"A freezing rain was falling one March afternoon in Tarrytown, New York, and I was thinking about frogs."
Does that sound like the proper introduction for an AmLaw 30 Firm Chair to use for an article with the theme, as he says farther on, that "I expect law firms to change more in the next five years than they have in the last 30 years?" The author is Ralph Baxter of Orrick, the frogs he was thinking about are the metaphorical ones who will leap out of boiling water but succumb to the same hot water if gradual heat is applied, and the article is here.
Not to be oblique about it, but Ralph thinks law firms are the frogs experiencing the gradual heat, who have not leapt out of the pot because "the simple fact [is] that they have not had to." In marked contrast, our corporate clients have had to be more nimble, finding ways to deliver more value to their increasingly globalized clients through (a) using technology to improve productivity and service quality; (b) developing new services and appurtenant pricing models; and (c) adapting to the changing work force through more flexible and creative hiring and professional development tactics.
I won’t summarize Ralph’s article for you—just go read it yourself—but I will supplement his thinking by reporting on a one-on-one conversation I had with him at Orrick’s offices here in New York last week.
Many if not most of you are probably familiar with the growth trajectory of Orrick under Ralph’s tenure—a roughly 1,000% growth in revenue, for starters—and we have all seen formerly regional or city-specific firms break out of their home territories and become national and even international powerhouses during the past 20 years. If you doubt me, ask yourself whether you still assume these firms are provincially limited to these cities: Foley & Lardner/Milwaukee; Jones Day/Cleveland; K&L Gates/Pittsburgh; Reed Smith/Pittsburgh.
But the question I had for Ralph was, understandable as it might be for those other firms to see the need to bust out of their frankly sclerotic local economies, what was so bad about San Francisco when he assumed the lead at Orrick? Whence the sense of urgency to expand beyond the familiar base of a then-and-now healthy region?
"I told my partners, the night I was elected to lead the firm, that what they had voted for and what they were going to get was change." Even if Orrick’s position as the go-to municipal finance firm was solid as a rock, Ralph aspired to more. I asked him why, where his drive came from, and he paused, looked at the ceiling and shrugged: "I guess I’ve always been ambitious; I wanted to be student council president in high school." So, for Orrick, Ralph wanted a larger stage to play on than that of the Bay Area.
"But," Ralph added, "something David Gergen said [giving the keynote at the Law Firm Leaders Forum in San Francisco the week before, which Orrick had sponsored in conjunction with Hildebrandt] struck me about the critical ingredients of leadership, and it was this: His first prerequisite for leadership was ‘ambition,’ but it was ambition for the team, not ambition for oneself.
"The other thing about change? It seems to make most people deeply uncomfortable: You know, ‘things seem to be going OK, and I’m not dead yet! So far so good.’ But I relish change, I really do. I think most people, and especially most lawyers, don’t."
I asked about how he had grown into the managing partner/firm chair role, and specifically what he did more of and what he did less of than, say, five years ago.
"Terrific question; never thought about it." (Pause.) "OK, I do less day to day management/administrative stuff, and much more communicating."
His pointing up the importance of communication reminded me of a piece of managerial wisdom that I’ve always valued, albeit having come from an improbable source. So I asked if he knew about the famous Washington political columnist Walter Lippman’s advice to Presidents about press conferences, namely to hold one once a month, with no agenda and no time limit?
No, he said, so I explained Lippman’s thinking: The idea was to instill policy discipline in the cabinet. If anything and everything could come up in the unscripted press conference, the President had to be briefed on, and concur with, the policy positions of Treasury, State, Defense, etc.—and all those departments and more had to be sure they had defensible, supportable, credible positions across the board. Even if the press conferences never occurred, the discipline they would instill was invaluable.
I observed that most managing partners have almost no staff to help them discharge their duties, and he responded that he’d actually become increasingly attuned to the need for a strong group to help him accomplish what he aspired to do. "I’ve learned, and the group has gotten better and better as we’ve re-aligned people to fit what actually needs to be done."
That is exceptionally unusual among law firms—no solitary "I can do it all" figure at the top—but if you’re into process (as any good lawyer will be), you intuitively understand the result of having talented senior staff. They get things done that you can’t do yourself. They follow through on initiatives you launch. They get back to people. They don’t let things fall through the cracks. They return emails and phone calls, delegate whenever possible and escalate when unavoidable. They work while you sleep.
I asked Ralph for his views on the mergers trend in our industry: Has it peaked, just gotten started, or something else altogether?
Attuned to the possible overtones his reply might have with respect to the recently and conspicuously cancelled Dewey/Orrick merger plans, he began undefensively by admitting that mergers between proud and autonomous law firms with decades of history were intrinsically complex.
But on the larger question of the merger trend within the industry—accelerating, decelerating, or none of the above—his view is that M&A is here to stay; there’s no a priori reason to think it will drastically pick up or fall off. And he does emphatically predict that we will see mergers of "strength and strength:" Two firms, neither of which has to merge, but which choose to in order to create a platform neither could achieve alone in such short order.
