Adventure of Strategy

Just a week into the new year and the danger signals are coming thick and fast about just how bad 2009 (and perhaps even a few years thereafter) might be in the United States and Europe.

In the New York Times today, we have President-elect Obama warning of a trillion dollar + deficit for years to come. Read this together with Bloomberg's assessment of $7.4 trillion being the total cost of the bailout / stimulus package.

Nouriel Roubini speculates that US Treasury Bills may be the next bubble to burst, which could have a devastating impact on the USA's ability to raise the sovereign debt that it needs to get its economy back on its feet:

"Given the level of extension in yields, it would not be difficult to generate losses of say 10% in the 10-year Treasury bond, and as much as 20-25% in the 30-year Treasury bond over a very short period of time"

Dennis Howlett comments in If all else fails on the possibility that fallout from the Madoff debacle could cause an Arthur Andersen style collapse of a major accounting firm. He lists the claims (pre-Madoff) that the largest six US accounting firms were facing as follows:

• 90 actions with damages claims in excess of $100 million
• 41 cases seeking damages in excess of $500 million
• 27 cases seeking damages in excess of $1 billion
• 7 cases seeking damages in excess of $10 billion

Finally, Martin Hutchison of Money Morning speculates about whether Citi Group will be allowed to slide into collapse:

"Obviously, if the government chooses to keep Citi afloat, U.S. taxpayers, as a group, are (just) rich enough to make that happen. But a sensible government will eventually realize that these expensive rescues are pointless. The financial services business - once an economic mainstay - is declining in importance in the U.S. economy, and is probably half its relative size compared to its historic levels from the 1970s. In such an environment, capacity needs to be lost and Citi is the capacity most obviously surplus."

If Citi is bailed out further than it has been already, Hutchison speculates on which US bank will be the next most likely bank roadkill in 2009:

"My bet would be Bank of America, which made a very foolish acquisition in Countrywide Financial Corp., at the beginning of 2008 and a very dangerous one (because of its size and over-leverage) in Merrill Lynch right at the end of the year. Countrywide was an enthusiastic participant in the worst excesses of the housing bubble, and hence will have a correspondingly large share of its detritus, while Merrill Lynch itself made what turned out to be a major misstep when it bought a major subprime mortgage lender, First Franklin, at the absolute peak of the bubble in 2006."

It's easy to get punch drunk with the deluge of negativity, but this is not a time for leaders of firms to lose focus. This time will pass. The firms that survive will be those that are brutally Darwinian and adapt unrelentingly as circumstances evolve.

By now, I'd imagine that most firms will have taken cost-cutting to the point where they are no longer cutting fat but slicing into meat. The next steps are:

1.   A sober and objective assessment of which areas of the firm are likely to survive (say) another 10 - 20% drop in fee revenue and a strategy to separate those areas that will not and divert resources being consumed by them to areas that will. If this exercise threatens the overall viability of the firm: start considering merger partners well before you are forced to with your back to the wall.

2.   An intense and highly aggressive focus on growing market share of the diminished pool of work available. This requires so much more than just reading another book about business development or attending a marketing course. To use a golfing analogy: your people need to be single digit handicap players in the area of developing and retaining business. Period!!! I would highly recommend Gerry Riskin's intense hands-on, behaviour based approach. The results that he has achieved in several law firms recently are nothing less than astounding.

3.  Cash is king. Be fanatical about tracking your 13 week cash flow. Assess your clients ability to pay before accepting an engagement and if there is any doubt, require retainers up front. Relentlessly drive down your working capital requirements.

4.  Assist your key people so far as this is possible to gear down their perosnal income requirements so that if (when?) incomes drop this year, the consequences though uncomfortable are not disastrous. You don't want key people in your firm to become less effective / ineffective because they are experiencing financial hardship or worse.

5.  Seek external help from people that understand your firm's business and also what is really going on in the market, especially where brutal objectivity is required. There are many consulting services that can be dispensed with when times are as uncertain as now, but it is still critical that the strategic decisions that you take are soundly objective.

