Whether lashing out at the managing partners of Wall Street law firms over alternative fees, opining on the “Noah’s ark” nature of Swiss vereins, or decrying the inefficiency of airports in Pennsylvania’s two major cities, longtime K&L Gates chairman and global managing partner Peter Kalis doesn’t have a problem sharing his strong opinions.
So when Kalis was reelected to his fifth consecutive term this week as head of K&L Gates, The Am Law Daily felt it was a good time to check in with the Rhodes Scholar and West Virginia native who during his tenure at the top of a regional shop with Pittsburgh roots gradually grew it into a global legal giant. (Click here for a 2010 Q&A with Kalis and here for a 2009 cover story on K&L Gates from The American Lawyer.)
In an email exchange with The Am Law Daily, Kalis—who was traveling in Europe this week and has been racking up the frequent flier miles while engaging in merger talks with Australian shop Middletons—spoke candidly about his firm’s financial performance and growth prospects.
His comments came on the heels of a mini-media firestorm sparked by a string of lateral departures out of K&L Gates, many of them from a Chicago office added via a late 2008 merger with Bell Boyd & Lloyd. Crain’s Chicago Business was the first to report earlier this month on the steady stream of partner exits in the Windy City. The paper cited morale problems over client conflicts, high overhead, and the expiration of frozen compensation rates post-merger as among the reasons why some partners chose to leave.
A subsequent report by legal newswire Law360 quoted anonymous former partners predicting that more partner-level defections can be expected, while blaming the alleged unrest at K&L Gates on concerns about the firm’s leadership and compensation policies.
The negative publicity prompted Kalis to unleash a stinging memorandum that was first obtained by Above the Law and later referenced in this space. In the memo, Kalis excoriated former partners for casting aspersions on K&L Gates’s health and presented a point-by-point rebuttal to some of the criticisms that had been leveled against the firm.
The announcement that the firm’s management committee had unanimously reelected Kalis, who ran unopposed, to the firm’s top management post came just a few days later. Kalis, who is fond of referring to the legal field as a “mature profession and an immature industry,” first took the reins of predecessor firm Kirkpatrick & Lockhart in 1997.
K&L Gates—whose name now adorns a headquarters building that has a prominent place in the Steel City skyline—has been involved in at least eight mergers during that time. Its most recent addition: an office in Milan acquired earlier this year when the firm absorbed local shop Marini Salsi Picciau Studio Legale, according to sibling publication The Legal Intelligencer.
Kalis says his hardest day-to-day challenge is constructing a “modern business enterprise suitable for the 21st century.” He likens the process of growing the K&L Gates brand, cultivating cutting-edge information technology, and managing the myriad other aspects of the firm’s finances to “building a bridge in wartime.”
Managing costs is a significant part of that process. Kalis says firm management always seeks to strike good deals with vendors—something he mentioned to The Legal Intelligencer earlier this year—including the landlords K&L Gates pays to lease some 2.5 million square feet of space spread across 41 offices around the world. Kalis says internal firm data shows that “space-related costs are nearly $10,000 per lawyer less” at K&L Gates than the average paid out by its peer firms.
In the memo issued last week, Kalis referenced managing “payroll expenses” in the first quarter of this year. Asked whether this was achieved through layoffs, salary decreases, forcing out unproductive partners, or a combination of the three, Kalis says K&L Gates has put in place a “strict though rebuttable presumption against hiring lateral associates,” so that the firm’s natural attrition rate is “not countered by recruitment.”
Kalis says that K&L Gates has also maintained a “dialogue with chronically underperforming lawyers”— something he describes as ”part of running a good business.”
Then there is the issue of lateral departures.
According to The Am Law Daily‘s analysis of lateral partner moves out of K&L Gates so far this year, many of the approximately 44 partners who have left the firm originally came to K&L Gates within the past four years through mergers with firms like Bell Boyd, Hughes & Luce, and Kennedy Covington Lobdell & Hickman.
The bulk of the partners who have left K&L Gates in 2012 worked in the firm’s offices in Austin, Chicago, Dallas, and the Research Triangle region in North Carolina (the latter saw a six-partner group break away to start their own boutique). All four locations were strongholds of the three predecessor firms.
Kalis says some of this movement is in line with the natural attrition that occurs after many law firm mergers. At the same, he notes that the vast majority of those that join K&L Gates “welcome our platform and our way of doing business.”
Kalis notes that his firm has also remained active in the lateral hiring market, stating that since January 2011, K&L Gates has recruited 35 partners from Am Law 50 firms and lost only 10 partners to that same group. (Kalis calls the 35-10 split “a rout,” likening it to the “typical score of a Steelers-Browns game.”)
Indeed, despite the lateral losses, The Am Law Daily‘s analysis shows that in the period covering the past 10 months, K&L Gates has actually picked up almost as many partners as it has lost, if one includes the seven partners the firm added from Parker Poe Adams & Bernstein when it expanded into Charleston in December 2011. K&L Gates has brought on at least 35 partners in 18 different offices around the world this year, according to The Am Law Daily‘s analysis, not to mention other recent expansion efforts in Sao Paulo last November and in Qatar a year ago this month. (Click here for a PDF of lateral partner moves both in-and-out of K&L Gates so far this year.)
On the subject of growth, Kalis says K&L Gates continues to reap the benefits from western Pennsylvania’s shale boom, and notes that the firm’s London office, which enjoyed a record year in 2011, expects revenue to grow another 10 percent this year. Other possible growth areas include Canada and South Africa, both of which Kalis calls “strategic destinations for any firm that seeks to provide global solutions for the client community,” as well as opportunities in South Korea’s newly-opened legal market.
And of course there is the potential deal Down Under with 283-lawyer Middletons, a firm that brought in about $117 million in gross revenue last year, according to our previous reports. (A known critic of the Swiss verein structure, Kalis says any potential merger with Middletons will be on a “fully integrated basis” in order to build a “single firm with one profit pool, one technology platform, and one governance mechanism.”)
K&L Gates’s own gross revenues increased less than 1 percent last year to $1.06 billion, according to annual Am Law 100 data compiled by The American Lawyer, while profits per partner fell 4.3 percent to $890,000 and revenue per lawyer rose slightly to $605,000. Kalis calls criticisms of the firm’s relatively low PPP and RPL figures unfair because K&L Gates doesn’t enjoy the benefit of having the bulk of its lawyers based in New York, like many of the Wall Street firms.
Although no one in the firm’s New York office gets paid less because of it, K&L Gates’s global presence serves to drag down its PPP and RPL averages, Kalis maintains. He notes that he is a “dissenter on those metrics and I’m not going to allow [anyone] to dictate our business model, which is working quite well for us.”
Kalis says practice areas that have performed well for K&L Gates this year include consumer financial services, regulatory enforcement, toxic torts, and FCPA litigation and investigations, while transactional work continues to be down, although the firm has managed to avoid a precipitious drop-off in Europe despite the continent’s dire economic situation.
Finally, when asked how the notoriously debt-free K&L Gates finances its increasingly global operations, especially in light of the failure of expansion-minded Am Law 100 firms like Howrey and Dewey & LeBoeuf the past two years, Kalis reiterates his argument that K&L Gates has never drawn down “a single dollar” on its $75 million in credit lines or “incurred third-party debt of any kind.”
The demise of Dewey has not really affected K&L Gates, says Kalis, because the firm is “super-conservative” in how it conducts its business: no debt, no lateral guarantees, and no unfunded retirement programs.
“We pay our partners out of profits and don’t disguise borrowed money as profits,” adds Kalis, whose next term as head of the firm won’t expire until February 2017. “If we can’t afford it, we don’t buy it.”