• The program extends for the usual two full years of an MBA degree, from April 2006 through March 2008.
• Classes are held for four-hour periods on Friday afternoons and Saturday mornings at SUNY/Stony Brook's Manhattan facility on Park Avenue South at 28th Street.

Some of the faculty include people you have decidedly heard of, including:

• David Barnard, former managing partner of Linklaters North America
• J. Speed Carroll, formerly worldiwde managing partner of Cleary-Gottlieb
• Chris Conroy, director of finance at Simpson-Thacher for 21 years
• Gary Fiebert, executive director of Schulte Roth & Zabel
• Art Gurwitz, executive director of Proskauer (and formerly of Sulivan & Cromwell)
• Jim Lantonio, executive director of Milbank (and formerly at Sidley-Austin and Covington & Burling)
• and others of their caliber.

The Advisory Board is equally distinguished (Rodgin Cohen of Sullivan & Cromwell), M. Frederic (Rick) Evans of Debevoise, Mel Immergut of Milbank, Valerie Jacob of Fried-Frank, Robert Link of Cadwalader, Daniel Neff of Wachtell, Barry Ostrager of Simpson-Thacher, William Perlstein of Wilmer-Hale, and Earle Yaffa of Skadden, just to name a few).

Why is this so exciting?

• It's timely.
• It's in the best possible (US) city for a ground-breaking program such as this.
• Whereas individual law firms have struck deals with business schools before to offer truncated executive education programs (Reed Smith with Wharton, DLA Piper with Harvard, as previously noted here), this is the first time a business school has recognized the need and formalized a law-firm-centric Executive MBA track.

And—saving my favorite for last—I am pleased, flattered, and humbled to report that I have been asked, and have agreed with alacrity, to teach the core course in "Technology & Innovative Practices."   Readers of "Adam Smith, Esq." will, I promise, get regular updates as the program launches, and as my participation evolves.

In the meantime, all you CIO's and CTO's out there:  What do you consider required reading for someone in your position?  Let's start compiling the syllabus together.

Starting Salary Straws in the Wind?

Quick quiz:   Q1:  If you made $125,000 in 2000, how much would you have to make in 2005 to have the same purchasing power (straight CPI adjustment per the Minneapolis Fed)?

A1:  $141,250.

Now add in this observation, from one of the leading law firm recruiters in London (in the context of an analysis of associate attrition rates at the UK's top 50 firms): 

"Candidates are calling the shots again," said [Joanne] Street [of Hays Legal]. "Law firms have to be very careful about looking after their associates because, as confidence in the market picks up, people will start moving around again."

One more data point: 

Are we in, then for another "ratchet round" of starting salary boosts?   Arguing the case for:

• Just do the math per the Minneapolis Fed; we're overdue.
• As reported yesterday with the NLJ 250 total lawyer headcount at those firms is up 4.4% year over year, its best showing since 2000.  But last time I looked, the elite law schools (Harvard, Stanford, Yale, Columbia, etc.) haven't been boosting their graduate numbers at all.  Increased demand, meet stable supply.
• Starting MBA's from blue-chip schools going to the Goldman-Sachs' and McKinsey's of the world can pull down $150,000/year without blinking—and they only have two years of student loans to pay off, not three.  Smart 24-year-olds are going to figure out this arbitrage and stay away from law school unless something gives.

Arguing the case against:

• Firms have just now finally digested the financial hit they took (and the associate billable-hour expectations boost) imposed on them by the 2000 salary spike; they're too smart to put themselves back behind that same eight-ball again so fast.
• Variable costs (read: bonuses) are always and everywhere preferable to fixed costs (salaries).  So firms will proclaim they are holding the line on salaries while making the adjustment under the covers in bonuses.
• It's just plain irrational for all the name-brand firms to march in lockstep on starting salaries.  After all, what you can get for $125,000 in New York will only cost you $80,000 in San Diego (but it will cost you $123,000 in Hong Kong)—and in general associates' salaries have outpaced inflation over the long run.

