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Democratic gubernatorial candidate Bill McBride, the former managing partner of Holland & Knight, took the microphone last month at a campaign rally in front of a rustic bed-and-breakfast in New Smyrna Beach, Fla. “I’m the only person in this campaign who’s run a business,” he said in his soft Central Florida drawl to about 150 senior citizens standing on the lawn. “And I ran a pretty good one. … The way you create great states is the way you create great companies or great organizations. You make sure everyone has a seat at the table.” Maybe. But the talk around that table that he left last June has taken a contentious turn. Holland & Knight, Florida’s largest law firm and one of the largest in the nation, is facing serious financial challenges. McBride led the firm with a strong hand from 1992 to 2001, engineered its expansion from 275 lawyers to more than 1,275 and carried the banner for its socially conscious policies. Now, some current and former Holland lawyers, as well as outside observers, are saying that the organization McBride steered to national prominence has arrived at a critical juncture. A Jan. 21 memo from a Holland partner to Robert R. Feagin III, McBride’s successor as managing partner, charged that the law firm made an error by emphasizing expansion over profitability. The memo, written by Martin J. Jaron Jr., a partner based in McLean, Va., predicted that many partners would jump ship within weeks — sending the firm toward possible “demise” — unless management increased profits and pay by cutting jobs and programs and shrinking the firm in size. “Our reduced profitability is the source of the intense and negative reaction you have been seeing from partners over the past weeks,” wrote Jaron, 51, a litigator whom McBride hired in 1998. He said that a Jan. 17 memo from Feagin to the partners did not “show an appreciation for the actual source of the problems.” “… As the firm’s financial situation has gone from bad to worse over the past two years — and especially in the past four months … partner confidence in the firm’s expansion-driven model, direction, and management is low and cynicism about the future of the firm is high. … Moreover, the firm has unrest among equity partners and general concern about the survival of the firm at all employee levels.” Holland’s management seemed to agree with Jaron’s drastic cost-cutting prescriptions. In recent weeks, the firm has taken dramatic steps to control costs. Its most visible move, though ostensibly temporary, was to suspend annual pay increases for associates and to reduce expected bonuses. People who completed a year as fourth-year associates, for instance, didn’t get bumped up a step to fifth-year pay, and so on. That freeze represents a pay cut of $10,000 or more for senior associates. In addition, firm managers say they’re planning an overhaul of the firm’s entire associate compensation program. The target date for completion of that overhaul is June 1. Jaron’s confidential memo, obtained by the Daily Business Review, contended that the law firm is burdened with too many offices, overpaid associates, underproductive veteran partners and excessive pro bono expenses. Many Holland partners now earn less than associates, Jaron complained to Feagin. “That is an outrage,” Jaron wrote. “We are in trouble. These and other poor management practices have placed the firm in peril.” Feagin had invited the input. Jaron’s 14-page memo was written in response to a series of requests by Feagin over the previous two months to the firm’s 730 partners for input. Feagin says the requests elicited about 85 responses. While Jaron is just one of 1,279 lawyers at Holland, his memo echoes broader concerns within the ranks about the financial health and mission of the firm, whose roots trace back to the Tampa law practice of Peter O. Knight in 1889. In interviews with about two dozen current and former Holland partners, legal consultants and outside attorneys — few of whom were willing to comment for attribution — what emerged was a picture of a firm engaged in a passionate internal debate. The struggle is over how to preserve the firm’s identity as a organization committed to charitable causes and social justice while significantly boosting profits. “It’s a fight between the eat-what-you-kill guys and the guys who care as much about pro bono as they do about making more money,” says one longtime partner who requested anonymity. In an interview, Feagin downplayed Jaron’s gloomy predictions. “I am not fearful of the kinds of defections from Holland & Knight that you heard about,” he said, adding that 2002 could be the firm’s best year ever, with billings and collections already showing significant improvement over last year. Still, the question of how deeply to cut costs played a central role in the elections this month at the firm’s annual partners meeting in Orlando. Eight of the 24 Director’s Committee seats were up for grabs. Roughly half — the firm would not confirm this — went to candidates known to favor aggressive cost-cutting, known jocularly inside the firm as the Taliban. Feagin insists he isn’t worried. He gauged the mood at the Orlando partners meeting, he says, and found the attorneys’ commitment to