Valley of the dole

The reverberations of the technology crash are still being felt today, not least by those law firms servicing the industry in Silicon Valley. Kathryn Hobbs reports on the ultimate losses – jobs

When Brobeck Phleger & Harrison announced its third round associate redundancies earlier in the month, the shockwaves were still felt across Silicon Valley. Valley firms that floated high on the dotcom bubble of start-up and technology-related capital markets and corporate work in the late 1990s were suffering. The flurry of initial public offering (IPO) work grabbed by Valley firms tailed off in mid-2000 and a more general economic downturn struck towards the end of that year.
At the seven firms that are most identified with the technology boom – Brobeck, Cooley Godward, Fenwick & West, Gray Cary Ware & Freidenrich, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, Venture Law Group (VLG) and Wilson Sonsini Goodrich & Rosati – IPO work plummeted by 87 per cent. Between them, these firms handled 22 IPOs in 2001. The figure for the previous year was a whopping 175.
Struggling against the slump, these firms have been forced to address staffing issues and overcapacity. Since last summer, The Lawyer has reported story upon story of West Coast US firms axing associates and support staff.
Brobeck is not alone in taking the difficult decision to shed staff. Since VLG started the firing trend last June, at least 420 associates have lost their jobs. This figure could realistically fall far short of the final total, as some firms have been less overt about their staffing decisions than others.
Wilson Sonsini remains adamant that it has not cut staff in response to economic pressure, but according to The Wall Street Journal 'Cubicle Culture' columnist Suein Hwang, its numbers are down 10 per cent on last year's. Wilson Sonsini managing director of operations Donna Petkanics insists that any attrition is based on performance-based cuts and voluntary departures.
VLG provides a micro example of what has happened to technology-dependent law firms. It was at the vanguard of the dotcom boom, specialising in start-up companies. Once these clients had passed beyond their initial growth phase, West Coast older brother Orrick Herrington & Sutcliffe took over the relationship. While times remained buoyant, it was a system that worked with almost conveyor-belt simplicity.
But by the middle of last year, it was clear that VLG was not seeing as many clients come through the door. At that time partner Don Keller told The Lawyer: “I don't think any of us have ever seen this type of slowdown before. The events are very significant – a once in a century-type event. There's been a fall in the start-up work and a reduction in attrition rates, so we find ourselves with more lawyers than we need.”
As a result, around 10 lawyers were shown the door and a further six were redeployed into non-fee-earning roles. VLG also assessed its strategy and decided not to continue with its policy of referring clients on to Orrick.
By comparison, VLG's larger full service referral partner Orrick has weathered the downturn. It maintained its top-five spot in the San Francisco table for turnover in 2001, billing $365m (£251.3m). CEO Ralph Baxter says: “For Orrick, we're still doing well, but it's not at the hectic pace it was two years ago.” He says that the firm has not made any redundancies and that the plan is one of expansion rather than contraction.
Orrick is one of the few West Coast firms to have a London office and it has plans to increase its European presence still further. At the beginning of the year, The Lawyer revealed that the seven-partner Paris office of Watson Farley & Williams was gearing up for a merger with Orrick. Germany is also being closely considered. London managing partner Mike Bacon argues that any serious international player has to include Germany in its geographical spread if it is to be taken seriously.
Orrick nabbed Clifford Chance Rogers & Wells (CCR&W) partner Johannes Gäbel in March to boost its German capability in New York. His clients include WestLB and HypoVereinsbank, providing Orrick an entrée into the German market.
Baxter puts his firm's robust progression over the past couple of years down to simple breadth of practice. He says of rival firms: “The problem was that they were too narrowly focused. The more narrow your focus, the more vulnerable you are to market shifts. We made a strategic choice to focus on a number of practice specialities in line with what the global economy needs.”
According to Baxter, those specialities are finance, corporate and dispute work. It might be a cliche, but litigation is one of the few practice areas to thrive in a downturn.
Marina Park, managing partner at Pillsbury Winthrop, agrees. “Any firm with 100 per cent of its eggs in the tech market basket is going to have a tough time,” she says. Firms that focused solely on technology work, particularly those advising start-up companies, have seen a huge percentage of their business just evaporate. These firms, which two years ago were making all the running in the associate salary battle, now find themselves with too many lawyers doing too little. The high leverage ratios that worked in their favour when times were good have become a millstone around management's neck. Associates had to go.
And go they did. The largest single set of layoffs came at Cooley Godward. In August, the Silicon Valley giant laid off 86 lawyers in one fell swoop. Fenwick & West was not far behind, cutting 32 associates the following month. With the ball now rolling, October was a bumper month for layoffs. Gunderson Dettmer ditched 16 lawyers, Skjerven Morrill MacPherson dumped 11 associates and VLG revealed another round of cuts, shedding 10 more associates.
Pillsbury was not immune to cutback syndrome. Its difficulties had been localised until September. The Palo Alto office was suffering in line with its peers, but New York was holding up. Park said that after 11 September the deal market collapsed, and from then until December the situation in New York became progressively worse. She added: “We're sort of feeling like we hit rock bottom and we're slowly moving up.”
In November, Pillsbury instituted a hiring freeze and cut 20 associates in New York and Silicon Valley. Park muses: “Our Palo Alto office was the first to feel the impact of the downturn. We have about 78 lawyers there now, down from 90. It feels like a lot of shrinkage given that we had gone through 30 per cent growth.”
Pillsbury escaped with a relatively low reduction rate, but Park says: “We're still carrying quite a bit of excess capacity. We didn't cut ourselves to the bone.” Like Orrick, the firm outperformed West Coast rivals, achieving a turnover in 2001 that was up 6 per cent to $445m (£3.6.4m). In the San Francisco turnover table, Pillsbury moved from sixth to third as technology-focused competitors slipped down the rankings. Park says the litigation practice, which makes up 50 per cent of the firm, is extremely busy.
By the beginning of 2002, Brobeck and Wilson Sonsini were the only two firms among the key seven not to have cut jobs. Brobeck, however, had lost 82 lawyers through a voluntary buyout in December. Wilson Sonsini's official line was still that it had not cut staff for economic reasons – its definition of a layoff.
While other firms faced up to the problem, West Coast leading light Brobeck seemed to prefer the ostrich approach. An internal wrangle between partners who felt the force of the downturn in their wallets advocated cuts, while former chairman Tower Snow persisted in his belief that associate reductions could be avoided.
To this end, while Snow remained at the helm, Brobeck staved off calls for associate cuts by chopping back other areas of expenditure. Overtime, inter-office flights and department retreats were shelved and the firm introduced a scheme whereby associates could take unpaid leave or opt for part-time hours. When Snow was replaced as chairman by Richard Odom, associates were rightly concerned that layoffs would follow. A grand total of 171 associates have left the firm in three waves of reductions.
Brobeck managing partner Richard Parker comments: “We had hoped that the earlier reductions would be a one-time event. We left in place significant excess capacity in the hope that there might be a modest upturn in the economy, and correspondingly an increase in the amount of corporate work coming in the door.”
Like Orrick, Pillsbury and Morrison & Foerster, Brobeck has a strong litigation practice. This practice, and particularly Snow's securities litigation team, has done much to take up the slack from dwindling IPO instructions. How the firm will react to the news revealed in The Lawyer last week that CCR&W had its beady eyes on the securities litigation team is not known. Snow himself has not been available for comment.
Like Snow, Orrick's Baxter is a keen enthusiast for the technology sector. He argues: “The technology sector will be vital to the world's economy for the rest of time. It simply reached a frenzied time in its growth pattern. We're in it for the long haul.”
'Scepticism' and 'caution' seem to be the watchwords for the West Coast firms once bitten and now twice shy. Park observes: “I don't think we're out of the woods yet in the technology markets. I use a seesaw analogy. We're watching it creep up slowly right now, but I'm prepared for it to fall back down again. We have contingency plans.”
The firms most deeply affected by the technology slump have had to learn the truth of old adages about eggs in baskets the hard way. Baxter says: “Many of the firms should have levelled their growth and turned away work, but that's easy to see with hindsight.”
Carried away by the optimism of a frenetic IPO market for technology companies, Silicon Valley firms led the salary battles that characterised the legal market at the turn of the century. These young pretenders found their paths checked by the economic conditions that forced all law firms to look at their work-to-staff ratios. But just as technology will not be disappearing any time soon, neither will the firms that serve it. Always assuming, of course, that they have enough people left to handle the work when it returns.

