‘This is a very difficult time for our firm, for our attorneys and for our staff. Many of us have spent our entire legal careers at Howrey and remain proud of what we built. We find some solace in the fact that our people have been so well received by their new firms. They are first-class professionals and deserve the respect accorded to leaders in their fields.’
-Howrey LLP chairman and CEO Bob Ruyak, March 2011
Harrowing words indeed to commemorate a business that had shown so much promise. Founded in 1956 by former Federal Trade Commission (FTC) chairman Jack Howrey, the eponymous firm emerged as one of the earliest specialist US outfits in the antitrust field. Over four decades, Howrey’s domestic reputation for innovative service delivery soared.
Then, in 2000, the firm was galvanised. A merger with Texas-based intellectual property (IP) firm Arnold, White & Durkee presented Howrey with the required resources for international expansion, and its enthusiasm for that process did not disappoint. Starting with London in 2001, the firm branched out to several European cities. By 2008 it had added Amsterdam, Paris, Brussels and Madrid to its portfolio and employed around 750 attorneys.
But, by then, Howrey was already in trouble.
The circumstances that led to the firm’s demise were characterised by a twist of irony: a pioneering law firm with a will to innovate, suddenly imbued with resources to realise long-held ambitions, leapt into a global market that was innovating faster.
By the time Howrey had built its European network, legal process outsourcing (LPO – the forerunner of the more sophisticated legal services outsourcing, or LSO) was changing the rules of engagement between law firms and their corporate clients. More flexible, customised delivery models flourished, and labour arbitrage brought costs down. Howrey – which offered a suite of discovery services similar to those provided by LPO vendors – found it hard to adjust.
As Howrey ceased activities this month, Bob Ruyak admitted as much. ‘We created a whole portion of the firm to handle discovery efficiently, using staff attorneys, temporary people, computer systems and facilities,’ he told the Wall Street Journal. However, in the wake of the LPO boom, competitors were offering to carry out discovery work less expensively. Although his firm ‘started to make corrections’, it was never able to respond quickly enough to changing demands, he said.
That is not all. Once established in Europe, Howrey found that the patent cases it picked up there were not big enough to match the business volume it had been used to in the United States. On one hand, the firm needed a smattering of smaller cases to keep its operations in play. On the other, it was not economically feasible to staff up its European offices to US levels in order to source, or handle, that work. This was a crucial area of administrative tension.
But perhaps the biggest threat to sustainable growth came from conditional fee arrangements (CFAs), in which Howrey lawyers took no upfront sums and agreed to take payment only if they delivered courtroom victories. By 2010, CFAs accounted for 10% of all Howrey’s billable hours. In the 1990s, they had comprised just 3-4%. As CFAs assumed a larger proportion of Howrey’s work, the revenue they produced plummeted from $35m to $2m – an inevitable result of the waiting game enforced upon the firm by cases pending completion. Meanwhile, Howrey’s average partner profits had slumped from $1.3m in 2008 (a dramatic 30% rise over the previous year) to $845,000 in 2009: not the arithmetic the partners had hoped for.
Workflow difficulties posed by European markets; cash-flow vagaries posed by CFAs; partner profits fraying the purse strings: these three factors stirred a perfect storm of panic.
A run on the bank
In April 2010, partners who had judged that they were working in a financial vacuum began to withdraw their capital – much in the way that customers retrieve investments from a bank if it falters. The web of legal experts that had laced Howrey together steadily fell apart. By the time dissolution was formally announced on 9 March, the firm had haemorrhaged 140 key players, many of whom had taken business with them to other firms.
NewLegal Review asked Brad Blickstein, principal of US legal consultancy Blickstein Group, what kind of lessons the Howrey scenario had in store for other law firms. ‘Ironically, approaches that law firms consider to be “non-traditional” – such as alternative fees, document-review centres and value-based pay – require more traditional management,’ he said. ‘Jeff Carr, general counsel at FMC Technologies, is fond of pointing out that his company builds subsea systems to drill for oil miles and miles offshore – for a flat fee. But this does not happen by guesswork, and it does not happen by accident. FMC's operational and economic experts provide sophisticated analysis and management. Law firms can succeed with innovative models. But they must learn – and be willing – to do what it takes to manage them.’
For Blickstein, Howrey's demise is ‘really a shame’, because the firm had made a genuine effort to innovate. ‘From their branding campaign in the early 1990s to their Boot Camp for associates, this firm had been on the cutting edge for a long time,’ he said. ‘Attorneys, however, do not tend to embrace change. For a firm to be “non-traditional”, its attorneys have to believe. The firm grew so quickly through the merger that many partners did not grow up in this culture. When times got rough, they did not have the fortitude or desire to continue being non-traditional.’
Blickstein also detects a lack of planning and communication. ‘If the firm cannot survive a situation where contingency fees fell from $35m to $2m, the firm should not have put itself in that situation. If you don't have partners willing to live with variable compensation, then you cannot afford contingency litigation.’
‘Law firms can survive’
For Blickstein, it is clear that Howrey’s partners lost faith in the firm's leadership. ‘Without that faith, there is just no reason to stick around if times are tough,’ he said. ‘Why go down with the ship – especially if you were a recent addition who got there by merger? New leadership might have impressed the partners enough to get them to stay – despite a rocky road and perhaps reduced compensation. But this becomes less likely with so many other firms willing to absorb anyone with portable business.’
By any standards, Howrey’s collapse is a wrenching outcome for those who worked so hard to build the firm. So how does Blickstein think that traditional law firms, LPO vendors and client organisations can best collaborate to ensure that the work they undertake is beneficial to all parties – forestalling the threat of another ‘Howrey scenario’ in the future?
‘Law firms must understand that all their previous income streams will not be available to them forever,' he said. ‘More and more clients are starting to understand that law firms are typically the most expensive way to solve any problem, and are reserving their use for times when a law firm is the only solution. That's OK: law firms can survive that. They just need to focus on their core competencies and provide exceptional – and unique – value in all interactions.’
In the long term, warned Blickstein, any law firm that continues to count on the income it receives for providing services that it cannot deliver efficiently or cost effectively is committing itself to a losing streak. ‘The quicker firms stop fighting change for their own self-interest and try to help their clients solve problems as efficiently as possible – even if the solution is to NOT use the firm – the better,’ he said. ‘Law firms who build relationships with LSOs and other service providers will be viewed as value-added and retain some control over the situation. Firms that do not will be sidestepped or fired. This will not necessarily mean that firms will be smaller. But they will be limited to attorneys who can provide outstanding legal advice, and/or bring in business.’