After a far-too-long hiatus, I'm delighted to announce that Edge International has just published another edition of its journal, Edge International Review. Personally, I think it is the best that we have ever produced and I do hope that you like the new format and style.

To download high resolution PDFs of the individual articles or of the whole edition from our website, please click here.

If you are on a slower internet connection and would prefer a smaller (1.6MB) but regrettably lower resolution version, click here.

Feedback, as always, is MOST welcome!

The crux of the billable hour debate really seems to lie primarily in one very basic conundrum. That is: how else to accurately and sensibly value the output for a wide diversity of legal services, other than "by the hour," with anything like the same ease of applicability. It seems almost sacrilegious to ask the question .... but this by no means the first time that the dilemma has arisen about sensible metrics to measure performance in the production of diverse products or services.

In the erstwhile Soviet Union, where factories were state controlled and performance was measured in terms of output rather than profitability, similar problems emerged. When the product was simple and homogeneous (tons of iron refined; kilowatt-hours of electricity produced, for instance,) the issue was relatively straightforward.  When a wide range of products or services were involved, though, output either had to be defined in very specific terms for each and every item individually, or it had to be defined in general terms. In professional services, where the nature and range of the service being delivered cannot really be accurately defined until it is actually delivered, the availability of the former option often falls away. Defining output in general terms in the case of professional services, on the other hand, is well known. This is precisely what "billing by the hour" constitutes. The problem is: it was precisely where a general and often somewhat arbitrary measure of value was used that problems emerged for the Soviets, much as they do in law firms today.

“Whenever orders are given in units of weight, managers find it easiest to fulfill their output plan by making goods unnecessarily heavy. Thus, writing paper or roofing materials become too thick, screws and bolts are manufactured predominantly in larger sizes. The Soviet humor magazine Krokodil once carried a cartoon, showing a nail factory which had fulfilled its output plan by producing one single nail, the size of the plant, suspended from the ceiling. To give the orders in square meters of writing paper or in millions of nails would have the opposite, equally undesirable, effect, as paper would then be too thin or nails available in smaller sizes only."

Shaffer, Harry G. 1963. "A New Incentive for Soviet Managers." Russian Review, Vol. 22, No. 4 (October): pp. 412. (Thanks to Dr Michael Perelman at California State University for pointing me to this reference.)

I wonder if the current wave of enthusiasm for alternative fee arrangements and value pricing (which I enthusiastically endorse and with which I join) is going to achieve what the Soviets could not, and come out with usable measures of value for all of the wide range of diverse services that law firms deliver to their clients, in ways that make economic sense for both buyer and seller and are easy to apply. Hopefully it will ....

What was Cinderella’s slipper made of?

As just about every person who grew up on European fairy tales would know, the answer would be “glass.” But .... as Pascal Costantini, managing director in Deutsche Bank’s Global Market Research, points out in my current bedside reading Cash Return on Capital Invested: Ten Years of Investment Analysis with the CROCI Economic Profit Model (Butterworth-Heineman, 2006, and yes, my wife thinks I’m weird too :-) …. they would be wrong.

In Charles Perrault’s original text in ancient French, the slipper was made of ‘vair’, pronounced the same as ‘verre,’ which indeed means glass. ‘Vair’, however, means squirrel fur …  a far more sensible choice when it comes to fine footwear if not for squirrels. Because of the error in translation, generations of children have had to try to visualize poor Cinderella negotiating the dance floor in her slippery, presumably transparent and very fragile slippers. On the bright side, it is fortunate that the translator was not of German extraction, otherwise the word may have read sounding like ‘vair’ as in ‘fer’ (the letter ‘v’ is pronounced ‘f’ in German) and poor Cinderella may have had to wear slippers made of iron to the ball!

Costantini’s point in including this ‘tale about a fairy tale’ in a book about asset valuation is that the universality of a belief is not a guarantee of its validity. There are many such examples of this in the field of legal services, for instance:

• PEP (“profit per equity partner”) is the best measure of the performance of a law firm (it is only the best measure of how effectively the partners can strip cash out of the firm.)
  

• Law firms can be reliably valued on the basis of the NPV ("net present value") of future fee earnings (only if one realistically factors in the risk of the “machines walking out of the factory” if they don’t like the new owner…. now there’s something on which to build a latter-day fairy tale…. but more on that in a future posting!)
  

• All we need to do to make people work harder is to modify the compensation system to reward production more (this holds as little validity as “if we modify the compensation system to reward originations, everybody will become stellar rainmakers.)

