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In Wake of Bingham, Lawyers Contemplate Services Centers

June 18, 2015, 9:46 PM

In early 2014, as Bingham McCutchen reported abysmal financial results, its chairman Jay Zimmerman pointed to a hefty expense dragging down the firm’s bottom line: Its recently launched “Global Services Center” in Lexington, Kentucky, where two floors had been leased and many of the firm’s administrative personnel had been relocated at an estimated cost of $22.5 million.

Later that year, Bingham collapsed amid a crippling partner exodus as most of its lawyers were taken over by a larger competitor, putting the wisdom of opening the Kentucky service center into sharp review: The center had cost every equity partner around $100,000, according to Zimmerman, who cited the expense in multiple press interviews.

Projected to save $25 million in annual overhead expenses by 2016, the firm disintegrated before ever achieving such cost savings. Today, realtors are looking for new occupants for the nearly deserted space that is set to officially be open for rent on July 1.

[caption id="attachment_2789" align="alignleft” width="189"][Image “Jay Zimmerman, former Chairman of Bingham McCutchen. Photographer: Daniel J. Groshong/Bloomberg News” (src=https://bol.bna.com/wp-content/uploads/2015/06/m244453-e1434663124373.jpg)]Jay Zimmerman, former Chairman of Bingham McCutchen.

Photographer: Daniel J. Groshong/Bloomberg News[/caption]

Bingham’s experience illustrates the potential risks of making a large capital outlay to open an administrative center — including that the hit to partner’s pocketbooks can contribute to destabilizing a firm, and also that such centers are rarely enthusiastically embraced among the administrative staff being relocated. Labor costs, however, constitute such a significant component of a law firm’s total overhead, estimated as high as 80 or even 90 percent, that many law firms forgo these risks and seek the cost savings that can be achieved by consolidating their accounting, finance, knowledge management, IT and other departments at a single location, usually somewhere with a lower cost of living and lower tax rates.

Littler Mendelson’s Midwest Open

Most recently, in April, Littler Mendelson joined some two dozen other firms and announced plans to open an administrative center in Kansas City, Missouri, filing a WARN Act notice and indicating it would lay off 113 staffers on July 1.

“The goal is that most of the jobs will be up and running in Kansas City by the end of the third quarter of this year,” said Co-President Jeremy Roth.

Roth explained that Littler Mendelson has a ten-year lease on its main office in downtown San Francisco, which expires in March 2016 and is expected to rise “very dramatically.” It surveyed 942 markets and decided to relocate its administrative departments to Kansas City, a location chosen for, among other things, its convenient Central Time Zone to best service Littler’s offices on both coasts and areas outside of the United States in areas such as Peru, Guatemala and Honduras.

Only about 25 people, or nearly 10 percent of the 275-member workforce that will occupy the new office, will relocate; that may enable the biggest cost saving of all as the firm simultaneously reduces its admin workforce and hires local personnel for lower salaries.

Out of the top 25 most profitable firms, Latham & Watkins appears to be the only one that has moved to launch a back-office to place support staff, in Manchester, England. White & Case, the 26th most profitable, based on financial figures in The American Lawyer, opened its second back office in Tampa last fall after launching its first in Manila in 2007. The activity, at least so far, seems to be more popular among firms that are either global, such as Baker & McKenzie and DLA Piper, or occupy major money centers while practicing in the middle market, like Sedgwick and Kaye Scholer.

Bingham Should Not Be a Factor

Mark Klender, a principal at Deloitte Consulting who is one of the nation’s leading consultants in establishing law firm back-offices, said he has been struck by how many large law firms have not relocated and consolidated their administrative staff in a low-rent hub. Many do not because they aren’t willing to put down the upfront cost, given their financial pressures.

He refuted, however, that the fate of Bingham McCutchen’s services center should be factored into any analysis of another law firm leader considering such a move. “It should not, and I do not think that it did,” he said.

Morgan Lewis & Bockius, which acquired most of Bingham’s assets last fall, including the Lexington office, has decided to shutter the office rather than use it as its own administrative center and extended offers to some Bingham employees to relocate and join its administrative staff in Philadelphia, although some staffers have said the terms were not favorable and did not cover relocation expenses.

“I think that most would understand this is just Morgan’s way of doing business,” said Klender. A Morgan Lewis spokeswoman did not provide comment about the Lexington office for this article.

It can cost tens of millions of dollars to pay for a new services center, covering severance packages to employees, relocation costs, office space, and technology and infrastructure. Labor is the area where law firms save most, according to several consultants who work with law firms on thinning overhead expenses and setting up such back-offices.

Financial Benefits, Cultural Downside

Mark Seeley, Senior Managing Director of Labor Analytics Group at CBRE who advised Littler Mendelson, said that labor typically takes up between 70 and 80 percent of a law firm’s operating cost for shared services centers. He said the number of staff that end up relocating to a new services center ranges anywhere from 10 to 50 percent in total staff, and that the workforce typically ranges from 100 to 300 people, depending on the size of the firm.

Pillsbury Winthrop Shaw Pittman is one firm that has seen the financial payoffs of a services center – its establishment of a 175-member services center in Nashville, Tennessee has contributed to the firm’s overall reduction of real estate costs of more than $10 million a year, according to its chief operating officer Richard Donaldson.

[caption id="attachment_2790" align="alignleft” width="268"][Image “The Gateway Bridge in Nashville, Tennessee. Photo by Brent Moore (Flickr/ Creative Commons)” (src=https://bol.bna.com/wp-content/uploads/2015/06/111223683_2347d1c106_z.jpg)]The Gateway Bridge in Nashville, Tennessee leads to Pillsbury Winthrop’s services center. Photo by Brent Moore (Flickr/ Creative Commons)[/caption]

Yet the site has been received with mixed emotions internally.

“If someone said, ‘Let’s move somewhere new, where is it going to be?’ Nashville would not have been on my list,” said Eline Isaacson, a telecommunications manager at Pillsbury who was uprooted from her Washington, D.C. home in 2013 and now resides in Nashville. “I am a city girl, so it was a challenge for me to come here and dial it back.”

But Isaacson, who has worked at Pillsbury for nearly 30 years, said that her living situation made the transition realistic, with her daughter a junior in college and her only living roommate in the city a large tabby cat rescued from the woods of West Virginia. She is beginning to settle in, she said.

“I’m getting used to the Southern hospitality.”

Not For Everyone

As for Bingham’s old Lexington office, it’s unclear whether another law firm will jump in and take up the opportunity to occupy it.

The commercial real estate firm, Jones Lang Lasalle, has put the office on the market, available July 1, with a lease expiration of April 2023. Its two floors of 45,376 square feet are going for a rental rate of $22.50 per square foot, coming out to a little more than $1 million a year, according to a JLL marketing brochure.

“I’d say it’s still in the honeymoon phase of marketing,” said Josh Gerth, Vice President at JLL in Cincinnati and Northern Kentucky who said his company had listed it a couple months ago.

Gina Greathouse, Senior Vice President of Economic Development at Lexington Commerce Inc., said the local chamber of commerce is also seeking tenants and has strategic targets, and is not holding her breath for the next occupant to be a law firm.

“We are actively seeking businesses and professional services firms, and other global services centers.”

David Koschik, chair of White & Case’s innovation and efficiency council, explained that a services center is not for all law firms, and that for White & Case, its “global footprint” made the deal hard to refuse.

“For us, it’s really been about how we can operate efficiently,” he said. “Some firms that I have come across in my travels wouldn’t consider doing this, and it may just be that they aren’t ready for it... I think it’s probably for each firm to decide for themselves.”

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