Tag Archives: Howrey

THE BINGHAM CASE STUDY: PART II

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Starting with the introduction, Harvard Law Professor Ashish Nanda’s case study on Bingham McCutchen depicts Jay Zimmerman as the architect of the firm’s evolution “from a ‘middle-of-the-road-downtown-pack’ Boston law firm in the early 1990s to a preeminent international law firm by 2010”:

“Zimmerman was elected chairman in 1994. Over the next 15 years, he shepherded the firm through 10 mergers, or ‘combinations’ in the Bingham lexicon, the establishment of 11 new offices, and a ten-fold increase in the firm’s revenues to $800 million… Given its impressive expansion, [journalist Jeffrey] Klineman said, ‘Bingham McCutchen has shown it could probably open an office on the moon.'” (p. 1)

Harvard published the study in September 2011.

Another Case Study

Ten months later, Nanda released another case study, “The Demise of Howrey” — a firm that was dying as he considered Bingham. Interestingly, several footnotes in the Howrey study refer to articles explaining how aggressive inorganic growth compromised that firm’s cohesiveness and hastened its collapse. (E.g., “Howrey’s Lessons” by me, ““Why Howrey Law Firm Could Not Hold It Together”, by the Washington Post’s Steven Pearlstein, and “The Fall of Howrey,” by the American Lawyer’s Julie Triedman) But Nanda’s 15-page narrative of Howrey barely mentions that topic.

Instead, he invites consideration of “the alternative paths Howrey, and managing partner Robert Ruyak, might have taken to avoid dissolution of the firm” after that growth had occurred. The abstract concludes with these suggested discussion points:

“What could Howrey have done differently as clients demanded contingency payment plans and deep discounts? Should Ruyak have been more transparent about the financial difficulties the firm faced? Should he have consulted with a group of senior partners instead of relying on the counsel of outside consultants? Is a litigation-focused firm at a disadvantage when it comes to leadership, as compared to a corporate practice? Participants will reflect on the leadership structure of Howrey while discussing issues related to crisis management.”

With all due respect, those inquiries don’t reach a key lesson of Howrey’s (and now Bingham’s) collapse. The following sentence in the study does, but it goes unexplored:

“Howrey continued to add laterals over the concerns of some partners that increased lateral expansion might detract from the firm’s strategic focus and weaken its cultural glue.” (p. 6)

The Metrics Trap

Nanda’s case studies report that at Howrey. as at Bingham, a few key metrics suggested short-term success: revenues soared, equity partner profits increased, and Am Law rankings went up. But beneath those superficially appealing trends was a long-term danger that such metrics didn’t capture: institutional instability. When Howrey’s projected average partner profits dipped to $850,000 in 2009, many ran for the exits and the death spiral accelerated.

Likewise, Bingham’s record high equity partner profits in 2012 of $1.7 million dropped by 13 percent — far less than Howrey’s 2009 decline of 35 percent — to $1.5 million in 2013. But a steady stream of partner departures led to destabilization and a speedy end.

Balancing the Presentation

According to the final sentence of the Bingham case study abstract, “The case allows participants to explore the positives and negatives of following a strategy of inorganic growth in professional service firms….”

The negatives now dwarf the positives. No one should fault Nanda for failing to predict Bingham’s collapse two years later. The most spectacular law firm failures have come as surprises, even to many insiders at such firms. But the Bingham study emphasizes how Zimmerman conquered the challenges of an aggressive growth strategy, with little consideration to whether the overall strategy itself was wise over the long run.

For example:

— The study notes that after Bingham’s 2002 merger with 300-attorney McCutchen Doyle, “Cultural differences…loomed over the combined organization….” But the study goes on to observe, “[T]hese issues did not slow the firm’s growth on the West Coast.” (p. 11) By 2006, “Bingham had achieved remarkable success and unprecedented growth.” (p. 14)

— The study reports that the firm’s American Lawyer associate satisfaction ranking improved from 107 in 2007 to 79 in 2008, which Bingham’s chief human resources officer attributed to “an appreciation for the leadership of the firm. People have confidence in Jay’s competence.” (p. 17). The study doesn’t mention that the firm’s associate satisfaction ranking dropped to 100 in 2009 and to 106 (out of 137) in 2010. (American Lawyer, Sept. 2010, p. 78)

— “Our management committee has people from all over,” the study quotes Zimmerman. “You don’t have to have been at Bingham Dana forever to lead at the firm.” (p. 15) But the study doesn’t consider how too many laterals parachuting into the top of a firm can produce a concentration of power and a problematic distribution of partner compensation. When Bingham began to unravel, the spread between its highest and lowest paid partners was 12:1.

