Orrick bends with winds of change

On the front page of The Lawyer last week, Orrick ­Herrington & Sutcliffe chairman Ralph Baxter summed up the ­challenge currently facing the world’s leading law firms.

“There’s been gigantic, dramatic and sudden change in the world,” Baxter said. “That’s the story. We don’t yet know how this is all going to shake out, but in five years’ time the world’s leading law firms will be those that are best orientated to adapt to that change.”

In the week following those comments, Baxter’s firm proved it was more than capable of adapting to change when it announced it was cutting up to 100 associates and 200 support staff across its offices in Asia, Europe and the US.

Orrick made it clear that the cuts were unrelated to performance, but were “made necessary by the world economic crisis and the impact of that crisis on our clients and the levels of activity in the world market”. In other words, things have changed and the firm was responding.

Orrick has long been a firm defined by its ability to capitalise on market opportunities. Now the test is to see how well it, and Baxter, can respond to unprecedented market challenges.

“This era will be one where we find out if we’re any good at ­leadership,” admits Baxter. “But in some ways it’s easier for us to change, because Orrick is and always has been orientated to change.”

Orrick has been at the forefront of innovative legal ­practices for years. In 2002 the firm moved the bulk of its back office staff to its global operations centre (GOC) in Wheeling, West Virginia. The move looks ­particularly canny considering the current economy. Any firm that wants to make it through the downturn to the recovery will need to take ­deliberate action to manage the costs it incurs to deliver its service.

“The ;change ;will ;be ­evolutionary,” argues Baxter. “Darwinian. The fittest are going to survive.”

According to Baxter, fittest does not mean cheapest.

“There’s a very important ­distinction to be made between a cheaper and an improved service,” he states.

But the pressure to deliver a top-quality service at a reasonable and ;predictable ;price ;has increased markedly over the past few months, Baxter says.

“I believe that the recent ­developments in the market have accelerated trends that were already underway,” Baxter argues. “In the first three quarters of 2008, clients were already demanding discounts. But by November last year there was dramatically lower tolerance for fees that reflected an absence of cost consciousness on the part of the law firm or for fee arrangements that failed to ­deliver to the client what they thought was reasonable in terms of
value delivered and adequate ­predictability.”

Despite all the unprecedented market upheaval last year, one thing that did not change at Orrick was the firm’s – and Baxter’s – appetite for expansion. Although there was no major full firm ­merger, Orrick added 83 lateral partners.

“We made more investments in 2008 than in any other year in our history,” says Baxter.

The ;most ;eye-catching ­investments Orrick made included 27 partners from collapsed firm Heller Ehrman in the US last October followed by the firm’s London corporate team in November, as well as an energy and project finance team from another defunct firm, Thelen, in San Francisco. Orrick also added 55-lawyer ­Hölters & Elsing in Germany.

But the large number of hires coincided with Orrick’s first drop in average profit in 20 years, the significance of which was not lost on one New York rival, who claimed the firm was “hurting” as a result of the large number of ­guarantee deals it had struck with its new partners.

The Lawyer asked Baxter whether Orrick had overextended itself and if he had any regrets about 2008’s major hiring spree.

“No, not at all,” he says. “It’s true we’d commonly make financial arrangements with partners that would give them some ­predictability in their first-year income in the firm. It’s common practice. There is some sort of floor. But the moves we made in 2008 are among the best we ever made. Spectacular.”

Sources close to the firm ­suggest that the cost of bringing in the 83 laterals last year averaged out at just over $100,000 (£70,000) per partner. With Orrick already in full cost-cutting mode after last week’s major round of layoffs, the probability is that it can afford to take that kind of hit.

For the present Baxter is focused on getting through the downturn and ;dealing ;head-on ;with ­whatever new challenges are thrown at him and his partners.

“Until 2007 you could reasonably anticipate what the following year would look like in terms of income,” he says. “Revenues for 2009? No one knows. Yes, ­probably down, but by how much?

“You could put 50 managing partners in a room and feed them all truth serum and they wouldn’t be able to predict whether revenue would be down 5 per cent, 10 per cent or more. Therefore every major ;law ;firm ;knows ;its ­foundation for budgeting is far less sound than ever in our experience. That means we have to stay ­constantly focused on where the revenues are.”

And no one ever accused Baxter of not staying focused.