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Post #484 – Wednesday, August 11, 2010
An Irrational Form of Leverage
Regular readers of this blog will know that I have a keen personal interest in economics, was among the first within the profession to predict the current recession, and have been virtually alone in suggesting to client firms that they need to measure their strategic plans against an economic slowdown that will likely continue for some years yet. In the process of pursuing my interest I have developed a camaraderie with a number of astute economists whom I respect and whom provide me with their insightful opinions from time to time.
As was true of the ominous position that the real estate sector found itself in. some years back, now in an entirely different sector the clouds are turning black once again. Strip out the finer details, and you'll find the very same mechanics that brought the sub-prime housing market from boom to bust:
. widespread investor acceptance
. complicated derivatives
. intense incentives for banks to make deals
. boneheaded assumptions of endless return on investment
. under-qualified borrowers
. stunning amounts of leverage and debt
. loosely regulated multi-trillion-dollar market
. overstated credit ratings from Wall Street
. social and political pressures to maintain growth
This crisis-yet-to-be is . . . municipal bonds and here is what I learned through an e-mail last week from one of my economist buddies:
Munis have been a long-standing pillar of stable return. Only bonds from sovereign governments and blue chip corporations have a better reputation for credit-worthiness than munis. So when a city or state sells bonds to build a new school, sewer or stadium, investors form a line around the block. In the history of the union, only one US state has ever defaulted on its debt (Arkansas 1934). A few cities here and there have also done so. In other words, munis have performed admirably over the years.
But reputations, as this credit crisis has taught the world, no longer mean jack. Though vast and complicated, the root of American municipalities is like any business or household: Money goes in, money goes out. Money comes in mostly from taxes and revenue streams such as utilities and tolls. Money goes out to finance municipal government payrolls and public works programs. Cities and states sell bonds when they either can't pay upfront for such needs. No big deal . . . at least, it wasn't a big deal until recently.
In this era of high unemployment and shrinking economies, municipal revenues are hurting. Tax revenue tends to be lower with 15 million Americans out of work. And so, not surprisingly, municipalities are struggling to cut spending in line with lost revenue. But their biggest expense of all is untouchable - pension plans. California offers a telling example. A recent Stanford study concluded that the state pension fund program is under-funded by roughly $500 billion. The researchers urged Gov. Schwarzenegger to inject $360 billion into its public benefit systems - right now - to have an 80% chance of meeting 80% of obligations over the next 16 years. Facing a $20 billion state budget gap, what can he possibly do?
The problem, just like with subprime, is an irrational form of leverage. In essence, municipalities borrow current earnings of public employees in exchange for some of the most favorable retirement plans in the world. That borrowed money is invested aggressively, just like a private-sector employee would in his 401(k). Except if the fund loses money, which they all have over the last 10 years, pension funds don't adjust payouts. The social and political pressure to maintain the status quo - keeping our public employees comfortably retired - is just too strong.
So municipalities kick the can down the road. New employees buy into the funds. Fund managers maintain their projections of endless 8% annual returns. Retirees keep taking out the funds they were promised . . . and no one pays the tab. And it's not just California. Orin Cramer, chairman of New Jersey's pension program, estimates a national funding gap of around $2 trillion.
The municipal bond market is roughly $2.7 trillion. If Cramer is on target, that's a total liability about the size of France and Britain's annual GDP - combined. Therefore, in yet another subprime redux, Wall Street has found a way to make the muni bond problem even worse. Like the mortgage market, the municipal bond market has morphed into its own new era of highflying finance, adjustable-rate loans and complex securities.
Of course, what modern catastrophe is complete without a credit ratings debacle? According to the National Conference of State Legislatures, 34 states are projecting budget gaps for 2010. The total shortfall will likely exceed $84 billion. Yet only two US states, California and Illinois, are currently rated lower than AA by Standard & Poor's. Only four states have fully funded pension programs. Yet 11 have S&P's coveted AAA credit rating.
