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March 16, 2011 6:46 PM

Howrey's Lessons, Part 2

Posted by Steven Harper

Howrey--the 55-year-old firm that started as a one-office, Washington, D.C., antitrust boutique and over the last decade grew into a a 13-office global powerhouse--officially dissolved on March 15.

Last month, I concluded my article, "Howrey's Lessons," with skepticism toward Vice-Chairman Sean Boland's recent comment that stunning departures had produced cost reductions that "made the firm much more efficient." Even more incredible (in the way that trial lawyers refer to unpersuasive witnesses) was its outside consultant's statement that "what was happening at Howrey is largely by design." As the firm headed toward dissolution, I didn't expect to be writing about it again.

Then I read an interview with Howrey former chairman Robert Ruyak in which he offered his first explanation for the firm's collapse: Contingency fee matters had risen to 10 percent of billable hours, up from 8.5 percent in 2009 and 3-4 percent in the 1990s.

Two days later, I read Wall Street Journal columnist Peggy Noonan's review of the new book by former secretary of defense Donald Rumsfeld.

Rumsfeld and Ruyak have more in common than the first two letters of their last names. Both are at the center of dramatically unfortunate episodes that occurred on their respective watches. Both look for villains and miss the bigger picture.

A former Reagan speechwriter and conservative columnist, Noonan leads off her review with: "I found myself flinging his book against the wall in hopes I would break its stupid little spine...You'd expect [Rumsfeld] to be reflective, to be self-questioning, and questioning of others, and to grapple with the ruin...He heard all the conversations. He was in on the decisions. You'd expect him to explain the overall, overarching strategic thinking that guided them. Since those decisions are in the process of turning out badly...you'd expect him to critique and correct certain mindsets so that [others] will learn." He doesn't.

Those words also describe Ruyak's unsatisfying explanations for Howrey's failure.

On the firm's European offices:

"The real problem we ran into in Europe was conflicts of interest...It's a different analysis in Europe. But we had to apply the U.S. standards across Europe. That made it difficult to grow because we had to forgo a lot of cases..."

Analysis of potential conflicts issues should have anchored any business plan that began with London (2001) and continued with high-powered lateral acquisitions in Brussels (2002), Amsterdam (2003), Paris (2005), Munich (2007), and Madrid (2008). By July 2008, Howrey was named the "Top U.S. Firm in Europe" by the U.K. publication Managing Intellectual Property--the firm had more than 100 lawyers there and plans for more.

More importantly, firms survive conflicts-related departures. But here, 26 European lawyers (12 partners and 14 associates) in October 2010 supposedly set off a chain reaction that crushed an otherwise healthy, 550-attorney firm that, only a decade earlier, had no European presence.

On document discovery vendors:

"We created a whole portion of the firm to handle [document discovery] efficiently--using staff attorneys and sometimes temporary people, computer systems and facilities." Along came some companies that were "offering to do this work less expensively at a lower price."

But in May 2009, Ruyak had attributed part of Howrey's leading RPL surge on The Am Law 100 to a decision to avoid "areas that suffered significant downturns," singling out for praise the firm's five-year-old document review and electronic discovery center that added $47 million to the top line. So successful was the Falls Church, Virginia, operation that he was considering a second one on the West Coast.

Yet somehow, 75 staff attorneys and 100 temps accounting for 8 percent of Howrey's $570 million gross revenue in 2008 became a key contributor to the firm's demise two years later.

On contingency and alternative fees:

"Unlike corporations that operate on an accrual basis, it's hard to adjust from a cash base on your business to an accrual base where you are deferring significant amounts of revenue into future time periods. Once you make that adjustment, I think it works. But the adjustment period is difficult."

In other words, partners couldn't tolerate the deferred gratification associated with contingency fee matters. But they loved the upside. In 2008, Howrey's average partner profits jumped almost 30 percent, to $1.3 million. When PPP dropped to $845,000 in 2009, Ruyak said 2008 had been an aberration resulting from $35 million in contingency receipts.

Perhaps inadvertently, he revealed the real culprit: a revolution of rising expectations among the already rich. Ruyak put it this way: "Partners at major law firms have very little tolerance for change."

If he's referring to firms that have lost cohesion and a shared purpose beyond a myopic focus on current profits exceeding the last year's, he's right. But that culture exists for a reason. Aggressive lateral growth produces partners who don't know each other. Firm allegiances become tenuous; the institutions themselves become fragile.

Ruyak's self-serving explanations avoid accepting personal responsibility, but that's not their greatest fault. The bigger problem is that other law firm leaders will find false comfort in his litany; it encourages the view that Howrey's challenges were unique. As I said before, they weren't.

 

Steven J. Harper is an adjunct professor at Northwestern University. He recently retired as a partner at Kirkland & Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at www.thebellyofthebeast.wordpress.com. A version of the column above was first published on The Belly of the Beast.

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Finally ... somebody articulates so well what many former-Howrey folks have been trying to say. I think this demonstrates the lengths people will go to in order to protect their egos. Perhaps this is too soon for us to expect self-reflection given the gravity of the situation and the embarassment he must feel, but hopefully with time he will emerge from his own shadow side and take some responsibility. Plus, a heartfelt confession rooted in self-reflection might be healing for himself and many others that have been impacted.

It's not unique to Howrey. Any firm lacking glue (i.e., the reason partners stick together in tough times) is vulnerable. As the author notes,

"Aggressive lateral growth produces partners who don't know each other. Firm allegiances become tenuous; the institutions themselves become fragile."

I could not have said this any better myself. While firms today do need to grow laterally, there is a difference between growth for the sake of growth and slow, steady and smart growth.

Steven J. Harper has written two excellent articles on the topic of Howrey's demise, and they truly capture the dangers of so many major firms today managing themselves by focusing on nothing but the bottom line (and doing whaever it takes to sustain those high profits per partner). They have forgetten the culture and collegiality that is necessary for firms to survive in the long term, and the fact that partners (and assocaites) want to enjoy the practices of law and be proud of how their fiorms treat their lawyers and staff, even at the cost of reducing some profits.

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