The Dot-Firm's Dot-Bomb
How a leading West Coast law firm killed itself.
The dot-com meltdown has claimed another victim. After failing to merge with a larger law firm, San Francisco's Brobeck, Phleger & Harrison—which employed 900 lawyers just two years ago—announced yesterday that it is folding.
Brobeck isn't the typical dot-bomb. It's not a poorly capitalized startup in a silly, profitless industry. It is a 77-year-old blue-chip firm whose clients include the highly solvent Cisco Systems.
Americans have learned in the last two years—at a cost of billions of dollars—how the New Economy failed to revolutionize business. The death of Brobeck signifies how it also failed to revolutionize law.
During the '90s, law firms happily rode the technology wave without fundamentally altering their business. As associates defected to dot-coms and venture capital firms, law practices raised salaries and hiked bonuses. But they didn't seek to transform the business of law.
At least not until late in the boom, when previously staid Brobeck began to act like its technology clients. It became a dot-firm. Run by a charismatic leader, the firm spent lavishly on marketing, built a palatial headquarters, sacrificed cash upfront for equity, and focused its resources on the technology sector. Guess how the story ends.
Brobeck charged into the limelight after an attorney named Tower Snow assumed its chairmanship in 1998. The firm boosted first-year salaries to compete with New York powerhouses and added lawyers with abandon. Fed on a steady diet of initial public offerings, VC deals, and mergers and acquisitions, Brobeck grew fat. Revenue jumped from $214 million in 1998 to $314 million in 2000. By the summer of 2000, the firm counted 754 attorneys, up 40 percent from the year before.
Essentially, law firms are high-end employment agencies, in which the partners sell the labor of associates and paralegals at a vast markup. So once you've built that overhead into your billing structure and established a loyal client base, it's hard to go wrong. When work slows down, you simply let people go. Overhead is also easily controlled. Most blue-chips occupy nice but not lavish offices, and marketing is generally discreet—advertisements in the American Lawyer, booths at professional conferences.
Even though Brobeck's profits-per-partner soared to more than $1 million in 2000, Snow wasn't content. He started to view himself not merely as a good lawyer, but also as a good businessman. "He believed that a law firm could be run like a successful company, and, influenced by clients such as Cisco Systems Inc., he emulated the growth, management, marketing and sheer boldness of Silicon Valley's highfliers," Susan Beck wrote last summer in the American Lawyer.
And so Brobeck began to do things that law firms didn't do. It continued to bulk up even after the Nasdaq peaked. In 2001, it became the first corporate law firm in the United States to advertise on national television. The campaign, which ran on CNN—as if viewers of Larry King Live are big consumers of high-end legal services—may have cost $10 million. Snow spoke grandly of taking the firm public.
Brobeck became the anchor tenant in a gleaming new complex in East Palo Alto and expanded its offices in New York and San Diego when prices were peaking.
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at email@example.com and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.