the firm remained strong. Their confidence, he said, “reflects the strength in our firm right now and the prospects we have for continued success.” He expressed optimism about the firm’s future. “I am committing to my owners that I am going to give maximum effort to improving owner profitability,” Feagin said. “I would like us to be at the top of the ranks.” Holland is hardly the only law firm feeling the chill of the economic recession and the dot-com debacle, along with the post-Sept. 11 trauma. Around the country, many firms are dumping lawyers, freezing pay and rolling back costs. But at Holland, there appears to be considerable internal dissent — with part of the unhappiness directed at Feagin, who served as chairman for 10 years before being named managing partner last June. There’s also a lot of implied criticism of the previous managing partner, a dominant figure who left Holland in June to try to unseat Gov. Jeb Bush this November. McBride makes his case as the future leader of the state partly on the claim that he successfully led a large business. Though still an underdog in his challenge to former U.S. Attorney General Janet Reno for the Democratic nomination, McBride is outpacing her in fund raising. McBride, 56, a former Marine captain and decorated Vietnam veteran who grew up in Leesburg, joined Holland in 1975 as a protege of then-managing partner Chesterfield Smith, and took over as the firm’s chief executive in 1992. Following his vision of taking the Florida firm national, the firm grew from 10 offices, eight of them in Florida, to 32 offices in 11 states, the District of Columbia and seven foreign countries. All the while, critics derided Holland as “McFirm,” harping that the growth didn’t make the firm a major national player and that its partners made dramatically less money as a result of the expansion. But McBride burnished Holland’s image as a good corporate citizen. The firm was a leader in providing spousal benefits to gays and lesbians and establishing a “living wage” for its janitorial and mailroom workers. Three years ago, Bill Clinton presented McBride as a featured speaker at a national civil rights conference at the White House. Both McBride and Feagin long have been advocates for the progressive social vision of Chesterfield Smith, the former managing partner and American Bar Association president and a 52-year veteran of the firm. At age 84, Smith still maintains an active presence as a senior partner in the firm’s Miami office. But keeping elderly partners like Smith on the Holland payroll comes in for strong criticism in Jaron’s memo. Holland is known within the legal community as a firm willing to accept somewhat lower profits to enable its lawyers to take on unpaid work that benefits the underprivileged. “If you want to maximize your income in a law practice, you probably would go somewhere else,” says Ward Bower, a principal at Altman Weil Inc. in Philadelphia, a consulting firm that lists Holland & Knight among its clients. Despite Holland’s phenomenal growth, its profits per partner put it in the bottom tier of the nation’s largest firms, according to the Am Law 100 rankings for fiscal year 2000, published by American Lawyer magazine last July. While ranking as the country’s 27th largest law firm in gross revenues, Holland’s $395,000 in profits per equity partner puts it in the bottom 11 percent on that list. Compensation per partner, equity and nonequity partners combined, averaged $290,000 at Holland — 98th out of 100 firms. By comparison, Miami-based Greenberg Traurig, another fast-growing firm, ranked 61st in profits per equity partner, at $635,000, and 64th in compensation per partner, at $500,000. According to figures that Jaron’s memo attributed to Feagin, Holland earned $157 million in profits last year, on collections of $466 million and expenses of $309 million. That’s a 34 percent profit margin — not great, but not terrible, by law firm standards. “A little weak,” says legal consultant Peter D. Zeughauser, principal of ClientFocus in Newport Beach, Calif. Last year, according to one longtime partner, equity partners at Holland took a pay cut of 10 percent to 12 percent. And, if Jaron’s memo is correct, the firm engaged in its long-standing practice of borrowing from current-year revenue to pay even that reduced amount. The practice, known at the firm as “the push,” is neither unethical nor uncommon, but it is sometimes seen as a sign of financial weakness. “Horrendous” is how the managing partner of one Miami firm describes the practice of paying partners out of current revenues. In his view, it could indicate that “you’re living beyond your means and your business model isn’t working. It has to come home to roost at some point.” Other lawyers and law firm consultants are less critical. They see such borrowing as a matter of practicality for firms that might have strong earnings but not a lot of cash on hand at the start of a year. For his part, Feagin says that “we’re mindful of the need to restrain [borrowing], and we do.” One reason Holland’s profits weren’t great was that throughout the ’90s, McBride led the firm in a strategy of rapid expansion by acquiring smaller firms and opening offices around the country. That carried big costs and diluted per