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‘Big Law’ clients seeing virtue of midsize firms

biglawMore and more, midsize law firms are finding themselves to be the better option for corporate clients that increasingly are questioning the value of paying big-firm rates for the handling of run-of-the-mill legal matters.

That conclusion is borne out in a recent study by the business consulting firm CEB, Inc. Released in November, the “CEB 2016 State of the Legal Function Survey” found that, from 2014 to 2016, there’s been an 8 percent jump in the portion of outside counsel budgets allocated to midsize firms. In 2014, corporate legal departments used 32 percent of their outside counsel budgets on midsize firms. That number reached 40 percent last year.

That finding is consistent with what Paul L. Feldman is seeing in the local market. Feldman is the managing shareholder at Davis, Malm & D’Agostine, a 36-attorney general practice firm in Boston.

“Market forces in the last several years have driven companies to start diversifying their use of outside counsel,” Feldman says.

According to Feldman, the 2008 recession forced companies to reexamine how they managed their legal services.

“Once they realized there were some alternatives, that became part of their norm of how they operated their legal departments,” he says.

Francis A. Connor III, co-managing partner at the 30-attorney litigation firm Barton Gilman in Providence and Boston, agrees that corporate clients are seeing midsize firms as a viable alternative because of their lower rates. However, he suggests there’s also a greater appreciation of the quality of work performed at midsize firms.

“Clients are not going to hire a lawyer for less money if they’re sacrificing the subject-matter expertise they need,” Connor says. “More information and transparency has allowed more clients to become very sophisticated consumers of legal services.”

Controlling costs

Not surprisingly, the biggest factor making midsize firms a more attractive option for corporate client is cost, according to Jaclyn L. Kugell, managing partner of Morgan, Brown & Joy, a 32-attorney employment and labor boutique in Boston.

Kugell says larger firms are being squeezed on the one hand by the pressure exerted by corporate legal departments focused on tightening their belts in the wake of the recession. On the other hand, there are internal pressures to maximize revenues to pay for high overhead and the demands of partners to maintain the income levels to which they are accustomed.

Jeannette Riendeau, director of marketing and business development at 25-lawyer Bernkopf Goodman in Boston, says she expects Fortune 100 companies to continue to stick with the big law firms.

However, she also expects to see more opportunities to pick off big-firm clients in the future because corporate decision-makers have become savvy about the cost of legal services.

“They can look at a bill and see when they’re getting billed by an associate at a $600-an-hour rate at a large firm,” Riendeau says. “The thought process is, ‘I am paying to train an associate how to do their job.’ There’s resentment that’s starting to come from that.”

Sheryl J. Dennis, an attorney in Wellesley, Massachusetts, is skeptical that big law firms will adjust to the changing marketplace, equating them to ocean-liners unable to quickly change course.

“Part of it is they’re stuck in their ways,” Dennis says. “If they weren’t stuck in their ways, would Bingham McCutchen have gone down? They have a mindset on how things are going to run. They’re just not as agile or adaptable as a smaller firm can be.”

As managing partner at Fields, Dennis & Cooper, a five-attorney family law and estate planning firm, Dennis says even a small firm like hers is benefiting from the competitive pressures facing big firms.

“Many of your large firms are phasing out their estate planning and probate practice because they don’t feel it’s bringing in enough money unless it includes money-management,” Dennis says.

Kugell says midsize firms are well-situated to meet a corporate client’s needs in terms of handling the “everyday business-of-law” type cases in a cost-effective manner. And while she accepts the fact that corporate America typically will turn to the big law firms in “bet-the-farm” cases, Kugell thinks corporate clients like the fact that her firm is open to alternative fee arrangements.

Of Morgan Brown’s top 10 clients in terms of billing last year, half had alternative fee arrangements, Kugell reports.

“That makes the cost of doing business attractive for both them and us,” she says.

One of the challenges in attracting corporate clients intent on cutting costs is to show that the midsize firm is a better option than bolstering in-house counsel to handle the more routine matters, Kugell says. She asserts there’s a good answer as to why going to a midsize firm can be more cost-effective for the client than adding to the “head count” in the legal department.

“You don’t have the employee cost, the salary, the benefits and all the other overhead that goes along with staffing the internal legal department,” she says, adding that smaller firms naturally have more flexibility when it comes to trying something like flexible billing.

