Dow Hits 11,000! Why Aren’t We Celebrating?

American investors, happy days are here again! The Dow Jones Industrial Average (DJIA), the landmark statistical index of large corporate stock values in the United States, just nudged over the 11,000 level for the first time since May.

American firms are clearly recovering from the Great Recession, and their shareholders are benefitting as well. But the latest American unemployment figures are grim, with limited private sector hiring overwhelmed by government sector lay-offs.

How is this possible? How can American companies (and their investors) be growing stronger while their employees lose their jobs? And how long can these trends continue until employment finally strengthens …

… or, conversely, until American firms again weaken?

Gunning For Growth

The primary reason for this “disconnect” between American firms and their employees is that, to put it simply, American companies aren’t wholly American any more. Quintessential red, white, and blue firms like Coca-Cola, Disney, and General Motors are experiencing far more growth in global markets than in domestic markets, and thus they are inevitably hiring new employees in regions that are generating more business. Why would Coca-Cola, for instance, build its work force in the United States instead of Asia when its North American sales volume is dropping by 1% while its Chinese sales volume is soaring by 29%?

Other United States firms claim that they would prefer to hire more American workers, but immigration laws prevent them from doing so. Technology firms like Microsoft and Google note that many foreign nationals are attracted to American universities, where they are trained to perform highly sophisticated value-added functions. However, even though many of these individuals would prefer to remain in the United States and become American citizens, our immigration laws make it easier and cheaper (and, in fact, often legally necessary) for American firms to establish new locations in foreign nations and then to employ these graduates overseas.

The bottom line is that, for a variety of reasons, companies inevitably hire employees in locations where sales volume is growing and talented employees are eager to work at relatively affordable salaries. That’s why American firms are increasingly building their work forces overseas instead of in the United States. And, in the process, the companies are becoming less American themselves.

The Investor Class

This divergence of fortune between United States corporations and the American work force also impacts the differing circumstances of domestic investors and workers. Last month, for instance, the DJIA jumped by over 7%, while the Nasdaq stock index soared by over 12%. A 68 year old retiree with a fully guaranteed pension and a 401(k) investment “nest egg” worth $1 million would thus have seen his 401(k) savings soar by over $70,000 in just one month if he had invested all of his funds in a relatively conservative DJIA stock fund. Of course, he would have received his monthly pension payment and government funded social security and health care benefits as well.

Meanwhile, a lower middle class supermarket clerk scraping by on minimum wage would not have felt any benefit from the stock market surge; such individuals generally own few or no investment funds. He may well have felt the burden of soaring health care service costs, though. Many working Americans who possess no health insurance coverage, after all, are employed in clerical positions that offer no benefits.

Furthermore, the American income tax system places higher rate burdens on lower middle class supermarket clerks than on wealthy retirees. Most retirees are paying a long term capital gains tax rate of 15% on their retirement fund withdrawals, whereas employee wages are subjected to higher rates in total by the income tax, social security tax, and Medicare tax systems of revenue collection.

Valid Arguments, But No Solution

There are, quite naturally, perfectly valid arguments in favor of maintaining these status quo policies in the United States. After all, the United States does indeed maintain a mature economy and cannot possibly match the explosive economic growth rates of emerging nations. American firms are thus far better off pursuing explosive growth opportunities in emerging nations than not pursuing them at all.

Furthermore, the immigration laws have indeed been developed to protect the American labor market from being overrun by immigrants seeking better lives. And senior citizens don’t perceive their government financed retirement benefits to be wealth transfers from working adults; instead, they assert that they paid into the retirement system during their own decades of employment, and they are now simply receiving equivalent value during their retirement years.

These are all valid arguments, and yet they offer no solution to the problem that is now confronting American society. Namely, an economic recovery is clearly underway for corporations and their investors, but an end to massive unemployment is not yet in sight for the work force. And eventually, if America’s employee pool collapses entirely, it may pull all of the other American stakeholders down with it.

Introducing the Virtual Law Firm!

Would you hire a virtual law firm? If it only exists in a virtual office? And if it can only communicate with you by using virtual technologies?

