Adam Smith, Esq.

About a week ago, I wrote about the American Lawyer's release of its annual "Diversity Scorecard" and pointed out what I thought were some shortcomings in its analytic technique.

 whether (Theory A) something nefarious and troubling is going on here, or whether (Theory B) the macroeconomic environment was disproportionately harsh on associates in general and junior associates in particular--and whether the posited over-representation of minorities in those ranks simply, but innocently, took its toll.

Since the polls have now been open about a week, I thought it worth returning to report on the results.  And, by about a 90-10 ratio, you think the macroeconomic environment is behind the numbers.

Unfortunately, I've seen, up close and personal, law firms that suffered serious setbacks-or even failed outright-due to what could only be called "failure of succession planning."

What brings this to top-of-mind prominence is of course everyone's obsessive issue namely The Great Reset we're still experiencing, with an environment unlike anything current managing partners and senior leaders have ever seen before. If your firm is soon to be looking towards a new firm chair (by clicking of the term limitation clock or otherwise), you would be extremely well advised to think about succession planning.

A word about term limits: First, I'm of mixed mind about them. Second, I'm against them. Yes, I see and understand the attraction of wanting an institutionalized way to instill fresh blood, and sclerosis is an organization-killer second to almost no other. I have also seen more than one firm blessed by a gifted leader who had to step down after the allotted eight (or whatever) years, only to be succeeded by a relatively inept compromise-choice who at best oversaw a period of treading water for the firm and who at worst led to its actual implosion (no kidding).

But if the incumbent is doing a great job, knows how to do it, remains fresh and energized and challenged by the job, and finally and most importantly continues to maintain the good will and enthusiastic endorsement of the partnership, why stop a good run short? Ultimately, the cure for a super-annuated leader is for someone to challenge them and win. When the time has come, my prediction is reliably that it won't be that hard.

Back to succession planning.

McKinsey has now stoutly weighed in on this evergreen topic, hanging their story on what journalists like to call a "peg":  Ken Lewis' announcement that he would be stepping down as CEO of Bank of America, with no remote plans for an actual successor in sight. And if you're feeling defensive right around now that your firm has no concrete succession plans in place, McKinsey reports that while 84% of directors believe such planning is more important than ever, only half actually have a plan in place.

Here's the diagnosis and, to some extent, the prescription:

So why doesn't succession planning get the attention it deserves? For CEOs, spotting the talent that will eventually replace them can be an unwelcome intimation of executive mortality. For boards, bringing up the succession can feel awkward when things are going well. When they are not, it can feel like a threat. But these are excuses, and not particularly good ones.

When CEO succession is a regular, structured process that forms part of the board's agenda, it becomes a matter of routine, no more sinister than the annual compensation review. In fact, boards should view CEO succession as a strategic process intimately related to corporate performance. To that end, succession planning should include not only the CEO's job but also all mission-critical positions in the organization.

Now, you don't have a "board," but presumably you have an Executive Committee or the functional equivalent. And de-fanging the process by extending it to include all "C-suite" executives and practice group leaders should also help.

The next question is: What are you looking for?

Let's start with your firm's strategy.

You need someone, to state the obvious, who buys into the espoused strategy. With a vengeance: Lip service won't cut it. And you might even want to think about bringing in an outsider for a dispassionate view:

The board and the CEO must therefore agree on the company's future strategy and the competencies it will require and then agree on how they will be assessed and evaluated in the candidate selection process. If succession planning reveals a fundamental misalignment within the senior leadership team, that discovery can be a blessing in disguise if it happens early on.

One Fortune 500 company, for example, engaged an independent third party to interview each of its directors as part of the succession process. It learned that there were diverse opinions among the directors on whether the company should continue to pursue an aggressive acquisition strategy, which had been the primary vehicle for growth, or focus during the next few years on integrating the most recent acquisitions. This finding resulted in an open discussion between the board and the incumbent CEO. In the end, they jointly agreed that while a near-term focus on integration was critical, the company also needed a measured M&A strategy for future growth, and therefore a CEO with proven competence in M&A.

The McKinsey piece goes on to describe whether it's optimal to only look inside the firm (never!) or to explore another option altogether:

The second component requires looking outside the company to map and benchmark the talent market. How do our people compare? Who might be available? Companies that fail to ask these questions can become myopic, thinking that they have the talent they need when they don't.

The day a law firm does this, of course, will be the day we all know that we have truly grown up as a professionally managed and sophisticated industry. Or else we will have lost our souls. Uncharacteristically, I remain on the fence about that. But those of you following at home can think about it.

Lastly, how about a dose of reality about how this is all really done today? And how would that be? By process of elimination, of course. Our next Managing Partner needs to be:

• Not too young and not too old;
• From a significant practice area in the firm;
• From a major office in the firm, if not historical headquarters itself;
• Exceptionally well regarded as a practitioner;
• With a high record of billable hours, origination credits, and business generation;
• Who has mentored some associates who have become successful;
• And who doesn't have significant cohorts of the firm aligned defiantly against him/her.

Once you eliminate folks not able to slip through all of those gates, you generally find yourself with a very short list indeed. Actually, it often has just one name on it.

Scientific it ain't, but that seems to be how we typically do this.

Could we do it better?

Need we do it better?

The next few years will test firms, I submit, as they have never been tested before in living memory.

Succession planning deserves a bit more respect. Just a thought.

