Friday, January 23, 2009

The Werther Effect; 21st Century Darwinism?

As global economics crumble under weight of historical bad management, organizations scramble to eek out a means for their existence beyond today. As the bail-out-billions begin to flow and the Dow Jones continues to fall, signals to a hopeful world that there remains little confidence in the market place. Organizational survival during these times is trying at best, as firms are squirreling away their capital while trying to get consumers to spend.

The current economic climate has precipitated a wealth of writings how best to ‘solve the problem’; I admit, I too have added my two cents to the mix. The most interesting aspect of this burst of knowledge is very few organizations are using it. It seems the blinders have gone on and the solutions for today’s problems are drawn from historical approaches. It is almost as if continuing to replace a light bulb would create light, during a power failure. It is no wonder that so many organizations are failing at this time.

The professional services world, specifically law firms, has really fallen into this lemming mentality. To fix today’s problem, we will replace the light bulb, because that solved the problem in the past. Over the last eight weeks I have spent considerable time working with large west coast law firms, and upon reflection. Their actions now are predominately no different than they were two plus years ago. The one difference, more layoffs, but with a twist! The twist; keep the status quo!

During a dinner meeting with the CFO of a huge international law firm, the topic of 2008 profitability came up. As we spoke, I realized quickly this person really had no strategy beyond December 31st; other than a 14% reduction in staff. When I countered with, do you feel that the staff reduction will enable the firm to weather the climate, the answer I got startled me. The answer: “Don’t know, but as long as I get my annual bonus I will be fine”. The firm ended flat line on their operating budget for 2008, they shed staff and the remainder of the people got bonuses. As for my friend, he has no idea what to do in 2009! A Harvard MBA and an accountant, and he has no plan, other than possibly further layoffs.

The tools of creative thinking, although plentiful, seem to have been lost or have been stifled in so many professional services firms. It seems that the ego driven ‘me’ mentality has individualized those in firms to seek their own means of survival. What everyone is failing to realize is that the ‘me’ mentality limits our survivability!

William Henderson, a professor of law at Indiana University, believes that more large firms are building up their equity from non-equity partners while many firms are moving to an ‘eat what you kill model’. For those firms who have moved to higher equity contributions, this was probably the best move in the history of the firm. In my experience, professional services firms have been undercapitalized for decades. Having a strong equity base will make the firm more resilient to external pressures. However, the ‘eat what you kill model’, completely throws evolution out of the window. The firm is devolved from a strong arm going to battle for a common cause, to every person for themselves; like my CFO friend! With that type of model, survival is measured in billable hours and days, not months and years.

For some, this Werther Effect among firms, signals the big law firm bubble is about to burst. According to law firm consultant, Brad Hildebrandt, “the bubble won't burst.” However, Hildebrant affirms that survival will be based on a scrutinizing of management models more closely. I strongly support Hildebrandt’s contention regarding the bubble, however at the same time, I feel that the landscape will be littered with the remains of many dead big law firms. As many large firms have already demonstrated their unwillingness to change, their Werther Effect mentality, through their current actions.

The recent release of Legal Week Intelligence’s (LWI’s) 2008 Client Satisfaction Survey states that more than a fifth of companies (23%) are planning to scale back the amount of work they send to private practice law firms over the next year, with that figure increasing to 28% by the end of 2009. Firms who are into survival mode rather than copycat mode, should be retooling their management, practice and compensation structures to deal with the changes in the market place. However, current articles are suggesting that there is more of the former activity happening than the latter.

The economic challenges of today will never be overcome with historic solutions; survival depends on a critical open-minded analysis of all the variables. An excerpt from, "Flaws in Strategic Decision Making," (The McKinsey Quarterly, January 2009)., outlined decision-making practices and compared them with decision outcomes. Decisions that were made after a company's executives sought out contradictory evidence and opinion were more likely to turn out well. In cases where decisions turned out poorly, only 25% of respondents agreed that the decision makers had sought out evidence contradicting their initial plan, compared with 51% who strongly disagreed. But in cases where decisions turned out well, 43% of respondents agreed that decision makers sought out contrary evidence, and only 23% disagreed.

With wisdom at our fingertips, ultimately we choose our organizational destiny. We either evolve because of changes in our environment or we copy those failing around us – it is in our hands!