Given the ratings agencies' track record over the last 10 years, those AA and AAA ratings seem woefully optimistic. Insolvent is insolvent, not matter what the rating agency's say.
Post #483 – Friday, August 6, 2010
An Aggressive AFA Marketing Campaign
I received an email today confirming that UK-based CMS Cameron McKenna has launched a major alternative fee campaign in an attempt to boost client loyalty and attract new business.
The firm is offering a 'no questions asked' fixed-fee payment system, which would see clients pay for legal advice on a regular monthly basis. As part of the campaign, Camerons sent 3,500 clients information about available alternative billing options (Have a look at a copy of CMS Brochure: The Future of Fees), including five specific alternative fee arrangements.
The guidelines come with a scorecard that lists the factors that make a client eligible for a reduction in fees, which include:
• paying bills within 14 days;
• giving Camerons more than 33% of all legal work;
• supplying work across practice groups; and
• agreeing to an associate as the main point of contact at the firm rather than a partner.
CMS senior partner Richard Price commented: "This is part of a campaign to set ourselves apart from competitors, but there are also some clients that need help in understanding how these arrangements work. There is a lot of talk about value for money and fees but it doesn't provide you with much substance. These guidelines, while not comprehensive, give a good idea of how the client can achieve better value."
Camerons claims that one marguee client has already signed up to the arrangement for a year, and that it is in talks with others about similar deals.
I think that this is an aggressive move that is destined to stimulate more than a few copycats!
Post #482 – Sunday, August 1, 2010
The Worst Thing About Best Practices
Mike McLauglin and I have long had a mutual admiration for each others work and he kindly sent me a copy, some months back, of his latest writings, Winning The Professional Services Sale which I heartily recommend reading. Well, I just came across this article about Best Practices that Mike authored and wanted to share an excerpt with you:
It’s tough to pinpoint when copying some other law firm’s tactics morphed into “adopting best practices,” but somewhere along the line it did. The notion that an organization can transplant the ideas of another has become so widespread that it’s no wonder so many professional firms look remarkably alike.
Of course, there is value in learning from others’ experience and success. It’s natural to look at how another firm (especially a competitor) created a new market opportunity. Many firms face the same kinds of challenges, so applying others’ tested strategies and tactics often seems like the ultimate shortcut to salvation. But too often, following others’ practices results in wasted investment and disappointment when the results fall short of their original application. Here are four reasons you should dump best practices:
They rarely work. A firm’s best practices—however widely admired—function in the context of its particular organization’s processes, culture, systems, and people. Plucking a practice from the situation that brought it forth and trying to graft it onto another firm produces results that are by no means guaranteed.
It’s a follower’s strategy. In an era when clients demand creativity and innovation, why follow someone else’s lead? In the long run, relying on best practices will doom you to mediocrity. Instead of getting bogged down trying to reverse-engineer the strategies of others, find your own path. Be the leader, not the follower.
Change comes from within. People rarely respond well to implementing some other firm’s ideas. In fact, best practices that come from on high usually cause resentment. Let people create their own solutions using their in-depth knowledge of your firm’s clients, suppliers, employees, and processes. That will result in ownership of the ideas and determination to get results.
They don’t come with a manual. Business books and benchmark reports are full of snippets about best practices, but they rarely explain what to do with them.
The problem with best practices is this: Using them as a guide lulls people into thinking that a practice already exists, tested and ready, and can be successfully transplanted. When you import a practice, thoughts immediately turn to how to implement that practice, when you should instead focus on what needs to be done and why. If you begin with a predetermined solution, you’re more likely to overlook innovative ideas right under your nose.
MICHAEL W. MCLAUGHLIN is a principal with MindShare Consulting LLC, a firm that creates sales and marketing strategies for professional services companies. He is co-author of Guerrilla Marketing for Consultants and author of Winning the Professional Services Sale and the newsletters Management Consulting News and The Guerrilla Consultant.
Post #481 – Friday, July 30, 2010
July Soundings: Tidbits of Interest
• I’m currently reading . . .
