March 17, 1995

The firm’s managers saw warning signs on the horizon, but their reluctance to make hard choices left dissolution the only option.

As long as four years ago, when symptoms of Pettit & Martin’s declining health first began to surface, the firm began exploring ways to keep partners happy and the firm afloat.

In 1991, Pettit management convened what became known as the "Bob Committee" – so named because of the preponderance of members named Bob. The panel was given an ambitious mandate to rescale compensation, cut costs and consider cutting partners.

But the result, says one former partner, was "turmoil."

"It was an abrupt change in the workings of the firm," he says. "This group of partners was going to meet and not talk to anybody and not reveal what they were talking about."

Under the guidance of then-managing partner Randal Short, Pettit convened more committees, commissioned consultants, revamped its management and attempted to alter its compensation system.

But interviews with 20 current and former firm partners reveal that the efforts were mostly a case of "too little too late," and often served to make matters worse.

Former tax partner Brett Dick says Pettit’s "downward slope" began when Congress passed the 1986 Tax Reform Act, which knocked out Pettit’s real estate syndication and equipment leasing syndication practices. The subsequent contraction of the legal market further exposed a host of problems at Pettit that had been camouflaged under an influx of money in the 1980s.

By the time the partnership voted to close the firm’s doors on May 6, it had become clear that efforts to keep its most productive partners had failed. With its ranks reduced to 125 from a high of 240 in the late 1980s, its 26-lawyer Washington, D.C. office on the verge of announcing its defection to an East Coast firm, and four San Jose partners also about to relocate, Pettit partners found the firm demoralized, debilitated and running out of options.

"Looking back on it now, we probably should have done something more dramatic then," says Dick, who is now a partner at Heller Ehrman White & McAuliffe. "With hindsight, we should have been more aggressive in pursuing a business plan that scaled back the size of the firm and attracted new partners with new business areas."

VACUUM AT THE TOP

Part of Pettit’s problem was leadership. Nearly all of the 20 current and former partners interviewed for this article say Short never commanded the level of respect accorded to his predecessor, Thomas Kostic. They say he deferred to Kostic and Washington partners David Anthony and Carl Vacketta on many decisions – by default leaving the firm in the hands of the same people who had been in charge since the early ‘80s. As a result, these lawyers say, Pettit was pervaded by a system of "cronyism" in which certain senior partners looked out for each others’ interests at the expense of other partners and the future of the firm.

Short did not return three detailed messages seeking comment.

The firm was well-managed in some respects, with one partner saying it was "like religion" that Pettit carried no debt. "But that is management, not leadership. What they were doing was glorified bookkeeping, not looking at where they wanted the practice be in five, ten years.

Kostic, the former tax partner who ran Pettit from 1982 to 1984 and again from 1986 to 1989, admits to some shortsightedness. "We were so busy in the ‘80s that we may have missed some strategic spots to be properly positioned for the ‘90s," says Kostic, who is now a partner at Morrison & Foerster. "But it’s hard to look for flaws when you’re billing high hours and working like hell."

DIVIDING UP THE PIE

Perhaps the most intractable obstacle facing Pettit management was the firm’s compensation regime, which was linked to historical client relationships rather than billable hours.

"They introduced to the firm at some point in history a system where a client who would become in any other firm an institutional client…was the sole province of the originating attorney," says one partner at the firm who, like most of those interviewed, spoke on condition of anonymity.

The system, younger partners say, encouraged partners to do anything and everything to remain the billing partner on an account without encouraging them to contribute to the productivity of the firm.

"I don’t think you can overestimate the destructive force of a system that rewarded people for doing what was not in the best interests of the organization," says another Pettit partner.

While senior managers admit that the firm’s compensation system was flawed, they say they believed that changing the system slowly might avoid introducing an "eat what you kill" attitude into its culture.

"People have [selective] memories," says Thomas Burke, who ran the firm’s Los Angeles office until he left last September. "If someone had one bad year, then that was all that people remember."

INTEROFFICE SQUABBLING

Inequities in profit distribution also led to rifts among branches of the firm by the early 1990s. Indeed, partners in the profitable Washington office had been threatening to leave since as early as 1989 because they felt San Francisco partners were devouring more than their share of the pie.

As one former San Francisco partner explains it: "We had a bunch of offices that really had no synergy. We didn’t have a reason for a lot of these offices."

Since 1981, when Pettit’s San Francisco government contracts group spun off into its own firm, the bond between San Francisco’s real estate and transactional focus and Washington’s government contracts practice grew more tenuous. In the early ‘90s, Washington started pushing managers in earnest to cut back on San Francisco’s compensation and expenses.

San Jose partners, too, began to see the San Francisco office as out of control. Former San Jose labor partner John Fox, for example, recalls meal reimbursements reaching $100,000 in one year.

Another former partner explains the difference was also cultural. "They saw the San Francisco partners as being a bunch of soft-hearted liberals with overstaffed offices, no idea how to run a law firm as a business, and no guts to make the necessary cuts in the firm’s costs," this partner says.

And while the Los Angeles outpost had closer ties to the home office – mostly due to a longtime friendship between Kostic and L.A. managing partner Burke – it had its own problems, including personality differences, massive attrition, low profitability and high overhead.

DEATH BY COMMITTEE

Pettit’s first attempt to right the ship came in March 1991 when it laid off 11 associates. In April, the ill-fated "Bob Committee" also established a tiered compensation system and a 20 percent bonus pool, but partners said it did little to redistribute income.

