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Latham & Watkins Founded:1934 by Dana Latham and Paul Watkins No. of lawyers:1,544 No. of partners:337 2002 Revenue:$906 million Domestic offices:San Francisco; Menlo Park; Los Angeles; Orange County; San Diego; Boston; Chicago; New York; Newark, N.J.; Reston, Va.; Washington, D.C. International offices:London; Brussels, Belgium; Frankfurt, Germany; Hamburg, Germany; Milan, Italy; Moscow; Paris; Singapore; Tokyo; Hong Kong Major clients:Advanced Micro Devices Inc., Credit Suisse First Boston Group, France Telecom, Goldman Sachs & Co., Longs Drug Stores Corp., Lucasfilm Ltd., Mentor Graphics Corp., Owens-Brockway Glass Container Inc., Pacific Gas & Electric Co., Safeway Inc.

If partners weren’t clear that Latham & Watkins was in trouble, they knew it as soon as they stepped into the tacky hotel conference room near the Los Angeles International Airport. The scene was no-frills, and that’s just how John “Jack” Walker Jr. wanted it. The firm chairman was sending a message to his colleagues that their business was edging toward collapse. And a luxurious spread in a four-star suite wasn’t going to drive that point home. Latham had been the go-to firm during the junk-bond boom of the late ’80s. But by October 1992, as Walker and his partners gathered, a trio of the firm’s major clients had hit the skids. With them went a third of Latham’s revenues, and the profits that had once been the envy of its California competitors were taking a nosedive. The message to partners was simple and clear: Shape up — now. Walker announced the firm was tossing its long seniority-driven pay system in favor of one that rewarded rainmaking. In other words, if they didn’t make more money and attract more clients, they wouldn’t get paid. “We had some serious problems,” Walker said, “and we had to take some serious steps.” Latham halted and reversed its ’90s death spiral through a then-controversial mix of pushing out unproductive partners, laying off associates and restructuring the firm’s pay scale, partnership track and billing rates. At the time, the decision to lay off associates brought gasps of horror from people inside and outside the firm, and the firm’s reputation as a place where lawyers could spend a career appeared lost. But tough times seemed to have the opposite effect on Latham than they had on other firms, notably the recently deceased Brobeck, Phleger & Harrison. Bad times pulled the Latham partnership together. Rainmakers stayed put, and partners retooled practices to focus on more profitable work. Fast-forward to 2003. Latham is the largest firmin the nation’s largest state, grossing $300 million more than its closest California competitor, Gibson, Dunn & Crutcher. In just seven years, revenues have tripled and profits per partner have doubled. It is now one of the world’s elite law firms, with global reach and a sterling reputation for the quality of its work. Behind Latham’s success are partners who dug in as the firm faced disaster. And within that story may be a lesson for firms facing tough decisions about how to survive a dismal economy. “There’s a broad consensus on what they want to achieve and how hard they have to work to achieve it,” said Keith Wetmore, chairman of Morrison & Foerster. “Although we have many differences, I often refer to them and think of them as an admirable alternative path and certainly a strong competitor.” TALE OF TWO MANAGERS Behind Latham’s turnaround appears to be a tale of two managers — Walker and current Chairman Robert Dell. “Jack put the pieces in place,” said Gregory Lindstrom, a partner who has served on the firm’s executive committee. “Bob took the firm to a whole new level that was not contemplated in the early 1990s.” Walker, partners say, did much of the heavy lifting as the firm struggled. He became chairman in 1987 when the junk bond juggernaut reached its zenith. But his tenure was tinged with difficulty. By 1990, the firm was falling short of its budget. In December of that year, Walker said he felt his gut go cold. “We wondered about our future existence,” he said. “That’s when we said, ‘this is serious — we have to do something.’” The chills Walker was feeling were understandable. Latham relied heavily on its business with investment bank Drexel Burnham Lambert Inc. and leveraged-buyout leader Kohlberg Kravis & Roberts. The firm had represented Kohlberg Kravis in its storied $26 billion takeover of RJR Nabisco Inc. But the credit-driven nature of both businesses backfired when the economy slowed. Drexel declared bankruptcy in 1990, and Kohlberg Kravis simply stopped doing deals. Those blows would have been tough enough for Latham, but it had also lost a big chunk of business a few years earlier when Hughes Aircraft Co. — a client that had been with the firm since the 1950s — was sold, and the company’s work went to another firm. Those clients, Walker said, “had determined the rate of growth for the firm. During the go-go late ’80s we built up a lot of capacity to service the KKR and Drexel work. We were hammered in that recession. We suffered more than the average bear.” But