Professional Services
Fall 2007

I. POSITIONING AND ALIGNMENT

a) Developing and Implementing Strategy: Wachtell Lipton

Wachtell

Why has Wachtell been so successful? - Niche o M&A, hostile takeovers o General counsels, CEOs come to Wachtell when they have a problem - Size: small o 1 office (140 attorneys in 1995, 193 today); organic growth (no mergers/acquisition of other firms & only 2 lateral partners in entire history) o Benefits = control over quality of work; quality of recruits; sense of collegiality; maintenance of position in niche (if it stays significantly smaller than the market for its services, no matter how bad business gets, it will always have enough work); avoids inefficiencies of partnership model b/c decisions made quickly w/ little process - Bills o Based on value, not time o Wachtell does not pursue bills aggressively – they call twice, and that’s it. Clients can literally stiff the firm… only consequence is that it will never take you on as a client again and it will tell all its other clients that you didn’t pay. ▪ Wachtell’s realization rate ~90% (vs. ~80% at other firms) - Clients o By matter, not long-term relationships ▪ Gives the firm independence from clients – fewer conflicts o Can pick & choose interesting, innovative, and high-paying work o Doing only transactional work expands the market because no conflicts o Business from investment bankers (because Wachtell gets the job done) and from other firms who need specialized services (because Wachtell won’t steal their clients) - Compensation: lockstep o Benefit = there is no competition between attorneys ( synergy (the whole is greater than the parts because the pie gets bigger when you help each other) o Risk = free-riding; one team member slacking affects everyone else ▪ To mitigate: • Keeps compensation higher than other firms • Gets top talent with drive and interest in the work (internal motivation) • Stays small – there is nowhere to hide • Strong culture of hard work where everyone pulls own weight ➢ Neff: “collegiality is a fist hidden in a glove” • Keeps morale up – people feel that they are treated fairly and paid more than they’re worth - Leverage: 1:1 o Chance of making partner = 50% after 8 years o Transparent expectations - Recruiting o Get better mentoring, learn quicker, work on innovative projects right away o Excellent exit opportunities: Wachtell attorneys do not leave for other firms, rather they go in-house, sit on co. Boards, teach at HLS o Attorneys work very hard (crazy hours), so burn out faster, but only stay 12-15 years ▪ **Wachtell counts on people leaving after a no. of years so more associates can come up (compensation decreases at age 60 and there is an attractive retirement package) - Reputation cannot be matched by new firms o Law student thinks “I could go to a Wachtell copycat, or I could go to Wachtell”

Future Concerns - Transition for next generation: [SEE CASE STUDY] o Neff: the transition to younger generation is “far more advanced than anyone knows” - Economic Shift: Wachtell’s model depends on NY as the financial center o Neff: the firm is considering expanding to London

Strategy

- Strategy defines how the enterprise will occupy a unique place in the market to achieve sustained business success. o Service Market (clients) — service: assignment, relationships o Capital Market (owners) — success: profitability sustainability o Labor Market (professionals) — satisfaction: compensation, career opportunities - It is crucial to decide what you don’t want to do – this, in fact, defines your strategy o Look at what Wachtell decided not to do ▪ Clients know when to go to Wachtell, and for what ▪ Partners know what kind of work they are doing ▪ Attorneys know what to expect and what is expected of them - An effective strategy makes clear choices and drives actions that are consistent with those choices. o PSFs are human capital-intensive organizations. For strategy to be effective, it must be understood by the professionals and they must be prepared to execute it. o Also, professionals are busy producing and have little time or inclination to engage in extended discussions about ambiguous collective-action plans. Consequently, effective strategy relies upon a mix of persistence, persuasion, and consultation on the part of PSF leaders. - Implementing Strategy in a PSF o Strategy is the realized consequence of the professionals’ efforts ▪ For everyone to understand it and act in concert, strategy should be as simple as possible—but no simpler AND strategy should be consistent across boundaries and over time o The firm has to commit to its strategy over the long run ▪ Life in a PSF often feels like a sprint – quick, intense bursts of activity, short cycle times ▪ But building strategy is a marathon – it takes time to achieve understanding and consensus; strategic identity develops and evolves slowly - Alignment: in order to be effective, a strategy must fit with organization and must have the right people to accomplish it

b) Professional Services Spectrum: McKinsey & Co.

Professional Services Spectrum

- Service Markets o Choices PSFs make re. service markets ▪ (1) whether to offer premium or commodity service ▪ (2) the scale and scope of their operations ▪ (3) whether to evolve organically or through acquisitions. o The approaches that PSFs take towards their service markets determine the distinct capabilities that they have to develop and leverage. - Alignment: making the 7 Ss fit o Strategy: how the enterprise will occupy a unique place in the market to achieve sustained business success o Structure: the way in which tasks and people are divided. The basic grouping of activities and reporting relationships; the primary basis for specialization and integration o Systems: formal systems and procedures including management control systems; performance measurement and reward systems; budgeting systems, information systems; planning and capital budgeting systems o Staff: the people, their backgrounds and competencies. Includes recruitment, selection and socialization; how people are trained and developed, and all aspects of career management o Skills: the basic competencies that reside in the organization. Includes distinctive competencies of people, management practices, technology, etc. o Style: the leadership style of top management and the overall operating style of the organization. It reflects the norms people act on and how they work and interact both internally and externally o Shared values: the values that are widely shared within the organization and which serve as guiding concepts of what is ‘right’. They focus attention and give purpose and meaning to the organization's vision and how it achieves it. - Long-term success depends on interaction among all the Ss, not any individually. - What distinguishes high-performing firms = how the Ss fit.

McKinsey

Why has McKinsey been so successful? - Brightest people - High degree of self awareness - Principles (Bower) o One firm strategy ▪ Focus is on total firm profits, not on profits per individual office ▪ Global profit pool: compensation comes from total firm pool ▪ The firm “owns” clients, not individual offices or professionals o Independence ▪ Note: Bauer was concerned about this in the 1930s (conflicts inherent in being both a consulting and accounting firm); SEC did not wake up to this until the 1990s o Clients > firm > professionals o Consequences ▪ Loyalty to firm, not individuals ▪ Team works together across geographic locations ▪ Reputation is of the firm, not p.r. for particular professionals ▪ Can have offices in locations that are important for clients, even if not as profitable ▪ Collegial culture b/c professionals travel to work onsite & meet colleagues from all over

McKinsey vs. Wachtell

| |McKINSEY on the Spectrum |WACHTELL on the Spectrum |
|Strategy |Long-term, client-based relationships |Selective |
| |Value billing |Transaction focus |
| |No mergers, organic growth |Reputation enhancing |
| |Particular about type of clients – not based on profits alone (e.g. MK requires |CEO/CFO level |
| |CEO of client co. to be on board with MK’s participation) |Complex issues |
| |Alumni ( prestigious placements, potential clients |Innovative solutions |
| |Global reach |Value pricing |
| | |Low growth |
|Structure |Broad experience |Single location |
| |Run like a partnership |Low leverage (1:1) |
| | |Few disciplines |
| | |Flexible, organic |
| | |3 key committees |
|Systems |Up-or-out promotions |Informal |
| |Benefit = everyone who makes it knows they’re at the top [?] |Lock-step compensation |
| |Risk = comptn; stress; less loyalty? |No bonus for rainmaking |
| |BUT firm puts lot’s of effort into outplacement help |Lavish support |
| |Huyett: up-or-out system can have neg consequences, but the way it works at MK is |Peer pressure |
| |the first people to go are the ones with “sharp elbows” – the most competitive, |3 Key Committees |
| |least pleasant to work with |Marty Lipton |
| |Professional development system | |
|Staff |Brightest people |Highly selective |
| |Diverse backgrounds |Best and brightest |
| | |Apprentice model |
| | |High prospects of making partner quickly |
| | |High senior partner turnover |
| | |No lateral hires |
|Skills |Apprenticeship, on-the-job training ( exposure to senior level management @ |Innovative |
| |clients |Cutting edge legal issues |
| |Breadth of experience |Technically focused |
| | |Interdisciplinary orientation |
|Style | |Intellectual |
| | |Exclusive/elitist |
| | |Hard working |
| | |Egalitarian |
|Shared Values |Reputation |Meritocracy |
| |Self-awareness |What not to do |
| |One-firm strategy |Single Partnership |
| |Independence | |

