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Texas Law Firms Fight for Talent, Revenues and Survival
© 2015 The Texas Lawbook.
By Mark Curriden
(May 14) – Oakland A’s General Manager Billy Beane stood before partners of
Haynes and Boone last October at the Gaylord Texan Hotel with a message:
Just because you cannot afford the highest priced talent doesn’t mean you
cannot play in the major leagues.
HayBoo and about a dozen other large, full service Texas-based law firms face
competitive pressures that are quickly and dramatically transforming the
Texas legal marketplace – changes that result in wealthy, aggressive law firms
being bigger and more profitable while other firms shrink, merge or
eventually dissolve.
The Dallas-based firm believed that Beane, the baseball genius who was the
focus of the book Moneyball: The Art of Winning an Unfair Game, could
provide crucial advice. Or at least they would get to meet the character played
by Brad Pitt in the movie version.
As it turned out, Beane’s insight was a home run.
“Billy Beane talked to us about competing at the highest levels, despite not
having the biggest payroll,” said HayBoo Managing Partner Tim Powers. “He
said we have to look at things differently and figure out how to compete and
succeed based on the resources that we have.
For firms like ours, it is about finding our niche and
being creative and giving great client services,” Powers
said. “In the end, for law firms like ours, it is about
surviving and succeeding.
By all appearances, the Texas legal market is firing on
all cylinders. Overall, Texas business lawyers worked
more hours, generated more revenues and earned
more profits in 2014 than any year in history,
according to data obtained by The Texas Lawbook.
Tim Powers
Lawyers practicing at 28 of the largest law firms
operating in Texas billed more than $4 billion in revenues last year – an
increase of more than seven percent from 2013, according to financial
information provided to The Texas Lawbook. The demand for legal work by
Texas companies actually increased nearly four percent last year, even as
corporate legal work in most other markets was stagnant or declined in 2014.
Despite the record revenues and profits, legal industry insiders say that the
Texas legal marketplace is in turmoil.
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A handful of law firms – those described by legal consultants and analysts as
the “elites” – are experiencing phenomenal growth in revenues, profits and
workload. Litigation boutiques targeting business disputes seem to open
weekly. National law firms with specialty practice areas such as health care,
employment law and intellectual property law, are flooding into Texas. Even
global mega-law firms have infiltrated the state’s once tightly knitted legal
marketplace.
“Texas is an extremely competitive market for talent and clients,” said
Thompson & Knight Managing Partner Emily Parker. “The elite firms are
following the energy clients. We see franchising operations setting up in every
major city, including now in Dallas and Houston. All these factors are coming
together at once because of the Texas economy.”
As a result, old-line, full service law firms that
flourished for decades are now struggling to tread
water and could face major restructuring in the near
future.
“Many of the big Texas firms became too comfortable
and they didn’t pay the attention necessary to meet
their clients’ evolving needs,” said Houston law firm
consultant Bill Cobb. “As a result, they have lost
significant business and are indeed fighting for
survival.”
Emily Parker
Financial analysts who monitor the legal industry in Texas agree.
“Upper middle market law firms are getting squeezed. They are getting
pressure from both ends,” said Jeff Grossman, senior director of Wells Fargo
Bank’s Wealth Management Legal Specialty Group. “There’s an uber
segmentation of the Texas marketplace.
“The top profitability law firms are significantly outpacing the other law
firms,” he said.
Grossman said that revenues at the elite business law firms in Texas grew by
12 percent in 2014, while the remaining full service law firms experienced
minimal to no gains.
It is a trend that spans several years and shows no sign of turning back.
Eight of the 28 law firms in The Texas Lawbook financial survey saw its
revenue per lawyer increase by more than 25 percent during the past five
years. By contrast, revenue per lawyer at a dozen Texas-based full service law
firms surveyed grew less than 10 percent since 2010.
Seven law firms with sizeable operations in Texas reported revenues per
lawyer at or above $1 million a year. Five of those firms are based outside of
Texas.
Four of the seven highest revenue per lawyer firms – Gibson Dunn, King &
Spalding, Latham & Watkins and Sidley Austin – had no office at all or only a
miniscule presence in Texas in 2009. The 349 Texas-based lawyers at those
four firm law firms generated more than $362 million in revenues in 2014,
according to The Texas Lawbook financial survey.