By now, it is obvious to all but the most myopic that the United States and therefore the rest of the world is in the midst of the greatest banking crisis of our generation and probably since the Second World War. The London Interbank Offered Rate (LIBOR) for overnight deposits shot up last night on both sides of the Atlantic on the news of Lehman Brothers demise, to rates that have not been seen since 2001. The LIBOR overnight rate is perhaps the best measure of the level of inter-bank trust and assessment of risk. Reuters reported this morning:

“The sense of crisis engulfing interbank money markets deepened on Tuesday as the cost of borrowing overnight dollars surged above 10 percent, indicating that money markets had frozen and counterparty trust broken down completely.

As the fallout from Lehman Brothers' collapse at the weekend continued to infect financial markets, the interest rate banks demanded for lending dollars overnight to other institutions ballooned to more than five times the U.S. Federal Reserve's 2 percent target rate.”

Click here to view the rather sobering graphic of the LIBOR overnight rate since 2000.

Within a matter of months, three of the “Big 5” independent Wall Street merchant banks have collapsed. Other banks are de-leveraging at a brutal pace. So far, the global banking industry has written off half a trillion dollars. The IMF has estimated the full extent of the global bad debt at some $1 trillion, including at non-banks and Nouriel Roubini, an economics professor at New York University, has been talking of an ultimately $2 trillion size problem. Alan Greenspan said just last week that “there’s no question that this in the process of outstripping anything I’ve seen and it still is not resolved and still has a way to go and, indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes.”

At what level will the price of homes stabilize? The optimists seem to hover around 30% below the peak that they achieved. The pessimists …..

This means that anybody that was more than 30% leveraged on their mortgage at the peak now owes their bank more than their house is worth. Given their increasing appetite for short term debt over the past two decades this in turn means, by irrefutable logic, that many middle class Americans are personally bankrupt. Including, quite conceivably, many of your colleagues. Given that most knowledge intensive enterprises like law and other professional service firms rely on the personal creditworthiness of their owners to secure their corporate lines of credit, this means that many such firms are either already in or are about to find themselves in dire financial straits, too.

If you have not yet switched the focus of your strategy to creating contingencies to deal with the very serious possibility of survival under the worst possible economic scenarios, then do so now. Do not delay.

1.  Make sure that you have jettisoned all non-essential costs (but not the essential ones)

2.  Make sure that you are getting accurate and objective information from the market .... keep especially close to your key clients

3.  Make sure that you have a plan based on the "What If?" scenarios that you have identified might emerge

4. Keep your eyes peeled for opportunities as well as threats to be warded off

5. Unless absolutely unavoidable, stay true to your core strategic intent

This time will pass. Right now, a clear mind and strong leadership are absolutely essential.

You know that old game about naming the person, living or dead, whom you would most like to meet? In my case, Nelson Mandela would easily elbow out other heavyweights like Warren Buffet and the Dalai Lama for first place in the "living" category.

"Madiba," as he is affectionately and respectfully known to all South Africans that have a functioning brain, has just turned 90. The Time Magazine of July 21 is running an article titled: Mandela at 90 : The Secrets of Leadership : Eight lessons from one of history's icons. 

Well worth a read. Here are the headlines:

No 1.  Courage is not the absence of fear - it's inspiring others to move beyond it
No 2.  Lead from the front - but don't leave your base behind you
No 3.  Lead from the back - and let others believe that they are in front (shades of Lao Tzu with that one, but with a uniquely African twist.
No 4.  Know your enemy - and learn about his favourite sport
No 5.  Keep your friends close - and your enemies even closer (shades of Sun Tzu this time.)
No 6.  Appearances matter - and remember to smile
No 7.  Nothing is black or white
No 8.  Quitting is leading too.

These eight lessons give some indication of the brilliance of the man as a strategist, amongst his many talents. His actions have often been counter-intuitive. His ability to let others (sometimes even his enemies) lead whilst playing the role of a powerful background influence has been uncanny. He is one of those rarest of strategists that does not try to reduce everything to simplistic binary choices where his own assumptions dictate what must be enforced. To quote from the narrative accompanying Lesson 7:

"Life is never either/or. Decisions are complex and there are always competing factors. To look for simple explanations is the bias of the human brain, but it doesn't correspond to reality. Nothing is ever as straightforward as it appears."