This weekend I received by courier from the UK the just-released report The Next Wave: Globalization After the Crisis, published by Jomati Consultants LLP, the London-based affiliate of Adam Smith, Esq.  If you don't know Jomati, you should:  Based in the City of London, it's headed by Tony Williams, former managing partner of Clifford Chance and then of Andersen Legal.  (You won't be surprised to hear that I count Tony a good friend.)

When is a story not a story? (This is not a trick question.)

Well, when, for example, it reports on a development so small as to be trivial--but inflates its import and meaning greatly out of proportion.

Or when it is premised on statistical analysis but doesn't pursue where the data might lead in any analytically sophisticated or helpful way.

Or when the environment at large is changing in such profound and unprecedented ways that one would be craven or naive not to suspect that the "key finding" under discussion might not merely be an innocent and entirely unintended piece of collateral damage.

We now have a trifecta, in The American Lawyer's annual Diveristy Scorecard 2010

which counts attorneys of color in the U.S. offices of some 200 big firms. In each of the previous nine years that we've compiled the Scorecard, the percentage of minority attorneys at all participating firms increased, rising from less than 10 percent in 2000 to 13.9 percent in 2008. In 2009, for the first time, that proportion dipped, to 13.4 percent.

The drop in law firm diversity may be small, but it's important.

How significant can this be? If you compare 13.9% to 13.4%, the change is less than a 5% proportionate decrease. Yet according to the very same story, "overall, big firms shed 6% of their attorneys [and] 9% of their minority lawyers." This kind of statistical "what's going on here?" cries out for deeper analysis.

Unfortunately, we don't really get that.

We do, however, learn that there are other reasons for concern:

Diversity advocates call the drop a warning sign that shouldn't be ignored. "I think [that] when you're looking at any numbers of a population you're trying to increase, and you see a decrease, that's significant," says Venu Gupta, executive director of the Chicago Committee on Minorities in Large Law Firms. "I guess I hoped we wouldn't be going backward," echoes Fred Alvarez, chair of the American Bar Association Commission on Racial and Ethnic Diversity in the Profession and a Wilson Sonsini Goodrich & Rosati partner.

The decrease in minority head count confirms a concern voiced by many in the legal industry: that the massive law firm layoffs of 2008 and 2009 would hit minority lawyers especially hard. "There were fears when the recession began that these folks would be disproportionately impacted, and it appears to be the case," says Thomas Sager, general counsel of E.I. du Pont de Nemours and Company and a longtime diversity champion. Sager and other observers fear that this year's falloff could be the start of a new downward trend, given a climate of slower law firm hiring, fewer African American law school students, and so-called stealth layoffs. [...]

Consultant Arin Reeves of The Athens Group says minority associates suffer when work dries up: "Your ability to meet hours is reflective of whether or not you've been invested in."

Now, not to gainsay what's being reported here, or its potential import if the cited trend continues for the next several years. The biggest news (which is in the lead paragraph, as it should be) is that for the first time in the 10 years that TAL has been conducting the Diversity Scorecard, there's an overall drop in percentage of minority attorneys. When a trend goes on for as long as it's been measured and then reverses, that is indeed news.

My reservation is less with the headline and more with the rather alarmist tones of concern excerpted above,which give the story its punch and its juice.

The problem is that the deeper you dig, the less there there is there.

How so? In trying to analyze what might be behind the numbers, I found that that last remark (above) from Arin Reeves provided the beginning of a clue. The clue lies in the focus on associates. Here's another bit of evidence:

For a long time, the way that law firms beefed up their diversity numbers was really to have a lot of diverse associates in the first-and second-year classes," says Gupta from the Chicago Committee on Minorities. If a firm didn't hold on to its minority associates--and many didn't--it was relatively easy, Gupta says, to hire more in the next recruiting season.

But that was in a so-called normal economy. These days, firms can't quickly replace the minority attorneys they lose through voluntary or involuntary attrition. Reduced recruiting is another factor that is likely contributing to the decline in minority attorneys.

In other words, firms' diversity scores disproportionately rely on their associate ranks.

So let's take a look.

Here's the data:

	Change in Non-Partners	Change in Partners
Overall Total	-10%	+1%
Black	-16%	not reported
Asian	-11%	+6%
Hispanic	-13%	+3%
White	not reported	not reported

As I look at this, I see a much more nuanced--and optimistic--story.

Overall, to state the obvious, serious cuts came in the ranks of associates and non-equity partners. (Caveat: The story doesn't specify whether "partners" as used by the author means equity or both equity and non-equity, but since industry-wide we've seen no meaningful growth in the ranks of non-equities in the past year, I'll assume it refers to equity only.)

But (second big caveat--given the data we are provided) minorities did better than average in growing their representation among the partnerships. How, pray tell, is this bad news on the diversity front? It's possible--not that it makes for an alarming story, of course, but it's possible--to interpret this data as implying that the long hoped-for ascension of minorities into the partnership ranks is actually taking place.

Finally, the missing statistical analysis: The only way to really tell whether the disproportionate layoffs of non-partners among minorities (see table above) has resulted from firms' using the economic downdraft to try to conceal what in their dark and secretive hearts is prejudice pure and simple--highly implausible, in my book--is to separately break out the demographics of lawyers laid off for economic reasons, which the article says is "a project beyond the scope of this survey."

More's the pity.

Because that's the only way to tell whether (Theory A) something nefarious and troubling is going on here, or whether (Theory B) the macroeconomic environment was disproportionately harsh on associates in general and junior associates in particular--and whether the posited over-representation of minorities in those ranks simply, but innocently, took its toll.

