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New Yorkers believe they’re at the center of the universe. And New York lawyers, of course, are no different. For the last century they’ve had the benefit of being right. New York firms have been the nation’s most profitable, respected, envied, and influential. But that era is ending. Make way for the New Paradigm. For the past few years, every significant change in the legal profession has come from a handful of firms in Silicon Valley. They sparked last winter’s associate salary raises. They popularized the practice of taking equity stakes in clients in addition to fees. Within the legal profession they pioneered casual work environments, looser hierarchies, a fast-paced, streamlined work style, and — most importantly — a focus on high-tech clients. Influenced by the cutting-edge companies they counsel, these firms have become the profession’s trendsetters. The New Paradigm developed by these firms isn’t just about building a technology client base. It’s a whole different way of doing business — an entrepreneurial approach that requires more risk and innovation. The old-style law business is stubbornly resistant to change. New Paradigm firms seek change. Old-style firms pride themselves on their stable of megaclients. New Paradigm firms search for promising young companies that are relative unknowns. Just as New Economy clients have captured the imagination and loyalty of younger workers, New Paradigm firms appeal to young lawyers. They still race like dogs at the track, just like at New York firms, but they’re spending those hours in a less starchy setting, and they’re getting more client contact and responsibility. Let’s face it: The way that old-style law firms have been run has made few associates happy. For decades they put up with it because they had few options. Now there’s a choice. After watching countless clients soar from obscurity to the top of the market, Silicon Valley law firms now ask why the same thing can’t happen to them. “We’ve seen companies that did not exist a decade ago emerge as the largest, most successful, and dynamically growing companies in the world,” says Tower Snow, Jr., chairman of San Francisco’s Brobeck, Phleger & Harrison. For example, he points out, Cisco Systems Inc., the Internet networking giant, didn’t float its IPO until 1990. Today the Brobeck client has one of the largest market capitalizations of any company on earth. Cisco and companies like it have succeeded, he says, because they embrace change and are constantly reinventing themselves. Snow believes in applying that model to Brobeck: “Firms like ours are focused more than anything on learning from our clients,” he says. This doesn’t mean that premier New York firms will stop thriving. But no longer will they have the center stage to themselves. New Paradigm firms will challenge them for prominence and importance. “We have to recognize that technology is really driving the economy,” says Larry Sonsini, chairman of Palo Alto, Calif.’s Wilson Sonsini Goodrich & Rosati. “This is a shift in the economy, and law firms that focus on that shift will definitely have more influence.” Sonsini, who was one of the first to grasp the importance of this market with such early clients as Apple Computer, Inc., Sun Microsystems, Inc., and Netscape Communications Corporation, says we’ve only seen a fraction of the potential. “The globalization of technology is just in its infancy. We’re in the top half of the first inning.” “I believe that for all firms the technology client base is going to be the key to the future,” says William Lee, managing partner of Boston’s Hale and Dorr, which is increasingly focusing on a high-tech clientele. “Technology clients and people whose business is based on technology are going to drive the most successful law firms.” New York firms aren’t ignorant of the New Economy. Davis Polk & Wardwell; Simpson Thacher & Bartlett; and Skadden, Arps, Slate, Meagher & Flom have all opened shop in the Valley to seize a piece of the bonanza. The most telling development, though, is the expected arrival of New York’s most successful firm. Wachtell, Lipton, Rosen & Katz — which has never opened a branch in its existence — appears poised to set up a small office in the Valley (as soon as it can find office space). That the smartest, most selective, and most strategically focused firm around believes it must be in the Valley speaks volumes about the importance of this market. Yet even as they flock to the Valley, many New York lawyers scoff at the suggestion that the world won’t continue to revolve around them. Some insist that this technology boom is like the oil and gas bubble of the eighties — a fad that will pass. Their firms have always dominated and will always dominate, they staunchly maintain. That smugness is fine with Brobeck’s Snow. “If people are dismissive of firms such as Brobeck, so be it. History shows that those who are overconfident or arrogant tend not to do well when the environment changes.” He continues, “The success of New York firms in their traditional areas of practice is a two-edged sword. It’s a disincentive for them to change and has led them to attach low priority to emerging growth and New Economy opportunities.” Sonsini says firms that consider this boom a passing fad are looking at it too narrowly. “There will be phases in the technology industry, but the key is continued growth,” he says. New Yorkers may be surprised by how quickly the Silicon Valley-based firms are moving up on them. In the first four months of this year, Brobeck hired 208 lawyers. Since the end of last August, the firm’s attorney ranks have grown 40 percent, from 540 to 754. Snow predicts that Brobeck may pass the 1,000-lawyer mark by the end of next year. Palo Alto’s Cooley Godward has grown 38 percent since last August, adding 158 new attorneys. Much of that expansion has occurred outside of the Valley. In the high-tech center of Reston, Virginia, for instance, Cooley has zoomed from zero lawyers to 65 since opening in April 1999. Wilson Sonsini, the behemoth of the Valley, has grown 25 percent since last August. Of course, size alone doesn’t ensure success. When it comes