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Legal Commentary

: Adam Smith, Esq.

What We Know & What We Don't Know

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Just as McKinsey's consulting practice centers on corporate America, certainly its core clientele and expertise, as opposed to law firms, where they have no domain expertise that anyone would notice, the McKinsey Quarterly surveys do not encompass law firm leaders, but global corporate executives. Nevertheless, these are widely traveled and well-informed people with their fingers on the pulse of the global economy, so it's worth reviewing what McKinsey learned in its most recent (March 10--March 16) series of interviews in its "Global Survey."

Here's what they found.

In summary, a "gloomy economic stasis has taken hold," and while the proportion of executives saying economic conditions have deteriorated has, at least, not increased this quarter, fewer than one-third expect an economic upturn this year.

As we've almost come to expect in these types of surveys, and amusingly, overall they remain confident about how their own companies are handling the crisis (still, over half expect profits to drop in the near term).

Some other interesting results of the study:

  • There's no doubt whatsoever that trust in business has fallen: 85% have that view. And the culprit? The #1 response(56%) was: Financial firms' inability to comprehend risk and guard against its repercussions. For our purposes, what's more interesting is that after #2 (33%, "job losses," which is something of a non-response) was "executive compensation levels" (29%). Why do I mention this? Only because lawyers are seen as highly paid.

  • Recovery will take time. 90% of these global executives say their own national economies "are in very poor shape" and "have declined since September 2008" but a similar number also agree conditions have not gotten worse since then.

  • Some particularly revealing responses came in answer to questions about jobs and prices:
    • Compared to just three months ago, even more executives expect their workforces to shrink: 50% now vs. 42% in January, and only 38% expect them to stay the same size now vs. 45% in January.
    • The news on prices (can you say: Rates?) is equally telling: Projecting changes for the first half of 2009, only 12% see an increase, 25% see a decrease, and 54% see no change (9%, presumably in commodity businesses, don't know).

  • There are very modest signs of a potential upturn in economic conditions. By and large, these executives are more hopeful than they were as recently as January:
    • When asked how they expect their country's economy to be in the first half of 2009, the results were:
      • January: 50% moderately worse, 7% moderately better
      • March: 41% moderately worse, 14% moderately better

  • In terms of seeking new funds for new initiatives, while two-thirds of firms said they had sought no new funding, the change in the composition of what the other third that were seeking new funding planned to do with it was revealing:
    • Four months ago, 40% sought funding simply to increase available cash; now that's down to 30%
    • Four months ago, 32% sought it to pay for new initiatives; now that's up to 37%.

  • A final, and suggestive, set of responses concerns differences between executives and managers who consider their firms to be "weathering the crisis well" (i.e., well-managed firms) and those at firms who say they have been hurt by the crisis because of poor management. What are firms deemed to be well-managed (by those who should know) doing differently than those poorly managed?
    • "Reducing operating costs:" Over three-quarters of well-managed firms but just more than half of poorly managed firms are doing this.
    • "Introducing new products/services to gain market share from weakened competitors:" Over one-third of good firms but just over one-quarter of bad firms.
    • "Increasing productivity:" Nearly 2 in 5 good firms, just over 1 in 4 bad firms.
    • "Leaving certain markets:" Only 8% of good firms, nearly one-quarter (23%) of bad firms.

What does this tell us, back here in LawFirm Land and out of McKinsey Land?

If trust in business at large has fallen, it perhaps cannot help but have spilled over into our world. Or, if as I do, you would prefer not to believe that, it nevertheless signals an opportunity to get closer than ever to your clients. Don't permit even a whiff of questioned trust to enter your relationships with your clients. Do you think (do they think?) that if there's nothing going on, there's nothing to talk about? Wrong, wrong, wrong. Reach out to them.

Second, if businesses are shedding jobs and prices are under pressure, surely we have known since at least September 2008 that the same is true of us. This is, at this point, very old news.

Third and most important, what is your firm actually doing in response to the crisis?

Here the McKinsey survey actually provides a bit of guidance, even if you're tempted to more realistically categorize it as confirmation of common sense. But the guidance would be:

  • "Cut operating costs:" Engage in the dreadful substance, process, and experience of laying off lawyers and staff. And yes, associates today and partners tomorrow.
  • "Increase productivity:" Partly by engaging in (a), above, but more creatively and more importantly by reallocating people to practice areas in greater relative demand. You object that it's hard to retrain people? I retort that it's only hard if those individuals who are about to be among the retrained find it hard themselves. And then you know who is onboard the train and who is not.
  • "Leaving certain markets:" Here the message may be, if any of these are, more positive. Do not retrench. At least not if you're in markets you entered after due consideration, and not in a pell-mell rush to emulate a competitor or to plant a flag for ego's sake. If you are in a particular city for a fundamentally sound reason, aligned with your own internal firm strategy and your clients' long-term demands, do not retreat. We last saw this, may I remind you, in 2000 when everyone seemed to plunge into Northern California just about at the peak of the dot-com boom. Those who subsequently retreated were not there for the long haul, and should not have been there for the short.

Summing this up, I choose to put at least a skin-deep positive gloss on it.

We clearly don't know nearly as much as we'd like about what we're experiencing, but that doesn't mean we know nothing. We can take some obvious steps (costs, productivity, markets).

We can, also and imperatively, engage our partners, associates, and staff in the new firm-wide enterprise of shifting from a mindset of do-no-harm and steady-as-she-goes to one of:

  • creativity,
  • agility,
  • flexibility,
  • and suppleness.

Think different.

Full post as published by Adam Smith, Esq. on April 02, 2009 (boomark / email).

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