- Clients o At WL, relationships are transactional, no long-term relationships with clients o At MK, the firm builds enduring relationships with clients so has long-standing client base - Size o WL has 1 office with 1:1 leverage o MK is global, has strategy of growth, 5-7:1 leverage ▪ ~250 Director; 700 Partners; _,___ Associates

History - 1971-76 o Problems ▪ Rapid expansion ( quality issues ▪ Change in leadership (specifically, Bower stepped down) ▪ Economy slowed ( forced the co. to take more routine assignments ▪ Competition increased (specifically, BCG challenge) • Other consulting firms approached clients differently – BCG came with framework, whereas MK started from scratch with each individual client’s problem; then Bain came along criticizing other firms for being too theoretical • On positioning spectrum, BCG attacked from the right and Bain attacked from the left. o Solutions ▪ McKinsey developed “T” consultants with general experience, but expertise in a particular area ▪ Started advertising (McKinsey Quarterly) ▪ Distinguished self from BCG and Bain • HOW? - 1990s Tech Boom o Hiring problems ▪ Other firms responded by creating special departments for recruits who would otherwise go in-house with start-ups and VCs ▪ McKinsey resisted the urge to go public, add VC department, etc. Rather, maintained long-term focus, own strategies. To respond to market changes, increased salaries, decreased time to partnership, expanded pool of potential recruits by increasing recruitment of non-MBAs • Attrition rate only increased by 5% (from 17% to 22%). o 1994-2001: Gupta’s Tenure ▪ Revenues increased ($1.5 to $3.4 billion) ▪ Staff grew (3,300 to 7,700 consultants) ▪ Geographic expansion (24 to 44 countries) ▪ Difficulty maintaining culture and quality of services as they grew - 2001 Tech Bust and Economic Slowdown o Problem ▪ Attrition decreased remarkably and yield increased ( over-staffing o Solution ▪ While other firms responded with lay-offs and rescinding offers, MK honored offers ▪ McKinsey decreased hiring and made up-or-out policy tougher ▪ Cut some prices for clients ▪ Asked partners to chip in

Bill Huyett (director) - See pp. 18 and 21 of the case study: this is “everything you need to know about McKinsey” - Issues around economic downturn: The firm had gotten “sloppy” with hiring practices before the bust so needed to lay more people off during o During the tech boom, the firm was so focused on clients that it forgot the “people” model o Take-away: highlights the power of a leader early on to establish a strong values system - Tension between maintaining values and updating values o What to conserve? o How to interpret values for the modern era? - Strategy is based on values, rather than reacting strategically to what is happening in the outside world. o Self-governance o Non-commercialism ▪ Going public, taking equity for payment would make the co. richer, but would undermine independence ▪ Use knowledge and values to attract clients, not commercialism

Positioning
(where you are in relation to competitors)

Commodity Procedures Grey Hair Rocket Science

| |Commodity |Procedures |Grey Hair |Rocket Science |
|Pitch: |Give us your issues, we can |We have set way of solving your |We have experience |We tackle difficult, unique problems|
| |solve them faster, more |problems, systems that work; | | |
| |efficiently |labor-based | | |
|Selling: |Efficiency; Procedures |Consistent methodology |Experience; Judgment |Innovation |
|Professionals: |Need efficient, hard-working |Need detail-oriented people who are |Need people with experience |Need brilliant, creative people |
| |people who will follow |willing to work hard, people with |who you can train quickly, | |
| |procedures |“fire in their bellies” |who will be loyal | |
|Motivation: |Work hard to get paid more. |Work hard to get experience and learn a lot b/c have high chance |
| |Acquire generalized skills. |of making partner and working with superstars on more challenging |
| | |issues. |
|Knowledge Management: |Keep track of everything w/ set procedures. |Info is relationship-based; can’t write it down. |
| |Build databases. | |
|Example: |Infosys |Accenture |McKinsey |Wachtell Lipton |
| |(outsource call center) |[leverage ~54:1] |[leverage ~5:1] |[leverage ~1:1] |
| |[leverage ~200:1] | | | |

* NOTE leverage increases as you move to the left along the spectrum

- When you ask firms where they are on the spectrum, their self-assessment tends to skew to the right, from where they are empirically. ( This leads to misalignment. o Why? ▪ Professional pride, self-bias ▪ Over time, firms drift from right to left b/c: • Growth/expansion • If you are successful, clients want to internalize it and competitors copy it, so what was rocket science yesterday is not today ➢ THUS, must get ahead of the curve strategically to stay on top ← (1) Continually innovate ← (2) Reject work that would pull you to the left, even if it would give you stability, growth, relationships, etc. ← (3) Continue to focus on recruiting to attract best, most creative, brilliant talent ➢ OR just recognize shift to the left and realign (although this can be very painful, especially for associates) - Accenture: “poster child” of how to manage the shift to the left well o Internally, stayed ahead of commoditization o Externally, farther to the right than internally o As they shift left, reinvent selves back to the right o Started with cooling and moved into systems integration. When systems integration got commoditized, moved business integration, then to total business solutions.

c) Service Profit Chain: Shouldice Hospital Limited

Shouldice Hospital

Why has Shouldice been so successful? - Niche o Efficient – everything is featured around one procedure o Specialists - Procedure o Expert doctors o No general anesthesia, just local o Make people exercise for quicker recovery, less pain o Recovery is faster ▪ Opportunity cost is lower b/c even though would not have to pay for procedure at local hospital, with Shouldice procedure, are back to work in half the time ▪ Low rate of recurrence requiring surgery to be repeated (.08% at Shouldice; up to 10% at other hospitals) - Client Experience o Shouldice has turned around impersonal, dehumanizing aspect of the hospital experience ▪ Intake procedure includes a number of processes – don’t wait excessively for any one ▪ Dinner the night before your operation with people who already had it – next night you are the one who has gone through it and talking to new patients - Professionals o Compensation is 1½ x higher than in any other Canadian hospitals o Doctors ▪ Have no exit opportunities, do not learn state-of-the-art procedures ▪ Attracts the type of surgeons who like the hours, patient contact o Nurses: no menial, manual labor, rather counseling work - Structure o Hospital is not for profit: costs $2.8 mil, earns $3 mil o Clinic is for profit: costs $2 mil, earns $3.6 mil - Transparency o Shouldice allows outside doctors to visit and teaches them how to perform the surgeries – the hospital opens up everything to them. ▪ This does not hurt Shouldice because it is extremely hard to copy the culture. Alignment is difficult to replicate. o Lot’s of PSFs have also gone to Shouldice to get tips about the profit-service chain – it is about satisfying all the constituents (partners/owners, associates, staff, clients)

Future Direction

|Choices for Growth |Benefits |Risks |
|Saturday surgeries |No capital expenses |Dissatisfied docs, nurses; would have to pay higher |
| | |salaries; no room capacity |
|New hospital |Closer to patients; decreased competition; keeps |Doc supply; concern about quality b/c less control; |
| |culture |capital expenses; risk to brand |
|Increase practice |Decreases risks of competition; can add other |Risk to quality; approach might not work; capacity; |
| |surgeries |competition (would be an entrant, not an incumbent) |
|Additional floor |Maintain culture; fulfill demand |Quality control; disrupts atmosphere; admin issues |
|Increase prices |Increase profits; decrease waiting list |Decreased customer loyalty; client profile changes |
|Marketing |Protect brand |Waitlist increases and patients annoyed by delays; |
| | |increase costs |
|Franchise |Others market for you; meet demand; quick fix; |Quality concerns; lose control over culture; strays |
|(certify surgeons elsewhere) |more people get this better surgery (social pos.)|from strategy |

What did Shouldice do? - Started performing Saturday surgeries and put patients two to a room. o The waiting list grew from 2 to 4 months. o Doctors were unhappy. - So stopped the Saturday surgeries and left it alone. Shouldice is today what it was in 1980.

