Pendulum Swings in Favor of Mid-size Law Firms

By Larry Bodine, Esq., a business development advisor based in Glen Ellyn, IL, and Tucson, AZ. With the Apollo Business Development Program, he has helped law firms nationwide get new clients and generate millions of dollars of new revenue. He can be reached at 630.942.0977 and www.larrybodine.com. Follow Larry Bodine at http://twitter.com/LarryBodine

In a major shift, the economic pendulum has swung away from megafirms and in favor of regional and mid-sized firms, which can offer equally-good service at much lower rates.

True story from one of my own clients: a partner in a regional California law firm was listening to an executive from a semiconductor manufacturer complain about his current law firm.  The client beefed that his 600-lawyer firm was charging him $950 per hour to perform routine corporate work, and his lawyer didn’t answer his phone calls.  The regional firm partner mentioned that his maximum rate was $500 and that he returned all calls within 24 hours.  The client changed law firms and it was a win-win for both client and lawyer.

This anecdote illustrates a larger trend in the legal profession: lawyers in smaller and mid-size firms are successfully luring away prize clients of large law firms.

“I have read a number of articles in recent weeks predicting it will be boutiques/locals/regionals that will do best in 2009-2010. Today, one of my clients, Reilly Pozner, www.rplaw.com, a litigation boutique of 21 lawyers, told me they are hiring another seven lawyers. They have been appointed by the bankruptcy court as national coordinating counsel for loss recovery for a Wall Street investment bank,” said Bob Weiss of Alyn-Weiss & Associates, Inc. in Denver, CO.

“In 2008 small and midsize firms increased their presence on corporate ‘short lists’ from 24.5% up to 38.2%. This is a staggering change!” said Michael Rynowecer of The BTI Consulting Group in Boston, reporting on new research in BTI Premium Practices Forecast 2009: Survey of Corporate Legal Spending. “For a GC to bring one firm in is really quite easy; there is no shortage of law firms marketing to them or venues to meet law firms. But the big change is in the GC’s mindset: the corporate counsel we surveyed said, ‘I will open my pocket book to hiring small and mid-sized firm.’”  

Rates are a factor, according to the new research: 62% of GCs are not happy enough with their primary law firm enough to recommend them.  “The ability to deliver value is main reason a GC will recommend a law firm. The thing that hurts major law firms is that clients see the $165,000 starting salaries for big law firms.  If client can see value, they will try a lower-rate law firm,” Rynowecer said.

"This is the third recession my personal injury firm has been through (five attorneys and 20 support staff). Like the two previous, we do not see any change, due to the economy, in the number of cases or clients seeking our services,” said John Bisnar of Newport Beach, CA, founder of Bisnar Chase, a catastrophic injury and national auto defect firm. “We have not experienced a downturn in business or results in previous recessions. We have experienced in past recessions and this one, a lowering in our costs of operation (employees, experts, materials, equipment and rent). We had a great year last year and have $3.25 million in settlements so far in 2009 and we are expecting to exceed our best year ever by July 1st.”

“For law firms that are willing, and able, to offer cash-strapped general counsel quality services at a lower price, the current crisis presents an opportunity for more business,” wrote Zach Lowe in The American Lawyer in an article "Will Regional, Mid-Tier Firms Emerge as Winners in the Current Crisis?” This includes specialized boutiques. It also includes midsized regional firms with contacts at Fortune 500 companies, according to several lawyers, general counsel and law firm consultants.”

“General counsel at large companies -- including Allstate, Johnson & Johnson, and Waste Management -- today are sending more litigation and deal work to regional firms that, in the past, they've relied on for less intensive matters, according to half a dozen consultants we talked to.”

”Among the beneficiaries are regional firms with 100 to 300 lawyers who have advised these bigger clients before, albeit on smaller matters. The consultants we spoke to single out several firms, including mid-Atlantic firm Saul Ewing, Parker Poe Adams & Bernstein in North Carolina, Butler Snow in Mississippi, and Lightfoot, Franklin & White in Alabama.”

Not every small firm is prospering

See also "Smaller law firms cut back attorneys and salaries" in the Chicago Tribune.

To be sure, being a regional firm doesn't guarantee immunity from the recession.  “In my NC county all sorts of small firm and solo attorneys are getting on the court appointed lists to represent indigent defendants. A significant part of the business plan for my new practice was court appointments, and it's been a setback to me to find that I am getting half to one-third the cases my mentors told me to expect. The recession appears to be hitting the small practices here,” said Jeff Gillette, an attorney at the Gillette Law Firm in Cary, North Carolina.

“We primarily handle family law and education law. Normally our divorce cases increase during an economic downturn but not this time. Clients are telling us they can't afford to separate,” said Mark Spencer Williams, managing member of Rice Law in Wilmington, NC. “We are busy but only because we are adapting to our clients needs -- unbundling services, etc.”

Daniel Alexander II, a partner at Graves & Alexander in Los Angeles, said, “My little firm is feeling a recession. We are busy, but it is getting harder and harder to get paid on time.”

