Midsize Law Firms
By Karmah Elmusa, who was the associate editor at California Lawyer.
Midsize law firms still have their place in the global legal market.
For years, media attention has been lavished on the mammoths of big law, and more recently, on the upswing in boutique firms the country has seen post-recession. Predicting the downfall of industry giants has been popular since the economic downturn, most recently in a July New Republic piece titled, “The Last Days of Big Law.” And while a considerable portion of new U.S. law school graduates have always landed at firms with 25 or fewer attorneys, that share rose from 40 percent of the class of 2008 to 53 percent in 2012, according to the National Association for Law Placement.
But what about the firms that fall awkwardly in the middle – somewhere between the 40- and 150-lawyer mark? They make headlines when they merge, or when they fail, but is there a place for them in this changing legal landscape? SunMi Kim, Metro Market Manager for Robert Half Legal in Los Angeles, answers with an unequivocal yes. “In talking to my corporate clients, they are now often seeking small or midsize firms with a particular expertise or knowledge,” she says. “Some of these firms are able to provide the level of attention they need and are much more cost effective.”
Others say the market for these firms is shrinking. Lyndon J. Parker, the Los Angeles-based managing director at the legal placement firm Mestel & Company, believes they are struggling amid the globalization of business. “The reality is, the huge firms have a global reach to offer their clients, and sometimes can even beat the rates of regional firms,” he says. “The competition has extended to the guy in the next county, or ten states away, or [in] another country. That’s all new, and midsize firms are trying to figure out how to adapt.”
Gerald A. Klein, a partner at Klein & Wilson, a two-lawyer business litigation firm in Newport Beach, agrees with Parker. “Big firms can now be all things to all clients,” he says. “They have offices internationally, they have departments in every conceivable type of area of expertise, and if you’re looking for a one-stop shop, it’s convenient. Midsize firms generally do not have the same breadth of expertise, and they don’t have as deep of a bench. There are going to be cases midsize firms can’t take for one reason or another, so it will go to a bigger firm. We’ll start to see more poaching.”
But Peter Zeughauser, a legal consultant with Zeughauser Group, sees the globalizing market as a boon to midsize law. “As more firms have developed international footprints, that’s driven a cost structure that’s required higher rates,” he says. “A lot of work that used to be done by the larger firms has migrated to the regional firms and midsize firms because of their more attractive rate structures. Midsize is a really good place to be.”
Zeughauser says he personally has never bought into to the decades-old myth of the midsize firm death knell, such as the 2008 Altman Weil paper predicting that midsize would soon be obsolete. The paper showed companies’ growing preference for bigger firms, and ominously warned midsize firms to “pay close attention.” Meanwhile, the recession came and went and took its toll on law practices of all sizes. The legal world is experiencing a slow recovery – Citi Private Bank’s Law Firm Group predicted in August that 2013 will be a flat year for law firms, and that the industry will have difficulty matching 2012’s modest growth.
In this climate, counting pennies is critical, and earlier this year the Corporate Executive Board published a list titled “9 Efficiency Trends to Watch for in Legal.” Number seven on the list is, “Use smaller law firms more often.” With law firm size as a major factor in hourly rates, CEB “sees larger companies reducing their reliance on large law firms in favor of midsized law firms … to consolidate their legal spending.”
It’s no wonder, then, that many midsize firms have weathered the recession and lived to see another day. In fact, they’ve thrived. Partners at these firms, and many in-house counsel as well, will tell you midsize firms are a prime option for many clients. The key to success in today’s market, they say, is specializing in a niche corner of the law (for example, there’s now a specialty known as “truck law”), or having a regional or statewide presence. And of course, those firms that have enjoyed stability through the recession often have their own financially conservative mindset to thank for it.
At Carothers DiSante & Freudenberger, for example, California employment law is the sole focus of the modestly sized firm of 40 lawyers – a number equal to or larger than the California employment practice groups of many big firms. The firm, which has five offices located throughout the state, strives to make sure its practitioners have in-depth knowledge of California’s challenging labor code, which is constantly in flux.
Attorneys at CDF are comfortable being midsize, though they’re of course open to growth as it happens organically. “Linear growth has happened in the 20 years we’ve been in business,” says Alison Tsao, the firm’s San Francisco-based managing partner. “And we’re happy to grow and accept the challenges that come with growth, but we’re committed to maintaining the level of services we’re used to providing.”
In the environmental law arena, Beveridge & Diamond – a nationwide firm of about 100 lawyers, including eleven in California – is feeling no post-recession pain. Environmental law is, of course, a growing practice worldwide, and Kenneth Finney, a principal in the firm’s San Francisco office, says the niche practice contributes to the firm’s success in a number of ways. For one, as a career environmental law specialist, he finds great job satisfaction in working in a place where each and every colleague is dedicated to his field.