Service Profit Chain

average time w/ firm client defection rate

loyalty

client satisfaction

- The Loyalty-Profit Relationship o Loyalty leads clients to: pay healthy margin; purchase more service; maintain a long-term relationship; purchase other services from the same provider and refer others to the provider o Revenue grows because of repeat purchases and referrals o Costs decline because of lower client acquisition expenses and efficiencies of serving experienced clients o Employee retention increases because of greater job pride and satisfaction o Profits increase: 5% increase in Client Loyalty can produce 25% to 85% Profit increase

- Professional Loyalty driven by Work Environment o Compensation: monetary and non-monetary; salary and career prospects o Collegiality o Decision rights: ability, autonomy, and authority to achieve results for clients o Nature of work: intrinsic satisfaction provided by the work

B service ( = delivery – expectations A

client satisfaction

- Service Experience = Service Quality – Client Cost o Client Cost = Service Price + User Cost o Expectation of service level depreciates over time, unless renewed - Estimating Client Satisfaction o Managing Partner gets 3 complaints ▪ 80% of dissatisfied clients complain to the partner handling the account ▪ 25% of those are not satisfied ▪ Of these, one in five complain to practice head ▪ 80% of these are satisfied ▪ Half of those still dissatisfied complain to MP o THUS, 3 complaints to MP implies 750 dissatisfied clients ▪ Dissatisfied clients have weak Loyalty ▪ Weak Loyalty translates to low Revenues ▪ Law Revenues lead to poor Profitability o SO, monitor Client Satisfaction proactively

[pic]

II. ORGANIZATIONAL STRATEGY

a) Compensation Systems: Brainard, Bennis & Farrell

Compensation Systems

- What is a compensation system for? o Reward past effort o Motivate people, incentivize future effort o Retain people and increase loyalty o Culture, promote desired work environment o Reward performance - Substitutes for compensation o Promotion o Recognition o Power o Perks - Choices about compensation o Total compensation relative to labor market o Proportion of compensation that is short-term or long-term in nature o Proportion of compensation that is fixed vs. variable o Compensation based on seniority vs. performance ▪ Performance-based • Benefit = reinforces accountability, helps avoid coasting, and directs attention to the firm’s success factors • Risk = it is difficult to administer well ➢ Performance measurement on all metrics is difficult ➢ No system can capture all required behaviors ➢ Individual performance based quantitative systems sacrifice mutual cooperation and fail to recognize important contributions that can’t be measured ➢ The more performance is stressed in compensation decisions, the more pressure is brought to bear on the performance appraisal process ➢ It is almost always biased to the short-term, whereas performance in professional services tends to be cumulative and major gains are made in the intermediate and long term ▪ Seniority-based • Benefit = easy to administer, helps to preserve collegiality, reflects the value that experience adds, and can substitute for stock options as a means of recognizing people’s role in building firm assets • Risks = seniority fails to reward star young professionals who may be less willing to wait; it fails to confront poor performance and allows free riding • Such a system works best in stable, homogeneous, continuously successful firms o Performance compensation based on individual vs. collective results o Primary criteria used in making compensation decisions o Amount of variation within grades and across the firm

( v = value to firm

— c = compensation — o = outside option

A B

( v — c — o — v

— c

— o

- SO there are different ways to pay people o (1) Pay just above market ▪ v is much higher than c, which is slightly above o ▪ Incentivizes professional to develop general skills to increase o o (2) Pay higher than outside options, but not up to actual value ▪ c is, again, between v and o, but much more evenly spaced than in first option ▪ Incentivizes professional to develop firm-specific skills to increase v

- Types of compensation systems o Lockstep ▪ Concerned about the free-rider effect ▪ In more egalitarian firms, lower performers hurt more o Eat-what-you-kill ▪ Concerned about sharp elbows, nasty competition

- Communication re. compensation o Transparent ▪ Benefit = makes people feel compensation is fair and linked to work; motivates people ▪ Risk = makes people argue, question, compete; sacrifice culture for motivation • BUT keeping information secret doesn’t insulate an organization from complaints • If open information about pay unleashes a torrent of complaints, there is a bigger problem than secrecy of compensation: people do not understand or do not embrace the organization’s performance appraisal and reward allocation systems o Hidden ▪ Benefit = professionals may question their comp. less?, don’t know if they’re making significantly more or less than their colleagues ▪ Risk = lose motivation factor; people interpret the numbers w/out full information; sacrifice motivation for culture ▪ THUS for this to work, people must trust comp committee and judgment process must be thorough, unbiased, equitable, and perceived as such

- Setting compensation o Subjective ▪ Benefit = can adjust to individuals and reward for different strengths ▪ Risk = politics, unfairness • BUT can mitigate by giving detailed evaluations o Objective ▪ Benefit = clarity ▪ Risk = rigidity

- Compression in Compensation o Firms that practice high-commitment HRM (?) also tend to compress wages, because of the symbolism that everyone is on the same team, and to break down symbolic barriers between partners and professionals. o Studies in the academic setting have demonstrated that, all else being equal, wage dispersion tends to reduce collaboration and job satisfaction. o Tendencies to compress wages are strongest in settings in which collaboration is more important and where social comparison processes are most rampant.

- Compensation’s in most firms:

pay productivity

associate | partner

Brainard, Bennis, & Farrell

- SEE CASE

b) Practice Economies

Drivers of Productivity

- Trends o Profitability increases with productivity (relationship is strong and linear) o Profitability increases with leverage (relationship is more dispersed than b/t profitability and productivity) o Profitability increases with margin (relationship is more dispersed than b/t profitability and productivity) o Productivity and leverage are independent o Margin and Leverage are negatively correlated (if leverage increases, margin is affected negatively) o Productivity and Margin are positively correlated (rates and productivity move in same direction – together they drive profitability) o As PSFs drift to the left (away from rocket science, toward commodity): ▪ Leverage increases ▪ Utilization increases ▪ Rate decreases ▪ Margin decreases - Scale – Profitability Relationship: Bermuda Triangle Effect (Exhibit 1): focused, niche-oriented practices and large, multi-location practices that are profitable, but mid-sized practices tend to be stuck in the “Bermuda triangle” of low profitability o No systematic relationship between growth and profitability o No linear relationship between number of professionals and profitability o Why this happens? ( when firms that grow, they fail to transition to formal systems properly; it is important to either stay small and informal (Wachtell, Gunderson) or grow and adjust, become formal. o Rationale for Growth and Scale ▪ (1) Growth or Scale for their own sake: x • May lead to decline in Profitability through diseconomy and dilution ▪ (2) Growth or Scale directly lead to greater Profitability: ? • Growth is unrelated to profitability • Cause & effect are not clearly distinguished • Profitable firms might grow faster and growth might require investment that lowers current profitability • Scale is weakly related to Profitability: • The relationship is is U-shaped rather than linear ▪ (3) Strategic reasons: ( • Establish market presence • Become major player in consolidating market • Ensure survival - Caveats o Economics might differ across practices o Do boom and bust years follow similar economics? o Analysis is cross-sectional; investment activities influence profitability over time o AmLaw100 is a data source prone to biases and focused only on the top 100 law firms – raises questions of reliability and generalizeability

