The Ten Years' War

It's been nearly a decade since McKinsey published the seminal article, The War for Talent, but many of its abiding observations remain true today and indeed are worth revisiting. What they found ten years ago started from the implacable demographic reality that the baby boom generation was passing through the senior management pipeline and that there were far fewer bodies coming down the pike in the future.  It can be summarized thus:

"What we found should be a call to arms for corporate America. Companies are about to be engaged in a war for senior executive talent that will remain a defining characteristic of their competitive landscape for decades to come. Yet most are ill prepared, and even the best are vulnerable."

And their recommendations?

• First, make the war for talent a top priority of the entire organization, starting at the top. That means spending senior partner time interviewing not just lateral partners, but lateral associates and all associates, at regular intervals, to discover what's on their minds.
• Make sure you have a compelling answer to the question, "Why would a very talented person want to work here?"
• Recruit continuously. Not just seasonally, and not just when you think you have an opening. Constantly be on the lookout for talent. (I might add that in the current fear-of-recession marketplace, this is more true than ever; perfectly good talent may find itself on the street, or on the fence, for no good reason. Be opportunistic.)
• Put people in situations before they're entirely ready. This is one of the hardest for lawyers to endorse, but if you think back on your own career, I'm sure you'll find it the most penetrating of all the observations and recommendations on this list. When you were thrown in the deep end of the pool, you did learn to swim, didn't you? And you've never forgotten it, right? Give someone else that opportunity. After all, you'll be standing by the side ready to throw them a rope all along.
• Move the poor performers out. It's not only humane (in the long run), it's essential for the morale of the high performers and it's essential for you, in order to give yourself time to concentrate on the higher performers.

But that was then and this is now.

Today, McKinsey has a ten-years-after update, Making Talent a Strategic Priority. If anything, the problem is more acute. According to two new surveys, executives consider finding talent their most pressing priority, and they also expect intensifying global competition for that talent. No other consideration ranked higher in priority over the next five to ten years.

Yet the obstacles to giving talent management its due are high, and familiar:

• Senior management can't spend enough high-quality time on it;
• The firm is "silo'ed" and departments don't share information about promising up and comers;
• There's no real talent management "strategy;" it's more catch as catch can; and
• Practice group managers don't adequately address underperformance, even when it's chronic.

Interestingly, McKinsey cites three developments as intensifying the new 21st Century war for talent. Each seems as if it were designed to target our industry:

• The rise of knowledge workers;
• Globalization; and
• Demographic changes (read: Gen X/Y).

But haven't we all heard that the enormous graduation rates of professionals in the developing world will raise all our boats? That we'll be able to find talented Indian lawyers, native English speakers, to walk hand in hand (well, I speak figuratively) with us into the developing world's future? That Silicon Valley will be able to find the talented electrical engineers, Boeing the mechanical engineers, the Big 4 the CPA's, etc., etc.?

Not so fast.

Here's a striking graphic compiled in response to the question, "Of 100 graduates with the 'correct' degree, how many could you employ if you had demand for all?"  In other words, this is asking—aside from the technical baseline qualification—what percentage would actually be suitable material to bring into your organization.

Since this is hard to read, here are some top-line figures:

• The highest percentage deemed suitable, 50%, are engineers from Central & Eastern Europe.   Notably, Russia scores drastically lower, at a mere 10%, a figure matched by China and barely exceeded by Brazil.
• In "finance and accounting," where India and China are supposed to have superior educational systems, only 15% would be considered suitable.
• But the most interesting figures for our crowd are of course in the "generalist" column, where a virtually nonexistent 3% of Chinese would be suitable, and a bottom-scraping 8% of Brazilians and 10% of Russians and Indians (11% of Mexicans).

In other words, the vaunted fecundity and educational rigor of the developing world is not exactly going to ride to our demographically-challenged need for talent.    Shortcomings cited in the McKinsey survey included poor English, dubious educational qualifications, and, overall, "cultural issues" such as inexperience with teamwork and a reticence to take a leadership role or show initiative.  While some shortfalls (English fluency) can be remedied through training, in my experience cultural ones essentially never are—certainly not on the wide scale needed to make a big difference here.

Which brings us back to Gen Y, people born after 1980.  Here's the best synopsis of all that's different about Gen Y that I've seen to date:

"People in this group see their professional careers as a series of two- to three-year chapters and will readily switch jobs, so companies face the risk of high attrition if their expectations aren’t met. The Gen Y cohort, already representing 12 percent of the US workforce, is therefore perceived as substantially harder to manage than its predecessors. As one North American HR director explained, 'The millennial generation doesn’t want to work 100 hours a week. These kids want a different deal; they have seen their parents work all their life for the same company and then get fired. They are not interested in killing themselves for work.'"

Whether we have only ourselves to blame for this, in the sense that the past few decades have seen a terminal severing of the reciprocal bond of trust between employees and employers, is a question I shall leave to economic historians.  The point is the reality of Gen Y is quite different, and in some ways unprecedented.  But as I've said in other contexts, denial is not a coping strategy.

If, then, the ten-year-old war for talent has not only not been won but has actually escalated—which is the soundbite conclusion of McKinsey's survey—what's to be done?  A redoubled commitment to gaining a leg up on your competitors, in a word.   And that takes place through three complementary initiatives.

Target talent at all levels

It's not just about senior lateral partners, and it's not even just about lawyers.  Your firm should cultivate top talent at all levels (what the insurer Aviva calls "the vital many").  For a few reasons:  First, it's just smart business.  Second, if you only focus on the top people you broadcast a remarkably hypocritical message if you then expect all the underlings to think they matter as well.  And last, human nature loves a community—and study upon study has shown that workplaces where people feel a sense of inclusion and belonging perform at consistently higher levels, with less attrition, less unproductive navel-gazing, and less energy devoted to bureaucratic machinations.

Communicate your firm's (various) "value propositions"

A cliche, to be sure, but there's a reason so many people stress the criticality of the value proposition:  It's what motivates behavior.  It answers the question, "Why would an ambitious and talented person, with other alternatives, want to work here?"

And whereas ten years ago McKinsey speculates that there might have been one unitary response, today there clearly must be many.  The expectations of a Gen Y in Asia are likely to be quite different from those of a Gen Y in the UK or the US.  Career aspirations will also vary across geographies, backgrounds, and age and gender demographics.  But for almost all cohorts, the value of training and professional development will be a key calling card.  In the era of "free agent nation," people know that they are ultimately the only ones responsible for their own careers.

Bolster HR

This is McKinsey's last recommendation; I beg to differ.  As they note:

"Unfortunately, the credibility and influence of HR executives have declined over the past decade, and the function has failed to develop many critical capabilities. According to our research, 58 percent of all line managers believe that the HR function lacks the wherewithal to develop talent strategies in line with a company’s business objectives."

Whereas their view is that HR needs to be repaired, mine is that in many firms its reputation—certainly as a strategic asset—is tarnished beyond salvation.  Nevertheless, many of the functions McKinsey wants the new & improved HR to perform surely have to be carried out by someone somewhere.    I nominate your office managing partners.

Permit me a brief digression.  There's a long and honorable history of debating whether firms should be organized geographically by office or functionally by practice area (or, in a few more iconoclastic cases, by primary clients' industries).   This is one of those perennial debates that never seems to settle into the repose of equilibrium.  Geographic organization has its advantages and backers, and so does practice group organization.

In general, I come out pretty firmly in favor of organization by practice group.  It simply has to make more sense to focus management's attention on the collective capability of people to serve a given legal need than it does to focus on their somewhat random grouping by the happenstance of geography and history.  (And if you want to take to me about being organized along lines that follow your key client industries, that would be great fun.)  Nevertheless, the office manager organizational matrix should probably be superimposed in light grey dotted lines over the heavy black solid lines of practice group organization, and the primary reason is that office managers have the strongest sense of the local market for talent. Who's available?  What's hot/what's not?  Which firm is "damaged goods" locally?  Etc.  So I would appoint your office managers your de facto local champions of recruiting.

That our only assets are our people is a bromide too often observed in the breach.  Yet it bears repeating; they really do leave every evening in the elevator and the only thing that brings them back up tomorrow morning is their individual desire—a decision which can be reversed in a heartbeat—to give their professional best to the firm.  That HR has acquired (earned?) a bad name can't obscure this fundamental truth.

People must be your priority.  And yes, they are hard to recruit, can be hard to retain, and are almost always hard to select.  But if the last decade of advances and declines in firms' reputations and standings proves anything, it's that people make all the difference.

Alternatives to PPP: The Word from London

As many of you know, back in  November I was in London for a week.  Among other activities—many other activities—I was pleased to be invited to participate in a panel discussion hosted by Guy Beringer of Allen & Overy, who was on the panel, along with his partner Stephen Denyer, Quentin Poole of Wragge & Co., and John Kelly of Bridge Consulting. 

The purpose of the panel, attended by nearly 150 people, was to discuss alternative measures of law firm performance:  Specifically, alternatives to the almighty Profits per Partner.

I was recently asked to convert my presentation to the form of a paper, presumably to be circulated through some appropriate medium along with my fellow panelists' contributions, and it occurred to me you might find it of interest.

If so, here it is.

Cheerio.

A Compensation Meditation

Our  text for today, Dear Reader, coming from The American Lawyer, is as follows:

"There's nothing like a fund-raiser at a private school in Manhattan to define your social station. Time was, lawyers were near the top of the heap. Investment bankers and other finance types have long eclipsed them, but the difference used to be one of degree. Then came private equity investors and hedge-funders, and lawyers nose-dived on the socioeconomic ladder. 'Face it, we have no status,' says an Am Law 100 partner of the pecking order at his sons' private school. 'We go to these school functions, and this well-heeled group looks right through you. They won't give you the time of day. You're just one step ahead of the doorman.'"

Now, it may seem crocodile tears to commiserate with someone making "only" somewhere north of $1-million/year and not, say, $2.5-million and up.   And to be sure there is no richer stage for the conspicuous display of excessive wealth than at Manhattan private school auctions.

But if we've learned anything from the past 30 years of psycho-social experiments addressing income inequality, it's that perceived deprivation never has anything to do with absolute deprivation:  It's all relative.  (Similarly, there's remarkable consistency across nearly all income levels when people are asked, "How much more would you have to make to feel better off?"  The answer?  An almost invariant  15—20% more, whether you're making $15,000/year or $750,000/year.)  

Still, the psychology and the economics of feeling under-appreciated are more complex than whether the leading digit on your 7-figure income is a "1" or a "2" or even how many digits your income comprises.  The goal of this column is to explore some of that complexity, and some of the drastically mixed feelings swirling around the whole subject of lawyer compensation.

Associate compensation

Let's begin, as it were, at the beginning, with associate compensation.  On few other subjects has so much maddeningly off-topic ink been spilled.  Let us line up the primary offenders.

"How can a first-year possibly be worth [$125,000/$145,000/$160,000/$180,000]?"

This typically arises from comparing first-year's to other worthy professions and careers and concluding that, for example, since librarians only make $40,000/year and first-year's are not four times more beneficial for the polity than librarians, something is out of whack.  But markets don't work that way; there is no such thing as a market for a hybrid librarian/first-year, just as there is no market for a librarian who bills out their services at $375/hour.   In other words, the "comparing-professions" argument stumbles out of the gate in confusing the presumed social benefits conferred by a slice of the labor market with what society at large ought to be willing to pay those who have chosen a career there.  Cruel, or inevitable, as it may be, markets, again, don't work that way.  The elements that go into the pricing of a first-year are far more complex, and involve at a minimum:

The return (a/k/a profit) the firm hopes to earn on the associate's labor over their tenure at the firm.  This, of course, will often be a negative  number in the case of any individual associate, but had darned well better be a positive number in aggregate (and it will be).

The competitive marketplace for graduates (a) of top law schools (b) at the top of their classes.  Here it's instructive to point out what might sloppily be thought of as a mismatch between supply and demand, as evidenced by the following chart.

This shows the total lawyer headcount of the NLJ 250 over the past 30 years or so (the green line) vs. the number of graduates of US ABA-accredited law schools (the red line) and first-year enrollment in those schools (the blue line).  It's self-evident that firms must be recruiting from more law schools and/or recruiting more deeply from each class of graduates, as the number of NLJ 250 lawyers has gone from about 25,000 in 1980 to over 125,000 today (a 500% increase) while the number JD/LLB's awarded has gone from just under 40,000 to just over 40,000 in the same period, for  perhaps a 15% increase).  The number of graduates in the top quarter of their class from the top ten schools has essentially been static.  

So that indicates a supply/demand "mismatch," right?  No:  Supply and demand always match.  What varies is price.  Next time you see a headline along the lines of "Inadequate Oil Supplies Foreseen," don't believe it.  You may not like the price, but oil will be supplied. 

That the price of first-years, then, has gone up, should surprise no one.

Associates' Compensation is Only Fair Given: (a) That They'd Gone Without a Raise for Awhile; and/or (b) The Burden of Law School Loans

Nonsense, and nonsense.  Reason (a) has been, as they say in the military, "overtaken by events."  It was a "reason" you used to hear only after the famous Gunderson-Dettmer "dot-com bump" of 2000 to $125,000 for first-year's had been in effect for some time.   Raises recently have been coming along at a nice clip, with some event predicting $200,000 is within our sights.  (The story comments on Williams & Connolly's recent raise to $180,000 for first-years in Washington—although W&C studiously avoids paying bonuses, so the comparison is not quite apples-to-apples.  Ward Bower, among others, says that it "indicates to me that top firms in New York are going to turn around and not only match it but beat it.")

Reason (b) demonstrates the sloppiest  kind of economically illiterate wishful thinking.  What it costs to go to law school—while admittedly, on average, probably more than those MBA's at the hedge funds and I-banks had to spend—has precisely  zero to do with one's post-graduation salary.  Whether you think of it as a "sunk cost," an admission ticket, or simply an investment—one whose future returns have yet to be determined, and which may be positive or negative—no one is going to pay you a penny more for an outrageous student loan burden than for a modest or nonexistent one.

Clients Complaining About First-Years' Salaries

We've all heard general counsel and other highly educated people who ought to know better griping about the "insanity" of first-year salaries (actual quote, and I could have used far more trenchant language and kept it real).

 The only intelligent response to this is, "Snap out of it!"  

Indeed, I wish our profession had more law firm leaders sufficiently courageous and plain-spoken to offer precisely that uncompromising rebuttal to what is the height of irrationality.  The economic mistake our good friends and clients are making is to pretend that it should matter to them what the prices are of specific factors of production that go into the end goods and services they buy.   No sensible buyer cares about the cost of each, or any, specific component of what they're contemplating purchasing; they care about value for price.

Here's a  concrete example:  If I'm debating whether to buy a BMW or a Lexus, do I care what the factory-line workers get paid?  For that matter, do I care what each CEO gets paid?  Not unless I'm hyperventilating about some tendentious socioeconomic cause—in which case we can stipulate my purchasing decision will not be made on the merits of value for price.

So why are clients saying these things about 1st-year salaries?   My only hypothesis, since it cannot be rational, is that it's psychological:  It could be a poisonous combination of jealousy and resentment that BigLaw associates do so relatively well so early in their careers, compared to those toiling in the vineyards of corporate legal departments.  But whatever the explanation, it is not our problem and someone should display the common sense and modicum of judgment required to tell them so.

Income not wealth

Rare is the lawyer, partner or associate, who observes that while our profession of late provides extremely handsome incomes, firms provide  no true wealth-creating opportunities compared to investment banks, private equity and hedge funds, or even good old fashioned Fortune 500's extending stock options. 

I have no explanation for why this bedrock fact goes so unremarked.  It could be that all the noise about associate salaries and PPP's drowns out the signal concerning wealth accumulation; it could be that we're all so inured to the current state of affairs that we don't think to comment upon it; or it could even be that the very fact of noting it seems to serve little purpose beyond salting the wound.

Yet senior partners in prominent firms have complained to me, on occasion, that the method by which almost all firms raise capital namely, enforced partner contributions of capital—jocularly referred to by one as "passing the hat among one's friends"—is singularly unsophisticated.   A seminal consequence of that lack of sophistication is that returns on contributed capital are below-market at best and zero at worst, meaning that some consider themselves lucky to get their contributions back intact (and unadjusted for inflation), much less to enjoy a competitive rate of return on equity ownership of a piece of their firm:  "I might as well park $X-hundred thousand or million dollars in a mattress for 25 years, for all the good my capital contribution has done me!" 