The essence of strategy is to embrace complexity; not to deny it. Economies, firms and relationships within groups of people are all both complex and dynamic systems. What worked yesterday does not necessarily work today, because the world is changed. Humility is needed to acknowledge that a course of action that one previously advocated is no longer the best, and to back down gracefully. (See Lesson 8.)

According to their web site, Quinn Emanuel Urquhart Oliver & Hedges, LLP is a 375+ lawyer business litigation firm - the largest in the United States devoted solely to business litigation.  Their lawyers have tried over 1175 cases and won 1078, or 92%.  When representing defendants, their trial experience gets them better settlements or defense verdicts.  When representing plaintiffs, their lawyers have won over $6.2 billion in judgments and settlements.  They are the only firm in the United States that has won three nine-figure verdicts in the last five years. In that same period they have also won three nine-figure settlements.

Not at all a bad role model for other litigation focused firms.

If you want an insight into how the firm works, I'd recommend that you read the posting :

Wherein We Hear From John Quinn of Quinn Emanuel

in the blog Above the Law. It contains an email from name partner and founder John Quinn, in response to a few gripes that his firm's associates had apparently submitted to Above the Law. Topics that he covers in his email include:

• The Firm's approach to billable hour targets and  bonuses ($0 for associates that billed <1900 hrs ; Cravath + $5k for those 2100 hrs and above)

• Partner appointments (they eschew non-equity partners)

• Governance (Quote: "if you make the right decisions about who you practice law with, lawyers do not need to be governed; you just need to see that they have adequate help and stay out of their way. at our firm we have very little governance")

•  and even party budgets (they are "not adverse to spending money" on these!)

'Above the Law' and my favorite part of his email?


"it has been suggested that i do not use capital letters in my typing in an effort to be "cool." i am not cool; wish i was, but after 56 years i don't think it is going to happen. the fact is i am not coordinated enough to hit the shift button with one hand and a letter with the other."

Hat's off to a great leader (Euromoney calls him "one of the world's leading litigation lawyers"  and Chambers calls him "known litigation genius") of an amazing firm (what other epithet for a firm that wins 1078 out of 1175 trials) for putting pen to paper (or rather fingers to keyboard) in this way.

Gary Wingens of Lowenstein Sandler and Frank Burch of DLA Piper listen to Dan DiPietro of Citibank forecasting a tough 2008, at The Army and Navy Club in Washington DC during The Edge International Managing Partners Strategy Summit

Last week, my Edge International partner and friend Gerry Riskin and I hosted a very private, personal invitation only, Strategy Summit for the leaders of 10 law firms to explore:

•    key strategic issues facing law firms today

•    what law firms are doing to address these issues

•    what constitutes "best practice" in law firm strategy process

The managing partners represented firms ranging from the largest in the world (DLA Piper) to a tiny, brand new firm with a highly innovative business model (Valorem Law Group.) It was a truly fascinating two days of strategic debate and solution building.

On the facilitation / faculty side, we were joined by guests Dan DiPietro of Citi Private Bank’s Law Group and Michael Rynowecer, President of BTI Consulting Group in Boston. The venue was one of the most prestigious and historic venues in Washington DC: The Army and Navy Club, barely a block from the White House.

A publication is currently being prepared to communicate learnings from the summit for publication in February. Not everything will be covered. The summit included many candid exchanges between the managing partners, sometimes on quite sensitive issues. Arguably, this was by far the most valuable part of the summit. We have agreed that the managing partners themselves will be the final arbiters on what gets published and what does not.

Thank you very much to the managing partners that participated. In alphabetical order, they were:

Charles P. (Chuck) Adams, Jr., Managing Partner, Adams & Reese
Francis (Frank) Burch Jr., Joint Global Chief Executive Officer, DLA Piper
Nicolás Herrera, Managing Partner Guyer & Regules (Montevideo, Uruguay)
R. Steven Kestner, Executive Partner, Baker & Hostetler
Patrick Lamb, Chairman, Valorem Law Group
Don G. Lents, Chairman, Bryan Cave LLP
Christopher Marston, Chief Executive Office, Exemplar Law Partners
Keith Vaughan, Managing Partner, Womble Carlyle Sandridge & Rice, PLLC
Mark D. Wasserman, Managing Partner, Sutherland Asbill & Brennan (substituted for by Executive Partner Tom Gick on Day 2)
Gary M. Wingens Managing Partner Nominee, Lowenstein Sandler

Each invitation was extended based on personal peer recommendation.  The event was not publicized beforehand.  Many of those invited could not attend, though, because of conflicts with their internal firm events, specially related to compensation given the time of year.

