Now this is how you handle negative rumors about your firm.

As we mentioned last night, in the past week or so we’ve seen media reports of possible trouble at K&L Gates. Stories in Law360 and Crain’s Chicago Business speculated about “an alarming rate” of partner departures and “attorneys increasingly los[ing] faith in the firm’s leadership and strict compensation policies.”

The chairman and global managing partner of K&L Gates, Peter J. Kalis, isn’t taking all this sitting down. Very early this morning, the famously outspoken Kalis sent around a firm-wide memo that powerfully refutes some of the claims made about the firm.

If you’re at all involved in law firm management, you should read it. The Kalis email offers a master class in how to thoroughly respond to negative rumors….

I have to say, it’s an impressive email. It’s a ten-point, data-driven memo, explaining that K&L Gates is in very good shape right now. Here’s how it begins (all links supplied by me, not Kalis):

As you know, we are in merger discussions with the Australian national firm Middletons. About a week ago, the managing partner of that firm received an anonymous email from someone who described himself as a former partner of our Chicago office. The email was sharply and unfairly critical of K&L Gates. My counterpart at Middletons gave the email the short shrift that an anonymous sender deserves. At the time, I wondered what would drive someone to write such an email to a stranger on the other side of the world, and I wondered also what he (perhaps joined by other disgruntled former partners) might do next. My question was soon answered when certain false and malicious press coverage appeared.

This is a great beginning. Even though K&L Gates has 1,800 lawyers around the world, by relating this story about the anonymous email, Kalis takes the reader into his confidence, sharing with the reader the perspective of a managing partner. The anecdote makes the reader identify with Kalis and bond with him — even though Kalis, as the firm’s chairman and global managing partner, is many layers removed from the vast majority of people who will receive this email.

After a bit of throat clearing, in which he emphasizes he bears no ill will towards former partners of the firm, Kalis continues:

There recently has appeared bank survey data on how the legal industry is faring in 2012. See “Citi Mid Year Report Sees SIgns of Trouble Ahead for FIrms” in the August 16 AmLaw Daily; “Citi Report Shows Law Firm Leaders’ Confidence Waning” in the September 11 AmLaw Daily; “Law Firm Performance in in 2012: ‘Not Stellar,’ ‘Outlook Grim’” in the September 14 Wall Street Journal; and “Report: Law Firms Struggling to Keep Up with Rising Expenses” in the September 17 AmLaw Daily. The first two articles derive from Citi’s comprehensive survey and the third and fourth articles derive from Wells Fargo’s comprehensive survey. Both banks tend to target the AmLaw 100 and AmLaw 200 firms with their surveys, and both had well over 100 firms respond. [Ed. note: See also Above the Law stories here and here.]

I’m going to focus on the Wells Fargo survey because it’s surely a watershed moment for our profession when one of the world’s greatest and largest banks calls our industry’s 2012 outlook “grim”. In summary, Wells says: profits were down through the first two quarters of 2012 for the surveyed firms, and “all indicators suggest [profits] will be down [in 2012].” But the magic, as always, is in the details.

Okay. After reading these paragraphs, I thought to myself: Kalis is about to announce some disappointing news about K&L Gates’s financial performance. He’s setting up the background so that whatever he announces won’t look that bad, in the context of what Biglaw is going through right now.

1. Wells Fargo says that profits fell at its surveyed firms through the first two quarters in 2012 as compared to the same time period in 2011.

At K&L Gates, our profits increased during that time period by approximately 20% as compared to the same time period in 2011.

2. Wells Fargo says that many firms deferred 2011 expenses into 2012 to make their 2011 years look better.

At K&L Gates, we don’t engage in financial management of that sort. We deferred no such items.

….

4. Wells Fargo says that all indicators suggest that profits will be down in 2012.

At K&L Gates, at our regularly scheduled Management Committee meeting earlier this week, our Chief Financial Officer (employing conservative assumptions and data available through August 31) forecasted an increase in revenues and profits per equity partner.

BAM. Those three items, in a ten-point tour de force, state that K&L Gates is thriving — even in an environment that many other firms are finding challenging. By setting up the grim outlook for law firms generally but then stating that K&L Gates’s revenue and profits are looking up, Kalis nicely upends the reader’s expectations. It’s an extremely effective rhetorical move.

You’ll note that we quoted points 1, 2, and 4. Let’s go back to point 3 for a sec:

3. Wells Fargo says that headcount is up at many firms thus swelling payroll expenses.

At K&L Gates, we began managing down payroll expenses early in the first quarter of 2012 and expect to incur about $10 Million in payroll savings as against budget by yearend.

If you read between the lines a bit here, you can catch some sobering news. “Managing down payroll expenses” and expecting additional payroll savings in the future generally spell bad news for employees, in terms of reduced compensation, layoffs, or both. But given the challenging environment outlined above by Kalis, such measures may be a necessary evil, and part of prudent law firm management.

In Point 5, Kalis discusses lawyer utilization levels. Then he turns to a subject of recent interest to us here at Above the Law, partner capital calls and capital contributions:

6. Wells Fargo says that the surveyed firms’ permanent capital has increased by 7% in the first two quarters of 2012. (Journalistic accounts of special capital calls and of assessing income partners for firm capital are well documented.)

