What Happened To Heller Ehrman — And Who’s Next?

October 22, 2008 by  
Filed under Lawyers & The Law

Until very recently, Heller Ehrman LLP was a mainstay of the San Francisco legal community.  Today it is gone.  Virtually overnight, a firm that in 2007 grossed $471 million and spun off $1 million in profits per partner has vanished. 

I’m not an alarmist by nature, but what happened at Heller – just a block from my own office at Bush and Montgomery Streets — can happen again, in any major U.S. city, with little warning.  It can happen at another firm as venerable and successful as Heller.  It can happen during good economic times or bad.  Not only can it happen, I’m quite certain it will happen.  Just wait and see.

By any measure, whether financial or professional, Heller Ehrman was successful to the end.  Heller was the victim of a classic run on the bank.  It started slowly with a handful of departures, none alarming by itself.  The departures continued in 2007, which saw a modest 3 percent decline in revenues and profits per partner. 

Then a larger group — 14 intellectual property litigators — decamped together to Covington & Burling this year.  The remaining partners became increasingly anxious and started walking toward the exits.  Soon the walk became a run as a mob mentality gripped the partnership, and no one wanted to be the last lawyer left.  The snowball effect will destroy even a fundamentally healthy organization.

What did Heller do wrong?  Nothing – other than to succeed and believe the law firm consultants who seemed to know what they were talking about.  Heller hired and trained the best lawyers. It expanded into the best legal markets.  It excelled in the most profitable practice areas.  All the while, it gave back to the community through significant pro bono work and a commitment to diversity in its ranks.  Heller’s success begat growth.

The larger it got, the more business it needed to sustain itself. The feeding of the mega-firm that Heller became required large clients, deals and cases, which it successfully attracted.  Several big litigation cases wrapped up in 2007, resulting in a down year.  Still, revenues for the year were only down 3 percent.  Who would walk away from a $1 million-a-year partnership over 3 percent?  But looking at competitors who saw a boom year in 2007, Heller’s results felt meager to some partners.

It’s no secret that the professional services sector is inherently cyclical.  As the economy cycles through boom and bust, different practice areas rise and fall.  Litigation and bankruptcy, for example, typically outperform other practice groups in tough economic times.  One of the business advantages of larger law firms over smaller ones is that the diversity of practice groups can smooth over some of the ups and downs.  One year, the transactional lawyer may bring in a lot of business.  Next year, it’s the litigator. 

The irony of today’s legal landscape is that smaller firms – the ones with larger swings in revenue from year to year – may be more stable than larger ones.  That is because once a law firm gets big – as in one of the 100 largest in the country – the bonds between partners are too weak to support even modest economic stress.  The partner down the hall or three floors up or in a different time zone isn’t interested in carrying the load for a group of strangers in another practice group who happen to be having a bad year. 

Unlike in years past, when many lawyers spent their entire career at a single firm, the typical big firm partner today may be working at his second, third or fourth firm since law school.  In a revolving-door partnership, it’s no longer a virtue to suffer a down year for the good of the firm.  If your group is raking in the bucks today, someone else will take you, and if they offer you more money, why not?  Don’t wait around, because the offer won’t be there next year when your red-hot practice area cools down.

What are the lessons of the Heller Ehrman debacle?  For many out-of-work Hellerites, the lesson may be that the “Manahattanization” of big law is pernicious, some would say evil.  Heller, like all the rest, gauged its success by the standards of big New York law firms that raked in profits per partner double or triple Heller’s.  Heller looked to New York not out of greed, but simply because that is the yard stick used by partners at nearly all of the 100 largest U.S. law firms.

This is not a morality tale.  Big law is not evil, just a little misguided at times.  Big Law is also different from the native culture of the Hellers of the world (who were themselves misguided at times).  I worked as an associate at O’Melveny & Myers LLP from 1994 to 2001.  During that time, I saw the partnership make a strategic decision to keep up with the New York firms.  The law firm consultants said “You’re either growing or dying.  There’s no middle ground.”  O’Melveny drank that cool aid, and has done very well. 

Seeing the success of many California firms that have moved East, who wouldn’t agree with the consultants that “Bigger is better”?  Now we see there’s more to it than that.  Growth is no guarantee of survival.  Heller Ehrman was middle of the AmLaw 100 pack in 2007 – ranked 55th in revenue per lawyer, a key metric.  It had improved its rankings over the past 10 years from the number 60 spot in 1998.  It did everything right, but ended up in the dust bin.

The Heller story is tragic in the ancient Greek sense.  Classic tragedy depicts the downfall of a noble hero or heroine, usually through some combination of hubris, fate, and the will of the gods.  I’m not sure which of these was Heller’s downfall, but that doesn’t matter.  I’m more concerned about the walking dead at other successful law firms suffering from the “Bigger is better” delusion. 

It’s time for some firms to take stock and figure out another route to success before they grow themselves into the ground.

For all of your litigation questions, contact Newdorf Legal, a San Francisco business litigation law firm.

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