Adam Smith, Esq.

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.

The final agenda for the "Business of Law" program, this coming Monday, February 1st, at LegalTech/New York has just been released.

Please take a look here, and sign up here.

Hope to see you there!

If we were in Corporate Land, this would be the beginning of earnings reporting season, with the close of the customary calendar year-fiscal year for most of BigLaw.

It's too early to draw any statistically solid conclusions about what 2009 looked like overall, but sometimes a report raises so many more questions than it answers that it begs for a bit of comment, analysis, and "deconstruction," if you will.

That would surely appear to be the case with Sonnenschein's reporting.

Here's the headline, from The American Lawyer:

Profits per equity partner dropped 3 percent at Sonnenschein Nath & Rosenthal in 2009, according to figures reported by the firm late Thursday, and gross revenue was flat. PPP fell from $804,000 in 2008 to $780,000 last year. Gross slipped from $473 million in 2008 to $472.5 million, according to the firm.

So far, so innocuous. But if you read a bit more carefully, there's more to the story.

First of all, Sonnenschein added 100 lawyers from Thacher Proffitt effective January, 2009. To add 100 lawyers and be "very pleased" that gross revenue was flat must establish some new apogee or highwater mark in redefining "the new normal."

Second, the decline in RPL (using an apples-to-apples, same accounting method comparison, of which more momentarily) is -11%. This is can only be viewed as a quite negative indicator which suggests the firm, despite going through three rounds of personnel cuts in the past 18 months, may not yet be "right-sized" or certainly is not achieving pre-bust utilization rates.

Third, PPP dropped more than 12% in 2009 vis-a-vis 2008, and now we are told it dropped another 3%. But I understand that partners have been told that cash distributions to them are off 19%. This doesn't quite compute if PPP is actually down just 3%, unless something strange is going on with "cash."

Which brings us--fourth--to the weirdest and most inexplicable part of the Sonnenschein news (emphasis supplied):

The firm also restated its 2008 gross revenue numbers Thursday. Last year the firm reported $492 million in gross revenue in 2008, but yesterday Sonnenschein lowered that figure to $473 million. The firm attributed the discrepancy between the two figures to a change in accounting. Sonnenschein previously reported gross revenue on an accrual basis, but now reports it on a cash basis...

This is a firm founded in 1906, which has used Arthur Andersen and now McGladry Pullen as accountants. Why would this be the year they would change accounting methodology? I have no inside information as to why that might be the case, but it strikes me as oddly convenient that the change in stated 2008 gross revenue from $492-million to $473-million quite nicely enables them to say that revenue in 2009 was "flat" at $472.5-million.

Well, aren't revenues revenues? And isn't the cash basis more rigorous than the accrual basis? Yes, and yes.

First, I for one can't imagine advising a client to "restate" revenues, any more than I can imagine restating a budget once it's set. You can miss the budget or exceed the budget, but the budget is the budget. In my book, rewriting history just shouldn't be done, however tempting it might be to succumb to the desire.  States that do this are rightly accused of Kremlinology.

And second, as for whether cash recognition of revenues is more disciplined than accrual, the short answer is of course it is. You either have the check in hand by midnight December 31st or you don't. No squishiness or wiggle room to that. No woulda-coulda-shoulda.

But ponder for a moment the other side of the Income & Expense statement: Expenses. If you were recognizing expenses on an accrual basis (conservative accounting), but now you only recognize them on a cash basis (more aggressive accounting), voila, I can virtually guarantee you that reported profits will go up. (At least as a one-time shot, but that's a story for another day.)

Now, please understand: I have no brief against Sonnenschein in the least, and I wish the firm, its clients, its partners, associates, staff, and their many dependents all the best in these times of unprecedented difficulty.

Sometimes, however, you have to look behind the story. If there are innocent and plausible explanations for all of this, I welcome them and will publish any comments I receive as updates to this piece (assuming the writers' permission).

In the meantime, take what you read with a grain of salt. Or better yet, a nod to critical thinking.

---

The link to the American Lawyer article on Sonnenschein's reporting appears to be intermittently broken, so here's the original article. If I've offended "fair use," I apologize forthwith to the American Lawyer but the thing about the Web is that links should work.