“When we have our strategic sessions at our company retreat, every single practice breakout discussion is something you’re interested in and you can participate in,” Finney says. “When I was at a big firm, there was one kind of insular group that you would find to talk about environmental law. Here, we don’t have any dabblers – everyone practices environmental law full time, and that makes it a really satisfying place to work as an environmental attorney.”
In fact, Finney thinks that for him and many of his colleagues, working at a midsize firm is ideal. It provides many of the advantages that a big firm has in terms of technical support – human resources, IT, and an administrative staff – paired with a small-firm feel where everybody knows your name and client retention is not an issue. “It’s not unusual to get an overture from a bigger firm,” he says, “but it’s not the course we see for ourselves.”
Finney adds that although its Washington, D.C., office is essential to Beveridge & Diamond’s environmental law practice considering that much of the legislation involved is federal, having a regional office in California makes his clients comfortable on a state-law level. An in-state presence is key for Atkinson, Andelson, Loya, Ruud & Romo (AALRR), a California-based firm that started out specializing in labor and employment law but over the years has added other practice areas in both the public and private sectors. James C. Romo, the managing partner based in its Cerritos office, says being all California all the time gives AALRR a distinct advantage at the large end of midsize (about 140 lawyers).
“Our lawyers are California-based and mostly California-educated,” he says. “We focus on practice areas that are big in California. Some clients seem to be attracted to the notion that we are a California-based firm and are jacks-of-all-trades, so to speak.”
AALRR is also a prime example of how slow and sustained growth can help prepare a midsize firm for tough economic times. Founded in 1980, over the years AALRR has acquired a few small firms with no more than five or six lawyers. “We never grow for the sake of growing,” says Romo. “We grow if we have the business and we need more lawyers to accommodate our clients’ needs.”
Thomas Lambert, managing partner at the 125-attorney Mitchell Silberberg & Knupp, says this principle of financial conservatism has sustained the firm (which is national, but headquartered in L.A.) through the turbulent economy. “We don’t have size goals in mind, other than of course wanting to maintain some growth in certain areas,” he says. “But we’ve always been very conservative. We never borrow money to expand, and actually don’t take on debt of any kind.”
Lambert notes that midsize firms work more efficiently by staffing cases leanly. Though some clients might see this as a negative, oftentimes that smaller staff is more experienced overall. Lily Hughes, vice president and associate general counsel at Ingram Micro in Santa Ana, says her company sometimes goes with smaller firms because “they’ll give you a partner to work on your matter for the same price that a big firm will charge you for an associate.”
Hughes says she and many other GCs she knows value a midsize firm with a specific expertise for certain matters, but that they may consider various firms of all sizes, depending on the size and scope of the issue at hand. She says some of the lawyers with the most expertise can be found at midsize firms, despite the popular notion that top producers end up in big law.
According to Hughes, Ingram Micro uses a very specific process for choosing outside counsel. The first question the in-house team addresses is geography. If the matter is global, a bigger firm is the likely choice, but with more regional issues, midsize firms are always in the running. A decision is made after interviewing candidates, looking at cost, and considering proposals from interested firms. But Hughes says often it’s the interpersonal relationship she develops with the outside lawyers that make them the right fit. “For me, a trusting relationship developed over time with the partner and senior associate is key,” she says. Factors like compatibility, then, can have an edge over firm size.
There’s a lot of draw to working at a midsize firm, says Robert Half’s Kim, who has placed lawyers at both midsize and big firms. “A lot of midsize firms are recruiting very talented attorneys [who] once worked at some of these larger firms but want more work-life balance,” she says. “They also have much more opportunity to get involved in the case work they want more quickly, without necessarily putting in years and years of support work.”
Mark Chandler, senior vice president and general counsel at Cisco, believes midsize firms can compete rate-wise, even in an era of the alternative fee arrangements that he champions. “While big firms often have enough ongoing matters that potential variations in cost work for them, there’s an advantage that midsize firms have here, too,” he says. “They have a different sort of flexibility that big firms don’t have, in that they don’t need to ‘feed the beast,’ so to speak, or worry about overhead quite as much. They have the ability to offer more innovative pricing than large firms with bigger overhead and complex compensation arrangements.”
All in all, naysayers may want to take a second look at midsize firms. Despite our increasingly global economy and the vast resources many big law firms offer, for certain matters and complicated specialties, midsize often fits just right. “I advise midsize firms to pick a few strong suits and build breadth and depth in them,” says Zeughauser, the consultant. “I tell them to achieve status in their region in a small number of core practice areas, and to try not to be all things to all people. If they keep those things in mind, there’s a really strong market out there for them.”