Anecdotally (but there are many many comparable anecdotes), consider the case of a fellow I know who just barely failed to make partner at a major New York City firm, only to end up years later as general counsel of a major financial services organization, with a rich stock options buffet from which to dine.  Missing out on partnership may have been the best thing that ever happened to him, financially. 

And  my point with this would be?

I have two, actually, following repetition of the meet and right reminder that there is little call for sympathy for the economic circumstances of almost anyone employed by BigLaw these days.

Firstly, we should not don the defensive cloak quite so hastily when critics attack associate salaries or ever-escalating PPP's.  That is part of the picture, and a very nice part indeed, but only part.  No one who chooses BigLaw as a career for 40 years, under the current model, will retire with accumulated wealth handed to them along the way.  They will have earned whatever they have, paid full-bore ordinary income tax on it, and then and only then been able to save and invest some portion. 

Secondly, we might begin to wonder whether the current model is all it's cracked up to be.   Lloyd Blankfein, CEO of Goldman Sachs, received "the largest payday ever for the head of a Wall Street firm" this year, namely about $69-million in cash, stock, and options awards.  And his base salary?  $600,000, or an amount entitling your firm to the quite distinct back of the pack if that's your PPP figure.  There are more ways, may I suggest, to skin the compensation cat.

On that note I conclude this holiday compensation meditation.

Are we doing what we can and should to reward the genuine achievers in our firm?  Does associate lockstep still make sense?  Did it ever?

Is paying out cash as ordinary income the only model we can conceive of?  How strained are our imaginative faculties?

On the billable hour model, what hope is there—ever—for capital creation and wealth-building?  Common wisdom about the billable hour is to the effect that lawyers and firms should love it because it's a no-lose "cost plus" model.  Is that, in fact, the most damnably short-sighted perspective possible? 

And why, again, are we as a profession so reflexively defensive about our earnings?  I haven't noticed Goldman Sachs, or Mr. Blankfein, in an apologia this week.

Do we, in fact, really know where we stand on all this?

Globalization: What Feeds Your Network?

There are different ways of being a global firm, and while all may not be, ultimately, equally successful, I believe we're in a period of experimentation and exploration, unsure as an industry which global model will prove superior—and in the event there may be a variety of models each successful in its own way. To paraphrase Tolstoy's famous opening line in Anna Karenina, "every regional firm is alike; every global firm is global in its own way."

Herewith some models of "global."

Obviously, none of these are absolute, and none of them are necessarily permanent or irreversible. But they are tendencies that reflect different approaches, different preferences, and different beliefs about what model best serves clients and the firm's associated goals such as lawyer recruitment, retention, and motivation.

[Another way altogether of operating globally is essentially to confine the firm to one primary home office and achieve global reach through a network of "best friends."  That will be a topic  for another day, but suffice to note  in passing that firms as robust and successful as Cravath, Slaughter & May, and Wachtell employ this model.]

Today let me discuss one  of these dimensions of "global," namely item #4 on the table: Does "headquarters" feed the network or does the network feed the network?

Headquarters feeds the network

This is the traditional model of the Magic Circle, where the City of London's "Square Mile" was home to the bulk, at least by value, of the firm's clientele:  The banks, investment  banks, and FTSE 100 companies that drive the core practice areas.   Relationships with clients are of longstanding, thoroughly institutionalized, and even in some respects hereditary.  Partners in the headquarters office are primarily responsible for generating and servicing business, and non-headquarters offices exist primarily to serve demand driven by headquarters.

To  some extent, at least historically, it has  been the model of the "bulge bracket" New  York firms, the vast majority of whose lawyers are in Manhattan and whose overseas offices, even if of long-standing, have only relatively recently developed credible independent business of their own.

The virtues of this model are apparent: 

• Simplicity:  Client  cultivation is centralized and relatively straightforward. Partners in remote offices have little responsibility for business development. Career paths are clear and the choice between "home"or "foreign" office is readily understandable and from that one choice  flow a multitude of consequences.
• The need for local law capability is minimal:  Since by hypothesis clients are concentrated near headquarters, their requirements for on-the-ground local legal advice is  far less than would expected were the local offices truly responsible for generating business in a major way.
• Local lawyer recruitment is, accordingly, less of a priority.

Drawbacks of this model are also fairly apparent, and it's  fair to say that  they're the  flip-side of the virtues of  the alternative.   This may explain what follows.

While I was in London last week, I had an interesting experience:   I tried to make a point of probing with the managing partners and other senior lawyers I met with which model—business driven by headquarters or business driven by the network—their firm followed, and without exception they told me the "headquarters" model is obsolete and their firm no longer subscribes to it.  Occasionally this was accompanied by some defensiveness, along the  lines of, "Well, to be sure, we used to function that way, but have not  done  so for 5 or 10 years at the least."

Never, it's noteworthy to report, did I hear  the view that both models might have virtues of  their own and that it boiled down to a question of the firm's historical path and the preferences of the partnership.   This brings us to the alternative.

The network feeds the network

On this model, while there are inevitably larger and smaller offices, reflecting a combination of the geographic dispersion of underlying economic activity, the firm's historic path to development, opportunities seized or rejected, and client migration, the general expectation is that interesting and valuable work might come from almost any office and require the  services of almost any other. 

Without exception, the US-based firms I  spoke with in London announced that  this was very much their  model.  Its virtues are:

• All partners are responsible  for  business development, regardless of the size or prominence of the city and office where they practice.  This  has the advantage of boosting mutual self-respect among the partnership,  and eliminates the risk that some will come to resent the notion that  they are pulling more than  their weight, or conversely that  others will lose sight of the pressures business development imposes and tend to take revenue flow for granted.
• Clients tend to get the lawyers from the practice areas and  geographies they really need.  In other words, clients' portfolio of demands for  legal service tends to align more  closely with what the firm can optimally provide.   For example, I spent some time this  week with the senior management of an AmLaw 25 firm's Portland, Oregon office, and they had at the ready any number of examples of Oregon-based clients who needed (for example) the services of  FDA experts in the firm's Washington, DC office, or IP experts in its Boston office.  They also reported that, on the whole, their  office seemed to "import" about the same amount of work as  it "exported"—with the advantage to clients being, again, access to the  degree of specialized knowledge that the Portland office alone would not be  able to sustain economically. 
• Talent recruitment and development is more powerful.  As with "importing and exporting" work for clients, recruiting and developing lawyers  is ideally a  two-way street.   Again, the Portland partners reported that  they could offer a different array of lifestyle choices and work/life balance expectations than, say,  the firm's  New York  office, giving talented lawyers who might have had enough of New York an alternative to leaving the  firm.   Conversely, ambitious Portland-grown lawyers  (who  had  either started at this  firm or been recruited laterally) knew that they could enjoy the luxury, the  stimulation and excitement, and  the challenge, of having  access to a wider stage than any of the other Portland law offices could provide. 
• In portfolio diversity there is strength and  resilience.  We are experiencing this right now as we watch the sub-prime  mortgage crisis threaten to  metastasize into a more general credit  crunch:   Woe is the structured finance lawyer this fall.  Yet firms with a more geographically diverse footprint for business generation—which implies and brings with it a more diverse portfolio of industries from which clients are drawn and a broader array of legal services they accordingly need—may well be better  insulated from  this particular ebb tide than firms more centralized in their practice on major capital markets headquarters.

Is, then,  the lesson of my conversations in  London that the "headquarters" model is a quaint anachronism, bypassed by economic history and  supplanted by the "network" model?

I believe it's more nuanced than that, although the general direction of the vector of globalizing firms is clearly towards the network, and it's really only the  velocity of that vector that remains open to debate.

The nuance is that there are a very few  firms (I hereby nominate Skadden as a candidate) whose practice is so focused that the headquarters/network distinction is beside the point.  Their geographic footprint, and the composition of  their business development efforts, "follows the money."   It follows the index of financial-services intensity around the globe and has no use for any other places that  do not  score highly on that scale.

The moral comes  down to execution, as it so often does.  Alternative strategies are often equally viable:   Just consider, in retail land, Wal-Mart and  Home Depot vs. Cartier and Tiffany.   The devil, or as  I prefer  to believe, the gods, are in the ceaselessly challenging details of  execution.    What are you going to do on Monday morning?

Post- (And Pre-) Merger Integration: The Reed Smith/Richards Butler Story

As we've known since October 19, Reed Smith reached agreement to merge with Richards Butler Hong Kong, nearly a year after completing its merger with Richards Butler (UK) in London.  The agreement will add about $60-million in revenue and a little over 110 lawyers in Hong Kong and a small office in Beijing (with a license application pending to open in Shanghai), and, most importantly for Reed Smith, puts it on the third of the three continents where global firms needs to be in today's Flat World. 

I wanted to get a fuller perspective on the deal than just the facts and figures, however, so a couple of weeks ago I spoke with Tom Todd in Hong Kong, a senior Reed Smith partner who has been driving the integration and who relocated from London, where he had been working on the Warner Cranston and then the Richards Butler integrations.  Tom originally is from Pittsburgh, but evidently hasn't been spending too much time there lately.  Tom joined Reed Smith straight out of Harvard Law in 1967, and thus has been with the firm 40 years.  His undergrad degree is in history from Williams, Phi Beta Kappa.

A bit of background for those perhaps unfamiliar with the players:  Tom was part of the senior management team at Reed Smith for many years through 2000, and, as of the mid-1990's, the firm's strategic plan had been to gain stature and scope in the Mid-Atlantic and Northeast states—all in one time zone.  While this may sound unambitious, it was not to last for long, and the firm at least was one of the first to link all its offices through a single computer network, demonstrating a commitment to multi-office operations and management. 

A consensus began to emerge that the firm needed to be in London, the ultimate result of which was the 2001 merger with Warner Cranston, a UK firm with 60 lawyers in London and 10 in Coventry.  

As Reed Smith's strategic plan has evolved, one pillar has remained unchanged:  To ensure that it revolves around its clients and their needs, particularly to ensure that Reed Smith has a significant presence in markets important to those clients.  Historically, key industries for the firm have included financial services (Tom is a partner on the relationship with Mellon Financial, and continues in that role following its merger with the Bank of New York in July 2007) and life sciences.  The Richards Butler/London merger added a focus on shipping, trade finance, and media.

Getting down to the Hong Kong Richards Butler deal, Tom's first observation was to cut through the swirl of media clutter (well, at least for those of you who follow these things) that has surrounded the extended period of uncertainty following Reed Smith's merger with Richards Butler/UK (London) and its conspicuous non-merger with Richards Butler Hong Kong.  [There are tax reasons why the two pieces of Richards Butler had been set up formally as separate legal entities, which are both too obscure and too irrelevant to go into, but that was why a merger with one was not automatically a merger with the other.]  

Suffice to say that immediately upon announcement of the London deal, the question on every observer's lips was, "So, when is Hong Kong?  Or is Hong Kong?"  Tom's rebuttal to this is that all deals take time—which he believes is a good  thing—and even the UK deal had taken about a year to bring to fruition.  The Hong Kong deal was not much different, at bottom, "except that we were doing it in a fishbowl—which, let's just say, never makes things easier."

So what has  Tom been actually doing to advance the prospects for the merger and now the integration of the two firms?  First, simply getting to know all Richards Butler/Hong Kong lawyers, their practices, and their clients.  Second, facilitating introductions back and forth between Richards Butler/Hong Kong and Reed Smith in the US and UK.  Third, meeting with clients to reassure, inform, communicate, and seek their thoughts.  And finally, sitting in on, but, he notes pointedly, not leading or running the activities aimed at combining the two firms.  (A formal integration committee will be established now that the merger is approved.)

And what exactly is so special about this?  Isn't that the way any well-run firm would do it?  Perhaps, but Tom reports, and I have no basis for disagreeing, that he's not aware of any other large firm that puts a senior lawyer on the premises of the merging firm for the explicit and dedicated purpose of facilitating integration.  He notes that his role is manifestly "not to run anything, and not to change them, but to provide the glue between the two firms and help them get to know each other."  I ask if he was involved in the negotiations leading to the merger and he reports firmly that he was not.  I gather he thinks it an advantage to have stood back from the process of negotiation per se and only to step in when the firm's leadership believes he could be helpful as a partner on the ground going forward.

"And how do you know that integration has been a success?" I ask.

"Well, our philosophy has always been to try to pick people we want to combine with because of their talents and their capabilities and their knowledge of their own local marketplace (and we don't believe we have all the answers).  Our intention, our hope, and at least in part our experience, has been that if you've made the right decision you will find out there are both people and processes that will improve Reed Smith. 
"And on that score I think our track record speaks for itself:   Just look at the key people now in positions of senior management at Reed Smith that came initially from other firms:

• Dave Duckhouse, our CFO, came from Warner Cranston
• Mark Dembovsky, our Chief Strategy Officer, also came  from Warner Cranston
• Roger Parker, our Managing Partner for Europe and the Middle East was the Managing Partner of Richards Butler
• Colleen Davies, head of our Litigation Department (nearly 800 lawyers) came to Reed Smith from Crosby Heafey in that 2003 merger.

"And I could go on."

I'm sure you have heard the same objection I have to putative mergers, or even to the very thought of a merger:  "Our firm's culture is such that we could never stand for being taken over."

I submit that mergers done right are the antithesis of takeovers.  Can your firm do them right?

"It Was 20 Years Ago Today..."

Twenty years and a few months ago (apologies for missing the actual anniversary), the merger of Clifford Turner and Coward Chance was announced, which changed the landscape of our industry forever.   Not just in the City of London, but across the globe.

It's worth a moment's reflection on how that happened and what its repercussions have been.

This is how the Times (UK) reports it in retrospect:

"This revolution did not go unnoticed. The Times reported under the headline 'Solicitors' merger creates City giant' that 'two of the City's biggest firms of solicitors are to merge to create the country's first ‘mega' law firm which will have a turnover of several million pounds'.

"The use of 'mega' was key. With one bound the two constituent firms had overleapt to double the size of what had previously been the biggest firm, Linklaters & Paines. The natural order of things had been changed dramatically."

The change in the way the profession would come to operate can scarcely be overestimated.  Again: 

"Above all, it helped to usher in a new kind of lawyer - multicultural, multilingual and multinational in outlook of a type you will now also find also at Linklaters, Allen & Overy, Freshfields and Herbert Smith. In other words, as different as possible, says Chris Perrin (now the firm’s general counsel), from the stereotype of the stuffy, conservative, cautious, uninspired solicitor that had prevailed hitherto."

And of course there were skeptics at the time.  A common jibe was that combining two second-rate firms wouldn't make them first-rate.  And while that may have carried a sting because it carried a grain of truth, the fact was that the  marketplace—the international financial and business community—was beginning to demand a firm with international presence and scale, and the Clifford Chance merger, ideally conceived, was a response to that demand.

"'I recall an American saying to me that whichever law firm could produce the first cross-border legal product to an international standard would instantly create a following,' says [Jeremy] Sandelson [today Clifford Chance's London Managing Partner].  'We did it and that’s exactly what happened.'"

Following the merger came of course the challenge of managing the enterprise.  Geoffrey Howe, managing partner starting in the early 1990's, saw the need for, and acted fairly decisively to bring about, a more business-like approach, bringing in professionals other than lawyers to oversee certain critical functions, introducing systems and processes and carefully monitoring and evaluating the effectiveness of individuals. 

"The trick we had to pull off," he says, "was to introduce a decision-making structure that produced results without killing off the ethos of partnership." 

Today the expectation that major firms will by definition be global is scarcely challenged, which is one reason the Clifford Chance merger deserves a moment's reflection.  The certitudes we take for granted today were not always so. 

This should be humbling for starters—if we think we're so smart today, how could we have been so blind then?

But I'd like to suggest it should also be inspiring, and encourage us to question received wisdom.  What elements of what we take for granted today will look archaic twenty years hence?

Not to leave you hanging, I'll venture a few nominations for assumptions that will change dramatically before our careers are over:

• That a top-drawer US/UK merger will never happen.
• That there are inherent limits—managerial, structural, in terms of conflicts, etc.—to the size of global law firms.
• That lawyers have nothing to learn about handling their practice and their relations with clients from non-lawyers.
• That law firms have no need or use for capital beyond what can be readily raised directly from partner contributions.

Care to nominate some of your own?  If not, you can just read Tony Williams' "Ten trends that will shape the legal market," which include:

• Erosion of profitability at mid-tier firms
• Technology enabling projects to become "unbundled."
• Clients' driving fundamental change in how law firms  operate.
• An increasing segmentation between basic information and advice, available online or for fixed (and low) fees, and those  who can truly deliver exceptional value.

Why listen to Tony?   He was formerly managing partner of Clifford Chance.

