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PROFITABILITY STRATEGIES: MIDSIZE FIRM SUCCESS STORIES

Resisting the Urge to Merge

Five Midsize Firms Prove You Can Say No to Suitors and Stay Profitable

By Steven T. Taylor

While scores of midsize firms succumb to the consolidation craze, others have managed to blithely buck the trend. They don’t need a megafirm’s deep pockets to survive. They thrive by doing things their way.

 

A couple of years ago, Bryan Schwarz was kicking back from his hectic day as managing partner of Levenfeld Pearlstein, a 60-lawyer Chicago firm. He decided to do a little evening channel surfing. Amid infomercials for superfluous kitchen gadgetry, sit-coms about shallow-but-sexy singles and game shows with overly coiffed hosts in monochromatic clothes, Schwarz found something of substance.

It was a documentary titled If These Walls Could Talk, depicting the plight of gays and lesbians in still-largely homophobic America. Schwarz was moved by the portrayal of widespread discrimination—in housing, the workplace and elsewhere—that many homosexuals encounter daily. He thought it "un-American."

A few days later, Schwarz was having lunch with one of his law firm partners, an openly gay man, who was meeting with Schwarz to discuss ways to become more adept at marketing. Schwarz recalls the meeting: "I asked him, ‘What’s different about you? Because if you don’t have anything different, I don’t care how good you are at marketing—nobody’s going to be interested.’ He went through a couple of things that were boring. And I basically said, ‘Well, there is one other thing about you that’s different. You’re gay.’"

At first the partner seemed offended. But Schwarz, known among his peers as candid, engaging and creative, explained the point he was getting at: How could this partner parlay his sexual orientation into something special to help advance his career? That moment planted the seeds for the nation’s first gay law practice.

Partners at Levenfeld constantly ask themselves what they can do differently to attract and retain clients for their high-level corporate practice. "When we look at the corporate market, we look for underserved areas in that market," Schwarz says. "We discovered that gay and lesbian business owners were not receiving the type of representation consistent with the type of representation we can deliver."

Schwarz’s encouragement of the gay practice won him a Spherion Marketers of the Year Award. It also earned him the attention of large firms wanting to grow ever bigger in this era of merger mania. In fact, Levenfeld partners are approached by acquisition-hunting law firm leaders about once a month. "We’re not interested," Schwarz flatly tells them.

That’s fairly bold, considering that players and observers have been ringing the death knell for midsize firms for several years now. What makes Levenfeld and other firms so intrepid in resisting the urge to merge? They already thrive on less-traveled roads.

A Behemoth Is at the Door

Many midsize firms have met their end in recent years—sometimes slowly through gradual attrition, sometimes quickly through mass defections, but almost always painfully through the ordeal of giving up storied traditions or prized dreams of long-term success. In Texas alone, 10 midsize firms closed their doors in 2001.

Given the current climate, similar-size firms feel that they’re in tenuous positions these days. Consequently, when suitors come calling, many midsize firms start falling—both because of the larger firm’s deep pockets and vast resources and because they feel they have no choice. In some instances, perhaps they don’t.

Nonetheless, other midsize firms would be loathe to succumb to the seduction of the consolidation craze. Yes, megafirms can offer full-service expertise with a global reach. But sometimes clients get stiffed by these behemoths filled with lawyers too busy to return phone calls. For their part, the practitioners can be taxed to the breaking point. And young lawyers often fall through the cracks at large firms.

What’s more, the corporate world has shown, especially this year, that bigger is not always better in still other ways, that major organizations like Andersen, Enron and WorldCom can, partly because of their size, lose their financial and ethical moorings.

Bigger is not always more efficient, either. In its May 27, 2002, issue, the New Yorker ran a story about the Goldilocks effect in the business community, featuring two midsize companies that are flourishing amid their giant competitors. The article’s author, James Surowiecki, cites a 1998 study finding "that smaller banks were more efficient on a per-customer basis than their hulking rivals; they have lower expenses and higher profits."

Economies of Scale Can Be Illusions

Studies of the legal profession bear similar findings, according to consultant Ward Bower, of Newtown Square, PA-based Altman Weil, Inc. "Our survey of law firm economics that we do every year, and have done for 30 years, has consistently shown that bigger firms spend more on a per-lawyer basis than do smaller firms," he says. "As a result, the expected benefits in economies of scale just don’t materialize."

"When properly managed," Bower adds, "midsize firms have people who know each other and have a sense of belonging to the organization. And, particularly if everybody understands what the firm’s focus and business objects are, midsize firms can be comfortable and successful environments in which to practice law."

One such firm is Houston-based Porter & Hedges, with 85 lawyers, led by the baronial William Porter. "There are spin merchants who suggest that, except for boutiques, the only future for law firms is in these Brobdingnagian megafirms," says Porter, who’s fond of dropping Swiftian and other literary references into his conversations. "We’ve been hearing that in Houston for 15 years, and we’re still here and more profitable than ever. We don’t get hung up on labels about big, medium and small."

