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Mention the recent partner exodus that rocked Littler Mendelson, and Gary Mathiason doesn’t flinch. He picks up a magic marker and sketches a graph illustrating the firm’s ups and downs. For most of the 1990s, demand for Littler’s labor and employment expertise rose as employers grappled with an explosion of workplace laws and litigation. But by 1998, the unthinkable had happened: Times were simply too good for employers and employees to do battle. Demand stagnated, explains Mathiason, drawing a flat line marking Littler’s static growth. Compounding the problem were booming technology and general practice firms, flush with work and looking to beef up their employment arms. Littler was a prime hunting ground and, with offers of as much as $200,000 a year, partners began to walk. “We sure did [lose partners],” Mathiason says. “People were thinking the day was over for labor and employment law firms.” Some still do. Mathiason, however, says Littler is gaining the upper hand. As former high fliers like Brobeck, Phleger & Harrison try to regain their footing amid the economic slump, recession-proof tortoises like Littler that crawled through the good times are looking a lot smarter in the bad. According to Mathiason, work has picked up dramatically as companies seek guidance on layoffs and the threat of terrorism in the workplace. Half the turncoat lawyers have asked to come back, he says. In Mathiason’s eyes, now is Littler’s time to shine. “This is a huge story,” he says as he puts down the marker. How the tale ends is an open question. While Mathiason and other Littler partners paint a rosy picture for the coming years, there are plenty of doomsayers. These are trying times for the labor and employment bar generally. Profit margins are being squeezed from multiple directions. On one side, more companies now buy insurance to cover garden-variety employment matters, thereby putting penny-pinching insurers in control of defense costs. On the other, accounting firms and other vendors are encroaching on the law firm turf, offering their own training products for sexual harassment and other workplace trespasses. For Littler, the so-called commoditization of the labor and employment practice has been exacerbated by the high cost of running a 383-attorney, 31-office empire. Littler’s outposts range from major cities like Los Angeles and New York to far-flung locales like Bakersfield, Calif., and Yakima, Wash. — good news for multistate companies. But office rents have been a drag on profits. What’s more, the firm’s own competing line of cheaper, off-the-shelf products contribute to the downward fee pressure. The numbers bear out the problem. Revenues in the past decade surged 133 percent, to $138.5 million, as the firm’s attorney count more than doubled. But average profits per partner stood at only $345,000 last year, a mere 13 percent increase from 1991. Revenue per lawyer, a more accurate barometer of a firm’s health, rose just 20 percent, to $380,000. While Mathiason and Managing Director Wendy Tice-Wallner say business is brisk this year, they won’t disclose projected revenues or profits, other than to say that partner income is expected to be flat. Add to that mix lingering internal strife over partner compensation and a culture fractured by growth, former partners say. As employment insurance gains popularity, former partners say, the firm will have to take drastic steps to change its business or risk suffering the same fate as any number of traditional insurance defense shops sunk by low margins. Among the possible surprise endings: a merger with an accounting firm — once the regulatory barriers fall. It is a big story, perhaps. One that’s filled with uncertainty. A FIRM ON THE RISE Change is a constant at Littler, which got its start during the World War II era busting unions from a California base. In 1992, amid a wave of new federal and state legislation, the firm launched a massive expansion drive and, at the same time, moved away from “loose, consensus-driven” leadership and established a formal management structure. Under the guidance of Mathiason and J. Richard Thesing, the firm’s first managing director, Littler became a firm on the rise. In 1996, revenues of $84 million vaulted the then-250-attorney firm onto The American Lawyer‘s annual ranking of the country’s top-grossing firms. The firm planned to finish the decade with 500 lawyers and a brand name as the go-to firm for employment advice. That same year the firm opened offices in New York, Atlanta, Las Vegas, Denver and Morristown, N.J. As it dove into new markets, Littler also branched into ancillary products and services. Over the years it rolled out manuals, conferences, newsletters and online sexual harassment and other workplace training. Clients have abundant options: a toll-free number (1-888-LITTLER) or a $1,750, all-inclusive, one-year program that gives each subscriber access to firm conferences, breakfast briefings and news alerts on breaking developments in the law. Credit for these moves goes largely to Mathiason. Although lacking a formal role, the 55-year-old is, for all intents and purposes, the wizard behind the curtain. He prefers a more corporate description, that of “executive vice president of research and development.” His job, as he describes it, is to analyze trends, develop a strategy and then sell it to his partners (shareholders, technically). Littler, according to Mathiason, has three key advantages: sex, drugs