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Post #384 – Thursday, March 26, 2009
More Bad-News Trends Worth Noting
Sometimes it’s necessary to prepare for the worst and pray for the best. This is one of those times. Here are a couple of trends worth noting:
• A brand new research study conducted by Archstone Consulting revealed that 57% of the companies have not yet identified sufficient savings opportunities to meet the cost reduction targets necessitated by the dramatic economic decline in 2009. The survey found that in 2009, companies are turning increasingly to the use of more complex initiatives, such as logistics redesign (+11%), shared services (+9%) and asset rationalization (+9%), in order to realize their cost savings goals this year.
Since earlier this year, I’ve been telling clients that my corporate experience suggests that companies will have prepared three budgets for 2009 – their best case, the most realistic case and their worst case. Get ready for many of these companies to begin the switch to their worst case scenarios in the next few weeks as they see the results from the first quarter.
• Alarms ring as European M&A plunges! There has been a stark warning of what to expect in 2009 after the Q1 M&A tables from Mergermarket showed that deal activity has entered freefall across Europe. According to provisional figures, the first quarter of 2009 has seen 487 deals valued at $88.7bn. This represents a hefty 61% decrease on the last quarter in 2008. AND, when compared to Q1 2008, this quarter is down by 70% in value terms ($225.2bn) and by 69% in volume terms (1,544 deals).
These findings come ahead of the Q1 2008 M&A legal adviser table, due in the next two weeks. The substantial drop in activity will not make pleasant reading for many law firms, which are expected to take a major hit as the recession tightens.
• In a startling speech earlier this week China went on public record to propose a sweeping overhaul of the global monetary system, outlining how the U. S. dollar could eventually be replaced as the world's main reserve currency by the IMF's Special Drawing Right. Mr. Zhou Xiaochuan, governor of the People's Bank of China, diplomatically did not refer explicitly to the U. S. dollar. But his speech spelled out Beijing's dissatisfaction with the primacy of the U. S. currency, which Mr. Zhou says has led to increasingly frequent global financial crises.
We had all better pray that Obama’s multi-trillion dollar rescue plans start to show some measurable results and soon. China is the largest holder of U.S. dollars -- approximately $2 trillion. If China should decide to dump it’s holdings, we are in big trouble.
• With the commercial space vacated by defunct financial firms and an array of troubled businesses, from restaurants to architectural firms, to high tech operations, to offset printers, etc., the inescapable result (that I predicted in my alert last year ‘Managing Through A Prolonged Downturn” and only now being discussed in the business media) is a commercial real estate bust that will be costlier, wreak greater havoc and prove more intractable than the residential market decline.
When commercial real estate crashes, the depressive atmosphere of vacant floors and empty cubicles will dampen the workday spirit of the still-employed; ever present reminders of laid-off friends and colleagues and of the fragility of employment. Abandoned, untended business and industrial parks will highlight the already mournful scene.
• From a former BigLaw managing partner and extraordinarily astute observer of the profession, Edwin Reeser, comes this prognosis:
The big question that will be asked at the end of this month . . . “now that we have made all these cuts, how do we look for year end income projections, assuming nothing changes?"
The answer is likely to be very somber for a lot of firms. Net operating revenues are likely to be down in serious double digits for most firms in 2009 from 2008, notwithstanding all of the hard steps taken. Confronted with that reality, (and the "insider" partners are going to have a direct line to the management committee that is sitting on those constantly updated projections), there is going to be a palpable tension over who is going to stay and ride it out and who is going to be among the first to go. Internal policies over return of departing partner capital will be one of the primary hooks that holds people in. If the reduction in income over loss from return of capital is out of balance such as to favor departure - the house of cards comes down, and fast.
Do NOT expect the mass layoffs to continue in the second quarter. The second quarter will be a) voluntary departures and moves by solos and small groups taking clients with them. And b) involuntary partner de-equitizations and expulsions / terminations.
Do NOT expect significant mergers. The political will is not likely to be there to draw upon for the partner votes needed to make them happen, (partners will be concerned about rounds of partner level cuts) and the aversion to taking on debt, fixed overhead and liabilities is not likely to be there.