---

The Am Law 100:
Sonnenschein Profits Drop 3 Percent

The American Lawyer

By Ross Todd

January 22, 2010

 

Profits per equity partner dropped 3 percent at Sonnenschein Nath & Rosenthal in 2009, according to figures reported by the firm late Thursday, and gross revenue was flat. PPP fell from $804,000 in 2008 to $780,000 last year. Gross slipped from $473 million in 2008 to $472.5 million, according to the firm.

"[The] bottom line for us is that we are very pleased with the performance in view of the substantial investment we made in January of 2009 to add 100 new lawyers from Thacher Proffitt," Sonnenschein chair Elliott Portnoy said via e-mail Thursday. Portnoy (pictured at right) was traveling and unavailable for a phone interview.

Last year marked the second straight year of lower profits at Sonnenschein; PPP dropped more than 12 percent to $804,000 in 2008. The firm also restated its 2008 gross revenue numbers Thursday. Last year the firm reported $492 million in gross revenue in 2008, but yesterday Sonnenschein lowered that figure to $473 million. The firm attributed the discrepancy between the two figures to a change in accounting. Sonnenschein previously reported gross revenue on an accrual basis, but now reports it on a cash basis to match the method it uses to report net distribution to partners. The change in accounting affects Sonnenschein's revenue per lawyer numbers. The firm reported Thursday a drop of 7 percent from $778,000 in 2008 to $722,000 in 2009. When using the numbers the firm reported last year, the drop in RPL is 11 percent from $808,000 to $722,000.

Part of the RPL drop can be attributed to Sonnenschein's boost in head count. The firm grew from 608 lawyers in 2008 to 654 in 2009. On January 1, 2009, Sonnenschein added 100 lawyers from New York's Thacher Proffitt & Wood, including 40 partners. The hires--the largest lateral group the firm has taken on--nearly doubled the size of Sonnenschein's New York office.

The Thacher Proffitt lawyers brought with them a $500,000 contract awarded in December 2008 by the U.S. Department of the Treasury to advise on its investments in the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF). In March, Sonnenschein was chosen along with Cadwalader Wickersham & Taft and Haynes and Boone to advise the Treasury Department on its role in last year's auto industry restructurings. The auto industry contract carried a ceiling value of $8.59 million.

Sonnenschein, like many firms last year, also employed a number of cost-cutting measures. The firm cut associate compensation in June and announced in December that it would roll out a new merit-based associate compensation structure in early 2010. In September the Am Law Daily's colleagues at The National Law Journal reported that the firm cut about 30 lawyers, including 10 income partners--the third series of personnel cuts at the firm in an 18-month period.

 

This report is part of The Am Law Daily's ongoing Web coverage of The Am Law 100's 2009 financials. Results are preliminary. Final rankings and full results for The Am Law 100 will be published in The American Lawyer's May 2010 issue and on AmericanLawyer.com. The Am Law Second Hundred will be published in the June issue.

Turbulent..  Challenging.  Unprecedented.  Once-in-a-career event.  Paralyzing.  Opportunity. 

However you want to characterize the period we've experienced and are still working our way through and out of--and shall be, I predict, for a few more years--if it has served a salutary purpose, and it has, it's been opening firms' senior leadership's minds to the possibility of "thinking different."

Welcome to Game Theory.

Game theory, codified it not invented by John von Neumann and Oskar Morgenstern in 1944 (Theory of Games and Economic Behavior), has grown to encompass the analysis of interactions between individual actors in complex socioeconomic contexts which tend to resemble markets:

• Interactions among the players are repetitive; that is to say, it's not a one-time only encounter or a sort of sudden-death overtime.  This is important because it introduces the notion of maintaining and enhancing one's reputation.  Scorched-earth tactics and burning bridges are, shall we say, suboptimal.
• Each actor is presumed to be rational, at least insofar as they can see their own self-interest--
• But their own self-interest anticipates others' reactions to their own choices, decisions, and "moves."