and violence. “They are always going to be a part of life,” he explains — and forever a thorn in employers’ sides. Today, Mathiason boasts that the firm covers almost every major metropolitan market in the country. The three holes — Detroit, Boston and Florida — he aims to fill within the next year or so, assuming the firm finds the right recruits. The value of a broad national network can’t be underestimated, say Mathiason and other partners, especially for a state-specific practice like employment. If a multistate client in Seattle calls up with a question about Texas employment law, the answer is just a phone call away. But sometimes, say former partners, the growth isn’t strategic. Littler may hang out a shingle in a small town just to accommodate a partner, not because the firm uncovered a gold mine. Earlier this year, when the firm nabbed 19 lawyers from Pittsburgh’s Buchanan Ingersoll, Littler added leases in both Pittsburgh and Philadelphia. According to Tice-Wallner, Littler had been eyeing Pennsylvania but not necessarily both cities. The two offices were simply part of the same package. The story that never gets told, gripes a former partner who wants to be anonymous: the number of offices shuttered. “They open and they close them,” he says. Too often, he says, “it’s a test drive for two to three years and then it’s ‘Oh my god, we’re losing our shirts.’” Among the locales that no longer house the Littler name: New Orleans; Morristown; Long Beach, Calif; Portland, Ore.; and Menlo Park, Calif. Another former Littler lawyer, who now works for a competitor, calls the multi-office approach an “interesting marketing idea” but one that, given the lease costs and impact on firm culture, is hard to justify. “This isn’t McDonald’s,” grouses the lawyer. “It’s the law.” The cost of absorbing the 19 lawyers from Ingersoll Buchanan is one reason that profits won’t increase this year, Tice-Wallner says. It’s a common refrain: In past flat years, management has pointed to the price of expansion, often indicating that the impact would be short-lived. THE QUINTESSENTIAL LITTLER Mathiason and Tice-Wallner have heard the carping before. Partners are forever saying, “‘Let’s not engage in national expansion,’” says Tice-Wallner, who calls Littler a “federation,” not a franchise. Partners, she says, frequently wonder, “Shouldn’t we be plowing more money back into the partnership?” The national strategy is not only sound, they say, but critical to the firm’s survival. It’s Littler’s out-of-state branches, Mathiason says, that kept the firm afloat in the late 1990s. The slowdown in California-generated business was so precipitous that, without them, Littler would have tanked. That said, Mathiason pledges that national expansion is nearing an end. For now, the debate over growth strategy centers on which client types to target — Fortune 500 or small business. Asked how the firm can pour money into real estate and lower-cost services and maintain a viable business, Mathiason launches into another tutorial. “I’m going to tell you a story that’s quintessentially Littler,” he begins. It goes something like this: A client calls asking for a review of its employment application to ensure that it complies with the laws of the 17 states where it has workers. How long, the company official asks, will it take and how much will it cost? Two hours and no more than $1,000, replies Mathiason. The firm already has a 30-page mockup that addresses the issue across 50 states. All it will require is a little tinkering to fit that client’s particular needs. So what was once a weeks-long, $50,000 project has been packaged into a near-instant, off-the-shelf product. “You can’t get a better bargain than that,” boasts Mathiason. Get a high volume of sales going, the thinking goes, and you’ve got a steady revenue stream at little cost. Better yet, you might just lock in a client for life. But the strategy hasn’t always panned out. Employment Law Learning Technologies Inc., an online provider of training modules, is trying to turn the corner after suffering, along with most tech operations, through the downturn. ELT, say former partners, is a high-stakes gamble. The firm and individual partners invested several millions of dollars in the late 1990s to fund an operation for which Mathiason, at the time, was projecting annual revenues of $150 million by 2003. Today, his expectations have lowered considerably. After growing to more than 40 staffers, the company has now shrunk to about a dozen. One former partner claims ELT is on the verge of bankruptcy. But Mathiason, while acknowledging the company has gone through “terrible, terrible, terrible” times, insists that ELT has turned the corner. The room for error in the firm’s strategic plan could be shrinking. Former and current partners worry about the growing prevalence of so-called employment practices liability insurance. EPLI has been bad news for the labor and employment bar, because insurers are in the driver’s seat when it comes to defense costs. As EPLI grows, labor and employment practices have struggled to survive. Some have gone under. Jeffrey Tanenbaum, the partner who oversees insurance-related cases, knows what he’s up against. EPLI, according to Tanenbaum, represents roughly 20 percent of the firm’s revenues. He calls fee negotiations with insurers “ongoing and very unpleasant.” But, he continues, the work is not a loss leader. Often clients are asked to make up the rate difference — or find new lawyers. Sometimes the blended rate