There will be collapses and failures of firms increasing in the third and fourth quarters as numbers of lawyers make the decision that there is no way to work their way out of the hole the enterprise is in. The experience of Thelen, Heller, Thacher and Wolf will be repeated more times than we care to imagine right now.
Post #383 - Friday, March 13, 2009
Involving The Firm Leader In Selecting A Successor
A partner, on the executive committee, at an AmLaw 200 firm (which should remain confidential) posed the following question:
Our managing partner has confirmed that he will be stepping down at the conclusion (in June) of his current term. He is now recommending to the executive committee that it would be expedient for him to select his successor. He informs us that that is a common and expected practice within the business community (e.g. Jack Welch at GE) and that there are a number of larger AmLaw firms where it is the accepted practice. From your work with managing partners, what is your experience?
Firm chairs and managing partners can play a very critical role in identifying and developing leadership talent within their firms – most specifically those ready to head up offices, practice groups and industry teams. But in my experience there are a number of reasons why I would caution you about having your current firm leader choose his successor.
Your next managing partner needs a clean break. If that professional feels in any way that they owe their position or are obligated in any way to their predecessor, the predecessor’s influence could constrain that new leader from making any needed changes.
Old leaders tire and especially if they have held the office for some prolonged period of time. The initial fire-in-the-belly for improvement, change and innovation may (not surprisingly) have cooled somewhat with each passing year. (In fact, there is empirical evidence to show that it does cool and eventually affects the performance of the organization). Sometimes a long-serving leader can become more focused on preserving what they feel they have accomplished than with positioning the firm for the future. Either way, a once high-spirited change agent can become a foot-dragging defender of the status quo.
Finally, times change, opportunities change, our economy changes (and not for the best) and law firms regularly need new perspectives. If the same personality, sensibility and approach that made your firm what it is today, gets to decide who will lead the firm tomorrow, there will be a very natural human tendency to choose a clone . . . and then tell me please, where will the new ideas come from?
Now, given all of the ink spilled in business articles about how the job of a corporate leader is to choose and develop their successor – this may be a controversial subject. So, what do you think?
Post #382 – Thursday, March 5, 2009
The Coming New Partnership Tier Structure
To strengthen DLA’s financial position in this struggling economy, many of you may remember how the partners “overwhelmingly approved” a change to a one-tier partnership, effective January 1st. The obvious question that follows from that date is: How many nonequity “income” partners balked at having to pony up $150,000? The answer, as reported yesterday was: practically none! Apparently nearly all of the firm’s former nonequity partners have committed a capital contribution to the firm. In discussion with my good friend Edwin Reeser, a former managing partner, we speculated on what impact this move might have for the future of BigLaw. Here’s what Ed had to say:
One of the interesting developments of the current crisis in BigLaw economics has been for some firms to turn to the nonequity or income partner class, those who have been in the second and lower tier of the "two tier" partnership structure that has evolved over the last fifteen years, and request of them capital contributions. This is something that is so immensely logical as a business move for the existing first and higher tier of the "two tier" partners that we may expect to see more of it once it is more carefully digested and understood by their firm leaders.
Of course, once implemented the inclusion of a large number of new equity partners, definitionally all or almost all earning less than all of the partners in the first tier, will have a substantial dilutive and diminishing impact on PPEP as reported to the various legal journals. But that optic will be dismissed as no longer providing a meaningful metric to apply to the firm because they have gone to a different, broader, more inclusive partnership structure; that they pay competitively relative to performance at all levels and their superstars make just the same or more than superstars at other law firms (which is probably going to be true in most cases).