c) Governance: Goldman Sachs IPO

Partnership vs. Public Corp. Governance

Four BAD reasons PSF leaders typically give for going public - (1) Because others are doing it ▪ BUT, Nanda: this is never a good business strategy - (2) To secure permanent capital ▪ BENEFIT: capital is more stable b/c partners do not have the option of pulling their $ out of the co. every time the partnership agreements need to be resigned ▪ BUT, Nanda: it’s not actually “permanent capital” because if SHs are unhappy and pull their money out, the stock price falls ( the shares still owned by the partners also fall ▪ AND there are ways to make partners’ capital less liquid, even if private - (3) To access acquisition currency ▪ BENEFIT: $ can be used to merge internationally and secure global presence, and hopefully prominence ( some argue that this is crucial in today’s marketplace ▪ BUT, Nanda: firms often become careless in acquiring cos after they go public b/c are using investors’ $ instead of their own - (4) To reward professionals with ownership ▪ BENEFIT: IPO leads to greater equity w/in the firm b/c so few partners no longer get huge proportion of profits, rather can promote more associates to VPs and VPs to MDs • Idea is to compete with hedge funds, which offer more money to younger, less experienced professionals ▪ BUT, Nanda: increasing associates’ pay decreases partner compensation

Four GOOD reasons PSF leaders don’t give for going public - (1) Monetizing goodwill ▪ Idea is that the co. is valued at greater than its book value b/c of the value of its intangible assets (excess of MV over BV is called “Q-value” – accounts for the premium investors are willing to pay over the actual acct value of the firm’s assets; usually 2-4x for PSFs) - (2) Partner risk diversification ▪ Lessens individual partners’ legal liability ▪ Lessens individual partners’ financial risk: partners’ assets are tied up in the firm; when it goes public, can take their money and diversify investments • THUS partners will be less risk-averse in running the firm (riskier ventures are often more valuable) - (3) Overcoming free-riding ▪ BENEFIT: Partnerships work very well when they arte small, but the risk of free-riding increases when they get big because it is easier to hide ▪ BUT: there are agency costs associated with running a firm like a business b/c people don’t feel like owners - (4) Taking advantage of an exuberant financial market

Issues related to going public - Impact of monetizing goodwill o Who has claim on realized value? o Ongoing motivation of converting partners o Impact of leaders’ focus on financial market o You get what you measure - Overcoming the problem of “lemons” and “laziness” o Assets are often individual specific ▪ Adverse selection ▪ Moral hazard o Solutions: ▪ Partial floatation ▪ Lock-ins - Converting partners into employees o Partner reward = Compensation for effort + Ownership return ▪ When partners become employees, they no longer get paid as owners so comp. falls ▪ Also, you are not making the same kind of decisions for the firm as previously o Effect of tax rate difference and transfer of social and fringe expenses ▪ Recall the Cap Gemini – Ernst & Young case [???] - Leading a public corporation vs. a private partnership o Transparency increases o Accountability through performance rather than to partners o Measurement focus o Concentration of decision rights o Culture of corporation vs. partnership

Goldman Sachs

| |Pre-IPO Distribution |Post-IPO Distribution |Outcome |
|Outside* |12% 0.8B |15% 3.7B | |
|Partners / MDs |36% 2.2B |57%** 14.2B |2x increase in proportional ownership |
|LPs |23% 1.4B |10% 2.5B |2x decrease in proportional ownership |
|Estate |22% 1.3B |9% 2.3B |2x decrease in proportional ownership |
|Employees |6% 0.4B |9% 2.2B |1.5x increase in proportional ownership |
|TOTAL |6.0B |25.0B | |

* Outside: pre-IPO = Senior LPs (companies with fixed stake, NOT individuals) post-IPO = Public
** 70% of the nonpublic shares

How would the IPO affect various constituencies? - Potential Recruits: unclear impact, likely very little o Culture ( ? o Salaries ( would not increase new associates’ salaries b/c set by the market o Bonus ( might get stock options as a bonus post-IPO ▪ Pros and cons – incentive to work hard, but less flexibility than with cash o Chance of making partner ( ? (IPO will increase # of partners and decrease leverage) ▪ Whether the IPO affects the chance of making partner/MD is the crux of the issue for potential recruits in that if chance is very low, then potential recruit would generally see a relatively low impact from IPO overall b/c IPO has a much bigger effect on senior people o Might also be concerned about newly rich partners’ long-term commitment. - 7th Year VP: huge impact o Immediately: pissed – partners profit hugely (cash out big) from this and you don’t get a share o Short term: pissed – PPP will decrease and won’t increase again unless pie gets much bigger (b/c partners now have a smaller portion of overall ownership) o Long-term: unsure – still have chance to make partner, but no guarantees that you will or that, even if you do, PPP will go back up ▪ Getting larger does not always make you more profitable - LPs o Happy? b/c although shares decrease, value increases and shares are more fungible OR Unconcerned? b/c no longer actively involved in the co.? OR Very concerned about effect on firm culture? ▪ LP that retired the year before the IPO will probably be resentful - Competitors o Pro: can recruit the senior associates who are mad about being left out of the wealth (will be the best VPs who made it this far and would have made partner at Goldman in the near future) o Con: concern about Goldman’s new deep pockets

How might IPO affect the firm culture? - Loss of “mystique”/uniqueness of being a partnership when all competitors are public. o NOT AN ISSUE FOR LAW FIRMS (CURRENTLY) - Concern about partners’ incentives: pre-IPO made money year-to-year (were asset-rich, but cash-poor); although annual compensation will still be tied to the success of the firm post-IPO, they will be fabulously wealthy as a result of the IPO cash-out so might lose motivation to work hard - Concern about losing “long term greed” mentality (idea of a long horizon, the bigger picture, leads to less risky decisions b/c willing to wait for rewards from conservative decisions): post-IPO SHs might push for potentially valuable short-term risk-taking

Eric Dobkin (advisory director) - Four things that mattered in IPO debate: o Culture: tension between the old and the young, partners and non, retired and working o Profitability: thought global expansion would increase profitability but needed $ to expand. o Growth: need a more permanent capital base to support expansion o Capital & people: response to poaching by PE firms - Key reason Goldman went public = retention o The most important thing is not hiring the right people, it’s keeping them. o Huge turnover, lot’s of volatility ruins a firm’s culture and makes it seem undesirable. - Concerns the firm had, related to retention: o (1) Huge leverage ration (30:1 – 6,000 professionals, 200 partners) ▪ There was a feeling that it was impossible to make partner at Goldman, so part of the idea behind the IPO was to increase the pool of upper management with an ownership stake o (2) Stable capital ▪ 1994 exodus of a ton of partners, who all took stake out of the co. ▪ 1994, ¼ of partners uncertain about resigning partnership agreements; lot’s of tension ▪ Firm thought: do we really want to do this every two years?! - Goldman attempted to mitigate some of the concerns about going public o Maintained “partner” designation for a group of 200 of the MDs. These partners are compensated by a separate pool (partner compensation pool) in order to maintain the cultural benefits of a partnership to some extent.

d) Managing Multipractice PSFs: Family Feud: Andersen v. Andersen

Andersen v. Andersen

The players (Exhibit 2)

The Arbitration: Should AC make a significant payment to AA to secede?

