Horses for Courses

According to data published by Citi Private Bank, covering the vast majority
of large US-based firms, the compound annual growth rate of yearly revenues
from 2001–2007 was 10.6% and that of profits per partner was 9.3%.  Put differently,
the average firm’s revenue more than doubled during that period–up 102%–and
PPP was not far behind–up  87%, even after allowing for a 22% increase in equity
partner ranks.  Results for the great UK-based firms were comparable.

These are stunning figures by any account, and alas also unsustainable.  As
the great US economist Herbert Stein succinctly remarked, “Unsustainable trends
tend to come to an end.”

We have now violently crossed from can’t continue to aren’t continuing (and
are even reversing), and the Wall Street wisdom never to confuse a bull market
with brains has kicked in.  What, everyone wants to know, will this mean? 

Here are some of the theories being loudly or softly bruited about:

• Lower revenue
• Lower headcount 
• Lower associate: partner leverage
• Drastically reduced non-equity partner ranks
• [Note how these all add up to smaller firms; do you detect an emerging
  consensus?]
• A clean sheet of paper re-think of the associate career path–compensation,
  advancement, billing rates, billable hour expectations, and professional
  development included
• Alternatives to the invincible billable hour finally, really and truly,
  gaining traction with clients in the marketplace
• A diversification of practice areas away from the profoundly compromised
  financial services sector
• Searching questions posed about the supposed inevitability and pace of
  globalization.

If you’re looking for my thoughts on which of these may kick in sooner, later,
strongly, or mildly, stop reading now.  Because I believe another issue overrides
all of these speculative future paths for our industry.  (Not that I don’t
plan to continue talking about all of them right here.)

That issue is leadership: 

Your firm’s leaders will be tested as never before–none
of us has lived through anything remotely like now–and the quality of leadership
will distinguish winners from losers, those firms that seize opportunity in
the face of peril from those that freeze in uncertainty. 

Never has visibility been so low. 

Business is not war, and even litigation is not combat, but sometimes military
analogies are helpful nonetheless.   One of the lessons the US Marine
Corps embraced in the wake of Vietnam was never again to fight a war of attrition,
hoping to overcome the enemy simply by throwing more guns, bombs, and human
beings into the fray. Not only did that prove a failed strategy, it of course
came as well at terrible cost.  (Failed strategies that come on the cheap
at least have that much going for them.)  Instead, the post-Vietnam Marine
Corps is focused on agility, speed, and superb reconnaissance.

So when I say that visibility into the future is almost nonexistent, the Marine
Corps would respond, “Conduct some reconnaissance!”  And the
goal of reconnaissance is to probe for areas of weakness in the enemy (read:  your
competitors) so that you can swarm resources into those potential breaches.  The
goal, by the way, is not to swarm resources against the points of
most hardened resistance.  In the military, it’s called choosing your
battles, and in business and economics, it’s called being sensitive to opportunity
costs.

Never has the cacophony of competing demands been so
deafening. 

Clients want not just discounts or lower or blended or capped rates, but they
want fundamentally new approaches to legal work that seek to take embedded
costs out of the system.  Associates don’t want salary cuts (although
my money says they’d accept them, almost by acclamation.)  Partners don’t
want lower profits.  And none of your practice group leaders or office
managers want to see cuts in the areas they oversee.  Your balloon, as
it were, is being squeezed ever more tightly from all sides.

How to respond?

Not by temporizing and not by brute force, across-the-board cuts.  You
must make informed, educated guesses decisions about where
it makes sense to invest and where the firm would be wise to scale back. 

Leading
means making choices. Not even the US Marines can attack across all fronts
all at once, and they wisely choose not to.  Theoretically at least, you
have three basic options for your firm in this environment:

• Uncertain what to do, do nothing.  This is commonly referred to
  as “deer in the headlights,” but my own preference is to call it “risk-averse
  and defensive.”  How might that be, you ask?  Because it comes
  closest to the lowest common denominator managerial imperative of “do no
  harm.”  If you don’t know what to do, do nothing.  That, to
  me, epitomizes “risk-averse.”  It is of course also the short
  road to exposing your firm to some of the greatest existential risks of all.  Even
  tortoises sometimes have to come out of their shells to feed, and they may
  find the landscape has changed unalterably in the meantime.

• Batten
  down the hatches, cut expenses to the bone, sit tight, and hope for the best.  This
  is slightly less passive, but hardly aggressive.  It may see you through,
  but it won’t do much to put a rosy-flushed bloom on your firm’s health on
  the other side.

• Make selective investments premised on assets (everything from talent to
  office space) being remarkably cheap compared to their price tags of just
  18 months ago.  Judge–as best you can–where blood will start
  flowing again on “the other side” of this in the economy, and place a variety
  of small but strategic bets on those sectors and practice areas.  If
  you are tempted to adopt this model, which I highly commend to you, keep
  the Dell philosophy in mind:  They’re willing to make a large number
  of small bets, but they are equally if not more willing to pull the plug
  on losing bets ASAP.  Open a handful of Dell kiosks in Sears stores?  Sure,
  let’s try it:  Bombs out.  Rather than butt their heads against
  the wall by redoubling the efforts, they pulled the plug quickly and utterly.  Learned
  something.  (And recall the Marines not assaulting the most
  heavily reinforced compounds on the front.)