Layoffs: who, when and how many

June 2001: Venture Law Group (VLG) cuts more than 20 staff – up to 20 lawyers, nine paralegals and five support staff.
August 2001: Cooley Godward lays off 86 lawyers and 50 other staff.
September 2001: Fenwick & West axes 32 associates and 15 paralegals.
October 2001: Gunderson Dettmer Stough Villeneuve Franklin & Hachigian sheds 16 associates and 28 support staff. VLG lets 10 legal and 22 support jobs go. Skjerven Morrill MacPherson cuts 11 of its 98 associates.
November 2001: Perkins Coie lays off seven lawyers. Pillsbury Winthrop cuts 20 associates in New York and Silicon Valley.
December 2001: 82 Brobeck Phleger & Harrison associates in its business and technology group agree to take a voluntary buyout.
January 2002: Gray Cary Ware & Freidenrich ditches 46 associates and 68 other staff. Skjerven Morrill cuts 18 associates and 27 staff.
February 2002: Brobeck Phleger & Harrison axes 54 associates and 85 additional staff.
May 2002: Brobeck Phleger & Harrison cuts 35 associates and 24 support staff.

West Coast law firm performance 2000-2001
Rank '01 Rank '02 Firm Gross rev ($m/£m) Net income ($m/£m) Profits per equity partner ($K/£K) Total lawyers/equity partners/non-equity partners
1 3 Morrison & Foerster 490/341 140/97 675/470 889/207/44
2 1 Brobeck Phleger & Harrison 447/311 108/75 660/459 792/163/47
3 6 Pillsbury Winthrop 445/310 86/60 615/428 733/139/153
4 2 Wilson Sonsini Goodrich & Rosati 425/296 117/81 830/578 708/140/0
5 5 Orrick Herrington & Sutcliffe 365/254 96/67 765/532 568/126/78
6 4 Cooley Godward 354/246 103/72 715/498 628/144/6
7 7 Heller Ehrman White & McAuliffe 331/230 101/70 645/449 500/156/38
8 8 Gray Cary Ware & Friedenrich 225/157 51/35 515/358 448/98/52
9 9 Thelen Reid & Priest 202/141 56/39 560/390 392/100/83
10 0 Littler Mendelson 153/106 47/33 350/244 380/135/45
Figures rounded to nearest whole number; profits per partner rounded to nearest $5,000/£3,500
Source: The Recorder