| |Arthur Andersen (YES) |Andersen Consulting (NO) |
|Economic |AA made AC what it is through AA’s |AC earns more and transfer payments to AA. It is like subsidizing a competitor. |
|Arguments |investment in AC: |BUT AA subsidized AC for many years |
| |Clients (relationships) |AA and AC have diff cultures |
| |Brand (credibility) |AC has a diff service-profit chain spectrum and thus AA’s control has decreased AC’s |
| |Training |economic value |
| | |Diluted brand |
| | |Constrained services |
|Contractual |We own you: partnership agreement says AC|AA breached the Dallas Accord by competing for clients by offering consulting |
|Arguments |pays 1.5x revenue to leave. |services. |
| | |BUT AA only provided services to class of clients AC was not servicing. |
| | |Provisions of the partnership agreement do not apply b/c only relevant to departure |
| | |of a small group, not to the entire practice leaving. |
|Integrity |AC consultants are greedy traitors. AC |AA hasn’t ever treated AC like partners. |
|Arguments |is not being very partner-like. |Consultants couldn’t even be partners until recently. |
| | |Very unequal control. |
| | |AA got rid of any consultants in leadership positions who represented AC’s position |
| | |(e.g. Brebach). |

Different approaches to arbitration - AA o 5 negotiators: 1 chief, 4 advisors o Wanted to choose 3 arbitrators from NY and London (lawyer, I.banker, academic) - AC o 1 negotiator o Stuck to K: 1 arbitrator from country w/ no Andersen office.

Lessons from Family Feud - Re. Investment in, and Returns on, Human Capital o RISK: Investment in human capital is often “insecure” ▪ Human capital is inalienable from the individual ▪ Hence, human capital investment risks expropriation o RESPONSE: How do leaders respond to this risk? ▪ (1) Under-invest in human capital, OR ▪ (2) Exploit human capital so long as possible (attitude: they’re going to leave anyway so squeeze them while they’re around), OR ▪ *(3) Give voice to capable, high-potential individuals before they demand it • Give high performers a seat at the table early • Underlying idea = stewardship: repaying investment previous generation made in you by investing in the next generation ➢ This builds great institutions but is only as strong as its weakest link. ➢ The more concern for individual returns a firm has, the less stewardship there is. - Re. the Leader’s Role in a Multi-practice PSF o In a multi-practice (multi-geography) PSF, a leader must coordinate between businesses ▪ It is not enough to seek/ request/ urge coordination ▪ A leader that does not coordinate across practices/ geographies forfeits the leadership responsibility

Strategic Lessons - (1) Human capital. The whole prob have been avoided if AA had brought AC leaders in at the beginning and given them power and decision rights before they had a chance to demand them. - (2) The role of leadership is to coordinate – this can’t be delegated. Each part was self-aware but lacked understanding of the other – AW should have bridged this gap. o Each aligned self w/ where it was on the spectrum (AC farther to the right and AA to the left). This contributed to each being at the top of its market. o But b/c they were not aligned to each other, being run together led to tension and infighting. It was job of AW’s leadership to coordinate groups – instead, they acted as advocates for AA. o BUT CF. Deloitte: the auditing and consulting practices did not each align to where it was supposed to be on the spectrum and thus neither reached a top market position. However, b/c they were aligned with each other, there was a collegial culture and ppl liked working there.

Tactical Lessons - 1st mover advantage o Can lead to racing behavior - Consequences of having a clause of binding arbitration: o Low cost of dispute resolution (ex-post) o Low barrier to raising disputes (ex-ante) - Arbitrator choices: o Number: single vs. panel o Background: legal vs. business o Location: business hub vs. disinterested region o Corner vs. interior solution o Arbitrator’s psychology - Running negotiations: o Optimal process for the negotiation v. SOP

III. PROFESSIONAL DEVELOPMENT AND RETENTION

a) Transitions

- Transition Characteristics o Fundamental changes in role and context ▪ Strengths can become weaknesses o Multidimensional: need new skills, relationships and styles of interacting with others o Professionals learn through interactive, trial and error process ▪ Observe role models • Skills and style • Effectiveness, feasibility, and congruence ▪ Experiment • Adapt self to role and role to self • Evaluate results, performance gaps • Develop approaches that work ▪ Develop effective, authentic identity o Requires organizational and self-knowledge ( so firm should make available “non-technical” training o What helps professionals learn ▪ Relationship with at least one senior ( so firm should foster jr / sr relationships ▪ Stretch assignments ( so firm should pay close attention to the assignment process ▪ Range of role models ( so firm should foster jr / sr relationships and peer interactions ▪ Clear learning agenda ▪ Willingness to experiment ▪ Self-reflection o Sometimes involves profound transformation for some

Major transitions before partner level:

| |Individual contributor ( |Team manager ( |
| |Team manager |Relationship manager |
|Skills and Competencies |Project management: |Execution and diagnostic skills |
| |structuring and organizing the work |Client relationship management |
| |Performance management: |Business perspective |
| |delegation, team leadership | |
|Relationships and Networks |Up, down, lateral: interdependence |Clients/client organization |
| | |Internal sponsorship |
|Image and Credibility |Develop a management style that works and fits the |Develop a professional “persona” |
| |individual |Establish credibility with partners |
| |Develop a reputation as high-potential |Build reputation in a specialty |
| |Attract mentor(s) | |

b) Mentorship: Rob Parson at Morgan Stanley

Mentorship

Importance of mentorship for development of star professionals - Developing a network is important – want a # of strong ties, but lot’s of weak ties o In PSFs people tend to need more confirmation of the quality of work of women than of men – so for women, building a network is not as important, rather must get top people behind you o How to get a mentor? ▪ Bring that person value – don’t just ask for them to do things for you ▪ After you have done work for them, then ask for feedback, open communication o Mentors’ roles (SEE BELOW) ▪ (1) Coach (gives feedback) ( development • Support people to maximize strengths and address developmental needs • Coaches help develop ability, knowledge, and confidence to improve performance ▪ (2) Advisor (advice of long-term goals, sounding board, mirror for you) ( self-insight • Advisors offer advice and guidance based on their experience • Offer judgment, insight, reflection ▪ (3) Sponsor (support within the organization) ( power, promotion • Network • Better work o It is a myth that you can get all these things from one person – different types of mentors (inside org & in your practice group, outside you firm)… think of it more like a personal board of directors o 90% of what you learn is through mentorship

What effective mentorship requires of senior leaders - COACHING: Feedback: effective mentors provide regular developmental feedback to advisees. Mentorship does not require much time; it requires care for and attention to junior colleagues. o To the listener, evaluation always trumps development –whenever you are giving feedback to someone, give both evaluation and dvt, but focus less on the dvt part. Then meet with them again soon and repeat the dvt part. o Culture of an organization is undermined by making exceptions. So if the culture is teamwork, when you make exceptions it should no longer be your culture. ▪ MS doesn’t make compromises, uses Rob Parson case in their MD training o Why didn’t Nasr tell Parson that he was screwing things up, when Parson came to him? ( its hard to give negative feedback. ▪ People take neg feedback personally and dislike the teller – fight or flight rxn. o People who give you development of feedback in a caring manner is a precious commodity. ▪ Need “feedback on the run” – to be told right after you make the mistake ▪ When someone is giving you feedback your first reaction will be defensive, so say at “thank you, let me think about it” – then do. o The reverse side is that if you care enough about another person you have to have the capacity to give them negative feedback in a caring manner. ▪ Most important part of neg feedback is telling them what they did wrong and then asking them what they think and listening ▪ Trust is important –if they know you’re saying it to help them, it can be positive - ADVISOR: Advice and Advocacy: mentorship involves several activities that can be grouped into three distinct categories: o Giving career advice, o Providing political support, and o Acting as an impartial and independent advisor. - SPONSOR: Skill- Relationship- and Credibility-building: Rather than take a “cookie cutter” approach, mentors should mold their advice to the specific circumstances of their advisees. Specifically, in addition to helping their advisees gain skills, mentors should also help them to build relationships and establish credibility. o Judgment, insight, reflection o Network o Better work - The best senior leaders THUS: o Showed interest in their long term development o Had a “point of view” o Gave “behind the scenes” insight o Provided concrete and actionable feedback o Set high standards and accountability o Were role models in terms of both performance and values o Pushed them to learn from others

How junior professionals can take advantage of mentorship - Rather than seek one ideal mentor who performs all these functions, a professional might seek mentorship from several individuals.