Given the very positive feedback from the participating managing partners, we will certainly host similar events in the future.  If you are interested in being invited and are willing to recommend other firm leaders with whom you would like to explore timely issues, please let me (email me) or my Edge partner Gerry Riskin know.

What can one learn about leadership from an angry mother-cow? Before you dismiss the notion as too "off the wall" even for Millard, ye who be serious-minded folk, consider the author: Dee Hock  is founder and former CEO of Visa USA and Visa International, now a $1.25 trillion enterprise owned by 21,000 financial institutions. So if he told me that there were lessons to be learned from angry mother inchworms, I'd still listen.

His article is titled The Art of Chaordic Leadership and it was published in Leader to Leader seven years ago. It's a darn good read. "Chaordic" is a term that Hock invented to describe forms of organization that are neither rigidly controlled nor anarchic; a hybrid form of consensus decision-making. If you don't have the time to read the whole article, at least click below and scan through his bullet points on chaordic leadership.
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Interesting insights today into the strategy of the managing partner of a global law firm, in the British newspaper The Independent, with an interview with David Childs of Clifford Chance. The highlights:

• As the firm's chief operating officer, before being elected managing partner earlier this year, he shaved $75 million (GBP40 million) off the firm's cost base from 2003, requiring some "tough decisions."

• He notes increasing pressure from clients to reduce costs by moving mundane tasks to lower cost locations

• Top London firms have been more successful than US firms at growing internationals, although this has been at the cost of diluting profits compared to "New York's finest."

• Says Childs :   "The main issue for us is that there is a pack of leading international law firms. And while we are different because we have real depth of resource in the US, Europe and Asia, we know that will go over time. So the question is how one positions oneself ahead of the pack." The answer, he says, lies in continuing to build a global network that can help clients wherever they choose to do business.

• Hopeful that the situation in India (where non-Indian law firms are prohibited from practicing) will change soon

• Even given the pressures of his managing partner role, he continues to do some client work.

Further to my previous posting on succession planning and leadership in professional firms, I thought it would be useful to push the topic of leadership a couple of inches deeper. There is much around on leadership, ranging from pure wisdom to pure hogwash. Everybody from generals to psychologists to coaches to mountain climbers have their bit to say. But there are relatively few resources, I've found, from people that have both practiced and studied leadership deeply and comprehensively.

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How do professional firms select their leaders?

A study undertaken by the Managing Partners Forum (MPF) earlier this year confirms that the way that law and accounting firms approach selection of leaders and succession planning is somewhat different to other organizations. The findings may well be true in many other professions, too. Yet effective leadership is critical to the success of a modern professional firm. The MPF study examined practices at a sample of 43 of the UK's top 100 law firms and top 50 accounting firms and aimed to "shed light on the degree of consistency at each stage of the selection process for managing partners (MP,) senior partners (SP,) and heads of business units (BU.)"

The results of the study are well summarized in an article titled Less Politics, Clear Rewards by Nigel Knowles (joint CEO of DLA Piper and chairman of the MPF) and David Pester (MP of TLT Solicitors.) The article was published in the June 2006 edition of Legal Business.

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Roy Andersen is a man of many diverse talents. Besides being Chairman of the Board of South African insurance giant Sanlam and civil engineering contractors Murray & Roberts, as well as of the South African interests of Richard Branson's Virgin group, he also serves as a major general in the South African National Defence Force, where he commands the Defence Reserves for the South African Navy, Army, Air Force and Medical Services. He is a chartered accountant by profession, which all goes to show that one should never underestimate those that choose to arm themselves (primarily at least) with pen and pocket calculator! Being an artilleryman, this particular accountant's other weapon of choice would no doubt be be the G6 Self Propelled 155mm Howitzer!

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Will Herman has a posting titled When To Tet Rid Of The "Best" People That Work For You, with some personal experience on handling the "900lb gorillas" that so many firms seem to have.

