THE LATERALS REPORT 2007: Growing Sideways
Sonnenschein plans to double its revenues by cherry-picking lateral partners. So far it seems to be working.
Sonnenschein Nath & Rosenthal partner Kara Baysinger is on the road. Every week since July, she has landed in an airport far from her San Francisco Bay Area home, climbed into a cab, and headed for one meeting or another. When she's in a city with a Sonnenschein office, she sets up shop in a nondescript room reserved for visiting partners; otherwise she makes do however she can. Most nights she eats yet another protein-heavy dinner, often with recruiters or prospective laterals the firm is trying to charm. Baysinger, 40, is Sonnenschein's newly appointed lateral acquisition partner, the firm's recruiting ambassador. An ebullient woman who turned a prelaw stint in the insurance business into a $4 million insurance regulatory practice, Baysinger herself is a Sonnenschein lateral. She joined the firm as an associate in January 1998 and made partner in 2000. Her partners say she's precisely the type of lawyer Sonnenschein is trying to attract, which is why they've put Baysinger in charge of lateral recruiting.
You could call her Sonnenschein's wine-and-diner-in-chief. Except that for now, she's laying off the wine. Baysinger is pregnant with twins due in March.
"Nobody else seems to mind if I'm having cranberry juice instead," she says. Baysinger says she revels in the endless stream of phone calls and the long meetings with Sonnenschein practice heads that her recruiting responsibilities entail. And she plans to continue traveling as long into her pregnancy as she can. "As you can see, I'm all about growth," she jokes, glancing at her belly.
Kidding aside, Sonnenschein's strategic goals make it clear that as the lateral acquisition partner, Baysinger can't relax. She isn't just carrying twins: She bears the weight of her partners' plans for the firm's future. Led by longtime chairman Duane Quaini, 61, Sonnenschein's partners have decided that the aggressive pursuit of laterals is the firm's surest route to prosperity and independence. In June, Sonnenschein released a new strategic plan to partners, offering a road map for growth from the firm's current middle-of-the-pack $800,000 in profits per equity partner to $1.4 million in 2008. That PPP would have placed the firm second among Chicago-based Am Law 100 firms in 2006, behind only Kirkland & Ellis.
Sonnenschein's plan calls for the usual cost-cutting and trimming of less-profitable practices, but its best hopes for growth rest in lateral recruiting. And not just the New York-based recruiting that has become the vogue for firms based outside the city. With the acquisition in May 2006 of the Phoenix-based rainmaker Richard Ross, Sonnenschein has already proved its commitment to opening offices in out-of-the-way places in order to accommodate new partners with big-money practices. Baysinger and firm leaders say they expect to announce three or four major acquisitions in the first quarter of 2007, including two in cities where Sonnenschein does not now have offices. In January Baysinger completed a series of trips that will culminate in the opening of Sonnenschein's new Palo Alto office.
Sonnenschein's growth plan has already entailed some pain. Between October 1, 2005, and September 30, 2006, 33 partners left the firm-including more than 15 who were asked to leave. About a dozen more partners were deequitized last year.
Nor is there any guarantee that Sonnenschein's plan will work. Other Am Law 100 firms that have tapped the lateral market for growth have experienced varying degrees of success. Greenberg Traurig's aggressive hiring pushed the firm over the $1 million profits per partner mark in 2005, but the lateral acquisitions of Holland & Knight have barely raised the firm from the bottom of the profits per partner ranks at $480,000.
But Quaini and Sonnenschein's other leaders base their faith in lateral hiring on the firm's own experience. Five years ago, Quaini, Washington, D.C., partner Caryl "Cap" Potter III, and other Sonnenschein partners recruited a fast-growing public policy group, headed by 36-year-old Elliott Portnoy, from Arent Fox Kintner Plotkin & Kahn. The acquisition proved so successful that two years after the group arrived, the partners on Sonnenschein's policy and planning committee invited Portnoy to join the governing body. And last summer, when the committee selected the chairman who will succeed Quaini-the partner who will lead the firm in attracting new laterals and building new practice areas-they chose Portnoy.