And never has the need been more urgent for great and visionary
leaders to step forward.

“Great” and “visionary” are easy to say but hard to do.  How
hard?  This month’s Wired magazine has a story entitled “Googlenomics,”
which tells the tale of how what came to be Google’s fundamental locomotive
of revenue–advertising–came to be as powerful as it is.  And
part of its success is due to Google’s own decision, internally, to kill off
what had been the largest part of its advertising revenue stream in its early
days:  Old-fashioned ads sold by New York-based Google ad reps over martini
dinners to major media buyers, a service called “AdWords Premium.”

Here’s the
story (emphasis mine):

It wasn’t long before the success of AdWords Select [based on an automated
auction algorithm as opposed to human sales one-on-one] began to dwarf that
of its sister system, the more traditional AdWords Premium. Inevitably, Veach
and Kamangar [two very very early Google team members–Kamanagar was the
ninth employee] argued that all the ad slots should be auctioned off. In
search, Google had already used scale, power, and clever algorithms to change
the way people accessed information. By turning over its sales process entirely
to an auction-based system, the company could similarly upend the world of
advertising, removing human guesswork from the equation.

The move was risky.
Going ahead with the phaseout–nicknamed Premium Sunset–meant
giving up campaigns that were selling for hundreds of thousands of dollars,
for the unproven possibility that the auction process would generate even
bigger sums. “We were going
to erase a huge part of the company’s revenue,” says Tim Armstrong, then
head of direct sales in the US. (This March, Armstrong left Google to become
AOL’s new chair and CEO.) “Ninety-nine percent of companies would
have said, ‘Hold on, don’t make that change.’ But we had Larry, Sergey, and Eric
saying, ‘Let’s go for it.'”

News of the switch jacked up the Maalox consumption among Google’s salespeople.
Instead of selling to corporate giants, their job would now be to get them
to place bids in an auction? “We thought it was a little half-cocked,” says
Jeff Levick, an early leader of the Google sales team. The young company wasn’t
getting rid of its sales force (though the system certainly helped Google run
with far fewer salespeople than a traditional media company) but was asking them
to get geekier, helping big customers shape online strategies as opposed to simply
selling ad space.

Levick tells a story of visiting three big customers to inform
them of the new system: “The guy in California almost threw us out of
his office and told us to fuck ourselves. The guy in Chicago said, ‘This
is going to be the worst business move you ever made.’ But the guy in Massachusetts
said, ‘I trust you.'”

Every firm is not Google, but I suspect in their heart of hearts every firm
wishes they could be ever so slightly more like Google.

You’ve just seen what it really takes to be Google.  It’s not
quite so brazen as eating your first-born, but it’s being willing to bet on
a new and improved business model that will, in the bargain, eviscerate perhaps
your #1 existing cash cow.

This is not, I might add, the kind of thinking that sits back in the Hippocratic
Oath mode of “First, do no harm” for a seven-year period when the compound
annual growth rate of revenues is nearly 11% and that of PPP is nearly 10%.  Those
days are gone, I imagine never to return.

You may be (probably are in fact) telling yourself that your firm could never do anything remotely as radical as what Google did because lawyers are “risk-averse.”  As ubiquitous, nay universal, as that formulation is, I have never been satisfied with it; I think it’s fundamentally misleading.

I think a far more accurate statement is that lawyers are “change-averse.”  How is this different and why might it matter?

At the moment we are witnessing on truly dramatic scale the implications of senior leadership of major organizations being “change-averse.”  I have in mind, as of this very week, General Motors.  When Toyota and other Japanese car-makers came onto the scene in the 1970’s, the feckless (make that nonexistent) response of GM was to continue doing what they had always been doing in terms of their now-revealed-to-be-antiquated manufacturing processes and customer market segmentation.  Choosing not to respond (not, that is, to change) turned out to be the equivalent of embracing not just any risk but what we now know to be–and what some prescient observers at the time even predicted would be–a fatal, game-ending decision.

The wonderful London Business School professor Don Sull (who I had the opportunity to meet when over there last week) has developed the concept of “active inertia” to describe how great companies faced with exogenous changes to their markets often find it easier to double down on their pre-existing commitments than to take honest stock of the altered environment and seriously re-evaluate their own internal processes (“how we do things around here”) or their values or their “frames” (what they see when they look at the world).

The moral of GM, then, for leadership of any firm, is that there are times in the life of an organization when the riskiest possible course–one that can, as we see, be absolutely fatal–is to be change-averse.  And by being change-averse one ends up embracing the most monumental “risk” of all.

So if I could ask you only a single
question in pursuit of seeing your firm emerge on the other side more capable
and competitive externally and more united and vigorous internally, it would
be:  Do you have the right people at the top? 

How, you ask in return, can you tell?   By these criteria:

• Bold and even inspiring vision for the firm combined with personal modesty
  and humility.

• A collaborative and open mind and a propensity for agility over resolve.
• Energy and clear-eyed optimism combined with unyielding rejection of the
  wishful and the superficial.

Tomorrow will not resemble yesterday.  Do you have the right horse for the
new course?