to profitability, the top Valley firms at first glance appear to lag far behind the New York leaders on the Am Law 100 charts. But the momentum is with the challengers. In the last ten years, no firm has risen faster up The Am Law 100′s gross revenue charts than Wilson Sonsini. In 1990 it was in ninety-ninth place; this year it’s number 28. Cooley didn’t appear on the 1990 gross revenue chart; this year it’s tied for number 50. Brobeck’s profits per partner increased 44 percent last year, to $855,000; Wilson Sonsini was up a hefty 35 percent to $835,000; Cooley gained a more modest 18 percent to $665,000. But by this measure, even Cooley bested all 10 of the most profitable New York firms, which saw profits per partner rise only 9 percent on average. At Cravath, Swaine & Moore, profits per partner rose only 3 percent; at Davis Polk, 5 percent; and at Sullivan & Cromwell, 9 percent. The biggest increase among the top ten New York firms was at Skadden, which was up 16 percent. And of course, these results are based only on revenue from legal work. They don’t include gains from client equity investments, a practice that the big New York firms eschew but one that Valley firms have used to make a killing. Wilson Sonsini, Brobeck, and Cooley don’t disclose their exact gains from equity investments, but all confirm that in recent years many of their partners have made as much from equity as from fee income. That means that top partners at these firms are making nearly as much as their counterparts at Skadden and Davis Polk. Brobeck’s Snow predicts the equity component of partner compensation will only increase. “If we do this right, three to five years from now, although we’ll have a sharp growth in revenue, we should get more of our [income] from equity than fees,” he says. Wilson Sonsini and Cooley are no less ambitious. This strategy is important because there’s evidence that most firms, especially New York firms, have maxed out on the fees they can squeeze out of each lawyer. While New York firms boast about their ability to command premium fees, their revenue per lawyer remains relatively flat. At the ten most profitable New York firms, revenue per lawyer rose only 6 percent on average, to $945,000 — even though those firms spent 1999 operating on overdrive. As a result, firms that can supplement income with valuable equity stakes can move ahead. “It’s about the survival of the profession,” explains Brobeck’s Snow, who warns that law firms will lose the best talent to more lucrative fields if they can’t keep within striking range of equity-rich dot-coms and investment banks. “The law is in danger of being a profession of second choice.” These investment gains are not fleeting windfalls. The recent swoons in the Nasdaq show that the size of these gains may fluctuate, but they won’t disappear. The technology business isn’t going away, and new companies will continue to emerge and grow. The Valley firms make their investments so early at such cheap stock prices (often pennies per share) that so long as the company doesn’t completely collapse, they’ll make a profit. And since the Valley firms rarely take their stock in lieu of fees, the equity is gravy. Old-line firms may publicly question this strategy, but they’re scrambling to get in. If a big firm hasn’t recently established a client investment policy, it’s probably drafting one. “A lot of firms that two to three years ago would never consider taking equity in clients are all piling up trying to figure out how to do so,” says Cooley managing partner Lee Benton. The Valley firms are also quickly rising up the charts that measure mainstream corporate activity, long the bastion of the Manhattan elite. Three years ago Wilson Sonsini didn’t even appear in our Corporate Scorecard rankings of the top 25 M&A dealmakers for 1996. This year the firm ranked number four on the M&A list, which is based on number of deals closed in 1999, behind only Skadden, Simpson Thacher, and Wachtell. (Twelve firms had deals with higher total value than Wilson Sonsini, though.) Brobeck cracked the list for the first time this year at number 13, as did Palo Alto’s Fenwick & West, which finished in 20th place. Not surprisingly, this year’s IPO list — which like the M&A list is built around the number of transactions in 1999 rather than their value — was headed by Wilson, Brobeck, and Cooley, in that order. But put charts aside. The most important barometer of a firm’s future is recruiting. Firms such as Cravath and Davis Polk rose to the top and stayed there because they could attract the brightest, most talented candidates. There’s no doubt that those firms are still hiring top-tier students. But New Paradigm firms are gaining a higher profile on campus. Richard Climan, a corporate partner in charge of recruiting at Cooley Godward, says he’s seen a dramatic increase in interest at law schools. Last fall the number of students who signed up for interviews with Cooley jumped 33 percent, even though the firm visited the same number of schools. In a wave of lateral hiring this year, Brobeck picked up associates from Cravath, Simpson Thacher, Skadden, and Sullivan & Cromwell. The firm planned for 75 summer associates; it got 102. These students are attracted to something different from the New York experience. Like their friends at business schools, they’re less impressed by old-line institutions. They want a new model. The firms that will thrive under the New Paradigm are the ones that don’t just tolerate change, but desire it. “IBM did not think it needed to change,” notes Abe Isenberg, Brobeck’s executive director. “There is not one industry in this country that has not had to go through serious change. … Look at the top market-value public companies today versus 25 years ago. You will find very few [from then] still on that list.” Wilson, Brobeck, and Cooley are no longer content to dominate the Valley. They’re barreling into this decade with aggressive plans and lots of momentum, as well as some New York-style arrogance. Says Snow: “Those that don’t get it are already dead. They just don’t know it.” Related Chart: The Am Law 100 Am Law 100 Index

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