Succession Planning Is Over-Rated

Today's WSJ has a front page story "Perform-or-Die Culture Leaves Thin Talent Pool for Top Wall Street Jobs," which discusses the dearth of talent—or at least, talent deemed publicly acceptable—"for the biggest jobs in finance."

"It's a weird state of affairs that these phenomenal global companies can't self-reproduce executives,' says Glenn Schorr, a financial services analyst at UBS AG. 'It is a function of the culture and the leadership or lack of leadership' at each firm, he says."

The peg for the story is of course the departures of Stan O'Neal as head of Merrill Lynch and, over the weekend, Chuck Prince from Citigroup, leaving in their wake ad hoc "interim" arrangements while hasty searches for replacement CEOs are launched under the klieg lights.

One plausible reaction to this story is of course to question the premise that the talent shortage is actually so dire.   I'm sure the situation is precisely as the omni-competent Journal describes it if you go along with the presumed, extensive, laundry list of requirements that credible candidates must be able to check off:

• Coming from a leadership position at a similarly-sized global financial institution;
• Without a black mark on their resume from having been in the neighborhood of a profit shortfall and its attendant fallout;
• Able to relate as well internally in corporate communications as externally with the analyst and shareholder community;
• Highly versed in the nitty-gritty of finance;
• And, if an internal candidate, someone who ideally is widely known outside the firm.

Few individuals are likely to possess all those characteristics, so if they constitute the height of the bar, the story is surely correct.

Now, if this doesn't put you in mind of succession planning at your firm, I'm not sure what would.  But before turning to law firm land, one additional reality of Wall Street, which you may view as charming or perverse or merely reality, as you will, is this:

"Roy Smith, a professor of finance at New York University and former partner at Goldman Sachs Group Inc., said Wall Street chiefs, obsessed by their stock price, are quick to let go anyone whose unit has a bad quarter. That may show their boards that they are aggressively managing their subordinates, but it means talented executives who make mistakes can be quickly shown the door."

We don't have such a hair-trigger mentality, so presumably we may have some more practice group leaders or other individuals likely to be deemed Managing Partner material hanging around, but the question remains what the criteria for selection ought to be and how formalized succession planning should be.

In terms of criteria for Managing Partner in waiting (a concept I will criticize in a moment), today they are quite familiar and have been described jocularly by one AmLaw 25 firm leader as "the last man standing" decision making process.  The ideal candidate:

• Will be not too old and not too young;
• Will be an equity as opposed to an income partner;
• Will be, if not "home grown" at the firm, an incumbent of long standing;
• Will have led, or had a senior role in, one of a handful of practice areas deemed critical to the firm;
• Will be viewed by his/her colleagues as a consummate practitioner; and
• Will not have obviously alienated any significant proportion of the partnership and will not have strong opinions about the future of the firm at odds with conventional wisdom.

Can you see how we, like our Wall Street brethren, begin to arrive at very very short lists of plausible candidates?

This, I'm here to tell you, makes no sense. 

We are donning blinders, of our own volition, and irrationally limiting the candidate pool to those almost certain to produce negligible impact as leaders.  If you think the Wall Street criteria are unduly self-limiting (as I do), how are ours any more rational?

The criteria that really matter, I suggest, are these:

• An intimate familiarity with the peculiarities of our profession and our industry;
• A larger—dare I say non-lawyerly?—perspective on business, strategy, finance, and marketplace realities; and
• "Stature," to be sure, in the eyes of the partnership, without which the collaboration, dialogue, and buy-in essential to any material initiative will be stillborn.

What is missing from this list? 

• The  "home grown" component.  And why, again, is that so necessary given the custom and practice of corporate America of recruiting heavily outside its own four walls?—without seeming, overall, to be the worse for it.   Understand that I'm not proposing or recommending that a suitable candidate would come from a firm utterly unlike yours in scale or practice scope, but if the Boeing --> Ford transition is plausible (Alan Mulally), or Hasbro --> eBay (Meg Whitman), why wouldn't a senior post at, say, one AmLaw 50 qualify one for a senior post at another?
• The non-negotiable sine qua non that the candidate be an active practitioner.   Again, it doubtless helps build the "intimate familiarity" I list as the first criterion above to have practiced, but why do we assume one still is?   Might it not be more likely that someone who has already doffed the practitioner's hat for a role in executive management has demonstrated a predilection for management?

I submit that the harder one looks at the unspoken assumptions underlying the conventional laundry list of requirements (the "last man standing" model, that is), the more irrational they appear.

I promised a word on succession planning, or having anointed a presumptive "Managing Partner In Waiting," and despite having lived most of my life believing to the contrary, this is my view today:  Don't do it.  Don't be too eager to narrow the funnel of potential heirs apparent; and don't embark on a search, formal or sub silentio, until you absolutely need to.

Why not?

• Don't make a lame duck out of your current leader.
• Don't narrow the back of the envelope candidate pool until you are staring directly into the face of the competitive landscape, the firm's inherent capabilities, and the marketplace trajectory that the successor will actually be facing—which you cannot know until that day arrives.
• Don't foreclose the ability of people to grow and, yes, the ability of other people to shrink.   Someone deemed callow or shallow when your way-in-advance planning engine kicks into gear may be  the soul of statesmanship by the time the fateful day arrives.  The reverse, we know too well, can also happen.
• Don't let anyone get too cozy; don't let anyone assume they have it locked up.
• As  important, or more so:   Don't discourage anyone from aspiring to greatness. History is replete with figures, from Washington to Lincoln to Truman, who had massive responsibility thrust upon them when the smart money was still focused on their rather small-bore backgrounds and inadequate preparation.  (And, infamously, it was the "best and brightest" who led us into and into and into Vietnam.)

Successor selection is, when you come down to it, more art than science.  And it's faux science to draw up a checklist of must-have's and see who produces the most colored circles under the "yes" column. 

As for what matters most, I defer to Dennis Weatherstone, former chairman of J.P. Morgan, who is given the last word in the Journal article:   Granted, he says, "the number of candidates for these positions is somewhat limited" and experience is "always valuable."  But he sees the key in something else:  It's more important, he avers, to find a CEO who can "anticipate change." And maybe the one best able to anticipate change is one who has less of a vested interest in the status quo. Just a thought.

Update 7 November:

In response to a few reactions by readers, permit me to clarify the difference between "succession planning" and "leadership development." 

While I may believe you can have too much of the former, you can never have too much of the latter.  Indeed, in my fantasy life I envision in the future the emergence of a law firm akin to GE—a corporate management finishing school seeding its vice president progeny across the economy, bringing their trial-by-fire pedigrees with them.

The  distinction becomes clearer with reference to Harvard Business School Professor Joseph Bower's new book, The CEO Within:  Why Inside Outsiders Are the Key to Succession Planning (Harvard Business School Press, 2007).   Over at HBS Working Knowledge, his views on succession planning and leadership development are nicely summarized in "Why Is  Succession So Badly Managed," and on today's WSJ opinion page he follows through with "Avoiding a Succession Crisis," where he writes:

"But what I found [in my research] is that many firms have not instituted a process for managing the development of potential leaders. Many have not even thought about the process of selecting a leader when the time comes for change. [...]

"This situation is hardly optimal -- not when global competition and technical change, in the context of an active market for corporate control, make the job of CEO about as tough as it ever has been. Companies need world-class efficiency, constant innovation and a customer orientation. This requires a group of talented, dedicated people working as a team across business units and country boundaries.  To get that kind of organization you need continuity in leadership."

To "continuity" in leadership I would only add:  Breadth, and excellence.

Wouldn't it be miraculous if your firm prepared so many talented leaders that it could afford the departure of many of them to elsewhere in the industry?  Now that would be fulfillment of my fantasy.

Four Leaders On The State of the Profession--Make That, "the Industry"

Last week I was able to attend a panel discussion sponsored by ALM Events on "Developing the Next Generation of Law Firm Leaders." Moderated by Aric Press, the panelists were nothing if not qualified to speak.   They were:

• A.B. Culvahouse, Jr., Chair of O'Melveny & Myers
• Peter Kalis, Chairman and Global Managing Partner of K&L/Gates
• Barton Winokur, Chairman and CEO of Dechert, and
• Alfred Youngwood, Chair of the firm and of the Management Committee of Paul Weiss.

Their remarks about the state of our profession and our industry were as informed, articulate, and divergent as any I've heard in the space of a single hour within recent memory.  Herewith your scribe's attempt at recounting the highlights (along with some editorial comment appended).  In the order in which they spoke:

Winokur

"There are certain characteristics of lawyers which do not lend themselves to leadership." 

A few years ago Dechert hired a consulting firm (unidentified) to interview 45—50 partners on a variety of topics surrounding leadership, including their failures and successes in that area in order to determine perceived commonalities among high- and low-performing "leaders."  Bart observed that there are some characteristics which cannot be changed, or learned, such as integrity, but that there are others which can be learned, such as being comfortable with and having strong instincts about personal interrelationships.

The second part of the consultants' engagement consisted of three 3-day weekend workshops offering a cohort of tests and some "360" reviews.  In the end, 16 people evaluated each of the leadership candidates on 72 separate characteristics, such as "ability to listen."  It should come as no surprise that essentially everyone (they're lawyers, after all) ranked in the bottom 5% of the population in terms of sociability.  If you have to deal with people as a leader, this can pose a problem.

Nevertheless, Bart reports, one of the more marginal performers, upon discovering these results, immediately realized why they had felt "outside their comfort zone 95% of the time" and was able to adapt and even to capitalize upon that understanding, becoming one of the firm's star performers subsequently.

Kalis

"Law is a very mature profession and a very immature industry." [Editor's Note:  I fully intend to steal that phrase, albeit with due attribution, many times to come.]

"We are engulfed in the indicia of that immaturity."  For example:

• We are running several-hundred million dollar a year enterprises capitalized by passing a hat among our friends.
• Consultants to the industry are immature and rely more on anecdote than empiricism.
• [With a nod towards Aric Press, editor-in-chief of The American Lawyer], the most publicized financial metric dominating our industry is divorced from an understanding of how firms operate, is divorced from generally accepted accounting principles, is not reported consistently or with accuracy, and reveals little or nothing about the ongoing financial and economic well-being of firms.
• We look for our leadership of these firms to the "last man standing" principle, rather than looking for the best possible leader within (or outside!) the industry.  The leader of a firm must be, for starters:
  • an equity not an income partner
  • of a certain age—not too young and not too old
  • the leader or a key player within only some specific practice groups
  • etc.
• We do not do what other firms outside law do when they need a new CEO or Chairman, which is to look well outside the firm—including going up to Fairfield, Connecticut, to steal a Vice President from GE. 
• Leaders in our industry identify themselves because the opportunities to lead are ubiquitous and dispersed, from hiring, evaluations, talent development, leading offices or practice areas, etc.—and many of these roles are open, at least in cabined form, to associates as well.
• Law firms should think of themselves as laboratories for leadership development.
• The hegemony of business school thinking "is one of the most pernicious intellectual straitjackets of the 20th and now of the 21st Centuries.  It is simply beyond false that business schools teach collaboration and law schools do not.  Law school is the definitive collaborative and teamwork training ground.  Imagine the experience of getting out a volunteer-staffed Law Review, in the context of huge-ego professors and unrelenting deadlines."
• The best way to identify leaders is to put them in a position to fail, and preferably to fail spectacularly, with blood on the floor (ideally their own).  And then to see whether they can recover and win back trust of their colleagues.

Culvahouse

More leaders can be made than are born.

When he became Chair of O'Melveny in 2001 he hired McKinsey to undertake a strategic review of the firm, and they recommended (and O'Melveny followed) that the firm be reorganized away from having the most powerful or, conversely, the most disposable, partners in charge.

Starting next year he will implement the "No 2 Jobs Rule," which means that no partner can have two jobs:  If you're office manager or on a key committee, etc., you can play one and only one role.  This is intended to end the Casablanca police inspector's famous fall-back of "round up the usual suspects."  In other words, spread opportunities for leadership more widely. 

Practice Group Leaders are "the point of the spear," and not office managers.  If office managers are on top, they put the wrong teams out there.  If PGL's are on top, they put collaborative (read: the right) teams out there.

O'Melveny has now contracted with the Kellogg School of Management at Northwestern to create the O'Melveny & Myers Executive Leadership forum, consisting of (among other things) week-long programs for PGL's.   Another component will encourage risk-taking and "a bias for action." 

Succession planning? 

Start late.  There is of course planned and unplanned successions, but don't start planned succession planning too early.  Yes, "lawyers like the known," and therefore there's always anxiety over succession.  But don't succumb to it.

Youngwood

Al will retire at the end of 2008 and started more than three years ago to pick a group from which his successor would be chosen.  It's now down to two or three people.

At Paul Weiss, there's a tradition of contested elections for almost everything.  And in accord with that tradition, there is no nominating committee.

If some of the other firms are "immature," in a business sense, "then Paul Weiss is a very immature firm."  [Laughter.] 

In terms of compensation, there is no "billing" partner, no "origination" partner, and essentially a tightly fixed lockstep for the first eight years of partnership; after that, the lockstep remains all but fixed with just very tiny differences thereafter based on legal skill and contributions to the partnership.

85% of the partners at the firm are home-grown and 85% of the partners are resident in New York.

There are no plans to open additional offices, although Shanghai remains a possibility.

The firm has had one weekend retreat in eight years, which was at a resort, and partners complained that they couldn't go home for the evening.  Added Alfred drily:  "It will probably be another 8 years before we have a retreat."

Question for the Panel:  Should Managing Partners Also Have an Active Practice?

Al:  If you have a global firm (a category into which he notably does not place Paul Weiss), it's probably difficult to have any practice.  But he reports having spent 600 to 800 hours last year practicing, and thinks there is a "large value to that" because it connects you to your partners' everyday concerns.

Bart:  I like to keep my hand in, but it can be difficult.  He'd like to practice more if he could "because it's fun."

A.B.:  I think it's important for maintaining the respect of one's partners to keep an active practice going, even if it's far far less than full-time.  "Besides, your clients are far more appreciative of what you do for them than your partners ever are."

Pete:  Aside from himself, K&L Gates also has a Global Development Partner and a Global Integration Partner; all three are full-time.  He doesn't realistically see how it could be otherwise, and he also notes that he does not believe that the respect one has earned as an impeccable practitioner "is a wasting or perishable asset; it's an enduring asset."

Question for the Panel:  What Will Be the Key Challenge of the Next 5, 10, or 15 Years?

A.B.:  We need to "live in the external world," putting our best talent in front of the client community and not focusing on internal debates.

Pete:  The tremendously powerful centrifugal forces at loose in the profession must be resisted by even more powerful efforts to create a centripetal equilibrium.  There are also two romantic notions of "professionalism" abroad, one of which is arrant nonsense and the other of which is to embraced as an inspiration:

• The hokum romantic notion was most recently expressed by Stanford Law School's Dean Larry Kramer (as picked up on the WSJ Law Blog) who lamented:  "Twenty years ago, most lawyers would have scoffed at the idea that profitability, much less profits-per-partner, should be the measure of success and prestige. Yet that is where we are. Law firms are run like businesses by managing partners and committees whose time is almost wholly occupied with, well, managing."
  He could not be more wrong; this is pathetic whining posing as analysis.
• But the admirable side of the profession is embodied, for example, in former Republican Attorney Generals of the US testifying recently before Congress that the President cannot claim executive powers that exceed  constitutional bounds, and who insist that "the rule of law" has meaning and teeth.  This stiff-spined and consequences-be-damned integrity is the antithesis, by the way, of what some "captive" practitioners do to stay in a client's good graces by nodding vigorously that a planned transaction has their oracular legal blessing even if it runs right up to ethical boundaries and, if it does not actually cross those boundaries, would be the type of arrangement one could never live down were it to appear on the proverbial front page of The New York Times.

Bart:  "Alignment" will be the challenge.  By that he means getting people on board with the firm's vision for its future.  Separately, he notes perhaps an even bigger threat, which is the "clear progressive breakdown of trust that used to exist between lawyers, firms, and clients.  There are some examples of where that trust is intact, but there are many many more examples of where that trust has broken down."

Alfred:  "I have a less cosmic vision. For me, the challenge for the firm will be how, in a more inter-connected world, we can remain the true, classic, law firm partnership we have always been.  I noted, for example, that our partner compensation system was in place when I became a partner 37 years ago, and it will remain in place when I leave." 

Now, how do you view these observations?

