Well, it sure looks like Mayer, Brown, Rowe, & Maw LLP stirred up a bee’s nest last week when, according to various sources, it asked 45 partners to leave or to accept other positions with the firm as part of a restructuring. According to an article in The Wall Street Journal on March 2, 2007,
James Holzhauer, who will assume chairmanship in June, said the cuts were made to increase the firm's "leverage" -- the ratio of partners to associates -- in an effort to boost profits per partner.
Does this mean that Mayer Brown is playing LawBall? Honestly, based on what little we know about the decision, it’s hard to tell – although that alone may be telling. According to the WSJ article, citing American Lawyer’s 2006 survey (2005 operating results), Mayer Brown was 8th in gross revenues but only 51st in profit per partner. If we accept Holzhauer’s statement at face value, then in the language of “LawBall” it looks like Mayer Brown has decided that special teams (leverage) performance is the root of its financial performance evil, not its offense (asset turnover) or defense (margin), and needs fixing.
I think that’s a pretty weak explanation for the firm’s action. In LawBall fashion, I’d want to see what’s going on with the firm’s return on assets (ROA or profit per lawyer), which is a good measure of the efficiency with which a business allocates its resources since it eliminates the effects of financial leverage on operating results, before I decided to increase leverage by “de-equitizing” 45 partners. And, with respect to ROA, is the asset turnover (offense) better or worse? Is the margin (defense) better or worse? Is the cost per lawyer better or worse? What are the trends in ROA and its components? How do the firm’s numbers compare to the competition? If the firm is not using its assets efficiently, is the cause of that the 45 partners? My best guess, based on the scant public information available, is that Mayer Brown is not really playing LawBall, although it would like the public to think it is by talking about leverage; instead, it is treating a symptom – what it’s labeling as low profits per partner or ROE – simply by engaging in “denominator management” and is not addressing the real cause of what ails it.
In any event, for a segment in the workforce (lawyers) that is seen as accomplished “spin-doctors,” Mayer Brown should get an “F” for public relations. Despite admittedly record profits per partner, according to Holzhauer the firm decided to cut the number of partners to increase its profits per partner. In its internal memo (posted via a comment to WSJ’s “Law Blog”), the firm said, “In an increasingly competitive and consolidating legal market, it is imperative that our firm be among the best managed in the industry.” But, no explanation was given as to how this action would improve the long-term business outlook for Mayer Brown. The memo made only oblique reference to the “competitive legal market”; the firm’s “strategic objectives”; “serving its clients’ needs most efficiently”; and “consolidating legal market.” It was critically silent on how this action would facilitate best management: no strategic objectives to be met by this action discussed; no
competition identified; no financial performance comparison to the competition made along the lines of LawBall; and, no discussion of whether the firm’s business base or the demands of that base had changed, requiring a change in the “assets” (lawyers) necessary to service it. With no explanation as
to what was going on with the offense or the defense or why the special teams needed fixing, one simply is left to ponder exactly how this move makes the firm among the best managed in the industry. And to gargle to get rid of the dirty taste that it’s just about partners lining their pockets with even more green – and the image of Gordon Gecko addressing the firm. One couldn’t have made a poorer case if he or she were Richard Nixon trying to explain that “third-rate burglary” known as Watergate.
About denominator management – it often can be the business equivalent to a cheap parlor trick and generally results in short-term improvement only. Gary Hammel and C.K. Prahalad, in Competing for the Future, said about return on investment (ROI = profit ÷ investment):
Managers . . . know that raising net income is likely to be a harder slog than cutting assets and headcount. To grow the numerator, top management must have a point of view about where the new opportunities lie, must be able to anticipate changing customer needs, must have invested preemptively in building new competencies, and so on. So under intense pressure for a quick ROI improvement, executives reach for the lever that will bring the quickest, surest improvement in ROI – the denominator. To cut the denominator, top management doesn’t need much more than a red pencil. Thus the obsession with denominators.
. . . Denominator management is an accountant’s shortcut to asset productivity.
Hammel and Prahalad’s thoughts about competition also are in stark contrast to the tenor of Mayer Brown’s internal memo, which for whatever reason essentially seems to say that in order to meet its strategic objectives, serve its clients’ needs most efficiently, and compete successfully the firm must increase the amount that its partners make. Hammel and Prahalad say:
We believe a sense of excitement and possibility can replace the fear and resignation that so often accompany downsizing and reengineering. And we believe it is possible to regenerate purpose, meaning, and direction in the absence of crisis. . .
Rather than calculating the number of people to fire in order to become competitive, companies should be asking How can we create the sense of purpose, possibility, and mutual commitment that will inspire ordinary individuals to feats of collective heroism?
LawBall isn’t about denominator management. It’s about having a business model that supports a strategy by, among other things, uniquely blending the firm’s competencies, assets, and processes. And, when that model begins to decay, as it will, it means avoiding the temptation to pour human energy and capital into improving the efficiency of the operating model and, instead, inventing new business concepts or dramatically reinventing those that the business already has. LawBall is about understanding that a firm’s financial operating performance is the result of efficiently allocating its resources and actively managing the relationship among its income statement and the left and right sides of its balance sheet – the firm’s asset turnover, margin, and leverage. Its about understanding that financial performance is not just one year – it’s about trends based on past performance; and, it’s about competition or - again to quote Hammel and Prahalad - about “creating a compelling view of tomorrow’s opportunities and moving preemptively to secure the future.”
I’ll end with the thought that, if I were one of those affected by the Mayer Brown decision, either as one of those being asked to leave or to accept a different role in the firm or as one of those remaining lawyers (both partners and associates) in the firm, in addition to the LawBall questions I posed earlier I would want to be able to answer a few questions from Hammel and Prahalad before I decided that “de-equitizing” 45 partners would help make the firm “among the best managed in the industry”:
• Does senior management have a clear and broadly shared understanding of how the legal industry may be different 10 years in the future? What is it?
• Is this point of view about the future clearly reflected in the firm’s short-term priorities? How?
• Is the firm pursuing growth and new business development with as much passion as it is pursuing operational efficiency and downsizing? How?
Based on what’s publicly available about Mayer Brown’s action and its apparent reasons for taking such action, in my book that isn’t LawBall; and, Mayer Brown isn’t ready to put up a sign on the wall that says, “LawBall is played here.” As Dennis Miller would say, “That’s just my opinion. I could be wrong.”