that an insurer agrees to is higher than the regular rates charged by attorneys working the case, Tanenbaum says. That means that junior lawyers often do the EPLI work. The challenge is to avoid a two-class system that separates EPLI lawyers from their more profitable colleagues. There’s still plenty of lucrative work to be done — and both Littler and its former partners-turned-competitors know it. Class actions involving claims of race, age or sex discrimination or harassment are thriving, says Dallas partner Ronald Manthey. So-called wage-and-hour class actions, which center on whether companies owe certain workers overtime pay, are especially hot, says Manthey and other employment practitioners. Manthey, who heads the firm’s class action group, estimates the firm has at least eight nationwide class actions on its plate. His group has about 25 lawyers, up from eight to 10 a few years ago. Competition for the work is fierce. While Littler partners say their deep expertise and broad presence offer unparalleled advantages to any major corporation, competitors at general practice firms maintain that they have the upper hand. When it comes to high-stakes litigation, these rivals say, senior officers are more likely to turn to firms they tap to handle other critical company work, like regulatory filings or intellectual property litigation. BOTTOM-LINE FOCUS Tanenbaum, the EPLI manager, isn’t the only one keeping a watchful eye on billing rates. As Littler’s managing director, Tice-Wallner’s job is to execute the Mathiason strategy and make sure budgets are met. Gregarious yet steely, the 49-year-old is now in her third year at the helm, working with an executive committee comprising four colleagues, down from about nine shareholders in 1999. Describing the challenges of running a multi-office shop, Tice-Wallner offers her own anecdote. She recounts checking in with a partner who had recently joined the firm in Phoenix. He raved about starting his days by spending an hour or two reviewing all the requests for help posted on the firm’s intranet from partners in distant time zones. Tice-Wallner quickly ran the numbers. If every partner spent that much time every day poring over e-mail that may not be relevant to them, that could be a lot of lost money. Her solution: Funnel all the requests through a gatekeeper and make sure the time gets billed. “Nobody,” says Tice-Wallner, “should be talking about the billable hour. It should be the billable minute.” The bottom-line focus, together with the consolidation of power at the top, alienated some former partners. The pressure to raise billing rates above what he considered market levels was too much for Floyd Palmer, a former management committee member who spent some 20 years at the firm before launching Sacramento, Calif.’s Palmer Disario Kazanjian Holden in 2000. “[Wendy] had a different outlook on the way the firm should be managed or grown,” says Palmer. “A lot of us took a look and said ‘I’m done’ and walked away.” Since stepping into senior management, Tice-Wallner has addressed other partner gripes, including partner pay. Littler’s model for decades, often derided as the “tattoo” system, rewards rainmaking above all else. A partner who brings in a new client receives lifelong credit for the revenues that follow, to the detriment of the eventual relationship partner. For years, when the firm was still small and struggling to gain a foothold, the system worked well. But later, as Littler grew both in size and geographic reach, partners openly chafed at a system they say rewarded a few older partners at the expense of the whole. One of Tice-Wallner’s first orders of business was to overhaul the tattoo model. The new plan, which she says will take effect next year, evenly splits credit between originating and relationship partners. It also sets up a budgetary process that requires each partner to plan the year ahead — and be paid according to the results. “Your compensation program,” she observes, “is your strategic plan.” Palmer, the former Sacramento partner, thinks these and other changes are healthy and will, in the end, create more cohesion. Once that happens, he cautions against underestimating the firm. “It’s the only firm that I’m aware of that’s set up to handle mega-corporations with multistate facilities,” he says. “Littler will bounce back and be one of the strongest labor and employment law firms in the country.” Mathiason would agree, of course. When it comes to just what Littler will look like over the next decade, though, he waffles slightly. He’s not sure yet whether Littler’s growth will plateau at 600 lawyers or explode to 4,000. The only way to get to the latter is through a merger, most likely with an accounting firm. He’s not coy about his reasoning. “Our position all along has been to become the fiercest competitor an accounting firm has ever had or the best merger partner they’ve ever encountered.” The one major drawback: the foray by Big Five consultancies into legal services — far more extensive abroad — has so far been unfocused and disorganized, says Mathiason. First, they’ll have to get their acts together to turn Mathiason’s head. One thing Mathiason and Tice-Wallner know for sure: Change is inevitable. It’s a prediction that is firmly grounded in Littler’s recent past and that has plenty of support at the top. “We cannot be the same firm five years from now that we are today,” says Tice-Wallner. And if it is? “We will fail.”

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