In 2004, in the aftermath of the Enron / Worldcom / Arthur Andersen etc debacle, a book that I read by Alex Berenson and Mark Cuban titled The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America turned out to be a real page-turner. It outlined all the 20th Century financial crises, ending with the [then] most recent one. The authors concluded that executive compensation was to blame. Specifically stock options (in particular) and other aspects that encouraged executives to sacrifice long term vision on the alter of short term results. The book concluded on a sombre note, with a warning that things were unlikely to change and that short term greed would, in time, induce another crisis.

Sadly, as we all now know, they were right. This morning, there were several blog posts in my aggregator commenting on Princeton economist Alan Blinder's article in the Wall Street Journal titled Crazy Compensation and the Crisis. Here are two of them:

Greg Mankiw's Blog - Blame the Board

Mark Thoma - "Crazy Compensation and the Crisis"

Across the pond in the UK, Alice Cook's blog 'UK Bubble' presents a post titled All Debt and No Equity, showing how reluctant UK firms are to raise capital by issuing new equity. As any first year MBA student knows, equity capital is far more expensive in the long term than debt, because the latter is simply repaid without having to fund capital gains resulting from the company's growth. Debt funding, if you can find it right now, also currently costs next to nothing. Cook suggests that the real reason for the aversion to issuing new equity is the effect that the dilution will have on share prices and ..... yes .... bonuses are usually linked to share price performance, so managers have a strong incentive to keep the share price high in the short term even at the risk of long-term corporate sustainability. So, given the degree to which the credit supply has constricted, companies may be giving up growth opportunities that could be funded with equity funding instead, because executives fear for the impact on their pockets personally.

If we can't fix this, then we would be justified in wondering just how long it will be before another crisis driven by compensation systems that over-reward short-term performance drives the western world to the brink of collapse again!!!

There are models that seek to balance compensation sensibly with strategy. The balanced scorecard is perhaps the best known and I have worked with several law firms now to align their compensation systems for both partners and employees with its principles. It is as well to remember that Arthur Andersen had a balanced scorecard system too .... the "four rocks on which our firm is based" it was apparently called, although cynics reportedly called it the "three pebbles and a boulder" because of the degree to which revenues were prioritized over the others. In other words, their scorecard wasn't balanced.

As firms scramble to redesign their compensation systems and make them more performance-driven, it is critical to think carefully about the unanticipated consequences that the changes may drive. There is a great clamor at present to ditch lockstep systems and focus relentlessly on performance. I worry that "performance" in many cases is being defined in the same way as in the "Wall Street Syndrome" described above ..... short term and focused [almost?] exclusively on "the number."  Designing effective compensation systems that balance short term performance with sustained, long-term profitability and corporate resilience and agility may in fact be one of the most important strategic priorities facing law firms right now.

I'd love to hear your comments on this ....

I snapped this picture of a Daily Telegraph advertisement on a train station in England during my last trip over there and just posted it on Facebook. A couple of people have commented on it so I am posting a high resolution image of it here and a PDF here in case it is of use to any of you good readers of my blog.

Who says firms cannot change? In the 1930s, IBM made business equipment like weighing scales; in the 1950s Lamborghini made tractors and in 1979 Nokia made wellington boots. So, it is that hard to reinvent oneself? The answer of course is "yes it is .... and that is so why so few succeed," but for those that are determined to do so, hopefully this will help with a little inspiration!

A couple of weeks ago, I was honoured to be asked by Law South (a collaboration of nine law firms in the South of England) to address their annual conference on the topic of scenarios for the future of the legal profession through to 2015. This was the third time over the years that I have served Law South in this way. This year, the evening's entertainment was provided by a band called 'The Lawbreakers,' drawn from the ranks of the lawyers at Wilsons, which is a firm better known for its premier private client services to high net worth individuals, land development and services to independent schools.

They were very good. In fact, I recorded one of their numbers using the video function on my digital camera, intending to post it, but the camera's capabilities in recording the sound properly did not do justice to their performance so I think we'll keep to the photograph above (click here to view a larger image.) Not sure what the white orbs in the photo are .... maybe the music woke the ghosts in the magnificent old Victorian manor house (the Elvetham Hotel in Hampshire) that was the venue for the conference .... :-)

Clearly a firm of lawyers (or rather solicitors, given that we were in England) that like each other and have great fun practicing together .... which does make life's ups, downs and recessions far easier to deal with.