What precipitated the need? Clearly the tightening down on lending for working lines of capital by the banks. Formerly the darling child borrowers for banks, the cash flow erosions and recent firm collapses have required a new look at the creditworthiness of all law firms, and the early results are that firms will be given less credit, and it will cost more. And borrowing from the banks to pay equity partner draws is frowned upon, when it used to be encouraged. But if you have to live on your collection of accounts, you may not have enough monies in the bank to make any draw payments to your tier one partners for the first several months of the year. And that could cause them to pick up their portfolio of clients and move across the street to another firm that can pay them a current draw . . . and lead to the demise of your firm. Not desireable, so you need to get some money to pay the first tier partners. The clients are not able to pay it. The banks won't allow their money to be used to pay it. You have cut all your costs as best you can and you are nowhere near to be close enough to generate monies to pay draws to your big producers. So all that is left is the noncapital second tier partners and you go to them to get it.
Why do the second tier partners want to do this?
The driving force for a tier two partner is that
1) if you don't do it, you are "out." Where are you going to go? So you basically are buying your job. Not a guaranteed job, but a job for now as contrasted with no job now.
2) if you do it, maybe you have better chances of promotion etc etc. This is more likely to be self delusion, but it does sell to some people.
Of course we cannot forget that the initial reason the big law firms went the direction they did from one tier to two tier partnerships is there are some very difficult issues on the cost of true inclusion of large numbers of folks in the partnership equation. But nobody believes that the present economic position of the tier two partners is actually bettered or that they will receive more income by virture of being a tier one partner. Absolutely that will not happen. They were not participants in the profits of the enterprise when they had no equity, and they will not be now that they do. All that will happen is that their compensation will be administered and determined in a fashion that is different than that applied to an employee at will, which is essentially what tier two partners are now.
The test of what this really means is in the drafting of the rights of partners in the partnership. What will the procedures and policies be that make this function smoothly. There is still likely to be a two tiered equity participation, just under the umbrella of a single class. The one thing that senior tier one partners will not likely be enthusiastic about is dilution of the power and authority they hold by including several hundred new faces in the voting pool. They want their money, not their voices. So they will have tiered ownership, voting, and information sharing. It will not be parri passu. Those on the inside of tier one will determine compensation, promotions, and dismissals. The lower tier two people will be paid a salaried equivalent that they had before. But now they will have equity at risk.
How much at risk? Probably around 25% of their scheduled annual income will be the typical ratio. Since most of those income partners earn in the range of $250,000 to a maximum $600,000, this is why you have only a relatively few at the $150,000 contribution level for a tier two partner, while a tier one equity partner in most big law firms these days should have more than $250,000 and as much as $1,000,000 in equity capital. A reasonable guesstimate is that the average former "income" or "nonequity" partner for a firm making this type of restructure in their partner ranks is earning somewhere around $425,000. So around $100k+ would be the capital per person the firm pulls in. But that still amounts to a very substantial infusion of tens of millions of dollars in fresh capital for a firm bringing in 150 to 200 new partners. And if the firm has a leadership with any brains (and they do) they will tap the tier one equity partners for another capital round by raising their capital requirements, probably by somewhere around $50,000 per partner on average, to collect another large amount of capital. This shows commitment by the "upper class" and incentivizes the newbies to step up and participate. For a firm of a thousand lawyers, which probably relies on a line of credit on the order of $100 million at least . . . this should be enough to get them perhaps $30 million in additional capital, well beyond the newer bank restrictions on amounts they will advance for partner draws. But don't be fooled. That is not where the real money is.
Figure that the firm employs a partner draw program that is roughly 50% of scheduled compensation. The GENIUS of this arrangement is not just extracting a bucketload of money from the tier two partners . . . it is deferring half their salary for a year!!! AND, having them now forfeit all of the benefits normally paid for by the tier one partners for them as they used to receive as employees, such as pay for their own health insurance premiums which probably average $12k per person, parking and other typically covered employee perks . . . the impact is GIGANTIC. And the net impact is a real terms pay cut.
Now, with those savings in costs, deferral in timing of payments for hundreds of partner "employees", and the added capital, the impact to the financial income statement, which is what the bank lending covenants are tied to, is radical. All that salary and benefits overhead . . . POOF. Gone. Instead it is converted to PROFIT entry on the income statement! And that is allowed to be distributed to partners. And cash reserves contributed by the partners is . . . now paid out to them in income.
But it is nothing but "optics" from a true enterprise management view.