“Size has everything to do with being more nimble,” she says. “If you’re smaller, you have the ability to navigate these issues more easily.”

But Connor doubts whether big firms are or will be as inflexible on fees as some suggest.

“I don’t have any reason to think that the big firms aren’t equally willing to consider those kinds of arrangements,” he says. “They’re feeling competitive and are probably willing to do that.”

Several of Boston’s largest firms contacted for this story, including Foley Hoag, Goodwin, Ropes & Gray and WilmerHale, either declined to comment or did not respond to a request for comment.

In 2014, corporate legal departments used 32 percent of their outside counsel budgets on midsize firms. That number reached 40 percent last year.

‘Price point’ issue

As managing partner at Todd & Weld, a 40-attorney litigation firm in Boston, Christopher Weld Jr. sees big firms having a particular problem serving large corporate clients on the litigation front.

According to Weld, using a big law firm may be justifiable in a case in which the future of the company is at stake or in a high-stakes class action.

“There’s still a perception that it is worth paying the fees and everything else to the big firms in those large cases,” Weld says.

But big firms are having trouble handling the “mid-level” cases in a cost-effective manner, opening the door to more litigation work for firms like his, Weld says, calling it a “price point” issue.

“If you have a $1.5 million to $2 million piece of litigation, you’re going to pay a big firm over a million bucks to do that, which is kind of hard to justify,” he says.

Weld certainly agrees that lower fee schedules give midsize firms a distinct advantage when it comes to recruiting cost-conscious clients. But he sees overstaffing as an even more fundamental problem for big firms in controlling costs.

“We tend to be a lot less top-down than the big firms,” he says. “At a big firm you’ll get a senior partner, a junior partner, a senior level-associate, a junior-level associate and a paralegal assigned to a case. So a two-hour meeting is a $5,000 or $10,000 affair.”

Feldman points out that, unlike at a big firm, a partner at a midsize firm is more likely to be performing actual services as opposed to simply serving a management function. That means the client may actually be getting more experienced and productive counsel.

“[Corporate decision-makers] can look at a bill and see when they’re getting billed by an associate at a $600-an-hour rate at a large firm. The thought process is, ‘I am paying to train an associate how to do their job.’ There’s resentment that’s starting to come from that.”

— Jeannette Riendeau, director of marketing and business development, Bernkopf Goodman

Talent drain?

Dennis says her firm has already hired one attorney from a big law firm who brought her clients with her, and another big-firm lawyer will be joining Fields Dennis shortly. She expects to hire up to three additional attorneys in the coming year.

Big-firm clients find her firm an attractive option not only because of lower hourly rates, but also because of the firm’s openness to alternative fee arrangements, including flat fees for certain matters, and the fact that the firm doesn’t “nickel and dime” them with additional costs for items such as photocopying.

“We’re undercutting the downtown firms on rates,” Dennis says.

Feldman says Davis Malm recently made three lateral hires from larger firms, and in each case the old firm’s high rate structure had become problematic for the attorney in retaining his or her clients.

“In all three cases, when we talked about our rate structure, that was one of the things [the new hires] found attractive,” Feldman says. “They were having trouble maintaining their client base because they were getting squeezed from ever-increasing rates. They even felt it impaired their ability to grow their practice.”

Peter C. Lando knows first-hand why talented big-firm attorneys may want to migrate to smaller firms. Lando himself is a former big-firm lawyer who in 2003 joined with other big-firm lawyers to found Lando & Anastasi, a 27-attorney intellectual property boutique in Cambridge.

“We were lawyers who came together from larger firms recognizing this was going to happen,” he says. “Rates can only go so high, so the demand for that type of practice can only go on for so long.”

Lando says his firm has seen steady growth over the years, successfully competing for clients who ordinarily would have gone to big firms. He attributes part of that success to the fact that his firm’s average billing rates are 25 percent lower than the typical Boston market rates.

“We’re looking to add eight practitioners this year because our work is growing,” Lando says. “The type of work we do is work that large firms would love to have.”

Weld envisions some large firms eventually coming to the realization that their infrastructure is too big to handle a client’s small- to mid-level cases in a cost-effective manner. When that happens, he says, look to see more partnering arrangements in which attorneys at large firms hand off work to trusted attorneys at smaller firms.

“When they look in the mirror and conclude they don’t want to handle those cases, the question becomes, ‘Where can I put the case so I don’t have a risk that the person is going to steal my client?’”

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