At K&L Gates, we have had the same capital policy in place for the 15 years that I have headed the firm. No variations. No exceptions. No capital calls. No hitting on our income partners for capital.

Note the punchy, short sentences. And this, while colloquial for a managing partner memo, is awesome: “No hitting on our income partners for capital.” The sentence drips with Kalis’s disdain for the practice.

(We are still left wondering about how partner capital contributions can range from 20 to 60 percent, as reported by Law360, but we’ll leave that for another day.)

(UPDATE (9/21/2012, 6:30 PM): The Law360 piece isn’t perfectly clear, but as a commenter suggests, I may have misread that passage in my prior post. Perhaps the sentence should have been written this way (alterations in brackets): “On average [across large law firms], partner capital contributions can range from 20 to 60 percent, making K&L Gates’ levels on the high end [at 60 percent].”)

This next point is big:

7. Wells Fargo says that uses of bank lines of credit by the surveyed firms increased by 14% in the first six months of the year.

At K&L Gates, we have never used a single dollar of bank line of credit and indeed have never had any bank or other third-party debt. Never. No short term debt. No long term debt. We distribute only our earned profits to our partners and do not engage in the Deweyesque charade of paying partners out of debt. Even if we were tempted, which we’re not, we have no debt out of which to pay them.

That’s impressive. Does this mean that K&L Gates doesn’t even have a revolving line of credit? If so, that’s reassuring. As regular ATL readers will recall, part of what did in Dewey was debt.

And speaking of Dewey & LeBoeuf, whose ghost looms behind any negative reporting about law firms these days, you have to love Kalis’s shout-out to them: “We distribute only our earned profits to our partners and do not engage in the Deweyesque charade of paying partners out of debt.”

A “Deweyesque charade” is a delicious turn of phrase. Can we borrow that, Mr. Kalis?

The next three points also all go to how K&L Gates is not like Dewey. Kalis states the following:

  • K&L Gates doesn’t have any active unfunded retirement programs.
  • K&L Gates is not experiencing unusual partner attrition, just “healthy” turnover. It has 900 or so partners now, about 3 percent fewer than in January, which “is in line with our historical pattern this deep into the fiscal year.”
  • K&L Gates doesn’t provide lateral partner compensation guarantees (which was disastrous for Dewey). “This is not a guarantee culture. Our partners earn it every day.”

Having finished up his ten numbered items, Kalis turns to the Chicago situation — and waxes a little sarcastic:

And what of our poor and forlorn Chicago office where many of our partner departures this year did in fact occur? Well, it’s not feeling so poor and forlorn these days. With a more efficient office headcount, its utilization is 5 points above plan and 7 points above the same period last year. Although most of the departures occurred early in the year, its billings are up over 10% through August 31. And the corrosive effect of the disaffected has been externalized from the firm — a group that, incidentally, left behind $2.3 Million in bad accounts when they departed. Chicago is doing quite well, thank you.

Kalis closes the memo by taking a look at our little world of legal media:

Let me offer a final word on legal journalism. Law360, which only months ago named K&L Gates as one of its 20 “Global Powerhouse” firms, wrote an article damaging this firm’s reputation on the strength of one or more anonymous sources. Late in the day before publication, a journalist called me with a “still beating your wife?” type question, to which we declined comment. This was an entirely tawdry and amateurish performance for a publication that gets it right more often than not.

Stating that Law360 “gets it right more often than not” lends greater credibility to Kalis’s criticism of the publication’s specific article as a “tawdry and amateurish performance.” It’s a shrewd move.

Journalists, like lawyers, need a point of view to operate. But their weapon of choice should be a healthy and informed skepticism. For an entirely fair and professional report on this affair, see David Lat’s recent posting on Above the Law.

Aww, thank you, Mr. Kalis! Here at Above the Law, we just try to call things as we see them. Sometimes we attack firms and sometimes we defend them, but we always try to be honest.

In recent days, I’ve been overwhelmed with partner input to the effect that I ought verbally to dismember the embittered ex-partner(s) who attack us from the shadows of anonymity. Yet, in cooler moments, we all know that debating an anonymous foe is a fool’s errand. Instead, and with the help of the Wells Fargo survey, we have compared our firm to the industry standard. As you can see, the picture that emerges is at odds with what the accusers say.

Peter Kalis

Actually, I think you kind of just did “verbally… dismember” the “embittered ex-partner(s)” behind the recent media attacks. But you did so in a matter-of-fact, data-driven way, so that’s okay.

If you look at Peter Kalis’s bio, you’ll see that he’s a Rhodes Scholar, a Yale Law School graduate, and a former Supreme Court clerk (to Justice White). Given those credentials, one might say: “Someone like this could do anything!”

Including, it seems, go into law firm PR work. The Kalis memo is one of the best pieces of law firm advocacy — call it “spin” if you like — that I have ever seen, in all the years I’ve been doing Above the Law.

So yes, I’m a fan of the Kalis memo. But as I mentioned last night, I welcome any and all information about K&L Gates, positive or negative. If you have info to share, please feel free to email us, subject line “K&L Gates,” or text us, at 646-820-8477 (texts only, not a voice line). Thanks.

P.S. In other K&L Gates news, the firm just picked up a three-partner team from Sidley Austin in London, as reported by Legal Week. Congrats.

(Flip to the next page to read the Kalis memo in full and without the interruption of commentary.)


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