In times of change, it is even more important than usual to rigorously challenge assumptions .... even if they are so widely held that they would never normally be challenged. How many “glass slippers” can you think of in your firm?

Ever played that game of comparing notes with friends about which person living or dead you'd like most to meet / spend time with? With me, that question has a really quick answer. It's Nelson Mandela. If you intend looking for me tomorrow evening, don't bother .... I'll be at the cinema :-)

My “aeroplane reading” this trip has been David M. Smick’s “The World is Curved.” Bill Clinton has called it one of the top three books on the financial crisis. Alan Greenspan has called it “an essential read for those who wish to understand the workings, politics and distresses of the global financial system.” Others endorsing the book are a veritable who’s-who of international finance.

The book outlines how the crisis of 2007 – 2009 unfolded both generally and, in quite specific and easily understood terms, exactly what went wrong in 2008 and how/why it might recur. He points out that the actual quantum of sub-prime debt was quite small, relative to global capital pools. (A mere $200 billion in a global economy worth several hundred trillion dollars.) The problem was the lack of knowledge of who owned the toxic assets and the consequent breakdown in trust. He stops just short of actually predicting that we will see a repeat performance in due course in the Far East, given the ballooning number of non-performing loans and far more opaque banking practices in China.

He notes the intent on the part of the Chinese automobile industry to produce 20 million units per annum by 2012, at which point domestic demand is estimated only to be 9 million units. Who, he asks, is going to buy the remaining eleven million units? He writes of the stockpiling of commodities. What, he asks, would be the impact of a slowdown in the Chinese economy, leading to an unloading of these goods into the global economy? Japanese strategists, he says, remember well the 1960s when that country’s economy grew at 10% per annum on the back of massive steel production, only to deflate to 4% as the steel bubble deflated. He quotes Chinese officials as saying that a GDP growth of 8% is the bare minimum required to avoid serious political disruption. Essentially, Smick argues that a significant risk exists that this level of growth may prove unsustainable.

A chapter is devoted to the crash of the British Sterling currency in 1992, as an illustration of how quickly and disastrously poor policy decisions can cause things to become unstuck. He writes of the shrinking ability of central banks worldwide to deal with crises as the global financial systems become more globally integrated and complex. He likens central banks to firefighters who rush to blazes only to find that their ladders and houses do not reach the upper floors of the burning building. He comments on the emergence for the first time of “class warfare” in the United States and on the folly of relying on higher taxes for upper income brackets as the solution to current ills. Not argues that this will effectively kill the entrepreneurship and innovation in which lies the real solution to America’s travails. He quotes a 2008 Morgan Stanley investment report that noted than in a national with three hundred million citizens fewer than nineteen thousand households enjoy immediately available, investable financial assets of $25 million or more. More than 40% of Americans, he writes, do not have sufficient savings to sustain a family of four at the poverty level for four months. He writes of how current U.S. policy is steadily retreating from the drive towards globalization that characterized the prosperous Clinton era and worries about the long-term effects that this might cause.

The final chapter is titled “Surviving and Prospering in This Age of Volatility.” In it, Smick calls for a better understanding of the factors at play, including climate change (another major wild card in the future) and a broad international strategy for dealing with the Chinese financial and manufacturing “juggernaut.” Above all, he calls for a reformation of “today’s dangerously flawed financial architecture, including the system used to assess and allocate risk.” The world faces a dilemma. On the one hand, unbridled greed by U.S. and European bankers in under-regulated environments nearly brought the western world to its knees. On the other hand, over-regulating the industry will simply cause capital to move to less regulated markets. Already, there are suggestions that higher risk financial services are simply moving east; out of the USA to Europe and beyond to the Middle East and Far East. He warns against a sledgehammer, “Sarbanes Oxley” approach.

While written primary through an international finance lens, the book is important reading especially for lawyers in firms with international practices. As important, perhaps, as Thomas Friedman’s “The World Is Flat 3.0: A Brief History of the Twenty-first Century” from which the book borrows its own title. The point is inescapable: we live in a globalized world and the degree to which one can circle the wagons, even if one wants to, is extremely limited. The legal profession is also becoming increasingly globalized and lawyers who serve clients with sophisticated global operations need to understand the issues that Smick raises every bit as clearly as do the nation’s policymakers, if they are to serve their clients adequately. Even wholly within the USA, lawyers need to be at the forefront of helping the entrepreneurial startups that have been the lifeblood of innovation in the American economy for decades now, to be able to access capital again. The legal profession cannot sit idly by and wait for clients to come to them with specific legal issues. Clients need business advice about the legal ramification of changes to their business environment. There is much that they “don’t know that they don’t know.” As never before, the lawyers that dominate this space will be those that take to heart David Maister’s concept of being a “trusted advisor” to their clients. And that work proactively with their clients to help them understand how the changes impact their business strategies, rather than simply viewing everything through a purely legal lens. Sometimes, that will involve working, perhaps quite extensively, with the clock switched off.