I'll give you the "Adam Smith, Esq." view, at the risk of misinterpreting or traducing what each of our four intimate observers really intended:

• A.B.:  Firms can be managed, but only up to a point.  Leadership is ineffable, but the right conditions (such as "no 2 jobs") can be put in place to cultivate its emergence.
• Bart:  Leaders can be made.  Systems can be effective.  People and firms can change.
• Alfred:  This I hold true above all else:  It ain't broke.
• Pete:  It's past time to begin emulating the grown-ups.

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.

Transformative Change On Your Agenda?

If you have a candidate for something that's harder to achieve than large-scale organizational change—transformative change, not reforms or trim-tab adjustments—let me know.  And yet, if your firm is to remain relevant in changing marketplaces, sooner or later you'll find yourself confronting the need for just such radical change.

As McKinsey drily puts it, "leaders seldom meet greater demands on their skills than they do when they embark on a major change effort."  Indeed, when surveyed last year about the most recent radical change effort they were involved in, 10% admitted it had been  "mostly" or "completely" unsuccessful, and just over one third deemed it   "mostly" or "completely" successful.  I feel confident predicting you would find that low rate of success unacceptable with practically any other serious organizational initiative.

So let's talk about how to drive radical change.  Many things can go wrong, of course:

• A confusing proliferation of issues under the umbrella of the mandate for change, where focus on the essential impetus is lost.
• An indisputably needed and worthy aspirational goal, supported by clear communication as to its urgency, but undermined by lack of follow-through and sustained support.
• A starry-eyed focus on the desideratum with insufficient regard for the organization's actual capacity to get there.

First, here's McKinsey's conceptual map of what's involved.  Then, we'll unpack its  component parts:

I'm congenitally allergic to formulaic approaches such as this, but I present this because I think there's genuine value here.  This one is best read from the inside out. 

Start, therefore, with aspiration.  What must we achieve?  What is the goal?  Why is it worthy?  Why does it beat the status quo?  Why, indeed, is the status quo unacceptable in the long run?  Most important of all, perhaps, why now?  What that we treasure and value will be threatened or undermined if we do nothing?

Next comes—this is the good news and the bad news—leadership.  Leadership, as usual, has two faces, two components, two phases.  The first is simply to identify the  aspirational goal, the justification for the transformative effort.  Sometimes this takes no "leadership" at all; it's simply obvious.  How much "leadership" does it take for the Republican and Democratic Presidential candidates to determine that dealing with the Iraq war is a focus of their policy?  (Real leadership would be bringing up an issue that's not  top of mind for most voters, but which could actually have a tremendous impact in the long run, such as the entitlements burden, the dysfunctional tax code, or the plethora of well-intentioned regulations that cumulatively undermine our international competitiveness.)

Assuming you've identified the menacing problem, and the desired future state that would enable your firm to triumph over that problem, the second phase of leadership becomes a relentless, impassioned, clear-eyed, and unrelenting campaign of communication.  At every opportunity—and sometimes with no obvious opportunity—you need to preach (I use the word "preach" because there's an imperative to this campaign) the need for transformational change, the unsustainability of the status quo, the virtues of the future state, and your stout confidence in the firm's ability to navigate from here to there. 

Behind the "communication" campaign is a far more demanding intellectual and institutional task:  Mapping the plan of battle to accomplish the transformation.  For one thing, it may have to be done in steps.  For another,  you yourself may find the question, "Where to start?" daunting.  If your firm is in something of a crisis, these questions are both more pressing and more difficult of satisfactory answers.  But this "battle plan" is essential in order to:

• make the change seem attainable, through a series of small steps each of which is indisputably achievable
• reduce anxiety; "where will I fit in?" should be answered by the plan
• and not least, give people a vision of the value of the transformation, and the rewards for sacrificing the comfort of the status quo.

A useful trick McKinsey suggests as part of the battle plan is to envision what the firm will look like at the halfway mark.

Psychologically, this has the truth of embodying a goal we may feel is more attainable than the ultimate goal, while also describing a firm that is not unrecognizably dissimilar to the firm we know today.  Further, it has the virtues of acting as what negotiators like to call an "anchor:"  A set place in the bidding that serves to focus attention away from extraneous and outlying possibilities. 

Let's make this concrete with an example.  Suppose your firm is 75% litigation and you want to bring the practices more in balance towards 50/50 litigation and corporate/transactional.  The "halfway point" might not be 62.5% litigation and 37.5% corporation (an arbitrary splitting-the-difference type of halfway point), but it might be something more concrete and readily achievably, such as getting 50% of your summer associates to opt for the corporate department, or ensuring that 50% of your lateral partners are corporate hires. 

But metrics and measures will take you only so far.   To "win hearts and minds," you need to tell a story.  The story needs to be one you write yourself—and in plain English forming complete sentences:  No bullet points.

Use metaphors and analogies, and loudly celebrate examples of the new type of behavior you want to encourage.  The story also must:

• be true to your firm's heritage;
• explain the need for change—especially critical if business as usual seems like an option (and indeed may be an option, at least in the short run);
• describe individuals' contribution to that change, and why it's in their best self-interest;
• and, most important, outline an inspiring and energizing vision of the future, making people want to be there and participate.

Even with all these stars aligned, your task of course has just begun.  Driving to the successful end state you envision is going to take a sustained campaign supported by a high level of energy.  You don't have to take my word for it.  Just glance at this striking graphic:

This tabulates the percentages of respondents who had experienced a performance transformation in the past 5 years who were completely or mostly successful (yellow bars) or completely or mostly unsuccessful (blue bars), when asked the critical question:  How good was your organization at sustaining energy during the transformation?  

McKinsey points out that 57% of those who experienced successful transformations maintained high energy while on 15% of those who failed at transformation did the same.

To my eye, the most vivid contrast emerges if you aggregate all the positive responses ("successful" at some level) and all the negative responses ("unsuccessful" at some level).  Here, the booster rockets to success of the transformation process that sustained energy-behind-the-effort provides is unmistakable:

• 86% of successful transformations were supported by high sustained energy, whereas
• 64% of failed transformations were accompanied by low energy levels.

What does this abstractly laudable notion of "energy" mean?

Presenting visible results.  You can't turn around the whole firm at once, so maybe you should start with a laboratory of a practice group or a client team.  If their transformation becomes visible and emblematic, it will have inspirational power.

Another option is to recruit evangelists to the cause:  Practice group leaders, main-line partners, or conspicuous associates and staff who have bought into the vision and whom others will perceive as ambassadors of the firm.  Enlist them as your apostles for the change and get them preaching on the road.

Finally, have and display great faith in the people of your firm.  My own experience is that people rise (or fall) to the level of expectations you have for them.  Add to this that people—especially people in high-performing organizations such as sophisticated law firms—are ambitious, curious, and want to learn and be capable of doing more.  The transformation effort is one way to enable them to do just that:  Learn and become more capable.

So if you're facing the challenge of radical change, you may be tempted to temporize, stand back, procrastinate, aim low, or doubt your firm's ability to pull it off.

Doubt not.  Challenge your colleagues.  Tell them why; tell them where.  Aim high.

Social Networks and Partners' Desks

• Sustaining our firm's culture is critically important.
• Professional development and mentoring are the only way to sustain our pipeline of talent.
• Knowledge transfer across generational divides (including institutional knowledge) is essential to our continued success.

Add in:

• Humans are social animals.

If you believe these things, as do I, you should care about "social networks." 

I've written about them before, in "20% of our group's value is quitting," "Social network analysis release 2.0," and "Who you know or what you know: How about both?", but today I want to take a different spin on this. 

McKinsey has just validated the value of social networks in a new article, "Harnessing the power of informal employee networks."    What do they bring new to the table?

  First, they simply reconfirm what we already know:  That through the informal networks in your firm flow rivers of information untracked by anything on the organizational chart.  Call them communities of practice, peer groups, or no-name ad hoc spontaneously precipitating assemblages, they exist and they are in their own way highly functional.

Second, if you believe we're in the business of knowledge sharing, the intangible power of these networks ought to be a priority for you—a priority, that is, for you to nurture, cultivate, and advance.  They go a long way towards explaining how work actually gets done in your firm.   I've called it the "Ask Sally" phenomenon, and I believe it's ever-so-real. 

When a lawyer or a staff member at your firm needs to know something both tangible and actionable that they don't know and need to know, whether it's who the working contacts at a client are for a specific matter or which associate last re-wrote a section of a brief, the most convincing and reliable source is usually along these lines:  "Ask Sally; she'll know." 

In other words, we rely on talented co-workers, in informal networks, to get our jobs done. 

This much is scarcely surprising.  The question is how you as a leader can reinforce these informal networks.

Here's the problem, as exemplified in this graphic:

This is a real case study from an energy company.  On the left is the formal structure, headed by SVP Jones, with a fellow named "Cole" well down the hierarchy and, were he not highlighted by McKinsey, functionally invisible.  On the right, by contrast, is the informal structure, showing Cole at the center of the way people get work done, and, were it not for a serendipitous direct connection to Cole, Jones would be all but left out of the loop. 

Now, McKinsey has their own complexified protocol for how they recommend we might do this, and to be fair, I'll summarize it here.  Then, I have another idea.  But first, McKinsey:

• "Redesign processes to eliminate or reduce noncore interactions"
• "Companies typically underinvest in the capabilities needed to make networks function effectively and efficiently." [So invest more.]
• "The greatest limitation of these ad hoc arrangements is that they can’t be managed."  [So prepare to manage them.]
• Finally, to be fair, McKinsey has an engaging table contrasting matrix organizational structures with formally reinforced social networks.  I'll paraphrase their findings here:

One of the questions I'm asked most often by firm leaders is whether the ideal organizational structure is:

• by office
• by practice group, or
• by client/industry

My answer is usually a form of "it depends what you're trying to achieve," but in actuality my default answer is that all three interact in mutually reinforcing ways if properly understood, somewhat along these lines:

• Office managing partners need to be aware of and attuned to the specifics of their local marketplace.  This is particularly germane when it comes to recruiting, knowledge of local law schools and centers of business and economic power, and familiarity with nonprofits, foundations, and charitable and civic organizations.
• Practice group leaders are responsible for professional development, cohesiveness of the group, spotting new and emerging trends (and, no less, senescing and declining areas), morale-building, and talent spotting.
• Client/industry leaders—which would be my first choice if you could only organize your firm in a single dimension—are responsible for staying abreast of developments, staying in touch, being ambassadors, and ensuring the firm understands its clients' businesses and conversely that clients understand the firm understands.

But back to social networks.

An impact of globalization has been to make matrix organizations increasingly dated and even irrelevant.  Globalization increases both uncertainty, in the business environment, and the number of channels of "inputs" you need to stay attuned to to have a prayer of making sound decisions.  In this environment, matrices reveal their brittleness, and social networks reveal their flexibility. 

Without going so far as McKinsey does and proposing the calculated introduction, maintenance, and support of formal professional networks, one can readily envision small steps in that direction that could make great sense.  For example?

I've long believed that client intake is one of the most profoundly strategic activities a firm undertakes on a day to day basis.  Your client intake procedures do nothing less than shape the future demand pipeline for the firm.   If it's an automated conflicts check and an accounting munchkin OK'ing credit, you are sorely losing a tremendous opportunity.  How to improve this and give it more of a flavor for grown-ups?

I just learned today that Latham recently instituted an internal wiki devoted to client intake.  The immediate advantage is that the wiki begins to constitute institutional memory.  "Let's see, I think we had a potential client like this a few months ago; what on earth did we decide and why?"  Check the wiki.   Now this is a social network with legs.

And I have another idea.

It's partly prompted by a reader who wrote a few weeks ago to note that, as an associate at a well-known Washington, DC based firm, he had to commandeer a conference room for a few weeks to conduct a major document organization.  As it turned out, this particular conference room doubled as the informal office-away-from-the-office of a partner, who spent a large part of his day taking calls, dealing with clients and opposing counsel, briefing associates, and conducting the usual business a partner would conduct.

Now, you may be thinking:  What a recipe for disaster!  How could the partner get his business done and the associate get his document organization done, both in the same room at the same time, jealous about turf, no doubt, and trying to avoid the social impropriety of overhearing things or pretending not to listen while listening as intently as possible?

The answer, as reported by my correspondent, was that it was perhaps the single most valuable learning experience he had as an associate—and the partner minded not a bit, even seemed to enjoy the company.  What did the associate learn?  Simply put, how a partner deals with clients, opposing counsel, and associates.  At least to a great degree, he learned these things.

Which gave me the idea to institutionalize this type of ad hoc social networking. 

Traditionally, partners would share not just an office but a desk; this tradition ostensibly began in the offices of UK banking firms,  but why couldn't the concept behind it—collaboration—be revived to advantage today? 

Now, while sharing a desk may be extreme, sharing an office, or, more realistically, a conference room on a long-term basis, might not be so extreme.  We all need room to spread out once in awhile; why not make it a social instead of an exclusionary occasion?

I'll conclude with an economic reason for doing so:   Have you looked at Class A rents lately?  I thought so.  As your firm has occasion to move or to redesign its existing space, consider how to maximize shared/collaborative space and how to minimize—within reason, of course—private/un-shared space.   Management consulting firms, accounting firms, architectural and advertising firms—never mind the likes of Google, Apple, Intel, and Cisco—have all shown the way over the past decade to get away from the corner office/cookie-cutter office hierarchical antique model and to adopt and embrace the fluid, open-space model, that encourages people to spontaneously interact, to fortuitously connect, and even to serendipitously overhear. 

Are all those firms wrong?

Antique English Partners' Desk

Update: 12 October, 4:45pm

A reader writes:

Hi Bruce,

A good summarization of the importance of people in the knowledge process.

One additional point that I'd make is that while in the above example it is evident that Cole is a "hub" in the social network, you ALSO need to understand why that is and what kind of hub Cole is. For example, is Cole a hub between all of those people because of overall knowledge...or is it also related to the fact that Cole may serve as the bridge between the different parts of the organization? Perhaps Cole's background is such that Cole has the knowledge necessary to discuss situations or issues with Drilling and Production. Or it could be as simple as Cole's kids in the same soccer league with the folks in those areas, so they know each other well. And while it is hinted at above -- not all social connections are necessarily positive. It could be that Cole has some sort of administrative control (check-valve) over the other areas, so they have no choice but to connect to Cole.

In typical Social Network Analysis (SNA) it is important to also include arrows which then indicate flow. In the example I cannot really know for certain whether Cole is the source of knowledge, or if instead Cole is an active seeker of knowledge. Cole could be a conduit, or a bottleneck. Hard to say.

But what is clear is that there is a network which is undocumented and certainly not understood. The real issue unfortunately comes to head the day that Cole's kids no longer play soccer with the kids of Jones, Cohen, Shapiro, etc. Then the "shadow organization" which exists will grind to a halt. Everyone will wonder why but they'll almost certainly get it wrong.

Regards,

Dan

Dr. Dan Kirsch, CKM, CKEE, CKL®, MKMP, CKMI® Chief Operating Officer Knowledge Management Professional Society (KMPro) http://KMPro.org

email: COO@KMPro.org

A Victory for Common Sense (& Freshfields)

From the TimesOnline (UK):

"Peter Bloxham, the former head of restructuring at Freshfields Bruckhaus Deringer, has lost his landmark £4.5 million age discrimination claim against the elite City law firm."

This was a long-awaited and closely watched decision, and Bloxham appears to have lost rather resoundingly:  Not only was the Tribunal unanimous in its ruling, it went out of its way to say that Freshfields' policies laid out in its revised pension plan—which Bloxham was challenging as discriminatory—"not merely met" but "comfortably passed" the crucial test of whether they were (under the statute in question) "a proportionate means of achieving a legitimate aim."

I'll explain the slightly recondite circumstances of Bloxham's claim, and the UK law in question, but the key takeaway is that this is a refreshing and extremely welcome injection of common sense into an area of law hitherto quite uncertain. 

Here's the background: 

Under Freshfields' previous pension plan, partners with 20 years as such became entitled to a lifetime annuity equal to 10 points on the firm's lockstep.  Importantly, this liability was "unfunded," meaning it was borne by partners still at the firm.  Although theoretically open-ended, the liability was capped at 10% of total profits, a cap which projections said would be reached by 2018.

Now, a 10% haircut on total profits is material in anyone's eyes, and would increasingly be seen as an albatross by aspiring partners as the burden became heavier.  This is precisely the type of issue that should occupy the attention of senior firm management.

So, in 2006 Freshfields revised its pension plan to reduce future pensions for partners who were then younger than 55—as was Bloxham.  (Those 55 or over by April 30, 2006 were entitled to a full pension for life under the terms of the previous plan.)   Bloxham could choose either to retire at once with 80% of a full pension, for life, or remain past age 55 at which point he'd only be entitled to a much less generous pension for 25 years. 