A couple of great articles – ALL well worth your reviewing:
- 12 Guidelines For Law Firm Marketing Investments is written by Jim Stapleton, CEO at Fenwick & West and provides some much needed counsel on how to sort through that myriad of wonderful opportunities for blowing your marketing budget. Jim states, “I wrote the article after years of mild to medium frustrations with both partners and vendors who don’t seem to understand how and why we invest in specific activities.”
- The Law Firm Paradigm: Relevant or Relic? by Timothy J. Waters, a senior partner at McDermott Will & Emery. Tim tells me that “This article is based on my personal observations as an individual who recruited many, many lawyers from a spectrum on law firms in the US and Europe. My goal is to precipitate a debate and (hopefully) some introspection among and between law firm managers.”
• And while I’m on the subject . . .
Jim Hassett’s new Legal Project Management Quick Reference Guide packs an impressive amount of techniques, tools, and templates into104 pages. Written for use as training material in LegalBizDev's workshops and coaching and as a resource afterwards, the Guide is designed as a ready reference, organized so that readers can look up material to help them with a specific need, rather than as a manual to be read from start to finish. Its purpose is to help law firms rapidly apply the key principles and tools of project management that will "have the greatest impact for each individual practice."
• I’m enjoying . . .
A new website that represents the latest time-waster - I Write Like was created by Dmitry Chestnykh and allows you to paste a short writing sample in a box and click the “analyze” button. The site then examines word choice, sentence length and punctuation in comparison to the works of 50 famous writers in its database and, within seconds, spits back the name of the author your writing most closely resembles. Apparently with one of my articles I write like H.P. Lovecraft . . . "the American writer of the twentieth century most frequently compared with Poe in the quality of his thematic preoccupation with the obsessive depiction of psychic disintegration in the face of cosmic horror." Ouch!
• I’m fascinated by the views of . . .
Professors Gregory Northcraft and Kevin Rockman who put a group of more than 200 participants through separate teamwork exercises – face-to-face and e-mail and video-conferencing. The groups that met face-to-face were more trusting and cooperative than the groups that negotiated by e-mail. Their study shows that face time allows us to assess our colleague’s trustworthiness, typically based on visual clues such as tone of voice and facial expressions. Meanwhile, e-mail can give users a sense of anonymity that can bring out the worst in people – they write things they might never say. (Can you imagine?) “Face to face, people have more confidence that others will do what they say they’ll do. Over e-mail, they trust each other less, claimed Northcraft, professor of executive leadership at the University of Illinois.
• I’m relieved to know . . .
M&A Activity is forecasted to increase. IntraLinks recently commissioned mergermarket to conduct a survey of 160 Global M&A professionals to gather their opinions on a number of issues including the post-global financial crisis, the current economic and dealmaking environment as well as the key challenges and opportunities market participants will face in the coming year. Respondents were drawn from Europe, North and South America, Japan, Australia and South East Asia and represented the corporate, financial, legal and private equity communities. A couple of Highlights:
- In a vote of confidence for the future of M&A, which for a time looked very bleak, respondents from all regions expressed a high level of optimism about the level of dealmaking to come. Indeed, 78% of all respondents expect the level of dealmaking in their region to increase over the next 12 months. Understandably, this level of confidence was even higher in the hard-hit North American market – here 89% of the region’s respondents felt deal flow would ‘increase’ or even ‘increase greatly’ over the year to come.
- Given the sheer number of deals that have been announced in the Energy, Mining & Utilities space over the past years it is at times difficult to believe that there can be more to come. However, 55% of all respondents predict that this sector will see the bulk of deal
flow in their region. Technology, Media & Telecommunications was just ahead of this at 56%. Of course, one must consider the fact that buyers in China and India are still scouting the world over for attractive targets in the Energy and Mining space to address the ever expanding energy needs of each respective country.
• I’m pleased to report . . .
Our August 16 forum entitled Overcoming Lawyers’ Resistance to Change has been fully subscribed such that Ark is now planning a second session in New York on Tuesday, January 25, 2011. I’m honored to be able to participate again in this second session with the same faculty members as scheduled to appear at the University of Chicago.