It seems indisputable that US firms have had better success launching offices in the UK than UK firms have had launching offices here. Why did he think that was?
First of all, he said, don’t underestimate the amount US firms have had to "invest" (or if you prefer, the less euphemistic "lose") to get their London beach-heads up and running. "We’ve lost money there to begin with, I think everyone’s lost money there to begin with, but we’ve lost less and less every year, and many firms are finally making money now. As for the UK firms not having had great success here, I think their compensation systems, which skew towards lockstep, aren’t ideal for penetrating new markets; you need better incentives for sticking your neck out. But I think they’ll make it here sooner than some people expect.
"As for Orrick’s commitment to London, you have to realize you’re in it for the long haul. You do need to make the investment, and be prepared to stick with it, or else you’re not serious about it."
Is Orrick in a "war for talent?" Absolutely. And Orrick isn’t competing just against other law firms, it’s competing against investment banks, management consultancies, private equity and hedge funds, all of which can pay multiples of what even the most astutely-run law firms can pay.
I noticed that Ralph had a copy of this post of mine in front of him, as he pointed to it and observed that the "hostilities" of the latest associate salary spike to $160,000 for first-years was very much a challenge to firms just shy of the top tier. They would have to swallow hard before matching—or not match. It’s yet one more pressure point on those firms.
Finally, what did he see, if he’d thought about it, life for him would hold after Orrick? "Something interesting! I’ll never be done; I’ll never quit. I’m too curious; you seem to be as well."
I started this piece by saying that almost all of us are familiar with the trajectory of Orrick over the past 15 years, and we understand it at an intellectual, financial, quantitative, and rational level; one week ago at this time I certainly shared that understanding.
But I now understand at a visceral level how the dynamic interaction of Ralph Baxter’s personality and vision, and Orrick, have combined to create a new platform in 2007 which would be unrecognizable, and unimaginable, to an observer in San Francisco in 1989.
The question I couldn’t ask, because there’s no one yet to ask it of, is how to follow Ralph’s act.
Update: 4 April 2007:
A reader who is General Counsel at a Fortune 500 company writes:
“As the old saying goes, "I may be crazy, but I’m not alone". I agree with Ralph that firms have not changed because they have not been forced to. That’s not surprising because, as lawyers, they are inherently and highly resistant to change. In addition, most firm structures simply get in the way of such necessary change because, at least in part, they are essentially built on rewards for inefficiency.
"Firms, despite being billed as LLP’s or professional corporations, retain the essential character of collections of individual contributors — these might best be thought of as hotels where similarly inclined itinerants stay.
"As individual contributors, partners stay as long as they like the mint on the pillow and they leave when some new property appears more attractive. Perhaps most distressing, however, is the observation about newbie lawyers. If law firms are in a war for talent, they aren’t asking their clients if it’s a war worth fighting. While I’m certainly prone to hyperbole, I can’t imagine a first year associate in the world that is worth $160K/yr to a corporate client.
"So long as the firms insist on trying to pass those costs on to the client, then we have a very real interest in the unreasonableness of those costs. These are unilateral costs incurred and accepted by the firms — that unilateral decision to increase costs justifies neither rate increases nor other forms of cost pass through.
"That being said, we in the in-house community do have an interest in the long term sustainability and therefore the ultimate profitability of our law firm service providers. As such, we need to instead work with our firm to reduce their costs of providing services while sustaining profitability. That means stopping the focus on top line revenue growth and instead focusing on profitability.
"With that in mind, firms might think twice about increasing their cost structures through unilateral decision. Perhaps the ultimate answer is in working together to change attorney licensing requirements. Before we start paying associates outrageous sums perhaps we should send them to a "farm team" (the legal equivalent to residencies or apprenticeships) to see if they’ve got the right stuff to be useful counselors as opposed to body count to feed the billable hour machine.”
My thoughts?
I think our General Counsel friend is, in truth, exercised about junior-associate billing rates and not about their salaries: At least that’s what I’d be exercised about were I he. After all, it’s not his job to run Orrick, and if Orrick thinks going to $160K for first-years is in its rational self-interest, it’s entitled to make that decision and live with the consequences.
This is how rational consumers behave: If I were in the market for a BMW (which I’m not), I wouldn’t care how much BMW paid its factory workers, or its CEO, for that matter. I would care whether, on the whole, I perceived the BMW model I was eyeing delivered compelling value for its price.
But his other point, that clients and law firms should work together to figure out how to ensure they indeed deliver "compelling value for price" is one I heartily endorse. And, I intuit that he’s thinking of fixed fees, not the billable hour. I particularly appreciate his point about having a long-run interest in firms’ financial health. Whenever lawyers tell me that if they shifted to fixed fees clients would cut their margins to zero I tell them that no sane company wants its key suppliers to go bankrupt. They act as if such a thought had never crossed their minds.