Rob Parson

Should Rob Parson be promoted? - YES o Performs to reqs, cross selling, shares info unselfishly, works very hard o Increased MS from 2% market share and #10 to 12% and #3 in an important business. ▪ Before him have tried to do what he did and haven’t been able to do it. o Clients love him and they will leave with him. o Plus they implicitly told him that he’d be promoted. o He also recognizes his weakness and wants to improve o The job requires an aggressive person ( no one ever told him to hold back ▪ Maybe the real problem is Nasr as a manager o NOTE: the capital market us $.5 trillion. So 12% market share brings in revenue is $50B, profit margin is 50 basis points –$250M ( he is personally contributing $100M to the bonus of the 7 MD’s in his dept ( i.e. he gives $40M to your bonus this year. - NO o Culture is important at MS and franchise is part of that. ▪ The comments don’t seem that bad but they’re bad by MS standards o Treats colleagues poorly ▪ He’s not managing director material b/c you have to be able to work with people. o Maybe he’s too much of a risk taker o Will be turned down this year for sure based on evaluations b/c its not Nasr’s choice. - Alternatives o Give him a big bonus now and try to develop him for another year; then put him up for promo ▪ BUT Parson is driven by the promotion, not the money – he wants to be in the club. ▪ SO, if you just try to give him a bonus, he might be insulted and quit since it means the club is closed to him. If he is put up for promo and does not get it, he will leave. o Nasr could have a convo with him and tell him he (Nasr) screwed up and would work with him to improve.

What actually happened? - Nasr saw that Parson wasn’t on the list, went to Mack and told him that this was a good person and worried that if he’s not promoted, we’ll lose him. - Mack said it would cut promotions committee at their knees if he undermined them. Told Nasr to try to convince them. Eventually Nasr took Parson out for a drink and told him he was not getting promoted. Parson walked out. - Parson comes back and said he was willing to give it a chance but not work with Paul Nasr.

c) Promotion Process: Bain: Making Partner

Promotion Process

Why promotion is a critical decision - For professionals o Professionals work hard over long stretches of time toward this goal o When they make partner, they get both a big jump in compensation and a ton of new power and responsibility – often an ownership interest - For firms o Promotions are relatively irreversible commitments o Promotion decisions are powerful signals to non-partner professionals and potential recruits of what the firm values o Promotions determine firm future. ▪ “You are who you promote” – over time, the firm’s identity reflects the collective identities of the partners of the firm ▪ Firms depend on upper management to bring in business, build client relationships

Criteria for promotion - This is crucial because professionals (for which, we’ve established, promotions have huge consequences), often look for clarity re. promotions in terms of the selection criteria - For the firm, subjective criteria is just as important as objective criteria in order to reach different strengths of different professionals - Understanding of how the different criteria are weighed is also important - BUT the criteria are only a starting point. The process is just as important…

Process must be transparent because: - Promotion decisions have far reaching consequences o Hence, the promotion process typically involves exhaustive collection of information, careful deliberation, and exercise of judgment. ▪ NOTE this information and the process itself can be used for professional development as well as for evaluation of promotional decisions – it’s a good time to tell professionals what they do well and how they can improve. - B/c it is so important, the process can also become and/or be seen as opaque, political, and partisan - To ensure that the process not only is, but is seen to be, aboveboard, o (1) the process itself must be transparent; and (2) the process must be managed by individuals respected w/in the organization as independent and fair. o Outlining promotion criteria is crucial, but not sufficient

Mentorship - Mentors are crucial to professionals’ success in PSFs - Success depends on skills, network, and identity o E.g. McKinsey hires for what you know (skills), promotes for who you know (consultants), and makes partner for what you’re known for (identity). - All three of these change as you rise in a PSF and what leads to success in one job may lead to failure in a new position. So when you are making the transitions you must develop on all three dimensions and it is critical to have guides to help you along the way.

Tenure and Up-or-Out Systems - Examples:

| |Up-or-out: NO |Up-or-out: YES |
|Tenure: YES |Law firms? |Universities |
| |Accounting firms |Top-tier strategy consultants |
| |Top-tier i-banks | |
|Tenure: NO |$-management firms |Military |
| |Mid-tier i-banks | |

- Reality o PSFs do lay off “tenured partners” during difficult times o PSFs w/out tenure systems often protect senior professionals during economic downturns o PSFs with “up-or-out” can allow professionals to move off the track into a permanent position without prospects for advancement o PSFs w/out “up-or-out” may encourage professionals that haven’t crossed a promotion hurdle to exit the firm - Tenure o Benefits: ▪ Protects free speech ▪ Encourages risk-taking ▪ Encourages partners not to misrepresent their evaluations of partner-candidates for fear of losing out to high-quality candidates if they are made partners ▪ As the firm and the professional learn about the quality of their match, well-matched professionals develop long-term employment relationship (tenure) with their firms in return for promise of investing in firm-specific skills (loyalty) o Costs: ▪ Introduces rigidities in adjusting size of PSFs to market circumstances ▪ Can motivate tenured partners to “free-ride” on efforts of others - Up-or-Out o Benefits: ▪ A churn in professionals allows induction of fresh blood at the bottom of the pyramid ▪ Poor matches between professionals and firm are terminated ▪ Up-or-out is a commitment by partners not to exploit senior professionals’ efforts by retaining them but not promoting them to partner status o Costs: ▪ Highly skilled professionals that are nevertheless under the bar are lost to the organization ▪ Professionals that are not qualified to be partners but still possess other valuable skills cannot be accommodated ▪ Can create a culture of mutual competitiveness and strife at lower levels of the pyramid

Bain

Partnership Decisions - Criteria for making partner o Shared Bain values (team player) o Proven track record of success o Generates business o Client-centric, builds relationships o Good business judgment o Smarts o Highly respected o Leadership within office, within firm o Geographic location (i.e. business case for dvt in that location) - SEE 11/6 NOTES re. specific candidates in case study

Phyllis Yale (director, former chair of Promo & Comp Committee) - Promotional process says a lot about the values of the firm – signals are being sent via promotions - One of the cardinal rules of the promotional process is never base decisions on fear that someone will leave. - Don’t just promote when business is good, rather take a longer term perspective

d) Drivers of motivation for professionals

- Internal Motivations - Extrinsic Rewards (comp, perks, status, recognition) - Intrinsic Rewards (challenge, learning, mastery closure)

e) Leveraging Star Professionals: Ecolab, Inc.