Portnoy believes that as law firm stratification intensifies, lateral hiring will vault Sonnenschein into the elite. "Length of service to the firm won't be an impediment to the ability to grow your practice, to get resources, to get compensated generously and move into leadership roles in the firm," he says. "There are boundless opportunities at Sonnenschein for laterals."
When Quaini was leaving for his annual Italian vacation in April 2005, he brought, as always, an agenda of firm issues to ponder. "When I'm away, I spend an hour or so per day just thinking about the firm with the benefit of time and a lot of sleep and distance. I have found this to be good and, quite frankly, healthy," says Quaini in a voice that is equal parts mellifluous and gravelly. At the time, Quaini was turning 60 and had less than three years left in his tenure as Sonnenschein chairman (the firm requires partners to give up management positions at the end of the year they turn 62). Quaini was worried about coasting through the rest of his term. As he sat on the balcony of the villa he and his wife had rented, sipping coffee and looking at Lake Como, he decided to suggest putting together a bold plan for Sonnenschein's future to the firm's governing body, the 15-member policy and planning committee.
Quaini says that the changing scale of the legal market-the continuous growth and consolidation of the firm's competition-demanded strategic thinking, just as it had in 1997, when Quaini, newly elected as chair, led the firm through its first comprehensive restructuring. That process, Quaini says, resulted in more than 30 partners being deequitized or leaving the firm between 1997 and 1999. The restructuring was painful at first: From 1997 to 2000, Sonnenschein's Am Law 100 rank fell from 46 to 71, and its profits per partner barely budged, from $355,000 to $370,000. But after 2000 the firm outpaced the Am Law 100 average, doubling gross revenue to $448 million and profits per partner to $800,000.
At the policy committee meeting that followed Quaini's vacation in May 2005, Quaini proposed that the firm stake out a new comprehensive plan, inviting partners to share their ideas and concerns at the committee's next face-to-face committee meeting in July. "Duane leaves for vacations with big ideas and comes back with bigger ideas," says D.C. partner Potter. Potter and others present say that there was wide agreement in the room that it was the right time to consider new ideas. The consensus was that the firm should capitalize on the momentum of a series of strong years with a new strategic plan.
Quaini's concern for Sonnenschein's future stems in part from his connection to the firm's past. "I've been here almost 37 years," he says. "I've been nurtured by this firm. For that entire period of time, I have always been doing things here that I loved with people I admire, respect, and like so much," Quaini continues, with a storyteller's sense of timing and pace. "I want to make sure that the people who come after me have the same opportunities, or better, than I've had." Quaini signed on with the firm in June 1970, recruited out of Stanford Law School by Harold Shapiro, the firm's first chair. At the time, Sonnenschein was well established-founded in 1906 by Jewish lawyers who couldn't get jobs at other Chicago firms, it was known for its insurance, real estate, and restructuring practices-but still had just 45 lawyers and a single office in Chicago.
Quaini, a general corporate litigator, tapped into a specialty that would become a central Sonnenschein practice: insurance class action defense work. He worked as an associate on the first class action to go to verdict in Illinois for Northbrook-based The Allstate Corporation, a bedrock Sonnenschein client. That case launched the relationships that eventually made Quaini Sonnenschein's primary litigation partner for Allstate, for which, in 1993, Sonnenschein handled the $2.4 billion initial public offering that was then the largest in history. Quaini was also instrumental in Sonnenschein's expansion out of Chicago in the mid-1980s, helping to establish many of the firm's new offices and practice areas through lateral recruiting.
Elliott Portnoy, one of the many partners Quaini helped bring aboard, was at the policy and planning committee meeting on the day that Quaini invited his partners to develop a new growth initiative. Portnoy well understood the challenge the firm faced: In 2002, he turned Sonnenschein down the first two times he was approached by legal recruiter Thomas Wronski about meeting with Sonnenschein partners. Quaini and Washington, D.C., office head Cap Potter had been struggling for several years to acquire a public policy group that would establish an inside-the-Beltway identity for the firm's then 35-lawyer office. Portnoy, a cheerful former Rhodes Scholar with a head of dark, spiky hair, led an Arent Fox public policy team with about $5 million in annual business-and seemed to be an irresistible candidate. Wronski made a third push for a meeting, and Portnoy finally budged.
