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October 19, 2011 6:48 PM

As Lateral Losses Mount, McDermott Leaders Focus on Growth

Posted by Brian Baxter

UPDATE: 11/7/11, 6:42 p.m., EDT. Another McDermott lawyer, tax partner Margaret Wilson in New York, has left the firm for Morgan, Lewis & Bockius.

More than two years into its current management regime, McDermott Will & Emery has seen at least 38 partners—including several practice group leaders—leave in 2011.

The latest defectors: Stephen Shahida, the head of the firm's IP litigation group in Washington, D.C., who joined Weil, Gotshal & Manges on Monday, and Gary Moss, the head of the IP practice in London, who is leaving for British IP boutique EIP.

The departures of Shahida and Moss follow those of three other partners earlier this month: former New York–based restructuring cochair Geoffrey Raicht, who moved to Proskauer Rose; former IP partner and East Texas practice head David Stein, who joined Akin Gump Strauss Hauer & Feld; and Palo Alto–based tax partner Roderick Donnelly, who left for Morgan, Lewis & Bockius.

The lateral losses come amid declining revenues and a shrinking equity partnership (though not every partner who left this year had an equity stake). Am Law 100 figures show that McDermott's gross revenue fell from $966 million in 2008 to $788.5 million in 2010. The firm, which like many others laid off attorneys and staffers during the recession, saw its equity partner numbers drop from 266 to 185 during the same period.

Interviews with 11 former partners and three legal recruiters and consultants—all of whom spoke on the condition that their names not be used—suggest that while high turnover is not new to McDermott, a lack of strategic vision on the part of the firm's current leaders combined with certain financial factors has accelerated the churn.

In an October 13 interview, however, those leaders strongly disputed that characterization, downplaying the departures, touting the addition of 19 partners and 11 counsel to offset the losses, and insisting that McDermott is committed to growing in key areas.

JeffSto"Looking at ins and outs can be misleading," says litigation partner Jeffrey Stone (right) in Chicago, who was elected cochair of the firm two years ago, along with New York–based litigation partner Peter Sacripanti. "There is an intelligent and strategic growth initiative going on here."

Stone and Sacripanti say that 2011 has seen McDermott grow in head count (including new fee-earners), gross revenues, and profits. They also cite the addition this year of 25 lawyers—partners, counsel, and associates—to the firm's IP practice. And they note that McDermott continues to keep costs down for itself and, by extension, its clients.

The cochairs declined to comment on specific lateral departures, but say that few of those who left this year held significant, firmwide leadership posts. Stone and Sacripanti also would not discuss which of the moves may have been byproducts of McDermott's new strategic vision.

"I'm not going to say anything bad about any of our former partners, and I'm not going to comment on any individual," Sacripanti says. "That's not our style, and there's just no reason to do that. Some [departures] were voluntary and some were involuntary, and I'll just leave it at that."

GLOBAL FOCUS

Asked to identify the firm's strongest practice areas, Stone points to health care, employee benefits, tax, and private client and wealth management, and adds that white-collar litigation and IP are growing as well. He says the firm's middle-market corporate practice is strong in both the U.S. and Europe and that transactional work out of Asia is another bright spot. In the latter category, McDermott advised a group led by Fila Korea and Seoul-based Mirae Asset Private Equity earlier this year on their $1.2 billion acquisition of golf gear maker Acushnet.

PeterSac

Stone and Sacripanti (left) see that deal as a sign of things to come for the firm''s Korean-born and Korean-speaking lawyers, and say McDermott is poised to capitalize on a liberalization of South Korea's legal market thanks to a recently passed free trade deal that could lead U.S. firms to open offices in that country.

The firm's cochairs also praise McDermott's other Asian initiatives. In May, for instance, the firm relocated Brussels antitrust partner Frank Schoneveld to the Shanghai offices of Chinese alliance firm MWE China Law Offices, which launched four years ago. McDermott developed the exclusive referral relationship with MWE China to overcome regulatory hurdles in practicing Chinese law.

Stone and Sacripanti point to the opening of a Paris office in April as further proof that McDermott is committed to investing overseas. The firm, which currently has 12 lawyers in Paris—five of them partners—made its most recent lateral hire there in September. McDermott also restructured its London office and moved into new space following a series of recent departures, as reported in September by U.K. publication Legal Week. The firm hopes to double its 53-lawyer London presence within three years.

OUTBOUND TRAFFIC

London was the scene of McDermott's first major loss this year, when the office's former managing partner, Doron Ezickson, left as part of a nine-partner energy and commodities team that joined Cadwalader, Wickersham & Taft in January. (Another energy partner, Stefan Schmitz, jumped to Reed Smith that same month, three years after joining McDermott's London office.)