Here's a reason to polish up your firm's "elevator pitch" :

Sainsbury's is a large UK supermarket chain selling a wide range of products from foodstuffs to white appliances to financial services. According to the BBC, they have just instituted a system based on the successful BBC TV programme Dragons' Den, to select their future suppliers.

In Dragons' Den, aspirant entrepreneurs appear before a panel of venture capitalists and have three minutes to persuade them (or not) to fund their business idea. Some of ideas that have been pitched are hilarious.

Now, everybody from suppliers of yoghurt to fresh fish to dishwashing liquid to .... legal services (!!!) .... are apparently being required to appear before the Sainburys' Dragons, to persuade them why they should be allowed to supply the corporation. The panel has already seen eleven firms, including City 'buebloods' Addleshaw Goddard, CMS Cameron McKenna, Denton Wilde Sapte, and Linklaters.

If you had to reduce what you say in pitching your firm to clients to three minutes (the time limit on Dragons' Den,) what is it that you would say? Foremost in the Dragons' minds would probably not be your firm's general credentials, history or the quality of your lawyers. They would not have invited you to pitch, were they not already confident in these. Judging by the results of recent client satisfaction surveys on both sides of the Atlantic, they would be looking and listening mostly for evidence that you:

1.  understand their business better than the other pitchers

2.  have a better value proposition for them (which is more than cheaper hourly rates)

3.  will be more responsive and easier to work with than the others

Now .... these things are almost impossible to "fake" and they are routinely amongst those issues that come out at the top of the list of areas of unhappiness that corporate clients have with the law firms that serve them. So, if your overall strategy was focused on genuinely excelling in these three issues, in your selected areas of business, then what would you need to do differently? In what kinds of initiatives would you invest within your firm? How would you change the way that you measure performance (assuming that the old adage that people do as they are rewarded rather than as they are told is true.) How would your firm need to evolve? How would you interact with clients?

Two swallows do not make a summer, as the old saying goes, but here are a few links to current articles and blog posts that give some cause for optimism:

Chinese manufacturing is expanding for the first time since August 2008

End to Europe's recession in sight?

Good economic news?

So this is what a recession looks like ....

Clearly, we are not out of the woods .... not by a long way .... and there is undoubtedly more pain to come in the next few months. All but the most optimistic economists whose work I am tracking to make sense of the implications for law firm strategy are putting real recovery firmly into 2010. But .... things do look like they will start to improve before then and we may look back and see that the bottom of the recession "trough" was round about now, or even that it occurred a month or two ago. More importantly: a clearer picture is also emerging now of what the strategic environment for law firms will look like post-recession. It is very clear that it will be substantially different, in many important ways, to what we were used to in the 1990s and 2000s.

For the past six months at least, managing partners have been mostly too busy firefighting to think deeply about strategy. This is unsurprising. The most brilliant strategy in the world means nothing if the next skirmish proves fatal. The time is close though, if not already here, to start shifting the focus back to the medium term. By "medium term," I mean the period from the return to positive GDP growth (i.e. early 2010) up to three to five years (still a useful time-frame) later when the recession's effects will have been fully diluted into a new set of market vectors. The reward for doing so will be to identify actions that need to be taken in late 2009, in order to drive your firm forward in that medium term, while your competitors' eyes are still "off the ball." For some firms, this will mean strengthening their position. For others, it could mean the difference between prosperity and dissolution.

This medium term will almost certainly remain full of surprises (of both the opportunity and the threat variety) so agility and flexibility are critical. In turn, this will take a very different approach to strategic planning, to that which most law firms (and others) used in their last strategic planning cycle. So, even if you are not ready to embark on a new strategic planning exercise just yet, it is time for you to start thinking how you and your firm need to change the way that you think about strategy and how you intend approaching strategic planning this time around.

If you'd like to discuss options further, by all means email me. I'd love to hear from you.

How much would your firm charge to compile a term sheet for a typical venture capital deal?

$100,000 .... ?  $10,000 .... ?  $1,000 .... ?  $100 .... ?  $10 .... ?