For Potter, it was love at first sight. "I thought, 'I don't care what promise I have to make to this guy, I will make it,' " Potter says. "I made every promise I had no authority to make." Portnoy had a long list of requests: that Sonnenschein boost funding of its political action committee from less than $40,000 to $150,000; that the firm add space for political events to the D.C. office; that it compensate Portnoy's nonlawyer colleagues like lawyers; that it make several of Portnoy's associates partners; and even that Sonnenschein provide BlackBerrys to the public policy team although the firm had no BlackBerry servers at the time. Potter agreed to them all. Shortly thereafter, Portnoy was on a plane to Chicago to meet Quaini. "I found there to be an enormous appetite for the kind of public policy practice we wanted to build," Portnoy says. About four months after the initial meeting with Potter, Portnoy and his team-five lawyers and three nonlawyer lobbyists-joined Sonnenschein.
Portnoy did everything Quaini and Potter could have hoped for, establishing a model that Sonnenschein touts to laterals who have followed him. Portnoy and his team put together a list of the 25 highest-revenue clients at each Sonnenschein office and searched records to find out who their lobbyists were. Then he visited every firm office to meet partners, show them his data, and explain to them what his team could do for their clients. Two of Portnoy's largest clients in 2006-the unsecured creditors of Federal-Mogul Corporation, the auto parts supplier facing thousands of asbestos claims; and the unsecured creditors of UAL Corporation, United Airlines's parent company-were the result of his deft internal marketing. Both are also Sonnenschein bankruptcy clients.
In the five years since Portnoy joined Sonnenschein, the public policy group has become one of the firm's signature practices. It has grown to 28 lawyers and lobbyists and last year brought in more than $25 million in billings. Under Portnoy's leadership, it has also extended the boundaries of a traditional lobby shop, with more than 25 percent of the group's work in 2006 coming from the burgeoning practice of political intelligence, in which the group gathers information on pending legislation and regulations for private equity and hedge fund clients. Today, though the public policy practice does not produce the gross revenues of the firm's much larger litigation or corporate departments, it is consistently one of the three most successful in generating profits per partner.
Portnoy was already on Quaini's list of possible successors in May 2005, when Quaini first suggested to the policy committee that it formulate a strategic plan for the firm's future. Portnoy would have to trade in his 2,700-hour-a-year practice, but Quaini-who in Sonnenschein's governance structure proposes his own successor to the policy and planning committee for approval-believed that his endorsement of the young, Washington, D.C.-based lateral would send a powerful message: Sonnenschein cared more about quality of leadership than about geography, practice area, or tenure with the firm. "I needed to be certain in my mind that Elliott had indeed gotten what the firm is about," Quaini says, "and that frankly is something I never doubted. Elliott gets it."
Portnoy, in turn, supported Quaini's call for bold action. Sonnenschein's last major restructuring resulted in a 116 percent bump in profitability from 2000 to 2005, a notable improvement over the Am Law 100's 44 percent rise in average profits per partner during the same time period. To Portnoy, the success of that earlier effort only heightened the imperative to act again. "We don't want a gun to our head when tough decisions have to be made," says Portnoy, whom Quaini suggested as his successor to partners on the policy and planning committee starting in mid-May 2006. Portnoy was named chairman-elect on June 22 and will take over as Sonnenschein chairman sometime in the next two months.
Two days after the firm announced Portnoy's elevation, Quaini unveiled the new strategic plan to the firm's equity partners. It was the product of a year's work by a policy and planning subcommittee that hired Blaqwell Inc., a New York-based consulting firm. Blaqwell knew Sonnenschein: In 2003 it advised the firm not to reopen the London office it had closed in 1999. This time Blaqwell consultants interviewed more than 50 partners and about two dozen clients over a six-month period in 2006. The resulting plan calls for Sonnenschein to build national practices capable of serving clients' litigation, regulatory, and transactional demands by lateral growth or possible mergers. By 2008, if all goes according to the plan, revenue will have doubled and profits per partner will have done almost the same. It's an ambitious goal, but Portnoy says Sonnenschein is scrutinizing profitability practice-group-by-practice-group. Group leaders are expected to set their own profitability objectives, looking at leverage, billing rates, realization, productivity, and lateral growth as means to meet them.
