In the News

Midsize on the Rise
Medium-sized firms use traditional practices to weather the storm

Brenda Sandburg
The Recorder
October 2, 2001

Two years ago, traditional midsize firms were looking about as hip as a lime green leisure suit.

But the lawyers who stuck it out at midsize firms may be having the last laugh. Firms with 50 to 150 lawyers seem to be enjoying something of a renaissance for the very reasons that made them vulnerable before the dot-com bubble burst.

Many had old-economy or litigation-heavy practices that were all over the map at the very time corporate boutiques and big firms were specializing in the hot tech sector. Overhead sucked away partner profits; associate ranks were thin; and they didn't pay enough to lure or keep top talent.

But with the downturn in the economy, traditional clients are looking more and more attractive, rents are dropping, and the freeze on associate salaries has given firms more breathing room. Particularly well-situated, firm managers and legal consultants say, are firms with significant litigation or IP practices.

"I haven't even heard of a midsize firm that's in trouble," said consultant Gerry Holt. "That's kind of amazing."

But not everything is rosy. Firm managers are wary about the future as the economy hurtles toward recession and the country grapples with fallout from the terrorist attacks on Sept. 11. Business activity has slowed everywhere, they say, and many transactions are getting put on hold.

"If you talked to me two weeks ago I'd have been pounding my chest at how great we're doing," said Skjerven Morrill MacPherson Managing Partner Edward Anderson. "Now I'm worried."

GROWTH RATE MODEST

While many midsize San Francisco Bay Area firms don't reveal financial data, many say they are on track to increase their revenues 10 to 20 percent over last year. And a survey of 399 midsize firms conducted by the consulting firm Altman Weil Inc. found that among California firms, the average revenue per lawyer was $400,701 last year. Overall, firms with 76 to 150 attorneys had average revenue per lawyer of $388,766, a 14.4 percent increase from 1999.

The survey also found that the three top grossing practice areas were commercial litigation, plaintiffs' contingency litigation and IP.

The current stability among midsize firms follows a rash of firm closures. Since 1999, numerous Bay Area firms shuttered their doors, including Jackson Tufts Cole & Black; Bronson, Bronson & McKinnon; Landels, Ripley & Diamond, and Limbach & Limbach.

Their collapse was driven in large part by partner defections and poor practice diversification. Recruiter Avis Caravello said the changing economic climate has made partners less interested in moving.

"Last year, and the year before, some of the key rainmakers at midsize firms were looking for a bigger slice of the pie," Caravello said. "Now, these same individuals may likely be happy with more moderate and steady profits per partner in the $400,000 to $500,000 range."

Managers say their firms have remained steadfast in the face of turmoil because of their practice focus and their culture.

"I'm impressed by how stable the situation is here," said Farella Braun & Martel Chairman William Schlinkert.

He attributes the firm's ability to cope with the economic downturn to its diverse practice and the fact that 60 percent of its business is litigation. The 120-attorney firm anticipates a 10 to 15 percent growth in revenues this year.

Howard, Rice, Nemerovski, Canady, Falk & Rabkin will have similar gross revenues this year as compared to last year, said Managing Partner Stuart Lipton.

"Overall, things are about the same pace as last year," Lipton said. While transactional work is not as strong, he said litigation and tax are about the same and bankruptcy work has increased significantly. But he said it's hard to predict how the economics will play out after Sept. 11. Prior to the terrorist attacks, the firm was on track to add 15 lawyers over the next year -- a little more than half of which would be new associates -- but he said that number might have to be adjusted.

IP firms also have seen their fortunes rise over the past year.

Townsend and Townsend and Crew had profits of approximately $74 million in 2000 and is approaching $100 million in gross revenue this year. San Jose, Calif.-based Skjerven, another firm focused exclusively on IP, expects to see a 20 percent jump in its revenues this year. Last year the 140-attorney firm grossed $53 million.

But Skjerven's Anderson is worried about what the next six months will bring. "While startups were the first to be hit by the slowing economy," he said, "the recession will hurt all businesses, including all law firms.

"There are a shocking number of layoffs every day, and I think that has an effect on people's willingness to go forward with normal business," Anderson said.

BILLING RATES AN ISSUE?

As a result, some consultants and corporate counsel expect to see some shift of business toward firms with lower billing rates.

"Corporate and general counsel say they will go to the Midwest or suburbs of New Jersey where overhead costs are substantially lower and firms have a lower price structure as a result," said consultant Peter Zeughauser of ClientFocus.

While high-end work is still going to the large firms, he said a material amount of midmarket work -- such as employment law, general corporate work, commercial litigation and real estate -- is going to regional firms. "It's a bit of a backlash to the increase in fees" that followed the boost in associate salaries, Zeughauser said.

Michael Roster, general counsel of Oakland's Golden West Financial Corp., said companies began turning to midsize firms over the last few years, particularly during the boom period, when they had trouble getting large firms to respond to them. He anticipates that the smaller firms will be more attractive with the coming recession.

"When United Airlines and American Airlines each lay off 20,000 in a week, you can imagine the CEO and CFO telling their general counsel 'you must cut your expenses 20 to 30 percent,' " Roster said. One way to do that, he said, is to shift work to a lower-cost firm.

"It isn't as if the gene pool is such that only smart people live on the two coasts and go to large firms," said Roster, who was managing partner of Morrison & Foerster's Los Angeles office 10 years ago. There are attorneys in Chicago, Milwaukee, Cleveland and other cities "who went to superb schools and do superb work. There's no reason we can't use them."

While the billing rates for midsize firms in the Bay Area are comparable to those of large firms, managers say they aren't concerned about losing business to regional players.

"I don't believe we will lose any business to firms outside San Francisco merely because they have significantly lower rates," Lipton said. "You have to look beyond hourly rate to the quality of service provided."

Phillip Rudolph, vice president and U.S. general counsel at Oak Brook, Ill.-based McDonald's Corp., said he looks for the right lawyer to handle a case rather than a particular firm.

The size of a firm makes a difference only in cases that require significant infrastructure. McDonald's hired Heller Ehrman, for example, to handle a class action over the ingredients in the company's french fries.

"Heller Ehrman had the horses we needed to help us defend that case," Rudolph said.

Billing costs are an issue, however, and when firms ratcheted up their rates to cover the increase in associate salaries, Rudolph said that McDonald's, as well as many other companies, made it clear they wouldn't cover the cost.

As to the survival of midsize firms, Rudolph said they "face a challenge because they're not big, full-service, international firms that a lot of people need and they don't offer the efficiency and low overhead that boutiques do."

But, he added, "people have been saying that about midsize firms forever."