Grossly oversimplified presentations of game theory--more by way of caricatures than presentations--have become standard fodder for MBA courses, typically in the form of the classic "prisoner's dilemma," with unrealistic but theoretic-model-friendly assumptions such as: the prisoners can't communicate; the game is never repeated; each can give only one answer at one point in time, etc.

Needless to say, the real world involves immeasurably more dynamic,more multi-player, and more protracted in time, considerations than the textbook prisoner's dilemma. 

So what use can game theory possibly be?

Our reliable friends at McKinsey have attempted to answer this question, in "Making Game Theory Work for Managers," which advertises itself as nothing less than an attempt to "generate answers representing the best compromise between risks and opportunities in all likely futures."

How successful are they?

Here are some of the dilemmas faced in trying to adapt theoretical game theory to the senior leaders' real-world role:

• Striking the appropriate balance between simplification of a problem to make it manageable vs. retaining enough complexity so that it's relevant.
• The extremely detail-oriented nature of any particular hypothetical exercise in game theory --our good professors call this "sensitivity to initial conditions."
• The preference of theory to generate a single monolithic predicted outcome rather than an array of more and less probable, more and less favorable, possibilities. 
  
  

(Digression:  If I were asked the classic nasty/aggressive interview question, "What's your greatest fault?," and had been administered truth serum, I suspect I'd blurt out that I don't like to state the obvious.  Because....it's obvious.  I much prefer to dwell in the land of nuance and greys rather than black and white.  Of course, this is a signal failing if you cannot assume, as I do but is often not the case at all, that your interlocutor shares the same premises you do as to exactly what's "obvious" and what isn't.)

The new and more dynamic model discussed in the McKinsey piece claims to improve upon the artificially constrained textbook model as follows:

 Instead of predicting a single outcome, with all factors balanced, the model first generates a narrow set of strategic options that can be adjusted to account for changes in various assumptions. Instead of solving an individual game, the model automatically involves a sequence of several games, allowing players to adjust their actions after each of them, and finds the best path for different combinations of factors. As one result, it supports executive decisions realistically by presenting managers with the advantages and disadvantages of the strategic options that remain at each stage of the progression. In a second step, the model finds the "best robust option," considering its upside potential and downside risks under all likely scenarios, assumptions, and sensitivities as time elapses. This approach is different from attempts to look for equilibrium in an artificially simplified world.

Are you thinking, about now, that these are generalizations that have little but platitudinous application to any issues you're actually facing today?

In fact the authors essentially admit as much by saying that "The best way to understand the model is to examine it in action," and proceed to present their case study of having worked with the deregulation of the European railway network.  Starting this very month (January 2010), cross-border passenger service will be fully open to competition in the EU.  Germany, Italy, Sweden, and the UK have expanded on that by opening long-distance domestic passenger rail service to competition as well.

The first lesson to take away from this is that every market is very much its own.  Every market, that is, is highly specific.  Context matters.  History matters.  (In the case of rail, of course, geography matters.)  So think about what follows not in terms of one-to-one correspondence with challenges you might be facing, but as illustrative of a way of thinking about moves you might make and competitors and clients might make, in turn. 

Indeed, if there is one single notion I'd like to implant in your thinking with this column, it's the power of dynamic as opposed to static analysis. 

By that I simply mean that if you take Action X, the marketplace, clients, and your competition do not stand still.  In the military's inimitable phrase, "The enemy gets a vote."  (Dwight Eisenhower, or George Patton, or Douglas MacArthur [take your pick--attributions vary] said that "no battle plan survives its first encounter with the enemy.")   Static analysis would assume the environment is, well, static. Guess again.

So, to more on the European passenger rail market.

What might entrants to this newly deregulated industry anticipate?

Price wars are certainly a possibility.  On the other hand, network effects are very important to customers in rail service.  Not can you get me point-to-point, but how thick and dense is your network?  The ability to get to an extremely wide variety of destinations on one carrier (presumably for a favorable price) is not to be gainsaid. 

