Back from the Brink
These Five Firms Had to Change Their Direction to Change Their Fate
Posted Sep 1, 2004 3:48 PM CST
By Jill Schachner Chanen
Sitting in a Minneapolis hotel conference room last spring, rob beattie had every reason to wonder where he would be working in a few months. All around him the partners who had remained at Oppenheimer Wolff & Donnelly were hashing out the future of the firm, if there was to be one at all.
For Beattie, the scene was all too familiar. Just four years earlier he had watched his old firm implode. Although Oppenheimer once boasted 350 lawyers in cities across North America and Europe, it, too, seemed destined for a similar fate. Certainly, it wouldn’t be the first seemingly successful firm to fail—or the last. Not that long ago, headlines had announced closings at powerhouse firms like Brobeck, Phleger & Harrison; Altheimer & Gray; and Hill & Barlow. Yet for every Brobeck there is an Oppenheimer—a firm that faced potentially fatal challenges and managed to come back from the brink and find new success.
Management consultants and lawyers posit a variety of reasons for law firm turnarounds. Some cite formal management structures, for example, or a professional sales staff that can boost client development. But as any lawyer knows, law firms come in too many shapes and sizes for any one-size-fits-all fix. What works for one may spell disaster for another.
A recent survey by Washington, D.C.-based management consultants The Brand Research Co. and Greenfield/Belser underscores the point. The firms surveyed 70 law firms that had been deemed either a success (for achieving a 5 percent increase in revenue for two successive years) or on the brink of failure. The researchers were looking for common characteristics among each group to explain why some firms fail and others succeed. They found none.
Instead, says researcher Mark Greene of The Brand Research Co., the survey showed several important factors. Among them: reinvesting profits instead of distributing them, hiring nonlawyer managers, and fostering a strong firm culture.
Yet Greene did find a theme that cropped up only among the firms that had failed: the idea that being the best was all it took to succeed. This didn’t surprise Greene. Being the best is simply not enough in today’s marketplace, he says. “You have to be willing to take risk and be willing to embrace change.”
Chicago consultant Joel Henning, however, believes success has more to do with money than response to change. Says Henning, lawyers simply have to work harder and take home less. But as Oppenheimer Wolff & Donnelly and these other firms found, sometimes an open mind helps, too.
Oppenheimer Wolff & Donnelly in Minneapolis
Problem: Overextended and bleeding money
Solution: Re-establishing itself as a local firm
By the time Oppenheimer’s partners met last year to discuss the firm’s future, the damage was already done. The last vestiges of its overzealous expansion—offices in California and New York—were shuttered. The Paris office had been spun off. The capital reserve fund was tapped out.
The partners had one last question: Now what?
But Oppenheimer’s management committee had a plan. While a sea of red ink had been flowing through its satellite offices, the Minneapolis home office had always stayed in the black. Very black. It also had strong practice groups and a loyal client base. The firm could carry on if the partners were willing to go back to the firm’s century-old roots as a Minneapolis law firm.
“It was an office that did quite well and was built around a core of people who had practiced with one another for a very long time,” says Beattie. “We had a strong business model that focused on corporate business practices, corporate litigation and intellectual property. ... If we could get through to the other side, into 2004, we could all do very well.”
According to Beattie, lawyers would not have accepted the plan if it had required them to tolerate long-term economic losses. But the financial history of the Minneapolis office supplied proof that the losses had stopped and within a year the firm would once again be profitable.
The plan would work only if the firm stayed largely intact, however. Otherwise, the overhead would be too high to return to profitability. Beattie credits firm chair Brad Keil’s passionate leadership as one of the primary reasons that the partners voted to carry on.
As Beattie tells it, Keil listened patiently as his partners vented their anguish during the firm’s marathon partner meeting last year. The session proved cathartic. After six hours, a majority of partners realized they had not only a bond but also a common purpose. And no one wanted to see any more lives devastated by office closures. “There is no question that the economics of the practice were primary, but we also were able to demonstrate that, on a going-forward basis, things were going to work out,” says Beattie. “Also, on the human side, we could demonstrate the bond and pride we had working together.”
Now, more than a year after that fateful meeting, Oppenheimer is thriving as a local law firm with its corporate transactional, litigation and intellectual property practices providing the predicted revenues.
The firm has no immediate plans for growth. Continued stability is its only goal. But Beattie is confident that the future only portends good things. “Professional organizations are fragile but if well-tended can do quite well,” he says.
Kavanaugh, Scully, Sudow, White & Frederick in Peoria, Ill.
Problem: Focusing on the urgent, not the important
Solution: Hiring a nonlawyer manager
Let’s face it: In this day and age no lawyer has the time to figure out whom to call to upgrade the firm’s computer system. But that is exactly the type of thing that the partners at Kavanaugh Scully found themselves doing on a near daily basis.
