For Big Law, Here’s the Value Proposition to Opening in Smaller Markets

Big Law firms in the last few years have launched a flurry of new offices in smaller cities, from Nashville, Tennessee, to Austin, Texas, and Salt Lake City—areas where billing rates are far below those in New York, Washington, D.C., and Los Angeles.

But analysts say the value proposition for law firms, even for some of the most profitable firms that can’t command their usual rates in such cities, is simple: enticing talent, being near valuable clients, and adding offices with lower overhead costs.

Industry observers say there are generally two paths for Am Law 50 firms opening in such markets. One is following high-opportunity startups, which often pay for legal services through alternative fee structures. The other route is more of a talent play: bringing on excellent lawyers who have practices that expand beyond the market or who can help do work outside their region.

Those broad strategies are buoyed by unusual times. Associate compensation continues to climb faster. Demand has also reached incredible highs, so even the most successful firms have more work than people who can actually do it. And the COVID-19 pandemic has jolted remote technology and norms, making national and international work-sharing easier than ever.

“It’s kind of like necessity is the mother of invention, a little bit,” said Kent Zimmermann, a legal consultant for Zeughauser Group. “And firms are figuring out how to deal.”

Am Law 100 firms launching in Salt Lake City in the past year include Mayer Brown; Kirkland & Ellis; Foley & Lardner; and Wilson Sonsini Goodrich & Rosati. Those launching in Austin last year include Latham & Watkins; Gunderson Dettmer Stough Villeneuve Franklin & Hachigian; Kirkland; Quinn Emanuel Urquhart & Sullivan; and O’Melveny & Myers. Meanwhile, Nashville has lately attracted K&L Gates, Spencer Fane and Jackson Lewis.

Billing rates in these cities can be half as much as billing rates in the largest U.S. markets. For instance, the median partner billing rates in Salt Lake City, Austin and Nashville last year were $355, $495 and $468, respectively, according to a recent report from Wolters Kluwer’s ELM Solutions. Meanwhile, median billing rates for partners in New York and Los Angeles were $1,015 and $822, respectively.

When entering smaller markets, some law firms are finding local talent while relocating current partners.

Mayer Brown, which announced its new office in Salt Lake City last month, plucked local laterals from Stoel Rives but also relocated a capital markets partner from Northern California. In an interview, firm chair Jon Van Gorp said he expected to grow “substantially” in the market and wanted a full-service offering that could help both local and national clients.

But the size of the office that opens in the market will often depend on the strategy. The first strategy—going after a somewhat niche client base like emerging companies—usually means going in with a narrow team. There’s precedent for that in a market like Seattle, said Kristin Stark, a principal at Fairfax Associates.

“If they’re trying to serve a venture capital type of market, they’re going to do that with a targeted team, 10 to 20 or so lawyers,” she said. “You look at when firms started entering Seattle, they didn’t go try to build a 60-lawyer office overnight. They started small, served specific client needs in targeted segments with their typical attorney caliber, and it worked for them. They didn’t go in big.”

The other strategy, building a lower-cost talent base, might necessitate a larger office. Those firms aren’t competing for routine work, necessarily, Stark said. But the strategy is a play for talent. ”They attract quality lawyers who they can pay at a lower rate and handle more routine work. So that latter strategy may allow them to build larger,” Stark said.

Another piece of the puzzle is associate pay. Carmen Grossman, managing director and global talent manager for The Foster Group, said firms probably aren’t paying associates in a place like Salt Lake City the way they’d pay them in New York City.

“There are firms that are touting ‘we pay the same everywhere,’ but I don’t think you’re going to see that if there is a geography where housing and expenses are at a much lower scale,” she said.

She also said New York firms in secondary markets will generally have to charge clients less than they would in primary markets. But she said the firms that go into cities such as Austin and Salt Lake City and others usually do have some kind of attraction to the local client base, as well an attraction to the talent and the lower costs.

“They’re not sacrificing the quality of their product, and maybe they can offer when it’s appropriate some kind of rate differential to their clients,” she said, adding that going into a secondary market may help practice areas that don’t naturally support high rates.

Some of the calculus for firms entering smaller cities could change whenever demand slows down. Zimmermann, of Zeughauser Group, said he thinks when the economy softens and deal flow comes to a halt, some of the offices in secondary markets will begin to look different.

“Many of them will be smaller, and some may close. I think the answer will have everything to do with the firm’s capacity and utilization,” he said.

‘Experimental Flavor’

Eric Maxfield, a Salt Lake partner at Holland & Hart, a firm that has been in the city for decades, observed that several firms that have recently announced offices in Utah had served clients there beforehand, particularly in the corporate and transactional world.

He also said given the state of the economy, and the growth in the area, the charge toward Salt Lake wasn’t “too big of a shock.” Maxfield said for his firm, there isn’t a concern about the market being too saturated. But for others, “I think there’s certainly an experimental flavor to this.”

“There is a question about what this will look like. I can’t predict what’s going to happen, two years from now, or five to 10 years from now with some of these new entrants. Maybe some will succeed. Maybe some will decide this isn’t the place for them,” he said, noting that Holland & Hart is there “for the long haul.”

“It’s really hard to speak with what these other folks will do,” he said, “but I think they probably look at it as an experiment as well.”

https://www.law.com/americanlawyer/2022/02/11/for-big-law-heres-the-value-proposition-to-opening-in-smaller-markets/

Zubair Q Britania

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