The analysts posit four main avenues of attack for new entrants:

• Meet incumbents on their own terms, by providing nearly identical service.
• Attack, by providing more frequent or cheaper service.
• Specialize, with a niche service such as high frequency at peak hours.
• Or differentiate themselves with an offering focusing on, say, leisure travelers who are very price-sensitive, but who don't care about cheaper, slower, older rolling stock, or conversely going for the high-end with premium, "business class only" high-speed luxury service.

As for the incumbents, they too have a range of options:

• Ignore the newcomers.
• Try to mimic their offerings and hope to prevail through greater brand-name recognition.
• Take the offensive by undercutting cheaper competitors on price, over-delivering vis-a-vis luxury competitors on service, and reinforcing networks and "hub and spoke" models.

Then there's a third level of dynamic change going on. How is the market, overall, evolving?  Again, there's an array of possibilities:

• Overall demand changes:  If rail service improves (in the eyes of travelers), car and plane trips will, relatively speaking, decline.  Trains will gain market share.
• Cost differentiation.  While newcomers may initially have cost advantages (fewer legacy costs), incumbents often enjoy economies of scale.  Which side of the balance beam prevails is highly context-specific.
• Network advantages.  Incumbents almost invariably have more mature and extensive networks (office platforms and practice areas).  This is difficult for newcomers to surmount unless customers demonstrate a preference for the boutique approach.
• And price sensitivity.  What, in economese, is the "price elasticitiy" of demand for your services?  You better hope that it's very low indeed (that is to say, that clients are highly insensitive to rates and fees, and that they perceive your firm's services as valuable with little regard to cost.

So what can we conclude?

Intriguingly, one of the most powerful and "robust" (as academics like to say) findings of the McKinsey study was this:

"When we run the European passenger rail model through an array of different situations, a critical factor appears to be the way demand reacts to liberalization. Will the new offerings seduce travelers to take trains rather than cars or jetliners, or will overall demand remain stagnant, leaving rail companies to battle for an unchanged pool of customers?"

Why do I highlight this?

Because we tend not to think this way.

But what if changes to the BigLaw business  model, including the possibility of increased demand for BigLaw services in lieu of substitutes, could actually increase our market share, as it were?  What are those "substitutes?"  In-house counsel, most obviously.  But also, and increasingly, outsourcing vendors located everywhere from downtown Manhattan to Bangalore and Fargo, North Dakota.  Why should our instinct be to run up the white flag in the face of this brave new competition?  We shouldn't be so shy, or callow, or scared.

---

The basic message is clear:  Think about what you might do.  Then think about what other firms will do.  Then think about what clients will do. 

Repeat.

Speaking of interesting conferences in New York, on Monday, February 1st, from 1:00--5:00 pm, LexisNexis is hosting a "Business of Law" Symposium at the New York Hilton, Sixth Avenue @ 53rd Street, home of the annual LegalTech confab, which this flies under the flag of.

Why do I mention it?

Because I'm giving the keynote, called Economic & Strategic Perspectives on the Current Environment, and I'll also be moderating the three subsequent hour-long panels, on:

• Knowledge Management:  How technology can drive competitive differentiation.
  
  
• New Structures for the New World?:  Addressing what components of the conventional law firm business model might need to change, including:
  • Associate career paths
  • Alternative fee and billing models
  • Revenue and profitability models
  • Lateral recruitment, and improving the batting average, and
  • Law student recruiting--taking on the NALP menace
    
    
• Future Strategies:  If growth for growth's sake is no longer the universal solvent we once perceived it to be, what new strategies are plausible, effective, and needed in the marketplace? 

If I may say so, we've also recruited some top-drawer talent for the panels, including Harry Trueheart, Chairman of Nixon Peabody, Bill Bachman, Chief Operating Officer of Bingham McCutchen, Sally King, Regional Chief Operating Officer of Clifford Change, Aric Press of The American Lawyer, David Lat of Above the Law, Oz Benamram, Chief Knowledge Officer at White & Case,and Saul Rosenberg, Director, Knowledge Operations, McKinsey & Company--as well as many talented others.

Bonus for attendees:  Audience members will be given wireless polling devices allowing you to vote anonymously and see the results displayed in charts at the front screen in real time.    Accordingly, each session will feature several questions for the audience designed to enlighten, or perhaps uncover latent inconsistencies in attitudes.

