Let me apologize now for the Dennis Miller-type rant that follows. If you have a weak stomach, over-inflated self-image, or very large ego (as for me in that regard, I’ll just quote Tex Schramm, the late general manager of the Dallas Cowboys, who when called “sick, demented, and totally dishonest” by Duane Thomas said: “Well, he got two out of three”), you may not want to read further. Why the rant? One of my pet peeves - the incorrect use of business terms by lawyers, particularly when they’re talking about the business of practicing law. For a group that normally is incredibly precise when it comes to words – and makes a lot of money when the rest of the world is not so precise – lawyers are very imprecise when it comes to using business terms. Unlike Justice Potter Stewart who in effect said that although he couldn’t define “hard-core pornography” he knew it when he saw it, most lawyers not only can’t define the business terms they throw around like so much cocktail party conversation, they often don’t know the things represented by the terms when they see them.
Bill Gratsch at Blawg’s Blog wrote a nice piece this morning about how the “legal vertical” finally may be catching up with the rest of the world with respect to “new (and not so new) technologies.” I hope he’s right! But, as it relates to understanding business terms lawyers frequently use, they still lag far behind. When it comes to their use of business terms in talking about the business of practicing law, lawyers are great mimics . . . but would be even better mimes. Why? Because lawyers “talk the talk” but don’t “walk the walk.” Despite, or perhaps as a result of, the fact that many lawyers frequently are around business transactions and/or interact daily with business people they pick up the context within which certain business terms are used. But knowing the context doesn’t convey the term’s actual meaning as well. When lawyers spot a context involving the business of practicing law that is analogous to one for “non-law business” businesses they’ve experienced, they “mimic” the non-law business context and use the term in the law business context. The end result often is the speaker has communicated that he or she doesn’t know what he or she is talking about, particularly when the law business context in which the term has been used is devoid of fundamental business performance analysis. In that situation, the lawyer would be better served if he or she would be a mime and not say a word rather than by being a mimic.
Let me give you a few examples. “Synergy” is a word used so often that I cringe when I hear it. Mark Sirower, in his book The Synergy Trap, defines synergy as “increases in competitiveness and resulting cash flows beyond what the two companies are expected to accomplish independently.” Merriam-Webster defines “synergism” as the “interaction of discrete agencies (as industrial firms), agents (as drugs), or conditions such that the total effect is greater than the sum of the individual effects.” In Mergers, Metrics, and Other Musings, I noted synergy is “the enhanced economic value expected from the merger, but often defined by ‘new’ math as 2 + 2 = 5.” Whichever you choose, I think it’s safe to say that synergy means the value of the parts together is greater than the value of the parts standing independently – it’s not just the feeling that the parts will complement each other. So, if two law firms are going to merge and it’s reasonable to forecast based on available information that the consolidated margin, asset turnover, leverage, profit per lawyer (return on assets), and profit per partner (return on equity) post-merger all will be lower for one firm than it was pre-merger while for the other firm it will be higher, then one would think that it’s not wise to talk about the expected “synergy” from the merger, especially if more mergers than not fail to achieve their expected purpose because (as noted by McKinsey & Company in its report cited in my preceding posting) most companies routinely overestimate the value of synergies they can capture from acquisitions. Nonetheless, as I pointed out in Mergers, Metrics, and Other Musings that looks to be what the Chairman of then Kirkpatrick & Lockhart Nicholson Graham did when discussing it’s announced merger with Preston Gates & Ellis.
I’ve spent more than enough time already blogging about Mayer, Brown, Rowe & Maw’s recent decision to “de-equitize” 45 partners (Is Mayer Brown Playing LawBall? | Is Mayer Brown Playing LawBall? A Postscript), so I’m not going to spend any more time analyzing that decision here. I’ve also commented on how poorly I think the PR surrounding that decision was handled – I’ve noted the sterile use without substantive reference of the terms “competitive legal market”; the firm’s “strategic objectives”; “serving its clients’ needs most efficiently”; and “consolidating legal market” in the firm’s internal memo and reported comments. In fact, the mental image I got from reading those words was that of a 
PR firm in the persona of Soap’s Chuck Campbell having written the comments to be spoken through an internal firm spokesperson in the persona of Bob sitting on Chuck’s knee. But for today’s posting, I must admit that I was amused to hear that law firms apparently have a “stock price.” When discussing the firm’s de-equitization decision, Mayer Brown’s incoming chairperson reportedly said, “We want to drive our stock price up.” Hmmm. Stock price is about value – what a willing buyer will pay and what a willing seller will accept for an interest in a company. And, value of a business enterprise generally is about the present value of the future cash flow from the enterprise. Putting aside whether or not there actually is a market (private or otherwise) where one could buy or sell “stock” in a law firm (other than perhaps to another firm or an individual lawyer) so that there would be a “stock price,” value was not the focus of the chairperson’s other reported comments – those were all about improving the firm’s leverage. “Leverage” is a financial operating measurement that affects profit per partner – the functional equivalent in a law firm of return on equity (ROE) in a non-human capital-intensive business. ROE is a measure of “return” on capital invested by the owners, not a “value”; and, as such, leverage is not about value, it’s about return. The chairperson’s analogy rang hollow. Profit per partner is a distribution to the owners of the return earned on their capital– if one felt compelled to say anything at all as justification and to analogize to a non-law business context, “We want to increase our annual dividend” might have been more accurate.
Now the one that really irks me – “competitive advantage.” If one more lawyer says the acquisition of a certain group of lawyers gives his or her firm a “competitive advantage,” I’m going to toss my cookies. It’s the same with some firms’ promotional material. One I read says, “With the guidance of its Chief Information Officer and professional support staff, [the firm] invests in the use of technology to maintain a competitive advantage in the marketplace for legal services and to support the practice and business of law.” That’s nice – but to paraphrase the young fan seeing Shoeless Joe Jackson emerge from the courthouse, “It ain’t so, Joe.” Because you benefit from new technology, cheaper labor, new or additional lawyers, or some other temporary competitive “edge” simply means you are able to compete better; but you don’t have a competitive advantage since those things can be replicated by your competition and often times quicker and cheaper. Basic economic theory says in a perfectly competitive market rivals eventually will eat up any excess profits earned by a successful business. In their books Competition Demystified and Value Investing, Bruce Greenwald and Judd Kahn describe this environment as one where there will be no “economic profit” – no returns greater than the cost of invested capital. If market demand conditions enable any firm to earn unusually high returns, others will notice those returns and, absent real barriers to entry, jump into the market. The resulting fragmented demand will drive profit down. In those markets, Greenwald and Kahn postulate that that the only chance a company has is to run itself as efficiently and as effectively as possible. “Competitive advantage,” on the other hand, means being able to do something that your competitors cannot – and doing it over a long period of time. It’s what Warren Buffett calls a “wide moat” – a sustainable, durable advantage that allows the business to earn profits greater than its cost of capital for long periods of time. I’ve yet to hear of or to see a law firm that can do something that no other, or very few others, can do that can’t be replicated in very short order. Until that happens, there are no law business competitive advantages – only temporary “competitive edges.”
I hope you’ve gotten as much enjoyment from reading this rant as I did in its writing. But I also hope the fact that it’s a rant hasn’t hidden my real message. Don’t kid yourself - lawyers are intelligent people. But their intelligence notwithstanding, neither their education nor their on-the-job training through exposure to the business world has prepared them to own, operate, and manage multi-million dollar, and in some instances multi-billion dollar, businesses.
As Dennis would say, “That’s just my opinion. I could be wrong.” And, since I’m going to see him “live” next week, maybe I’ll just ask him!
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