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August 27, 2009 - Phil Hodgen

Deep specialty, wide network, Chinese manufacturing, and us

Ninety percent of what we do has “international tax” in it.  That’s who we are.  Via Vinnie Mirchandani and Dennis Howlett, I learned today about John Hagel’s analysis of supplier networks in Chinese manufacturing. This is a great 4 minute video.  Thanks, guys.

This largely explains a great deal to me why it is that our law firm thrives and where we fit into the ecosystem.  We regularly refer out work that is not within our specialty.  We regularly receive referrals (including from other tax lawyers) of international matters.  We routinely are a part of a team achieving an objective.  We have a wide network of people we know and like and trust.  We do stuff that the big enterprises (large law firms, large accounting firms) simply cannot do.

The twin constraints mentioned by John Hagel (lack of a financing infrastructure, lack of IP protection) apply to service firms like ours.

IP for lawyers

John Hagel talks about the lack of IP protection in China (perceived or real, it doesn’t matter).

IP for us means “stuff we know that others don’t.”  For instance, in a meeting of the Beverly Hills Bar Association Tax Section yesterday, I was the only person in the room of 40 or so tax lawyers who actually has a foreign bank account amnesty active in Philadelphia — the end of the line in the amnesty process.  I’ve received the audit letters.  I’ve dealt with the audit on the back end of this process.  No one else has. Yet. And there were heavy hitters in the room.

They’ll all be there in a few weeks, I’m sure.

The point is, “stuff I know that you don’t” has a short shelf life in international tax law.  (And in every other human endeavor.)  The lesson is to innovate.  We specialize because we can move faster for our customers — innovate — by specializing.

The heavy hitters can do things I can’t do. Life’s too short for me to attempt to acquire the IP of knowing how to handle other tax law stuff — criminal tax court trials when jail is on the line, etc.  I bring in the network.

Memo to all personnel – be paranoid, be learning, move fast, be humble and don’t think you’re the smartest person in the world because (shockingly) you’re not.  Being a smart person – that’s just the ante to be sitting at the table.

Financing infrastructure

The other perceived disadvantage in the Chinese manufacturing supply chain ecosystem was lack of financing.  For us it’s no so much a matter of financing as balance sheet depth in general and the ability to pull in resources.  Manufacturers need to bring in money to finance operations.  We need to “borrow” other assets.

International tax knowledge is typically found in small specialty houses like ours, or in the mega-juggernaut houses like BigLaw and the Big 4 accounting firms.  That’s our analogous “disadvantage.”

Quite simply, it’s not.  There are some things they can do that we can’t.  Throw 50 bodies at a problem is one.

But this is actually an advantage for us.  My informal analogy for CFOs at corporations is “Sometimes you need the regular army, and sometime you need ninjas.  We’re ninjas.”

True story:  CFO asks $BIG4AUDITOR a simple international tax question.  Gets a bill for $10,000 and a non-answer.  Late.  I’m sitting across the table from the CFO and give an off-the-cuff “good enough for early stage business decision purposes” guess.  BANG.  Problem solved.We don’t displace $BIG4AUDITOR and we don’t want to.  But I know they’re a necessity because the books must be audited because the SEC says so.  We’re there by the CFO’s choice because we deliver high value.

There are a lot of factors involved here.  Primary among them is the ability to move fast and a willingness to live within the real world of business decisions.  The ability to price things effectively and predictably.  The ability to sit and listen.  And give understandable answers.

But at the bottom of all of these you’ll find a structural benefit to the specialty firm loosely networked.

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