A 'sound-byte' :

"One of the problems I encountered more often than I'd like to admit took me a very long time to figure out. It's the problem of having one of the best people working for me in terms of performance to their assigned task also being a performance black hole for the rest of the organization. You know the type, they usually consume more of the manager's time than anyone else; they openly vent disagreements in direction or goals in a negative manner without regard to who's listening; they spend hours each day discussing all that is wrong with the company or group with people that are not as productive and, therefore, can't afford that time; and they completely ignore the impact of their natural leadership position by virtue of their high-performance and productivity."

Stephanie West Allen has a posting on her blog idealawg, that contains a link to whole suite of lectures (25 of them) given by Tal D. Ben-Shahar in his spring semester course at Harvard on the psychology of leadership. It is a quite remarkable series, but then Ben-Shahar did teach two of the three most popular courses at Harvard College that semester! The course is described on the Harvard site as follows:

"How can leaders - in the business sector, politics, or education - create an environment that facilitates growth? Topics include transformational leadership, personal identity, change, ethics, peak experience and peak performance, motivation, and systems thinking."

One of the characteristics of the leaders that really 'ring the bell,' is a thirst for knowledge and self-betterment that never dries up. There can be few areas where the need for top-rate skills is greater. I commend watching and listening to these lectures to anybody's personal self-education programme.

To link directly to the lectures, click here. (Ain't technology wonderful?)

IBM's recent study on the world's top corporate CEOs is, they say, the most comprehensive survey of its kind ever conducted. It polled 750 top CEOs worldwide. The study discovered that the majority of these global CEOs plan fundamental change in their organizations over the next two years, and expect new forms of innovation to drive growth.

Frankly, though, some of the results are worrying .....

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Real-world decisions are not always made through logical steps, and often they shouldn't be. That's the startling conclusion reached by renowned strategist Henry Mintzberg, author of the landmark book The Rise and Fall of Strategic Planning and Frances Westley in an article in the Spring 2006 MIT Sloan Management Review, titled Decision Making - It's not what you think.

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There's nothing new under the sun, so the saying goes. That's as true in change management as anything else. Of course IT has given us new tools to communicate and collaborate in driving change, but the underlying principles are constant. To illustrate, here's a quote from Niccola Machiavelli from his book on statemanship called The Prince, first published in 1512:

"There is no more delicate matter to take in hand, nor more dangerous to conduct, nor more doubtful in its success, than to set up as a leader in the introduction of change. For he who innovates will have for his enemies all who are well off under the existing order of things, and only lukewarm supporters in those who might be better off under the new."

This is clearly as true to the modern day strategist or change agent as it was 500 years ago. Here's another Machiavellian quote, perhaps more aimed at the strategist him/her self:

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To judge the calibre of a leader, look at the behaviour of his or her followers. History is replete with even democratically elected leaders who had the "title", but were nothing of the sort. This is as true in professional service firms, where the dice are heavily loaded against leaders in the first place, as anywhere else. David Maister blogged about this recently, seizing several nettles that people often tiptoe around. The "fatal flaw," he says, is whether professionals even "want" to be led at all. He avers that few do, and many actively resist it:

"We want to be helped, we'll agree to be coached and (with careful definition of the term) we might consent to be managed. But we'll rarely agree to be led."

Ironically, I think this "fatal flaw" gets very close to defining what a leader might be (in a professional service firm or, I'd suggest, anywhere else in the known universe.) It also gives good guidance for measuring leadership effectiveness, in professional service firms and elsewhere.

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Click pic to enlarge

Believe it or not, this is a map of California. No, it's not a futuristic map following a cataclysmic earthquake. It is actually several hundred years old (1662.) Stewart Black and Hal Gregerson used one similar to it in their book Leading Strategic Change as an illustration about times when there is too much wishful thinking and too little knowledge.

How the map came to be drawn that way has as much relevance for 21st Century professional service firm strategists as it did for 16th Century explorers.

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I have just read a posting on David Maister's blog that is undisputedly the best piece on the topic of leadership in the context of professional service firms that I have come across in a good long while. It's called Dangerous Rubbish About Leadership and it's really solid stuff! (You'll also understand my somewhat weird choice of graphic for this posting once you've read it.)

