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Smaller law firms positioned to withstand recession

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Despite the fact that large law firms were some of the first high-profile businesses to implode in the troubled economy, many small and mid-sized law firms are doing well, especially compared to their super-sized counterparts.

Large, well-known law firms like Heller Ehrman and Thelen were early casualties of the recession. Since then, the popular legal industry Web site Law.com assembled what it terms "The Layoff List," chronicling the significant layoffs at major law firms. The list has grown to include 95 large law firms, up from 62 in late February of this year.

Those in the legal industry refer to Feb. 12 as "Black Thursday," when six large law firms dismissed more than 700 attorneys and staffers in one day.

Meanwhile, John Stephens, managing shareholder with Wertz McDade Wallace Moot & Brower, a mid-sized San Diego law firm with 28 full-time employees, says his firm is holding strong and has not had to lay off any of its full-time staff. He hears similar reports from other small and mid-sized law firms.

Rather than having to rely on expanding the scope of work with existing clients, Stephens and colleagues have seen much of their growth come from new clients, some who have purposefully ended their relationships with large law firms.

"I think billing rates and experience help us attract clients who have left large law firms," Stephens said. "In these times, everyone is trying to tighten their belt, and when people find out that they can get more attention from mid-sized law firm principals, and that those top-level professionals actually charge lower hourly rates than some associate lawyers assigned to their case at big law firms, it's an easy choice."

The BTI Consulting Group's Premium Practices Forecast for 2009 indicates that small and mid-sized firms may continue to benefit. In its survey of corporate legal spending, 62 percent of in-house general counsels are not happy enough with their primary law firm to recommend them, citing their inability to deliver value as the main reason.

"The BTI survey findings don't surprise me," said Gil Cabrera, principal of The Cabrera Firm APC, a small law firm located in downtown San Diego. "I serve as general counsel for some of my clients, and when I review some of their bills from outside law firms, I'm amazed by how much overhead time some of those law firms charge. Smaller firms are far less likely to nickel and dime their clients."

Cabrera, who worked for two large and prominent law firms before starting his own practice, points out that many of the lawyers at small and mid-sized firms were previously trained at large firms and are able to deliver the same expertise at lower hourly rates.

Small and mid-sized firms may also be more willing to negotiate fee structures. Stephens said Wertz McDade charges flat fees for some of its business law services, especially for straightforward reporting and estate planning services.

Some clients ask their law firms to work on full or partial contingency, meaning the revenue earned depends upon the results of the case. While large firms are often unwilling to negotiate their fee structures, small and mid-sized firms may do so under the right circumstances.

"When a client comes to us with a strong enough case, we may be willing to adjust our hourly rates to just cover overhead or to cover all expenses in exchange for a portion of the damages that may be awarded," said Stephens.

Large firms with large private clients often avoid public agency work, as the firm is then obligated to charge reduced government rates. Mid-sized firms have been more aggressive about pursuing this work, and will likely benefit from doing so at a time when government entities are benefitting from a large portion of the stimulus money.

Wertz McDade, whose client roster includes several public agencies, also benefits from the diversity of services it offers. While its real estate and land use groups have taken a hit from the economy, its business and litigation services work has grown.

"During a recession, litigation goes through an acceleration of sorts," said Stephens. "At a mid-sized firm like ours, we have fewer young lawyers and a higher concentration of experienced lawyers, so most of our people, regardless of their specialty, have litigation experience, which positions us very well to shift more people into our litigation practice when necessary."

Experienced lawyers and smaller firms are also very agile in their ability to shift focus, Stephens said. While the development work in his firm's real estate group has shrunk, many clients also own and operate existing real estate. Most of the shareholders at Wertz McDade have worked through several economic cycles and have experience in just about every kind of real estate law.

The learning curve required at a large firm that employs many young lawyers will be greater in this situation, and thus the client may be billed for more hours -- another factor that might incentivize some companies to seek out smaller firms.

Stephens and Cabrera are careful not to seem too optimistic or opportunistic, though. "We're really pleased to have weathered the last two years well, but we're very careful and just as concerned as everyone else," Stephens said. "We realize that our success depends partially upon how our clients fare."

Cabrera added, "2008 was better for us than 2007, and 2009 is looking relatively strong, but no one is immune to the economy."


Whitelaw is a freelance writer.

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