— Bingham’s final acquisition — McKee Nelson — was the largest law firm combination of 2009. The study doesn’t discuss the destructive impact of accompanying multi-year compensation guarantees that put some McKee Nelson partners at the very top of the Bingham McCutchen pay scale. To be fair, Nanda probably didn’t know about the guarantees, but the omission reveals the limitations of his investigation. The guarantees came to light publicly when the American Lawyer spoke recently with former partners who said that “the size and scope of the McKee Nelson guarantees led to internal fissures…that caused at least some partners to leave the firm.”

No Regrets

Looking to the future, Zimmerman told the Harvard researchers, “[W]e’re competing with the best every day. We know we are among the best.” (p. 19)

I wonder if he would now offer the same self-assessment of his leadership that Robert Ruyak provided to the American Lawyer at the time of Howrey’s bankruptcy, namely, “I don’t have any regrets.” Nanda’s case study on Howrey’s demise concludes with “Ruyak’s Reflections.” The “no regrets” line could lead to interesting classroom discussions about accepting responsibility, but it doesn’t appear in the Howrey study. Ruyak’s explanations for the firm’s failure do.

One explanation that receives no serious attention in the case study is Ruyak’s observation that the partnership lacked patience and loyalty to the firm: “The longer-term Howrey people realized that our profitability jumped around a bit,” he said. “The people who were laterals, maybe, did not.” (p. 15)

Perhaps the potential for institutional instability that can accompany aggressive inorganic law firm growth receives greater emphasis in classroom discussions of Howrey and Bingham than it does in Nanda’s written materials. In that respect, both firms are case studies in management failure that is regrettably pervasive: a wrongheaded vision of success and a reliance on misguided metrics by which to measure it.

THE BINGHAM CASE STUDY — PART I

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“For the first time since I’ve been in this job, we have all the pieces we need to do our job.”

That was former Bingham McCutchen chairman Jay Zimmerman’s penultimate line in the September 2011 Harvard Law School Case Study of his firm.

Oops.

Harvard Law School Professor Ashish Nanda and a research fellow developed the study for classroom use. According to the abstract, it’s a textbook example of successful management. It demonstrates how a firm could evolve “from a ‘middle-of-the-downtown pack’ Boston law firm in the early 1990s to a preeminent international law firm by 2010.”

Oops, again.

Familiar Plaudits

At the time of Nanda’s study, the profession had already witnessed a string of recent big firm failures. He should have taken a closer look at them. In fact, only seven months before publication of the Harvard Study, Howrey LLP was in the highly publicized death throes of what was a preview Bingham’s unfortunate fate.

Bingham’s Zimmerman and Howrey’s last chairman, Robert Ruyak, had several things in common, including accolades for their leadership. Just as Nanda highlighted Zimmerman’s tenure in his study, two years before Howrey’s collapse, Legal Times honored Ruyak as one of the profession’s Visionaries. Along similar lines, less than a month after publication of the Harvard study, Dewey & LeBeouf’s unraveling began as partners learned in October 2011 that the firm was not meeting its revenue projections for the year. But Dewey chairman Steven Davis continued to receive leadership awards.

Perhaps such public acclaim for a senior partner is the big firm equivalent of the Sports Illustrated curse. Being on the cover of that magazine seems to assure disaster down the road. (According to one analyst, the SI curse isn’t the worst in sports history. That distinction belongs to the Chicago Cubs and the Billy Goat hex. But hey, anyone can have a bad century.)

Underlying Behavior

The Lawyer Bubble investigates Howrey, Dewey, and other recent failures of large law firms. The purpose is not to identify what distinguishes them from each other, but to expose common themes that contributed to their demise. With the next printing of the book, I’m going to add an afterword that includes Bingham.