This is a book that I intend reading a second time, with a highlighter to hand this time. It can be found at Amazon here: The World Is Curved: Hidden Dangers to the Global Economy

The Big Picture:  A VERY COOL, 165 second summary of what lies ahead for the legal profession by our friends at Beaton Consulting in Australia. Adobe Flash (free download) required.

Are YOU ready for the future?

I'm blogging from a Starbucks near Embankment station in cold, windy and somewhat rainy London today.

What do you do when knowledge that you have been selling becomes publicly available .... for free? Another milestone along this trend line surfaces today with the launch of a free legal search service engine from Google. From the Google blog:

"Starting today, we're enabling people everywhere to find and read full text legal opinions from U.S. federal and state district, appellate and supreme courts using Google Scholar."

More evidence that in the future ... the near future ... law firms that are relying on simply selling knowledge are going to be in for a tough time. Clients will buy deep, thoughtful judgment and business advice from their lawyers, but not simple repackaged knowledge.

Posting today from Miami International Airport on my way to London and thereafter to Mexico City to deliver a keynote address on current global trends and their likely impact on the legal profession at the Lex Mundi 2009 Latin America / Caribbean Regional Conference.

One of the changes that is beginning to loom large on the radar is the matter of "alternative fee arrangements." My friend and colleague Jordan Furlong has tackled the latest on this topic in a thoughtful and lucid (as usual) post captioned Beyond Billing on his "Law21" blog .... well worth a read!!!

We all heard back in the midyear about Rio Tinto's initiative to outsource a significant proportion of its in-house legal work to India, in the hope of achieving a 20% cut in legal spend. (See this June 2009 article about it in The Times.) Well, nearly six months on and the arrangement seems to be working rather well. In this webcast, Richard Susskind asks Leah Cooper, Rio Tinto's Managing Attorney and head of the 100+ lawyer in-house team worldwide, how many law firms have been on the telephone to her to find out how the initiative is working and what they can learn from it. Her unbelievable answer? It's not law firms that have been calling at all. General counsel and other in-house legal advisors from across the globe have, but not law firms.

This webcast is a REAL eye-opener. To be clear, this is not about business process outsourcing / back office work, but lawyers from CPA Global undertaking real, substantive legal work, sometimes in conjunction with Rio Tinto's panel of outside law firms, as a natural extension of Rio Tinto's in-house team. The same quality of legal service, at a cost differential of 1:7.

These are absolutely essential insights to assimilate if you are a leader in a law firm that aspires to continue to serve sophisticated corporations in the future, from somebody who is leading the way. Despite its length, I highly recommend that you watch the webcast right to the end. The conversation moves more in the second half to how the arrangement with CPA Global really works in practical terms, and how it has affected the law firms that serve Rio Tinto.

As a footnote : Firms that think that they are going to simply get away with passing on a 10% fee increase to their clients in 2010 .... just don't get it. See Pat Lamb's DejaVu all over: bad habits are hard to break and Susan Hackett's Are Firms Tone Deaf? Why the Push for Rate Increases in 2010? The key, it is clear, must be to find ways to achieve the same or better net income by working differently; not just pushing up rates or working more hours.

Incontrovertible evidence that:

1.  No matter how hard you try, things might still go disastrously wrong .... or alternatively ....

2.  Sometimes lunch just falls into your lap when you're lying around doing nothing.   :-)

Greetings from Atlanta GA today, where I am the speaker at a luncheon organized by the Association of Legal Administrators (ALA) on current and emerging global trends and their likely impact on the legal profession over the next five or so years.

Attached is also an article from the ALA's bimonthly "ALA News" on the course on law firm strategy and management that I helped develop and present at the Lagos Business School, Nigeria, earlier in the year. Click here to read

The prospect of non-lawyers being allowed to own businesses that dispense legal services in England & Wales is leading to a comprehensive re-examination of how one values a law firm. I wrote an article on this topic on this blog nearly four years ago in January 2006 (see How Much is a Law Firm Really Worth?) There are a range of others that have also written in this area, varying from those that paint an exuberantly optimistic picture, to the likes of that doyen of law firm strategy and management, Prof Stephen Mayson, who like me takes a FAR more pragmatic and sober view.