partner profits, in anticipation of future financial growth. Multiple-office firms spend more per lawyer than smaller firms, due to replication of functions, says Altman Weil’s Bower. They have more receptionists, libraries and waiting areas. But Feagin insists that the extra costs associated with expansion are worth it. “You have to invest in growth to make it happen,” he says. “We believe that growth is going to provide partners of the firm a return in terms of increased profits going forward.” On the other hand, he says, “the expenses we have incurred in connection with that growth are under constant examination.” He vows that the firm will continue to build its national platform. “We’re well on our way to completing and filling out that plan and, yes, it is working,” he says. “More and more of our clients are served by a wider range of lawyers out of more offices, representing more practice areas than ever before.” One of the major reasons to establish a national presence is to attract national companies which need a law firm which can provide the appropriate legal skills wherever they are needed. But it’s not easy to quickly move up the scale of corporate clients to the Fortune 500 or Fortune 150 companies targeted by Holland, experts say. The managing partner of a prominent Miami law firm, who did not want to be identified, says Holland’s strategy of developing a Fortune 500 client list was misguided. Two-thirds of those corporations are locked in with New York lawyers, or with law partners the corporate executives went to school with, says this attorney. “You can open a New York office and stand on your head until you’re blue in the face and never get in,” he explains. Meanwhile, Holland faces growing competition for the mid-range corporate work on which it has relied, this managing partner says. By mid-range work, he means legal work that comes, for example, from a banking lawyer’s relationship with a mid-level bank loan officer rather than with the bank’s CEO. With competition increasing for these price-sensitive clients, there’s a temptation to accept less-creditworthy clients. That can lead to accounts receivable problems, the lawyer says. “It’s a dangerous slope.” RADICAL COST-CUTTING URGED In his memo, Jaron criticized Holland management’s financial turnaround plan for focusing excessively on improving efficiency, for instance using more knowledge management, and for relying on outside consultants. “Follow that plan and the firm will be history and a maze of creditor claims and lawsuits in two years,” he warned. Instead, he outlined a radical series of cost-cutting measures. He described himself as qualified to make such recommendations — even though he wasn’t privy to full management data — based on his seven years of previous experience as assistant manager of a Virginia county with 6,000 employees and an operating budget of nearly $1 billion. Among the changes he urged: � “Right-size” the firm by eliminating attorneys and offices. Jaron suggested that the firm has 200 more attorneys than it has work for. � Reconsider the national strategy. “We don’t seem to be attracting many [large national] clients. … [W]e need to ask ourselves whether the basic model is flawed.” � Freeze hiring. Entry-level recruiting should be slashed this year, if not eliminated, and the firm should consider rescinding or delaying job offers extended last summer, he said. � Stop allowing associates to apply pro bono work as credit toward bonuses for billable hours. “We have institutionalized and rewarded moderate productivity for associates with higher compensation and have reduced compensation for many highly productive partners to pay those associates,” he wrote. � Consider mandatory retirement. Holland has too many Class A, older partners who do not bill, yet receive “significant compensation,” he wrote. If they’re doing nonlegal tasks, then those tasks might be handed to less expensive, nonlawyer professionals, he added. � Take a hard look at Holland’s ancillary consulting business, H&K Consulting. � Reduce secretarial support. � “Drastically” reduce or eliminate support for pro bono work, including the firm’s full-time Community Services Team. But pro bono work by individual lawyers should continue to be encouraged. � Restrict the managing partner’s unilateral authority for spending and borrowing decisions over $500,000 dollars. “No single person, including the managing partner, should have the authority to incur that obligation for the firm without board approval,” Jaron wrote. � Use more conservative revenue forecasts in budgeting. � Share more financial data with partners, rather than just summary budget information. Jaron concluded on a slightly more optimistic note, by jokingly quoting comedienne Lily Tomlin: “Things are going to get a lot worse before they get worse. All kidding aside, I don’t think that is true in our case.” In response to requests from the Daily Business Review for comment, Jaron faxed a letter on March 5 retracting some of his statements in the memo and denying permission to publish any part of the memo on the grounds that it was proprietary to Holland & Knight. He wrote that he had learned since Jan. 21 that management “was engaged in initiatives on many fronts.” He said he now believes that