Care to vote?

Earnings Season is now in full throat, and we're beginning to see a remarkably consistent pattern emerge:

• Revenues essentially flat to down 10%
• Profits flat to slightly down-but PPP flat or even up a bit

I generalize, of course.

But here is some of the evidence (these are randomly selected from more recent releases):

	Revenue	Net Profits	RPL	PPP
Arnold & Porter	+2%	+12.3%	-1.1%	+1%
Bracewell & Giuliani	+<1%	-7.7%	+4.2%	+10.2%
Dechert	-12.6%	n/a	n/a	-8.6%
Fulbright & Jaworski	-7.5%	-6%	-6.3%	-5.2%
Holland & Knight	-10%	flat	-1%	+2.6%
Howrey	-16.3%	-28.3%	-19.2%	-34.9%
Kirkland & Ellis	+2%	+16%	-3.6%	+1%
Mayer Brown	-14%	-19%	-7%	-4%
Patton Boggs	-2%	n/a	-7.4%	+3.7%
Paul Hastings	-9.8%	n/a	+4.4%	-1.4%
Vinson & Elkins	-4.8%	+5.5%	-6.2%	-3.1%

I could go on, but you get the idea. And again, I emphasize that these are random names, selected, frankly, from the latest data I could readily put my hands on. I would like to think a random sample implies it might be statistically representative of a larger universe.

So what do we see?

The first column, revenue, ranges from essentially flat (certainly inflation-adjusted flat) to rather seriously down. This is of course the pole star that management must manage to. It's a rigid, unyielding number, particularly in cash-basis accounting businesses, from which there is no escape in terms of everything else you can try to manage on the expense side of the income statement. More on the implications of this in a moment.

"Net profits," the second column, are pretty much all over the place, but I'm not sure how much information that metric contains, so this doesn't particularly alarm or delight me.

When it comes to RPL, however, faithful readers will know that this is one of my favorite all-purpose law firm "performance" measures. Why? First of all, it's hard to fudge either the numerator or the denominator. (Sure, you can play games with FTE's and so forth, but frankly most firms aren't that focused on this metric to go to the bother.) So what's the RPL story?

To the extent it's disclosed, or calculable, I view RPL as something of a rough proxy for "quality of practice." By that I simply mean that the more clients are willing to pay you, on average, for a lawyer-year's worth of time from your firm, the higher the value clients place on what you do for them. At the margins and in the short run, this may be influenced by tweaking hourly rates or recognition percentages, but over the long run and in extremely revealing ways, the trend of your firm's RPL (vis-a-vis your peer group, as always--discipline, people!), be it up or down or sideways, tells an enormously important and almost incontrovertible story about the trajectory of your practice. You can be going up-market, down-market, or staying-market, but RPL, over time, won't lie.

So again, what does RPL reveal? Pretty simply this: It was a tough year. If you eliminate the highest and the lowest changes in RPL, the remaining cross-section looks like it's down in the middle single digit percentages. The sky is not falling, but people clearly aren't as busy, or aren't as busy on valuable matters, as the previous year. But the most important part of that sentence is the introductory clause: We're not in dire straits.

Finally, of course, column #4, the sexiest column of the all. Permit me to suggest that the PPP story is the second simplest story to tell, after the gross revenue story. Again, eliminating the highest and the lowest to normalize against outliers, the story is one of essentially flat year over year PPP.

---

The two key numbers come back to this: Revenue flat to seriously down, PPP flat to very mildly down.

Here's where I think law firm management deserves credit (again, generalizing).

Most of corporate America would be delighted to have emerged from 2009, or any difficult period, with revenue decidedly down but profits marginally up. It takes turning the ship quickly. And here's the good news from our industry: We did just that.

If you look at any of the charts tracking layoffs during 2009 (if you haven't, that's OK, I have so you don't have to), more than half the year's total layoffs took place in the first 3 months of the year. In other words, management reacted quickly.

Remember that September 2008 was the carpet-bombing month of damages to the financial system: Not just the Lehman bankruptcy, but the WaMu takeover, largest in history by the FDIC, the death of investment banks as we know them, the BofA/Merrill takeover, the $85-billion AIG investment, the Fannie Mae/Freddie Mac implosions, and even more-all in a single 19 days.

For firms' management, widely if not across the board, to have responded with historically drastic measures one short quarter later is, to me, nothing short of surprising. Management deserves more credit than it may have gotten.

As an industry, we did respond with alacrity. Kudos where kudos are due.

---

Now, two last thoughts.

First, the human toll of layoffs.

Putting aside partners who were overdue to be "spoken to," non-equity partners who were in place only because of a cowardly preference by their practice group leaders for avoiding awkward conversations, associates who long since "checked out" psychologically and in terms of commitment, and staff who might have come to view their jobs as sinecures--all of whom needed to be excused for the health of the firm overall, and overdue much of it was--there are still the legions of people who were collateral damage. People who were doing their best, even if it wasn't good enough. My heart goes out to them, and I've known more than a few.

But second, the Darwinian logic of the marketplace that compels firms to sustain PPP in the face of the most gruesome downturn in any of our careers is not cavalier and not selfish.

Why is PPP so important?

Because it is nothing less than the lifeblood, in today's currency, of firms' ability to compete for talent in the market. (Whether tomorrow could look different is a story for another day.)

If management allows PPP to take a serious hit in today's hyper-mobile environment, they may find that all of a sudden there are fewer partners and no profits. Lights out. And that, of course, is when the collateral damage to the secretaries with 20 years' service and a learning-disabled child at home hits you between the eyes.

