HOWREY’S LESSONS

If Howrey LLP disappears, most big law leaders will make distinctions; they’ll focus on how their organizations are different from Howrey’s. More interesting are the similarities, especially the universal forces that might render others vulnerable to the highly respected firm’s current plight.

First is the speed with events can overtake seemingly secure institutions — and I’m not referring to the fall of Mubarak in Egypt. On May 19, 2008, the Legal Times hailed Howrey LLP’s chairman Robert Ruyak as one of the profession’s “Visionaries.” He deserved it. During the prior 30 years, his distinguished career enhanced Howrey’s reputation and the business of law in DC. But on February 1, 2011, he and Winston & Strawn’s managing partner Thomas Fitzgerald together urged Howrey partners to act quickly on Winston’s offers to hire about three-quarters of them. The big law world can rapidly take a dramatic and unexpected turn.

Second is the way unprecedented demand for big law services combined with the prevailing business model to create enormous financial paydays that became even larger as firms grew. When Ruyak became chairman in January 2000, Howrey ranked near the middle of the Am Law 100 in average profits per equity partner (PEP — $575,000). It had 325 attorneys (89 equity partners).

Ruyak’s strategy targeted growth in three core practice areas: antitrust, IP, and litigation. As the Legal Times observed, “To achieve that vision, Ruyak knew that the firm had to be bigger, so Howrey went on a merger spree.” It added Houston-based patent firm Arnold, White & Durkee, acquired the antitrust practice of Collier, Shannon, Rill & Scott, and established European offices in London, Amsterdam, Brussels, Paris, Munich, and Madrid.

By 2006, Howrey had 555 attorneys; its 127 equity partners averaged $1.2 million each. After profits dropped in 2007, they soared by almost 30% in 2008 — the biggest percentage revenue-per-lawyer gain in the Am Law 100. Howrey’s 2008 profits were $1.3 million per equity partner — an all-time high.

Third is the fragility that such financial prosperity created for the fabric of many law firm partnerships. When profits plunged 35% in 2009, Ruyak’s partial explanation was that 2008 had been aberrational. Large contingency receipts accounted for much of that year’s non-recurring spike. The firm was still “figuring out how to do [alternative fee arrangements] well.” (The American Lawyer, May 2010, p. 101)

Unfortunately, the revolution of rising expectations was underway; the short-term bottom-line mentality is an impatient and unforgiving two-edged sword. In 2000, Howrey had a clear identity and average equity partner profits of almost $600,000 — seemingly sufficient to keep partners satisfied and any firm stable. Certainly, that amount far exceeded any current big law equity partner’s wildest financial dreams when entering the profession. A decade later, disappointing projections that the firm might reach only 80-90% of its $940,000 PEP target (or $750,000 to $850,000) fed rumors and a perilous media downdraft.

Heller Ehrman proved that lateral hiring and law firm mergers risk sacrificing firm culture in ways that inflict unexpected damage. I don’t know if that has happened at Howrey, but when cash becomes king, partnership bonds remain only as tight as the glue that next year’s predicted equity partner profits provide, assuming those predictions are believed.

That leads to a final lesson: leadership requires credibility. Only two weeks before the remarkable joint message from Ruyak and Fitzgerald, Howrey spokespersons insisted that all was well: “The amount of costs taken out of the firm at all levels — which includes leases, partners, associates, and the like leaving the firm — have made the firm much more efficient,” vice-chairman Sean Boland said. “It’s done wonders for our cost structure, such that we’re going to see some major advantages in 2011. We’re very encouraged by the cost cutting that we’ve done.”

Likewise, one of its outside consultants said that the firm was “getting back to its strengths… What’s happening at Howrey is largely by design.” Maybe so. But from this distance, the parade of top partner departures and Ruyak’s involvement in Winston’s outstanding offers make the design appear curious, indeed.

In May 2008, the Legal Times, concluded with a senior partner’s observation that Howrey had become “a very exciting place to work.” I suspect that’s still true. As with most things legal, the definition is everything.

7 thoughts on “HOWREY’S LESSONS

  1. Well done, once again, Steve. Well researched and succinctly articulated analysis.

    It’s a sad day for the profession when any firm closes its doors. Howrey is the 39th AmLaw firm to shutter its doors since Finley Kumble filed for bankruptcy in 1988. As you know, the patterns in each of these law firm failures read precisely the same.

    It’s also a particularly sad day for the professionals and staff at a law firm sinking beneath the water line. The disruptions and trauma last a life time. And, the financial consequences to the partners of the sinking firm are quite onerous. http://kowalskiandassociatesblog.com/2011/02/03/the-financial-and-legal-consequences-of-a-law-firm-dissolution-on-the-partners-of-the-defunct-firm/

    Jerry Kowalski

  2. Exactly right. The fragility of course stems from the leverage of high associate-to-partner ratios, bank debt, and dependence on unusually large matters. If several major matters terminate in the same quarter or a contingent-fee case fails to deliver, highly leveraged firms often face a death spiral. Of course, when the cases go well, profits soar. If Howrey had stuck to its core competencies, the partners would have forgone the huge paydays of the mid-2000s but the firm almost certainly would have survived.