Think about it. The partners all just coughed up millions in AFTER TAX dollars to now pay themselves back with the same dollars in TAXABLE INCOME! How smart is that?
Of course, it does nothing to fix the operations inefficiencies that are the real source of operations distress. It buys TIME. Now, the key is, will it be wisely applied or just wasted away?
Post #381 – Thursday, March 5, 2009
In A Time of Uncertainty & Economic Turbulence
It is my honor to be serving as Conference Chair for the Ark Group’s Practice Management In A Time of Uncertainty & Economic Turbulence event on March 18 at the University of Chicago. You only have a limited time left to register so that you can hear . . .
- how Patrick Lamb, Partner, Valorem Law Group; Paul Lippe, CEO, Legal OnRamp and Brian Burke, Chair Emeritus, Baker & Daniels recommend you drive productivity through operational excellence. These three speakers will suggest ways in which you can create new services and pricing models uniquely suited to the pressures that your clients are facing; identifying the strategic and structural changes essential to ensuring cost reduction while streamlining (or restructuring) business processes to maintain the financial performance of the firm; and other similar pragmatic techniques.
- how Harry Trueheart, Non-Executive Chairman, Nixon Peabody; Don Lents, Chairman, Bryan Cave and Ross Fishman of Fishman Marketing suggest that you take action to accelerate your business development in a dismal economy. Learn how to address the changing nature of the firm / client relationship; identify and implement metrics that underpin your firm’s business strategy, and forge resilient strategies designed to focus on areas in which you can establish a clear lead.
Further sessions feature speakers from law firms like DLA Piper, Jenner & Block, Holme Roberts and Axiom dealing with subject ranging from understanding the key performance factors for 2009 to how to capitalize on emerging technologies.
For further information and registration details, call Peter Franken today at the Ark Group (773) 281-4275.
Post #380 – Friday, February 20, 2009
When Facing The Terror Of Termination
Today, I received the following eminently astute insights, from a reader (former managing partner) of this blog that offers some salient advice for every firm and practice group leader when having to face a termination situation.
Your latest postings offer some very good points, well delivered, and unfortunately timely. There are three basic types of terminations that I have had to work with:
1) Termination for cause.
Don't think for a minute that these are easy. They are incredibly difficult. You have a whole package of legal issues. But emotionally, there is such a let down and disappointment because it is somebody you have worked with. You know them. You trusted them. They did something very clearly and absolutely with intent they knew was wrong. Sometimes there are pressures and reasons (none of them justify the transgression) that are behind it. Sometimes they are just stupid. Fortunately they have tended to be rare. But even so, there is an interesting thing about these terminations. They tend to be popular with the rest of the team. They see that not only are there rules, but they are applied across the board, fairly. No worse a morale flogger can there be than rules held out to be important, that are ignored or selectively applied. Also critical is the need to be compassionate and generous even to the dismissed employee under these circumstances. There is no need to humiliate or make an example of them in some public way. Most folks know or find out what happened anyway. Sometimes there are legal and business reasons why you should maintain confidentiality. Usually it is just common sense to do what you have to do and move on. Nothing is to be gained by stomping them. Treat it for what it is, as a tragic and unnecessary event brought upon themselves. And don't personalize it as your choice or election. Your position requires you to fulfill your duty to take the action, and you do. What you like, or want or would prefer to do personally can have no part in it. Do what every person in the position should have to do. If you can be classy in this situation, it spreads to other tough things you have to do.
2) Terminations for performance.
