Business cutting ties with large law firms in favor of little guys
U.S. companies, adopting a model used by DuPont Co., are adding firms with 300 or fewer lawyers to their outside-counsel roster and saving as much as half compared with fees of Wall Street firms more than triple that size.
DuPont and other clients, hit by the recession, are pressing firms for fixed fees or 10-to-25 percent discounts, industry consultants said. Lower overhead of smaller firms, such as 210-lawyer Hiscock & Barclay LLP, permit them to charge less than DLA Piper LLP or Latham & Watkins LLP, which have thousands of lawyers. Partners at smaller firms charge $500 to $600 an hour as top fees compared with as much as $1,000 at large New York firms.
"At a time when general counsel are looking for alternative billing arrangements, the playing field has been leveled, so smaller firms can make pitches to big clients that would have fallen on deaf ears before," Thomas Sager, DuPont's general counsel, said in an interview.
Starting in 1992, Wilmington, Delaware-based DuPont, the third-biggest U.S. chemical maker, set out to reduce its stable of law firms, applying rigorous criteria to cut costs and increase the value of legal services. The company's current roster includes eight of the 100 biggest U.S. law firms and four times as many smaller firms, which Sager said he prizes for their "flexibility and creativity" in billing.
Small firms offer quality work at a discount because they are more conservatively managed, with fewer offices, fewer junior attorneys and less debt, said Todd Phillips, managing partner at Wick Phillips LLP, a 12-lawyer Dallas law firm.
High Overhead
"At many big law firms, the overhead is so high it pushes the rates through the roofs," Phillips said. "They are less able, or willing, to negotiate a different fee structure for fear of cutting their own throats."
Representatives of the 10 highest-grossing U.S. law firms, including Chicago-based Baker & McKenzie and Washington-based Jones Day, declined to comment on competition from smaller firms.
The largest firms, such as Skadden, Arps, Slate, Meagher and Flom LLP, continue to dominate mergers-and-acquisition and multibillion-dollar bankruptcy work, which can generate hundreds of millions of dollars in fees.
While companies will continue to use big firms for such high-stakes work, smaller firms can handle routine deals and lawsuits as well as patents, real estate, employment and immigration work, said Rachel Hayes, a consultant with Framingham, Massachusetts-based Wellesley Hills Group.
"At many of the big firms, clients end up dealing with a fourth-year associate," J. Joseph Bainton, a litigator in the New York office of Atlanta-based Smith, Gambrell & Russell LLP, said in an interview. "When you hire me, you get me."
Smith Gambrell partners bill 10 to 20 percent less than big firms and give the client more attention than they get elsewhere, Bainton said.
Nine-Lawyer Firm
Bainton previously ran a nine-lawyer New York firm. He joined 189-attorney Smith Gambrell with five of his colleagues in December.
A firm with less than 50 lawyers that specializes in a few areas of law is commonly known as a boutique. Smith Gambrell and others in the headcount range of 50 to 300 lawyers are traditionally considered midsize. The 10 biggest firms in the U.S., with offices around the world, have more than 1,500 attorneys.
The economic slowdown has hit big firms hard. Law firms such as Chicago-based DLA Piper and Dewey & LeBoeuf LLP, based in New York, have cut the annual payments to some of their partners. More than half of the 50 largest firms have fired associates and staff, anticipating revenue declines.
DLA Piper is the largest U.S. law firm, with 3,785 lawyers, according to the National Law Journal, a trade newspaper.
"These aren't great economic times for anybody, but there are lots of opportunities for a firm like ours," James Yates, managing partner of Raleigh, North Carolina-based Wyrick Robbins Yates & Ponton LLP, said in an interview.
Financing Acquisitions
Toronto-based BMO Capital Markets Corp. uses 64-lawyer Wyrick Robbins for its financing of acquisitions in the broadcasting industry, BMO managing director Bryan Rolfe said.
"They have a deep understanding of the industry, and the rates in North Carolina are different than they are in New York," Rolfe said.
About half of the 28 lawyers Wyrick has hired from elsewhere are from national firms including Latham & Watkins and Skadden Arps, Yates said. Latham was fourth-biggest in October with 2,322 lawyers, and Skadden Arps was fifth with 2,251, according to the National Law Journal. Both are based in New York.
Smaller isn't always better, said Jeff Coburn of Boston- based Coburn Consulting. Some small firms are poorly managed, and some midsize firms have a mishmash of specialties with no depth, he said. Also, some clients shun small firms on principle, fearing they perform inferior work, said Hayes of Wellesley Hills Group.
Legal Strata
Loren Brown, co-head of DLA Piper's product-liability practice, said clients trying to control costs without sacrificing quality are encouraged to "stratify" the legal work, matching DLA with smaller regional firms that have skilled lawyers and lower costs. An experienced litigation boutique, for example, can help a big firm handle mass-tort cases, Brown said in an interview.
DLA, the 11th highest-grossing U.S. law firm, often works with New Orleans-based boutique Irwin Fritchie Urquhart & Moore LLC, Brown said. The 38-attorney firm handles document review, scientific review, depositions, expert witnesses and trials, said Quentin Urquhart, a partner at Irwin Fritchie.
As DuPont's Sager began searching for firms with flexible billing arrangements, he discovered Bartlit Beck Herman Palenchar & Scott LLP, a 70-lawyer litigation firm in Chicago and Denver that rarely bills by the hour.
Fee at Risk
Bartlit Beck's trial lawyers prefer to put part of the fee at risk depending on the results, or charge an amount decided in advance, or both, said Lindley Brenza, a partner. Clients are invited to hold back a portion of the agreed-on fee and award that amount, and sometimes more, as a bonus if they get the desired result, Brenza said in an interview.
"Because companies are getting squeezed, they can no longer reflexively buy name-brand firms," Brenza said.
DuPont might hire Bartlit Beck to take a major piece of litigation to trial, another firm to manage offshore document review and still another to write pretrial motions, Sager said.
Smith Gambrell offers fee structures that include caps, partial contingencies and discounts, according to Bainton. A client that generated $3 million in annual legal fees for years now gets a 10 percent discount on litigation, he said. For another client he bills $15,000 a month, which allowed the general counsel to budget $180,000 in legal fees for 2009.
Forklift Maker
Crown Equipment Corp., the seventh-largest forklift maker, prefers small firms such as Smith Gambrell because they provide excellent service for a lower cost, said John Maxa, the New Bremen, Ohio-based company's top lawyer.
"I scratch my head wondering why so many large companies default to the large law firms," Maxa said in an interview. "They are very expensive."
Hiscock & Barclay, based in upstate New York, lavishes attention on clients, according to Managing Partner John Langan in Syracuse.
"The client wants to feel like the rock star, and if the regional firm knows how to price the matter, the client gets a lot of attention," Langan said in an interview.
Utendahl Capital Partners LP, a New York investment bank, hired Hiscock this year to handle its labor and employment work instead of the national firm it used previously, Langan said. Hiscock's labor and employment lawyers charge $495 an hour, he said, declining to name the larger competitor.
Utendahl uses regional law firms, among others, because they "provide high-quality service at lower prices than larger Manhattan-based firms," Ria Davis, the company's general counsel, wrote in an e-mail. Utendahl is "very satisfied" with service provided by all its outside counsel, she said.
"Once these smaller firms have been discovered, there is going to be a bifurcation of the work," said Coburn, the consultant. "The complicated stuff will continue to go to the big boys, and all the other stuff will go elsewhere."