“You could be working on a multimillion-dollar deal and someone could come in and say the fax machine is broken. You had to stop the moneymaking and take care of it,” says Brian Mooty.
Like other small law firms, the partners at 12-lawyer Kavanaugh Scully had managed the firm themselves. For most of its 100 years, their one-partner, one-vote approach had worked fine. But that management style was taking its toll, particularly as technology became more integrated into the firm. “We were meeting weekly but we had no sense of direction. Often we were dealing with urgent things instead of important things,” says Mooty.
The management issue also was masking bigger problems. Partner tensions over mundane issues were spilling over onto more important ones. Profits were flat. No one had control of the budget. There was no plan for the future. The firm was adrift.
Then the partners made a crucial decision to bring in an outside consultant to help fix the firm. It would be a turning point. Mooty says the consultant helped the partners create an entirely new management structure. An executive committee of partners was formed to make strategic decisions for the firm’s future. But day-to-day responsibilities for items like budgeting, financial reporting and operations were given to a single person: a nonlawyer manager.
The decision was particularly controversial because the firm had previously tried using a nonlawyer manager, and the experiment ended in disaster. Those partners who remembered the fiasco were skeptical.
Minds were changed, says Mooty, after lawyers looked at the amount of time they were devoting to management issues. They went on to devise a lengthy job description for the manager, obtaining partner buy-in to allow the new manager to actually do the job.
Now, four years later, the consensus is that the firm’s manager earns her salary—and then some. By delegating responsibility to the manager and giving her the authority to implement change, the partners helped restore profitability.
“We still spend time on management, but now it’s spent on higher level issues rather than whether we need a new fax machine,” says Mooty.
STICKING TO WHAT YOU DO BEST
Hughes Hubbard & Reed in New York City
Problem: Stagnating profits
Solution: Not being all things to all clients
No one could ever accuse Hughes Hubbard & Reed of foundering. The 100-year-old firm has an enviable client roster and counts some of the biggest names in the legal profession as partners.
Yet, chair Candace Beinecke says the firm was “not where we wanted to be in terms of the strategy, profile and profitability.”
While the firm was not losing partners, it was, according to some news reports, stuck in a rut. Five years ago, it had fallen off top-firm surveys, and trade publications were reporting that profits had not significantly risen, even though other firms at the time were experiencing record profitability.
Simply put, Hughes Hubbard needed a jumpstart.
Merger might have been an option—there were suitors—but Beinecke had other plans. “Hard work is best done yourself,” she says. “We thought we had something pretty unique. The only [option] was to focus hard on strategy and make some bets on how to take the firm forward.”
Beinecke and her partners began a period of introspection to figure what those bets should be. They began conducting informal interviews with clients, asking why they used the firm and listening hard to what they had to say.
Over and over, Hughes Hubbard heard the same thing: Clients hired the firm for extremely important corporate deals and litigation—for which the client was willing to pay top dollar. In particular, clients cited the firm’s work in areas like mergers and acquisitions, joint ventures, and international arbitration and litigation.
The clients also guided them to areas where they saw future legal needs, including intellectual property litigation, products liability work, white-collar criminal defense and securities litigation.
It was those informal interviews that formed the firm’s strategy for growth: Hughes Hubbard was never seen as a firm for all matters and never would be. Instead, the firm would strengthen the core practice areas for which it was best known—and best able to command big fees. It would also concentrate on the areas most important for its clients’ future needs.
As a result, lateral hiring became more focused on lawyers who could bring “depth” to these practice areas, Beinecke says. Lawyers also made a concerted effort to cross sell these services to existing clients, rather than marketing to new ones. That process is easier, Beinecke notes, when lawyers can say with absolute confidence that the firm can really help in particular areas.
By limiting its practice to those areas where it can charge a premium, Beinecke says, the gamble has paid off handsomely. She reports increased revenues and profits for the last four years and successful lateral hiring.
“But I do not define our success by profits, though they have grown,” she says. “We are doing the kind of work we want to do, and it is useful to our clients.”
A LOT OF LITTLE FIXES
Hiscock & Barclay in Syracuse, N.Y.
Problem: Overreliance on one client
John Langan had just moved back to Syracuse from New York City and joined Hiscock & Barclay when he heard some disturbing news. The firm’s largest client, Key Bank, was merging with another bank.
He knew trouble was on the horizon when he overheard one partner ask another whether the merger partner had counsel. The other lawyer’s answer: “It’s two men named Jones and Day.”
Key Bank accounted for almost two-thirds of the firm’s revenues and its loss proved devastating to Hiscock & Barclay. The 150-year-old firm had expanded to 110 lawyers and had opened numerous offices throughout the East Coast in response to Key Bank’s moves. Too many lawyers had grown comfortable having work handed to them.