even in disaster, Walker had a few tools at his disposal that set Latham apart. The firm was founded at the height of the Great Depression, and it maintained a culture that feared debt. Thus, it wasn’t burdened with large obligations to creditors. Teamwork was also a concept embraced at Latham. Committees ran everything at the firm, and top managers were expected to keep the partnership in the loop about nearly all decisions. “It’s relentlessly fair,” Walker said. So as Walker strolled into the airport hotel conference room in 1992 to deliver the bad news about compensation, he was fairly confident partners would bite the bullet. Nevertheless, “I never would have been able to make those changes without the recession,” Walker said. “Those shocks � paved the way and created a sense of urgency.” Partners credit the revised compensation structure as the key reason for Latham’s growth. Under the plan, the firm made it more difficult to make partner, as well as cut the salaries of senior partners, giving more points to the younger ones. The idea was to keep young lawyers in the fold and encourage them to generate more business, Walker said. The structure also rewarded lawyers for harvesting new work out of existing clients and for developing new clients. The point system, still in place, starts partners out with 300 points and tops them out at 900. The range used to be from 250 to 1,000 points. Last year, according to Walker, each point was worth $1,500, putting the base-pay range for partners from $450,000 to $1.35 million. The firm also set aside 15 percent of the firm’s profits for productivity bonuses for rainmakers, which includes lawyers who harvest additional billables from existing clients, he said. “The compensation structure disallowed you from being passive,” said partner Virginia Grogan. “It eliminated a sense of complacency. You had to work harder than you had to historically as a partner.” A NEW CHAIRMAN But revamping the firm took its toll on Walker. He describes the experience as “awful.” The partners were cooperating with the plans, but Walker said getting a consensus took its toll. “They beat me up, but when I made decisions, they listened and they lined up.” In 1994, he said he wanted to step down. A committee formed and selected three candidates. Partners, voting by secret ballot, chose Dell, who was managing the San Francisco office at the time. A litigator, Dell — now 50 — proved a self-deprecating, mild-mannered manager who introduced a methodical approach to growth. He put partners to work strategizing about whom to hire, which companies they should pursue as clients and what those companies would need from Latham in future years. “We looked at each office, each practice group,” said Grogan, who manages the Orange County office. “We were growing our lateral [ranks] to what we thought we needed to be in a thoughtful way.” At the top of Dell’s wish list were litigators. When he took over, the firm had about 70 partners in the litigation group. That partner number now stands at 148, plus a handful of others who have specialty litigation practices in other groups, like bankruptcy, real estate and environmental. He struck an early coup with the 1995 hire of 35 sought-after lawyers from New York’s Mudge Rose Guthrie Alexander & Ferdon. The next year, Latham lured Miles Ruthburg from Heller Ehrman White & McAuliffe, who soon took over the firm’s litigation group and attracted a lineup of big-name litigators to the firm. NATIONAL EXPANSION Dell has presided over a massive expansion by the firm. Since 1995, the firm has added 1,000 lawyers. Much of that growth has been outside Los Angeles. Though the firm still has 330 lawyers in its historic home base, Latham is a major player in most of the key markets in the United States. The firm has 158 lawyers in the Bay Area, 258 in New York, 178 in Washington, D.C., 101 in San Diego and 130 in Chicago. Like any firm with national aspirations, Latham set its sights on New York bankers, and even elite Big Apple players now say it is a top competitor. “Everybody recognizes that Latham has become perhaps the most successful out-of-town firm in New York,” said Thomas Kennedy, head of the corporate technology practice at Skadden, Arps, Slate, Meagher & Flom. Latham is especially known for its high-yield debt practice — a holdover from its days with Drexel. The Drexel relationship, in fact, appears to be the key to Latham’s New York success. When Drexel folded, several of its investment bankers holed up at Latham’s New York and L.A. offices to use the phones and office space while they looked for new jobs. And they remembered the firm’s loyalty when they moved on to new banks. “They stayed with us,” Walker said. “It was painful for a few years, but we really broadened out our investment banking practice because of [Drexel's] explosion.” Clients have been the primary driver behind expansion in most markets. In San Diego for example, health care companies encouraged the firm to hire lawyers in the market to serve their needs. TARGETING EUROPE And investment banks have helped drive the firm’s fast growth in Europe. The firm