Leaders at law firms across the country have taken to trumpeting the variety of their practice areas amid the slumping economy. The idea is that when one area is down — such as structured finance or real estate — another will boom and help prop up the firm in the mean time.

By that theory, boutique firms that specialize in one practice area should be on shaky financial ground expressly because they lack a broad spectrum of services.

While some boutique firms have suffered serious blows from the economy, many are finding some distinct advantages over their larger competitors when it comes to weathering the economic storm, say leaders at boutiques and law firm observers.

Boutique firms — whether they focus on intellectual property, corporate securities or labor and employment — generally have much lower overhead costs, little to no major debt, more flexibility to accommodate clients looking to cut their legal costs and lower billing rates overall.

As a result, they are able to scoop up more legal work and avoid the drastic step of laying off attorneys in order to keep the lights on. But staying ahead of the financial mess requires specialized firms to keep a keen eye on the future and make adjustments accordingly, observers say.

“The bottom line is that I think these troubled times are creating very unique opportunities for boutique law firms because of the value that they offer,” said Steven Spielvogel, president of the International Network of Boutique Law Firms.

Jose Astigarraga, chairman of the 18-attorney litigation firm Astigarraga Davis in Miami, said that the difference between boutiques and big law firms essentially boils down to the difference between driving a Lincoln Towncar and a Ferrari.

“When you’re in the Lincoln Towncar [a big law firm] and you go over a bump in the road, you don’t really feel it that much,” he said. “In turn, boutiques are the Ferrari. When you hit a bump, you really feel it. But you can also turn on a dime, which you can’t do in the Towncar.”

Of course, the disastrous economy is one big bump in the road for law firms, but Astigarraga said that boutique firms have the advantage of being able to quickly adjust to the changing economic climate to try to avoid the bump as much as possible. Large law firms don’t have as much maneuverability, he said.

A question of rates

Miller Starr Regalia is the type of small, boutique law firm that one might expect to be floundering in the current economy. With offices in Walnut Creek and Palo Alto, Calif., the firm has 55 attorneys and specializes in real estate — a practice area that has hit a virtual standstill at many firms.

Chairman Eugene Miller said the firm won’t surpass profits from 2007, but it will finish the year ahead of 2006. Real estate development work has been slow, but Miller said real estate litigation and distressed property work has been steady.

“It’s been busy. We just hired three new associates and a couple of people from the firms that just fell apart,” he said.

One major factor in the law firm’s ability to hang on to real estate business is the difference in rates, Miller said. He estimates that Miller Starr Regalia’s rates are about one-third lower than those of major national firms. At a time when legal departments are increasingly aware of costs, lower rates are key, he said.

William Henderson, a professor at the Indiana University School of Law — Bloomington who studies law firms, said large law firms tend to be saddled with much higher operation costs than small firms.

“Generally speaking, the per-lawyer overhead goes up [the larger a law firm gets],” Henderson said. “There is only so low large firms can go with their rates in order to meet their costs.”

Those costs include office rent, often for large spaces in prime downtown locations that cost top dollar, debt load from mergers or acquisitions, and payroll for armies of partners, associates and support staff. Large firms also have multiple offices, which drive costs up, said Robert J. Henderson, founder of RJH Consulting in Jackson Hole, Wyo.

“Each one of those offices has to have their own management and infrastructure,” he said.

The cost to operate a large firm proved to be too much for Heller Ehrman and Thelen, both of which dissolved in recent months, and countless other large firms have resorted to staff and attorney layoffs.

Morse, Barnes-Brown & Pendleton managing partner Donald Parker does not foresee any layoffs at his business-focused boutique in Boston. In fact, the firm has plans to expand in 2009, he said. The firm does general corporate work, corporate finance and venture capital, among other things.

“So far, we’re not seeing a downturn in those practice areas. I don’t believe we won’t be affected [by the economy], but I think the effect will be muted,” Parker said.

Morse, Barnes-Brown & Pendleton is small enough that it can be very flexible with billing, Parker said. That flexibility might mean lowering rates for a client, accepting a flat fee for work or making other alternative arrangements. The firm really began to see clients pushing for those types of accommodations about 12 months ago, he said.

But Parker also acknowledged that there is some inherent risk in being a specialized boutique firm.

“One of the great benefits of a general practice firm is that you are hedging your bets,” Parker said. “If you are a boutique, to some degree you are putting all your eggs in one basket.”

Chicago construction law boutique Stein, Ray & Harris found that out the hard way last month when it laid off four associates. The 21-attorney firm had hired seven attorneys earlier this year, only to see that the anticipated increase in construction litigation fail to materialize.

Stein Ray isn’t the only boutique making cuts. Tax and finance boutique McKee Nelson laid off 17 associates in early November, citing the gridlocked credit market. Last winter, the firm began offering buyouts to attorneys willing to quit its structured finance practice, which had been hit hard by the subprime mortgage crisis. Firm co-chairman Reed Auerbach has said the firm is moving to add litigation to its practice in order to diversify.

Astigarraga, the Miami litigator, said that the slow economy could spell trouble for some boutique firms that haven’t been well-managed. Boutiques need to be constantly focused on the future needs of their clients and to be prepared to adjust to those needs and realities. That’s particularly important for specialized firms since they cannot rely on other practice areas to prop up the firm in the event that they aren’t prepared to step up.

“You’ve always got to keep your eye on the road ahead,” he said. “You don’t want to miss a turn.”

For example, Astigarraga Davis is known for its arbitration work in Latin America, but is learning more about the Chinese market and exploring whether it makes sense for the firm to expand into other areas.

While there are some advantages to being a leaner operation right now, said Robert Henderson, the faltering economy is going to remain a challenge to both boutiques and large law firms alike.

“Each one has to deal with their own problems related to the economy,” he said. “It’s not a good time to be in the practice of law, period.”