Why Howrey law firm could not hold it together

Steven Pearlstein
Columnist March 19, 2011

Quietly and unceremoniously, another venerable Washington law firm went out of business last week.

It’s official name was Howrey, reflecting the new fashion in legal marketing that favors a single name, much like rock stars and supermodels. Many of us still remember it as the old Howrey & Simon, although that was before the firm embarked on the merger and expansion binge that would eventually lead to its demise.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

As recently as two years ago, Howrey appeared to the outside world to be a thriving global enterprise with more than 700 lawyers, quality clients and a tight focus on antitrust, intellectual property and commercial litigation. In that year, it posted annual revenue of more than half a billion dollars, with profit per partner soaring to near the top of the charts, at $1.3 million.

The firm was started in 1956 by Jack Howrey, a Kansas farm boy who grew up to become chairman of the Federal Trade Commission and would later develop a fancy for racehorses, weekends in the Virginia countryside and tennis played in long white pants. For for all his gentility, however, Howrey’s firm quickly developed a reputation for bare-knuckle representation that soon attracted big corporate clients such as oil companies and cereal producers looking for protection from federal regulators.

In the 1990s, under the direction of managing partner Ralph Savarese, Howrey was the first major law firm to pursue a branding strategy with a million-dollar media campaign and the catchy tag line, “In court. Every day.” With the help of a headhunter, Savarese embarked on what was then viewed as an aggressive campaign to lure partners (and their clients) away from rival firms, creating a climate of free agency in a profession that had thrived on loyalty.

Savarese was succeeded by Robert Ruyak, who shifted Howrey’s expansion into high gear with mergers and practice acquisitions that gave Howrey the “global platform” that soon became the industry’s strategic buzzword. At its height, Howrey boasted 18 offices worldwide.

Ruyak’s instinct for growth was matched by an instinct for innovation. He launched Howrey Bootcamp for second-year law students that stood in sharp contrast to the partying atmosphere of other big firm summer programs. And with his prodding, Howrey ended lock-step raises for young associates, basing pay on competence rather than seniority, and offered young litigators the chance to trade more practice and real-life experience for lower initial pay. Under his leadership, Howrey invested heavily in a state-of-the-art litigation support center in Falls Church, specializing in the hot new field of “electronic discovery.” There was also a back office in Pune, India, to provide low-cost legal research. In 2008, Legal Times cited Ruyak as one of 30 “visionaries” of the legal profession.

So what happened?

From a purely business perspective, Howrey expanded too much too fast, its overhead expenses growing even faster than its revenue. There were offices in London, Paris, Madrid and Southern California that were never profitable, and others had stopped being profitable years before.

Corporate clients began demanding lower fees and billing arrangements less favorable to Howrey. And lower-cost competitors entered the market for electronic discovery and litigation support.

Fixed costs are a challenge for all law firms, but particularly so for litigation firms such as Howrey that can’t count on a relatively steady flow of work from corporate clients — leases to review, mergers to handle, securities filings to make. Revenue in the litigation business tends to be lumpy. You get paid only when there is a case to be tried and then often only after the trial is over. Howrey, in particular, had come to rely increasingly on revenue from such contingency fee cases, which rose to $35 million in 2008 and then fell to $2 million a year later.

Like many firms, Howrey also discovered that the larger it grew, the more likely it was to run into problems with conflicts of interest — potential clients or cases that it couldn’t take on because the firm represented a direct competitor.

Again, this is a particular problem for firms specializing in litigation. And it reached the breaking point for Howrey’s office in Europe, where newly acquired partners found themselves losing business because of much tighter U.S. conflict rules that did not apply to their purely European rivals.

The conflicts, the excessive overhead, the volatility of contingency fees — all of these contributed to a precipitous drop in profit per partner that by the end of 2010 was at half of what it was at the peak in 2008. Profit per partner is not only the key determinant of how much partners take home, but it is the metric by which the very competitive and ambitious people in the legal business now keep score. And in today’s cut-throat environment, such a precipitous decline is something only the strongest partnerships can survive.

Howrey, however, was not a strong partnership. Over the past 20 years, it had more than tripled in size by luring away lawyers from other firms and setting them up in offices that had little traffic with each other, or with the lawyers back in Washington. For the most part, these were lawyers willing to switch firms because of the prospect of earning more money and attracting more clients, and for many years, it worked out just that way. But then, suddenly, it didn’t, for one year and then a second, without any clear indication of when or whether things would finally turn around. And it was then, by last autumn, that it began to be clear that the personal roots were not deep enough, the bonds of loyalty not strong enough, to hold Howrey together.

Howrey is hardly the only firm that has faced similar challenges in past years. Brobeck, Pheleger & Harrison, Heller Ehrman and Thelen all succumbed to a similar death spiral, even as firms like Mayer Brown and Cadwalader, Wickersham & Taft managed to avoid it by bringing in new leaders who had the trust of key partners. At Howrey, Ruyak managed to fend off challenges to his control until finally confronted last November with an open revolt from a group of younger partners demanding more transparency and more control.

By then, however, it was already too late: The headhunters were circling, and too many of the firm’s top performers were already looking elsewhere.

For me, it is of symbolic and substantive importance that law firms are no longer partnerships in the strict legal sense. Most, like Howrey, had transformed themselves into “limited liability corporations” or “limited liability partnerships,” a new hybrid form of business organization. Unlike old-fashioned partners, those in an LLC or LLP are shielded from individual responsibility for the liabilities of the firm. That means that they are apt to be less careful in making decisions about what risks and expenses to take on, knowing they do not face the prospect of losing all of their net worth. They also have less incentive to commit themselves to a long and difficult turnaround when the firm gets into trouble.

It speaks to the quality of Howrey’s lawyering that most partners have been snapped up by rival firms, even as associates and support staff scramble to find new jobs. While there is sadness and nostalgia in losing another venerable Washington institution, the local economic impact will be minimal. Most of the work that would have been done here will be done by other Washington lawyers.

More troubling, however, is the fact that the industry seems to have learned nothing from such episodes. Reading the legal press and legal blogs, you find the same uncritical acceptance of the wisdom and inevitability of firms becoming larger and more global, the same acceptance of the free-agency model, the same acceptance of a world in which firms are held together by nothing more than a collective determination to increase profit per partner.

It is hardly a coincidence that all of these have come to pass at the same time as an epidemic of job dissatisfaction among law firm partners and associates. The pity is that the remarkable cunning and determination that lawyers now devote to winning clients and winning cases cannot also be applied to turning their firms back into genuine partnerships and their business back into a profession.

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