Whatever your answer, you've just been undersold. Wilson Sonsini Goodrich & Rosatihave (amongst the most august US law firms by anyone's standards) have just launched an apparently very comprehensive Term Sheet Generator for venture financing . . . free of charge. Ross Holman at Strategise takes up the story:

"Why would Wilson Sonsini do this? It's not really costing them anything -- by their own admission, it is a web-based, generic version of a tool that they already use in-house. Maybe the end result will work for some venture money, but my guess is that there's enough that's generic that you may need to call Wilson Sonsini for advice and/or customization: give away the artifact (i.e., the term sheet) and make your money on the resultant service. Will some other attorneys use this and charge their clients for it? Probably. But my guess is that Wilson Sonsini is not after the clients that would go to those types of attorneys.

I think there's a massive paradigm shift that needs to happen in the field of law. Instead of charging hours to create what are essentially templated forms, agreements, contracts, etc., why not just sell the template for, say, $200? Buy some Google AdWords and advertise for very little per month, especially if you are selling a very specialized document. People can buy the template 24/7/365 from your website and if it's good enough as is, then you are still making money while you sleep and the purchaser feels like they got a good value. However, if the purchaser needs further advice or reviewed changes or some other service related to the document, then you can work out an hourly (flat?) fee for the services."

Ross and others preaching a similar message including Mark Chandler (general counsel of CISCO,) and Richard Susskind (author of 'The End of Lawyers') are dead right: the days of selling knowledge or standardized templates by the hour are almost gone forever. In the (near) future, information and "artifacts" (I love that term ... ) will be freely available in the market. Professionals will only make money where they need to apply deep expertise and judgement to their clients' specific businesses in ways that yield high value. For this, they will be able to charge superior rates not only because of the high value to the client, but because such deep expertise and judgement will remain rare in the market given the effort required to acquire it and remain up to date. For those relying on less sophisticated services, the price race is on .... all the way down to zero.

Same goes for the consultants that serve those professionals :)

It's nearly midnight here now and I've just finished going through the PWC 12th Annual Global CEO Survey. The main body of it (+/- 40 pages) at any rate. There are still another +/- 100 pages of appendixes to digest later. If you have a leadership role in any commercial organization, I urge you to read it too. If you don't have time to do this, here is a +/- 4 page headline commentary / summary:

CEOs also report that a wider range of stakeholders is involved in influencing their corporations’ strategies now than before and that a wider range of information is required in order to craft the most competitive strategy:

“CEOs do not just want more data. They want different kinds of information than the historical financial metrics they already have in abundance. More specifically, they want forward-looking information, which includes non-financial data. For example, the widest gap, 74 points, concerns the information necessary to anticipate customer needs. The second largest gap, is 70 points, between the importance and availability of risk information.”

JVs VERSUS M&A

A shortage of capital and strategic preference is forcing corporations to explore more innovative joint venture arrangements, especially for cross-border expansion, rather than conventional acquisitions as were the norm pre-crisis:

“The increased collaboration with business partners may be a strategic choice in many cases, but in others it may be the consequence of a lack of availability of capital in the current market. JVs and strategic alliances, for example, may reduce cultural conflicts, but they also typically cost less and require less funding than an outright acquisition."

Over the long term, however, they may be less stable and ultimately more costly because control is divided among partners, and strategic objectives can never be totally aligned. This argues for adding more rigour to the strategic evaluation, execution and governance of alliances, including a more thorough evaluation of potential risks.”

TALENT RETENTION

A focus on short-term survival has caused attention to be diverted away from talent retention as an immediate priority, but CEOs still recognize this as a key strategic issue. Some expressed concerns about the impact of reducing headcount now, on the medium term future (+/- 5 years away.) It takes several years to train good people and inculcate the culture and practices of an organization. Some see investment in technology as a remedy for future talent shortages. 97% of CEOs believe that the access to and retention of key talent is critical or important to sustaining growth over the long term. Most (72%) rate it critical and a similar number (69%) say that a limited supply of candidates with the right skills is a key challenge.

“Many CEOs feel that they are trying to conduct surgery by candlelight. They do not have a complete picture of the workforce, the money invested in employees and the skills needed for the business.”

RISK MITIGATION

The most important immediate threats driving CEOs priorities right now are as follows. The number in parentheses indicates the percentage of CEOs who said that they were “somewhat concerned” and “extremely concerned” about the issues.

1.    Downturn in major economies (43% ; 42%)
2.    Disruption of capital markets (42% ; 30%) Over-regulation (37% ; 18%)
3.    Energy costs (33% ; 17%)
4.    Inflation (37% ; 12%)

Numbers 2, 4 and 5 did not even feature on the list in the 2008 survey.