Jack ("Neutron Jack") Welch famously said that his 20/70/10 forced-ranking of stars, the solid bench, and the ankle weights who had to be cut off, was not inhumane. It was the only way to provide a healthy and ever-renewing organizational environment going forward in which the stars and the solid citizens would not be tethered to the subpar and the serving-time.

So looking ahead to 2010, take heart. By and large we did what we had to do at the start of 2009, and the numbers, which overall and in the long run don't lie, are starting to report that story.

The Law Society of England & Wales recently published Nick Jarrett-Kerr's Strategy for Law Firms: After the Legal Services Act, and Nick was kind enough to send me a copy for my perusal. (Disclosure: I've known Nick for years, although we have never formally worked together.)

The contents are wide-ranging, as you can see from these chapter titles:

1. The new world;
2. Understanding your assets;
3. Harnessing intellectual capital: strategies for optimal law firm infrastructures;
4. Understanding positioning and competitive advantage;
5.Developing a value-added strategy;
6. Alternative Business Structures as a tool to implement strategy;
7. Long term funding of law firms;
8. Mergers and acquisitions;
9. Law firm valuation (Michael Roch);
10. Remuneration revisited;
11. Governance, leadership and management in the changing law firm environment;
12. Summary and Prospects.

Although there's been less coverage of the Legal Services Act of late than when it was first being debated and then adopted in the UK (it actually only applies to firms based in England and Wales), I attribute that less to diminishing interest in the LSA than to the simpler reality that once the fireworks of the debate over adoption had concluded, there is little more to say until we see it kick into action (pending adoption of implementing regulations, probably in the next 12--18 months).

But if you feel the urge to prepare in advance, Nick's book will arm you better than anything published so far.

First, here's a bit more on the broad range of what it covers, and then we'll get to the heart of the matter: What Nick thinks that the "Alternative Business Structures" enabled by the Legal Services Act might look like. From the Law Society publications page:

Strategy for Law Firms guides firms through the strategic options available to them and suggests how they might position themselves to succeed in the market.

The book provides a practical approach that is underpinned by sound strategic and academic principles. The author offers insight, drawn from his vast experience of the legal market, on a range of topics including:

• harnessing a firm's intangible resources and capabilities
• competitive positioning
• the creation of a value added strategic plan
• Alternative Business Structures as a tool to implement strategy
• mergers
• law firm funding and valuations, including external funding
• governance
• profit sharing.

The author has created a new framework with which to analyse and assess your firm's position in the market, and identifies and explains 15 possible models of ABS under the new rules.

Although primarily aimed at law firms in the UK, the book is relevant to legal firms around the world.

Of greatest interest to those of us waiting with baited breath to see the fallout when the LSA takes effect is Nick's proposed taxonomy of "Alternative Business Structures:" What, in other words, he theorizes will arise in the next few years. It's fascinating (see Chapter 6 in general, pp. 89--103).

First, Nick posits three reasons a law firm might entertain launching an ABS:

• A strategy for growth and/or diversification may require more capital than the partners care to or could raise internally.
• They may perceive a need to protect or increase market share by becoming part of a bigger brand.
• They may hope that an ABS will give them a vehicle for recognizing the value of capital they implicitly own in the firm.

He then follows with his taxonomy, which is worth elucidating in some detail:

• Business forms mostly owned by lawyers:
  
  
  • Traditional law firms: There is little real doubt this model will continue, as the attraction of minimal non-lawyer involvement in firm governance is altogether real.
    
    
  • Marketing umbrellas: Here Nick envisions a sort of franchise model where operational decisions remain firmly in the hands of the extant partnership but marketing and branding support is provided by a centralized operation. It's hard to imagine this succeeding, however, without some quality standards being imposed so the hope of minimal operational involvement may have a vanishing half-life.
    
    
  • The full franchise: This builds upon #2 by adding centralized guidance and specifications for systems, processes, and standards that franchisees would be obligated to meet or face expulsion. The benefit to the firm joining the franchise is presumably increased exposure and being able to borrow from the halo of assured-quality granted by the franchise name; the cost is typically an initiation fee and a monthly management fee thereafter.
    
    
  • The roll-up. In this familiar technique, investors--who may be outsiders such as private equity or venture funds or who may be industry incumbents seeking growth--buy a series of firms and re-brand them as their own, potentially consolidating significant portions of an industry in the process. To some extent, we have already seen this. If you doubt me, simply look at the New York or London markets: You will have a hard time finding small, attractive, independent law firms still standing. Amost all have been swallowed by out of town firms or indigenous firms bent on growth. (Parentheticaly, this appears to be the primary motivation for Slater & Gordon, the Australian firm which launched its famous first-of-a-kind IPO two years ago.)
    
    
  • The virtual firm: We have already seen examples of this type of firm emerge and given the relentless march of technology--which excels at enabling collaboration at a distance--we will surely see more. One notable entrant that's up and running is Axiom Legal, which provides on-demand teams of lawyers with premium pedigrees to clients without heavy investment in office space or infrastructure.
    
    
  • Legal multi-disciplinary practices: These got an undeserved and unfair black eye about a decade ago when they were seriously proposed here in the US and strangled in their crib by a combination of the ABA's lobbying "FUD" (fear, uncertainty, and doubt) and the untimely implosion of Andersen Legal, which seemed to prove their inherent risks--although, of course, it proved no such thing.
    