“The elite law firms are doing so much better than the rest,” said John
Wilmouth, a senior client advisor with Citi’s private banking law firm group.
Legal industry analysts almost unanimously agree that those four non-Texas
based firms, plus Dallas-based Akin Gump and Houston-based Baker Botts
and Vinson & Elkins, are the “elite” firms dominating the aristocracy of the
Texas legal marketplace, at least when it comes to generating revenues and
profits.
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Texas Law Firms Fight for Talent, Revenues and Survival | The TexasLawbook
Texas-based lawyers at Gibson Dunn in Dallas and Latham in Houston
generated $200,000 more in revenues in 2014 than their counterparts at
Akin Gump and V&E, which are the highest performing Texas-based law
firms.
The revenue gap widens to $500,000 per lawyer per year or more when
Gibson Dunn and Latham are compared to lawyers at upper mid-market firms
such as Haynes and Boone, Locke Lord and Thompson & Knight.
Experts point out that there are other “elite” firms operating in Texas,
including Kirkland & Ellis, Simpson Thacher & Bartlett and Skadden, Arps,
Slate, Meagher & Flom, and Weil Gotshal & Manges, but that there footprint
in the state remains considerably smaller than their competitors.
“The gap between the ‘haves’ and the ‘have nots’ has widened quickly in
Texas,” said Rob Walters, managing partner of Gibson Dunn’s Dallas office.
“We’ve been in a steady ascent toward the barrister system, where expertise
and the ability to specialize is given a much higher value. This is especially
true in the litigation practice, where many of the large full service Texas firms
no longer get the high-end work.
“The rich law firms are getting richer and the disparity
will continue to widen,” Walters said.
To prove the point even more dramatically, Texas
Lawyer reported last month that the average profits
per partner at the 25 largest law firms in Texas grew by
just one percent from 2013 to 2014.
One percent.
At the same time, profits per partner at two of those
law firms, Baker Botts and Vinson & Elkins,
skyrocketed by 26 percent and 13 percent respectively, according to Texas
Lawyer magazine. V&E reported that its profits per partner exceeded $1.9
million in 2014, which is more than double the profits per partner at upper
middle market firms Locke Lord, Winstead, HayBoo, Gardere, Jackson
Walker and Thompson & Knight.
Rob Walters
Just six years ago, Texas-based law firms dominated the rankings of
successful legal practices in the state when judged by revenues per lawyer and
profits per partner. Only two national law firms – Jones Day and Weil – even
made the top 10.
Today, seven of the 15 top firms in revenues per partner are based outside of
Texas. Five of them would not have been on the chart just five years ago.
“The deck has been completely reshuffled in Texas,” said Kent Zimmerman, a
legal consultant with Zeughauser Group. “In a short amount of time, the
leaderboard has changed significantly.”
The trend can be traced to 2010, when Latham opened a Houston office by
poaching about a dozen top corporate and tax lawyers from V&E, Baker Botts
and Akin Gump.
National legal powerhouses Simpson Thacher, Sidley, Winston & Strawn and
Kirkland soon opened their own shops in Houston. Gibson Dunn dramatically
expanded its Dallas office.
“Law firms moved into Texas, buying lawyers with $4 million-a-year profits
per partner was bound to have a big impact,” said Parker with Thompson &
Knight. “It is hard to compete with firms with those kinds of resources. Of
course, with those salaries come New York rates.”
The elite national law firms targeted some of the best partners at each of the
Big Tex firms – lawyers with significant books of business who specialize in
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Texas Law Firms Fight for Talent, Revenues and Survival | The TexasLawbook
high-dollar practice areas, such as corporate M&A, oil and gas transactions,
capital markets, tax law and complex commercial litigation.
“It was rare for V&E and Baker Botts to ever lose partners,” said Brad
Hildebrandt, a national law firm consultant who works with several firms in
Dallas and Houston. “Texas was an isolated market. Law firms follow clients
and money. Texas law firms have never seen this kind of competition before.”