Where do I come down on this?  With ambivalence.  Clearly the vast majority of very junior associates are money-losers for their firms, and starting them at (say) $140,000 would only make a bad situation worse.  On the other hand, those associates have options (business school, for one) and the firms do not (no MBA's need apply).  I predict a break in the logjam, accompanied by "Stop me before I kill again" protestations from senior partners. 

Extra-credit bonus quiz:  Q2:  If you made $15,000 in 1968 (the notorious Cravath Spike), how much would you have to make in 2000 to have the same purchasing power?

A2:  Only $74,250.

We have, in short, seen this film before.

"Client At The Core" by Bruce Marcus & August Aquila

Today I submitted the following book review to my friends at ALM Media. No telling if they'll publish it, but the loyal readers of Adam Smith, Esq. deserve a look no matter what

Think that "marketing is just common sense?" Think again; it's both a discipline and an art. Aquila and Marcus will guide your hand at both.

This book is full of cogent, jargon-free, and street-smart things to say about what it's really like to try to market professional services. An unusual blend of clear and lucidly stated theory about marketing, and real-world insights into obstacles clients can pose�not to mention the high barrier of internal resistance that "professionals" instinctively erect when asked to be marketers�this book belongs on your desk if you're facing the complexities of marketing for a law firm in the 21^st Century.

A major theme of Client at the Core is that as a result of both the increasing importance of technology and the reaction to the corporate and accounting scandals of the past several years, the world lawyers face has changed and so has the way they must practice. Where once the profession was at the core of the practice, now the client is at the core of the practice. We have come a long way from the days of Oliver Wendell Holmes, who (apocryphally or otherwise) is reported to have said that �half the time, the best advice a lawyer can give is to tell his client he�s a damned fool.�

This �client-centric� orientation has both a positive side (delivering compelling value in clients� eyes) and a negative side (accommodating the client as a default choice), which a clear-eyed law firm leader needs to constantly re-evaluate with discernment and sensitivity to striking the proper balance. The authors provide a roadmap.

Who are Aquila and Marcus?

Aquila was inducted into the Accounting Marketing Association�s Hall of Fame in 2003 and is a leading consultant on M&A and succession planning, primarily in the accounting industry.

Marcus is the author of more than a dozen books and hundreds of articles on marketing, and publishes the Marcus Letter on Professional Services Marketing, with a worldwide readership of nearly 25,000.

The authors pose the challenge of professional services marketing upfront, and make it clear how radically it differs from conventional methods of selling a product. �If you sell me a vacuum cleaner, the vacuum cleaner stays and you go. If you sell me a service, you stay to perform that service.� The dilemma gets worse.

For example, whereas you might not be thinking of buying a motorcycle, an effective marketer can plant that seed in your brain; but no one has ever woken up and thought, �What I need today is a really well-drawn contract.� Moreover, when the day comes that a potential client does need a contract, your asserting �our firm writes better contracts� is an utter waste of breath. How, then to distinguish your firm?

Many firms make the mistake of starting with a wish-list of objectives or an inventory of their skills, and then try to map those objectives and skills onto a hypothetical market that may or may not exist. Instead, start with a concrete marketing plan, consisting of: (a) a definition of your target market; (b) a definition of your firm; (c) a definition of the marketing tools you will use; and (d) concrete expectations about how you will manage those tools.

Defining the firm is surely the hardest part. If you run your practice predominantly with the needs of the firm in mind, you are engaging in �an exercise in imminent disaster.� Rather, you must shape your firm to meet the needs of its prospective clientele, which is �an exercise in growth.�

Reflect again for a moment on the book�s title: The single most important message is build a client-centric marketing culture at your firm. As Peter Drucker wrote: �The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.� That culture rests on several supporting legs, including the heartfelt, genuine, and enduring commitment of senior firm management to the marketing effort; an understanding that nonbillable hours spent on marketing are an investment in the future of the firm; and the employment of top-flight marketing professionals within a formal structure at the firm.