He claimed that the amended plan essentially "forced" him to retire and furthermore that he had not been offered a lucrative consultancy package as an alternative to leaving.  Freshfields' defense was that: (a) no one was "forcing" him to retire or to do anything else; (b) he had so vehemently scoffed at the consultancy package that making a formal offer of it would be a nullity; and (c) most importantly, the steps taken to revise the pension plan's impact on future earnings were measured and reasonable.

Prior to the new age discrimination rules taking effect in October 2006, the UK had no laws specifically addressing age discrimination.  The  fascinating aspect of the new law—unlike, sad to say, US age discrimination law—is that age discrimination is permitted (technically, it's a defense to a charge of discrimination) so long as the discriminatory policy in question was "a proportionate means of achieving a legitimate aim."

The contours of what precisely that key phrase means are, of course, scarcely self-evident, and this is the first ruling on the question in a matter involving partnerships.   More important for Freshfields even than its vindication in the Bloxham matter is that there are commonly believed to be a large number of otherwise similarly-affected partners waiting in the wings, ready to sue, had Bloxham prevailed.  (Bloxham has the right to appeal, and many expect he shall.)

Here's some of the reaction to the decision courtesy of Legal Week:

"Commenting on the ruling, Ronnie Fox, employment specialist at boutique firm Fox, said: 'There will be a lot of relieved senior partners around. This is an extensive case to judge, and people will be looking at it for guidance of a general nature as it is the first real test of the regulations.'

"Farrer & Co. employment partner William Dawson said: 'That he was treated differently on the grounds of age was not the issue -- the question was whether they could justify it.  This is a great result for Freshfields, and it is the result I was hoping for. If they had come out with a different result it would have created difficulties for the profession and for all partnerships.'

[...]

"In a statement, Freshfields' joint senior partner, Guy Morton, said: 'It is a pity that this misguided claim was ever brought to the tribunal. We are pleased that the tribunal has recognised that both the reforms to our partner pension scheme and the procedures through which they were adopted were fair.'"

My own reaction?  As noted, an eminently welcome breath of common sense and fresh air into the hothouse environment of age discrimination litigation. 

Understand, of course, that discrimination of any form is devoutly to be eschewed—and that there's on the whole not much more of interest to say on the matter.  (I'm reminded of "silent" Calvin Coolidge who, when asked his views of sin on leaving church one Sunday, replied in total:  "I'm agin it.")

The trouble with anti-discrimination as a principle is that it's a knife that can cut far far too broadly.  Obviously, we "discriminate" all the time for perfectly laudable purposes when we extend job offers to students high in their graduating classes and not to those further down, when we promote high-performing associates to partner and not their disappointing brethren, and, for that matter, when we pick Olympic team members or create best-selling authors.

The UK law comes with the recognition that not all discrimination is per se condemnable or unjustifiable, an insight stunning in its simplicity and dismaying in its lack of statutory US counterpart.  While "a proportionate means of achieving a legitimate aim" may not qualify as lapidary prose, we all have an intuitive grasp of what it's driving at.

And, just as the Constitution is famously not a suicide pact, so anti-discrimination laws must not become destroyers of enterprise value or shackles upon managerial judgment and discretion.

We Pay Our Associates The Going Rate: Yes, No, N/A

Some of you may have seen the piece that ran in The Recorder about 10 days ago with the attention-getting headline, "In Salary Twist, Firm Pays More--and Less."  (It was also picked up by the WSJ's Law Blog, as the "Associate Compensation Story of the Day.")

The story profiles the ingenious associate compensation policies of Duval & Stachenfeld, a 50-lawyer New York based firm.  Other firms may well have tried such unorthodox policies before, but I'm unaware of any other firms of significance using them today.  Here's what they do:

• First-year's start at $60,000 (and no, I did not inadvertently drop a leading "1") and are placed in the two-year long "opportunity associate" track;
• After nine months, they go to $80,000 and then get $10,000 raises semi-annually.  No later than the end of their second year, but sometimes as early as at the end of their first year, they are promoted to the "full associate" track where the firm pays them the going market rate.  (The "going market rate" is currently determined by what Cravath is paying—plus $10,000 as a sweetener.)
• Assuming mutual satisfaction all around, they stay on the full associate track for the duration, until eligibility for partnership in their 7th to 9th year, with the 8th year being the expectation.

What's going on here?

While the Recorder's article lays out the basic parameters—which I found deeply intriguing, inventive, and potentially mold-breaking—when I read through the comments to the WSJ's Law Blog piece, which are filled with what borders on vituperation (samples follow), I found myself compelled to learn more on my own, and so I contacted Bruce Stachenfeld, who was gracious enough to give me more background on the plan. 

Full disclosure:  Bruce and I overlapped for a few years in the 1980's when we were both associates at the late Shea & Gould, but we had not been in touch since and, aside from some banter about what really caused the demise of that wonderful firm, that circumstance has affected the content of this piece not one syllable.

First, the promised samples of vituperative comments:

• Sounds like indentured servitude to me
• Sounds like a major bait and switch
• Partner greed masquerading as concern for clients
• Warning to associates! 90% of the firm’s associates are new grads. THEY DON’T HAVE ANY SENIOR ASSOCIATES. Based on their demographic data, they use you for a few years and fire you before giving you the raise
  
  But we have a few supporters:
  
  
• From my perspective, there is no downside. The starting pay is more than what I’ll make at a small firm, and if I make it to the third year I get paid as much as a Cravath associate.
• I know a lot about this firm having dealt with them frequently. [...]. It ends up being a win-win even for the associates that don’t “make it” - the training and reputation of the quality of this firm’s work enabled each and every one of them to get jobs in top-tier firms after getting 1-2 years experience at this firm. It actually is a system that works great for the associates, clients and partners - in almost all cases, everybody wins.

When I spoke with Bruce, I asked him where the plan came from, how it was working, how clients have reacted, and what the motivation for going off the conventional reservation was.  Herewith a distillation of our conversation.

They started the plan in 2003 "as an experiment."  But it "has worked out incredibly superbly."  Here are the statistics:

• Class of 2003 (the first year it was in effect):  Hired 5 associates; 4 were promoted and one left
• Class of 2004: Hired 9 associates; 4 were promoted and 5 left
• 2005: Hired 4; 2 were promoted and 2 left
• 2006 & 2007:  Still in the program; too early to say.
• Overall, of the 9 promoted from "opportunity associate" to full associate, 8 are still at the firm and one left post-promotion.

These numbers are no worse, and arguably better than the average attrition rates across the AmLaw 100.  The most widely publicized statistic on that issue (courtesy of NALP) is that 62% of starting associates are gone by the end of their fourth year.   Perhaps more to the point, Bruce repeats that if you track only associates who leave after the initial two-year period, they have lost only one.  He believes the firm has more mid-level and senior associates, proportionately, than the average firm.  Here's the distribution:

• 7th year: 1
• 6th year: 1
• 5th year: 1
• 4th year: 2
• 3rd year: 4
• 2nd year: 2

And out of a total of 25 associates currently at the firm, 11 have graduated to full associate and 14 are still "opportunity associates."  (I asked where that phrase came from, and he said that it reflected the thinking that the program offered opportunity both to the junior associates and to the firm.)

What do clients think?  "Those that know about it are extremely positive.  But understand, this is not meant to be an exercise in morality, but a business tool. We don't have to bill out junior associates at stratospheric rates to cover their costs and so clients  don't have to pay for relatively inexperienced lawyers.  On the other hand, by the  time lawyers are in their third to fifth years and above, they're providing truly valuable service and that's when clients benefit most.  We chose to focus our money on associates who matter most to clients."

How do you recruit?  What do you tell students?  Bruce replied that they generally go to about ten law schools and "we look for people who just barely missed making the cut at Skadden.  We look for the most highly qualified people we can find, but still, face facts, you never can know how good a lawyer someone is going to be until you start working with them."  Bruce became animated, telling me, "Look, historically these are not second class people but incredibly good.  Clients like them; they're eager; they work hard; they give it their best shot."

And how many actually make it through to partnership?  "We tell them that if they're still here in the fifth year that partnership is theirs to lose, not theirs to win.  And the proof of that is that of the ten equity partners in the firm, three rose through the associate ranks. In the  past five years, not a single person who's come up for equity partner has been passed over; prior to five years ago one associate left the firm shortly before being considered for partnership."

What else would you like to tell me?  What else should people know about this model?

"We've actually started something new; we're just launching it.  We call it our 'major/minor' practice group focus.  We want every associate to have a major practice group, where they'll spend 90% of their time, but also a minor practice group, for 10% of their time.  Look, law is a cyclical business, so if you're 90% real estate and let's say there's a slump, maybe you can pick up on your 10% bankruptcy practice and fill the gap.  It's just an experiment, again, but so far we like the way it's shaping up."

And finally, I ask why they embarked on this experiment to begin with.

"Our goal is simply to build one of the greatest law firms in the world.  I mean it! 

"Skadden is one of the greatest law firms in the world, but their business model is different than ours.  Their model (as I understand it) presumes that associates will start there and work for a few years and likely move on after having received excellent training.  They don't really expect that a significant percentage of starting associates will become partners.  It's a win/win for the associates, who get to put Skadden on their resume, and Skadden, which gets to hire plenty of star associates.

"Our model is different.  We hire people expecting (and hoping) that they will be qualified, and want, to stay for the long term.  In order for us to succeed with this model we need to treat our people with absolute respect, integrity and total honesty.  If we don’t do that then, quite simply, they will quit and the whole thing won’t work. 

"We try to be scrupulously honest with everyone about their prospects, their performance and how they are doing.  It just doesn’t work any other way."

Bottom line:  I think they've hit upon an ingenious way for the firm to "test-drive" starting associates at minimal risk and without alienating clients with head-turning salaries or billing rates.  To the charge that associates are being exploited I would reply on the moral plane that, in the larger scheme of a 40-year career, the "sacrifice" entailed is minimal weighed against the potential opportunity opened and, on the economic plane, that since by hypothesis Duval & Stachenfeld is drawing from the pool of law school graduates who do not have BigLaw offers, their market alternatives are limited and this may well be a creative way of providing a highly attractive option. 

In short, more creative thinking like this may help show the way towards escape routes from the increasingly brittle Cravath System that we've been living with for decades—under sustained and increasing assault from the forces of "work/life balance," Gen Y and Millenials, women who actually might contemplate non-childless marriages, and the calls for revolt against the tyranny of the billable hour.

I'd like to bookend the Duval & Stachenfeld story with another one from Legal Times discussing the struggles of Washington, DC firms over whether to match the "Simpson Thacher bump" of first-year pay to $160K earlier this year.   Its premise is that, startled as DC firms might initially have been by Simpson Thacher's hostile initiative, they have now recovered their bearings and fallen into step at the $160K level. 

More than six months on, the article supports my belief that the bump was an attempt to put increasing pressure on firms below the top-most tier (see "What does the great associate salary spike really mean?")

"New York firms have to be frustrated," says the managing partner of an international firm based in Washington. "There’s an attempt on the part of the Simpson Thachers of the world to divide the industry into first class and second class. But no one willingly accepts the characterization of being second class."

The raise had nothing to do with competition among top New York firms:  This was not Simpson  Thacher sticking its thumb in the eye of Davis Polk or Cravath.  Rather, it was an attempt to draw a line in the sand between  firms such as those and firms which will eventually decide that enough is enough and refuse to call the last raise:

"There’s no other rational explanation to what they’re doing other than trying to find the number where people start to drop out,' says the managing partner of a Washington-based firm in the AmLaw 100. 'And once people drop out of the horse race, there’s going to be a smaller number of competitors for the best law students.'"

Are we in, then, for another round of escalation?  Of course; the only questions of interest are when and by how much.  Aggravating the problem (if you're not a New York "bulge bracket" firm, at least) is a fundamental supply/demand imbalance.  AmLaw 200 firms hire about 10,000 associates every year, or fully one-quarter of the 40,000 who graduate from ABA-accredited law schools. Of necessity, firms are reaching farther down into the pool, while at the same time firms that insist on limiting themselves to the top X% from the top Y schools have no choice but to pay top dollar. 

The real crunch comes for firms at about the $1-million/year profit per partner level.  At that level, a junior partner is probably making little more than a senior associate at New York scale.   The economics of the associate/partner dichotomy, in other words, are showing severe stress.

Why does this matter?  After all, the junior partner is still making more than when he/she was an associate, and isn't the trajectory going to be ever upward?  Not so fast.  While that's true within the four walls of the firm in question, there's an enormous and increasingly transparent lateral marketplace out there.  As the cost structure of firms in the $1-million PPP range is pushed relentlessly upwards, firms with superior financials are increasingly attractive to lawyers who can bring business along with them.  And this, Dear Reader, is where the vicious "run on the bank" cycle can begin to kick in:

• Partners with meaningful books of business begin to seek greener pastures where they'll be recognized for it;
• Depleting the firm's revenue with their departures;
• Causing remaining clients to wonder what's going on and perhaps begin re-examining their relationships with the firm;
• Further eroding profitability;
• Making the position of most of the remaining partners—and essentially all of the associates—more tenuous and punching morale in the stomach;
• Leading, potentially, to the catastrophic death-spiral which ends in only the least marketable, least mobile lawyers hanging on for dear life.

It can happen with shocking rapidity.

And yet, and yet:  Few things are harder in life than to admit one isn't prepared to keep up with the creme de la creme.  Not only is it emotionally and professionally traumatic, one quite rationally fears the repercussions from the oh-so-public admission.  

Studies that videotape dogs with a sore paw or minor joint ailment consistently show that in the presence of people and other dogs, the ailment is gamely concealed and the dog acts as if all's right with the world; but as soon as the room is empty, the ailment is attended to and the affected limb visibly favored.  In other words, it's one thing to be hurting; it's altogether different to be hurting in public.

But the "hurt" inflicted by the steadily rising New York scale will, at some point, cause firms to drop off the escalator.  Whether they do so before, or after, they put themselves at risk of a run on the bank is for them to decide.

The associate salary spike wars are not over; a temporary truce has merely been called.

Prepare for the segmentation to accelerate.

Mandatory Retirement: Pro or Con?

My firm does/does not have a mandatory retirement policy.  I do/do not believe we should have one. 

Discuss.

This comes up because of the near-even split in the industry between firms that have such policies and those that don 't—57% of all firms with more than 100 lawyers do, and 43% don't, according to Altman-Weil—as noted in "Desperately Seeking Seniors" in The American Lawyer.   

Coincidentally, the New York State Bar recently issued a report urging firms to repeal or not adopt these policies, and is now asking individual law firms to pledge to abide by its principles.  (The ABA has also opposed mandatory retirement policies.)

Let's hear the case for these policies:

• Senior partners "have been making money for a long time, and for the young people to make more, the old people need to go," according to James Matthews III, a lawyer at Fox Rothschild who represents law firms in labor and employment matters.
• Younger partners can't ascend to leadership until older partners are gone, and it's important that younger leaders take over.
  • "'Mandatory retirement allows a natural succession to take place,' says Richard Davis, 61, a partner at Weil, Gotshal & Manges. At his firm, partners retire at 68, with a few exceptions made for so-called firm grandfathers who led Weil's early development, like Ira Millstein and Harvey Miller."
• Older partners who know they're facing sunset provisions will be more likely to share their clients with younger partners and enable smooth transitions.
• In lockstep firms, if older partners don't perform on par with their younger (but top-of-lockstep) peers, moderate to severe economic wind-drag can be imposed.
• Finally, mandatory retirement helps avoid uncomfortable conversations about declining performance.

There's the for side.  Here's the against side:

• Senior lawyers who don't want to let go of clients won't and don't have to.  This scarcely smooths the transition.  Indeed, this seems to have been the experience of Pillsbury Winthrop, which just this year ended its "out at 65" policy.  "Instead, Pillsbury will design a succession plan for each partner. [Firm chair James] Rishwain hopes that by inviting seniors to help set the terms of their departures, they will be more committed to transitioning clients smoothly."
• And what if senior partners are still profitable?  In that case, kicking them out is "just lunacy," says Robert Link, Chair of Cadwalader.  A man after my own heart, Link says that "economic arguments in favor of age caps are bogus."  The assumption that seniors must leave to make way for younger stars assumes that revenues and profitability are flat.  As Link observes, "As long as a firm is growing, it should be able to pay the lawyers driving that growth, be they 45 or 75."
• Finally, whence the assumption that age = unproductive?  You may be physically more likely to bill 3,000 hours/year when you're 40 than when you're 70, but sight unseen I'd take the Rolodex of the 70-year-old over the 40-year-old's on a dare.   Moreover, are we such a youth-obsessed society that we've devalued perspective, wisdom, and the virtue of the long view?