    
• Business forms mainly owned externally:
  
  
  • Integrated MDP's: These would combine a division offering legal services with other divisions offering allied service, such as investment or tax advice, real estate brokering, accounting, and even garden-variety investment banking services. The putative rationale is that clients would appreciate one-stop shopping, but as we've seen over the past decade in the experience of financial "supermarkets," the best that can be said about that model is: Unproven. Indeed, Nick admits that it "could prove to be a regulatory and liensing nightmare as the various regulatory bodies for the different professions involved tussle for supremacy."
    
    
  • Externally financed growth: This is probably the classic vision of firms contemplating outside "sugar daddies" who would come in as minority owners, contribute substantial capital, and not demand a controlling or even important voice in management. The concept is that private equity investors (say) would be willing to take relatively passive roles. Don't count on it. In fact, assume that serious private equity investors will demand majority control, period.
    
    
  • Branded conglomerates: This model starts from the reality that the boundaries of what constitutes "legal advice" are porous. What about tax advice from accountants? M&A advice from investment bankers? For that matter, mortgage or real estate investment advice from real estate brokers? The structure envisioned here is a panoply of more or less related services of which classic legal advice is only one, all operating under a single roof and brand name. A logical place to acquire the legal services component of such a conglomerate would, of course, be to buy an existing law firm.
    
    
  • Law Firm, Inc.: The classic law firm IPO, floating itself on the market. Nick, and I, see very few firms going for this option, and probably almost no firms employing people who might be reading this piece right now. But it remains a sexy option, and doubtless some of the undaunted or (if you prefer) the naive and self-aggrandizing, will try it. All I can say is, hold on to your seats.
    
    
  • The integrated legal network: A hub and spoke model where a centralized provider of back office operations and administrative services would feed subsidiaries (the spokes) with cost-effective services benefiting from economies of scale, while allowing each "independent" firm to operate on its own. Of course, independence is here in the eye of the beholder, and without doubt standardized quality control and other relatively intrusive measures would be imposed. It's hard to envision how any non-commodity law firm would find this feudal kingdom an attractive prospect, but for smaller firms honestly recognizing a shortage of pure managerial talent, it could serve a valuable role.
    
    
• Fringe and other models:
  
  
  • Online firms: My friend Richard Susskind has recently outlined what this creature might look like in his The End of Lawyers? In his vision, the future (I should say, and Richard would say, a future) sees a confluence of disruptive technologies providing automated legal services including document assembly, baseline advice, audits, or simple updates on topics of interest to subscribers.
    
    
  • Not-for-profits: Not a "business" model, at all, in the eyes of born-in-the-bone capitalists, but possibly viable for firms that are willing to pay clients enough to cover out of pocket expenses and able to recruit professionals enlisted in the vision of providing services to their worthy target market.
    
    
  • In-house options: Who's to say that in-house departments couldn't decide to offer their industry-specific expertise outside the walls of their corporation? Although the corporation might not see it as a "core competence" (it's not), if it were viewed as free incremental revenue for a resource that had to be maintained in any event, who's to object? Whether they'd be viewed as serious competitors to dedicated private law firms is another question. The more important question, in my mind, is why a corporation would provide top-notch, or even adequate, industry-specific legal advice to other firms that almost by hypothesis are direct competitors? Nick suggests this idea, but I don't know how serious he is. I wouldn't be.

Nick concludes with four predictions, only one of which I will share with you. For the rest, you need to buy the book. The one? "Pressures on margins will intensify.'

If you want to have intelligent plans for dealing with that prediction, not to mention the other three, perhaps your law firm needs a strategy.

Do you occasionally despair of changing the status quo, no matter how irrational it has exposed itself to be, simply because of the vast inertia associated with "the way it is," not to mention the vehemently self-protective behavior of any organization whose importance would be diminished--or, quelle horreur, whose very reason for being would be destroyed--by a move to a new reality?

First of all, despair is a remarkably unproductive approach to most problems.  An optimist at heart, I resist succumbing at all costs, regardless of the odds.

Be that as it may,  I believe the odds have just shifted--dramatically--in favor of ringing the death knell for what has become a toxic, market-poisoning, and increasingly archaic institution:  One which may be a walking antitrust violation to boot.  That would be?

NALP.

Here's how the stars are aligning.

In late December of last year, I decided to write about the defects and vices inherent in the NALP-dictated law student hiring process.  Most of you presumably have not seen my column on this topic, since it appeared in the Adam Smith, Esq. monthly subscriber-only newsletter. 

[If you're wondering what our monthly subscriber-only newsletter is all about, it's quite simple:

The newsletter, distributed by email monthly and archived permanently online at a password-protected site, contains material which has not appeared on this site, the Adam Smith, Esq. online publication, which of course remains free.  By contrast, the newsletter's premium content includes several articles each month which have not been published here and will not be published here.  Annual subscriptions are available at modest rates, including rates for individuals and firms of various sizes.  Firm-wide subscriptions are quite economical on a per capita basis.  You can subscribe here]

Since my views on NALP have not materially changed in the few short weeks since I wrote my original article, permit me to reproduce some of its highlights.

The "Great Reset," as I call it, exposed many latent flaws in the BigLaw business model, which happier, more oblivious, and more affluent times forgave and excused us from having to recognize. (Indeed, many did not recognize them as "flaws" at all; they were simply the honorable traditions of a profession that had always done things the way they were done.)