Like Levenfeld, Porter & Hedges is considered an innovator in the profession, although in a different way. The Chicago firm’s innovations can sometimes be quirky. For instance, Levenfeld’s lawyers have crayons and toy race cars on their desks to remind them to be colorful and quick in their work. And the firm has regularly scheduled "quiet times" for lawyers to ponder their careers. The innovations at the Houston firm, on the other hand, are inventive but hardly eccentric.

Consider Porter & Hedges’ new Web site. It features a page on which associates talk candidly about their experiences in the firm. Partners maintain the associates can say whatever they want, although it’s unlikely the site would publicly post a review that pans the firm. Still, the presentations, in essay form, are effective and unique and help the firm recruit young talent.

Such creativity is key for midsize firms to succeed. But today, nothing is as important as development of niche markets. In the 21st century, successful full-service midsize firms are an endangered species.

Avoid Becoming Amorphous

"Midsize firms must identify signature practice areas so they are not perceived to be an amorphous, all-things-to-all-people entity," says Larry Smith, director of strategy for Washington, D.C.-based Levick Communications. "It’s okay to be amorphous when you’re an 800-attorney firm. But when you’re at 150 lawyers, it’s death to be thought of that way. Then you are completely reliant on the goodwill of core clients. And if those clients go away, it’s very difficult to sell yourself because you don’t have a distinctive marketplace identity."

Porter & Hedges’ signature practice areas are in the energy, real estate, banking and corporate finance industries. "We staff those areas in depth. And we’re happy to compete with anyone in those practices," Porter says.

Asked if his firm receives many merger offers, Porter replies with a chuckle, "We haven’t been approached since last Friday." The merger talks usually don’t last long, primarily because most firms can’t match Porter & Hedges’ profitability levels.

"They do a lot better on an earnings-per-partner basis than many of the firms that would like to acquire them," says William C. Cobb, principal of the Houston-based consulting group WCCI, Inc. "Those firms come in and want to talk to them about mergers and the P&H people say, ‘Well, let’s talk about your spread of earnings per partner.’ P&H finds out what that rate is and they say, "No thank you. We’re not interested."

Cobb says midsize firms need to know what their lawyers are capable of, what they can honestly expect to achieve and, most saliently, what exactly their partnership is. "It should be so clear that if I were at a cocktail party and I asked them who they are, they could tell me in 10 seconds or less."

While that test may be a bit difficult to ace (after all, lawyers aren’t known to be laconic), the partners at DKW Law Group, a 125-lawyer Pittsburgh-based firm, are likely to pass with flying colors.

During a 1995 retreat, DKW partners did a little soul-searching and came to some conclusions: They liked being a stand-alone firm and weren’t interested in merger partners. They served middle-market companies with $10 million to $500 million in annual sales. They weren’t particularly suited to work with start-up companies. And they served clients in traditional manufacturing industries such as steel, rail, printing and aluminum, and hoped to get even more deeply involved in those fields.

"When everyone else was going with the trend of high-tech, we were headed 180 degrees in the opposite direction," says DKW’s managing partner, Leo Keevican. "None of the industries we’re in are particularly sexy, but that’s what we had done a lot of, where we had a lot of depth of understanding and what we wanted to do more of."

So if he ran into Cobb at a cocktail party, could Keevican beat the 10-count? "We’re a law firm that serves middle-market clients in the Midwest," he says, in about four seconds.

Importantly, the firm serves those clients in myriad ways, some outside the legal services arena. In fact, many people credit DKW with being the first U.S. law firm to open an ancillary business, a strategic move that has subsequently proved very beneficial for some other midsize firms.

In 1985, the partners that would leave another Pittsburgh firm to form DKW established Renaissance Partners. The entity offers business expertise to corporate officers on all matters related to leveraged buyouts. "It predates the formation of our law firm; we brought it with us," Keevican says.

The subsidiary proved so successful—and useful for DKW’s clients—that the firm opened another one in 2000, DKW Capital Markets, to help midsize businesses that have trouble obtaining investment banking services. The firm also opened a bank-consulting joint venture. Keevican says, "We feel these businesses are complimentary to our core legal practice."

While the firm has shown a willingness to take risks, it has made a few missteps, including opening an office in St. Louis only to close it a year and a half later. St. Louis, a city deep with corporate giants such as Anheuser-Busch, simply does not have enough middle market companies for DKW to serve. "We didn’t do the requisite due diligence, and shame on us, because that’s what we do in our M&A practice," Keevican acknowledges.

Embrace the "Comma Culture"

Partners at other midsize firms also have successfully opened subsidiaries, including those at New York’s 125-lawyer Herrick, Feinstein. It is a long-standing partnership that has been one of the city’s most well-regarded real estate firms since it opened in the 1920s. (Its litigation department, however, is now larger than its real estate practice.)

"We’ve always been entrepreneurial," says chair Harvey Feuerstein, who’s been with Herrick, Feinstein for 33 years and is known as the "heart and soul" of the partnership. The partners created Edwards Capital, a small business investment company that primarily lent money to taxi cab drivers. "We formed the company with some clients, and then sold it when someone offered us a handsome price," he says. "We made a substantial amount of money on the sale."