Post #480 – Wednesday, July 21, 2010
Are You Being Afflicted By Strategy Viruses?
I invite you to read my latest column for Slaw – Are You Being Afflicted By Strategy Viruses?
Slaw identifies itself as “a cooperative weblog on all things legal.” Slaw has been publishing for five years and gets 30,000 unique visitors and about 100,000 visits every month. For the past two consecutive years it has been the winner of three different awards as the best legal blog.
I’m honored to have been asked to become a regular columnist and invite you to comment on my latest meandering.
Post #479 – Tuesday, July 20, 2010
Words of Advice for The Words of a Leader
Listen more than you talk. Use your words sparingly. Leading doesn’t mean that you are required to talk more than anyone else. In fact, it is quite the opposite.
Carefully relect upon what you want to convey before you talk. Choose your words deliberately.
A well-turned question is often more effective to get people thinking than a dozen statements. Manage your questions to comments ratio.
All of your words must include respect as a foundation. As soon as respect is omitted from your message, you’ve lost.
Make certain that your words and your body language match. Given a choice between the two, studies indicate that people will believe your body language over your words.
Tough conversations on performance are part of your job. Embrace this reality and don’t sugarcoat your message. Do keep them focused on behaviors, and keep the behaviors linked to performance.
Genuine words of encouragement and well-deserved words of praise are rocket fuel for individuals and practice groups.
“The do must match the tell.” The words of leaders not backed by actions and support are just so much hot air.
Be aware that your words as a leader will be amplified and distorted. Manage your words carefully.
Post #478 – Tuesday, July 20, 2010
Ever Had a Job?
Here's an interesting item that is going around the Internet: If July has ides, this is it. A chart that showed past presidents and the percentage of each president's cabinet appointees who had previously worked in the private sector - you know, a real life business, not a government job? Remember what that is? A private business that had to meet a payroll payment?
• Roosevelt - 38%
• Taft - 40%
• Wilson - 52%
• Harding - 49%
• Coolidge - 48%
• Hoover - 42%
• FDR - 50%
• Truman - 50%
• Eisenhower - 57%
• Kennedy - 30%
• LBJ - 47%
• Nixon - 53%
• Ford - 42%
• Carter - 32%
• Reagan - 56%
• GHWBush - 51%
• Clinton - 39%
• GWBush - 55%
And the Chicken Dinner Winner is .........................
Obama - 8%
Only ONE IN TWELVE in the Obama Cabinet has ever had a real job.
Yep, EIGHT PERCENT!
And these are the guys holding a "job summit" . . . the guys who are going to tell you how to run your businesses.
Post #477 – Tuesday, July 20, 2010
When States Go Bankrupt
From my favorite economist buddy, I received an e-mail last week explaining that while the private economy has done a reasonable job attempting to pave the way for growth, the next big shoe to drop for the US may be the revealed insolvency of some of its big states . . .
A San Diego County panel - faced with $2.2 billion in unfunded pension liabilities and $1.3 billion in unfunded health care liabilities - recommended, among a number of other possible actions, filing for bankruptcy. According to Grant's Interest Rate Observer, four major American cities (Miami, Detroit, Los Angeles and Harrisburg) have all hinted at the same this year.
The big states are even worse. The Economist reports on Illinois: "By 2018, Illinois will be paying $14 billion a year in benefits, equal to more than a third of the state's revenue, compared with $6.5 billion now."
Plugging those kinds of gaps means getting creative with new forms of skullduggery. For instance, the State of New York, with its $9 billion budget deficit, is looking at a proposal to borrow $6 billion from its state pension fund in order to make a $6 billion payment due to that same pension fund. (Yeah, you read that right!)
The trials of Illinois and New York are not isolated incidences. Apparently, according to the Center on Budget and Policy Priorities: At least 46 States face or have faced shortfalls for the upcoming fiscal year (FY 2011, which will begin on July 1 in most States). These come on top of the large shortfalls that 48 States faced in their current budgets (FY 2010). Yet incredibly - or maybe not - Moody's maintains that "the credit profile of the US state and local government is very strong.