Challenge of Retaining and Leveraging Star Professionals

Movement of Stars: Nanda’s stock analysts study - Frequency o Non-stars move more o New stars (< 5 yrs.) move more than long-term stars - Impact of Move on Star’s Performance o The star’s performance fell sharply and stayed well below his old achievement levels ▪ Stars that moved significantly underperformed stars that stayed in the year after the move ▪ Performance didn’t climb back to that of non-movers even five years later o Stars that moved didn’t stay with their new firms for long ▪ Turnover rate of stars that had moved in the past was significantly greater (36% within 36 months, another 29% in the next 24 months) than for star that hadn’t - Impact of Star Move on Hiring Firm o Each time the firms announced that they had hired a star ▪ Stock prices of the investment banks we studied fell by 0.74%, on average ▪ Investors lost an average of $24M o Why? ▪ Performance of star hires declined post-move ▪ Performance of other professionals in the group hiring the star declines • Drop in performance of the team b/c resentful of star’s comp ▪ Star’s recruitment was a signal of the hiring company’s weakness

Drivers of Star Performance = the star’s intrinsic ability + platform the firm provides the star

- THUS firms systematically overvalue individuals’ intrinsic abilities and undervalue the “platform” that supports them (the firm’s systems, networks) o Performance drop was most pronounced and extended over five years after a star analyst moved from bulge bracket to smaller firm o When stars hopped between cos. with similar capabilities, their performance dipped for only two years o The performance of analysts who migrated from smaller to bigger firms did not dip significantly o Stars who brought with them teams of research analysts, salespeople, and traders performed better than stars who moved solo - Three reasons for hiring stars: o (1) Hired to fill a vacancy, replace others who have left (47%) ▪ ( often no disruption, individual just fits into existing slot. o (2) Hired to start something new, moves with team, bring elements of platform w/ them (37%) ▪ ( less decline in performance o (3) Hired to boost current practice/department, moves alone (17%) ▪ often seen as a threat, existing professionals resentful ▪ ( biggest decline in performance - Firms that successfully hire stars approach it like a merger – spend a lot of time on fit and integration.

Better Approach: Building Stars - On balance, the war for talent is won not by hiring stars but by systematically growing them - Three approaches: o (1) Recruit smart people and develop some into stars, knowing that they may be lost to rivals o (2) Hire people, don’t do much to develop or retain them, but focus on retaining the high-level stars developed and brought in from outside (Yankees Approach) o (3) Recruit bright people, develop them into stars, and do everything possible to retain them (Red Sox Approach) ▪ Leads most frequently to long-term success ▪ Develops more stars, faster - Should companies ever hire stars? ( very rarely and if so (1) hire them only when necessary to replace a star who has left and (2) focus on fit and integration

Ecolab

Case A - Why be a client? o Best products and service ▪ Extremely dependable (very important in this business b/c clients can’t stop cleaning) ▪ Foolproof products, safe, easy to use ▪ Full range of products, full service solutions ▪ Constantly trying to find safer, better products and processes • BUT Nanda does not think innovation is so crucial to the clients in this industry o Strong, longstanding relationships with clients ▪ Pyramid hierarchy of Ecolab mirrors hierarchies of clients ▪ Wines and dines big clients o Ecolab is only one of two big cos. that do this - Professionals o Sandy Grive(Al Shuman(Gerald Carlson ( Jack Ford ▪ “effective & systematic manager” ( charismatic, mentor, creative, rainmaker ▪ focused on the system – limits/ ( client-focus, “worry abt deal terms later” parameters for deals with clients
Case B - Should Gray do it? o YES: it’s a gamble, but huge potential pay-off economically and b/c it’s a big blow to E; AND Diversey has huge co. behind it willing to do whatever it takes to compete in this market (if get into talent war, for every $13 D raises, E must raise $45, and D has deeper pockets) o NO: they might not actually be able to deliver and they are asking for a lot of money; will definitely get sued by E; even if D gets the superstars, D can’t offer what E does

Case C - What should Schuman do? o Must inform BOD and CEO. o Call Ford and get him back? ( NO o Gather ranks and evaluate situation ( DEFINITELY ▪ Find most loyal remaining execs. o Call clients; visit clients ( YES o Sue?

Case D - What did he do? o Immediately informed entire co. of the defections and told them everything was under control. o Met indiv. with next levels of management to appoint new leadership ( looking for loyalty. o Advertisements in trade publications intended to build confidence in the firm’s reliability. o Field visits to key clients – regained their confidence and introduced them to new leadership. o Toured offices to “rally the troops.” o Enforced non-competes against defectors.

IV. LEADING ORGANIZATIONAL CHANGE

a) Leading Change: Linklaters: Seeking Clear Blue Water.

Leading Organizational Transformation

The dual role as producers and managers poses unique challenges to PSF leaders and their organizations. - Aligning for Change: all 7 S’s need to be aligned for superior performance o First set the context, then build the culture ▪ Start with the hard S’s (Strategy, Structure, Systems): they easier to change and tangible, observable ▪ Then follow with changing the soft S’s (Staff, Skills, Style, Shared Values), which are much more difficult to reach - Effectiveness of a change process is a function of: o D: dissatisfaction with the current state; AND o M: the attractiveness of the “model” of the future state; AND o P: the process that will lead from the current to the desired future state o ( = chance/ luck - THUS, what is required? o PSF leaders must: ▪ (1) Build dissatisfaction within the organization with current circumstances; ▪ (2) Establish a vision of where the organization is headed; AND ▪ (3) Communicate clearly the process by which change will be accomplished. o Natural sources of resistance to change have to be countered and inertia overcome. o Through the entire process, professionals must feel a sense of ownership of the change process.

[pic]

- The Five Forces Confronting Mid-Level PSF Leaders: o (1) Managing self o (2) Managing up o (3) Managing down o (4) Managing across o (5) Managing out

Linklaters

Class Discussion

- What does CBW call for? o Big, global clients o Market leadership o Comparison o Increased PPP (35 to 50) - Why CBW? o Competition: NY firms moving into the London market has increased competition for clients and attorneys – competitors are poaching top talent o Communication: tell to stars we hear you, we are taking steps, stick with us o Integration: following 2001-04 expansions, CBS is a statement of intent to integrate o Hiring: push for people – to retain high performers and push out low performers - Concerns with CBW o Decreasing collegiality and teamwork o Emphasizes “culture of hard work” – departure of culture of collegiality? (what Linklaters is known for) o Increasing generational struggle o The inclusion of a specific # focuses people’s attention on this, to the detriment of other goals ▪ Numerical goal vs. best work

- What do you think of CBW as… o A senior partner in the London office? ▪ Make a lot of money so already have a lot of pressure to perform (to carry own weight). ▪ CBW only increases pressure more. o A young partner in the London office? ▪ You don’t do as well with the lockstep system so you are frustrated. ▪ You get calls from U.S. firms and investment banks all the time so you have lot’s of outside options. ▪ CBW is a good first step. o A partner in the Cologne, Germany office? ▪ You are under a lot of pressure. • Your local German firm was a acquired by Linklaters a number of years ago – prior to the acquisition (and still) your office had mostly local business. • Power is concentrated in London, but you get paid disproportionately (your partners get paid more than their performance merits) – your compensation dilutes the pool. • To improve: ➢ (1) Your office must have fewer local clients and more global ones that pay more. ← BUT bigger clients are with your competitors. ➢ (2) Your office could get rid of partners who aren’t performing. ▪ CBW increases the pressure and makes it even more of a struggle. o A partner in the NY office? ▪ Challenges • The NY office is not as profitable as London. • Your office has been around for a long time – prior merger with a NY firm was a disaster so you are growing organically. • There is strong competition for people and you have a problem with attrition of midlevel to senior associates and junior partners because of lockstep. • Your clients are generally U.K.-based global clients – it is tough to break into the client market of U.S.-based cos. ▪ CBW intends to triple the size of the U.S. office • Concern about culture? • But happy about the support. • But HOW?, given the above challenges

- If you were Angel, what would you do? o Call a partner meeting ▪ Clarify CBW’s goals and direction ▪ Get partners’ feedback and address concerns o Get just the firm leaders together for the above o Ask each office to provide plan to implement CBW and clarify what resources are needed o Educate partners on why CBW is necessary – give them a sense of the market and dvts o Include a culture element in the plan o Streamline firm governance, make more effective and create some forum for partners to provide feedback and ask for what they need