A second committee retained Hildebrandt Inc. in late 1991 to study the firm’s problems. But when the Somerville, N.J.-based consulting company came back with a report in March 1992, it seemed to generate more animosities than it resolved.

"The [report] found that the partners widely believed that the firm was mismanaged and had no faith in the compensation system," says a former partner who read the report. "It found that the compensation system didn’t reward people for being productive and that people were less productive than they would have been in another system."

The report was also extremely critical of key members of management, going so far as to recommend a new managing partner to replace Short – litigation chief John Clark.

According to six partners and former partners, firm management disliked the report’s findings so much that Short originally led partners to believe Hildebrandt had only provided verbal recommendations. When it came out that there was a written report, partners were told they could see it only if they agreed to read it alone in an empty office.

In the end, a new management team was put in, although Clark was left out. The firm closed its unprofitable Dallas office, but left L.A. – which was also losing money – open.

The firm again tinkered with the compensation structure, but younger partners interviewed for this story say the changes were more cosmetic than anything. And many say the divisions that evolved in the wake of the Hildebrandt report prompted their decisions to leave Pettit.

Kostic says he believes the changes were made in good faith. "The problem is that people saw themselves contributing in different fashions."

Dick, the former tax partner now at Heller, agrees, but says that by then, the attempt "was like rearranging the deck chairs on the Titanic."

CORROSIVE CORPORATE DOWNSIZING

With business continuing to drop off and pressure mounting to cut costs and heads, much of the focus turned to the firm’s once-powerful corporate department, which other departments and offices viewed as overstaffed and overcompensated.

One former partner says that when it was time for the department to take a hit, younger partners felt that high-level "pseudo-rainmakers" should be the ones to see their lifestyles curtailed. Management saw it differently, however, arguing that the firm simply had two or three too many partners.

"We had a lot of bright, young corporate lawyers and we really had no business to keep them busy with," says Dick.

Firm managers thought the solution was to encourage attrition by decreasing compensation or stalling junior partners’ step raises.

"The message was you can stay here and have no credit for anything, or go somewhere else and see what it’s worth," says a former partner.

As a result, young corporate partners concluded they could do better elsewhere.

One former partner says Pettit’s attrition strategy had other unforeseen consequences: As the entire tier of junior lawyers in the department left, many clients either went with them or to other firms.

As a result, the corporate department – once a mainstay of Pettit’s practice – had shrunk from 45 lawyers to 11 by the time Pettit decided to fold.

UNLIKELY SAVIOR

By mid-1993, without a backbone of corporate transactional partners, senior partners in other departments realized they might also have to leave to get the support they needed for their clients.

"When you’re looking for people who will stay up all night to do public offerings and fly all around the country, that’s more in the line of what people 45 and younger will do. In 1993, the firm had no one to do that," says a former partner.

Ironically, the July 1993 shootings that made Pettit famous in non-legal circles may have prolonged the firm’s life. Not only did the killings bring an era of good will to the firm that one former partner likened to "the good old days of the ‘80s," but at least three former partners interviewed for this article say they put off departure plans in the wake of the shootings.

But after a brief hiatus, the defections continued. Fox, the San Jose labor partner, and Dick left shortly after the shootings; mergers and acquisitions partner Richard Climan went to Cooley Godward Castro Huddleson & Tatum in March 1994; and in May 1994 Clark took the entire San Francisco construction litigation group to Thelen, Marrin, Johnson & Bridges.

Thomas Burke and his labor group in L.A. joined Brobeck, Phleger & Harrison in September, and the same day Kostic announced that he planned to leave. With Kostic – the firm’s biggest biller – fielding job offers, Pettit lawyers started pounding the pavement in droves.

CHAIN REACTION

The real estate department, the most cohesive and collegial group at the firm and once the centerpiece of its practice, was the last to start disintegrating, even though its billings had been dismal for some time. Partners credit Robert Thompson and Reverdy Johnson with keeping the department together longer than expected.

Still, the quality of support from the corporate practice was declining along with compensation, and some partners eventually concluded that they, too, would have to leave. In January, Johnson decided to take of-counsel status.

"Notwithstanding what a good, collegial place it was," says a former partner, "it reached a point where you had no choice but to start looking"

With the Washington and San Jose offices rumored ready to bolt and with the last big billers looking to leave, everyone started considering their options. It was at this point that Pettit’s managers realized that the firm was headed for another major downsizing.

Business litigation partner Philip Atkins-Pattenson says at that point partners asked themselves whether they had the will to stick it out through another restructuring. "Once you asked that question and got some tepid responses, you realized it was time."

Pettit chairman Theodore Russell – who most partners agree took the helm too late, in mid-1993, to save the firm – insists that the dissolution was not an economic decision, as 1994 profits had rebounded to around $230,000. But other partners say the projections for future years were extremely glum.

Many of the 1994 profits came from partners who had since taken their business elsewhere, Pettit partners say, and the collection of a $1.5 million account receivable overdue since 1991 had boosted income to a level not likely to be repeated in 1995.

At a dinner meeting on March 3, the partners decided to call it quits.

Few partners expressed animosity at the firm managers whose actions – or inaction – might have ultimately led to the demise of Pettit & Martin. They have instead resigned themselves to the fact that management simply made some poor decisions in trying to preserve its culture.

In the end, however, most agree that the root of their problems was economic.

"We all just picked the wrong horse," says one former partner. "I have my list of bad guys, but there were just so many circumstances beyond people’s control. I’m sure people could have done something to save the firm. But who knows what was right?"

END