Dallas-based litigation boutique Gruber Hail Johansen Shank, a firm known for its trial expertise, permanently shuttered its doors this past spring after its partners decided that given all the disruption and changes in the Texas legal market, it made more sense for its lawyers to go their separate ways.
Houston probate boutique Ostrom Morris also closed after its lawyers determined that all the structural changes in the Texas market meant they either needed to staff up or shut down and move their private wealth practice to a bigger firm with more resources. They shut down and moved to Holland & Knight.
As out-of-state firms have continued their march into Texas, launching new offices, poaching local lawyers and merging with or consuming regional firms along the way, the state’s legal market has felt seismic tremors. And the disruption is not yet complete.
Texas’ super-charged lateral market means firms in the Lone Star State are constantly challenged to hold on to lawyers. Firm leaders say they combat big-money offers from competitors by giving lawyers the opportunity to do interesting work and achieve rapid advancement. But that only goes so far, and the lure of big money and access to national and global resources that out-of-state firms provide has prompted many a lawyer to abandon the old and join the new.
According to Barbarians at the Gate, an ALM Intelligence report on regional legal markets published last month, 46 firms opened offices in Houston between 2001and 2017—a level of market penetration surpassed only by San Francisco, with 47 office openings. Dallas saw 29 new offices during that period.
In addition, the number of NLJ250 firms in Houston increased by 135 percent between 2001 and 2017, according to the report, which specifically analyzed the Houston market. At the same time, Houston-based firms’ market share as measured by the number of lawyers declined by 40 percent.
And those numbers don’t even take 2018 into account—a year in which the influx of firms has been greater than ever. Texas also played a role in the three largest U.S. mergers in the second quarter of this year: Detroit-based Clark Hill, with 450 lawyers, joined with Dallas-based, 195-lawyer Strasburger & Price; 300-lawyer Andrews Kurth Kenyon merged with Hunton & Williams; and 230-lawyer Gardere Wynne Sewell combined with Foley & Lardner.
In addition, at least a dozen new offices have sprung up in Texas, including Kansas City, Missouri-based Spencer Fane; Chicago-based Katten Muchin Rosenman; Orrick Herrington & Sutcliffe; Shearman & Sterling; and White & Case.
Some of the bigger firms have come into the market throwing around huge compensation packages, according to some Texas-based partners. The amount of money being tossed about doesn’t make a lot of sense, they say, but the firms are willing to overpay to open an office.
More mergers and out-of-state firm expansions may occur before year’s end. Reports have already leaked that Dallas-based Winstead is in merger discussions with Atlanta firm Troutman Sanders. And Kirkland & Ellis, which has already bolstered its operations in Houston with lateral hires, is rumored to be considering the launch of an office in Dallas.
All this Texas turmoil has created a lateral market operating in hyperdrive, as firms expanding into Texas staff up by hiring lawyers away from prominent Texas firms. The impact is all the greater because Texas’ lateral market was already hot. Between 2001 and 2017, global firms and highly profitable firms netted a total of 137 lateral partner hires in Houston, while large Texas firms lost 101 during that same period, according to ALM Intelligence.
“If anything, the competition for lawyers, in particular, has increased,” said Kent Zimmermann, a law firm consultant with Zeughauser Group who does work in Texas.
The out-of-state firms, while not alone in their lateral hiring activity, have done quite a bit of poaching this year: Shearman & Sterling, for example, took eight lawyers from Andrews Kurth Kenyon when it opened its office in Austin. It then poached six partners from three different firms for its new Houston office, including Hugh Tucker, the chair of Baker Botts’ oil and gas practice and its global projects practice. Tucker had been at Baker Botts for more than 35 years. In addition, White & Case poached experienced partners from Texas-based Vinson & Elkins, Andrews Kurth Kenyon, and Akin Gump Strauss Hauer & Feld for its new office in Houston.
The upshot is that all the recent activity has put more pressure on Texas-based firms, Zimmermann said.
To survive, Texas firms have a choice: They can try to meet the out-of-state competition head-on—adopting such practices as doling out big bucks to their lawyers and setting high billing rates. Or, they can stay profitable by adopting a regional strategy, targeting work for which lawyers can charge less.
But with the market so volatile, Texas firms need to find ways to keep their lawyers from defecting to big firms that often promise big paydays.