One of the most irrational was the excruciatingly long lead time between committing to hiring what would, de facto, be incoming associates, and knowing what the actual marketplace demand for additional young lawyers at your firm would be when they finally joined, years later.

Consider the timeline:

• Can you project the demand for new starting lawyers three years hence? Well, that's precisely what you were expected to do. And for long enough, it didn't really matter. But here's how it works:
• Given the highly significant datum of first year law school grades (sorry, lost my head), your firm interviews these 1L's late in the summer before they start their second year, making them offers to be summer associates one year hence.
• After they become summer associates, it is of course one more year before they'll start.
• Unless they clerk for a year--and we like people who clerk!--in which case add a year.

So when you were projecting the demand you'd have for new lawyers in September 2009, you had all the data you needed--given that it was summer 2007 and not Ben Bernanke, not Hank Paulson, not Warren Buffett, not anyone in sight, knew what was coming.

Clearly, this works splendidly:  Assuming, that is, that your firm and law students alike enjoy canceled and postponed offers, the prospect of a "pileup" next year as this year's deferred grads run into the new crop, the drastic measure of some firms' simply "taking a year off" recruitment altogether, and the manifestly open question of whether deferred start dates may not turn into canceled start dates.

While corporate America has moved relentlessly towards "just in time" supply chains, we seem to be stuck in the prehistoric past. Are MBA's hired this way? (No, to state the obvious--if they were, they'd be hired before they even started business school.) BA's? No. Ph.D.'s? No. So why JD's?

One word: NALP.

NALP was founded in 1971 and, like many organizations well past their first generation, it's showing signs of having lost sight of its mission.

What are the symptoms of this?

For starters, organizations tend to become more and more self-referential as they enter senescence. Exhibit A: The NALP"History" page devotes a good three-quarters of its space to recounting the original members present at the 1971 founding, the locations of every annual meeting, and all the past presidents. Not a word about changes in the legal marketplace over the past half-century and how NALP has responded.

Exhibit B: It has five-year strategic plans.

Exhibit C: It has a "Mission" (bad initial sign), the introductory paragraph to which reads in full:

"NALP is dedicated to facilitating legal career counseling and planning, recruitment and retention, and the professional development of law students and lawyers."

What's wrong with that?

Simply that I have never, in a lifetime of working in law firms, in-house, and now as an analyst of and consultant to the industry, ever heard a single soul mention NALP in connection with any of those activities. They may think that's their mission but, to be charitable, they are flying under everyone's radar.

But all this is really unfair, because it's too easy.

Here's the real horror about NALP: Its reaction to this seismic shock our industry has been going through for 18 months (with no convincing signs that we're out of the woods).

Faced with:

• The highest level of layoffs since reporting began was in 2009. Worse than that, actually: More layoffs occurred in 2009 than in all prior years combined.
• Numerous failures of "name-brand" firms with, I predict, more to come.
• Soup-to-nuts re-evaluations of associate career paths.
• Soup-to-nuts re-evaluations of alternative billing.
• Soup-to-nuts re-evaluations of outsourcing, "staff" and "contract" lawyers.
• Widespread firings of non-equity partners and de-equitizations of full partners

Yes, faced with all this, once-in-a-career events each and every one, NALP's response was? This past July, to reaffirm its principles absolutely without change, amendment, or even sober relaxation of them in a time of crisis.

Here, specifically, is what they said:

Nevertheless, after weighing a variety of options, the Board is convinced that this is not the time to abandon or change the ethical guidelines that direct our professional expectations and behavior, and we urge all NALP members to adhere to the Principles and Standards.

These are the unmistakable indicia of an organization utterly out of touch with reality and resolutely determined to elevate the sanctity of its own pronouncements above the well-being of those it supposedly serves.

One thing has changed since I wrote those words, namely that on January 7, 2010 the NALP "Commission on Recruiting in the Legal Profession" released a report containing recommendations for changes to the annual recruiting season, the core of which is to prohibit any offers of employment to 2L's until sometime in January, the so-called "Offer Kick-Off Day."  Further, offers extended on the OKOD would remain open for 14 days.   Bear in mind that interviewing would still occur in August, but that firms would be forbidden from "signalling" their interest in any individual student for nearly the next six months until OKOD.

All of this to be enforced by an elaborate and draconian system of law schools' concertedly threatening to boycott offending firms--charmingly called "cheaters," and tagged as engaging in "unethical" conduct.

While I am only an armchair and not remotely an expert antitrust practitioner, Jones Day recently submitted Comments to NALP (the 8-page letter available here, which I commend to you in its entirety) not only attacking the logic, fairness, and even feasibility of the revised NALP proposals, but also making a compelling prima facie case that the proposal is deeply suspect as a matter of law, constituting a concerted refusal to deal or group boycott.  Greg Shumaker, Jones Day's hiring partner, who authored the letter--and who I was able to interview on the phone about this--writes:

In any other industry, this would immediately be perceived as suspect under the antitrust laws.  Efforts by associations and professional organizations to "regulate" competition among themselves have been found to violate the antitrust laws in numerous contexts.  [Citations omitted.] 

Given the adverse effects on competition and on law students, the Report's proposals, if agreed to by law schools and firms and challenged by an appropriate plaintiff, could well be found to be an illegal restraint of trade. [Page 6 of the cited letter.]

While Greg told me, as of the time of our conversation (a few days ago), that no other large firms had expressly offered support, I have to believe more will get onboard as they think through the actual ramifications of the proposed NALP rules.

