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Over the past few months, I have been asked repeatedly by leaders of large law firms about the collapse of Brobeck, Phleger & Harrison in January. They want to know how a firm could fall so far so fast, and also what they can learn from Brobeck’s demise. Finally, they ask whether there are other Brobecks out there — other firms on the same downward trajectory. There is so much interest in this topic, and the lessons of Brobeck are so important, that this month I am breaking from my usual question-and-answer format to focus exclusively on Brobeck. Over the past decade, Brobeck had muscled its way onto Wall Street, transforming itself from a regional firm with a strong West Coast practice into a New Economy powerhouse, competing with New York firms for the best work from technology clients, startups and behemoths alike. It capped the journey with a historic multimillion-dollar marketing campaign that blitzkrieged Lou Dobbs Moneyline and innumerable print publications. The ironic tag line: “When your future is at stake.” Brobeck was known for toughness and quality work, and brought out the best in its competitors. The notion that a practice once so strong could suddenly become so fragile has deeply shaken leaders of large law firms in the United States and Europe. First things first: I do not believe that there are more Brobecks waiting in the wings — at least not exactly. Brobeck was unique, because no other Am Law 100 firm has approached its meteoric rate of organic growth. Without a merger, or even, if memory serves, a significant lateral group acquisition, Brobeck increased its head count at a rate that until then was unthinkable. But the large-firm landscape is littered with plenty of weak performers that will face their own types of financial crises. If mishandled, each of those crises has the potential to end as badly as Brobeck’s. That said, these are the lessons from Brobeck’s death: � Communication is the lubricant of culture. Brobeck’s final days were shrouded in secrecy. In all likelihood, the people who really know the succession of events that brought down one of the country’s pre-eminent firms could be counted on one hand. Within the firm, there appears to have been a serious failure to communicate. Trust is the glue of a partnership; communication keeps the adhesive strong. In the absence of communication, rumors, dissension and ultimately fear of the unknown permeate a firm’s culture. � Chaos is the price of poor leadership succession planning. Remarkably, Brobeck’s collapse does not appear to have been caused by a single, overarching mistake. Instead, the firm slipped into tumult. With no apparent plan for an orderly leadership succession, Brobeck lost its chairman, Tower Snow Jr. (Snow decided not to stand for re-election), and then ousted him from the partnership. A firm with a history of strong leaders suddenly found itself without one. Today, successful transitions at large firms often take a year to accomplish. New leaders take over after careful grooming and, usually, with the graceful guidance of their predecessors. Orderly transitions in the chairman’s office not only result in better decision making , they fuel the confidence a leader needs from stakeholders. � Grow slowly, right-size quickly. No one will ever know whether Brobeck could have survived the end of the tech boom had it reacted quickly and started right-sizing immediately. For one thing, the firm reportedly had mammoth real estate obligations in Silicon Valley and other tech pockets. Nonetheless, it is clear that Brobeck acted much too slowly to cut overhead. It failed to bear down on costs until nearly a year after its Silicon Valley competitors did. When the tech sector first faltered, many firms, including Brobeck, were reluctant to lay associates off. They remembered that in the recession of the early 1990s they had decimated associate ranks. When the economy bounced back, they regretted that decision. It had left them without enough experienced, highly profitable, senior associates, and that, in turn, made law school recruiting difficult. This time, Brobeck, like other firms, vowed not to repeat that mistake. Invest in the future, they said, and let partners take the income hit. It worked for a while, but as the tech decline deepened, Silicon Valley firms began to see that their futures were on the line. Those that acted quickly, like Cooley Godward, remain strong today. In fact, Cooley experienced improved profitability last year, thanks in part to its nimble reaction to the downturn. A healthy net income per partner does not necessarily make for a healthy culture, but it sure encourages retention. � Don’t fix the blame; fix the problem. For too long into Brobeck’s economic crisis, the firm’s leaders blamed the firm’s problems on Snow and other former partners who had gotten out while the getting was good (though they are still owed millions in capital that they are unlikely to see). For anyone familiar with the horizontal decision-making structures of law firms, it simply isn’t credible to assert that the choices that led Brobeck into its oversized debt, real estate, and staffing obligations were made by one person. But assigning blame isn’t the point. For a firm seeking to stabilize itself, that’s largely irrelevant. To accomplish a successful turnaround, leadership must focus solely on the task at hand, without the distraction of finger-pointing. � Prize your culture, collegiality and civility. Lawyers love to talk about their firms’ collegial cultures. Collegiality is perhaps the one value lawyers prize more than financial success. At a time when Brobeck’s partners should have been closing ranks behind a survival strategy, its leaders instead allowed the financial crisis to drive a deep, vicious wedge into the partnership, forcing partners to take sides. There was no grace displayed when Snow was shown the door. Ousting a partner is never easy, but it should always be done with civility. Brobeck unnecessarily turned it into a nasty spectacle. The emotional toll was high, and it weakened Brobeck’s foundation. � Leverage your strengths. Law firms often suffer as a result of their horizontal structure. Decision-making requires buy-in from many partners, and the contrarian nature of lawyers often makes that hard to obtain. Yet when it came to the most important decision of all, to dissolve the firm, a handful of Brobeck’s partners reportedly acted sua sponte, without a full discussion among and vote of the partnership. At a time when the firm undoubtedly would have benefited from the deliberative efforts of a massive group of talented lawyers, a smaller group apparently took matters into its own hands. Instead of rallying partners, the group pulled the plug. This, more than anything, has shaken firms, landlords and lenders. � Beware of debt. Over the past couple of years, law firm debt has seemingly been rising faster than the federal deficit during the Bush administration. Little is known about the ability of law firms to carry big debts in an era of unprecedented cherry-picking. No matter what the “relationship bankers” say, in a weak economy with bulging credit risks, a bank’s bad-loan department isn’t likely to let sleeping dogs lie when a borrower shows signs of trouble. Equity holds a partnership together better than debt does, especially when a firm has made a big bet on growth. And in the end, even if you’re not especially fond of your partners, who would you rather have dealing with your clients when it comes to getting them to pay their bills: your partners or the bank’s collection agency? � Institutionalize clients. What finally brought Brobeck down wasn’t the debt, the failure to communicate or act quickly, the lack of an orderly leadership succession plan, or the finger-pointing. Those were important contributing factors, but in the end, Brobeck was killed by the same thing that had killed firms before it: books of business walking out the door. Brobeck simply couldn’t hold on to the revenue stream needed to support its debt. Powerful partners with big books of business found greener pastures elsewhere, taking their clients with them. And that is where Brobeck is not unique: At least twice in the last 12 months, $50 million books of business have walked out the doors of Global 100 firms. American firms have long preached about institutionalizing clients, but none have been able to do it. Why? It’s the compensation system, stupid. The heavy reliance of American firms on compensation systems that are based on origination and hours puts too much incentive on partners’ holding on to their clients, even when they leave their firms. That is what gives managing partners the shakes when they think about Brobeck. They know that the same thing that happened at Brobeck could happen to them. Peter D. Zeughauser is a legal consultant in the Corona del Mar, Calif., office of The Zeughauser Group. He is also of counsel at Claremont, Calif.’s Shernoff, Bidart & Darras. E-mail: [email protected].

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