Christine LaFollette, the partner in charge of Akin Gump Strauss Hauer & Feld’s Houston office, said the firm does its best to provide a good working environment and culture for its lawyers, which she said can counteract big-money offers from new firms moving into the market.
“It’s not all about the money,” said Cary Gray, managing partner of Houston-based Gray, Reed & McGraw.
Gray said his firm’s lawyers are paid well, but their lawyers are loyal because the firm is really good at what Gray calls the “soft-edge values.”
“If you want to translate that, it’s culture,” he said. “We are still a partnership like law firms were in the 1950s.”
Robert Reedy, managing partner of Porter Hedges in Houston, likewise said lawyers stay at his firm because they have bought into its culture and strategy. “We are blessed with being in a fantastic market in Houston—Texas in general—and of course the energy business. So I think we’ve decided to pursue our strategy of being really good at what we are good at,” he said.
Reedy could recall only one or two instances over several years when a lawyer left the 110-lawyer firm because of money. He said lawyers stay because the firm helps them build up their practices and build relationships with clients. “It’s working. Success always breeds a strong bond,” he said.
Mark Kelly, chairman of Vinson & Elkins, one of Texas’s largest firms with about 615 lawyers and offices in Austin, Dallas, and Houston, says it’s important that Texas firms keep their eye on the ball—especially now—when Texas lawyers at his firm and elsewhere are getting headhunter calls daily.
While those calls are not exactly welcome, Kelly sees them as a testament to the firm’s stature in the marketplace. “I always view that as a positive that we have amazing talent here,” he said.
Kelly concedes that money is important, but a firm’s culture—its collegiality and respect—can also play a role in keeping a lawyer from defecting, he said. For associates, in particular, it’s important to establish transparency, he said. In a recent question-and-answer session at V&E, for example, associates were encouraged to ask about firm financials and pose questions about how work is assigned and how they can ensure they are on a road to success.
Kelly said V&E, like other big firms, is more likely to hold onto its partners if the lawyers feel comfortable in the culture and have a successful practice. “They are less likely to take a risk and start over,” he said.
Of course, a firm’s financial success clearly helps, Kelly said, noting that V&E posted a second consecutive year of record revenue in 2017.
Still, V&E lawyers are getting more calls these days. And like other big Texas firms, it has lost partners in the lateral market mayhem.
“At the end of the day, if people aren’t busy, that’s when they get unhappy. A busy lawyer is a happy lawyer. That’s a key thing,” he said.
David Taylor, chair of Dallas-based Locke Lord, said that now is not the time, when the lateral market is super-charged, to start thinking about how to retain lawyers. Firms should be thinking about it consistently, he said.
Locke Lord’s history of big mergers has made retention of lawyers a priority. The firm has undergone a series of mergers since 1999—the most recent in 2015. The Am Law 100 firm has about 664 attorneys.
“For us, it’s really our culture of collegiality and collaboration. Our associates and our partners, we expect collaboration. We reward collaboration. We reward cross-selling. Our people are incentivized to do that from a compensation standpoint,” Taylor said.
Taylor said the firm uses the same strategies to hire laterals in the heated Texas market as it uses to keep valued lawyers: it sells them on what Locke Lord provides in the way of success and achievement. But he conceded that doesn’t work 100 percent of the time.
“With a lot of these out-of-state firms coming, they are putting a lot of money on the table and many times if we are looking at the same lateral hire, we may be outbid, he said. “In those situations, we wish them well at their new firm and hope it works out.”
Michael Gruber, who co-founded Gruber Hail—the firm that closed its doors this year in light of all the disruptions in Texas’s legal market—has moved on to Dorsey & Whitney in Dallas. He said Gruber Hail was able to do well for more than a decade because it had some of the most interesting cases and offered its lawyers “better training than anybody in town.”
But the temptations and choices that have become available to lawyers in Texas are hard for firms to beat. ”At some point,” Gruber said, “they are getting offers from people who will pay more.”
For further reading:
- What’s So Hot About Texas? For Law Firms, Apparently Everything
- One-Third of Texas Law Firm Leaders Say They Are Open to Merger Talks
- Barbarians at the Gate: The Invasion of Regional Legal Markets and How Mid-sized Firms Should Respond
- When Regional Legal Markets Get “Invaded”: The Impact on Local Firms