As a lure, the elite national firms offered significant pay increases, including
guaranteed compensation packages valued between $2 million and $5 million
annually.
“The fight for the best talent has gotten fierce,” Zimmerman said. “The law
firms that pay the most get the best talent. The best talent gets the best clients.
The best clients pay the highest rates, which leads to greater revenues and
profits.”
Nowhere is the success of the national elite firms more evident than in the
world of mergers and acquisitions.
Two of the top four law firms that handled the most mergers, acquisitions,
joint ventures and securities offerings in 2014 for Texas-based businesses
were Latham and Kirkland & Ellis, neither of which even had an office in
Texas prior to 2010. More than half of the top 20 law firms representing
Texas-based companies involved in M&A were firms based outside of Texas.
“Texas has a lot of mid-market law firms that once got a lot of big deals that
just do not see that work anymore,” said Michael Dillard, managing
partner of Latham’s Houston office. “Companies look for expertise. It is hard
for mid-market law firms to compete for the talent that has the expertise.”
Latham’s success in Texas has continued. The firm
now has 85 lawyers in Houston, which is its third
largest office in the U.S. Research by The Texas
Lawbook shows that Latham’s Texas-based lawyers
generated $104 million in revenues last year. It
promoted three of its Houston associates to partner
this year and it plans to hire 15 law school graduates
this fall.
“We still see growth opportunities in Texas, but it
certainly will not be as fast as the past five years,”
Dillard said.
Michael Dillard
Two other law firms – Sidley and Morgan Lewis – are following Latham’s
lead. Both firms spent a considerable amount of money to expand in Dallas
and Houston.
“We think there’s still significant growth opportunities here,” said Yvette
Ostolaza, managing partner of Sidley’s Dallas operation. “Our revenues here
are as good, maybe even better, than the national average. So, we will
continue to seek additional strategic hires.”
That is unsettling news for the upper middle market
Texas-based firms.
“It is a market disruption,” said Powers of Haynes
and Boone. “Lawyers get all these phone calls about
better pay. What are they supposed to do? Just the
invasion creates some anxiety.
Yvette Ostolaza
“I’m not going to lie to you,” he said. “We worry
constantly if we are positioned well enough to keep
our partners from going to more lucrative law firms
or well enough for our lawyers to keep or grow their
clients.”
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Texas Law Firms Fight for Talent, Revenues and Survival | The TexasLawbook
Powers and leaders at more than a dozen Texas law firms say they continue to
receive calls from national law firms seeking to open an office in the state or
interested in discussing a merger.
National law firms that have expressed an interest in starting a branch in
Texas include San Francisco-based Orrick, Herrington & Sutcliffe, Londonbased Allen & Overy and White & Case in New York.
Gibson Dunn, which has experienced tremendous success in Dallas, is
interested in opening in Houston, if the right situation presents itself, said
Walters.
“We’ve had lots of conversations about Houston, but it could be six months or
six years before it happens,” he said. “Of the 30 or so firms that have moved
into Houston, only a few have done it well. Latham and Sidley are two.”
Walters said Houston lawyers who receive inquiries about their interest in
joining Gibson Dunn in Houston are being misled.
“Nobody is calling on behalf of Gibson Dunn,” he said. “These are
headhunters trying to be entrepreneurial.”
Walters said his old law firm, Vinson & Elkins, should be given a lot of credit
for making tough business decisions and developing a strategy to be a go-to
elite energy law firm.
“V&E used its reputation as a great energy law firm and focused its money and
resources on what it does best,” Walters said. “Latham, Sidley and Gibson
Dunn raided V&E for top partners and yet the firm continues to demonstrate
its depth and influence in the state and in oil and gas legal work.”
The evidence supports Walters’ claim. Despite having lost more than threedozen lawyers during the past few years to national elite firms, V&E has seen
its revenue per lawyer and profits per partner steadily increase. Texas Lawyer
reports that V&E’s profits per partner topped $1.9 million in 2014.
While revenues and profits increased, V&E’s lawyer headcount actually
declined. The firm shed less profitable practice groups, including healthcare,
government lobbying, public finance and products liability litigation.