If Nanda had considered those larger themes, he might have viewed Bingham’s evolution much differently from the conclusions set forth in his study. He certainly would have backed away from what he thought was the key development proving Bingham’s success, namely, aggressive growth through law firm mergers and lateral hiring. He might even have considered that such a strategy could contribute to Bingham’s subsequent failure — which it did.

To find those recent precedents, he need not have looked very far. Similar trends undermined Howrey, Dewey, and others dating back to Finley Kumble in 1988. As a profession, we don’t seem to learn much from our mistakes.

The MBA Mentality Strikes Again

What caused Professor Nanda to line up with those who had missed the fault lines that had undone similar firms embracing the “bigger is always better” approach? One answer could be that he’s not a lawyer.

Nanda has a Ph.D in economics from Harvard Business School, where he taught for 13 years before becoming a professor of practice, faculty director of executive education, and research director at the program on the legal profession at Harvard Law School. Before getting his doctorate, he spent five years at the Tata group of companies as an administrative services officer. He co-authored a case book on “Professional Services” and advises law firms and corporate inside counsel.

It’s obvious that Nanda is intelligent. But it seems equally clear that his business orientation focused him on the enticing short-term metrics that have become ubiquitous measures of success. They can also be traps for the unwary.

In Part II of this series, I’ll review some of those traps. Nanda fell into them. As a consequence, he missed clues that should have led him to pause before joining the Bingham cheerleading squad.

Meanwhile, through December 6, Amazon is offering a special deal on my novel, The Partnership: It’s FREE as an ebook download. I’m currently negotiating a sale of the film rights to the book.

SPINNING DEWEY’S HEROES

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Dewey & LeBoeuf’s latest designated savior is Martin J. Bienenstock. The NY Times says that he faces “perhaps the most challenging assignment of his career: the restructuring of his own law firm.”

According to the Times, his challenges include bank negotiations to restructure Dewey’s outstanding loans, consideration of reorganization options, and avoiding liquidation. Given the complex array of fiduciary duties accompanying such a job description — as a partner to his fellow partners while also acting as counsel to the partnership as a whole without favoring any individual partner or group of partners — it’s a daunting task.

Last month’s star was Steven H. Davis, whose assurances during an interview for Fortune magazine produced an article titled “Dewey & LeBoeuf: Partner exodus is no big deal.” Right — Dewey started the year with 300 partners; 30 were gone by the time of Davis’s interview; 40 more have left since then. Among his least prescient remarks: “If the direction we’re taking the firm in was somehow disapproved of, then the reality is that there ought to be a change in management. But I don’t sense that.”

The more things change…

Less than a week later, a five-man executive committee replaced Davis. One member of the new “office of the chairman” is Bienenstock. It’s ironic because he exemplifies Dewey’s business strategies that may have worked well in his case, but less so in others’, namely, lateral hiring and compensation guarantees. Prior to joining Dewey & Leboeuf in November 2007 (a month after the merger creating it), he’d spent 30 years at Weil, Gotshal & Manges. While he sat on Dewey’s management committee that Davis chaired, his new firm became one of the top-10 in 2011 lateral partner hiring.

According to The Lawyer, Bienenstock was reportedly among those who recently agreed to cap personal earnings at $2.5 million. That’s a start, but the article also said that some partners’ deferred income took the form of promissory notes due in 2014. It’s interesting that a firm already on a $125 million hook for something that law firms rarely do — offering bonds that begin to come due in April 2013 — would add even more short-term debt to its balance sheet. Add it to the list of unexpected complications that accompany partnership compensation guarantees.

The real Dewey heroes

This rotating focus on a handful of lawyers at the top obfuscates the importance of everyone else. Rainmakers come and go — and their seven-figure incomes survive. Bienenstock is an example. So are the many former Dewey management committee members who have already left, including John Altorelli, whose parting words showed little compassion for his former partners, associates, paralegals and staff. Even top partners who managed firms that went bust seem to land on their feet. After Howrey failed, its former vice chairman, Henry Bunsow, got a reported multi-million guaranteed compensation deal at Dewey in January 2011. Welcome to the lateral partner bubble.