Portnoy began to put the plan into motion almost immediately. He is overseeing a management restructuring that shifts the system's emphasis from geography to practice groups. (Practice groups heads, rather than office managing partners, will be responsible for strategic planning and lateral hiring decisions.) Quaini and Portnoy also asked veteran Chicago litigation partner James Klenk to serve as Sonnenschein's first client service partner. He has analyzed the firm's relationships with its top 200 clients to see which relationships can be expanded, which are at risk, and which need to be handed down by partners nearing retirement age.
Quaini and Portnoy also embarked on a series of meetings-some uncomfortable-at all of the firm's offices. Over the last year, in addition to revoking the equity status of about a dozen partners, Sonnenschein's leaders have asked other longtime partners to adjust their practices. Quaini and Portnoy say that they personally have asked fewer than ten partners to leave the firm in the last six months. (Typically, say Quaini and Portnoy, by the time they ask underperforming partners to leave the firm, those partners have already met several times, over the course of many months, with practice heads to establish performance goals.) "I'm a very big believer in no surprises for all of our partners," Portnoy says. Nevertheless, the 33 partners who left the firm last year through a combination of voluntary and involuntary departures comprised 10 percent of Sonnenschein's total partnership.
But the firm also acquired 17 lateral partners last year. Key pickups included Gardner Carton & Douglas health care partner D. Louis Glaser in Chicago in November 2005, and Chadbourne & Parke intellectual property partner Mark Waddell in New York in January 2006. The Washington, D.C., office added two partners from Weil, Gotshal & Manges, including the new national chair of the firm's patent litigation practice, Alexander Hadjis. Hadjis is just one of the laterals who cites Portnoy as a big factor in his decision to join Sonnenschein. "I looked at Elliott and understood his experiences as a model," says Hadjis, whose team of eight attorneys came over in April and has already begun working on patent litigation work for Sonnenschein client AuthentiDate Holding Corp.
As in most organizations in a time of transition, Sonnenschein has a core of leaders dedicated to the changes at the firm-and a minority that opposes them. "Lawyers, being creatures of habit, don't like change," says one Chicago partner. "There has been a great feeling of shifting, and some people are very uncomfortable about that."
Still, partners at the firm say that Quaini and Portnoy are aware of their concerns, not only about the partners who are leaving but also about those who are joining the firm. "There are changes happening here at the firm, and many people are averse to change, and change can cause anxiety," says Chicago junior partner Blaine Kimrey, who joined the firm from Winston & Strawn in June. But, Kimrey says, "Elliott is addressing those anxieties in an effective way. . . . He said we are being picky. We're not just taking any $10 million book of business that walks through the door." So far, the firm's leaders appear to have kept partners happy. "Normally you would think I would get calls from people who are disaffected. But I'm not," says Chicago area legal recruiter Kay Hoppe.
Portnoy says he is mindful of the example of another young lateral partner who took over a healthy firm, doubled revenues over three years, then saw it all fizzle. That firm: Brobeck, Phleger & Harrison. That chairman: Tower Snow. Portnoy insists that he's not Tower Snow, and Sonnenschein is no Brobeck. "[Snow] was a visionary," Portnoy says. "But from how I understand it, he was far ahead of where his partners were. . . . My vision for the firm is not a singular vision. It is one that is shared by our management committee and the rest of our partners. I'm still leading. But am I several steps ahead? Definitely not. I'm a half-stride ahead of some. There are some partners that are a stride ahead of me and there are some by my side, and that's the way I think it should work."
