by Jeff Blumenthal

Philadelphia Business Journal

Large law firms managed recessionary effects on their business in 2009 by cutting costs — specifically focusing on their largest cost, personnel. 

But a business can only stay profitable for so long if revenues are flat or declining, and legal experts believe law firms will begin to implement a new business model this year that goes beyond cutting personnel and salaries.

“Cutting costs got them through the triage year,” said Tom Clay of law-firm consultancy Altman Weil Inc. “But in 2010, they will have to begin to implement a strategy that reverses course from that longstanding economic model or really look hard at the partners who don’t control business or bring some other kind of value to the firm.”

Clay said up that until 2007, large law firms around the country raised billing rates by an average of twice the level of inflation (between 6 percent and 8 percent) for 20 consecutive years. In 2008, that number decreased significantly, and in 2009, clients demanded rate freezes or discounts. Even so, an Altman Weil study last month estimated that U.S. law firms will raise billing rates by an average of 3.2 percent this year. 

Clay said most firms are making careful, considered increases — often client by client or lawyer by lawyer. In prior years, across-the-board increases were typical.

Andrea Utecht, general counsel of Philadelphia-based chemical maker FMC Corp., said she has told outside counsel that the company cannot accept rate increases for 2010.

“Exceptions have to be personally approved by me,” Utecht said. “We are simply applying the same principles to our firms that we as a business are subject to — that is, our customers will not permit us simply as a matter of course to raise prices each year, despite increases in our input costs. Rather, we are challenged to find ways to be more productive and implement cost-cutting where we can.”

Utecht understands that other corporate law departments are taking similar positions. She said the push toward alternative fee arrangements will continue.

“We have projects that we will only go forward with now on a contingency or modified contingency basis, which in the past we might have been willing to undertake on an hourly-fee basis,” she said. “We want to be sure … that we and our firm are aligned in terms of the legal strategy and work undertaken to achieve a particular outcome, with the result that we are sharing both in the upside and downside.”

Clay said that without large billing-rate increases and with clients paying closer attention to how matters are staffed by outside counsel, firms must figure out where the market is headed and align themselves with it. This will mean less leveraging matters with large numbers of lawyers, more alternative billing and firms not needing as many traditional lawyers.

“We are getting tons of requests from big firms for training partners on project management — trying to come to the realization that they can do the same work with fewer lawyers and for cheaper by using outsourced or temporary lawyers and staff,” Clay said. 

Ajay Raju, managing partner of Reed Smith’s Philadelphia office, said firms have used captive in-sourcing with contract lawyers. But now, says Raju, firms will begin to look at outsourcing overseas for lawyer and administrative functions.

He said technology also will start to become a threat to associate ranks.

“In the past, you might have had 10 associates reviewing documents looking for certain words,” said Raju. “Now there is software that can do that in 10 seconds.”

Recruiter Frank D’Amore of Attorney Career Catalysts in Haverford, Pa., said the biggest shift will be in firms cutting back on their second biggest expense: office space.

“They have younger people who can work at home,” D’Amore said. “Not every lawyer will need an office. I also think they will also begin … subletting excess space.”