Biglaw, Kirkpatrick & Lockhart, Lateral Moves, Law Firm Mergers, Money, Musical Chairs, Partner Issues, Partner Profits

A Peek Behind the K&L Gates: More Comments from Peter Kalis

Peter Kalis

As we head into the weekend, we’re happy to bring you additional commentary from Peter Kalis, the chairman and global managing partner of K&L Gates. Earlier this week, the colorful Kalis was unanimously reelected to his leadership role by the 60 voting members of the Management Committee.

The delightfully opinionated Kalis recently gave an interview to Am Law Daily, in which he shed additional light on the state of K&L Gates. His remarks weren’t as forceful as the beatdown he administered to the firm’s anonymous detractors last week, but they are interesting….

The interview was conducted over email, due in part to Kalis’s world-traveling ways, and written up by Brian Baxter over at Am Law Daily. After providing some background into K&L Gates’s recent time in the limelight, Baxter turns to his communications with Kalis:

Kalis says his hardest day-to-day challenge is constructing a “modern business enterprise suitable for the 21st century.” He likens the process of growing the K&L Gates brand, cultivating cutting-edge information technology, and managing the myriad other aspects of the firm’s finances to “building a bridge in wartime.”

Managing costs is a significant part of that process. Kalis says firm management always seeks to strike good deals with vendors — something he mentioned to The Legal Intelligencer earlier this year — including the landlords K&L Gates pays to lease some 2.5 million square feet of space spread across 41 offices around the world. Kalis says internal firm data shows that “space-related costs are nearly $10,000 per lawyer less” at K&L Gates than the average paid out by its peer firms.

This shouldn’t surprise. K&L Gates operates in an unusually large number of markets, including some in which real estate costs are quite low (at least relative to places like New York or London). Query whether the comparison controlled for this.

In the memo issued last week, Kalis referenced managing “payroll expenses” in the first quarter of this year. Asked whether this was achieved through layoffs, salary decreases, forcing out unproductive partners, or a combination of the three, Kalis says K&L Gates has put in place a “strict though rebuttable presumption against hiring lateral associates,” so that the firm’s natural attrition rate is “not countered by recruitment.”

Sorry, recruiters — don’t look to K&L as a cash cow, at least when it comes to associate placements.

Well, perhaps you can get some business on the partner side:

Kalis says that K&L Gates has also maintained a “dialogue with chronically underperforming lawyers”— something he describes as “part of running a good business.”

Then there is the issue of lateral departures. According to The Am Law Daily’s analysis of lateral partner moves out of K&L Gates so far this year, many of the approximately 44 partners who have left the firm originally came to K&L Gates within the past four years through mergers with firms like Bell Boyd, Hughes & Luce, and Kennedy Covington Lobdell & Hickman.

As we noted yesterday, in discussing the McKenna Long layoffs, reductions in lawyer ranks often follow mergers. Considering that K&L Gates has consummated at least eight mergers during Kalis’s tenure, departures should be expected.

And they’ve been balanced out by new hires, according to Kalis:

Kalis notes that his firm has also remained active in the lateral hiring market, stating that since January 2011, K&L Gates has recruited 35 partners from Am Law 50 firms and lost only 10 partners to that same group. (Kalis calls the 35-10 split “a rout,” likening it to the “typical score of a Steelers-Browns game.”)

Of course, wooing away partners from Am Law 50 firms isn’t cheap. Hopefully these new partners are delivering the business that K&L expected of them. (I don’t know anything about basketball baseball football — thanks, Wikipedia! — so I’ll leave that Steelers-Browns reference untouched.)

Indeed, despite the lateral losses, The Am Law Daily’s analysis shows that in the period covering the past 10 months, K&L Gates has actually picked up almost as many partners as it has lost, if one includes the seven partners the firm added from Parker Poe Adams & Bernstein when it expanded into Charleston in December 2011. K&L Gates has brought on at least 35 partners in 18 different offices around the world this year, according to The Am Law Daily’s analysis, not to mention other recent expansion efforts in Sao Paulo last November and in Qatar a year ago this month. (Click here for a PDF of lateral partner moves both in-and-out of K&L Gates so far this year.)

