For those who do not take an interest in football, Arsene Wenger has (from the viewpoint of those who do not support Arsenal at least) been the highly succesful manager of one of the top English clubs, leading them to cup and league success and making his team at times a by-word for attractive free-flowing football. Though successful in his own right, Rudi Gutendorf is perhaps the definition of "journeyman" football manager, having managed a remarkable 15 club sides and 18 national teams in a career extending over 47 years.
What on earth has this to do with legal services, still less ABS's, you may ask. The answer is somewhere in the complicated question of how the practise of law has (depending on your viewpoint) benefited from or been hindered by law firm structures, a debate that is starting to emerge in North America as contemplation of the prospect of non-lawyer ownership of law firms grows. Now that the giddy novelty of ABS law firms is starting to wear off in England and Wales, it is time for a more sober contemplation of the contribution of law firm structures to their success or otherwise.
In my opinion, part of this analysis must focus on how law firms develop and encourage their knowledge capital - principally their people. In his seminal work Making Sense of Law Firms (1997) @StephenMayson describes this "firm-specific capital" as a combination of of clients and client knowledge, a reputation for knowledge and "situational know-how", meaning "the knowledge and experience of a firm's personalities, culture, and working practices and procedures that arise both formally and informally" (Mayson 1997 p. 95). In other words, what makes a firm tick, which may in turn be an important component of its brand, ability to attract new talent and market position.
Following Sveiby and LLoyd's 1987 work Managing Know-How, Mayson sees firm-specific capital as forming part of a law firm's "invisible balance sheet". So while it may be possible to value a law firm or any other know-how business by reference to hard metrics such as its financial standing and performance, this does not give the whole picture. Managing the invisible know-how assets is not only a key task for management but is also what fundamentally distinguishes know-how businesses from conventional corporates. As Sveiby and Lloyd put it:
"While it may be quite acceptable for the industrial company to strive to maximise the growth of financial assets, to apply the same objective to a knowhow company would be to court disaster. For the knowhow company it is the expansion of the knowhow capital which is the measure of growth." (Managing Know-how, 1997 p.148)
Which leads me, somewhat indirectly, to those exemplars of football management, Arsene and Rudi. The career trajectory of most corporate managers is probably more like the latter than the former, with the average tenure of FTSE 350 CEO's being in the region of 6 years (see http://www.telegraph.co.uk/finance/jobs/10415876/Want-to-be-a-chief-executive-Heres-the-route-to-follow.html). Perhaps more interesting is Professor Xueming Luo's research that I cite here. Having measured the value and volatility of stock returns and the strength of relationships with two groups – employees and customers – in 356 US companies between 200 and 2010, Professor Luo concludes that when you hit the top rung, you should stay there for no more than 5 years to achieve best results.
The reasons advanced by Professor Luo for this conclusion relate to how CEO's learn and are, I believe, highly relevant to law firms. In the early stages new CEO's absorb information from a wide range of internal and external company sources, strengthening their relationships with employees and customers alike. However, as time goes on, they come to rely more on their internal networks for information, losing touch with what customers want and due to their increased investment in the firm, become more inclined to avoid losses than pursue gains. Hence performance dips and it may be time for them to depart.
All this makes perfect sense in the context of achieving value for shareholders. Where profits fall it may be entirely right to say goodbye to your senior management team and bring in fresh faces with more of a grasp on customer wants. How does that translate to legal businesses though? Traditionally, law firms have tried to tie in their knowledge or firm-specific capital by encouraging the belief among its better employees that sharing their individual know-how and developing durable relationships with clients and colleagues would lead to partnership/management positions with a degree of security of tenure and significant reward.
This is important because as Sveiby and Lloyd would have it, expanding the know-how capital (the only viable strategy for a knowledge business) requires development of the firm's professional and managerial know-how by: skilled recruitment of professionals who will stay; training; continuing education and work experience; and meaningful (i.e. know-how enhancing) engagement with clients. All of this in turn implies a commitment to invest over the longer term by both employee and management. The traditional law firm, in its more successful incarnations at least, does at least have a mechanism for reconciling individual ambitions and the requirements of a successful know-how business via the partnership model, or as Mayson described it, the partnership of "integrated entrepreneurs" (ibid. p.152).
So how will this work with ABS's? Corporate models might suggest, as per Professor Luo's research, that obtaining shareholder value requires a much more rigorous up or out approach to management (or if you like, more Rudi than Arsene). Where then the incentive for junior management or lawyers to make the kind of long-term commitment to that firm (rather than to their own career) that the know-how firm would seem to need, if the spaces at the top table are both limited and time-limited? Does this impact on client relationships and hence on the firm's know-how capital? Does the 5-year term CEO really have an incentive to invest in a knowledge structure that benefits his successors? The arguments about non-lawyer ownership of law firms thus far have often touched on legal or regulatory issues. I wonder whether in fact, it is a business issue, to wit the special dynamics of know-how businesses, that may be more important in the longer term. I can only express the hope that we will see some research on the interaction of ABS's, know-how and leadership as thought-provoking as that of Professor Luo and his colleagues.
It’s a familiar cycle: A CEO takes office, begins gaining knowledge and experience, and is soon launching initiatives that boost the bottom line. Fast-forward a decade, and the same executive is risk-averse and slow to adapt to change—and the company’s performance is on the decline. The pattern is so common that many refer to the “seasons” of a CEO’s tenure, analogous to the seasons of the year.