Death of a business Featured

10:04am EDT July 22, 2002
Robert S. Schwartz wasn't there when the 75-year-old Columbus law firm founded by his grandfather slipped quietly into extinction on a damp December evening in 1996.

Schwartz, 50, says the family trip he took to Florida those last two weeks of the year was an annual wintertime escape-not a purposeful retreat from the somber task of packing up and locking the door on the once-prosperous downtown legal firm that had supported three generations of attorneys in his family.

"I'm sure it was monumentally depressing," he says of the day Schwartz Warren & Ramirez officially ceased operations. "But I wasn't going to deprive my mother, who'd been very supportive of me, of that trip."

After all, it was Schwartz's late father, Stanley Schwartz Jr., whose powerful connections and business finesse made the law firm one of the most prestigious in town-and kept it there for more than four decades. What a heart-wrenching, even humbling decision it must have been for the younger Schwartz to have to pull the plug on it all. To cancel his traditional year-end pilgrimage to visit his mother-even as the final chapter in the law firm's history came to a close-would've been unthinkable.

"You need your family there to support you," he says. "Without that, it makes an emotionally difficult situation even harder to handle."

It wasn't a single egregious event that forced Schwartz Warren & Ramirez out of business nearly two years ago. Rather, the apparent reluctance of the management team to address ongoing personnel, financial and leadership issues allowed the firm to erode until it was virtually incapable of continuing.

"There was no backbone to take steps to allow the firm to survive," says Kenneth J. Warren, a former managing partner of the firm who is now a private practice attorney in Dublin. "No one was willing to do what was necessary."

"I probably would take more decisive action sooner if I was in that situation again," echoes Schwartz, who was one of the eight partners remaining at the firm when it dissolved.

The lesson is twofold: Business problems never solve themselves; and if you can't rectify them swiftly and completely, realize you may be digging yourself into a hole that eventually could become a grave.

Losing good talent

Schwartz became a partner in the family law firm, then known as Schwartz, Kelm, Warren & Rubenstein, in 1987.

"Those were, perhaps, happier times economically," Schwartz says. "It was a good time for law firms. We had done very well."

Well enough to be recruiting ace attorneys from the East Coast-and to be representing Les Wexner's personal investment company.

"The talent was as good as you could have in Columbus," Warren says.

As recently as 1990, the firm had more than 40 lawyers-making it among the 10 largest law firms in the city-handling cases for corporate giants such as The Limited, Bank One-Columbus and Consolidated Stores Corp. Business was booming. How could it go so wrong so quickly?

Schwartz pins the turning point on two key events in the early '90s.

First, his father, who had been with the firm for 43 years before retiring as its managing partner in 1990, died of lung cancer. Then attorneys started leaving en masse.

"The death of my father in the beginning of 1992 really deprived us of a great deal of leadership," the younger Schwartz says. "From the time he died and into the next year, there were leadership issues and people leaving and situations that never really stabilized."

The first sizable group of attorneys left the firm in early 1993, he says. According to Columbus Bar Association directories, 13 attorneys-including four of the 20 partners-with Schwartz, Kelm, Warren & Rubenstein in 1993 left the firm by 1994.

"To some extent we were able to replace those people," Schwartz says. "In retrospect, all those losses hurt."

Schwartz says he's unsure why many of these attorneys left, but Warren points to a common thread: money.

"Like a lot of organizations, in order to keep good talent, your compensation structure has to be acceptable," Warren says. "You have your categories of superstars, OK performers and the less than stellar. When people are educated as to what they may otherwise attain [outside the firm], there becomes an awareness that a lot of people are being carried. When we started to have an exodus of people, with them went sizable amounts of business. So as the base got smaller, the compensation issues got exacerbated."

Rather than trying to prevent additional departures, the firm's focus turned to recruiting new attorneys and promoting associates to replace the partners who left. But without a plan to decrease turnover, recruiting soon became a futile effort.

"Whenever you're shrinking, it's a negative," Schwartz says. "With a lot of defections, people became concerned about that."

By the fall of 1996, only eight partners remained at the firm, which had been renamed twice after the departures of Richard Rubenstein in mid-1994 and Russell Kelm in late 1995. The client list at Schwartz Warren & Ramirez reflected that shrinking pool of expertise.

"You need to have a team of specialists," Schwartz explains. "That hurt the ability of any of us to continue to work for our clients in a lot of cases."

The Limited-perhaps the firm's most notable, perennial client-was even lost amid the rapid turnover.

"A law firm is a unique business," Schwartz says. "It's a service business. Your assets go down the elevator every night. When everybody decides to go their own direction, there's nothing left."

Living beyond their means

As worries of the firm's survival mounted, the partners' attention turned to controlling expenses.

"We had too many people at the rate we were paying-too many attorneys, too much support staff," says Warren, who served as the firm's managing partner during the tumultuous years of 1994 and 1995. "We had to make drastic cutbacks."

That didn't happen. The ax got swung, but not broadly enough in Warren's opinion.

"We let a couple associates go in an effort to try to be sure everybody was busy all the time," Schwartz says. But that only aggravated the problem since clients followed those associates out the door, too. And since the firm's receivables were being used to cover expenses in the two years before its closure, the combination of layoffs and resignations sent the firm's finances into an all-out tailspin.