    Why is $600,000 not enough? Look at the clients. The senior executives at many (if not most) of Big Law’s clients do far better. As a result, the senior partners naturally compete with their clients. In turn, this raises larger issues of executive compensation and corporate governance.

    Add to that the leverage at major investment banks and bankers’ exponentially higher salaries and the “Goldman envy” (per Jamie Dimon, but no doubt shared by many talented private practice lawyers) becomes acute. And, ultimately, the huge paychecks at many Fortune 500 companies and investment banks inflates housing costs, private-school tuition, and other amenities that many large-firm lawyers want — all culminating in a retelling of The Bonfire of the Vanities.

  3. I applaud Professor Harper’s analysis of the demise of Howrey and the dangers that other large firms may face in the future by not heeding to the lessons learned concerning “the universal forces that might render others vulnerable to the highly respected firm’s current plight”.

    There is a great deal of truth in his observations but as a former Howrey insider I would add another:

    While as a serious law firm marketer I am certainly not an advocate of “sloganeering” for law firms and, in fact, most businesses, I find a certain irony in the way that Howrey’s two most visible marketing slogans connected to diametrically opposed periods of the firms history. The slogan “In Court Everyday” that began running in Howrey advertising in the early 1990’s truly defined the strength of the firm.

    This was not a global litigation firm, but rather a Washington DC-based firm of tough, smart, sophisticated courthouse lawyers who had expanded their client scope beyond their core anti-trust expertise to cross-sell government contracts, IP, trade, commercial litigation, etc. They had embarked on a very few, but highly targeted, lateral hirings and larger mergers were not considered seriously. Even the few lateral individual or group acquisitions (Harvey Sherzer, Paul Plaia and Los Angeles-based Hennigan & Mercer) were tentative at best and eventually unraveled.

    The firm was run then by a not-so-benevolent dictator and documented bully, Ralph Savarese, who despite his follow me, or else, bravado was a highly effective although universally feared, leader.

    Savarese did well in bringing the firm out of the losses it suffered in the anti-regulation Reagan era and positioned the firm for growth and prosperity and eventually its demise. If only the firm had stuck to its core competency of being great and even feared courthouse lawyers, not global litigators, things might have been far different. But, I digress.

    So the transition begins and Bob Ruyak embraces the threads of the Savarese vision and adds his own global focus to the mix. The dramatic growth spurt begins with a new slogan…”The Advantage of Focus”. I get it! We believe in being focused…who doesn’t? But what is the focus? The firm then modified and supported the slogan with a bunch of words that changed Howrey from what it was into what every other large firm in the world was saying that they were…and in the case of Howrey it just wasn’t as believable as many of their much more formidable competitors. And, in the end, the members and staff of the firm, as well as the marketplace, chose not to believe or embrace the hollow claims.

    Howrey was a good bunch of courthouse lawyers who didn’t stick to their knitting. Their grasp eventually exceeded their reach and their lack of “focus” became a key cause of their demise. They didn’t focus on their strengths, they didn’t focus on the people who got them to where they were in the first place and they didn’t focus on meeting and exceeding the expectations of those who mattered most. Somewhere along the way the tough, smart courthouse lawyers lost their focus. And, their collective way. And, their firm.

    The way things are heading now they may wind up In Court Everyday for some time to come and that will call for a great deal of focus.

  4. All true, though I would also focus on two factors which pop up in the narrative, and, though not a precipitating cause of the collapse, certainly greased the skids for it. One was the problem of conflicts in acquiring laterals (unless you are one of those firms that thinks there are no conflicts other than representing opposite sides in the same courtroom), and the other is the expense of maintaining branch offices, particularly outside the US. Both make it difficult and expensive to grow other than organically.

  5. I see on the WSJ blog that Ruyak himself puts signficant blame on conflicts and the EU expansion. He also blames alternative fees, though I am less persuaded by his arguments there – that should have been manageable. But the thing on the conflict and expansion is that these risks were not new, and not unknown. Had the firm had a more collegial management structure, someone, perhaps some of those underrated junior partners, might have raised enough questions to make the management stop and justify the decisions before jumping into that set of risks with both feet. As it was, the firm leadership, which largely seems to have been Ruyak, did jump, and judged wrong, The firm has paid the price.

  6. As John F. Kennedy famously said after the Bay of Pigs invasion fiasco in 1961, “Victory has a thousand fathers. Defeat is an orphan.” Kennedy made this statement at a press conference in which he accepted personal responsibility as president and commander in chief for the failure of the Cuban invasion, in spite of the fact that it had been planned during the Eisenhower administration and the joint chiefs of staff actively lobbied the new 44 year old president to proceed with the invasion.

    Jerry Kowalski

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