The partners also formed Metropolitan National Bank, which lends money to people who find it difficult to get loans for small to midlevel real estate investments. Again, such plunges into ancillary ventures demonstrate how midsize firms can not only survive but thrive in a marketplace dominated by firms like Baker & McKenzie and Skadden, Arps.

Furthermore, it’s safe to say, those who work in the megafirms practice in an environment entirely different from Herrick, Feinstein, where the lawyers and staff talk about "comma culture." Most firms use and or & before the last name in the masthead, which, according to an explanation on the Herrick, Feinstein Web site, suggests that "the name partners are finite in number and [implies] that they are the only ones worthy of such recognition." On the other hand, the use of the comma minus the and or the ampersand "connotes an unfolding or infinite list of unnamed persons worthy of such distinctions."

In a sense, comma culture symbolizes the we-are-family feeling that Feuerstein and others at the firm exude. "We truly work as a team here," says managing partner George Wolfe. "We don’t compete among ourselves for business. We give no [business] introduction credit. We give far more credit for client development once a client is in the door, and case management as opposed to origination, because that just breeds unhealthy competition for compensation."

For his part, Feuerstein says sincerely, "I look at all of my partners and associates with a very avuncular disposition. I enjoy watching them develop into better lawyers and better handholders of clients. It’s beautiful. That’s why I come to work smiling every day."

It’s this attitude—as well as the firm’s solid profitability—that has given the partnership a stellar retention record. Until earlier this year, when three partners left and joined Jenkins & Gilchrist, no partner in Herrick, Feinstein’s 76-year history had ever left for another firm.

Reputation and Democracy Please Associates

It’s not surprising to learn that Herrick, Feinstein carefully examines all potential new hires to ensure that they will fit its congenial culture. So, too, does Los Angeles’s Munger, Tolles & Olson, which similarly loses very few lawyers to competitors—although several have been lured away by U.S. attorneys offices and academia, a testament to the quality of the firm’s practice.

"We have never deviated from a high hiring standard," says co-managing partner Ruth Fischer. "I know all firms say that, but we have a very unusually gifted group of attorneys. We have resisted the impulse to hire when there’s lots of work just to fill the workload. We only hire people who are likely to become partners here. This means that in boom times we don’t grow as much as other firms, and in down times we’ve got plenty of work to keep everyone busy."

Munger, Tolles also has proved to be one of the most democratic firms in the country: All lawyers vote on all firm matters except hiring and partner pay (a policy that would send shivers up the backs of most partners elsewhere). In addition, associates frequently have the opportunity to do real work on top-shelf cases, many of which gain national publicity. In fact, the firm’s penchant for high-profile work makes it a household name in many legal and corporate circles, rare for midsize firms. When Chicago’s Kirkland & Ellis, perhaps the most well-known litigation firm in the nation, needed legal help for its involvement in the Arthur Andersen scandal, it retained Munger, Tolles.

Because its name makes headlines—positive ones—the firm doesn’t need to market as much as its competitors do, which, of course, increases the bottom line. "If you talk to most in-house attorneys, they will know us," Fisher says. "If they haven’t used us, they know someone who has. That word of mouth is much more significant than running an ad campaign."

Combine an extensive, award-winning pro bono program with the firm’s auspicious reputation and democratic culture and it’s easy to see why it consistently ranks high in associate satisfaction surveys. It was ranked number one in a recent American Lawyer poll of midlevel associates’ satisfaction.

These features may not be particularly innovative or sexy, but they are the chief reasons why Munger, Tolles has not come close to merging. "We have no aspirations to merge. We’re happy with who we are and what we’ve achieved," Fisher says.

Who Really Needs an 800-Pound Gorilla?

There are, of course, multiple benefits in remaining a midsize, stand-alone firm. Such firms often offer collegial work environments, require fewer slices of the profit pie and can be nimble enough to make organizational and strategic changes more quickly and efficiently.

But perhaps most advantageous is that the successful midsize firm can, "when it has a sufficiently deep and lasting client relationship, nurture a cultural brand that has meaning for the clients," says Levick’s Smith. "So when clients deal with Monger, Tolles, for example, they know they’ll get a certain high-quality service; they’ve always gotten it and they know they always will. And it won’t be diluted or polluted by a merger with an 800-pound gorilla.

Steven T. Taylor (sttaylor77@aol.com) is a freelance writer who has written about the legal profession for nearly a decade.

SIDEBAR #1

Five Ingredients Midsize Firms Need to Succeed

Creativity

Midsize firms need to explore new markets, consider various ways of delivering service and devise innovative, but reasonable, strategic plans.

Signature practice areas

Midsize firms must understand and act on the credo that they can’t be all things to all clients. Rather, they must be selective in the types of practices they perform and, of course, perform those services well.

Diversification

While developing and operating ancillary businesses may not be prudent for all midsize firms, subsidiaries have proven prosperous to some firms—and been beneficial for their clients.

Pro Bono publicity

Midsize firms with strong litigation practices would be wise to develop deep pro bono programs. They can often foster goodwill in their communities and help get their names out there, while also performing an important service.

Communication

Unlike their larger brethren, midsize firms can easily communicate to all their partners and associates. That creates a collegial culture, which, in turn, keeps lawyers satisfied and on board.