was also encouraged by reports from some of its international clients, particularly investment banks like Credit Suisse First Boston Corp. and Goldman Sachs & Co., that it had work waiting in Europe. And there was reason to listen — the firm’s investment banking practice generates $100 million annually for the firm, Dell said. The decision wasn’t cut and dried, however. Many of the partners thought Europe was a profit drain following the firm’s experience in London. The firm had opened up a London office in 1990, at what partner William Voge called the worst possible time. “We were fools, that’s all I could think of as I unpacked,” said Voge, part of the five-lawyer team who opened the London office. “There was nowhere near enough demand for our services. No matter what system of accounting you believed in, for the early days of London, we weren’t profitable.” But as the firm grew in the late ’90s, Dell said, partners had “to make a strategic decision of going to one path or another. Do we do what may have been the safe thing over time, growing offices in the United States? Or take the bolder step?” Instead of arguing, however, Dell encouraged the management committee to seek outside expertise on future growth. In 1999, at a price tag of $2 million, the firm hired management consultant McKinsey & Co. to study the firm’s options. The McKinsey study said 30 percent of the firm’s largest clients would use Latham in Europe if it were to expand there, Voge said. The results of the study were more convincing than partners had expected, and the tactic proved to be a shrewd move for Dell, Voge said. “I would have said we think 15 percent, maybe 20 percent of our clients want a firm like Latham in multiple jurisdictions,” Voge said. By merging with local firms, Latham went on to open two offices in Germany — in Frankfurt and Hamburg — and an office in Paris. The firm also expanded into Brussels, Belgium, and Milan, Italy. Voge, who heads the firm’s ongoing European integration committee, said McKinsey’s prediction came true last year. One-third of the firm’s 150 largest clients, defined as companies that pay more than $1 million annually in fees, are using Latham in Europe. Lindstrom, who ran against Dell for the chairman post in 1995, said Dell’s attention to the bottom line helped partners trust him when he championed an initiative, like the European expansion. “When he says ‘we can do this and have it be accretive to profits,’ people believe him,” Lindstrom said. “I couldn’t have made it happen.” BECOMING TOO BIG? With expansion, however, comes danger. The firm has prided itself on a culture that rewards teamwork. That goal may prove more difficult when 1,500 lawyers are stationed in 21 offices around the world and as the economy continues to falter. Retaining partners — new hires or homegrown — is a top priority at the firm, said Voge. And keeping the profit spigot running is part of that, he said. “It’s always easier to manage partners in a strong economy,” Voge said. “The last thing you want to do when managing a professional services firm is give the partners less money than they made the year before.” Longtime policies that encourage full financial disclosure among partners have helped Dell and the firm’s managers avoid some of the backbiting that generally plagues large firms — particularly when the economy is bad. Under Clint Stevenson, who served as chairman for 22 years preceding Walker’s tenure, Latham began churning out scads of financial data that examined every number — billable hours, costs, collections — in minute detail. The firm generates monthly productivity reports on each lawyer and annually publishes a phone-book sized, hard-bound volume of financial data about the firm. At any given time, partners can thumb through the firm’s financials and look up how much each partner earned, billed or collected in the prior year. In the book, for example, partners will find that more than 200 of their ranks generated $2 million or more in fees last year. Getting the information out there for partners to pore over dispels potential friction, Lindstrom said. “There’s a long history of making decisions based on fair, objective assessments that can be explained,” he said. “Someone may not like it, but you don’t get people here worried about being disfavored or that there are some being treated better.” The firm also has a long history of involving the rank and file in almost every level of decision-making. Latham is run by about 30 committees, most of which comprise both partners and associates — a rarity among major firms. “It produces good decision-making because it puts the people in the jobs who are good at those jobs and interested in doing those jobs,” said Mark Newell, a Washington, D.C.