The Cadwalader-bound group also included Paul Pantano, Jr., a member of McDermott's management committee and the head of its energy and commodities practice, and Karen Dewis, a former management and executive committee member who had been with McDermott since she was a summer associate almost 25 years ago. (Dewis was cohead of McDermott's global M&A group at the time she left.)

In addition to Dewis, Pantano, and Ezickson, who joined McDermott in 2008, six other practice and subpractice group heads from the D.C., Houston, London, and New York offices made the move to Cadwalader.

The departures continued in February, when Hogan Lovells hired Federal Energy Commission practice head Michael Yuffee in Washington and Houston-based energy and infrastructure partners David Locascio—the cochair of McDermott's project development, finance, and infrastructure practice—and Jose Vittor.

In March litigator Allan Schare, the former co–managing partner of McDermott's Los Angeles office, left for local shop Theodora Oringher and D.C.–based labor and employment partner Eric Conn joined Epstein Becker & Green. In April corporate partner Christopher Zochowski in D.C. left for Pillsbury Winthrop Shaw Pittman.

May brought more lateral movement. Former IP partner Michael Keller, who joined the firm's Miami office in December 2009, left for the Fort Lauderdale office of Roetzel & Andress. Vinson & Elkins grabbed antitrust partner Craig Seebald in D.C. and litigation partner Matthew Jacobs in Palo Alto. White-collar litigation head Abbe Lowell also exited, leaving McDermott after four years to return to Chadbourne & Parke and taking partners Pamela Marple and Christopher Man with him.

Chadbourne and Vinson weren't done hiring from McDermott. Vinson added litigation partner Jason Levine in August, while Chadbourne picked up litigator Michael Socarras, both of whom are based in D.C. Others leaving the firm that month included Palo Alto–based tax partner John Ryan, who joined Bingham McCutchen, and Chicago-based health care partner Roger Strode, who went to Foley & Lardner.

Those moves followed the departures of corporate partner Mary-Laura Greely in Boston to Brown Rudnick, private equity partner Matthew Rizzo in New York to Sidley Austin, corporate partner Jacqueline Hodes in Miami to DLA Piper, and corporate partner Edward Tuerk in Chicago for an in-house position at GE Capital.

Meanwhile, McDermott shuttered its San Diego office, allowing Perkins Coie to pick up former emerging companies and venture capital group chair Peter Townshend, along with ex-partner George Colindres and associate Monique Ho, both of whom became of counsel at Perkins Coie. Elsewhere in the Golden State, Hunton & Williams hired health care partner Douglas Mancino in Los Angeles to cohead that firm's health care practice.

FINANCIAL FACTORS

Former partners and legal recruiters and consultants interviewed by The Am Law Daily say one reason for the revolving-door atmosphere at McDermott is the large number of income partners the firm has always had relative to the size of its equity partnership.

While service partners with an equity stake are well-paid, they earn considerably less than top capital partners at the firm, which operates under the so-called Chicago model of law firm management. Some ex-partners claim this two-tier structure is chasing talent away because it fosters an "eat-what-you-kill" mentality by rewarding rainmakers handsomely—between $2.5 million and $3.5 million a year—and making younger partners wait up to 15 years before reaching equity status.

"I really think the two-tier model is dead," says one former McDermott partner. "I think these days one-tier is the way to go."

Stone bridles at the suggestion that McDermott shunts lower-earning partners aside.

"It hasn't been [that way] for six to eight years," he says. "We're instituting a plan where we'll be compensating individuals based not only their individual performances, but on the performance of their group. So the 'eat-what-you-kill' reputation is a misnomer."

Sacripanti says the culture at McDermott, whose roots are in Chicago, is built around teamwork and a "can-do midwestern" attitude. Stone underscores that point by saying he adheres to a "no-asshole rule," and cites a Stanford University professor's book on building better workplaces that mentions McDermott as employing just such a policy.

"We don't allow screamers in the hallway or people that are abusive to staff," Stone adds. "We come down on them, both in terms of compensation and moral prodding, and that's a deep part of our culture."

Culture aside, several ex-partners say McDermott needs to settle on a strategy for what kind of firm it wants to be. For example, these former partners argue, the kind of international expansion the firm is currently focused on increases overhead, which in turn puts pressure on the hourly rates the firm charges for its services.

In what has been a tough financial stretch for many firms, McDermott's profits per partner have fluctuated over the last three years, reaching $1.52 million in 2008, dipping to $1.3 million in 2009, and climbing to $1.46 million in 2010, according to Am Law 100 data. Considered against the backdrop of a 5 percent drop in gross revenue, last year's 15 percent increase in profits per partner fits in with the broader cost-cutting trend among Am Law 100 firms.

RIGHTING THE SHIP?

While this year's head count numbers won't be final for several months, McDermott had 41 fewer lawyers in 2010 (970) than it did in 2009 (1,011), according to an annual survey by sibling publication The National Law Journal. With nearly 2,000 employees spread across 17 offices, McDermott ranks as the twenty-first-largest firm in the U.S. by attorney head count, according to The NLJ.