Tony Angel (former MP; architect of CBW)

- Linklaters decided to build a global firm “at exactly the wrong time” o 9/11 in 2001 o SARS in Asia in 2003 - There was a feeling the Linklaters wanted to be “part of the pack of top firms” – it was a contentious idea that it needed to establish itself as the top firm - Angel was shocked by the strength of peoples’ reactions to CBW - Response: after unveiling the plan, the lot’s of leaders together for a “leadership retreat” to discuss the issues – they developed case study we read o The firm needed to convince its partners that competitive advantage was not necessarily being the best in local markets, doing the same local deals as local competitors, but in doing “premium work for premium (global) clients” ▪ SO, at the conference, educated partners on market challenges to which CBW was responding (e.g. showed that more complex deals were more profitable) – ▪ “It was as if we flipped a switch” – people who had previously been very against the plan cam on board o Alleviated partners’ fears about being judged solely on financial metric – developed a scorecard to determine teams were doing on a number of dimensions o Afterwards, they made changes to the plan and clarified what they were trying to achieve - PPP went from 35 to 43 to 65 - Currently o Linklaters’s lockstep compensation system is highly aligned with its business model because teamwork is so crucial to the type of work the firm does ▪ There is no benefit from not sharing / holding onto clients / not working together ▪ BUT lockstep is very demanding o Continuing leadership retreats – the firm continually educates partners on what Linklaters could do better, why change is important

b) Leading a High-Performance Team: Lehman Brothers: Equity Research Department

- The research department’s leader built a high performing team by hiring smart people, developing them into star professionals, and retaining them by building a supportive work environment. - Transformational leadership in PSFs requires two sets of activities: o (1) Operational improvement, which typically requires painful measures (such as cost-cutting, firings, setting high performance standards) o (2) Improving the work environment, which typically involves creating morale and encouraging entrepreneurship and risk taking. - Both Family Feud and Lehman Brothers emphasize that for multi-practice (or multi-geography) PSFs to succeed, their leadership must balance between central coordination and local autonomy.

V. SUCCEEDING AS PROFESSIONALS

a) Career Progression

- Successful career progression involves measured experimentation. - Professionals can benefit from investing in firm-specific expertise if their firm recognizes and values such investment. And conversely, professionals can benefit from investing in portable functional expertise if they work in professions with externally observable performance metrics and fluid labor markets. - How professionals can achieve a balance between professional and personal goals. The session will conclude with the “Career Launch”

b) Career Launch

What strategy is best? - Alignment is key – different practices require different strategies o Important to find out what works for the particular practice, talk to co-workers - Remember the components of professional success o Don’t focus exclusively on knowledge and skills o Build your network of relationships ▪ Learn the rules of engagement ▪ Be friendly –not just to superiors but to everyone o Build your reputation ▪ Early impressions count ▪ Attitude is critical: be positive; avoid cynicism ▪ Be recognized as: capable, trustworthy, honest, diligent, team-player - Fitting in ▪ Build and demonstrate expertise ASAP ▪ Intellectual horsepower and skill, not know-it-all ▪ Leverage time intensively o Figure out and fit into the culture ▪ Identify the core values; the taboos ▪ How do things get done? ▪ Be inclusive: o Figure out how to talk about HLS o Care about others ▪ Become part of the social fabric of the firm o Seek advice ▪ Seek mentors ▪ Ask star colleagues what it takes to be successful ▪ Ask questions, seek help - Mentors: see above - Turning things around o Understand the context ▪ Why is the feedback being given? ▪ Do you trust the feedback provider? o Understand the content ▪ Is it specific? ▪ Is it about style or substance? ▪ Is it about symptoms or root cause? o Respond ▪ Thank provider of genuine feedback ▪ Keep breathing; do not isolate yourself ▪ Remember success stories; don’t forget what got you there ▪ Get back on the horse; create and test action plans for change ▪ Start right away; change quickly and demonstrably ▪ Do great work; learn something new; enjoy

Exhibit 1 The Bermuda Triangle of Management [pic] Exhibit 2

|Arthur Andersen |
|Spacek (MP 1947-63) |
|Oliphant (MP 1963-70) |
|Kapnick (MP 1970-79) |
|Innovative |
|Controversial |
|Wanted to split |
|Kullberg (MP 1979-89) |
|Stable |
|Millar |
|Top consulting partner, left in 86 |
|Brebach |
|Replace Millar as top consultant |
|Fired in 1988– took 5 other sr. consultants and |
|started ICG |

|Andersen Worldwide |
|Weinbach (CEO 1989-97) |
|Credited for firm’s success and criticized for |
|disharmony |
|Grafton (Acting CEO 1997-) |
|Appointed b/c neither Shaheen nor Wadia could get |
|2/3 vote |
|Arthur Andersen |Andersen Consulting |
|Measelle (MP 1989-97) |Shaheen (MP 1989-99) |
|Wadia (MP 1997-2000) |Blunt, “flame-throwing” style |
| |Conahan (MP of Strategy) |
| |Forehand (MP 1999-) |
| |Understated, client-focused |

|ARBITRATION |
|Gamba (1998-2000) |

|Arthur Andersen | |Andersen Consulting |
|Berardino (MP 2001) | |Forehand (MP 2000) |

|Andersen | |Accenture |
|Berardino (MP 2001) | |Forehand (MP 2001) |
|Faces senate inquiries post-Enron | |2001 IPO |
| | |2002 second offering |

-----------------------

( Expectancy ( Motivation Dynamics* to Perform
* expectations about how efforts will lead to results & results to rewards

Nanda’s Take-Aways:
(1) Power of alignment
(2) Successful strategy is often consistent with values and is one that you persist with
(3) How you position your service within range of professional services has great consequences

Convex relationship between client defection rate and duration with firm.

- Concave relationship means poor service is much more negative than good service is positive.

- Clients will be much more upset at A than at B. o It’s better to give consistent service than some excellent & some bad. o Underpromise (harder to get clients) and o Overdeliver (easier to keep clients).

- Estimating Client Satisfaction o It is crucial to get to clients and ask about the service – encourage them to talk early, before reviews, before they complain at the end. o When you get feedback, follow-up, do something about it. o e.g. McKinsey: part way through each project, sends a partner to talk with the client; then partner on the account goes back to the client and says “here’s what we’ve done.”

- v must be greater than o, or the individual will leave.
- c must be between v and o, or the individual will leave.

- B is more valuable to the partners.
- A is a superstar but is so highly compensated that her value to the partners is less.

Good work environment ( satisfied professionals ( loyal professionals ( productive professionals ( high quality service (value > cost) ( good client experience (service level > expectations) ( client satisfaction ( client loyalty ( increased profits (

Each of these requires other complementary compensation systems to mitigate some of its negative effects.

Convex relationship between client satisfaction and loyalty to the firm.

- Consequences of this system o Generational Tensions ▪ Young associates will complain that they carry the older partners. ▪ Older partners will say that they already put in their time. o Partners will stay a long time. o System breaks down if associates leave before they are profitable.
- This model counts on associate & jr. partner retention

" / P = (" / R) x (R / p) x (p / P)

profits/partner = (profits/revenue) x (revenues/professional) x (professionals/partner)

Profitability = Margin x Productivity x Leverag∏ / P = (∏ / R) x (R / p) x (p / P)

profits/partner = (profits/revenue) x (revenues/professional) x (professionals/partner)

Profitability = Margin x Productivity x Leverage

R / p = (R / () x (( / p) Productivity = Avg. Billing Rate x Utilization (revenue/hours) (hours/professional)

Profitability = Margin x Avg. Billing Rate x Utilization x Leverage

( = ((D(M(P) + (

Components of Managing
Career Progression: