Corporations Search For Less Costly Legal Advice

Denver firms count on luring clients away from coastal firms

Denver Business Journal - by Renee McGaw
Friday, April 17, 2009

In the 1980s, times got so tough for Denver’s legal industry that attorney Dave Palmer once threw a candlelight “hard times” party as a joke.

This year has been worse, at least on a national level.

“I’ve been through five or six recessions, and this is the worst I’ve seen affecting the legal business,” said Palmer, managing shareholder in Greenberg Traurig LLP’s Denver office. “But I do think that the resiliency that Denver and the West have always had, plus a fairly pro-business state environment ... will help Denver weather this.”

Law firms nationwide are believed to have laid off nearly 8,000 people in the first three months of this year.

But Denver firms may be spared some of the pain seen in major coastal cities, as cost-cutting corporations seek less-expensive lawyers in cities such as Denver, Kansas City or St. Louis.

“Work is coming to the middle of the country,” said Marcus Ollig, president of The Advocates, a Denver attorney recruitment firm. “Denver’s never been a big corporate-headquarters town. But now if you’ve done deals in New York or Los Angeles ... you’ve got some [companies] really willing to listen.”

An experienced lawyer might charge $800 to $1,100 per hour in New York City; comparable expertise can be had in Denver for $500 an hour, Ollig said.

“Some of the billable-hour rates on the coast are so high that it’s going to drive sophisticated clients to look for law firms in mid-America — places such as Denver,” said Larry Pozner, a partner in the Denver law firm Reilly Pozner LLP.

Three-quarters of U.S. corporations expect to cut their legal department budget by an average of 11.5 percent in 2009, according to a recent survey by legal consultant Altman Weil Inc.

“They are all considering how to manage legal costs in an effective manner,” said Melinda Delmonico, president and CEO of Gibson Arnold & Associates Inc., a Denver-based legal staffing firm. “If they’re using a big national firm and the firm isn’t willing to adjust their rates, or hold their rates, they’re going to other firms that will work with them. I’ve heard of three corporations, among our clients, in the past month that have fired a firm for not being flexible.”

Recession squeezes industry

Since the beginning of 2008, law firms across the country have cut roughly 10,000 support staff and attorney jobs, according to Lawshucks.com, which tracks layoffs in the legal industry.

Some of the recent layoffs have been at firms that have Denver offices, including Hogan & Hartson LLP, Faegre & Benson LLP, Gibson Dunn & Crutcher LLP, Morrison & Foerster LLP, Cooley Godward Kronish LLP and Merchant & Gould PC.

On April 9, Denver-based Brownstein Hyatt Farber Schreck LLP cut 15 attorneys and 22 staff members.

But Denver has mostly avoided the mass layoffs seen in large money centers or formerly hot real estate markets, including New York City, Chicago, the San Francisco Bay Area, Los Angeles and Philadelphia, Ollig said in early April.

Firms in Minneapolis and Charlotte, N.C., where several major banks have headquarters, have been hurt; so have those in once-booming real estate markets such as Las Vegas and Phoenix, he said.

“In Denver, what we’re hearing is they’re more quietly tapping people on the shoulder, and taking small incremental reductions,” he said.

Firms that relied heavily on real estate and corporate practices have struggled the most, Ollig said. Declining work in corporate, mergers-and-acquisitions, securities, banking and real estate law began to be felt last year, and worsened with the stock market meltdown in late 2008.

On the other hand, employment litigation, securities and public policy work have increased, Ollig said.

Litigation is rising as well, Palmer said. Recessions usually lead to lawsuits over failed deals, lost financing and other issues, but that was slow in starting this time around.

“Litigation is definitely on an upturn right now, finally,” Palmer said. “It did take a while.”

But that doesn’t mean everything is rosy for lawyers.

“Locally, we are not as hard hit, but we are certainly getting hit,” Delmonico said. “Last year we had a very robust associate placement practice ... and that is gone. It has almost disappeared as an area of hiring for the law firms. They are not hiring associates aggressively.”

One bright spot is Colorado’s many startup tech companies, which are still receiving funding even as more mature companies struggle to raise capital, she said.

“We have general-counsel searches going on right now for those types of companies, because they’ve been able to get funding — or it was in the works last year and the funding is there now,” Delmonico said. “Who knows what will happen this year, though.”

Billing challenges

The recession also has revived a long-standing debate about the billable-hour model, in which attorneys are paid based on how much time they spend on a project.

Firms that are willing to consider alternative billing arrangements, such as flat-fee or contingency work, may fare best in today’s environment, Ollig said.

“We’re seeing corporations demand it, and we’re seeing smart firms do it,” he said. “Law firms that do trust and estate work ... have done flat-fee work for years. Law firms that do certain types of litigation will do it on a contingency basis, meaning if they win, they get a certain percentage of the award, and if they lose, they guarantee that [the fee] won’t go over a certain level. We’ve seen that. But we’re now starting to see it in other areas, such as corporate law.”

Cable industry lawyer Ken Tolle, co-founder of Launch Pad Media Advisers PC in Denver, embraces the idea of alternative billing.

“We work with a lot of startups — startup television networks, startup media companies, people with shows, people with ideas,” Tolle said. “Large-firm economics are just not amenable, especially in 2009, when it’s hard to get financing ... We get paid based on what we help create, instead of being viewed as just a cost center.”

But George Lewis, an attorney in Merchant & Gould’s Denver office, sees some irony in the shift away from billable hours.

As a child, he learned a few things about billing from his grandfather, John Gage, one of the founders of Kansas City law firm Lathrop & Gage LLP.

“The billable-hour system came out of the specific systems that we’re trying to get back to now,” Lewis said. “Prior to billable hours, which would have been in the 1940s or ’50s, they just sent a bill to the client. Someone would come to them with a problem, they would sort out the problem, and then at the end of it send them a bill. It was what people are now calling ‘value-based pricing.’ But then clients started demanding some sort of transparency.”

Flat fees are fine for some projects, but not all, said Bob Hottman, chief executive of EKS&H PC, an accounting and business advisory firm in Denver.

“It’s all about being able to control the amount of time that’s going into a project,” Hottman said. “Where it gets really hard is when you can’t determine the magnitude and scope of what you’re doing ... We’re seeing an occasional shift to fixed fees, but it’s not the norm yet, and I don’t think it will be anytime soon.”

Many firms are understandably reluctant to use contingency fees, Pozner said.

“The smaller the firm, the more it’s at risk,” Pozner said. “It’s called contingency for a reason; you must be willing to lose. In order to make that decision, you need all of your firm behind you and everybody to be in a similar mind-set.”

It’s easier for law firms to create the right contingency fee if they have a background in it and have been doing it for years, Pozner said.

“One of the things you must learn in the contingency-fee world is when to say no,” he said.

rmcgaw@bizjournals.com | 303-803-9230
Freelance writer Ryan Peacock contributed to this article.

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