Lost in the headlines about the stars are the worker bees with limited options and real fears. An Above the Law post from a seasoned Dewey paralegal captures the angst:

“I know these facts do not necessarily make for sexy headlines but I do ask that you report on the following. While some laugh and play their lyre as the city of Rome burns, it will be well over one thousand staff members who will also be gainfully unemployed.”

Add the nearly one thousand Dewey lawyers who have been watching quietly at the unfolding public relations nightmare since Davis’s bizarre interview. As Dewey’s publicity machine pumps out celebrity saviors of the moment, each has drawn more unwanted attention to the firm’s plight than the last. Martin Bienenstock’s appearance in the Times along with the proffered “pre-packaged bankruptcy” option is the latest example.

If Dewey survives the current crisis, Bienenstock’s suddenly magical touch won’t be the reason. Rather, it will survive because an entire law firm —  partners, associates and staff — kept noses to the grindstone. The real heroes didn’t go looking for more media coverage of a troubled situation.

Perhaps Dewey’s leaders thought that better press could solve the firm’s crisis. But that approach reverses the relationship between public relations and crisis management, which is simple: manage a crisis properly and the resulting story will write itself.

Here’s the obvious corollary: manage the firm properly and there is no crisis to manage.

THE LATERAL BUBBLE

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Most big law leaders say that they have to keep pushing equity partner profits higher to attract and retain rainmakers. They have repeated that mantra so often and for so long that the rest of the profession has accepted it as an article of faith.

Perhaps it’s true, but two items in the February issue of The American Lawyer prompt this heretical question:

What if the lateral hiring frenzy is creating a bubble?

Victor Li’s “This Time It’s Personal” describes the state of play: lateral hiring is way up. Law firm management consultants, including my friend Jerry Kowalski, predict more of the same for 2012 as firms counter revenue losses from departing partners to prevent the death spiral that can result. Such fear-driven behavior can easily lead to overpayment for so-called hot lateral prospects that turn out to be, well, not so hot.

As I’ve observed previously, the reasons for the lateral explosion have much to do with big law’s evolution. Its currently prevailing business model encourages partners to keep clients in individual silos away from fellow partners, lest they claim a share of billings that determine compensation. Paradoxically, such behavior also maximizes a partner’s lateral options and makes exit more likely. In other words, the institutional wounds are self-inflicted.

But the article quotes several firm leaders who emphasize that, while money was important in motivating some of the partners they acquired, the search for a global platform also mattered. Frank Burch, cochair of DLA Piper, acknowledges that enticing a lateral hire requires that the money offered be comparable. But he also says that his firm “did a lot of hiring from firms that reported higher profits per partner” than DLA Piper. The article cites four: Paul Hastings; Skadden, Arps, Slate, Meagher & Flom; White & Case; and Morgan, Lewis & Bockius.

Except “Crazy Like a Fox” by Edwin B. Reeser and Patrick J. McKenna (also in The American Lawyer February issue), makes the correct observation that a firm’s average PPP is not all that informative. The authors’ focus principally on the growing cohort of non-equity partners in a climate where clients are unwilling to pay for first- and second-year associates. But they make a telling point on a seemingly unrelated topic: the income gap within equity partnerships has exploded.

They note that a few years ago the equity partner pay spread was typically three-to-one; some places it’s now ten-to-one or even twelve-to-one:

“Over the last few years there has been a dramatic change in the balance of compensation, to a large degree undisclosed, in which increasing numbers of partners fall below the firm’s reported average profits per equity partner (PPP)…Typically, two-thirds of the equity partners earn less, and some earn only perhaps half, of the average PPP.”

(Trying to justify this trend, some firm leaders have offered silly explanations, such as geographical differences.)

Now apply this learning to Li’s article. A firm’s average PPP isn’t luring high-powered lawyers; the money at the top is. Perhaps the desire to provide clients with a better global platform plays a role in some laterals’ decisions, but most of the firms experiencing the highest number of lateral partner departures in 2011 are already worldwide players. In fact, four firms — DLA Piper, K&L Gates, Jones Day, and SNR Denton — are simultaneously on both the most departures and most hires list.