“Texas law firms started in 2012 to push out senior partners from equity
positions and shed less lucrative practices,” said Grossman of Wells Fargo,
who did not mention V&E specifically.
“If the upper middle market law firms take this opportunity to address overcapacity and focus on value billing, they will survive and be successful,”
Grossman said. “Sometimes, shrinking and getting smaller is better.”
V&E focused on its strength: oil and gas transactions.
The Texas Lawbook’s Corporate Deal Tracker shows that V&E continues to
dominate M&A activity involving oil and gas companies. In 2014, V&E
advised companies involved in 81 mergers, acquisitions and joint ventures.
Latham was second with 53 deals.
“V&E is performing at a very high level,” Zimmerman said. “Baker Botts is
also doing well.”
Indeed, Baker Botts joined V&E in having a record financial year in 2014.
Baker Botts was lead counsel in four of the five largest transactions of 2014,
including Kinder Morgan’s $58.7 billion restructuring and Halliburton’s $38
billion acquisition of Baker Hughes. The Houston-based firm saw its revenue
per lawyer increase nine percent and its profits per partner leap 25 percent, to
$1.7 million.
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Texas Law Firms Fight for Talent, Revenues and Survival | The TexasLawbook
“The Texas legal market has matured into a market that previously existed in
other global cities,” Baker Botts Managing Partner Andrew Baker said.
“Competition today comes more from practice groups than from geography.
“The Texas marketplace has been sophisticated and
diverse, reflecting the diversities of our cities’
economies,” he said. “People are finding their own
marketplace niches.”
Baker pointed out that Baker Botts celebrates its 175year anniversary later this year and is committed to
being a full service law firm.
“We are taking the time to consider why our firm has
Andrew Baker
lasted this long when the average life of a Fortune 500
company is 40 years,” he said. “We are spending
tremendous resources to re-examine every aspect of our firm to improve legal
services.”
Partners at Baker Botts and V&E say they have no interest in merging with
other national or international law firms.
“We discussed the possibility of merging with an equal-sized or larger global
firm, but decided against it,” said V&E Chairman Mark Kelly. “We want to
grow, but we decided against the strategy of having lawyers in every market.”
Other firm leaders readily admit there will be more
mergers.
“There is going to be more consolidation in the Texas
legal market,” said Locke Lord Managing Partner Jerry
Clements, who continues to engineer the Dallas-based
firm through its most recent merger with the Edwards
Wildman firm in Boston.
“Anyone in my position would be crazy not to keep an
eye open to opportunities,” Clements said. “But I am
not considering any merger discussions right now. I’ve
got my hands full with our recent merger. We still have a few things we want
to do, but we are in every major market where we wanted to have a footprint.”
Mark Kelly
HayBoo’s Powers admits that he also receives regular inquiries from nonTexas firms seeking a merger, but that no such plans are in the works.
Instead, Powers said that he and his partners are applying the practices Billy
Beane discussed by developing a business strategy that is unique to Haynes
and Boone and its clientele.
“Upper middle market is where we operate best,” Powers said. “The upper
middle market is hugely profitable and there’s so much legal work that needs
doing in that space.
“It is not about competing with the top five-tiered law firms, but about
competing with the law firms in our space,” he said. “Firms must realize their
strengths and identify the opportunities that are there for them.”
While HayBoo is a full service law firm, specific practice areas certainly
standout as among the best in the state. For example, the firm’s litigation and
appellate section, led by Anne Johnson, Nina Cortell, Barry McNeil and David
Harper, represents high-profile clients, including Energy Transfer Partners,
Energy Future Holdings and the National Football League. Powers points out
that Haynes and Boone has developed strong
“We can be the top law firm in one or two or three areas and then expand on
that,” Powers said.
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Texas Law Firms Fight for Talent, Revenues and Survival | The TexasLawbook
(Editor’s note: The Texas Lawbook does not include profits per partner
numbers in its law firm financial report because it is too easy for firms to
manipulate it by shifting lawyers out of equity partnership positions.)
© 2015 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected
by specific licensing agreements with our subscribers and under federal copyright laws.
Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our
goal is content that is 100% true and accurate. Thank you.
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