This does not have to be tough, if you have managed the review process, with honest feedback, along the way. Most of the time those persons who are struggling will get the message and leave voluntarily. And you should not be surprised that they do because that is supposed to be part of the honest and diligent feedback process. If you are communicating with someone that they are having trouble, or challenges, but that the firm is committed to working with them and getting them over the hurdles, and you back that up with tangible action, then the person with real potential that you want to keep for the next round should stay. I have never had a discussion with an attorney, whether associate or partner, who was surprised that we were coming to the end of the road together. And that means also that you don't shove them off a cliff. Provide time, support and real effort other than words, to get a new position elsewhere. Make this very fine professional, a member of your team, an ally into the future, a valuable alum, who will respect and appreciate that they were treated fairly. Some may not feel that way, but a great majority will if you handle it positively and well. These people are among the best and brightest out there. That is why you hired them in the first place. Not succeeding in your organization does not mean they will not succeed elsewhere. It may be in private practice, it may be doing something else. The raw truth is that there really is nothing all that special about the law, or about your firm. It is something you do, not who you are. Be open about that DAY ONE, with associates, partners and staff. Be clear about what you are all trying to accomplish and why. For those that make the right fit, it creates a strength and enthusiasm. For those who do not . . . not such a big deal. You are still great. We recognized it, others will too. Chin up, let's get a good place for you that will work even better if we can.
3) Terminations for economic reasons.
These are the hardest, of course. These are because YOU and your leadership team have failed. Plain and simple. Leadership is supposed to anticipate, position and manage a firm to success in good times and bad. (Is there a book out there that says leaders are not supposed to be accountable for failures of policies, strategies and directions that they have authored and implemented – or failed to author or implement – and we just missed it?) Some times you can steer the ship skillfully and avoid the rocks. Sometimes you get tossed about and bump into a few. Other times, and we are seeing a lot of this now, the boat gets grounded big time on a shoal, and even flounders. Leaders are supposed to look ahead, understand the business, position and structure the entity for survival, and make things happen for the benefit of all. If they cannot, better get somebody else on the bridge. This one is just a raw necessity termination because the firm has 100 mouths and can only feed 90. Nobody on the team is someone we want to let go. Call it like it is, apologize, and do everything you can to help. And this may seem odd, but stay in touch. When they get a job, send a note of congratulations. Invite them to a social event. Have alum gatherings. Keep open the possibility that maybe someday you will want them back, and they will want to come back.
And if you ever find that you can conduct a personal meeting of this type and you don't agonize over it before, during and after, then you have lost the emotional quotient and feel that you must have to do this part of your job properly, and you need to hand the reins to somebody else.
[As of 1:30 p.m. today, we now have our first week of more than 1000 people laid off from BigLaw (1002 - 352 lawyers and 650 staff)]
Post #379 – Wednesday, February 18, 2009
Avoid Adding Insult To Injury
I received the following e-mail this morning from Joseph Greeny. Joseph is coauthor of Crucial Conversations: Tools for Talking When Stakes Are High. I thought I would share his comments here as they build nicely on my last post – Now Be Sensitive To The Emotional Turmoil . . .
Getting laid off is horrible. It fills the laid off person with uncertainty. It throws a family into turmoil. It makes people doubt their worth and capacity. So, let’s be clear – nothing reveals a leader’s soul more than the way he or she handles necessary dismissals. Unless you are willing to sacrifice time, money and personal pain in the service of those you are dismissing, you deserve no loyalty from those who remain. Here are some things that can help you avoid adding insult to the injury of layoffs:
• Be immediately transparent about possibilities and certainties.
When you establish a track record of early communication you avoid the crippling loss of attention caused by mistrust. In the absence of prompt leadership communication, you don’t get focus, you get rumors. And rumors cost far more in the long run than any downside of prompt transparency.
• Feel pain when you deliver pain.
If you have bad news to deliver, give it face-to-face. Don’t try to protect yourself from discomfort by delivering e-pink slips or other mass messages. You expected these people to be loyal to you, now is your chance to show loyalty in return by demonstrating your willingness to suffer with them. Don’t be afraid to tell them how agonizing it is for you while sympathizing with their plight. If you feel sick to your stomach, say so. If you feel like crying, a tear can help them know they’re not in this alone — someone truly cares. However, before doing anything, make sure your actions are completely sincere.
• Respond to anger with compassion.
