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Everything Is Great, K&L States: Peter Kalis Comes Out Swinging

Peter Kalis, chairman and global managing partner of K&L Gates, issues a forceful response to speculation in the media about the state of the firm.

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Here is the Kalis memo. Note the time of sending — 5:36 AM — and the “High Importance” designation.

The email did not contain links as it was sent. We have supplied links to some of the items mentioned by Kalis for the convenience of the reader.

K&L GATES — PETER J. KALIS — RECENT ARTICLES ON K&L GATES

From: Kalis, Peter
Sent: Friday, September 21, 2012 5:36 AM
To: ALLLAW
Subject: Recent Articles on K&L Gates
Importance: High

Colleagues:

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.

I’m sure you understand my reluctance to debate publicly an anonymous source who bears a grudge and who has a slanted view of our firm. At the same time, as I did with the partners at our regularly scheduled videoconference on Thursday, I wanted to provide all of our lawyers with facts about how well the firm is doing. I do so with no predisposition against former partners. While they were here, they made contributions and I appreciate them as former colleagues. But when one or a few unfairly attack us, I need to equip all of you with the information necessary to conduct yourself with confidence and dignity at K&L Gates.

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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.

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.

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

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.

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.

5. Wells Fargo says that at this point of the fiscal year firms should concentrate on cutting expenses and collecting their accounts because legal work is unlikely to pick up.

At K&L Gates, through most of this year, our lawyer utilization has hovered above the 2011 level, and our September has begun strongly with an over-plan utilization performance expected. And, year in and year out, we focus on controlling expenses and managing our financial inventory throughout the fiscal year and not just in the last quarter.

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.

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.

8. Wells Fargo says that one in three surveyed firms have active unfunded retirement progams with balances running up to $50 Million.

At K&L Gates, we capped and closed those programs many years ago, and indeed were featured as the poster child for responsible early management of this issue in Julie Triedman’s fine 2011 article in The American Lawyer.

9. Wells Fargo says that most firms had turned over their partnership by one-third in the last decade and that firms with lower turnover were actually less productive.

At K&L Gates, we have approximately 900 partners. As compared to January, we have about 3% fewer partners right now. This variation is in line with our historical pattern this deep into the fiscal year. Our turnover is healthy, contributes to our productivity and is consistent with Wells Fargo’s observation.

10. Wells Fargo says that many surveyed firms provide lateral partner compensation guarantees which commit from 3.5% to as much as 15% of a year’s profits.

At K&L Gates, we don’t provide such guarantees. Never have. This is not a guarantee culture. Our partners earn it every day.

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.

I think you get the picture. There are many great law firms. But I doubt seriously that there is one more financially sound than K&L Gates or one whose partners are more committed to its mission to serve clients around the corner and around the world. Together, and with the help of our associates and other stakeholders, we have grown the largest integrated network of law offices of any firm in the world — one profit pool, one brand, one technology platform, one compensation model, and a unified governance group representing venues and practices from around the world. And our partners put their money with their mouth is — we didn’t incur a penny of debt in the exercise.

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.

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.

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.

This is important, and I thus hope that you are in touch with any questions.

As always, thanks for all that you do for the firm and its clients.

All the best,

Pete

Peter J. Kalis
Chairman and Global Managing Partner
K&L Gates LLP
K&L Gates Center
210 Sixth Avenue
Pittsburgh, PA 15222

K&L Gates adds Sidley Austin partner trio to City finance practice [Legal Week]
Expect More Exits From K&L Gates, Ex-Partners Say [Law360 (sub. req.)]
As big law firm mergers roll on, there’s some fallout – and K&L Gates is Exhibit A
[Crain’s Chicago Business via ABA Journal]

Earlier: Partners Streaming Out Of The K&L Gates?

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