Then and only then, with that predicate laid, can you deploy the classic tools of marketing. Helpfully, Aquila & Marcus outline the uses and abuses of these tools, including:

• articles
• the firm brochure
• public relations and dealing with the media
• advertising
• networking
• seminars
• newsletters
• direct mail; and
• the website.

For professionals whose livelihood depends upon effective written and spoken communication, lawyers are, in general, atrocious in dealing with the press. �When in doubt, �no comment,�� seems to be the operative mantra, but this approach guarantees that the story reported in the media will omit whose point of view? Yours. Aquila & Marcus specify precisely how lawyers go wrong with the press:

• Reporters can�t be trusted: No, their job is just different than yours. The more often you work with a reporter, the more likely they�ll get it right
• Mergers, moves, and hiring laterals are news: Only to your mother.
• Advertising and PR are the same: They could not be more different: With advertising you pay expressly to put a pre-packaged message out there; with PR, a third party creates the message for free and with minimal input from you.
• Everyone reads the article as closely as you. Not a chance. Unless you �say what you�re going to say, say it, and say what you said,� don�t count on your message surviving translation.

While the first two-thirds of the book is devoted to marketing strategy, tactics, and guidelines, the authors realize that the best-laid plans are for naught if the firm is just paying lip-service to marketing. The patient, in other words, must actually be willing to take the prescription.

So the final third of the book changes gears.

It addresses the overall cultural and managerial mindset, the gestalt, required if the marketing effort is to gain meaningful traction within the firm. What will it take?

• A more corporate managerial model, complete with CEO, CFO, and the equivalent of a board of directors. And while you�re at it, �overturn the anachronism that there is no hospitality in a law firm for a nonlawyer.�
  
  
• Understand that you�re managing knowledge workers, not drones. As the authors put it, your professionals must:
• know what the firm is about�its objectives;
• know how the firm is trying to accomplish those objectives;
• know why, and most importantly
• care why.
  
  
• Recruit and hire the best; provide training immediately; demand the best and be frankly intolerant of the rest; and demonstrate a sincere conviction to performance feedback.
  
  
• Make sure your internal communications are functioning and robust. Don�t assume that just because you sent the memo, everyone actually �got it.�
  
  
• Pay for what you want people to do. Use your compensation system to shape your firm�s culture rather than having your firm�s culture shape your compensation system.
  
  
• If you are serious about providing compelling value to your clients, abandon the billable hour. Heresy, you say? Consider:
• The billable hour begins life with �cost of production,� and is divorced from �value to client.�
• A focus on billable hours rewards individual effort and not collaborative team performance.
• Hourly billing shortchanges investments in the firm itself, including recruitment and development.
• Lastly, it encourages a technician�s mentality, which is a world away from that of an outstanding client service professional.

Finally, one must ask, does all of this sound too mercantile, too expedient, �unprofessional?�

To the contrary: By refocusing firms on the client at the core, Aquila & Marcus restore the missing ingredient lost in preoccupation over trends such as globalization and consolidation, the ever-increasing importance of �profits per partner,� and the regulatory-not-principled approach to firm governance exemplified by Sarbanes-Oxley. They call for a return to the highest standards of the profession:

�What seems to have been lost in recent years is a measure of the independence of the professional that was so powerful in building the professions in at least the first half of the twentieth century. As recent events have shown, it�s been supplanted by accommodation to the clients� wishes. The culmination of those same practices has been the scandals of the past decade. The firm of the future cannot be built on this foundation�it will not survive. Independence, one way or another, must come back in full force and with integrity, or else chaos will.�

Client at the Core, then, promises to provide a roadmap to the new landscape of law firm marketing. It delivers more: A comprehensive vision of the 21^st Century firm built on integrity and performing to rigorous standards.