If someone becomes upset, angry, or accusatory, you need not respond to the content of their statements. But by all means, respond sincerely to the emotion. For example, if someone says, “This is a croc, you’re just using this downsizing to get rid of anyone who’s not one of the good old boys.” You should be aware of and compliant with what you are authorized to share about the decision-making process involved in the downsizing. But in any event you can say, “I’ve done my best to follow the policies I was given in the downsizing. And I am sick at heart that it is coming down badly on you. I am sorry for the turmoil this will cause you and assure you I will help in your transition any way I can.” While this statement won’t take away the pain, it at least helps you avoid causing more pain by seeming clinical, political or defensive.
• Be as generous as possible.
Your willingness to sacrifice for those leaving is THE determinant of how much trust you’ll have with those remaining. Always side on generosity when you attend to the needs of those you’re laying off.
• Replace general insincerity with specific commitments.
No matter how stingy or generous your firm chooses to be in the layoffs, you can offer your own support — which is often more personal and meaningful when you’re sharing the bad news. Have a list of things you can personally offer, depending on the needs of those you’re letting go. A specific offer of two or three things you can do for the individuals you are laying off will tell them a lot more about your sincerity than general, “If there’s anything I can do…” statements.
Post #378 – Tuesday, February 17, 2009
Now Be Sensitive To The Emotional Turmoil
Last week was brutal for US law firms — in the space of two days, over 1,100 lawyers and staff had either been fired or asked to consider buyouts. So how does it feel to be one of the lucky ones that survived those cuts? "It's depressing," claims one senior associate. "You walk into the office and it's quiet, the entire atmosphere is sullen. People are anxious, depressed and pissed. One might say that at least I still have a job and should be grateful. Well, I'm not sure how grateful I really feel. Watching close friends pack their things to leave — and dealing with the guilt that it wasn't me and the anxiety that I might still be among the next group to go — that's not much cause for celebration."
The terms psychologists toss around to describe these feelings include survivor's guilt (why him and not me?); survivor's envy (thinking you might be better off gone too); and emotional contagion (the tendency to pick up your laid-off colleagues' feelings of extreme anxiety). These feelings are with us in every recession, but as layoffs continue, with wave upon wave of cuts, reported in firm after firm, people become despondent. In fact, empirical research shows that reduced commitment and diminished productivity can linger for the better part of a year after a major layoff takes place.
And yet many firms are oblivious to these effects. The member of one law firm executive committee was very proud to report that his firm had a generous severance package. I thought to myself, that's great, but I would love to have asked him what the firm has done for the people who have remained? I’m absolutely positive it would have been a conversation-ending question. The anguish may be real, but good luck talking about it. Talking about it, though, is exactly what you should be doing.
If you haven’t done so before, now is the time to talk openly about the effect of the downturn on your firm. By doing so, you can at least try to help people feel they have some small measure of control over the situation. Discuss issues such as what happened during the last business slowdown. How did things turn around? What was learned from that experience? Explore these topics in meetings. Brainstorm possible solutions and new ideas. Not only will you foster more of a “we’re all in this together” mentality, but you might also get some helpful suggestions.
As your colleagues may be suffering unusual amounts of stress, you need to reach out and help those who are feeling down, be more empathetic and tolerant than usual. And, your top performers, in particular, need some extra attention right now. Not only are their contributions especially critical, but your best people always need to be reassured and given compelling reasons to stay with the firm. Talk frequently with them about their professional goals and what motivates them.
Finally, even in times of economic turmoil, every good firm has upbeat facts that need to be repeated. An opportunity that the firm is moving forward with, a small client deal that was just closed, a litigation win that was achieved. Effective leaders find ways to keep hope alive!
Post #377 – Tuesday, February 17, 2009
Could European Banks Be in Eminent Danger?
There was a rather startling article that appeared in last week’s London Telegraph. The article I am referring to begins:
A bail-out of the toxic assets held by European banks’ could plunge the European union into crisis, according to a confidential Brussels document. “Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned. The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.
An economist friend, in-the-know, shed some light on this situation for me . . .
The banking system of Europe may be at the edge of the abyss. The author of the article claims to have seen a secret European Commission report. The report estimates that losses (write-downs) by European banks will be in the range of £16.3 trillion euros (the equivalent of $25 trillion). If true, then to save the banking system, European governments will have to find an extra $25 trillion, FAST. There is only one source of such funding: the European Central Bank.