the firm has “a strong plan in place for continued success.” Indeed, Holland recently has embarked on some major cost reductions. But its new curbs on associate pay increases and its planned compensation review come two years after the firm adopted policies that sharply hiked costs. Like other large Florida firms, Holland jumped onto the nationwide associate pay hike bandwagon in 1999, raising first-year pay to about $100,000. In late 2000, with considerable fanfare, Holland instituted a living wage policy for support staff. It boosted hourly pay for janitorial, filing and mailroom employees across the country by as much as 50 percent, from $8 to $12. Responding to Review questions about cost-cutting, Feagin says the firm is considering “all the things you would normally review in connection with your business plan and practices.” He declined to speculate about what actions the firm might take as far as job cuts and other options. According to one source, the firm already has a “right-sizing task force” hard at work, consulting with practice area heads and considering individuals’ performance. Pay cutbacks for attorneys, however, do carry risks, experts say. With the associate pay freeze, which disproportionately hurts senior associates, Holland risks losing some of its most experienced young lawyers. But if it doesn’t cut costs, it risks losing equity partners, who sources say are impatient with the flat revenues and relatively low profit margins. One type of cost-cutting Feagin seems to rule out, however, is reducing compensation to partners who reach retirement age. “It’s not on my schedule of things under serious consideration,” he says. PRO BONO CULTURE AT RISK? In his memo, Jaron warned that Holland had only weeks “to take decisive action demonstrating that the firm has adopted clear financial goals, understands the problems and has a serious and credible plan in place to solve them. Much longer than that, and I think the firm runs the risk of losing many highly productive partners.” So far, Jaron’s prediction of mass defections hasn’t come true. The firm has about 50 more lawyers now than a year ago. “It hasn’t happened, and from everything I saw in Orlando, it isn’t going to happen,” Feagin says, referring to this month’s partners meeting. But the situation in Holland’s Orlando office shows that danger lurks if the profit picture doesn’t improve. Over the past year, 15 out of 87 full-time lawyers in that office left for various reasons. One of those who departed told the Review that the heavy expenses associated with expansion and pro bono work meant longer hours and lower quality of life for the firm’s lawyers. “It’s not that each of us is greedy,” says the lawyer, who did not want to be identified. “But with lower costs, you can make the same money without working as many hours.” But Feagin argues that a strong pro bono policy makes good business sense for his law firm. “Clients find it appealing,” he says. “To the extent it makes us distinguish ourselves from other firms to clients, it damn sure generates revenue.” More than half of Holland’s lawyers do pro bono work, including four who are assigned full-time to pro bono projects. The firm ranked 34th on last year’s Am Law 100 on quantity of pro bono work. Stephen F. Hanlon, a Tallahassee-based partner who has run Holland’s Community Services Team since its inception in 1990, says that even that impressive ranking understates the challenging pro bono caseload Holland has taken on. Last year, after a 10-year effort, the firm settled a lawsuit filed in U.S. District Court in Miami against the Florida Department of Juvenile Justice and Department of Children & Families. The firm was lead counsel representing 45,000 children in the foster care and juvenile justice systems who were not receiving needed mental health services. The class action required the state to develop a system for providing those services. Holland also is heavily involved in pro bono representation of immigrant detainees in Florida, Death Row inmates in Alabama and HIV-afflicted prisoners in Mississippi. Still, Hanlon says he’s already overseen a partial pullback on pro bono work because of the economic recession. The firm, which has a goal of 50 pro bono hours per lawyer each year, went from an average of 45 hours per lawyer in 1999 to 32 hours in 2000, and held it to 36 in 2001. “It’s prudent management,” he says. The firm’s patriarch, Chesterfield Smith, expresses no worries about the spirit of public service continuing at Holland & Knight. “Making the justice system work for everyone is a lawyer’s responsibility, even if it means making reasonable sacrifices,” Smith says. “Holland & Knight has been doing that a long time. I don’t think we’ll quit.” And speaking from the campaign trail, Bill McBride defends his previous stewardship of the firm. The firm, he says, is following a sound business plan that he and Feagin established before he left on his political quest. “The firm is really strong,” McBride says. “Holland & Knight is positioned, as best I can tell, to have a great future.” Jim Oliphant of Legal Times , an affiliate of the Daily Business Review in Washington, D.C., provided additional reporting for this article.

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