Quaini echoes that sentiment: "If you make it only about money, it won't work. One of the things that has interested me very much is that I have been told repeatedly by my partners who have joined us laterally, 'Duane, don't screw it up, because you don't realize how special it is. You've never been anywhere else.' "
Portnoy and Quaini began working on Sonnenschein's biggest recent acquisition in the late summer of 2005, well before Portnoy's succession was announced. Phoenix-based hotel industry lawyer Richard Ross was looking to leave Squire, Sanders & Dempsey with the help of Mark Jungers, a managing director at search firm Major, Lindsey & Africa. With $5 billion in ongoing deals and an annual book of business of more than $10 million from such clients as Starwood Hotels & Resorts Worldwide, Inc., Hilton Hotels Corporation, and Vail Resorts, Inc., Ross had preliminary talks with 15 firms. Jungers had placed lawyers with Sonnenschein and knew the firm was looking to add hotel industry specialists to its national real estate practice. He pushed for Sonnenschein, convinced that Ross could benefit from the firm's strengths. "[Jungers] basically said, 'Trust me, Rick. They are a firm on the move with great leadership and great vision and great culture,' " Ross says.
Ross met with Quaini over a four-hour dinner in early August 2005, and the courtship was under way. "The difference at Sonnenschein came down to their understanding and embracing what our team does," Ross says. "We're industry-focused rather than practice-focused. Because of the nature of [our] practice, we use virtually all the practice groups." The key, says Ross, was finding a firm whose partners were willing to dedicate resources to his clients.
Jana Blackman, the Chicago-based head of Sonnenschein's national real estate practice, was in charge of the Ross acquisition, but over ten months of discussion and negotiation, several other partners joined in. Ross says he quizzed San Francisco litigation partner Paul Glad and New York corporate partner Paul Gajer on how they staffed their projects, the level of support they received from partners and associates, and whether the firm's compensation structure encouraged partners to work on each other's projects. Portnoy also met with Ross three times to share his lateral experience, once in New York, once in Chicago, and once in Phoenix. "Elliott has a very keen sense of our needs and what we should be doing to plug into the firm just as he built his own practice in Washington," Ross says.
The negotiation culminated on a Sunday night this past May. Sixteen people gathered for dinner in the private wine cellar at Lon's, a restaurant at The Hermosa Inn near Phoenix. The crowd-which included computer technicians, a real estate agent, a legal headhunter, secretaries, and a group of Sonnenschein partners, as well as Ross and his Squire, Sanders partner Mark Daliere-had assembled to review last-minute details of the plan for the next day, when Ross would inform Squire, Sanders of his plan to leave the firm. He would also reach out to his clients and to junior lawyers, none of whom knew of his talks with Sonnenschein. "It was very important to all of us that we show Rick as much personal and professional support as we could that night," says Blackman, the real estate partner who led the Ross deal. After all the months of interviews and negotiations, she says, she was nervous for Ross. She knew that ending his 17-year tenure at Squire, Sanders was as much an emotional as a professional experience. "This is not simply a business transaction," she says. "There are human beings involved who are concerned about their futures."
The next morning, as she waited for word from Ross, Blackman paced a makeshift war room that Sonnenschein had set up at the Hyatt Regency in downtown Phoenix. The firm's real estate agent was in tow to help find temporary office space for Ross's group. The information technology staff made sure that there were enough phone lines and Internet connections for the firm's systems to run at full capacity from the war room until the office was set up. Sonnenschein real estate partners Edwin Reeser III and Marjorie Zessar were also in Phoenix, ready to mobilize teams in Los Angeles and Chicago to keep Ross's deals rolling if Sonnenschein was not able to convince Ross's associates and of counsel to come over with him to do the work. "We did not want there to be even a hiccup in service to clients," Blackman says.
Shortly before noon Ross called to say that he had met with Squire, Sanders senior management and resigned. The Sonnenschein team jumped into action, calling Ross's associates and of counsel. A block of rooms was reserved for intake interviews with members of the firm's human resources department. Ross was on the phone the whole day informing clients. All of them, he says, made the jump to Sonnenschein with him. All of the key lawyers on his team came as well.