You may be ready, at this point, to guess where I come out on this.

First, this is none of the bar associations' business.  Last time I checked, their job was to enforce professional standards (which is different from enforcing cartels), and to encourage the profession, in general, to aspirational goals such as more pro bono work, defense of the indigent and representation of the impoverished, participation in public service, continuing legal education, and, most broadly, promoting the rule of law. (See the footnote* for the full text of the "ABA Mission & Association Goals".)

I do not see, in that list of (mostly) admirables, any reference to overseeing matters of internal firm governance, much less micro-managing and second-guessing issues such as mandatory retirement policies.   What new omniscience has infected them?

Second, if the issue is under-performing, you need to deal with that outside of the pretext of age.  Underperformers need to be counseled, cajoled, submitted to moral suasion, and ultimately excused, be they 25, 45, or 75. 

Third, if the question is passing clients along, this should come naturally with the territory and shouldn't require the blunt instrument of enforced retirement.  In the course of any typical client engagement, the firm will marshal an array of talent, bringing to bear promising associates, junior and mid-level partners experienced in "keeping the trains running on time" and getting the matter handled in a timely and utterly competent fashion, and lastly the sagacious seniors providing overall strategic direction and key insights.  Clients expect to be exposed to this full range talents; lawyers expect to provide it.  Burying everyone save the senior-most member of the team in the background is not only ineffective, clients will see it as bordering on the odd.

Finally, as to the "avoiding difficult conversations" argument?  Get over yourself; and do so in a big hurry.  That's what you're paid for.  Or, as a friend likes to say, "there's a reason they call it work."   Hanging one's hat on this should be the last refuge of a coward.

But perhaps the most important dimension of mandatory retirement is that it undercuts a dimension I've become more attuned to over time:  Culture.

We all speak in reverential tones of the value of our firm's culture, but it is not transmitted by osmosis or through WiFi in the reception area and conference rooms.  The DNA of your firm's culture resides most powerfully in its most senior members. Treasure that.  Value that. Hand that down.  Respect your elders to take a critical role in making it happen.

Or, to paraphrase Benjamin Franklin about our young Republic's democracy, "You have a culture.  If you can keep it."

*The "ABA Mission and Assocation Goals" follow, in full:

The following mission statement and Association goals were adopted by the House of Delegates:

ABA Mission

The Mission of the American Bar Association is to be the national representative of the legal profession, serving the public and the profession by promoting justice, professional excellence and respect for the law.
Association Goals

Goal I
To promote improvements in the American system of justice.
Goal II
To promote meaningful access to legal representation and the American system of justice for all persons regardless of their economic or social condition.
Goal III
To provide ongoing leadership in improving the law to serve the changing needs of society.
Goal IV
To increase public understanding of and respect for the law, the legal process, and the role of the legal profession.
Goal V
To achieve the highest standards of professionalism, competence and ethical conduct.
Goal VI
To serve as the national representative of the legal profession.
Goal VII
To provide benefits, programs and services which promote professional growth and enhance the quality of life of the members.
Goal VIII
To advance the rule of law in the world.
Goal IX
To promote full and equal participation in the legal profession by minorities, women and persons with disabilities.
Goal X
To preserve and enhance the ideals of the legal profession as a common calling and its dedication to public service.
Goal XI
To preserve the independence of the legal profession and the judiciary as fundamental to a free society.

If you see anything in there about second-guessing major policies of firm management, let me know. 

Beyond Profits Per Partner

Profits Per Partner troubles me.

As I've written before, it has (at least) the following defects:

• It's extraordinarily manipulable, with especially toxic consequences for firms whose approach is to hack away at the denominator while taking few or no steps to grow the numerator.
• Its ascension in the constellation of financial measurements to the one star that outshines all others owes more, I believe, to its inherent sexiness quotient than to its intrinsic merit as a metric that reflects strong or sustainable performance or growth.
• And its unintended consequences have been dire.

Moreover, most of you seem to agree with me.  When I asked you point-blank whether PEP was a proper measure of success, you rejected it by a more than 2-to-1 margin.  Indeed, the only option that amounted to wholesale endorsement ("Yes; I believe it's highly accurate and highly informative") garnered just over 1% of votes, while "At one point it was informative, but it's outlived its usefulness" captured  18% and "Absolutely not...the Emperor has no clothes" took another 45%.

That said, it's unhelpful and feckless to mount an assault on an incumbent (be it in politics or financial accounting) without nominating an alternative, so let me throw out a candidate for consideration.

Or, actually, not just yet.

I want to hold my fire on nominating my favorite candidate to first discuss an enlightening McKinsey piece, "The new metrics of corporate performance:  profits per employee."   If you think that "profits per employee" should be translated in law firm land into "profits per lawyer" and that profits per lawyer is dangerously close to PPP, you're exactly right.  Which is why the McKinsey piece deserves examination.

They of course start from the premise that our traditional GAAP methods grew up in and still reflect to this day the assumption that the world is made up of manufacturing firms ramping up widget production and bending metal:

"Let’s get right to the point: companies focus far too much on measuring returns on invested capital (ROIC) rather than on measuring the contributions made by their talented people. The vast majority of companies still gauge their performance using systems that measure internal financial results—systems based on metrics that don’t take sufficient notice of the real engines of wealth creation today: the knowledge, relationships, reputations, and other intangibles created by talented people and represented by investments in such activities as R&D, marketing, and training.

"Increasingly, companies create wealth by converting these “raw” intangibles into the institutional skills, patents, brands, software, customer bases, intellectual capital, and networks that raise profit per employee and ROIC."

And they follow with a fabulous statistic.  If you make the rough and ready assumption that the "intangible capital" of a company is its market capitalization minus its book value, the intangible value of the world's 150 largest companies in 2005 totaled $7.5-trillion, vs. $800-billion 20 years earlier in 1985.

We may thumb our sophisticated noses at the down and dirty, obsolete assumptions of GAAP, but when it comes to driving decision-making, we are probably more in GAAP's thrall than we would care to admit.  One of the most powerful behavior-modification force fields GAAP exerts is that we amortize capital investments but we expense intangible investments.  Thus:  Buy a new desk, a new computer, or build out a new office?  Painlessly amortized.  Pay a partner shadow points to mentor associates, or send senior lawyers to executive education courses?  Direct hit to the bottom line.

Now, neither you nor I in our lifetimes can change GAAP.  But McKinsey recommends this:

"To boost the potential for wealth creation, strategically minded executives must embrace a radical idea: changing financial-performance metrics to focus on returns on talent rather than returns on capital alone. This shift in perspective would have far-reaching implications—for measuring performance, for evaluating executives, even for the way analysts measure corporate value. Only if executives begin to look at performance in this new way will they change internal measurements of performance and thus motivate managers to make better economic decisions, particularly about spending on intangibles."

In corporate land, if the highest level of overall  profits is the goal, but "profits per employee" is the interim metric, you can drive profitability either by improving productivity per employee and/or by hiring more employees. Microsoft takes the first approach, Wal-Mart takes the second.  Thus:

This charts profit per employee on the vertical axis (in $thousands) vs. employee headcount on the horizontal axis (in thousands) and shows, for example at the extremes, that NTT DoCoMo generates about $225,000 in profit for each of its 30,000 employees, while Wal-Mart generates about $6,200 in profit from each of its 1.7-million employees. 

McKinsey goes on to examine overlap among the largest 150 global firms between:

• Net income and market capitalization:
  • The finding is that 17 of the top 30 firms on each measure overlap
• Total income and market capitalization per employee
  • The finding is again that 17 (a slightly different 17) of the top 30 firms on each measure are on both measures.

An interesting intellectual excursion?  I think so.  We've learned something about the value of talent as opposed to the value of bricks and mortar.

But if I don't like PPP, and if "profits per employee" --> "profits per lawyer" --> "profits per partner," then what do I like better?

Stay tuned.

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.

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

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

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

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

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

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

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

Here's what I learned.

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

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

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

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

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

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

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

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

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

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

How will she know if these efforts are paying off?

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

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

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

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

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

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

The IPO Itself, and the Immediate Aftermath

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

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

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

Obligations to Clients vs. Obligations to Investors

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

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

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

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

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

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

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

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

The Purposes of the Listing

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

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

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

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

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

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

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

The IPO Process:  Harder than Expected or Easier?

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

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

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

What are the benefits?

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

How was the IPO priced?

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

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

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

The Post-IPO Firm Culture

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

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

For example?

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

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

Any last thoughts?

The Benefits of Non-Lawyer Regulators

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

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

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

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

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

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

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

Managing Partner For A Cycle

The elements of leadership—not as ineffable as some would have you believe—are a topic I spend a fair amount of time on, for one simple reason:  I believe that leadership matters, deeply.  Regular readers will know that I subscribe to the theory that individuals make history, history does not make individuals.

So comes a new question:  How do leaders have to evolve over time during their tenure at the top? 

On one level, the answer might be obvious:  "You evolve to meet the evolving challenges."  And that, indeed, is the answer that the unimaginative and by the book bar exam graders will give you a "pass" for.

But, if one believes Wharton Business School's "Leading for the Next Act:  Why CEOs Must Evolve or Step Aside," it's not quite that simple.  According to research conducted by David Nadler, a consultant to boards and senior executives, a CEO's tenure is "a performance with a series of distinct acts.  Each act requires the CEO to lead, think and behave in fundamentally different ways. The successful ones are those who are able to make the transitions."

What does he mean by this?

In corporate-land, many CEOs appear on the scene when a fire needs to be put out.  Their first hurdle, then, is to pass the test of getting the company over that first challenge, be it changing the culture or bringing innovation.  Now comes the problem:

"The problem comes after the CEO solves that first issue; then it is act two and something else is needed, he says. Many CEOs fail because of what Nadler terms "success syndrome, that is, codifying a certain way of doing things, and then charging ahead with the old game plan no matter how the context has changed."

Bad example:  Carly Fiorina, whose 5-1/2 years at Hewlett-Packard Nadler assesses as successful at first, when she had to transform HP, break it static culture, and develop a new strategy through the acquisition of Compaq.  But after that, when her task turned to the more mundane one of execution and integration, she needed to "hunker down" but instead "she continued on the same approach, and the leadership model that had been successful in act one killed her in act two."

Good example:  Stan O'Neal, who took over Merrill Lynch just three months post-9/11, with the firm on the rocks and literally blown out of its World Financial Center headquarters.   In reality, the firm's challenges ran far deeper than those superficial wounds, and threatened the firm's very existence.  (Nadler doesn't explain this, but I will:  The threats to Merrill consisted of discounters like Schwab eating away from the bottom, an increasing sophistication of global investment banking competition at the top, and a somewhat ill-defined brand and value proposition trying with difficulty to bridge the gap between catering to Main Street and Wall Street.)

O'Neal's initial strategy was "demanding, almost brutal at times"; he focused relentlessly on control, discipline and cost. "His feeling was, 'I have to save the company. If I don't do this, we'll be finished and thousands of jobs will be gone.'"

Once that strategy began to kick in and Merrill began to recover, a new game plan was called for.  O'Neal realized this and acted on it. 

O'Neal did something different: He changed his entire executive team, focused on growth and rethought his own leadership style. Today, says Nadler, with Merrill Lynch stock trading at nearly three times the amount it did in 2001, O'Neal is focusing on building up the next generation of leaders.

Here's where  Nadler's research gets interesting.  He asked himself what caused the difference between success and failure and then decided to study failure rather than success—"because success is transient, but failure is reasonably permanent."  (By this he means that one can have success  upon success and be remembered for that, but if your last act—and by the rigors of a competitive talent marketplace it will be your last act—is failure, that's what you'll be remembered for.

Focusing his efforts, Nadler decided that the most fascinating cases were CEOs who came into a job, did well for awhile, but, when circumstances changed, had a hard time adjusting their leadership—had a hard time moving from one act to the next:

"The most 'heartbreaking' kind of failure, says Nadler, is when CEOs try to change but can't. 'We are not infinitely malleable. Asking a person who is 55 to act dramatically differently, and pull it off naturally, is setting a very difficult-to-achieve goal.'" 

Nadler's conclusion is that boards of directors should constantly be alert to whether the CEO-in-place has the attitudes, the disposition, the talents, and the mindset, to lead the organization in the direction it needs to go now, knowing that that direction changes and is cyclic or episodic:

• We merge; we integrate
• We grow; we assimilate
• We retrench; we restore
• We redirect; we consolidate

And so forth. 

But for all of Nadler's research, I found myself unsatisfied with his casual approach to one profound question:   He seems to assume that a CEO (read:  Managing Partner) can succeed only during one time frame addressing one challenge.  The moment times change, one needs to change horses.  As he says, "We are not infinitely malleable. Asking a person who is 55 to act dramatically differently, and pull it off naturally, is setting a very difficult-to-achieve goal."

I could not disagree more strongly.

We live in the age of re-inventing careers.  If Detroit auto workers can retrain themselves as registered nurses (and they are), how hard can it be for the managing partner of a firm to recognize that the challenge has moved from, say, getting the firm's Shanghai office in shape to figuring out how to recruit and retain Gen Y?   Nadler does humanity, and Type A, driven-to-succeed at the top of their game humanity, a shocking disservice.

With one caveat.

You need to listen.  Seriously listen. 

"Active listening" is one of the more depressing cliches to have emerged from the booming self-help industry, but I'll tell you what active listening means to me:  Actively encouraging disagreement.  What is wrong with this picture I've drawn?  What am I missing?  If you were me, what would you do differently?  "Conflict" it's not; "consensus" it's not.  Common sense it might be.

So can you be managing partner through more than a single economic and strategic cycle?  Only if you'll listen.

Update Tues 14 August:  A regular reader writes:

"Bruce, Great post! Thanks for bringing this Wharton resource to all our attention.

I agree that leadership is simply vital to law firms , but I draw a somewhat different conclusion, if I follow your drift.

I tend to agree with Nadler.  Precisely because law firms are going through such gigantic leaps in their understanding of more sophisticated management models, expanding into further and more complex and more challenging markets (geographic, industry and subject-matter area), and in general staring dazedly at the changes in their industry going by at a pace they can scarce keep up with, I believe that a paradigm that encourages short tenures for firm CEOs (MPs) is advisable.

Further, why not also have strong central leadership committees (for example, something akin to a board of directors--some firms have them) whose sole job it would be to identify the most important challenge or small set of challenges that the firm next needs to tackle, and then select either one of their own (or an outside leader) to address it.  Once that issues has been effectively dealt with, I see every reason for that person to pass the baton on.  As Nadler I think rightly points out, it is difficult to one person to work against type--especially when their natural inclination is so successful in one project.  Better to quit while ahead, get back into full-time practice, or, why not??, take the reins on somewhere else.

I personally see great benefit in the rise of a nascent law firm manager class that moves from platform to platform much as corporate CEO's do.

The necessary corollary to this, I believe, would need to be a strong sense of group leadership and ownership by all leadership within the firm, both senior and mid-level.  Only in this way can the firm have the strength of will to identify new challenges, rather than simply resting on laurels, or indeed, approaching new challenges with old thinking.  I heartily recommend the "Bees" post by fellow (and new) blogger Bilinksy at Thoughtful Legal Management.  Adding a dash of "hive-mind"--de-centralized decision-making, can, I think, dynamically interact with an even, and conversely, stronger centralized and powerful chief executive officer.  The two together could help launch law-firms not only to parity in terms of quality of leadership that is found in corporate America, but perhaps even sling-shot beyond it.

One can only hope!!!"

Have a great week!  I can't wait to see your next post.

pete

The History of Allen & Overy: 1998 - 2007

We conclude our three-part history of Allen & Overy with the years 1998—2007, the decade surrounding the turn of our current century.

These years are, for my money, primarily the story of A&O's investments in internationalization bearing fruit.  Indeed, Volume 2 of the history of the firm (A&O at 75, Allen & Overy: London (2005)) is arranged not chronologically but by city.  The frontispiece to the volume says simply, "An international practice at home everywhere - this is our story..."