Indeed, in an opinion piece published today in The National Law Journal, Peter Kalis, the chairman and global managing partner of K&L/Gates, characteristically minces no words in his denunciation of NALP:  Indeed, the title of Pete's column is the pungent and terse, "Abolish NALP Now."  (Disclosure:  I consider Pete a friend.)

NALP is, and for some time has been, a market imperfection -- no more and no less. For the common good, it should be abolished, and we should start from scratch.

Consider some elements of the NALP-enabled hiring regime:

• Employers meet on campus with law students for 20 to 30 minutes. What can you learn about a candidate in a 20- to 30-minute interview except whether he or she drools? What can you learn about a law firm except whether the interviewer is an imbecile?

• At many law schools, employers can't prescreen their interviewees. In some instances, employers are not permitted to see transcripts in advance. At times, employers are required to interview students who don't even rate the employer as a likely destination.

• Because of the importance of law firm summer programs, interviews and hiring decisions are essentially made two years in advance of a start date and after two semesters of legal education.

• Offers are required to be open for 45 days. Employers interview law students in August, invite them to visit, extend an offer after the visit and then keep the offer open until November or December. The 45-day requirement deadens a market that should be dynamic and highly interactive.

• From the students' standpoint, the system allows stars to hoard offers, freezes employers in place and deprives the market of the fluidity necessary to operate efficiently.

In the past couple of years, the Great Recession impeded the orderly flow of law students into the profession. Law firms scrutinized their business models, including their hiring assumptions. It was a time for nimbleness on all sides if the interests of law students and employers were to be served. Yet the NALP-enabled system -- including, inexplicably, rigid adherence to the 45-day requirement -- plodded woodenly along in fall 2009 to the detriment of all concerned.

Pete writes that he "earlier passed on [his thoughts] to NALP," and discusses further irrational elements of the new NALP proposal:

• Although no formal offers could issue before the January date, firms could give "winks and nods" to their top choices starting with interviews the prior August. Law students would have a sense of which firms will extend offers to them, unless, of course, law firms wink and nod indiscriminately to keep options open.

• This would create an intensely competitive but sloppy and confusing recruitment atmosphere resulting in weeks and even months of wining and dining and follow-up visits, a substantial increase in the cost of recruiting and more disruption to legal education and students' personal lives. To what end? Competition for jobs and talent should focus on finding where the merits and aspirations of the student and employer intersect, not on shock-and-awe campaigns. There should be a rational relationship between energy expended and insights gained on both sides.

• Students would be distracted by the longer time period in which to sort through employment choices for the following summer. Can it be good for law schools and law students that the entire first semester through examinations would be spent in the recruitment orgy?

• The most stellar candidates would await and receive offers from multiple firms, and, with no contrary incentive, those students would be unlikely to withdraw from consideration before the January date or to release a single offer after the January date.

• Prior to the 14-day acceptance deadline, candidates could accept offers and then withdraw their acceptances when they have an offer they desire more. This would cause an administrative nightmare and would hamper firms' efforts to achieve the appropriate class sizes and yield.

From the perspective of a simple economist, the most profound flaw in NALP's unilaterally imposed scheme is precisely the one Pete identifies, and which Greg Shumaker also discusses:  The sheer unreality, given human nature and the essence of competitive markets for talent, of expecting there to be no signalling between August and January.

But of course there will be signalling.  Not only will there be signalling, there should be every reason to encourage it.

Of course, once one admits that signalling in this artificially constrained timeframe makes perfect economic and competitive sense, then taking the next step is both trivial and inevitable:  Why resort to the imperfect mechanism of signalling (sometimes signals are misinterpreted, after all, not to mention that they require inordinate investments of time, energy, and funds in utterly unproductive activity, a deadweight loss all the way around)?  Why not just make the offer?

My own suggestion is that firms do just this.

As I wrote in December:

So what's to be done?

It's actually quite simple: Starting tomorrow, ignore any and all NALP guidelines and so-called "principles."

Clearly, NALP has become a toxic organization that:

• Straitjackets law firms into economically unworkable timelines;
• Forces law school career centers and deans to toe an unrealistic line which only discredits their opportunity to be of real service in a dynamic economy; and
• Most shameful of all, puts defenseless law students in absolutely untenable positions.

Hard to do, you say?

I ask: Who elected these guys, anyway? Who on earth do they think they are?

In one of our recent First Lady's immortal words, "Just say no!"

And what, then, of next recruiting season?

Simple:

Where: Rent a hotel suite just off-campus at schools you want to target, or simpler still, invite students straight to your offices if you have a location in the same city as a school you're recruiting at.

When: Whenever you are good and ready, and the market will tell you as much.

Why: To retake control over the indispensable pipeline of supply--talent--that is all you have to offer your clients in the future.

---

When an organization has manifestly outlived its usefulness, when it arrogates to itself the single-handed power to attempt to subvert the orderly workings of a critical marketplace for talent, and when it evinces not the remotest understanding of the folly of its proposals, that organization must die.

My December article had the same title as this column, but Pete's title is pithier:

Abolish NALP.  Now.

Dear Reader:

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Financial Reporting Season	What do the results tell us so far?
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The Newsletter-Only Article	The Psychology of Pricing, in which I discuss a new perspective on "Alternative Fee Arrangements," one that doesn't deal with blocking and tackling or techniques and tactics, but rather on what behavioral economics is beginning to learn about people's expressed preferences about how they're charged..
Quotes of the Month	Tom Stoppard
Client Relationship Series	Are teams that keep clients underappreciated compared to the "big wins" that bring cilents in originally?
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The Great Hill in Central Park Today

Fourteen years ago, Greenberg Traurig wasn't in the AmLaw 100, and today it's  #10. Their CEO during this entire period--until he stepped down lastweek--was Cesar Alvarez, now age 62. When he became CEO of the firm, it was a "small but prestigious Miami law firm known for corporate and real estate," according to this interview with the Miami Herald, and now is 1,750 lawyers in 30 offices with annual revenue of $1.2-billion.