-based partner who was made Latham’s chief operating partner last summer. Lawyers generally serve two-year terms on a given committee, devoting a few hundred to a few thousand hours annually in addition to carrying a full practice load. The committee system puts more people in charge of the day-to-day tasks, freeing up the firm’s seven-member executive committee to focus on strategic issues, Newell said. The committees also help foster the firm’s emphasis on teamwork by putting lawyers to work together more often than at most firms, Newell said. “It’s the fundamental way we stay connected to one another.” Getting lawyers to interact took on greater importance as the firm started to hire large numbers of lateral partners in the late 1990s. Latham continued to elevate associates to partner even in years of lean profits, but the firm has made it a policy to hire laterals. Ten years ago, Latham had 216 partners; it now has 337. To ensure partners are a good fit, Latham puts them through a grueling screening process. Grogan, in Orange County, jokes that “we indoctrinate, and we screen.” Latham puts lateral candidates through a gauntlet of interviews in six to eight of the firm’s U.S. offices. Prospects meet with about 100 partners and associates. It’s a considerable expense for the firm, but partners say it’s well worth it. “Part of the process is having people who want to accept the culture,” said Robert Long, an L.A.-based litigator. “Ours is a pretty intense and daunting process, which sometimes makes us lose a few people because they don’t want to go through the hoops, which is fine.” There’s a secondary purpose to all of the meetings, however, and that’s to get the candidate and future colleagues working on generating business. If partners fail to cooperate with the team, they get a call from management. Dell said he or another manager has to have a talk with about a half-dozen lawyers each year to remind them that they can’t simply say no when another partner needs help. Former Cooley Godward partner Alan Mendelson repeatedly heard such messages before the partnership voted him in. Mendelson, who joined Latham in May 2000, acknowledges he had a reputation for being quick-tempered and difficult to work with. Mendelson said Latham lawyers were concerned he would try to grab the spotlight instead of becoming part of the team. “The clear signal I got was that if I came in and played too high a string, I wasn’t going to succeed here,” Mendelson said. But Mendelson said Latham’s teamwork strategy has helped his practice. The contacts he made with other partners while he was interviewing came in handy when he needed help with a client. That’s exactly the point, Latham managers say. The firm is banking that its approach will help it cross-sell practices to clients. CONVINCING CLIENTS From a client’s perspective, the teamwork approach appears to be convincing. Douglas Ingram, general counsel of Irvine-based health care company Allergan Inc., is one convert. Ingram hadn’t used Latham until three years ago, when another firm he had hired was conflicted out of a patent dispute. When Ingram said he was planning to spin out two major divisions, the Latham litigator he was working with suggested a meeting with corporate partner Cary Hyden. Ingram hired Hyden — and that wasn’t a typical move on Ingram’s part. He said he doesn’t usually buy into the cross-selling marketing shtick. “We don’t hire firms, then expect them to handle all things,” he said. With Latham, Ingram said he feels like the center of attention and that the firm’s lawyers are constantly thinking about his problems. “There’s another level the outside counsel can go to,” Ingram said. “You can over time begin to evolve from being just a very competent service provider into an extension � of the legal department. Once you’ve done that, your value to the company has substantially increased.” Ingram now uses Latham lawyers for financings, employee benefits and tax work, along with general corporate matters. And he’s drawn upon the firm’s European offices. GROWING PAINS Latham’s biggest challenge may be how big it can grow without straining its culture and management to the breaking point. The firm’s expansion has given Dell problems of global proportions. He said he worries more about the global economy than any one particular practice or office within the firm. Since taking the helm, Dell has focused largely on diversifying the firm’s practice areas and opening enough offices to cushion the firm from a hit in any one region or industry. However, now Dell worries about how instability in the Middle East will affect his firm’s largest international clients and whether the outbreak of the SARS virus will have long-term effects on the Chinese economy. Dell said the firm has already revisited its spending plans for this year to put off some capital expenditures as the economy continues to drag. “We’re now large enough that we’re not impacted by a specific industry group or geography,” Dell said, “but if the whole world economy is moribund, it will impact us.” Still, it’s a long way from the worries of a decade ago. Latham is thinking about growth — not about simply surviving. It’s a position Dell says he’s grateful to be in. “When I took over, it wasn’t like I was put in place to save the firm,” Dell said. “So I had the luxury of looking for opportunities to enhance the structure and to continue to build.” Related chart: Latham & Watkins — Profits

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