And the list of contents is impressive:

• London
• New York
• Madrid
• Paris
• Brussels
• Antwerp
• Amsterdam
• Luxembourg
• Turin
• Milan
• Rome
• Frankfurt
• Hamburg
• Prague
• Bratislava
• Budapest
• Warsaw
• Moscow
• Dubai
• Bangkok
• Singapore
• Hong Kong
• Beijing
• Shanghai
• Tokyo

Looks impressive, to be sure, and sounds strategically indisputable.  But not so fast:  We say that from the vantage point of  hindsight.  All was not so obvious at the time the investments had to be made.  From the preface to the second volume (Richard Rowland, qualified in 1969, speaking):

"A fundamental point about the internationalization, you have to remember, is that there was a strong body in the firm who felt that we should not be anything other than English lawyers and that we shouldn't have offices overseas.  When it was first proposed in 1980 that we should have an office in Hong Kong, it was turned down."

In the event, the firm recognized that doing cross-border transactions required local law expertise.  Only when the US became a serious entrant in global capital markets in the late 1980s and early 1990s was the die cast.  With the disclosure requirements imposed by US and other local law (Rule 10b-5 is specifically mentioned), "we then needed overseas lawyers to be part of the team, and if they were part of the team it didn't work very well if they were not also part of the organization."

From the preface, other observations about how matters have changed and what are the contours of the current competitive landscape:

• "The culture of the American firm and the way the firms work is extremely strong, and colors their whole attitude, I feel. [...]  The US law firms are also adapting.  T here are more and more US law firms in London.  They are recruiting English lawyers and they are expanding aggressively.  They have huge resources behind them.   And so they represent a challenge."
• "If you ask what is going to happen now [in terms of international financial capitals], I think that New York may come into its own again.  [But the obstacle is] that people are more circumspect about the legal system which has populist elements.  It doesn't necessarily have the goodwill that London has and it is still too closed."
• [On the impact of technology]:  "When I started as a lawyer (which wasn't that long ago), people were still sending telexes.  You had days between turning around drafts.  Now you actually have to have everything at your fingertips if you are going to play at the highest level. We are living in the world of 24/7, of always being accessible.  One of the challenges is to know when you can turn to your client and slow things down to take stock.
  "Pretty much on every deal I got involved in during the 1970s, the first document I pulled out was the airline timetable, because inevitably it meant actually traveling to the place where the deal was being done."

Internationalization

While the challenges to international growth can be daunting, the lesson of the past decade at A&O can be summed up thus:  "It's worth it." 

But again, that was less clear when commitments were being made, and the road in some markets—especially New York—has not gotten easier.   Nevertheless, a robust New York capability was seen as essential: 

"Eighty per cent of economic activity in the United States, by far the world's biggest economy, is purely domestic, and, if you add in Canada and Mexico, more than 90 per cent.  ... Then consider that our top 30 clients are doing at least a third of their business in the US and you can see why it is so vital that we have the resources and the capability to be able to advise them.  Put the other way, it's a gigantic disadvantage if we can't play where more than a third of their business is."

It's still a slog.  According to Dan Cunningham, a marquee partner brought over from Cravath, "We have to develop our reputation case by case, deal by deal and client by client.  There is no other way.  We have to do the deals to win the hearts and minds of the legal decision-makers in the big institutions for whom we are likely to act."

Similar stories are told of opening in Moscow, in Hong Kong, in Frankfurt, and in Eastern and Central Europe.  Each and every office presented its own challenges, opportunities, and time-lines.  There's no such thing as a cookie-cutter approach to internationalizing a law firm.

For example, to cite the ups and downs of the Moscow office alone, they have included:

• Opening not in an office building proper, but in a flat, where the fax machine was in the bathroom and meetings were held in the kitchen.
• Surviving the October 1993 storming of Parliament ordered by Boris Yeltsin, when A&O's Russian staff ignored strict instructions to the contrary to remain indoors and mounted barricades on the streets to forestall the Russian Army from storming the building.
• Similarly surviving the August 1998 moratorium on all foreign currency debt repayments—the first time since the Ottoman Empire that a sovereign nation had defaulted on domestic debt—and the immediate collapse of the ruble.   Ultimately the firm had to retrench from three floors to one.
• Even today, the Russian economy is scarcely the smoothly running well-oiled machine Westerners might be familiar with.  Power is excessively concentrated; the rich/poor gap is dramatic, shocking, and growing; the entire country is far too depend on oil and gas wealth; and the fundamental notion of the rule of law enforced by independent courts remains alien.

The Warsaw office also opened in an apartment, but with an added sleight of hand.  The senior partner at the time, John Kennedy, remained convinced that A&O should limit itself to English lawyers practicing English law, so the solution was to open with a Polish lawyer—and the first from any civil law jurisdiction— "Andrzej Siemiatkowski in association with Allen & Overy."  Also onboard was A&O's association partner, the French firm Gide Loyrette  Nouel.  In the three-room apartment, Gide took the nicest room, A&O another, and the secretaries the third.  One early obstacle to efficient communication was that there was only one phone, typically prompting a rush to answer.

Nevertheless, progress was possible.  The firm moved out of the apartment in 1992, and by 1994 had trebled in size to 35 people and achieved profitability.  By the mid-1990s Warsaw was the firm's third largest office, after London and Hong Kong.

But to bring our perspective straightaway to today, let us conclude by reflecting a moment on A&O's latest (2006 fiscal year) numbers, and the just-released Legal Week UK 50.  (The full chart is here, and I strongly commend it to you; it's fascinating.)

As A&O puts it:

"Strategic investment across the globe has helped fuel record 2007 revenue and profits, clearly positioning Allen & Overy among the top six law firms in the world.

"Highlights:

• profit before tax up over 36 per cent to GBP 395 million
• turnover up 20.5 per cent to GBP 887 million 
• total number of lawyers worldwide increases by 10 per cent to 2,600
• presence in key global financial markets strengthened with new offices and capabilities in Middle East, Europe and Asia

"Following another outstanding performance across all practice groups and jurisdictions in the year ended 30 April 2007, Allen & Overy reported a 20.5 per cent increase in annual turnover to GBP 887 million resulting in an increase in pre tax profit of 36.3 per cent to GBP 395 million."

And need we add that PPP exceed £1-million for the first time?

The key, for A&O as for its Magic Circle brethren, has been the payoff from their investment in internationalization:  "Clifford Chance (CC) managing partner David Childs said the results vindicated a decade-long run of foreign investment by the big four firms. [Clifford Chance, Linklaters, A&O, and Freshfields.]  He told Legal Week : “Our foreign offices are now maturing. We are seeing significant revenue increases from these offices and they are becoming more profitable. The model is proving itself.” "

For some who were initially skeptical, this comes as a surprise.  Tony Angel describes it thus:

“The US firms are quite surprised,” argued Linklaters managing partner Tony Angel. “When we and other global firms began investing in building networks there was a real sense that scale was incompatible with top-notch work, but the fact that all the firms have done so well shows you can do well and stay focused.”

The moral of the story today is simple:  The large gambles, and gambles they were, that the top UK firms put down a decade ago on the concept of a global legal marketplace are now beginning to seriously pay off.  The top four firms racked up £4.18-billion in fees last year, accounting for 40% of the UK's top 50 firms' income.    US firms have not made similar investments in internationalization (with a very few exceptions).

Simultaneously, the top UK firms have accomplished all the financial and managerial engineering needed to boost their PPP numbers up into the stratosphere, stretching leverage, restructuring, conducting rigorous partnership reviews, and holding associates' feet to the fire.   My question would now be:  Is it time to dial back the pressure on "managing to PPP"?  As the editor of Legal Week notes, "such gyrations have pushed cultures and businesses near to breaking point."

I will close this extended history of the 75+ years of Allen & Overy with some insights from some of the more prominent heads of London-based firms.

• David Childs, managing partner, Clifford Chance

  On the magic circle pulling away

  "Our offices outside of London are now maturing. We are seeing significant revenue increases from these offices and they are becoming more profitable – the model is proving itself."

• Tony Angel, managing partner, Linklaters

  On the market

  "A number of facts have driven the profits of the magic circle firms. It may be that the UK domestic market has not been as buoyant as the global market and within the global market the UK, and international law firms, have been increasing their share. Investment in growing international networks and the growth of London as an international finance centre have provided real opportunities to firms like ours. The sort of deals being done benefits firms with strong financial markets and cross border transactional practices."

• Konstantin Mettenheimer, co-senior partner, Freshfields Bruckhaus Deringer

On the US

"As a capital market centre, London has been increasingly important, with a very large number of IPOs compared to New York’s very few. There has been a lot of capital flow and economic activity between Asia and the Middle East, not necessarily via London and New York. The jury is out on whether we will see the development of a third financial centre on top of London and New York, be it Dubai, Mumbai, Shanghai, Hong Kong or Tokyo."

• Nigel Boardman, corporate partner, Slaughter and May

On the US

"The City has gained significant market share in the world financial and legal scene. Part of this is Sarbanes-Oxley. Also Arab money doesn’t like to go to the US, where it cannot necessarily get money back out again. New York is not as good as London for Asian companies to be headquartered in."

On London

"Ten years ago we were talking about Paris and Frankfurt being significant threats to London, this is no longer the case. As long as there remains differential treatment of personal tax, this will continue to be the case."

On equity/leverage

"Partnership culls will have hit leverage significantly. I would imagine that the magic circle has shed 600-700 partners worldwide recently."

We have indeed come a long way from coal stoves.

The Data-Centric, Empirical "Law Firms Working Group"

My friend Professor William Henderson at Indiana University School of Law—Bloomington just sent word of a new initiative the law school is launching in conjunction with the American Bar Foundation. 

Called the "Law Firms Working Group," the project includes no fewer than 14 research teams comprising 38 scholars in all, who will have access under a special license to the archival data of American Lawyer Media, which "includes cross–sectional and longitudinal information on law firm structure, financial performance, lawyer demographics, branch office size and location, lawyer mobility, associate satisfaction, relative law firm prestige derived from lawyer surveys, practice group prominence, and other facets of modern law firm practice."

What precisely are they researching, and what makes this initiative different from yet another set of academic papers on our complicated profession?

First, what promises to make it different is that the "LFWG" researchers will actually be working with data.  In other words, their work will be far more empirical than the usual armchair-observing and abstract-pontificating (and no, I'm not naming any names, thank you).

Second, their proposed projects include several that promise to be of genuine interest to those of us who are long since out of the academy and into the actual nitty-gritty of management and leadership.  Here are a few that struck me as particularly "real world" in focus:

• Lawyer Mobility:  "The investigators will study the volume of lawyer lateral mobility, and the and factors influencing it. They will explore the importance of a strong firm culture in the quality of client service, firm profits, firm stability, employee satisfaction, and associate attrition. After this analysis has been completed, Marc Galanter and William Henderson will utilize this dataset to study the relation of mandatory retirement policies to lawyer mobility."
• Interaction Between Law Firm Structure, Hiring, and Partner Promotion:  "John Gordanier will study the empirical relationship between the structure of law firms and the characteristics of associates and partners. His focus will be on whether a multi-tiered partnership structure [with equity and non-equity partners] changes the composition of a firm's associates and whether it affects the quality of the partners."
• Globalization Strategies of U.S. Law Firms:  "Carole Silver and Nicole DeBruin will combine Law Firms Working Group data with their own prior research into non-U.S. offices of U.S. law firms to analyze the consequences of different approaches to global expansion. They will examine a variety of factors, including the ways that offshore offices reflect or differ from their domestic counterparts, and the relationship between offshore office growth and financial success."
• The Professionalization of Large Firm Management:  "Elizabeth Chambliss will track the emergence of full-time ("professional") managers in law firms, focusing on the managing partner and law firm general counsel positions. Her research will examine the relationship between professional management and the economic success of the firm, and the sources of managerial authority for full-time versus part-time/practicing managers."

Other projects will look at the relationship between firm performance and a commitment to pro bono, the changing geographic footprint of global law firms, career trajectories of young lawyers, and race and gender in large law firms.

For some time now, Bill Henderson has been one of the rare law professors with a dominant "quant" gene and I for one will be fascinated to see the fruits of these various research projects.

And of course, you know that "Adam Smith, Esq." will be one place where you can read about those results as they materialize.

The History of Allen & Overy: 1971 - 1998

When we left Allen & Overy in June 1971, Jim Thomson had just died.  "He, more than any one other single individual, represented Allen & Overy; in the minds of many people in the City, clients and competitors alike, Jim Thomson was Allen & Overy."

As Bill Tudor John, subsequently a managing partner, put it:  "Jim Thomson was such a larger-than-life character and his influence on the firm so profound that his death threatened to stop the firm dead in its tracks."

It was time for the firm to re-group.

As it turned out, the firm—whether through foresight or serendipity is not clear—was extremely well-positioned to benefit from changes coursing through the global economy in the early 1970's.  Eurobonds were a new invention, and syndicated loans were just gaining currency.  These two practices let the banking lawyers at A&O "make hay."   As Bill Tudor John reported:

"At one stage I had 26 syndicated loans all going on at the same time.  I remember once flying in from Iran, having the printer meet me at the airport, giving him the marked up agreement with instructions as to where he should distribute it after it had been printed, and then catching another plane to go off somewhere else.  I think in all I went to 73 countries."

Despite the bountiful flow of business from clients, disagreements can always arise over distribution of the spoils, and so they did in 1974.  The essential problem seems to have been that partner shares had not been fundamentally revisited since George Allen and Tom Overy retired into a closed room and determined points. 

Junior partners who felt they were giving more than they were receiving brought matters to a head.  (To be fair, the history points out the analogy between their sentiments and those that had led Allen and Overy to leave Roney & Co. four decades earlier.)   The result of their complaints was introduction of the lockstep system that prevails at A&O to this day:

• newly minted partners receive 20 shares
• they accrue two more shares per year for the next 15 years (for a total of 30 additional shares)
• and the lockstep maxes out at 50 shares.

Thus the span is 2.5:1, a very conservative, collegiality-inspiring span.  (To take a rugged contrast, the span at the deservedly ill-fated Finley-Kumble in its unlamented last days was 17:1, ensuring there was no way individuals at opposite ends of that spectrum would remotely consider themselves to be "partners" with the other.)

Testament to the power of this system is its endurance for 35 years—confirmed, of course, by the powerful growth of the firm during that time.

That's not to say serendipity did not play a part.  My favorite story on that score is of John Kennedy, a partner returning from Jeddah to London, who was asked by the stranger sitting next to him whether he had anything with him to counter an upset stomach (an occupational hazard of doing business in the Middle East, then if not now).  Kennedy religiously carried his "medicine bag," and from it he produced an antidote.  The stranger turned out to be a senior executive of UBS who discussed during their chat on the return flight UBS' desire to set up a London operation to deal with Eurobonds.  Cards were exchanged.   "UBS remains an extremely important client to this day."

Serendipity aside, the firm was becoming more self-reflective as an institution, and more aware of its place in the world and its internal cultural attributes.  Geoffrey Sammons, "whose close attention to recruitment shaped the nature of A&O through the 1970s" (when many of today's partners were coming on-board), put his philosophy this way:

"[The ideal A&O person is] someone with a good degree and the better it was, the better.  But t what really mattered was the personality.  I was clear we did not want just highly intellectual people coming into the firm. We wanted people who were intelligent but who could communicate."

Whether it was Sammons' recruiting efforts or the general economy (Thatcherite in the latter half of this period), the firm was prospering.  From 1976 to 1986 revenue grow from £3-million to £20-million and profits from £1-million to £8-million.   But reading between the lines, this good fortune strikes me as largely unplanned and uncontemplated, a wonderful example of being one of the prominent firms in one of the right places on the globe in what we now know was very much a right time.  

I could well be wrong—and I hereby invite any of those present at the time to correct the record forthwith—but if passive it was, that passivity would not last out the decade.

The late 1980s were famously the era of yuppies and Gordon Gekko, and the City exerted gravitational pull on the ambitious and the talented.  A&O was not exempt:  In one year, 3,000 trainees applied for 60 positions.  From 1983 to 1993, the volume of borrowing on international markets grew ten-fold.  Cross-border transactions in securities in the UK in 1990 was seven times the country's GDP.  Allen & Overy was in superb position to capitalize on cross-border transactions.

Capping this period was the October 27, 1986 "Big Bang" deregulating fixed commissions and allowing foreign companies into the Exchange.  The fallout in the legal world took an entirely different form:  The following year, Coward Chance and Clifford Turner merged to form Clifford Chance.  A&O was "forced out of its comfortable shell:"

"It was not that we were doing anything wrong professionally," recalls Chris Roberts, one of the 1985 group of partners, "It was just that Clifford Chance was suddenly getting all the attention."  [...] 

"Tony Herbert recalls:  "I remember being told that one week after the merger Freshfields had circulated a paper setting out their position on it, and someone asked, 'What are we doing about it?'  The fact of the matter was that we weren't doing anything about it.'"