“Short-term cultures change too late because the relentless drive towards growth encourages employees to ignore slowly building signs of trouble. One of the fundamental problems in the financial crisis was that many companies simply did not take the time to fully understand their own investments, because the returns were so good. Regulations can encourage people to take a wider and longer view of the risks behind outsized returns, but they will fail if people have strong incentives to work around them. This is sometimes thought of as the difference between a rules-based culture and a values-based culture. Aligning the values of top management, governance, compensation and infrastructure to support ethical and constructive behaviour is the cornerstone of any plan to build high levels of risk awareness into decision-making.”

CONCLUSION

The report concludes that “connectedness" was part of the problem, and will be part of the solution. The world has become a single market. Globalisation has produced enormous financial returns over the past few decades although cross-border flows of information, people and capital have also spread this crisis farther and inflicted more damage, faster than was ever possible before.

CEO responses to the survey indicate that attempts to “protect” industries and countries from each other will fail. Markets around the world are now linked inextricably.
The massive upside of global connectedness makes it politically and economically impossible to stop. As a result, more crises will emerge in the future that are beyond the control of any single nation or business. It therefore becomes a critical skill for the leader of any organization, to be able to lead and manage under adverse and uncertain conditions. This implies:

1.    Businesses have no choice but to increase the strength and variety of their connections. The broader and richer the network of connections, the greater the opportunities for collaboration and the richer the source of intelligence on which to base strategy.

2.    To help business, public policy needs to be clearer. This, in turn, will help businesses to calculate risk and return more accurately. The choice of policy in some cases is much less important than transparency, leadership and consistency across borders.

3.    Businesses and business leaders need to shift their mindsets, to take responsibility for issues once considered external to corporate responsibility and to allow greater scope for larger scale, less predictable investments. “As long as predictable, quarterly earnings and other short-term financial metrics (such as those tied to employee compensation) remain the ultimate measures of success, short-termism will continue and create more crises in the future.”

A FINAL WORD

"Despite the thin margin for error, business and governments have no choice but to keep trying new ideas. Fortunately, that is where the opportunity lies. Even in the hardest hit sectors, CEOs still spoke to us about gaining market share, planning for new markets and maintaining readiness for growth. Often, CEOs see the greatest business potential in products, services and operating models that help solve large-scale, social and environmental problems. And an increasing number of stakeholders, from customers to investors to employees, believe these issues are inseparable from success. In other words, the race to succeed in the post-crisis world has already started."

How does this impact your firm's clients? Do you and your colleagues know? If not, then I'd respectfully suggest that finding out should be one of the most critical strategic tasks on your "to do" lists over the next while. How does all this impact you and your firm directly? How has the economic crisis changed the strategy that you had in place in your firm just twelve months ago? How well developed; reduced to action planning; communicated within your firm is your new strategy? Is it being executed?
 

I am working my way through PWC's 12th Annual Global CEO Survey this evening (quite fascinating so not a chore) and just came across the above. Talk about déjà vu, given the penultimate sentence in my blog post published this morning (entirely separately) ....

My old friend John Henry Looney just sent me a set of slides for a webinar that he is presenting later today on the topic of sustainability, with the request that I critique them. One of the slides shows the above graphic (click here to see a larger version) that illustrates the countries of the world sized relative to their respective ecological footprints. Looking at it reminded me of Wall Street, circa +/- January 2007. (In other words, at the height of the pent up pressure prior to the collapse.) I would not be at all surprised if the imbalances portrayed in the graphic provide a pointer to a future global economic crisis .... especially when considered together with climate change and the increasing ease with which information flows across the world.

Perhaps even the "next" crisis?

Happy Earth Day :)

HG Wells, the prolific science fiction writer of the early 20th century, once said that in order to write a good science fiction novel, the writer had to limit him/herself to one assumption that defied current convention. In other words, a story could be about either aliens from Mars attacking earth or someone inventing a time machine or an invisible man, but not about more than one at once. Would that strategy was a simple as Wells' recipe for science fiction! Yet people often couch strategic questions in similar, mono-dimensional terms .....

1.  What will the impact of a much faster internet be on the legal profession?

2.  What will the impact of non-lawyer ownership of businesses providing legal services in the UK (will they still be able to be called "law firms?") on the legal profession?