Religious conviction; the national Treasury; a firm handshake: all symbols of trust that evoke expectations. Most importantly: the expectation that one will not be betrayed. If there is one place where trust is paramount, it is in firms that practice professions such as law, accounting and consulting, where the service being delivered is so intangible that trust is the only assurance that the client has, that its work will be done properly. Small wonder that trust-based relationships both with clients and internally are the very cornerstone of the cultures of such firms; certainly those at the 'top of the curve.'

The March/April edition of the Harvard Magazine contains an article on the differences between risk aversion generally and aversion to being betrayed. It makes fascinating reading and, I think, introduces a seldom-considered facet to the process of strategy.

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Surely the most dramatic mythological example of rebirth and renewal, is the Phoenix (or "Firebird.") It is found in ancient Egyptian mythology, various myths derived from it and, most recently, in Professor Albus Dumbledore's study in Harry Potter.

Said to live for 500, 1461 or for 12594 years (depending on the source), the phoenix is a bird with beautiful gold and red plumage. At the end of its life-cycle the phoenix builds itself a nest of cinnamon twigs that it then ignites; both nest and bird burn fiercely and are reduced to ashes, from which a new, young phoenix arises. The bird was also said to regenerate when hurt or wounded by a foe, thus being almost immortal and invincible.

Imagine, for a moment, that you were able to regenerate your firm in this way. Miraculously, you were able to instantly transform it into an organization of the highest performance with, what's more, that performance being sustained.

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It's a little known fact that back in 2002, the US Military went through a major war game exercise to model what a war between the United States and Iraq might look like. The exercise, Millenium Challenge, took two years to plan and cost $250 million, involving some 130 000 troops and very sophisticated computer modeling. And the USA lost!

Lieutenant General Paul Van Riper, formerly the Commanding General, Marine Corps Combat Development Command, Quantico, VA, played the role of the enemy commander; "a crazed but cunning megalomaniac ruling a militarily powerful Middle Eastern nation." In the opening stages of the exercise, using the element of surprise and highly unorthodox tactics, Van Riper's forces sank most of the US fleet in the Persian Gulf and brought the entire offensive to a halt. It was indeed fortunate that when the real war started, Saddam Hussein did not have a Van Riper commanding his forces.

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Those that regularly read my material or work with me will have noticed a common thread. Strategy, I firmly believe, must focus on making firms resilient to the unexpected. The world we live in is too complex and dynamic to plan for all eventualities. Even following detailed scenario analysis, unforeseeable events inevitably arise.

One of the new terms that the war on terror has introduced to the strategists lexicon, is the 'black swan.' Nassim Taleb, writing in the New York Times (free registration required) defines this as "an outlier; an event that lies beyond the realm of normal expectations." Most people [except Australians, of course, where real black swans are common] expect swans to be white. Their experience tells them to. "A black swan is, by definition, a surprise." Today's world, clearly, is more full of surprises than ever before.

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If there is one blog that any thoughtful observer of the economics of law firms needs to add to his aggregator, then it is Bruce MacEwen's ongoing discussion on that topic, Adam Smith Esq. I am delighted to have been able to hook up with Bruce for coffee twice in the last week or so as I passed through New York, once westwards and then again back eastwards. His philosophy on blogs, that they should be a channel for carefully formulated, useful commentary on matters of importance in one's topic, corresponds exactly with mine. You will never hear from either of us what we thought of a recent movie, the current sports or social happenings, or such trivia.

One of Bruce's most recent postings on the new chairman at Shearman & Sterling, and what that great firm might do to boost its profitability, is a case in point. As is his posting How Do You Know If The Troops Got The Memo, which deals with another important emerging aspect of professional service firm strategy, namely social network analysis.

At the time that Montgomery took over command of the Allied 8th Army in North Africa in mid 1942, it was almost completely demoralized. Superior in manpower, technology and tactics, Rommel's Afrika Corps had dealt it blow after crushing blow. The 8th Army was sitting astride an area called El Alamein, astride the main road from Libya and Tunisia to Cairo. The next tactical move, it was widely expected, was a retreat to Cairo and defeat in Africa. This was not to be.

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None of his expeditions achieved their objective, yet he is recognized as one the greatest leaders ever. In 1914, he set sail in the Endurance, intent on being first to reach the South Pole. What followed was utterly astounding...

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