IS MAYER BROWN PLAYING LAWBALL? A POSTSCRIPT

According to the handy-dandy dictionary that is part of my Mac OS X Tiger software, “postscript” means:

[A]n additional remark at the end of a letter, after the signature and introduced by “P.S”; an additional statement or action that provides further information on or a sequel to something.

Why the postscript?  Well, for whatever reason, I couldn’t stop thinking about Mayer Brown’s decision to “de-equitize” 45 partners.  In yesterday’s posting, I rhetorically asked several questions about LawBall-type information that I’d like to see as part of analyzing Mayer Brown’s action.  The absence of that information bothered me, because I believe it holds the key to understanding Mayer Brown’s decision.  So I did a little digging last night and, by using the American Lawyer’s 2006 survey (2005 operating results), I created a thumbnail LawBall comparison of Mayer Brown to the top 15 (in terms of gross revenues) firms in AmLaw’s top 100 and, since Mayer Brown ranked number 8, also just to the other top 14 firms.  I also dug back to 1996 for Mayer Brown and looked at the changes in the firm in terms of compounded annual growth rates (CAGR) from then through 2005.  Here’s the information:

A quick look at this information shows that Mayer Brown’s offense (asset turnover) slightly lags behind that of the top 15 firms as a group ($749,809/lawyer to $761,156/lawyer) and the other 14 top firms without Mayer Brown ($749,809/lawyer to $761,915/lawer).  Mayer Brown’s defense (margin), though, is significantly better than that of the top 15 firms (41.53% to 37.00%) and that of the other 14 firms (41.53% to 36.70%).  As a result, Mayer Brown’s return on assets (ROA) is 10.56% higher ($311,400/lawyer to $281,647/lawyer) than that of the aggregate top 15 firms and 11.35% higher ($311,400/lawyer to $279,658/lawyer) than the other 14 firms in the top 15, indicating that it’s making more efficient use of its assets (lawyers).  And, its cost per lawyer is 8.57% lower ($438,409/lawyer to $479,509/lawyer) than that of the aggregate top 15 firms and 9.09% lower ($438,409/lawyer to $482,256/lawyer) than the other 14 firms in the top 15.  Finally, Mayer Brown’s leverage is 31.78% lower (3.0609 to 4.4867) than that of the top 15 firms as a group and 33.90% lower (3.0609 to 4.6308) than the other 14 firms in the top 15.  Finally, from a CAGR perspective, from 1996 to 2005, Mayer Brown experienced commendable growth:  revenues at 13.05%, profit at 15.88%, asset turnover at 4.48%, ROE (profit/partner) at 8.95%, and ROA at 7.10%.  The firm’s margin during the same period improved from 33.23% to 41.53%, while costs per lawyer increased at a rate of only 2.95%.  Its leverage increased during this period at a rate of 1.72%.

From this down and dirty analysis, the inescapable conclusion is that Mayer Brown more than likely is underleveraged.  Why the hesitance represented by the qualifying “more than likely”?  Because we still don’t know anything about Mayer Brown’s base of business requirements – is it a more complex problem-solving business where more “specialized generalists” are required who can solve problems across multi-discipline lines in ever-changing circumstances or is it a more standardized/specialized one where specialists can easily recognize patterns and apply familiar tools so that they do not need to “reinvent the wheel.”  The former clearly should result in a lower leverage structure than the latter since complex problem-solving requires greater experience and generally is less efficient to execute, but it also should result in higher asset turnover and higher margins; while the latter involves pattern recognition that generally increases efficiency and should result in higher leverage, lower margins, and lower asset turnover.  Management of Mayer Brown’s business model requires that it support its strategy by, among other things, uniquely blending the firm’s competencies, assets, and processes.  If the existing blend is right, the firm’s problem may be that the margins and/or asset turnover aren’t high enough by comparison to its competitors, in which case the “de-equitization” of 45 partners may not be the right move.  If the existing blend is not right, then the de-equitization may be the right move.  Since Mayer Brown’s management is closest to the facts, I believe it’s entitled to the benefit of the doubt in saying, in effect, the firm has the wrong asset mix to service the demands of its base of business.

Mayer Brown still gets an “F” for public relations in my book, though.  Instead of substantively discussing the matter in the context of financial performance competitive comparisons, required changes to its business model necessary to service the demands of its business base, and the expected improvement in the long-term business outlook for the firm, it attempted to justify the move in a manner that screamed simple “denominator management” in order to line further the pockets of a bunch of greedy lawyers who’d eat their young and, to paraphrase Chuck Colson, would walk over their own grandmothers for more money.  Oblique, skeletal references to “competitive legal market”, the firm’s “strategic objectives”, “serving its clients’ needs most efficiently,” and “consolidating legal market” without some discussion that puts meat on the bones just isn’t good enough.  Yesterday, I closed with several competitive strategy questions from Gary Hammel and C.K. Prahalad in Competing for the Future that I think equally are appropriate to close today’s postscript and should be considered by all law firms, not just Mayer Brown:

•    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?

To paraphrase President Andrew Shepherd in the movie The American President:

LawBall isn't easy. LawBall is advanced business. You've gotta want it bad, 'cause it's gonna put up a fight.

Although its still gets an “F” in public relations, Mayer Brown actually may be ready to put up a sign on the wall that says, “LawBall is played here.”  To paraphrase Dennis Miller, “That’s just my opinion.  I was partially wrong yesterday.”