3.  What will the impact of standardization of (especially commercial) legislation across jurisdictional boundaries be on the legal profession?

4.  How will the new dispensations in banking across the world, post recession, impact the legal profession?

The point is that none of the above issues can sensibly be considered except integrally with the others, and a whole lot more besides. That is simply the way life works. Approaching issues independently leads to predictions that are as flawed as accurate representations of the future as stories like "War of the Worlds" or "The Invisible Man." This is difficult, and the processes involved represent a radical departure from the way that law firm strategy has typically been approached.

Some of you may have heard me speak on the future of legal services in the 21st Century. (I have been honored to be invited to address this topic before a wide range of audiences in several countries over the past two to three years.) My material on this subject has now been fundamentally revamped into three interactive half-day sessions, designed specifically to "provoke strategic thought" in your firm about what your market may be like post-recession, and also to provide specific guidelines for dealing with the complexity involved in preparing for that world. If you are a managing partner / executive director (or of a similar title) of a prominent US, Canadian or UK law firm, or we have exchanged business cards, then a document briefly outlining this is on its way to you. If not, and you'd like a copy, please email me and I'll get one to you.

I couldn't bear to leave such a depressing post as the last one as my most recent entry on my blog, so here's a more cheerful one ..... To all my Chinese readers: "Happy Tomb-sweeping Day!" Actually a bit late .... it was yesterday, April 6. So "Happy Araw ng Kagitingan" (Day of Valor) to readers in the Philippines for today, 7 April, as well. It's apparently World Health Day today, too.

Hat tip to Sara Naumann for Qingming!

Depressing .....

In my aggregator this morning was a blog post containing the graphics in top row of the above illustration (click image to enlarge,) being representations of how the market capitalization of a range of banks and insurance companies had shrunk. A dismal picture indeed. The comments below the blog post included a few readers howling that the circles are misleading because they are scaled according to their diameters, not their areas. So I reconstructed the circles myself, using their areas as the scale (see graphics in the second line above.) The readers are right. Not only that, but the original author of the graphics showed Citigroup (down from $255bn to $19bn) and AIG (down from $99bn to $4bn) as having the same sized "before" (grey) circles, which is doubly misleading.

The bar charts in the third line present the picture more accurately. An excellent example of how one needs to be so very careful when presenting data graphically, to ensure that the picture is accurately translated. An error in presentation can completely discredit the underlying message. Graphics in a strategic communication (or anywhere else) also need to be instantly understandable so they must be simple, unambiguous and clinically to the point.

No need to trash the firm concerned and the content of the original blog post is irellevant to the message in this one, so I haven't linked to it.

Finally, a definition of globalization to which I can relate .....

Question : What is globalization?

Answer : Princess Diana's death.

Question : Why?

Answer :  An English princess, with an Egyptian boyfriend, crashes in a French tunnel, in a German car with a Dutch engine, driven by a Belgian, who was drunk on Scottish whisky (spelled whiskey in America,) followed closely by Italian paparazzi, on Japanese motorcycles. She was treated by an American doctor, using Brazilian medicines. This was originally written by an Australian, and is now being posted on a blog by a South African, living in The Bahamas, using American technology (my Mac computer) onto a blog being hosted on Lexblog's server, also in America. You're reading it in any one of the 195 countries in the world, probably on your computer that uses Taiwanese chips, and a Korean monitor, and software packaged in Ireland that is supported by a help desk in India. That computer was probably assembled by Bangladeshi workers in a  Singapore plant, transported by Indian truck-drivers, hijacked by Indonesians, shipped on a Panamanian registered ship with a Greek captain unloaded by Maltese wharfies, and (if you're in the USA) trucked to you by Mexican freeloaders.

Tongue firmly in cheek but that, my friends, is Globalization!

Cees Bruggemans is one of my favorite economists. He's the chief economist at First National Bank in South Africa. Sometimes tongue in cheek with a wit as dry as the wind in the Sahara, his weekly emails are thought provoking, interesting .... never boring. It is also interesting to read perspectives on the global crisis from a 'guru' in a market that is not in North America or Europe but is most certainly affected by what happens there, so a close observer of developments. I hope that Cees does not mind that I reproduce his weekly email just received in its entirety. The address to request to be put on the mailing list is at the bottom.

Cees: You really need to discover RSS feeds. Email is so "20th century" and not all of us are on Facebook, either!  :-)