For comparison's sake, consider the $700 billion banking bailout in the United States last fall. Of this, only about half has been spent. That was sufficient bailing wire and chewing gum to keep the American banking system going. More will be needed, but so far, this has sufficed. The Federal Reserve did a lot of asset swaps in 2008 - - Treasury debt for toxic assets – and pumped in an extra trillion dollars or so. But the system has held. Adding these together - - the increase in the monetary base and $350 billion in bailout money - - the total is around $1.5 trillion. Then think "$25 trillion." This is a sobering thought!
Twenty-five trillion dollars in losses is twice the size of the gross domestic product of the European Community. There are over a dozen national EC governments. How will they coordinate their respective bailouts? Think of a dozen Henry Paulsons. Terrifying, isn't it?
European bank stocks have fallen since the article was published, but they are not in free-fall. In my view, the European public still has faith that the governments and the central banks will successfully intervene to restore commercial banks. But if the article was correct, that 44% of bank balance sheets have disappeared, then the public is living in la-la land. The entire structure of Europe's capital markets is at risk.
This is the ringing of the bell. The bell of the Great Depression of the 1930's rang on Wall Street in October 1929. But that was not the cause of the Great Depression. The causes were: (1) monetary base expansion in the 1920s, (2) the cessation of this expansion in 1929; (3) the governments' raising of tariff and trade barriers in 1930 all over the West, and (4) the collapse of the Austria's Credit Anstalt Bank in 1931. In the USA, we saw the first two, 200-2007.
Central banks will inflate to keep any major bank from collapsing. But the trend is ominous. Russia and Eastern Europe are gonners. European banks that lent to them are, too. So is the purchasing power of the euro - - and maybe even the actual euro. I can see Germany cutting and running sometime before 2011.
For further details you may want to read this story and the accompanying comments.
Post #376 – Saturday, February 14, 2009
More On Managing Your Priorities
Further to my Post #374 (When The Urgent Displaces The Important) and the response articulated by The LAB to a new managing partner’s specific question, I received the following comments from Edwin Resser an experienced firm and office managing partner whom I value greatly for his thought provoking insights. I sent these comments on to the firm leader who initially posed the question and then thought that I would also share Ed’s comments for those who are regular readers of this blog:
Good advice. Three additional bits to add for consideration.
1) Have at the top of your agenda being responsive as immediately as possible to every one of your partners, even if it is just to say, “I can't meet with you now, or tomorrow at noon, but I can see you at X o'clock the day after tomorrow.” They need to feel that you are serving them and all of the partners assiduously. And it has to be true. “Can you let me know what you want to talk about?” Many partners need to be asked what is on their mind because they just ask for a meeting with a blind agenda. The worst thing possible is to get together two days later and be asked a question you don't know the answer to or can get to with ten minutes of digging - but you need the ten minutes! And finally, have at the forefront of your mind when it is that they and you need to have that answer. Don't be compelled to give one with a hip shot. Think about it. Get some input from others if necessary. Have your own advisory group of key partners to go to for perspective, balance and reason when you need it. You are a leader; not a Messiah.
2) Not everyone is going to think of you as a benevolent person. Sometimes the job will require things be done that you don't want to do. There may be people who feel at risk or danger (the current economic environment certainly amplifies this!) But there are also some who, not surprisingly, are uncomfortable with all manner of authority and leadership irrespective of your own self-perception as a patient and kind human being! Consider having a consigliore, someone senior, respected and popular. He does not have to share your views, indeed in some ways it may be a good idea to have someone that clearly does not, and may trend to being ultra-sympathetic and nurturing to the point of being a blocker of any practical action in hard circumstances. That is ok. He or she is not the person making the decisions . . . you are. But the message to everyone is this:
“My door is always open. I feel and will try to be open about any subject you care to raise, and be objective about it. But, there may be something that for some reason you are concerned about raising directly with me. It may be about my performance. Or it may not be me, just you, that is uncomfortable about meeting face to face. I don't want you to be disenfranchised. There should be no sacred cows or taboo issues. So go to good old Mr / Ms Goodfellow, our beloved emeritus partner here, and I promise you this - A) absolute confidentiality. B) whatever it is that I am doing, should Goodfellow come to me about it, I will stop, seriously and in good faith reconsider and reflect on it. That does not mean that I will change my mind, but I promise I will be open to considering and if necessary discussing it, and even doing it. “
Just knowing that there is absolutely a means by which they can communicate any and every concern is a huge thing in a law firm.