There's no special charge for the event:  More info here. 

Hope to see you there!

On February 1st  and 2nd, here in New York, PLI will be presenting what looks to be an all-star cast of speakers at what they're calling the Law Firm Leaderhsip and Management Institute 2010.

More info here.

According to the overview:

Critical issues to be addressed include the future of "big law," billable hours, and alternative billing options, as well as concerns about delivering and maintaining the highest quality of work at a reasonable cost.

Law firms have been responding to these industry challenges with both expected and unexpected measures. Some have made significant cuts, deferrals and adjustments, and others are abandoning the associate class system and lockstep salary structures. Still others are lowering first-year associate salaries and billing rates, and at least one game-changing trans-Atlantic merger has been announced. The main question on the industry's mind is whether these are temporary changes in response to the current market conditions, or if they are here to stay.

You may think that's the typical PR puffery—and you would not be alone in that reflexive presumption—but I decided this was a "must-attend" for me when I read the list of participants.  Did I mention "all-star"?

As a special feature, there will be two luncheon presentations: "Educating the Next Generation of Lawyers," presented by Dean David E. Van Zandt, Northwestern University School of Law; and "Ethics and the Management of Law Firms," presented by Anthony E. Davis, Partner, Hinshaw & Culbertson LLP. Also, for the first time, attendees will hear a case study on the law firm Bingham McCutchen, presented by Ashish Nanda, Faculty Chair, Executive Education Research Director at the Center for Law and the Professions, Harvard Law School, and Jay Zimmerman, Chairman of Bingham McCutchen.

The program's stellar faculty includes: Candace K. Beinecke, Chair, Hughes Hubbard; Heather Bock, Ph.D., Chief Professional Development Officer, Howrey LLP; Francis B. Burch, Chairman, DLA Piper; Evan Chesler, Presiding Partner, Cravath, Swaine & Moore LLP; H. Rodgin Cohen, Chairman, Sullivan & Cromwell LLP; Thomas A. Cole, Chair of the Executive Committee, Sidley Austin LLP; Arthur Culvahouse, Jr., Chair, O'Melveny & Myers LLP; Steven H. Davis, Chairman, Dewey & LeBouef LLP; John R. Ettinger, Managing Partner, Davis Polk & Wardwell LLP; Martin Frederic "Rick" Evans, Presiding Partner, Debevoise & Plimpton LLP; Michael D. Fricklas, Executive Vice President, General Counsel and Secretary, Viacom, Inc; Eric Friedman, Executive Partner, Skadden, Arps, Slate, Meagher & Flom LLP; Kathy G. Gallo, Managing Principal, Goodstone Group LLC; Susan J. Hackett, Senior Vice President and General Counsel, The Association of Corporate Counsel; Andrew D. Hendry, Senior Vice President, General Counsel and Secretary, Colgate-Palmolive Company; Michael Hersch, Executive Director, Simpson Thacher & Bartlett LLP; Brad S. Karp, Chair of the Firm, Paul, Weiss, Rifkind, Wharton & Garrison LLP; David Lat, Managing Editor, Breaking Media; Susan C. Levy, Managing Partner, Jenner & Block; Jon Lindsey, Managing Partner, New York, Major, Lindsey & Africa; Francis M. Milone, Chair, Morgan, Lewis & Bockius LLP; Norm Mullock, Vice President, LexisNexis Redwood Analytics; Lester S. Pataki; National Banking Practice Leader and Chairman of Law Firm Group, JP Morgan Private Wealth Management; William J. Perlstein, Co-Managing Partner, Wilmer Cutler Pickering Hale and Dorr LLP; Peter John Sacripanti, Co-Chair, McDermott Will & Emery LLP; Esta Eiger Stecher, Executive Vice President and General Counsel, Goldman Sachs Group, Inc.; Barton J. Winokur, Chairman and Chief Executive Officer, Dechert LLP.

Let's just hope Al Qaeda doesn't have designs on the senior leadership of American law.

I hope to see you there!

---

Before it's too late to miss the brief window of opportunity for prognostications about the New Year, here's one more.

