Small Firms Luring Large Clients

Small and mid-size law firms stand to capitalize as large companies pinch more pennies in a tight economy.

Major clients are gradually shifting workloads away from big national firms with ever-increasing numbers of attorneys who charge ever-escalating hourly rates.

One company to make the move is GDF Suez Energy North America. The subsidiary of Paris-based natural gas giant GDF Suez SA transferred all immigration and ERISA work, and most tax work, to Houston-based Chamberlain, Hrdlicka, White, Williams & Martin PC about a year ago.

“We are experiencing some very good changes,” says Wayne Risoli, a shareholder with Chamberlain.

He says Fortune 500 companies are attracted by the firm’s rates, which he says are $120 to $160 less than those charged by major Houston competitors.

“With this economy and this legal environment, it’s very appealing to in-house counsels, CFOs and CEOs,” says Risoli.

Rates were an issue for GDF Suez, says Mike Thompson, senior vice president of human resources and communications.

“We’d been using a national firm for the last five or six years, and their rates kept going up every year with no conversation with us,” says Thompson. “We were being charged for the senior partner instead of a more appropriate level of person doing the work for us. If we called somebody and asked a simple question there was a $200 bill with that.”

GDF Suez is a $200 billion company with $8 billion a year coming from the North American subsidiary, but Thompson says the 30 percent rate reduction was a driving factor to move some work to a smaller firm.

While GDF Suez North America handles acquisition work mostly in-house, Chamberlain handles the bulk of outside work, which is substantial considering the company has been in “acquisition mode” this year.

Says Thompson: “A lot of people maybe aren’t moving all their work away from the big firms, but they’re moving some.”

Budgets hit billing wall

Legal expenses are coming under even more scrutiny as corporations prepare annual budgets.

“Many budgets are restricted or reduced in ’09, or they are going to remain flat,” says Chamberlain’s Risoli.

“In the past 12 months, large clients that we’ve never had before asked for proposals. The impetus was that law firms they had been working with had reached their budgets,” he says.

“A lot of Fortune 500 companies have run into a billing wall,” says Joel Mohrman, a Houston partner with McGlinchey Stafford PLLC. “I’m not sure how far along we are, but I think we’re seeing a shakeout in Fortune 500 clients re-evaluating whether they will continue to use the largest firms.”

McGlinchey has at one time represented almost every major banking and financial institution on the country. The list includes Bank of America Corp., Washington Mutual Inc., JP Morgan Chase & Co., Wells Fargo & Co., Wachovia Corp., Nissan Motor Acceptance Corp., Toyota Motor Credit Corp., GMAC LLC and Countrywide Financial Corp.

“When you look at that market now, you see more firms like ours representing those companies than Wall Street firms,” Mohrman says. “They seem to have come around to the idea that they’re going to pay a 10 percent to 20 percent increase rate to the highest firms.”

The powers that be at Munsch Hardt Kopt & Harr PC anticipated the market disruption a year ago and planned a strategy to drive more clients their way.

“We’re getting more interest, and when we make calls we’re getting more response,” says Ben Floyd, a Munsch Hardt bankruptcy partner who has become known around the office for saying “It’s not business as usual.”

“We continue to hone our strategic plan to present to clients a leaner form of organization that operates more efficiently,” he says.

Efficiency is also an operative word for Rusty Hardin, who runs 10-lawyer Rusty Hardin & Associates PC charging higher rates ($850 for Hardin and $550 for others) than many of the national firms.

“They haven’t come to us because of the rates,” says Hardin. “Clients get increasingly concerned about the number of lawyers that a large firm throws on the case. With our firm, when you get into large document cases, which increasingly we are, you have to manage it with the resources you’ve got. You can’t just throw everybody on there you think you can get away with billing.”

One-stop shopping slips

Big law firms either haven’t seen the shift, or have heard how it is affecting others.

“We’ve heard about it; we have not been affected by it,” says Arthur Nathan, practice management partner with Haynes & Boone LLP.

Nathan says his firm represents about 20 percent of the Fortune 500 in some way, and constantly talks to clients about various rate structures.

“The big companies are certainly looking for legal advice in the context of business adviser, not technical expertise,” says Nathan. “They’re looking for experience and depth, and they’re willing to pay for that, at least with us. Our hourly rate may be higher, but in the end it may be cheaper.”

Locke Lord Bissell & Liddell LLP Chairwoman Jerry Clements says her firm has not seen the shift — yet.

“Our clients, like all clients, are very concerned about their expenses across-the-board,” says Clements. “I expect we will continue to see concern and maybe requests for discounts, but we haven’t seen that yet.”

Having one firm handle legal work has been a comfortable arrangement for many companies, says Stephen Rappolo of the labor law firm Fisher & Phillips LLP.

“There’s a certain convenience and confidence in having one firm do everything,” says Rappolo. “The advantage of having it done that way is now being reconsidered because of the sheer cost and the ability to get high-quality work for a much lower rate. The pitch that the big firms have all made, which is one-stop shopping, has not been making as big an impact as it used to.”

Attorney Hardin says big firms, which have traditionally resisted change, are now being forced to examine alternative billing packages and rate plans to accommodate client concerns.

Risoli of Chamberlain expects more of the same in the coming year.

“I think if firms are smart, which they all are, they’re going to be looking at 2008 as a sea change in the business,” says Risoli.

Mohrman of McGlinchey Stafford has already noticed a different kind of wrinkle in the billing competition.

He says his midsized firm is getting undercut by litigators from big firms who open their own lean boutiques and charge well below McGlinchey Stafford’s $330 to $450 an hour.

Says Mohrman: “You’re getting a (big-name) attorney for $200, $250 an hour."