3) Set up a variety of working groups on administrative and executive levels through which you not only get things done, but solicit input from your partners and pass out consistent messages to then be circulated by them to their practices and working groups. It gets the communication flowing through multiple channels and cuts down on giving the same message separately, 50 times.
LISTEN at least ten times more than you talk.
PRAISE good jobs in public.
DISCIPLINE bad jobs in private.
GIVE CREDIT to achievements to others who played decisive roles, even if you were actively engaged to make it happen. Everybody knows. Insecurity reeks when as the leader you have to be telling your team you did something good.
TAKE RESPONSIBILITY for things that go poorly. No matter what the result, point out what could have done better. These are lawyers, they see it and know it. What they are concerned about is whether their leader is so stupid as not to see it. If they know you do see it, they are going to feel better about you. And immensely glad they don't have the job and will be inclined to support you to do a good enough job to keep after it so they don't have to do it themselves."
Edwin’s comments were originally posted on the Legal OnRamp Forum. If you are not a member of Legal OnRamp, please shoot me a note so that I might tell you about a valuable resource you are obviously missing out on accessing.
Post #375 – Saturday, February 14, 2009
Banking Crisis – Deja Vu
The Obama administration is committing huge dollars to rescuing banks. “Son of TARP,” the Financial Times calls it. Why do the banks need money? Because they don’t have any. If you add up their assets and subtract their liabilities, you end up with a hole. Maybe that hole is only $200 billion debt. Maybe it is trillions deep. Nobody really knows.
The Japanese have been there before. They endured a “lost decade” of economic stagnation in the 1990s as their banks labored under crippling debt and successive governments wasted trillions of yen on half measures. Back then, America sent a steady stream of advisors to Japan. The world’s second largest economy was in a stall and seemed in no hurry to get out of it. Its largest banks were “zombies,” said the Americans; they were propped up by the Japanese government in order to avoid losses and embarrassment. If the Japanese wanted to get things moving again they should let those banks fail . . . let the free market do its work . . . let the chips fall where they may. Then, capitalists, entrepreneurs and scrappy businessmen could pick them up and build with them.
The Japanese didn’t take the advice. To this day, 19 years after the beginning of Japan’s long, soft, on-again, off-again depression, the economy is still in a slump . . . and expecting negative growth again this year. All together, Japanese investors are said to have lost a sum equal to 300% of the nation’s annual GDP – the equivalent to a loss of about $45 trillion in the United States.
Observers of the Japanese situation see the same train wreck heading here. Ironic, isn’t it, that when the same crisis comes to the United States, Americans do not take their own advice. They are keeping the zombies alive, just like the Japanese did. And the zombies are sucking the blood out of the economy. So far, the Obama administration is avoiding the hard decisions – like nationalizing banks, wiping out shareholders, or allowing banks to collapse under the weight of their own debt. In the end, Japan had to do all those things.
Unfortunately, I think we’re still very early in this thing. It’s not going to just blow away like other post-war recessions. One reason that it’s going to get worse is that the biggest shoe has yet to drop . . . interest rates are now at all-time lows. What’s inevitable is much higher interest rates. And when they go up, that will be the final nail in the coffin. It will wipe out a huge amount of capital. And higher interest rates will bring on more bankruptcies.
Meanwhile, the demographics-based economist and best-selling author Harry Dent expects that the de-leveraging trend will continue into 2012 or 2013 before the economy can expand. In major banking crises like this, as opposed to a typical recession, things usually take about five years to work themselves out, Mr. Dent noted. I’m praying he’s wrong, but I’m planning for the worst, just in case. What are you planning for?
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