How are the partner lateral moves affecting the firm’s finances? Let’s look at the numbers:

K&L Gates’s own gross revenues increased less than 1 percent last year to $1.06 billion, according to annual Am Law 100 data compiled by The American Lawyer, while profits per partner fell 4.3 percent to $890,000 and revenue per lawyer rose slightly to $605,000. Kalis calls criticisms of the firm’s relatively low PPP and RPL figures unfair because K&L Gates doesn’t enjoy the benefit of having the bulk of its lawyers based in New York, like many of the Wall Street firms.

Although no one in the firm’s New York office gets paid less because of it, K&L Gates’s global presence serves to drag down its PPP and RPL averages, Kalis maintains. He notes that he is a “dissenter on those metrics and I’m not going to allow [anyone] to dictate our business model, which is working quite well for us.”

These PPP and RPL figures are somewhat low, but Kalis has a valid point. His firm is not a Cravath or Wachtell, a New York-based firm focused on premium work out of Wall Street. K&L Gates has almost 2,000 lawyers in 41 offices on four continents. Some of those lawyers work on high-margin matters out of major financial centers, and some of those lawyers work on less lucrative but still important matters for their clients. There’s no shame in that.

Of course, trying to operate in so many locations and practice areas has its challenges. If you’re going to have so many different kinds of lawyers under one roof, you have to be willing to tolerate (1) a higher spread in compensation between the highest-paid and lowest-paid partners and (2) a somewhat diluted firm culture, one in which so many partners have never met each other (except for maybe that one time at the worldwide retreat). You can’t avail yourself of the lockstep system that has served Cravath and similar firms so well over the years. You have to come up with a new law firm model and chart your own course.

And that’s fine. Just make sure that you’re in good financial shape, which Kalis seems to be doing:

[W]hen asked how the notoriously debt-free K&L Gates finances its increasingly global operations, especially in light of the failure of expansion-minded Am Law 100 firms like Howrey and Dewey & LeBoeuf the past two years, Kalis reiterates his argument that K&L Gates has never drawn down “a single dollar” on its $75 million in credit lines or “incurred third-party debt of any kind.”

Ah, interesting. So, regarding a question we previously posed — “Does this mean that K&L Gates doesn’t even have a revolving line of credit?” — the answer is, “The firm has a revolver, but it doesn’t use it.” (Chekov might be disappointed, but having a revolver that you don’t draw on would appear to provide a lot of security.)

Of course, just because a firm finances its operations more through equity (partner capital) than debt (like a revolver) does not mean that the firm is invincible. See this enlightening article from the Daily Journal, in which Ed Reeser explains that “[n]otwithstanding the absence of bank debt, a large law firm can still collapse under a structure of extreme financial leverage. The message ‘We have no debt’ is not the same as ‘We have no financial risk.'” In a nutshell, “the critical problem in firms is not undercapitalization, whether sourced in equity or debt, it is overdistribution [to partners].”

According to Kalis, K&L Gates is in no danger of falling into that trap:

The demise of Dewey has not really affected K&L Gates, says Kalis, because the firm is “super-conservative” in how it conducts its business: no debt, no lateral guarantees, and no unfunded retirement programs.

“We pay our partners out of profits and don’t disguise borrowed money as profits,” adds Kalis, whose next term as head of the firm won’t expire until February 2017. “If we can’t afford it, we don’t buy it.”

Bravo. We’ve previously praised Kalis’s way with words, and once again, he doesn’t disappoint. It’s too bad our leaders in Washington, on both sides of the aisle, haven’t heeded that wisdom.

So there you have it, ladies and gentlemen: Peter Kalis’s “State of K&L Gates” speech. And it seems that the K&L Gates stand strong, ready to withstand whatever blows the future might have in store.

P.S. If you want to play Justice Alito to Kalis’s Obama and cry “not true, not true,” feel free to reach out to us. We welcome all viewpoints. But please include evidence and specifics in any submission you make; Kalis has provided plenty of data points in support of his worldview, so if you want to take him on, we ask that you do the same. Thanks.

Heading Into Another Term, K&L Gates Chair Kalis Talks Growth, Mergers, and Lateral Moves [Am Law Daily]
Getting ‘real’ about law firm balance sheets [Daily Journal via JDSupra]

Earlier: K&L Reinstates: Peter Kalis Elected to Fifth Term as Chairman and Managing Partner
Everything Is Great, K&L States: Peter Kalis Comes Out Swinging
Partners Streaming Out Of The K&L Gates?

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