But first, let's back up a bit.

By almost anyone's lights, 2009 was dreadful for our beloved industry, even appalling. According to LawShucks, BigLaw laid off (read: fired) 12,196 people, of whom 4,633 were lawyers and 7,563 were staff. This, of course, ignores the reality that layoffs are surely under-reported.

Ugly enough, and the raw statistics don't remotely speak to the genuine, and too often borderline-tragic, realities of defenseless professionals finding themselves "redundant" (as the Brits either charmingly or bureaucratically term it), highly talented and expensively educated one and all. Worse, these people find themselves on the curb for reasons that either had nothing really to do with their performance or, if it was tagged to performance, for demerits that would probably not have had fatal repercussions a year or more ago.

For better or worse, that's not what I want to talk about here.

Adam Smith, Esq. is about the economics of law firms, and that's our topic.

---

Everyone, I believe, long ago wrote off 2009 in their own minds as far as financial rewards go.

• Associates are inured to salary freezes or even rollbacks.
• Staff expect the same.
• Everyone but everyone expects bonuses to be downsized compared to last year.
• Many non-equity partners, as far as I can tell, count themselves lucky to still be onboard.
• And of course, equity partners expect PPP to be flat to down anywhere from 5% to 25% or more. (You've heard the joke that "flat is the new up?" Chase Bank is rolling out a new campaign that "save is the new spend." Can you say "The End of History-- I don't think so."? This new mantra is foreign matter to the American DNA, and will be rejected by the host if it seriously attempts to implant itself in our expectations.)

Financial results for 2009 are, of course, just beginning to trickle out, and if past disappointing years are any guide--none of course remotely comparable to this--firms will not be rushing to punch the "send" button to announce their figures. Indeed, as is our wont, we will want the aircover of other firms announcing bad or worse numbers before we try to sidle our news into the media slipstream around 5:00 pm on a Friday before a holiday weekend.

But 2009 is not really on the agenda any more. We know about 2009 ad nauseum, we're done and we don't want, frankly, to hear much about it any more.

Which brings us to 2010.

I don't know about you, but I can take one bad year in stride. We all would prefer not to have to face a bad year, but as long as everyone in sight is more or less in the same boat, you can live with yourself, roll with the punch, and wax philosophical about the arc of a 40-year career.  Your spouse, family, friends, and professional colleagues will all understand.

Not so for 2010. People will want to know why 2010 will be different, and better. This is a potentially perilous topic.

A few fortunate firms will be reporting results that are on par or even better with 2008. But I predict the vast majority will be down on year-on-year comparisons, certainly in terms of reported PPP and even more certainly in terms of internally realized and distributed PPP. At too many firms, capital calls are up, distributions are delayed, and the future is unclear.

The most important question as we enter 2010 is very simple: "What now?" And "Why different and better?" This is the question that will be coming from your partners, associates, and staff as we grind out of the repercussions of late 2008 and 2009.

What's your answer?

The answer had best be persuasive, credible, and, perhaps most difficult, consistent with who your firm is and what has gone heretofore. You can't realistically turn the place around if that means making it something it never was, never ought to be, and isn't what your people signed up for.

In other words, the priority for senior management for 2010 is not just "making the numbers"--challenging as that will surely be--it's giving people a reason to believe.

Why will 2010 be better? How, exactly? How does this fit my image and vision of the firm? Not just how does it advance my career, but how is it something I can buy into, hearts and minds? "Trust us" as a response won't cut it.

And if you get this wrong?

I predict 2010, not 2009, will be the big year of shakeouts in the composition of the leading firms--and I mean that across the board, whether you define your peer group of competitive and therefore "leading" firms as the Global 50, the AmLaw 50, the AmLaw 200, or regional firms in your local market.

The dynamics are fairly simple: People wrote off 2009, but they're not prepared to write off 2010.  By "2010" I really mean the foreseeable future of their fortunes at your firm.  If this was the "Great Reset," then you should have re-booted, re-imagined, and re-invigorated your firm by about this time.  If you haven't, "2010" really means "as far as the eye can see."

