Saturday, September 30, 2006

Global Law Firms as Economic Laboratories: One Way to Think of Lawyers as Rats

Posted by Jeff Lipshaw

Law.com has an interesting story on the strategy of one of the old-line London city firms, Slaughter & May.  The firm has foregone global expansion a la Clifford Chance or Allen & Overy (and many of its American peers) in favor of "best friend" alliances with similar independent firms around Europe - Germany's Hengeler Mueller, and Italy's Bonelli Erede, for example.

I concur in the sentiments of the Diageo general counsel quoted in the article, who said he had an expectation of seamlessness in the end product, regardless of the internal structure.  The irony, from my standpoint, is that multi-national clients do not get that kind of seamlessness, even when they hire some of the more well-known global firms.  I still remember conversations, when I was a GC, with senior partners in some of those firms, telling them that it was their job, not mine, to insure, where a deal involved a French subsidiary of a German company holding Spanish assets being sold to a Netherlands buyer, that the Paris, Barcelona, Frankfurt, and Amsterdam offices were talking to each other.

Notwithstanding my own deontological bent, my experience with law firms as partner and customer is that they may well be perfect laboratories to test the predictions of competing economic theories.   My casual experience is that nothing will tell you more about your upcoming relationship than knowing how the firm's internal compensation system works, not only as a matter of partnership or LLC operating agreement, but as a matter of culture.  Here's an example of contractarianism gone wild.  Some years ago, when I was leaving AlliedSignal, I was approached by a smallish suburban Detroit law firm whose compensation system worked like this.  As the "rainmaking" partner for a piece of work, you controlled the profits.  If you needed tax work on the deal, you had to go to one of the tax partners and negotiate a split.  (It's entirely possible that the system worked for relatively independent trial lawyers; I couldn't imagine trying to rope in everyone I needed for a deal.)  The next time I encountered a system like this was negotiating a "preferred global law firm" deal with a major U.S.-based international firm.  I was told that if the U.S. office agreed to too much of a discount, it would not be able to entice its sister offices to participate!

Lisa Bernstein's study of the diamond district in New York was a classic.  The next "gem" for the empirically inclined is a longitudinal study of those interesting beings whose days are measured with time sheets and hourly rates.  Is behavior different in firms where all the partners have perfect information (i.e., the billable hour and billing leaderboard are open documents) or the information is asymmetric?  Do partners look to the long term, or is the availability heuristic at work?

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