But react A&O did, starting with creating a 14-member partnership committee charged with determining overall strategy, and following by beginning to hire its first non-lawyer C-level executives.  Most notable among these early hires was Ian Dinwiddie, brought in as director of finance from the merchant bank Guinness Mahon:

"'I remember my first talk with John Kennedy [the A&O partner] who said, 'We really want you to have authority: we're going to allow you to sign cheques up to £1,000 (at Guinness Mahon I think my limit was £50-million) and we want you to have the authority that when a partner comes in and says he wants to buy a new desk, you can say, no.'  That caused me to have a few doubts.'"

Be that as it may, Dinwiddie was among the first brought on board to respond to the firm's strong growth—doubling in size just between 1985 and 1990.  "As Angus Hewat cheerfully admitted to Legal Business magazine in 1991:  'I don't think anybody took much notice of administration.  Normally we resolved problems having a laugh and a drink about what amiable chaos we lived in.'"  This, it was clear, would no longer do.

As the firm grew internally, its external horizons grew as well.  Key was the fall of the Berlin Wall on November 10, 1989.  With extensive experience in privatization of formerly publicly owned entities in the UK during the Thatcher era, A&O rightly felt itself in a reasonably strong position to pursue privatization work behind the former Iron Curtain.

The only problem was:  The firm had no offices on the Continent, much less in Eastern Europe.  One of the A&O lawyers leading the charge to go international was Stephen Denyer, today International Development partner, and from 1997 to 2007 Regional Managing Partner for Europe, along with Michael Reynolds and Richard Rowland.  

But in 1989 Denyer had been a partner for all of two years and the primary obstacle to his argument that the firm needed to seriously internationalize was nothing less than management's continuing belief that A&O was a firm of English lawyers practicing English law, and under no circumstances would it be non-English lawyers practicing non-English law.  "Working within this limitation the Denyer finesse was to hire a local lawyer," the first being one in Poland, as a consultant "in association with Allen & Overy," and wait the 18 months or so it took the firm to come around to the notion that local lawyers might actually be required to fuel its growth abroad.

The key insight, and business development driver, of expansion into hitherto-unknown territories was that there were major companies there, which were successful and ambitious in terms of moving onto the world stage.  If A&O could get in on day one with local law credibility, they would be "tremendously well placed," as Denyer puts it, to develop work for those clients as they become more international and started to do bond issues, syndicated loans, and other financing issues under US or English law.

But those palmy prospects would be in the future; in the meantime, serious trouble had to be attended to in London. 

Bill Tudor John was the incoming managing partner in 1994 and "hardly had time to settle before being faced with a looming crisis."   For five months in a row, the firm was well below budget in billings; after another three months, it would be forced to borrow to meet cashflow.   An emergency review panel was convened to look at ways to cut costs, increase market share and, above all else, improve profitability.

Their findings were unsettling.  They asked for figures on how partners were performing—evidently a novel question—and learned, disturbingly, that some partners were earning 10 times more than others for the firm.  But putting individual partners' performance under the financial microscope was unheard of.   For years, the firm had been content to carry a partner or two who were plainly unproductive.  But times had now changed.

Thus was born "Project Alpha," whose raison d'etre, in a nutshell, was to put financial performance ahead of the traditional character of the partnership.  Because?  Only if the firm was successful could the professional and partnership ethos thrive.  As Bill Tudor John put it:  "Profits enable us to attract, motivate, and retain the best people, to invest in new offices, new technology, research and development training, to provide job security and a good career path for those who contribute to the business."    A list of the most poorly performing partners was drawn up.

The path from here to there was painful, of course.    Morale sank.  Partners avoided Bill Tudor John in the hallway.  Even productive partners were nervous and insecure.    Ultimately, five partners were excused from the firm, "with generous pay-offs," and others were informed they'd need to increase their productivity or face a similar end.  "Bruised but intact," the partnership continued.

Simultaneously with Project Alpha, the very texture of day to day life in the firm was being radically transformed.  Partners and associates alike began regularly billing late into the night and on weekends; by 1993 every lawyer had a computer; videoconferencing rooms were installed; mobile phones and laptops, and then BlackBerry's, followed.   We had come a ways from coal stoves.

In 1996 came another milestone:  Non-UK clients provided A&O with more of its revenue than UK clients.  The firm was truly international beyond doubt.  Just two years later revenue from non-UK clients would exceed 2/3rd's, the rapid international expansion made possible by something I've commented on here before on "Adam Smith, Esq.," namely the global exportability of Anglo-Saxon common law, with its phenomenal flexibility and mutability, able to accommodate a chattel conveyance last century and the tranches of a collateralized debt obligation now. 

So to what can we attribute the rise of A&O?

Surely, being in the right place at the right time—and with the right connections, starting with King Edward VIII—is part of it.  But, so in the right place at the right time were many solicitors in the City in the 1930's, the 1940's, the 1960's, and the 1990's.  Opportunity was there to be grasped, one might say in retrospect, but who actually grasped it? 

Political and military history may be written by the winners, as the famous apercu has it, but economic history is written by winners of a different sort—firms which, faced with marketplace conditions, opportunities, risks, and pitfalls equally plain or obscure to see for all, nonetheless made the combination of prescient, fortunate, and skilled choices that would distinguish them down the years. 

In the decade since the Big Bang, the number of partners tripled, staff quadrupled, and revenue more than octupled. 

Volume 1 of the history of Allen & Overy ends with some pregnant questions:

"Allen & Overy, by constitution a partnership, has become the equivalent in size to a mid-sized public company.  That statement of itself raises several important questions about the future direction of the firm. Can it continue to expand at the same rate as it has done over the past decade?  Can it continue to expand while maintaining the same absolute standards of quality?  More pertinently, can Allen & Overy possibly hope to maintain its partnership structure and ethos, so carefully nurtured over more than six decades, as it moves into the new century?

"The line between openness and unmanageability remains a fine one.  [...]

"From the vantage point of 1st January, 1930, the founders of Allen & Overy could not possibly have predicted what the firm would look like 70 years later.  Indeed, the extent of their time frame is unlikely to have been further than the decade stretching ahead of them."

Can we see more than ten years ahead for our firms?

To be continued...

The History of Allen & Overy: 1930 - 1971

A couple of weeks ago, the two volume history of the firm of Allen & Overy arrived FedEx from Europe.  I had just recently learned that the books existed, and the firm was kind enough to send me them when I expressed interest.  When they arrived, they were not remotely what I had expected.

First of all, the two books could not be more different, in format and typography, tone of voice, subject matter and organization, or even print quality (uniformly high, I hasten to add, but not remotely similar otherwise). 

Volume 1 (Allen & Overy The Firm 1930 - 1998, Allen & Overy, London, 1999), written by Humphrey Keenlyside, an alumnus of A&O, covers the years from the founding of the firm in 1930 through 1998, and resembles a classic law firm history with a greyish-silver cover, thick and heavy stock, and a standard chronological organization.

Volume 2 (A&O at 75, Allen & Overy, London, 2005), is a different beast entirely.  In format it's "landscape" not "portrait;" it's softbound not hardbound; it's printed in full, glorious, high-gloss color, with abstract commissioned drawings liberally sprinkled throughout; it covers no particular chronological period although it brings the story forward in time to 2005 (the firm's 75th Anniversary); and it's organized geographically, by office, rather than chronologically or by practice area or client. 

As Guy Beringer puts it in his foreword, "Rather than simply update the existing history of Allen & Overy, I thought it would be appropriate to focus on the single most important change that has happened to the firm -- our internationalisation."

Together, the two volumes tell what I believe is a story worth summarizing here in the pages of "Adam Smith, Esq.," for what it has to say about fortuity and foresight, luck and preparedness, vision and blinkered sight, and building on strength and recovering from disasters.

The history is voluminous enough that I will report it in three installments. Here is the first.

A&O opened its doors on a remarkably inauspicious day, January 1, 1930, at the start of what we now know was to be the Great Depression.  And although it seems alien to our current thinking, recall that Europe had still not psychically or physically recovered from World War I; the Continent, in particular, was still rebuilding.  Fortunately for A&O, George Allen and Tom Overy came from their previous firm, Roney & Co.—which they left because they were generating a large portion of the billings and receiving a small portion of the compensation—with a number of good clients that would get the firm on its feet. 

Conditions were, by today's lights, primitive.  The lift to the office "wheezed," heat, such as it was, came from coal, and transporting client files from Roney to the new global headquarters of A&O was accomplished in an overstuffed cab with Allen and Overy doing all they could to keep the piles from careening off onto the pavement.  (One imagines the same transfer of documents could be accomplished today through one or two zipped email attachments surreptitiously to oneself @googlemail.com.)

The history calls George and Tom "The Odd Couple," and indeed they seem to have been.  Allen "was exceptionally handsome, a dark, somber face offset by strong piercing eyes" and with an, austere, precise, scrupulously tidy military bearing.  Overy, by contrast, was all of 5'3" "and, if anything, gave the impression of being smaller, with the sort of face that scares small children."    In the first of several remarkably candid notes, the history states flatly that "it is quite possible that they were not even particularly good friends."  But share a commitment to the development of the firm they did.

The firm's first big break came when King Edward VIII abdicated the throne in December 1936 in order to marry Wallis Simpson; George Allen was the King's solicitor and arguably his key advisor during the crisis, spending the climactic ten days in almost continual close touch with his royal client.  Allen's gift for succinctness showed itself at a critical moment when the King, on the phone with Wallis Simpson (who was in France), covered the phone with his hand and asked Allen what he should say to summarize the situation to her.  Allen wrote, and the King relayed, "The only conditions on which I can stay here are if I renounce you for all time."

Although sensationally high-profile matters such as that undoubtedly helped the firm's profile, it's worth pausing for a moment to note that all is relative compared to the A&O we are familiar with today. 

After proclaiming that "the firm picked up quickly once the war [WWII] finished," it immediately follows with numbers which would be less than underwhelming today:  Total revenue for the year 1947 was £100,000, and Allen and Overy each earned nearly £12,000, which, we are reassured, was "the equivalent of £275,000 in today's money."

But if the firm was doing well, something I can only describe as human tragedy was in the offing.  In the summer of 1951, George Allen and Tom Overy decided to consult with their accountants to determine what they thought would be a simple matter:  The terms upon which they would retire.

The key issue was how the ongoing partnership would be able to repay the capital that Allen and Overy had contributed, together with the additional goodwill generated as a return on their investment.  The sticking point came to be how long the partnership would have to make good on the repayment.  The accountant initially suggested at three-year period, which Allen endorsed on the ground that even young partners were enjoying a high income by virtue of being partners.  Overy, on the other hand, favored giving the young partners longer to meet their sizable obligation.

Time was not on their side.

The partnership deed was due to be renewed January 1, 1952, and relations between Allen and Overy "became increasingly acrimonious," to the point that they were communicating only by written notes.  On December 31, 1951, they finally agreed on terms.  But the story was not ended. 

Early in 1952, as the junior partners began to realize the burden they had unwittingly assumed, they began lobbying to extend the repayment period from 3 years to 7.  Overy sympathized and took their side, but Allen "detected a conspiracy" and threatened to resign from the partnership altogether.  He even refused to attend a celebratory dinner with the partnership planned for the occasion of his knighthood by Queen Elizabeth in June 1952.   In June 1953 he formally retired from the firm.

George Allen in a formal portrait

And alas, the strain Overy had gone through began to take its toll as the decade continued, and "he began behaving strangely and unpredictably."  So long as this could be cabined within the four walls of the firm, it was manageable if awkward.  But the last straw was when he appeared unannounced one day at the offices of Morgan Grenfell (a client) demanding to be taken to lunch.  A senior A&O partner was summoned to pick him up, and shortly afterwards he would be committed.

As the book candidly puts it, "It is not clear whether Tom  Overy suffered a full-blown nervous breakdown or whether it was a temporary mental illness," but in November 1960 he was hospitalized and never again worked at the firm.  He died 13 years later at 80.

Tom Overy (undated photo)

In the early 1960's Allen & Overy seemed to be humming.  A 1962 book, Anatomy of Britain, identified it as one of the top four firms in the City, the other three being Linklaters & Paines, Slaughter and May, and Freshfields.   Customs of that time—well within the lifetime of many followers of "Adam Smith, Esq."—are as quaint and beguiling as they are unimaginable today.  For example, following the annual Christmas partners' lunch, all would proceed to Locks the Hatters in St James's Street to be sized and fitted for a new bowler for the coming year.

At the offices, each partner—in the absence of his own secretary, which of course all had—could buzz down to the general office where a light would blink next to his nameplate, prompting someone to rush to his office.  We are told that "if it was 4:00 pm and it was Tony Overy's buzzer going, the office boys would know the order that was coming:  a packet of DuMaurier cigarettes from the tobacconist opposite.  Years later, the instruction would more probably be for a visit to the off-licence."  [The "off-licence" is a liquor store, and Tony was Tom's son.  He had been made partner as of right under the original 1930 articles of partnership, which entitled George and Tom each to anoint one son as a partner.]

After Overy's departure, the role of "senior partner" was assumed by a triumvirate of Godfrey Morley, Willie Martin, and Jim Thomson, but "in reality it was Thomson who called the shots."  By all accounts he was a superb lawyer—some have said his reputation was as the finest commercial lawyer in the City—but it was his drive and ambition that gave him the impact he would have. 

"He was fiercely ambitious, not just for himself but also for the firm.  He made it his business to know everything that was going on.  No one, from senior partners down, escaped his attention.  He would call up files opened in the name of other partners without telling the partner responsible.  Whenever he passed anyone in the corridor he would shoot them a question about how a particular matter was being dealt with."

Thomson's leadership of A&O came at a time when the profession was undergoing a sea change whose repercussions are still being felt today:  It was no longer possible or desirable to be a generalist.  An update to The Anatomy of Britain published in 1965 read:

"'The new kind of lawyer is a more adaptable and positive person; he is staking his claim in the new corporate world, and prepared to deal with any business, including tax, pensions, and hire purchase, that his client might have.'  Substitute the words 'derivatives,' 'securitization,' and 'mergers' for those last three examples and that same sentence could just as easily be written today."

While the firm had made great strides during the  '60's, several large shocks hit it as the '70's began.  In the spring of 1970 John New, one of the new generation of leading lights, died of a heart attack at age 42.  He was the first at A&O to pursue the new field of intellectual property (and to realize its coming centrality to a sophisticated practice), and his death "left a huge hole."  In 1971, Robin Broadley, a partner since 1964, left to go to Barings.  He had been indispensable in developing the firm's banking work.

But the worst happened in the spring of 1971.  Thomson was in South Africa on business with a client.  On July 8, 1971, the car he was riding in to the airport for the return flight to London was forced off the road by a swerving driver; it hit a barrier and flipped over.  Thomson died on the way to the hospital.  Each of the other three people in the car was seriously injured, but ultimately survived.

The firm was "devastated.  Everyone went into a state of shock and a numbness spread throughout.  Allen & Overy revolved around Jim Thomson."  As the chairman of a major bank client put it:  "That will be the end of Allen & Overy."

Jim Thomson (undated photo)

To be continued....

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Management

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

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

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

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

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

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

IT

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

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

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

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

Human Resources

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

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

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

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

Client Relations

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

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

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

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

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

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

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

If It's In the ABA Journal, It Must Be True

The current issue of the ABA Journal (July 2007) has an article recapping the debate on the likelihood and advisability of publicly-traded law firms in the United States.  Some of the more notable positions on the topic are:

• “It’s hard to say anything is inevitable, but throughout the history of the law, the rules have changed when economic pressure is applied,” says Ronald Rotunda, a law professor at George Mason University.
• “I know I wouldn’t invest in a law firm. I think it’s so dependent on the quality of partners that it would be a risky investment,” says Robert E. Wilson, man­aging partner with 450-lawyer Haynes and Boone in Dallas. “But I think it could be great for the profession, bringing a more entrepreneurial attitude.”
• “Our tradition is so opposed to [nonlawyer ownership] that it’s hard to see,” says William Hodes, professor of law emeritus at Indiana University and a solo practitioner in Indianapolis. “All our rules are against it.”
• “You couldn’t have more incentive to maximize profits than you do now,” says Bruce MacEwen, a former corporate and securities attorney in New York City and publisher of the Web log Adam Smith, Esq.
  
  “If you were a publicly held law firm, the stupidest thing you could do would be to put other interests ahead of your clients, because without your clients, you’ve got nothing,” MacEwen says. [...] 
  
  “I think if the rule [against equity law firms] ever had any validity, it’s been overtaken by events,” MacEwen says. “We have perfectly adequate rules against conflict of interest, fraud and malpractice.”

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