It’s day four of the Howrey Watch. We take a look at the assertion by Howrey CEO Robert Ruyak that an increase in litigation work on a contingent fee was a major contributor to the firm’s demise.
From the WSJ Law Blog interview:
As clients began looking to lower their legal costs, the firm took on a growing proportion of work on a contingency or partial contingency basis-shifting a big portion of its business into what Ruyak described as â€œfuture recovery.â€
Future recovery? More like future shock.
The only reason any corporate law firm takes a business case on a contingent fee is to have a decent shot at making more than their standard rack rate. I hazard to guess that Howrey commanded high hourly rates for their excellent and seasoned litigators and crack associates and support staff.
But here’s the problem: your fixed costs come due every month. Contingent fees arrive, if at all, every few years.
This is why there are very few large firms that will take cases on a contingency except for a one-off for the case of the century or a special deal for a precious client. They aren’t staffed to work this way, and it isn’t in the fabric of the firm, because it isn’t literally in the DNA of the founding partners. I think Boies, Schiller and Susman Godfrey are exceptions to this. That’s some serious high-risk, high-reward DNA in those firms.
Now the interesting thing about litigation is that it has a long tail. Cases come in the Law Factory front door and the litigation widgets are pumped out the loading dock daily and charged for monthly. You keep doing this for years until you win or lose or someone cries “uncle” and settles. Litigation also masks other trends; some firms were very busy with litigation during the Great Recession that was filed before that downturn. Now some of those same firms are seeing work settle or end, and not nearly as much in the pipeline to take its place.
So Howrey decided to live in two worlds at once, and the standard, non-contingent work props up the contingent work. This is OK for a while, as long as some of the contingent cases hit big and you can share the love around the partnership. However, this probably gets old for some partners who are bringing in big hourly fees every month. I can hear more than one saying “Why should I subsidize those guys?” (only in slightly more colorful language).
Suddenly one Friday a major partner bolts for a pure hourly billing firm with a better balance sheet. A place where litigators can know to the penny what their next draw will look like. The next Friday two leave and the run on the firm has begun.
The firms that are landing Howrey talent are looking good now, but will have their own sort of discovery somewhere down the road. Because of larger forces going on the the legal world (like Mr. Ruyak’s finger-pointing at discovery vendors), even old-line hourly litigation is either not as profitable (moves down-market), not as frequent (clients resolve disputes like adults), or not as enduring (the few cases that are filed get settled quicker).
This is where Howrey is not just an outlier, and some of these trends are indeed ominous for large law firms. Big-ticket litigation is not routine for most clients. If you are a go-to large law firm for the Fortune 500, the major litigation and deals fattens the profits, but the transactional, compliance and regulatory work pays the bills. It’s continuity income, not contingent fees, that keeps the lights on and the staff coming back every day.
And large law firms will find that more continuity work will be done by less expensive firms, by legal process outsourcers, or by yet-to-be deployed technology.
If you really want to do contingent corporate litigation, why not set up your own, smaller shop, where costs are low and the shares of the bounty don’t have to be split 500 ways?
Howrey was unique in some respects, but like many other firms they were trying to re-configure a business model on the fly. (Update: I just saw this excellent treatment of Howrey in AmLaw Daily).
Definitely time to end this look at the past, we could all use some luck today, and maybe even a refreshment. Or two.