Portnoy points to the Ross deal as a prime example of the kind of moves Sonnenschein wants to make in the market. "We have to pursue lateral opportunities in a single-minded way," Portnoy says. And when the firm finds a lateral candidate it wants, he says, neither compensation nor geography are impediments. (Ross and Portnoy decline to say what Ross's compensation will be, but Ross and recruiter Jungers say he did receive more lucrative offers elsewhere.) "The sell is a lot easier than it was when I joined the firm," Portnoy says.
So far, both sides consider the Ross deal a booming success. Portnoy recently told Ross that more than 50 lawyers across the firm's real estate, corporate, labor, tax, and intellectual property practices are working on matters that his practice brought into the firm. In fact, Ross's group is so busy that he's in the market for new laterals. "My partners have given me great support," he says. "The chairman and the new chairman-elect give me great support to go out and hire people we need laterally."
A little less than a month after Ross joined the firm, in another sign of how crucial the firm considers its lateral program to be, Portnoy and Quaini approached Kara Baysinger about a new position: lateral acquisition partner. As envisioned in Sonnenschein's strategic plan, the lateral acquisition partner is supposed to oversee the firm's lateral program, serving as a liaison between recruiters, laterals, and the firm, and smoothing the transition once new partners join Sonnenschein. Baysinger's energy and ability to get to know people quickly, partners say, made her a good fit for the position. "Kara is the lens through which I want laterals to see Sonnenschein," Portnoy says.
Baysinger says she accepted the job only after Portnoy and Quaini promised that the firm would be "willing to pay top dollar for talent and aggressive in paying recruiters." As a former lateral, she subscribes to the strategic plan's emphasis on attracting lawyers from outside of Sonnenschein. "By hiring laterals, we increase our talent pool and become a more resource-rich firm," she says, "and in doing so it enables us to better serve our clients."
Baysinger has made two administrative moves to improve Sonnenschein's lateral program. She created a position for a manager who will oversee scheduling, check for practice conflicts, and update the firm's database of information on lateral recruits. She also established a network of about ten legal recruiters who know Sonnenschein's practices and needs. Her intention, she says, is to build recruiter loyalty to the firm by paying higher rates to recruiters who bring in multiple groups. "You pay for the behavior you want," Baysinger says.
Recruiter Jungers, who is part of Baysinger's network, says he's impressed by Sonnenschein's lateral commitment. (He stands to benefit from her incentives if he places other top-flight groups with the firm.) He and Baysinger are in contact several times a day by phone or e-mail, discussing ongoing projects. "They are willing to give us access to everyone and everything really," Jungers says. "Elliott is on a plane [to meet with my candidates] this Monday, Tuesday, and Friday."
But screening laterals for compatibility with the firm is Baysinger's primary focus. She calls herself a matchmaker. "It's a courting process. As you get more comfortable with each other, the questions get bolder," Baysinger says. She's trying to convince partners to ask the tough questions of lateral candidates earlier: Who are your clients? What are your rates? What are your clients' attitudes about your rates? How productive are the associates who work for you?
Since she was named lateral hiring partner, Baysinger says, her time commitments have flipped: She now spends ten hours a day on business development and four hours a day on client issues. She has handed much of her practice off to a team of partners and associates in San Francisco. Baysinger and Portnoy exchange e-mails several times a day, and she speaks with him on the phone a handful of times a week-in addition to the regular Monday morning conference call for her, Portnoy, and client service partner Klenk on implementation of the strategic plan. After her pregnancy becomes too advanced for her to fly, Baysinger says, she'll still be working the phones. And she plans to be back to work "reasonably quickly" after her twins are born.
"Kara is the gatekeeper [who] makes the strategic gut check," Portnoy says. "She asks, 'Is this a move that is aligned with our strategic plan? Is this a move that makes sense strategically, economically, and culturally?' " Adds Ross, who has worked with Baysinger to recruit partners: "Kara has that sense of place of who our firm is, who fits and who does not. . . . When she has a sense that someone is not the right person, she pushes back."
Baysinger says that saying no is one of her most important jobs. She may be "all about growth," as she jokes, but only if it's calculated. She knows about keeping growth under control. She may be pregnant with twins, but she doesn't have to use a seat belt extender on airplanes yet. She hopes to keep it that way.