Last year, as the economy faltered, many midsized firms began to hear opportunity knocking and came to find more and more large corporate clients gathered on their doorsteps.
The recession forced in-house counsel at even the biggest companies to find creative ways to stretch shrinking legal budgets and many of them turned their attention to midsized and small firms.
But in order to hold their attention, the firms themselves must prove their worth while contending with increasingly aggressive large firms, sources in the legal community say.
The Work Continues, But With a Few Twists
Midsized and smaller firms across Pennsylvania said they continue to garner interest from clients who, just a few years ago, might have worked exclusively with megafirms.
William Pietragallo II, a founding partner of 84-attorney Pietragallo Gordon Alfano Bosick & Raspanti in Pittsburgh, said his firm has “absolutely, unequivocally” attracted larger clients recently.
“I’m looking at new case openings and I can see [client] names that historically were at other [larger] firms and are now with us,” he said. “I’m going to surmise that price is part of it, but we’ve also got the talent and that makes business sense.”
When The Legal spoke to Timothy G. Dietrich, managing partner of 65-lawyer, Lancaster-based Barley Snyder, he said his firm was in the process of responding to a request for proposal from “a public company client that may supplant some of its other law firms with our firm.”
But while Dietrich said his firm has received inquiries from some larger companies since the economic downturn, it hasn’t been the influx some in the legal community might have foreseen a year ago.
“I think the movement’s been a little slower than was maybe first predicted because it took a while for companies that had long relationships with their firms to make the decision to change,” he said.
For those large clients that did shift some of their work to smaller firms, it was overall value, not just cost, that was the deciding factor.
“I think particularly if they were getting the quality of work they demanded [from their large outside counsel] and the only issue was driving down the cost curve, they were a little more reluctant to change,” he said. “For those [firms] that were high-priced and perhaps weren’t providing quality in some way, they probably felt the change more quickly.”
Dietrich added that he does believe the recession “allowed in-house counsel the opportunity to think about what capability firms of our size have and how we might be suited to certain types of work.”
Hesitant-to-change clients are not the only unforeseen wrinkle midsized firms have encountered while hoping to reel in some bigger fish.
Some have been pleasant surprises.”One sort of nuance to it that I didn’t necessarily anticipate is that we’ve had the good fortune of co-counseling with some of those larger firms,” said David Kleppinger, chairman of 130-attorney, Harrisburg-based McNees Wallace & Nurick, explaining that some clients have hired his firm to work on certain aspects of a matter, while a larger firm handles the rest.
But not all big firms have been willing to share.
“There’s no question that some of the larger firms are responding to the price pressures from their clients and attempting to meet the price competition from a midsized firm that may have a lower cost structure and therefore lower pricing,” he said.
Jeff Coburn of Coburn Consulting in Boston said big firms are beginning to “fight fire with fire” by dropping their rates dramatically, but he questioned how long they would be able to do that before they start losing money.
Kleppinger said whether or not this tactic is successful at all largely depends on the “sophistication” of the client.
Some clients, he explained, may not realize that the large firm they’ve been working with is basing its discount on a “high rack rate” rather than the rate it has traditionally charged that client.
“The less sophisticated purchaser may look at a 10 or 15 percent discount and say, ‘Wow, I’m happy with that,’ while another, more sophisticated purchaser may say, ‘I can find a better discount out there,’” Kleppinger said.
Again, Coburn doubted big firms could sustain that strategy.
“I don’t think you can play games for very long before it comes back to you,” he said.
New Client Mentality
There’s no question large companies have been more receptive to the idea of hiring smaller firms recently, but does that phenomenon represent a paradigm shift or a temporary shake-up?
“What happened in the economy was very traumatic beyond what most of us have seen in our lifetime and traumatic experiences usually cause long term changes in attitudes and outlooks,” Kleppinger said. “I think there may be larger changes occurring, particularly in-house lawyers looking more at value and asking, ‘What am I getting for the money?’”
He said he believes that philosophy is “a new and permanent way of thinking” among in-house counsel and one that has already resulted in increased competition among midsized and large firms.
Kleppinger said McNees Wallace has seen a significant increase in the number of RFPs “from large companies with in-house counsel who are clearly under significant pressure to reduce legal spending.”
“Ten years ago we may not even have received that RFP,” he said. “Today, we are receiving them from Fortune 500-style companies with facilities in the greater Mid-Atlantic region.”
Peter R. Spirgel, managing shareholder of Cherry Hill, N.J.-based Flaster Greenberg, which has 65 attorneys, said he’s had a similar experience.
When The Legal spoke to him, he was preparing to travel to New York to meet with a potential public company client.
“Specifically, they want to talk about us handling acquisitions for them,” he said, adding that, if hired, his firm would handle mostly “middle market acquisitions” for the company.
Spirgel said just getting that meeting is proof big clients have become more receptive to the idea of working with smaller firms, especially on relatively smaller matters.
“The reason they’re interested in talking to our firm is that they’re saying, ‘Gee, we should explore this because these aren’t $100 billion dollar deals we’re doing. We don’t need to use a megafirm for a $30 million or even a $100 million acquisition,’” he said.
So what do big firms think about competition from smaller shops?
Well, size is relative.
Even firms much larger than those interviewed for this story said they’ve been aiming for work that would traditionally go to even bigger firms.
“I actually hear a lot more chatter from our lawyers about going upstream than downstream,” said David S. Antzis, managing partner of 242-lawyer Saul Ewing in Philadelphia. “We are a midsized firm in this market.”
Time to Shine
Spirgel said he believes the recession was “the tipping point” where large companies began to see smaller firms as viable options.
But now that they’re in the spotlight, said Coburn, the firms must perform.
“We’ve broken the sound barrier for midsized and smaller firms being able to handle big corporate work,” he said.
But some midsized firms haven’t figured out how to get in the door of these large clients.
It starts with how they distinguish themselves from the pack, Coburn said.
According to Coburn, smaller firms should give large potential clients specific examples of past work they’ve done for other big companies.
And while these types of pitches are often made in response to an RFP, firms don’t have to and shouldn’t wait for big clients to come to them.
“If a midsized law firm already has some bigger clients, it should ask those general counsel, ‘Can you think of other sizable companies you know who might be crazily using large firms for work we can do?’” he said.
Coburn said formulating a strategy to bring in larger clients and hiring a business development expert to effectuate the plan can work wonders for a midsized firm.
“These are people who pick up the phone and make an event happen or who go and do research and find out who’s on the board of a company and circulate” that information, he said. “Those people are really important.”
And once a smaller firm has landed that big client, it must live up to the expectations of a company that has grown accustomed to the caliber of service megafirms can provide, Coburn said.
“It’s now credible. You can use a firm you’ve never heard of — in fact, [those firms] can be easier to work with, easier to get a hold of and more user-friendly,” he said, but added that, “In order for [a smaller firm] to qualify to get the business that used to go big firms, the quality has to be there.”
The next installment of the series will examine the competition law firms are facing. •