Dell Computer once revolutionized the personal computer industry and rose briefly to the #1 spot in sales volume by pioneering the virtual extended enterprise. Did Dell need real factories to produce their products, real stores to showcase them, and real trucks to deliver them to customers? Not at all! Instead, a kid named Steven (“Dude, you got a Dell!”) advertised the brand on television, a toll-free call center collected orders, a chain of independent factories around the world produced and assembled the computers, and Fedex and UPS delivered the goods.

Did it work? For a while, it was the perfect business model. Every customer could order a uniquely customized unit, thus ensuring the receipt of exactly the product that was desired. And every buyer provided a credit number number at the time of each order, thereby eliminating accounts receivable collection concerns and reducing working capital requirements.

So what went wrong? Why is Dell no longer #1? And what’s all this buzz about virtual law firms?

Risky Business

Whenever we analyze risk, it’s helpful to use the fundamental principles of enterprise risk management as defined by COSO’s integrated framework. They’re really quite straightforward; they simply require analysts to focus on the most potentially damaging crises, and then to determine whether the organization is doing everything reasonably possible to prevent and/or mitigate them.

So what can go wrong with an extended enterprise strategy? Interesting, its Achilles Heel may well be a product of what is generally its greatest strength. On the one hand, a virtual enterprise doesn’t need to spend money on factories, stores, or trucks … on “bricks and mortar” infrastructure, if you will. That gives it an incredible cost advantage as long as nothing goes wrong.

But what happens if numerous laptop devices malfunction just days after consumers purchase them? The risk of customer dissatisfaction thus becomes a major concern. Whereas a firm like Apple, with Genius Bars in retail stores, can simply direct customers to visit local shopping malls for service, a virtual enterprise like Dell must struggle to communicate with their irate customers from remote call centers.

In other words, the problem with virtual enterprises isn’t a matter of business management, but rather of risk management. Costly infrastructure is an unnecessary burden when business goals are easily achieved; it’s only when things go wrong that the infrastructure is sorely missed.

The Virtual Private Law Firm

Nevertheless, the alluring benefits of cost elimination and product flexibility are simply too enticing for the concept of the extended enterprise to die. This month’s issue of the ABA Journal, for instance, features an article about Virtual Law Partners, an extended enterprise in the field of legal services.

The article notes that VLP has no physical office. Instead, attorneys use technology to interact with each other and with their clients; any in-person meetings are simply held in private homes. The revenue and cost models are fairly simple as well: 65% of all revenue billed by individual lawyers is paid to them as staff compensation, 20% is paid to the individual who manages the engagement, and 15% is allocated to corporate overhead expenses.

The article doesn’t address VLP’s service mix or growth ambitions in any great detail, but their own corporate website provides a few intriguing elaborations. Apparently, at the moment, the firm’s practice is focused on the receipt of relatively routine outsourced work from the in-house legal departments of major firms. And VLP plans to expand into a “worldwide distributed network.”

In other words, the firm is in the outsourcing business, accepting tasks that (unlike criminal cases, for instance) may not require complex and sensitive face-to-face conversations between attorneys and their clients. Although the firm’s web site touts the strength of its “advanced technology platform,” one might wonder whether its capacity might sag under the strain of intense and continuous interactions with temperamental clients, in much the same way that Dell’s call oriented warranty service might struggle to meet Apple’s Genius Bar standard of customer care.

Strong Headwinds

Before we dismiss virtual legal practices as tiny entities without the infrastructures that are required to handle complex engagements, we might pause a moment and check the atmospheric conditions. Strong headwinds are coursing through the global economy, and they all seem to be blowing in favor of virtual networks.

After all, in the 1950s, General Motors never dreamed that Toyota could ever compete in America via a tiny collection of threadbare dealerships. And throughout the twentieth century, many conservative governments never believed that civic protests could be organized if television stations were tightly regulated. And yet, if Toyota could evolve from Toyopet to Lexus, and if the broadcasting industry could shift from analog signals to YouTube, why couldn’t virtual law practices learn to manage more complex legal projects as well?

Let’s face facts. Daily commutes aren’t getting any faster. Mass transportation options aren’t getting any cheaper. And printers of paper based reference materials aren’t getting any busier. So the ability and need to congregate in any real world location for communication and research purposes is not getting any stronger.

In other words, though virtual law firms may not be ready to take over the profession just yet, the business trends are all moving in their direction. As long as they can manage the risk of failure, they will likely continue to grow.