"We were relying on people to be working and producing to pay off our expenses," Schwartz says. "When people start leaving, they're not working and producing."

Nevertheless, few at the firm seemed willing to acknowledge the true gravity of the situation.

"People said it was a seasonal problem, that revenues were going to increase," Warren says. That, he adds, was wishful thinking. It was clear that fixed costs like rent and computer equipment needed to be slashed, too.

"We had very expensive space leased in the nicest building in downtown Columbus," Schwartz says. "That made it that much harder for us. We tried to renegotiate our space at the Huntington Center, but if you have so many square feet to run a firm of [that] size and you lose people faster than you renegotiate, it does not solve the problem."

"We needed to get out of the space we were in-by whatever means necessary," agrees Warren. "The rent was killing us. And we had a lease for a computer system that was almost one-third more than we needed. The expense was too much."

When the firm signed its rent-to-own deal on the computer system in 1992, it seemed wise to invest in the best system available. In hindsight, that was a big mistake.

"A lot can be done without leading-edge technology," Schwartz says. "Especially if customers aren't buying technology from you. Nobody comes to me for my technology. My clients are buying legal advice and services. To some degree, it helps me produce that, but the technological baseline of the legal profession is the quill pen ... Now I won't buy leading-edge technology. Pioneers get arrows in their backs."

So it was. The law firm's computer system depreciated so much that, when the partners finally unloaded it, they got 3 cents on the dollar, Schwartz says.

Looking back, Schwartz wonders if focusing on revenues might have been a better way to go. If the firm could've brought in more business-or charged clients more money-perhaps Schwartz Warren & Ramirez would've had a better chance of staying afloat.

"The real problem was the top line, not the middle line," he now says.

Warren disagrees.

"If we would've downsized, sure there would've been some costs-getting out of the real-estate lease and the computer lease-but we could've [emerged] with a group of 10 to 12 timekeepers that would've been very successful ⊃ and who might have been able to think about growing the firm again," he says.

Big shoes left unfilled

In the fall of 1996, the inevitable decision was reached to dissolve the firm. Schwartz admits approaching several competing law firms before that to discuss the possibility of a merger, but nothing panned out.

"It was not a happy day," Schwartz says grimly. "I attribute my ability to get through that to the support of my family-my wife and my mother. Their support made it possible to move on."

"It was nothing that was unexpected," says Warren, who resigned as managing partner in late 1995 and nearly jumped ship before being enticed to stay with the firm in "of counsel" capacity until the bitter end. "There was a difference of opinion about what to do with the firm. I had gone to the mat over the decision ⊃ but no one was willing to take the drastic steps that some of us felt needed to be taken."

That lack of leadership ultimately sealed the law firm's fate.

"One of the key issues was succession planning," Warren says. "There was no able successor to Stanley Schwartz [Jr.]; no able successor to continue the business-myself included."

In the six years after Schwartz Jr.'s retirement, Rubenstein, Warren and Ted Ramirez all rotated through the managing-partner position Schwartz Jr. had held for more than 30 years. None of these potential replacements wielded the same influence as their predecessor, who was revered as one of the leading corporate lawyers in the country and ran in the same civic circles as the late Mel Schottenstein, former Huntington Bancshares President Zuheir Sofia and, of course, Wexner.

"Stanley was the one that really grew [the firm]," Warren says. "Stanley had the insight, the expertise and the vision to take it on to the next level.

"When you've not groomed an heir, you open yourself up to competition-and even ill will," he adds.

It was a memorable lesson.

"I will never share power again," vows Warren, who launched his own practice after his former firm's demise. "I will never give someone else the power to override a decision I see as needing to be made."

"I'm truly sorry that we didn't do something more proactive sooner," concedes Schwartz, who now serves as a partner at Benesch Friedlander Coplan & Aronoff. "In retrospect, we probably should've faced up to the situation caused by my father's death a lot sooner than we did. We could've saved a lot of people a lot of grief."

The aftermath

Mopping up after a business closure is messy work. There are state, county, city and IRS forms to file. There are clients and suppliers to notify. There are outstanding bills to pay-lest they turn into lawsuits and even personal liabilities, depending on how the business was organized.

Schwartz says the staff and office expenses of Schwartz Warren & Ramirez "were fully paid until we shut down." But the day the law firm vacated its space at the Huntington Center did not coincide with the end of its lease term. Within two months, Huntington Center Associates had filed a breach-of-contract complaint in Franklin County common pleas court against the firm. Court records indicate the case was settled more than a year later, with the firm agreeing to pay the Huntington Center $1.5 million plus interest and court costs.

"I've had to write some checks," Schwartz admits. "I and some others had to make some payments," though he declines to divulge additional details.

"In a situation like this, the first person out the door has the smallest loss. The last people absorb the largest loss," he says. "The prudent thing for anybody would've been to be the first person out. There were a number of reasons I couldn't do that-loyalty to my father's memory, loyalty to a number of people I worked with. I didn't want to do that."

Though his loyalty cost him, Schwartz says he's learned some valuable lessons through it all.

"A law firm shouldn't borrow money and should minimize fixed expenses," he says. "You have to spend prudently."

To Warren, the message is more about planning ahead.

"Prepare for succession," he advises. "The goal of any managing group is to make sure there is a succession plan. Make sure someone has been groomed so you don't miss a beat."