Consultants told the firm they might as well start wrapping things up, but Hiscock & Barclay decided to press on. With an eye toward survival, the firm cut half its work force and closed all but two of its satellite offices. Then the partners set to work making sure that such mistakes would never be made again. “We were at the precipice,” says Langan, now managing partner. “I think industry consultants would tell you that a great change agent is being at the brink of disaster.”
Looking down into the deep hole that the departure of Key Bank had created, the partners realized that a diverse client base was key to the firm’s long-term viability. The partners also recognized that it had a unique opportunity to be a dominant player in the upstate New York legal market. To carry out that strategy, however, would require wholesale changes in the way the firm was used to doing business, which was by relying on a single large client.
Hiscock & Barclay immediately moved to a one-tier partnership from a two-tier one. The restructuring allowed the firm to bring more full-equity partners into its ranks for business development purposes.
It also created a new compensation committee, separate from the existing management committee, to independently and more objectively compensate partners. Compensation was to become merit-based with a special emphasis on rewarding partners for new business.
At the suggestion of an outside consultant, the firm created task forces of lawyers based on interdisciplinary practice groups charged with cross selling to existing clients as a way to increasing revenues.
Hiscock & Barclay also added a nonlawyer chief operating officer to make sure the firm did not derail from its plans. Langan says the COO not only took control of firm administration but also restored financial integrity by constantly minding the bottom line. For example, Langan says the COO encouraged the firm to hold retreats to discuss new business development efforts when revenues appeared to be flagging and also to purchase new computer systems with time and billing software to help stimulate revenues.
Now that the firm is squarely back on its feet, Langan says the firm doesn’t want to stop growing, it just wants to grow smarter. It will no longer open offices without an economic reason as it did before. And any lateral hires and new offices must have something to offer to the firm. Growth now may be slow, he says, but it will be wise.
REVVING IT UP
Arent Fox in Washington, D.C.
Problem: Lack of direction
Solution: Developing a strategic plan
For the last five years or so, lawyers at Arent Fox had been hard-pressed to tell what the future held for their firm. Infighting had caused the firm to lose not only partners—a lot of them—but also its sense of direction. Offices were opened and closed in other U.S. cities and in Europe. Bad press followed.
A long-time fixture in Washington, D.C., power circles, Arent Fox began a series of merger talks as a way to find direction. Instead, it only further divided remaining partners. But it wasn’t all bad—one good thing did come out of the talks, says managing partner William Charyk. The partners decided they didn’t want to merge after all. Partners also learned a lot about the firm’s strengths—valuable information they used to create an ambitious strategic plan to guide the firm into the future.
The plan calls for a total departure from the firm’s traditional organization by practice groups. Now the lawyers are being reorganized into three key areas in which the firm has a strong reputation and client base. These areas, which present untapped areas of growth, are life sciences, intellectual property, and commercial and multifamily real estate. Industry-focused practice groups in long-term health care and nonprofits also are being established.
Charyk acknowledges that growing pains are imminent, especially for lawyers whose practices do not fit into these so-called core engine areas. He says the firm does not want to force anyone out, yet the onus is on the lawyers to find a place for themselves within the firm’s new structure. And laterals will be considered only if they fit a specific niche.
The plan requires lawyers to rethink their traditional roles as members of specialized departments. Now they will become part of broader teams. One aim is to spur revenues by cross selling services better to existing clients, thus helping the firm to charge a premium.
“In the tax-exempt area, for example, we have lawyers with different capabilities—from tax-exempt bonds to litigation to antitrust—but I doubt that you could have found one person in the firm who during a 30-minute presentation with an executive director could pull all those resources together. Now the objective is to train people about what we could do and the fact that one firm can do it,” says Charyk.
Arent Fox is backing up the new strategy with other internal changes. According to lawyer Mark Katz, a new emphasis is on mentoring in the area of business development. “We decided that we would be much better off as a firm if we each took a few hundred hours to work with other partners and associates to help them with business development,” he says.
To support this mentoring, the firm is trying to dislodge the old-school mentality of compensation and instead encourage cooperation. “It’s important to reward people who are making the greatest contributions to the law firm,” says Katz. “But you have to redefine who is contributing to its success.”
To reinforce their dedication to making the plan work, the partners invested in a new capital reserve account, Charyk says. While declining to specify the amount, he says it is enough to fully fund the firm’s efforts.
While it’s too early to gauge the results of Arent Fox’s new strategy, Charyk knows it will be a challenge to keep the firm on its course. “It’s a high energy process,” he says.
“You have to constantly restock the pond to make sure we have everyone’s commitment. But we see this as key to our growing success.”
Jill Schachner Chanen, a lawyer, is a legal affairs writer for the ABA Journal.