Consider an example. Last year when Jamie Wareham became big law’s highly public $5 million man, did leaving Paul Hastings for DLA Piper improve his ability to serve clients? Doubtful. But the bubble question is far more important to the firm: Has Wareham been worth it? Only he and his new partners know for sure.

That leads to a final heretical question: Where a lateral bubble develops, what happens when it bursts or, perhaps more pernicious, develops a slow profitability leak? Nothing good. For the answer, ask those who once worked at Howrey, Heller Ehrman or one of the many other now-defunct firms whose leaders thought that acquiring high-profile laterals offered only upside.

ANOTHER DAY, ANOTHER LAW FIRM MERGER

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It’s now ancient history, but in 2002 Chicago-based Mayer, Brown & Platt (850 lawyers) joined with U.K-based Rowe & Maw (250 lawyers) in a law firm merger that seemed breathtaking. Today, combining firms has become a universal business strategy. Fourteen law firm mergers in the third quarter of 2011 alone brought this year’s total to 43.

Evaluating these ultimate lateral hiring events — wholesale combinations of independent enterprises — is a two-step process: first, defining success and, second, allowing sufficient time (measured in years) to observe results. Senior partners orchestrating such transactions have vested interests in making them look good. So do the management consultants cheering them on. Once they undertake a merger strategy, leaders take herculean steps to vindicate it. Their spin can distract from the downside, but it’s there.

Defining success

Management and its outside consultants often define success in deceptively simple terms: getting bigger and growing equity partner profits. That can be superficial and misleading.

Growth alone doesn’t create value. Recently, Minneapolis-based Faegre & Benson and Indianapolis-based Baker & Daniels announced the creation of Faegre Baker Daniels. Whatever economies of scale exist in the delivery of legal services, firms the size of Baker (320 lawyers) and Faegre (450 lawyers) seem large enough individually to have triggered them long ago. Will their 770-attorney firm operate more efficiently than two components half that size? Doubtful.

But this is certain: combined firms face more potential client conflicts than if they’d remained separate. That results from the interaction between the Rules of Professional Responsibility and arithmetic.

Some leaders promote a “bigger platform” as a way to entice prominent laterals. But bringing in seasoned outsiders makes preserving any firm’s culture even more challenging.

Culture shock

Then again, maybe there’s little culture to preserve after most significant combinations. Baker & Daniels is in the Am Law 200; so is Faegre. Together they’ll move into the Am Law 100. Is that a good thing?

Merger leaders always proclaim their determination to preserve each firm’s culture. But, those attending the first Faegre Baker Daniels partnership meeting won’t know half the people in the room. Likewise, being one of 100 equity partners is different from being one of more than 200 — and not in a way that enhances collegiality or a sense of community. Looking for a central identity or a geographic core from which senior partners working together can produce common principles? The new Faegre Baker Daniels firm won’t even have a national headquarters.

The winners

In the end, most merger proponents pander to the simplistic hope that synergy of the combined entity will produce value greater than the sum of its partner profits parts. If that happens, it’s a good deal economically for the survivors at the top. But many others may find themselves on the wrong side of a merger’s “restructuring opportunities” — a euphemism for shrinking the new equity partnership.

According to the latest Am Law listing, Baker & Daniels’ partnership has two tiers (equity and non-equity) and an equity partner leverage ratio of 1.71. Faegre has a single equity partner tier and a leverage ratio of 1.09. Something’s gotta give.

Faegre’s chairman Andrew Humphrey, a transactional attorney who will serve as the combined Faegre Baker Daniels chief executive partner, said the new firm would have a “unified compensation structure.” He plans to manage “partner expectations” and “incentivize people the right way.” I don’t know what he has in mind, but some current partners probably won’t like the results of that exercise.

Likewise, mergers put pressure on leaders to push everyone harder. They want to cite increases in billings, billable hours, and leverage as proof that the new institution is better. Never mind that no one will ever know what the base case — no merger — would have produced for either firm independently.

Even a short-term increase in partner profits doesn’t prove the long-term value of the transaction. For example, Howrey’s merger and lateral hiring binge began in 2001. Seven years later it had record profits, but by early 2011 the firm was gone.

I know, I know — Howrey was different. As I warned at the outset, beware of that spin-thing.