Recession causes permanent shifts in legal firms’ practices

By Douglas Sherwin, The Daily Transcript

The legal industry, like most other segments of the U.S. economy, is slowly improving as the country rebounds from the recession.

But the recent financial woes caused law firms and their clients to re-think how they do business — a change that is likely permanent, according to local legal analysts.

Many firms have moved to alternative billing rates as clients look for more certainty in their legal expenses while also cutting costs.

According to the Thomson Reuters Peer Monitor Economic Index for the fourth quarter of 2012, firm realization rates — the difference between what a firm bills and what it receives — fell to a historic low of 83.6 percent.

“It’s saying the resistance to fees is increasing,” said Darryl Solberg, a partner with the law firm Hecht Solberg Robinson Goldberg & Bagley. “There’s a lot of pressure to keep fees from going up and possibly change the dynamic on how attorneys bill, which is probably long and coming.”

Hecht Solberg, a real estate and business law firm based in San Diego, uses fixed fee arrangements for some of its matters. Solberg said clients have a problem with hourly billing because it can create the wrong incentive and encourage attorneys to work longer.

There are at least a dozen alternatives to the billable hour, and Solberg said the firm’s clients have welcomed the change to fixed fees.

“It isn’t that clients are not looking for a firm to be profitable,” Solberg said. “They’re looking for some certainty.”

The shift also has caused some companies to move toward smaller or mid-sized law firms to do their work and away from the high billing rates of the Am Law 100 firms.

“I think because of the recession we’ve been going through, companies changed their philosophy dealing with law firms, in how legal services are being retained,” said David Casey, managing partner of the San Diego personal injury firm Casey Gerry Schenk Francavilla Blatt & Penfield. “They are much more cost conscious now. They want to know what budget to set.”

He also said clients don’t want to pay for the law firm to train its younger attorneys, and they are requesting the work to be done by more experienced counsel.

“The old paradigm of associates filling out hours may not be working,” Casey said.

San Diego’s Larry Watanabe, a legal recruiter and founding partner of the legal placement firm Watanabe Nason, said now there’s even a great disparity between the billing rates of Am Law 100 and Am Law 200 firms.

It has caused partners at the bigger firms, whose clients are looking to cut expenses, to consider moving to smaller firms and their more friendly billing rates.

“Without a doubt local, smaller firms are in a unique market position,” Watanabe said. “So you’ll see more partners of national and international firms move toward firms like those as they assess their client base and needs.”

Regional firms in San Diego, like Higgs Fletcher & Mack and Procopio Cory Hargreaves & Savitch, are taking advantage and have experienced growth even during the downturn.

In the past year, Higgs has added seven attorneys, several of whom are partners from national firms.

“We were able to get the talent to (fulfill) the needs of what ordinarily was going to a much more expensive platform,” said John Morrell, Higgs’ managing partner. “We’re much more (reasonable) because we’re priced for the middle market. We’re more attractive to clients.”

National and international law firms have higher overhead, the biggest of which is office space.

“What we’ve been able to do is add talent to diversify expertise while still maintaining an attractive price structure,” Morrell said.

Casey said the new economic reality has caused his firm, CaseyGerry, to change its philosophy and become more aggressive in its litigation of cases.

“We’re working harder than we ever have,” he said.

Law firm work as a whole has picked up, and San Diego firms are experiencing increased business across several practice areas.

“Here in San Diego, and what I’ve seen in Southern California, real estate is starting to pull itself up,” Solberg said. “There’s almost a frenzy going on to buy lots to build houses, which we haven’t seen for 5-6 years. It’s catch-up time.”

Morrell said Higgs Fletcher & Mack is starting to experience the effects of the expanding economy as well.

Transactional work is increasing and new companies are being formed, which creates work for attorneys.

The intellectual property litigation practice remains very strong and there’s a strong demand for corporate lawyers and mergers & acquisition lawyers, according to Watanabe.

And while the unemployment rate has dropped, jobs are still at a premium, meaning labor and employment litigation attorneys are still busy along with those in commercial litigation and white collar.

“The economy appears to be strong,” Watanabe said. “People are buying based on consumer confidence. Lawyers are busy and firms are taking advantage of that. It’s really opened up in terms of lateral recruiting on the partner level.”

Firms that were conservative during the recession and didn’t bring on any lateral hires now are building their rosters along with the economic growth.

The movement in California has been particularly high. In a typical year, Watanabe said his search firm completes between 35-50 partner transactions. This year, the firm has already done nearly 30 before May.

“I’ve been doing this for 24 years, and I don’t know if I can remember a busier period from right after Thanksgiving to now,” Watanabe said. “Last fall, right after labor day, things were very slow. Firms were focused on the outcome of the election and how it might impact the economy. After the election, things started to pick back up and take on a lot of momentum.”