But you know this. That's not why I'm writing.

When someone with Cesar's perspective and accomplishments steps down, it's worth listening. (Naysayers in the audience--and I know you're out there, admit it!--who think that the Greenberg Traurig model is intrinsically flawed, or that it's a flash in the pan, or that it's unsustainable, or that it's [insert miscellaneous pejorative here], just stay with me. We all know GT is a "polarizing" firm, in that people tend to love it or hate it. That's a topic for another day.)

So let's listen for a moment.

He said two things that struck me:

• "Without our blind compensation system [only Cesar knows what each partner earns], we never would have been able to build this firm;" and
  
  
• "Q: What do you know now that you wish you knew years ago?
  
  "A: How important the culture of a firm is. Sometimes people tell you how critical culture is. When I started, I said culture is a nice thing, but unless you drive success, culture won't mean anything. In fact, I know now that it is the opposite. You need to drive the culture, and culture will drive success."

How could a "blind" compensation system ever work? Isn't more disclosure, more "transparency," today's Holy Grail? Well, not so fast.  As Warren Buffett has famously said:

Our experience is that envy, rather than greed, is the key driver. If you give someone a $2 million bonus but their co-worker got $2.1 million, they're miserable. Of the seven deadly sins, envy is the most useless - it makes you miserable and you lose a lot of sleep.

I couldn't agree more (with Warren, if I'm not yet entirely convinced by Cesar). Few things are more corrosive than the envy of small differences, and we all know that the most visceral rivalries are local.

Does that mean the "blind," cone of silence, system is necessarily right for your firm? Not at all. The answer to that depends on the historic path your firm has taken. For sure, if it's always had an open and "transparent" system, now, and perhaps not ever, is the time to change. But if there's needless neck-biting and back-stabbing thanks to minimal differences in compensation, you might start thinking about migrating in that direction.

But enough on that.

The truly fascinating comment of Cesar's was his about culture, and its primacy over financial performance.

In this environment, people are who are considering lateral moves are not considering them because of, or certainly not only because of, financial performance, but almost exclusively because of culture--the compelling lack thereof.

But "culture" is too often confused with such bland bromides as "collegiality," "support," and "team spirit."

Evidently, that's not what culture means to Cesar, although he doesn't explicitly make the connection. Culture, to Cesar, is a culture of high performance.

First, as to internal expectations (and forgive the extended quote, but it's required to deliver the context and import) (emphasis supplied):

Q: If a young associate comes to talk to you about work life balance, what do you say to him?

A: When I was an associate I wanted to do as many deals as I could as a corporate securities lawyer. I worked a lot of hours: Monday though Sunday. Ultimately you have to sell two things -- for the client to trust you as human being and as a lawyer. If you haven't been at these deals you won't be able to sell yourself to the client. My point to young associates is you have to invest in yourself. What you get paid in the first few years is insignificant.

Today associates want the outside life. You have to remember they have to choose to lead the life of a lawyer, not be here to have the lifestyle of a lawyer. If they want lifestyle without being a real lawyer it will not work long term. It's a business that requires a lot of experience.

Q: Does it require major personal sacrifice to be good lawyer today?

A: Absolutely. Nothing has changed from that perspective. This is difficult profession, period. It requires a lot of time and effort. There are wonderful rewards, but you cannot substitute time and effort, not when someone else is putting in the time and effort.

Many associates still don't believe it. Now they are feeling the recession, the uncertainty. They have never felt the uncertainty. They have always been in a system that rewarded them again and again even when their hours were going down.

Q: Have you seen a change in attitude?

A: Definitely. They realize they are lucky to have a job and are more focused on what they need to do to have their career.

And second, in terms of client expectations:

Q: Do you think the legal profession as a whole will address client expectations brought about because of technology?

A: I think you have to be connected to the client all the time. We're in the business of solving problems. Problems aren't just legal issues. The great lawyers know how to handle problems. You want to be an advisor, not just a technical lawyer. You have to spend time understanding the business of client. You have to invest time and stay connected.

Finally, he has some shockingly clear-eyed observations, firmly grounded in economics, on what's going to happen to the next few years of law graduates and young associates. Specifically, when asked what's going to happen with the "tremendous number of unemployed lawyers," he responds with a clarity worthy of Adam Smith:

The economy deals with supply and demand. The adjusting mechanism is price -- what they will be willing to be employed at and what we can charge a client for them. Once that comes into balance again, you will have a different issue. [...]

If I were a young lawyer and displaced from a large firm, I would be going into one of new areas and be at the ground floor. I'd be learning energy policy and how it works. A few years from now you will become very valuable to law firms. You could come back at a high level if you focus on areas that are new. Firms will always be buying expertise.

So:

• Consider the corrosive effects of envy.
• Economics matter, but a high-performance culture matters more.
• And this profession demands hard work: Always has, always will.

And one last consummately clear-eyed Cesar-ism (from a personal conversation, not this article): When asked about the PPP arms' race, he cogently observed: "The only thing that matters is profits per me."

Thanks, Cesar.