October 27, 2010 6:00 AM

The Story Behind Howrey's Very Bad Year

Posted by Julie Triedman

 

Preview from the November 2010 Issue of The American Lawyer

In late March, at a meeting during Howrey's partner retreat at the luxe Ritz-Carlton in Key Biscayne, Florida, a Brussels antitrust partner, Stephen Mavroghenis, lobbed a series of questions at firm management: Why, he asked, had the previous year's financial forecasts been so off? And could management assure him that the 2010 projection would be any more accurate?

Mavroghenis and others had reason to feel concerned. The firm's spectacular dive in profitability in 2009 had come as an unpleasant shock. As late as just before the holidays last year, ten former and current partners say, Howrey CEO and chair Robert Ruyak had reassured them that the firm was likely to come in under estimates--at most 10 percent under the $1 million profits per partner target set the previous March. But in early January of this year, after the books were closed on 2009, partners learned that they would receive about 30 percent less than the firm had projected. In fact, the actual 2009 PPP drop turned out to be 35 percent below firm projections, and Howrey posted the biggest PPP decline among The Am Law 100.

Ruyak promised to respond to Mavroghenis's concerns. And he has made good on his word: The firm is now sharing with partners the kind of financial information in real time that they never received before. It's also using an improved method for forecasting performance.

Howrey's other problems, however, are not as easily addressed. These problems--former and current partners repeatedly mention declining productivity; dissatisfaction over the firm's handling of conflicts; and too-lax management of client billing arrangements--recast last year's financial blip as potentially the beginning of a long-term contraction. Since March, there has been an extraordinary exodus of partners, capped in mid-October by the departure of most of the vaunted European IP practice, including the firm's Europe managing partner and 11 other partners (as The Am Law Daily reported in this exclusive on October 8). Total partner departures since last winter now stand at 63, or one in five. "There has been this snowball effect" since the retreat, says a former partner: "There was nothing about that meeting that was reassuring."

The New York office, which opened in 2007 to accommodate roughly 50 lawyers in spite of some partners' misgivings about the expense, now has just five partners and "more empty offices than filled" ones, says a former partner. Chicago now has 16 partners after losing six.

The loss of Amsterdam and a third of Brussels--the firm's two most profitable offices last year--is bound to hurt. Howrey was already grappling with holes created by other conflicts-induced departures, including the cohead of the firm's insurance practice, Robert Shulman, as well as eight other insurance recovery partners; Peter Camesasca, a Brussels antitrust partner whose major client, Samsung Group, was in conflict with another significant Howrey client; and several others. Though the European group pinned their departure on the competitive disadvantage they faced operating under tighter U.S. rules on client conflicts, the poor 2009 showing, and the firm's failure to prepare the partnership for it, was likely a contributing factor.

Several former partners say that communication, which has never been the firm's strong suit, became a much greater issue after the sudden deaths of two respected and independent members of the executive committee--deaths that coincided with a major slowdown in work. In June 2008 vice-chairman Mark Wegener, the firm's global litigation cochair, died of cancer at 59; 11 months later, IP cochair Cecilia Gonzalez, also a vice-chair, succumbed to cancer at 53. Gonzalez, a huge rainmaker, was "always willing to introduce you to her clients," recalls one partner. And Wegener "would always call you back right away," notes another--giving partners a sense their concerns were being heard and transmitted to Ruyak. 

The deaths also came at a time when Ruyak was instituting many changes to Howrey's business model--and when some experienced and independent advisers would have come in handy. Over the past couple of years, notes Ruyak, clients have insisted on more alternative billing agreements, success fees, and extended payment plans, making cash flow lumpier, financial reports more confusing, and projections less accurate. In 2008, some $35 million in contingency fees helped drive profits to record highs, but last year, notes Ruyak, the firm had negligible contingency revenue and was plagued by "poor pricing." Last year's dip "was a big swing," Ruyak says. "I understand many partners' psychological anxiety. But I can't really do a whole lot about that."

But critics say that Ruyak, the firm's self-anointed "marketer in chief," could have done something by spending more time monitoring individual client billing arrangements. "There were too many instances where folks were given the okay to cut deals with clients," says one former partner, "that weren't good business decisions." Ruyak confirms that the firm allowed too much work to be written off last year, but says he now has better tools to monitor individual client arrangements. He also readily admits that client conflicts are a big problem, especially for an all-litigation firm. But he says Howrey's business model had, until 2009, resulted in big profits for the firm. The same partners complaining about the shortfall in 2009 "shared in the recent string of 120-, 130-percent-over-budget years," he points out.

Early this year, Ruyak sought the advice of legal and banking consultants, including Zeughauser Group and Citibank Private Banking. One result has been an overhaul of the firm's methods for analyzing financial data and for projecting firm performance. The new forecasting methodology, says Ruyak, draws upon the most recent month's booking, billing, realization, and other information to constantly fine-tune projections, allowing the firm to identify specific weaknesses and to make corrections midcourse. For example, "if I see our write-offs are higher this month, I'll say, 'okay, I've got to work on that,' " says Ruyak.

The new openness may be a double-edged sword, however: The latest projections for PPP, based on data as of August, show the firm coming in at 83-93 percent of this year's profitability target of $940,000--a target that was already set lower than last year's. Partners find the lower forecasts unsettling.

For some, the firm's new openness is too little, too late. "Particularly for people who don't know [Ruyak]," says one former partner, "they no longer believe anything he says."

 

 

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