In turn, people's  faith in how 2010 may turn out at your firm depends on their faith in the strategic vision of the firm. Is it credible? Ownable? Distinctive? Why, again, is 2010 going to be better than 2009?  

If you don't have a compelling answer to that, be prepared for bad news on the people front.  We often say it, but sometimes the obvious is worth repeating:  Within five or ten city blocks of your offices (all of them), there are probably two dozen buildings containing 50 or 60 elevator banks leading to the reception areas of major competitors.  How hard is it, really, for someone to choose another elevator bank?

At the outset, I promised you a prediction for 2010. At the risk of your revisiting this in January 2011 and finding what follows utterly wrong (Adam Smith, Esq., on principle, never deletes anything from our archives), it's simple:

• We will see more firms fail;
• And more "surprising" firms fail;
• More firms merge;
• And more"surprising" mergers

in 2010 than we have in a long long time.  Economics may be the proximate cause, but a failure of vision and belief will be the core cause.

Happy New Year.

As we embark on a brave new year, I thought it condign treatment of 2009 and what lies beyond to spend a few moments on the broader view, and, more specifically, what industries may and may not survive the post-Internet, and more broadly the post-digitalization of life, future.

One could write books about this--several folks already have--so I will perforce be very abbreviated in my treatment of this, but I would hope a theme emerges. And of course this comes with the customary and obligatory caveat that it's all my surmise at this moment in time, lacking the foresight to imagine what the creative genius of our entrepreneurial classes will bring forth.

Won't survive

• Newspapers
• General interest magazines lacking extraordinary quality (yes, this excepts The New Yorker, The Atlantic, and a handful of others)
• Landline phones
• Fax machines
• Hard copies of all forms of entertainment--music, TV, movies (everything will be rented or streamed, although purists may hang onto printed books between covers for the incredible and still unsurpassed utility of their form factor, not to mention the symbolism of bookshelves [I probably count myself a purist])
• The following, as we know them today:
  • Realtors
  • Stock brokers
• Network TV
• Virtually any single-purpose piece of hardware:  GPS devices, calculators, and, I predict, Kindles and e-book readers.  It's simply way too cheap and appealing to add functions once one has the basic slab with a screen, a processor, and some memory.

I doubt any of these is terribly surprising.

Will survive, but in drastically changed form

• Car dealers
• Many point-of-sale services
  • We shall see the drastic integration of online and store sales
  • Ticket takers at cultural and sports events have seen their ranks cut by 90% as hand-held bar code scanners replace ripping and returning; while we're at it, when was the last time you actually bought a ticket--any ticket--from a human being at a box office?
  • Airline kiosks have supplanted counter attendants
• Banking and financial services
  • Including insurance and mortgage brokering.

I also think these are also relatively commonplace observations.

Will be oblivious

• Healthcare (digitalization of patient records will come, eventually, to be sure, but it won't fundamentally transform, much less threaten, the industry or anyone employed in it)
• Travel (not travel agents--the travel industry itself)
• Construction (hard to outsource or do "virtually")
• Utilities (same)
• Agriculture and mining (same)
• Oil and natural gas (same)
• Manufacturing of durable goods, including most importantly cars, trucks, and industrial equipment: Sometimes metal needs to be bent and people and goods need to move, and we don't yet have Star Trek teleportation in place
• Education (imagine making your Contracts 1st-year course a Webinar? I didn't think so)
• Essentially all of government:
  • Local (police, fire, traffic, zoning, water and sewer)
  • State (regulatory, welfare, Medicaid)
  • Federal (Defense, State, Treasury, etc.--run down the Cabinet list in historic chronological order)
• Personal care: Barbers, salons, manicurists, health clubs, personal trainers, spas
• Home and office maintenance: Cleaning services and maids, nannies, doormen, and all contractors and handymen--plumbers, electricians, carpenters, painters, etc.
• Sports
• And lastly, one of my favorites, the performing and visual arts.

What's most noteworthy about this last list to me is what an enormous slice of the economy it represents. And what a relatively trivial portion is represented by the first and even the second lists.

Which brings me to the point: The repercussions of the digitalization of the world may have been overblown.