McDermott was hardly alone in seeing head count dip during the recession, but several ex-partners interviewed for this story say that unlike many large firms,which purposefully thinned their ranks, McDermott shrank at least in part as a result of internal disagreements over strategy and direction.

One source within McDermott suggests another reason for the reduction in the size of the equity partnership: a change in the "guarantees" or economic contributions made by certain partners necessary to be considered for equity status under The American Lawyer's guidelines.

Several former partners, legal recruiters, and consultants specifically cite McDermott's dual management structure as problematic. These critics acknowledge that Stone and Sacripanti face tough challenges, but feel they need to act faster to get the firm on the right track.

"I think they've been a little too stringent and critical in looking at laterals," said one outside consultant. "I'd like to see them be less conservative in making new hires."

Others argue the opposite: that while the broader market for partner hiring is clearly volatile, a lack of due diligence on McDermott's part when bringing in lateral partners explains some of the recent movement.

Three former partners claim the firm suffers from yet another problem: practice groups more focused on their own bottom lines than their colleagues' collective needs. And though the litigation, health care, and IP practices remained lucrative amid the recession, others like tax and corporate suffered. Hoarding rather than sharing the wealth was encouraged because each practice area was evaluated by its own profit/loss figures.

That such factionalism exists is not a new complaint. The American Lawyer detailed the phenomenon in a 2006 story that examined how McDermott's fiscal prudence helped it achieve financial success, even as the firm lost key partners from its M&A, private equity, IP, and restructuring groups over a perception that the firm lacked the cohesion needed to build those practices.

Stone says McDermott's commitment to keeping costs low hasn't changed, emphasizing that the firm carries no bank debt at a time when such debt has hurt—and even helped destroy—other firms. He also scoffs at the suggestion that McDermott's management gives some practice groups more resources and attention than others.

"If someone's back isn't getting scratched, of course they're going to say, 'I've got an itch I want taken care of,'" Stone says. "We plan on growing in places where we can be really good, and that's how we've invested."

In addition to bolstering its partnership ranks by making lateral hires and naming 27 new partners at the end of 2010, Stone and Sacripanti say McDermott has also invested by bringing on 124 new associates this year and has taken advantage of soft real estate markets by moving into new office space in LondonMiami, and Washington.

Despite the losses of Shahida, who handled International Trade Commission work and served as a recruiting partner for the D.C. office's IP practice, and Moss, Stone and Sacripanti say they intend to continue expanding the firm's IP group.

They cite the hire almost two years ago in Palo Alto of former Sonnenschein Nath & Rosenthal partner Yar Chaikovsky—whose exit from that firm was handled somewhat awkwardly—as evidence that McDermott remains committed to investing in IP.  Recent IP hires include partner Lin Deng in Menlo Park, California, who came over from boutique Kenyon & Kenyon, where she was an associate, and IP partner John Magluyan in Orange County from Fitzpatrick, Cella, Harper & Scinto, according to a story by sibling publication The Recorder. Legal Week reports McDermott also made two IP hires this week in Germany.

Others joining McDermott this year include a three-partner private client team from Weil's New York office led by that firm's former estate planning chair, Carlyn McCaffrey, as well as energy partner Iskender Catto from Kirkland & Ellis. McDermott's D.C. office added antitrust partner Jeffrey Brennan from Dechert in July and energy partner Jeffrey Watkiss from Bracewell & Giuliani in September.

The firm also took several partners from Edwards Angell Palmer & Dodge, which became Edwards Wildman Palmer this month after completing a merger. Former Edwards Angell litigation partner Matthew Martel joined McDermott's Boston office in February, while partners Edward Eynon and Margaret Binzer joined the firm's government strategies practice this week in D.C. (Binzer, who joined Edwards Angell last year from Womble Carlyle Sandridge & Rice, was of counsel at her previous firm.)

Despite all the turnover, Stone and Sacripanti insist that McDermott's senior business leaders remain in place and that the firm continues to provide top-notch legal representation to its clients. 

And even skeptics admit that while McDermott may have drifted in recent years, it should be able to right itself. "There have been a lot of defections, but there are still plenty of talented people there who can rise to the occasion," says one former partner. "They can set this ship right."

Stone, who recently left on a two-week trip to Asia, and Sacripanti maintain they are doing just that.

"We don't invest my time or Peter's unless we're really serious about an area or initiative," Stone says. "The firm is growing."

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Very good, in-depth look at a firm with which I was not very familiar. Had noticed a string of departures, however. Well done.

Ask the staff and associates in the (remaining) California offices just how well-enforced that no a**hole policy is.

And maybe go re-read that article in The Recorder, written by Zusha Elinson in March 2010, for a view on “screamers in the hallway” and “people that are abusive to staff.”

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