Lessons from a Meltdown

By Nina Schuyler

When law firms started blowing up in California and across the country last winter, it made the dot-com bust of the early 2000s look almost trivial by comparison. Yet when Brobeck, Phleger & Harrison went belly up in 2003, it stunned the legal world. And the person most often singled out for blame was Brobeck's former chairman, Tower Snow. On a website devoted exclusively to Brobeck's meltdown and its aftermath (www.Brobeck Info.com), the firm's former co-counsel, Jayne Loughry, wrote, "Some people blame Tower Snow for spending too much money before the dot-com bubble burst, for underestimating the length and severity of the recession and, thus, its impact on Brobeck, and for not taking corrective action soon enough, if at all." But she also notes that Snow gave Brobeck partners exactly what they wanted: new buildings in San Diego and Palo Alto, state-of-the-art technology, hordes of newly hired associates, a national presence, and, most significantly, spectacular increases in partner income.

Of course, no matter who gets blamed, once Brobeck collapsed it left a terrible mess that has taken years to clean up.

All of which makes Snow a pioneer of sorts. Well before the current financial crisis, he learned firsthand what it is like to see an extremely successful firm go down in flames. And now, after a five-year hiatus, Snow is once again practicing law, this time with the 96-attorney firm of Howard Rice Nemerovski Canady Falk & Rabkin in San Francisco. From his downtown office, the 61-year-old Snow reflects on what law firms need to do now to survive this downturn.

Are any of the lessons that you learned in 2003 applicable today?

In difficult times, a collegial partnership becomes just as important as superb management. The lesson of Brobeck is not one of a firm that collapsed because of economics. Even at the end, as reflected in the annual AmLaw 100 or other surveys, Brobeck was a highly profitable, viable firm. The lesson is that law-firm partnerships are fragile, and that ultimately the success or failure of a firm is driven every bit as much by cultural glue as by market positioning and business decisions.

Why is culture so important?

In times of difficulty, a firm will do better if its starting position is that "We are in this together," and the objective is to come out of this together, and stronger than ever.?

During difficult times, firm culture is often neglected, even sabotaged. Is that because it's hard to quantify?

There are many business studies that quantify and place a value on culture. If you look at the best management books?Built to Last, for instance?they underscore that the truly elite U.S. businesses are characterized by strong cultures. They have organizations that make everyone feel important, from the messenger to the chairman. Ideas are solicited and encouraged from everyone.

Many law firms have engaged in massive layoffs. Is this the most effective way to right the ship?

When a firm fires people en masse, think about who is being fired: associates, who have significant student loans, probably a mortgage, young children; and staff who, by definition, have lower incomes, and also probably a mortgage and children. When the top 10 percent, who make gigantic incomes, fire en masse the other 90 percent, the message to anyone with half a brain is that partner income is more important than your livelihood.

So, if not layoffs, what other cost-cutting measures are available that don't exact so much damage to a firm's culture?

There's a whole array of management tools: pay cuts, voluntary buyouts, work furloughs, an immediate freeze on new hires, mandatory part-time arrangements, heightened performance reviews. For practice areas that aren't thriving, you can retool people or help them find a home at a firm where they're a better fit.

Also, when firms have overcapacity, it's a good time to put talented people to work on important projects. During the downturn at Brobeck, we put 80 associates to work on building the firm's knowledge-management system. The system allowed lawyers to access deal and litigation documents. These documents included information about opposing counsel, co-counsel, and clients?and the pros and cons of different approaches. This radically enhanced our productivity, allowing us to deliver a superior product to our clients quicker and cheaper.

You mention delivering a superior product to clients at an attractive price. In that same vein, should law firms reconsider the billable hour?

They should be exploring alternative fee arrangements?flat fees, fixed rates. But, so far, we've seen a lot of talk and not much action.

What other ways can lawyers be innovative and enhance a firm's revenue flow?

What has always distinguished a great lawyer from a good one is the way one approaches an assignment, whether it is a transaction or litigation. Great lawyers put themselves in the position of the client and deliver a superlative result?but it doesn't stop there. They use the assignment as a vehicle to enhance and strengthen the client's business. For instance, there was great lawyering in the lawsuit brought by Mattel against MGA, known as the Barbie v. Bratz War. The lawyers [for Mattel] got a remarkable result?a complete injunction against MGA to stop manufacturing the Bratz doll, which was a major blow to Mattel's primary competitor.

Given the pressure on clients to cut costs, what other cost-saving measures might a firm consider?

In today's environment, low leverage is the name of the game. Wachtell, the most profitable firm in the country, has a 2.3-to-1 ratio: 2.3 associates per partner. Sullivan & Cromwell is 2.5 to 1; Cravath, 3 to 1 or even lower. Howard Rice has a 1-to-1 ratio.

Your point of reference seems to be corporate America. Is that the right reference point for the legal profession?

The reference point should be our clients. When I came back to practice law, I was surprised by how little things had changed: Firms continue to look to other firms to evaluate what they should or shouldn't be doing. If someone in business comes up with an idea and presents it to management, the CEO might ask, "Who else has done this?" The question is asked not to gain cover but to learn if the company can be a first mover?the first one to bring a new product or service to the market.

In the current environment, many firms are focusing almost entirely on right-sizing their business. But the fundamental business model is not being questioned, which I think is a missed opportunity. A firm should be engaged in true strategic thinking: How do we deliver legal services differently? How can we use the business tools that our clients use but [that] haven't yet found their way into the legal environment? How can we better use nonlawyer professionals? The client wants a superior legal product at an attractive price. This is the best time for law firms to be exploring ways to provide that.

Nina Schuyler is a San Francisco-based freelance writer.

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