It has been a rough year for Washington law and lobbying giant Patton Boggs.
The firm has dismissed 40 attorneys and 70 staffers since the spring and lost important partners to rival law firms, while its profits have taken a hit.
But this week’s job cuts mark “the last piece of the restructuring initiatives” that firm leaders mapped out earlier this year to turn around declining revenue and profits, Patton Boggs managing partner Ed Newberry said.
“The first half of the year was very difficult,” he said. “We had to take action early in the year. Once we were able to take those actions, the firm started producing profit near historical levels. . . . It’s producing very strong results for us.”
The firm, which has 450 attorneys in the United States and the Middle East, has put together a new strategic plan that includes exploring mergers and changing key internal workings, such as management structure and pay practices. The changes, which have been ongoing since the beginning of the year, signify that Patton Boggs, a quintessential Washington business that for decades enjoyed unparalleled success in lobbying, is not immune to the economic pressures plaguing all big law firms.
Patton Boggs’s revenue dropped 6.5 percent, from $339.7 million in 2011 to $317.4 million in 2012. One major hit came from the loss of $35 million in revenue that ended when large litigation matters the firm had been working on were settled.
While the firm is still earning more lobbying revenue than any other lobby shop — $30.7 million during the first nine months of the year — that figure is down 14 percent compared with the same period last year, the biggest drop in publicly disclosed revenue among the region’s 10 largest lobbying firms.
Now that the firm has slashed about $20.2 million through job cuts, it is on budget and seeing signs of growth, Newberry said. The firm added 10 partners and 18 associates in the past two months. Demand, measured by the number of billable hours, is up 10 percent from August in areas such as corporate transactional work.
Average monthly net income rose from $1.7 million in the first five months of the year to $5.1 million over the next four months. For last month, net income was $11 million.
“You’re seeing a very sharp and steady improvement of performance,” Newberry said.
More changes are to come.
Plans are underway to run Patton Boggs more like a corporation than a traditional law firm partnership, with a new “practice management committee” made up of Newberry, three department chairs, a chief operating officer, chief financial officer, chief marketing officer and chief technology officer. Many law firms have moved in this direction in recent years.
Patton Boggs, which has 98 equity partners and 119 nonequity partners, will also continue changing the status of some partners, Newberry said, reducing the number of equity partners to around 80 by the end of the year.
The firm has not made a decision about merging with Texas-based law firm Locke Lord or a smaller New York firm that Newberry declined to name, but it is talking to and going through a due diligence process with both firms.
“At a 30,000-foot level, it’s a combination that has some very attractive elements,” he said of the potential marriage with Locke Lord. “We’ve made a commitment to expanding our platform and the only real way in this environment is to acquire businesses and firms, or to combine with businesses and firms.”
The potential combination with the New York firm would boost Patton Boggs’s corporate presence there, he said.
“We’ve got 22 very good lawyers in the New York office,” he said. “New York is an extremely competitive environment, and to get critical mass there, you need to be 100 lawyers or more. . . . We do not have a big corporate practice in New York; that [firm] brings us that practice.”
One of the biggest changes is a move away from how the firm splits profits among its partners — an important adjustment that will bring the firm’s compensation system more in line with that of most large U.S. law firms.
The current pay scheme relies heavily on partners’ financial performance, with 85 percent of the firm’s profits being split among partners based on three factors: billable hours, origination (bringing a client into the firm), and supervision of other partners and associates on client matters. Starting in 2015, pay for equity partners will be determined by a compensation committee that will consider more subjective factors, including pro bono work, commitment to diversity, collaboration and cross-selling business, in addition to financial performance.
“Over time, as law firms got bigger, most firms recognized they needed compensation systems that incentivized partners to take advantage of synergies that come with a larger firm,” Newberry said. “Most firms changed over the last five to 10 years. We did not, but we are now.”