I'm not a social psychologist and have less than zero desire to become one, so I won't attempt to hypothesize why so much ink has been spilled on the supposed topsy-turvy world we're plunging into, like it or not, but I would suggest you take another look at the people who work for industries in my first "won't survive" list, and I'll suggest what they have in common: They own the printing presses and buy those barrels of ink. (I buy gigabytes of server storage, but that's a separate matter.)

So what has this to do with Law Land?

I look at the lists presented above and ask what industries we are most like. Before I give you my thoughts, you might want to glance up and take another look.

I think we're some continually evolving combination of education, financial/medical adviser, and hands-on personal care.

How so?

Education, as a role for us, should I hope be obvious. We educate our clients, we are or at least want to be known as a "learned profession," and we have, actually, access to knowledge that the proverbial man on the street does not. We don't just rent this knowledge out to our clients, we should impart it so it becomes their own.

Financial/medical advisers are people to whom we entrust (one hopes) our every secret, hope, and fear. We should serve the same function. Too often, of course, we fall short, accepting superficial explanations from clients about what they want to achieve without delving deeper to truly understand their business objectives in the larger contextual scheme of things. We should be able to provide them with various roadmap's, decision trees, alternative ways of pursuing their objectives, with lesser and greater ratios of return and reward.

Hands-on personal care? Yes, because there is no substitute for being there. The more amazing technology and collaboration-at-a-distance becomes (what the Web, ultimately, is all about), the more important face to face personal meetings are. (This, incidentally, is why I'm long-term bullish on such global cities as New York, London, and Hong Kong.) The more people you know "virtually," the more you want to meet them in person.

Which should be something we do well.

Often, the value of hands-on care is underestimated when it comes to so-called commodity practices such as real estate transactions, employment law, and background-noise litigation. You underestimate the value of this at your risk.

Think that divorce or employment law are "commodity" practices that don't require sensitive and nuanced practitioners?  Try telling that to the wronged spouse who suddenly finds themself living in a trailer, or the 55-year-old assembly line worker laid off in Detroit. 

Clients still want to meet you, get to know you, feel you're in command and know your stuff; this can to this day only be done one on one.  No one in Bangalore can help.

Finally, a word on outsourcing: It's here to stay. Foreign or domestic, owned or rented by your firm, it is a wave (not the wave, but a wave) of the future. Get used to it. Baseline document review, legal research, perhaps even generic witness prep will be conducted by people who are not junior associates on your firm's payroll. This is simply reality. But is it a fundamental change in your business model? I hope your business model wasn't entirely premised on the role of junior associates.

Again, is the digitalization of everything an existential threat to us? I leave you to draw your own conclusions, but I think not.

Thoughts for 2010 and beyond.

Ever wonder where the Times Square New Year's Eve balls go when they're retired?

No?

Well, then, putting that aside straightaway, we're here to enlighten you.

The New York Times has now revealed that they end up about 50 feet underground, in a subbasement of 1 Times Square, the building from whose summit they once descended.  There have been a total of 8 balls, at least by the somewhat improvisatory enumeration of Jeffrey Straus, CEO of the firm that produces the New Year's Eve celebration.  Unfortunately, Balls ## 1 & 2 have disappeared.  Balls ##3, 4, and 5 turn out, actually, to have been the same ball, serving from the mid-1950's to the mid-1990's, but in separate incarnations:  The original (#3), the same ball in the form of an apple, briefly during the early 1980's (#4), before reverting to its original form (3 with an asterisk), and finally #5 when it got new skin and rhinestones.

#7 was a one-of-a-kind, serving only one year at the turn of the millennium, and we are now on #8, one covered with 2,688 Waterford Crystal triangles bolted to 672 LED modules, and capable of producing 16-million colors.

#6, you ask?

Here it, ingloriously, is:

 

Best wishes to you and yours

in this magical holiday season

and throughout 2010.

We at Adam Smith, Esq., hope for all of you 
peace, health, prosperity, and the realization of your dreams.

The Christmas Tree at the Metropolitan Museum of Art, in the Medieval Sculpture Hall