Huh? Do you wonder why anyone should take what these ratings agencies say seriously? In any event, what we may see happening is a great big bailout from Uncle Sam, which itself is broke - bleeding astronomical deficits and in hock for record amounts.
Post #476 – Monday, July 5, 2010
What Are You Paying Attention To Going Forward?
As your firm’s leader, what you pay attention to determines what your colleagues perceive to be most important. It therefore follows that if you do not track what is going on outside of the walls of your firm, you may soon be caught dealing with a priority that seems urgent but is less important than the one you should be dealing with. Determining what you will pay attention to is your first priority in effectively leading your firm. Here are a few challenges that you should not loose sight of:
Don’t get caught with your attention firmly fixed in the rear-view mirror.
Many firm leaders get so caught up in the busyness of business, that they don’t take a good long look at the world outside their firms. Concurrently, the executive committee members also become consumed by these immediate issues, and firmly enmeshed in the fierce urgency of now. Yet, the uncertainty and potential impact of the future demands that we reallocate our attention - because disruptions in the client environment can disrupt our business models with lightning speed. Uncertain client demands, encroaching competitors, and new technologies can be anticipated and managed only by routinely tracking them, even if they don’t have any immediate impact on your firm’s performance. Executive committee members must now spend some portion of their time reading, listening, and thinking about the external environment. Even your senior administrative professionals should allocate some amount of their precious meeting time to looking out rather than in. Jim Collins described the highest performers, as those leaders who were always looking out the window to identify where success comes from and looking in the mirror to find the source of failure. This trait is especially valuable when dealing with an uncertain future.
Don’t fail to challenge assumptions until they bleed.
Many of us often don’t question our beliefs when it comes to dealing with uncertainty. We continue to assume that people will always read newspapers, buy music in stores and pay legal fees based on a billable hour model. We assume that our firms will work best with a practice group structure based on lawyer competencies. We assume that the United States will continue to be the global economic powerhouse and that the US dollar will continue to be the global currency. These could be right or wrong assumptions, but for every firm, whatever is assumed based on the past, is likely to be wrong for the future. As comfortable as it is to determine your priorities based on your past experience—and as much as it saves time and money—it is today, a deadly practice.
Don’t allow hubris to cloud your view of the future.
By definition, arrogance makes you vulnerable to surprises. When you convince yourself that you have the answer—that you have a winning formula that will triumph in all circumstances — then something in the future is bound to get you. As Murphy’s Law postulates, “If something can go wrong, it will.” Intel’s Andy Grove once insightfully suggested that “sooner or later, something fundamental in your business world will change.” The future humbles us all. The challenge for everyone is to look into an uncertain future with a learner’s mindset and maintain flexibility.
Post #475 – Monday, July 5, 2010
What Are Your Corporate Clients Worried About?
The recent financial and economic crisis has meant testing times for the resilience and flexibility of many companies. The most crucial corporate attribute in such times is the ability to bounce back, while at the same time learning from experience so as to be better prepared the next time around. In April, 836 top managers from across the globe were surveyed and asked how they experienced the economic crisis. The findings paint a sober picture.
As a member of Egon Zehnder International’s Club of Leaders I’ve just received the findings of the firm’s eighth and latest survey on the topic of Resilience - a review of the current state of corporate leadership, flexibility and strategic foresight. Here are some brief highlights from that survey:
• Two out of three respondents identified the ongoing recession as their main external challenge;
• More than half of the executives who responded said their companies face the task of identifying a business model that matches the revised operating environment;
• High on the list of urgent challenges is an inadequate talent and leadership pool;
• Executives mentioned ‘high levels of national debt’ as a threat to their companies; and
• Adaptability, was identified as the most important factor in dealing successfully with future crises, according to the managers surveyed.
You are welcome to download and read a copy of the report – here.
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