Marketing consultant Bruce W. Marcus of Branford, CT, added, “It depends upon the clientele. Some firms have clients who are economically sound. Others have clients who are small entrepreneurs without the resources to survive a diminishing customer base. As the recession hits the clients of the smaller firms, the firms will feel the impact of the economic downturn. It's highly unlikely that all firms of any size will not feel the effects of the economic turndown.”

Trouble at the megafirms

Meanwhile, megafirms are going through the throes of layoffs, salary freezes and cutbacks in hiring associates.  February 12, 2009 was named “Black Thursday” among the AmLaw 100 and 200, when six law firms dismissed more than 700 staffers and attorneys in a single day. A seventh firm confirmed on that day that it had laid off attorneys on Feb. 11, and an eighth that it had laid off staffers on Feb. 10.

Layoffs occurred at Holland & Knight; Goodwin Procter; Bryan Cave; Epstein Becker & Green; Dechert; and DLA Piper, which cut 80 attorneys and 100 staff members from its U.S. offices on Feb. 12. There have been so many large-firm layoffs that Law.com published “The Layoff List.” As of February 21, it included an astonishing 62 law firms nationwide, each one a brand name.

According to the Department of Labor’s Bureau of Labor Statistics, the legal services industry in the United States shed some 7,000 jobs between December 2007 and December 2008. The numbers include lawyers, paralegals, public relations specialists, secretaries and other positions; and reflect layoffs by firms nationwide over the last few months, and the dissolutions of Am Law 100 firms Heller Ehrman, Thelen, and Thacher Proffitt & Wood.

In the article “More Economic Hell for Big Law Firms in 2009” two leading advisors to major law firms predicted 2009 will bring:

• Declining demand for legal services.
• A 15% drop in net income from 2008.
• Inability to raise rates.
• Additional layoffs.
• Salary freezes.
• Cost cutting.
• Heavier fee discounting.
• Expenses rising faster than revenues.
• A long wait for better times.

"This recession is significantly different that prior recessions and could lead to fundamental changes in the law firm business model," including more contract and temp lawyers and fewer full-time partners and associates, said James W. Jones of Washington, D.C., Managing Director of Hildebrandt International, speaking at the Marketing Partner Forum in Dana Point, CA, in January 2009. His comments were based on 100 peer law firms that Hildebrandt monitors.

Joining him was Lucinda J. Tambourine, Managing Director and Senior Client Advisor of Citi Private Bank.  "We are in a shift from a decade of growth and expansion to an extended period of reduced demand and resistance to increase in costs of legal services," she said.  Her opinion was based on 151 law firms responding to their surveys.

The editor of a national legal publication said privately, “Let's be realistic here -- these "purges" are being done for three reasons: To lower costs (good); to have money to "buy" laterals of practices that are booming, e.g., bankruptcy (better) and to keep the partnerships solvent (best). And by the way, there are many mega firms that are doing very well, especially those with elite banking and bankruptcy practices.”

Better than expected at smaller law firms

“I'm a BigLaw litigation partner who has felt the impact of the recession and am shocked at how many opportunities/offers there have been for me in my small market (Providence, RI). It seems that the $225-325 per hour lawyers are doing just fine, at least out my way,” said Brian Lamoureux, a partner at Brown Rudnick LLP.

Marketing consultant Bob Weiss added, “My law firm clients all charge less than $500 an hour, all have less than 100 attorneys, all are regional/local, all are hiring, and all pay associates less than $160,000.  All had record revenues and profits per partner last year.  Many, but not all, have reasonable lease rates (all of which are increasing.) They are cautious about 2009, but who would not be?”

“I agree that the recession is more of a mega firm problem. Small and mid-size firms continue to do well,” said Bill Tilley, a partner at Amicus Capital Services of Valencia, CA. In addition, consumer/plaintiff law firms are expected to thrive over the next several years as jury award trend upward in challenging economic times resulting in larger and quicker settlements on many cases. Plaintiff firms have just made it through some of the toughest conditions the past eight years with defense firms having deeper pockets and tort reform. Now the pendulum will swing back a bit as tort reform will likely stop with the shift to a democratic administration and the defense firms huge financial advantage easing.

“I just settled a back injury case for $300,000 at mediation, which in our area this was on the high end. A suit was filed and the case settled at mediation against a fairly conservative regional insurance company with great in house lawyers. Usually they push these cases to the brink of trial before settling. I do not know if that has any significance or not with the economy,” said Anthony Castelli of Cincinnati, Ohio.

“My law firm clients -- all PA firms with 50 lawyers and fewer -- either made budget or just barely missed it and the mood is optimistic for ’10,” said marketing consultant Stacy Clark, Esq. of Devon, PA. “These firms are not cutting back on their marketing budgets. New litigation cases are coming in but discretionary items -- like trusts and estates work -- seem to be down a bit. Family law appears to be rock solid -- with some payment issues.”“In industries less hard hit, regional and mid-size firms seem to be benefitting from their lower fees,” said coaching consultant Ellen Ostrow of Lawyers Life Coach in Washington, DC. “In my experience, it depends on the practice. Anything related to housing and real estate is down regardless of the size of the firm. Family law is suffering. Commercial litigation is down as is estates and trusts. There is little deal work, regardless of firm size.