The simple fact, according to Stephen in a keynote address to a seminar organized by the Solicitors Regulation Authority recently, is that lawyers are overpaid if one evaluates their compensation together with the return on [financial] capital and the cost of labour. Those that believe that external investors are going to pay them a large cheque for their firm so that they can "waltz off, retire, play golf, go yachting ...." are deluding themselves.

The basis for this is that if one views a business in conventional terms, which is what any sensible external investor should do, then the business needs to :

• Provide a decent return on the financial capital invested relative to alternative investments available (i.e. provide a 'return on capital.')

• Pay the firm's owners a salary comparable to what they would earn elsewhere or, put differently, what it would cost to employ others to deliver the substantive professional services to clients and to manage the firm (i.e. provide a 'return on labour.')

• Provide a return over and above that, as a profit that can be returned to shareholders as a dividend. This is the part that will be of most interest to external investors and in the case of most firms .... it simply isn't there. In calculating net profit, partner/owner return on labour is reckoned at zero. If all the "profit" is required to compensate partners/owners at a level that is competitive in the market, then the real profitability of the firm is .... well .... also zero. At least from the prospective of an external investor.

The really interesting impacts that might result from the Legal Services Act will not be caused by external investors injecting capital into law firms as we know them and understand them. Far more interesting will be if the opportunity for non-lawyer ownership creates entirely new and different business models that (a) provide a decent return on capital AND (b) provide competitive compensation for all senior talent whether owners or not AND IN ADDITION (c) provide a decent return over and above that too. That kind of innovation could easily have a domino effect in legal services across the world, fundamentally transforming the way that legal services are delivered to clients.

One thing is very sure: this will not involve an income model that simply relies on "rate x hours."

My partners and I are delighted to announce several positive and exciting changes in Edge International :

The first is that we have decided to dispense with our quarter-century old "gunsight" logo and re-brand with something more modern, exciting and reflective of our global practice.

The second is that Jordan Furlong, the former editor-in-chief of Canadian Bar Association's magazine, National, and former executive editor of CCAA Magazine, has honored us by agreeing to take up a partnership in Edge.

The third is that we are in the final stages of publishing a new edition of our now newly re-formatted and much-improved 'Edge International Review' journal .... watch this "space!"

During a re-examination of our own strategy at the beginning of this year, we decided that invitations for partnerships in Edge would henceforth be strictly limited to:

• Those who have a law degree or advanced business degree (preferably an MBA from a good school) or have otherwise similarly impressive academic credentials .... AND ....

• have held senior leadership / management positions in a law firm or another kind of business, preferably a business directly related to the legal profession or another kind of professional service firm .... AND ....

• have impeccable credentials in the areas of integrity, personal and professional values, a sense of collegiality .... AND ....

• demonstrate a deep empathy and respect for the legal profession and law firms and a genuine desire to help them achieve excellence in their businesses.

Jordan fits easily into that stringent set of requirements. Edge now has a truly impressive group of carefully selected people as partners and collaborating friends. (See under "About Edge" and then "People" on our new-look website.)

These are challenging times. Forces at play in markets worldwide are driving deep, fundamental change in law firms everywhere. So far, we are only seeing the "tip-of-the-iceberg" of just how that change will manifest itself in coming years. We are betting our future that law firms will "migrate to quality" in choosing the consultants that guide them through these uncharted waters .... that they will seek out the firms with the very best teams of people, that can deliver the very best advice and provide the wisest counsel, based on solid industry knowledge and experience, and a deep understanding of what really is going on in the world. Jordan makes a solid contribution to enhancing Edge's bench-strength in this.

Here are links to what a few others are saying about Jordan joining Edge:

Consultants scoop CBA editor (FP Legal Post)

Edge International proudly announces Jordan Furlong (Gerry Riskin)

Welcome, Jordan!

My friend and colleague Gerry Riskin has just posted a video similar to the Shift Happens video of a year or two back, specifically about social networking. It is compelling and important information for those trying to get their minds around what the impact of social networking is going to be on life, professional practice and the art/science of strategy over the next few years. Very cool!

Fascinating .... as much as an example of excellence in the communication of complex data as the content itself. Imagine having a tool like this for your firm's performance measurements ....

U.S. Debt Clock : Real Time