Archives for June 2009

Corporate Legal Departments Turn to Boutique Law Firms

Budgets for some corporate legal departments have been slashed this year in line with across the board cuts implemented as companies try to weather the downturn in the economy. This leaves corporate counsel with a smaller budget to accomplish the same legal work. In-house counsel at major companies are taking a hard look at outside counsel expenditures to determine if the legal work is being handled efficiently, and many have concluded that a different approach is needed.

One strategy that is becoming more popular is to hire boutique law firms that specialize in particular areas of the law. By wisely selecting the boutique firms, many in-house counsel have found that they can obtain the same, if not better, legal services from specialized boutiques than from large firms.

At the same time, because of the lower overhead expenses of smaller firms, substantially lower legal fees are incurred. According to the American Intellectual Property Law Association’s 2007 Report of the Economic Survey, the average billing rates for intellectual property attorneys at firms of greater than one hundred attorneys was more than 27% higher, on average, than at firms of less than twenty attorneys.

Moreover, the billable hour requirement is typically not emphasized in small firms the same way it is in larger firms. Attorneys in larger firms are under tremendous pressure to bill enough hours to meet billable hour requirements. As a result, this may lead to inefficiencies for the client because the attorney has less incentive to look for the most efficient way to accomplish a task.

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On the other hand, associates in smaller firms may not face this issue. The billable hour requirements are generally much lower and the emphasis is placed more on accomplishing the goals of the client.

Small firms tend to be more flexible than large firms in terms of being able to adapt to the client’s needs without the red tape of getting approval from multiple people. In most cases, if a client requests a change and the lawyer handling that matter is willing to agree to the change, the change can be accomplished immediately.

Personal service typically receives more attention at a smaller firm. The partner handling a matter will generally take a more active role in the work than at a larger firm where the partner managing the file may farm out most, if not all, of the work to paralegals and associates.

Two years ago Mike Dillon, the General Counsel of Sun Microsystems, predicted that the current law firm model of deriving profitability from growing the scale of the firm and raising hourly rates would soon be over. Indeed it appears that his prediction is coming true as a number of large law firms are faced with layoffs of associates and even partners in some cases.

Large firms do provide advantages and benefits that are not available at boutique firms. Probably the most significant advantage is having a large network of attorneys in different locations. This enables the firm to be used as a “one stop shop.” However, in-house counsel should consider whether the advantages of using a large firm are worth the price paid. In many cases, in-house counsel could save money for the company by doing some shopping and selecting a qualified boutique law firm.

Moreover, many smaller firms are subject to less turnover and are more stable than larger firms. This is particularly evident in today’s economy as larger law firms cut back on their personnel. Smaller firms are often more resilient, have less debt, and are able to adapt more readily to clients’ needs than larger firms.

Increasingly, corporate legal departments are turning to smaller firms. While smaller firms may not be the best choice in all circumstances, they certainly deserve a look to determine whether the use of boutique law firms makes economic sense.